Wholesale Competition in Regions With Organized Electric Markets, 64100-64173 [E8-25246]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 73, Number 209 (Tuesday, October 28, 2008)]
[Rules and Regulations]
[Pages 64100-64173]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-25246]



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Part IV





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Part 35



Wholesale Competition in Regions With Organized Electric Markets; Final 
Rule

Federal Register / Vol. 73, No. 209 / Tuesday, October 28, 2008 / 
Rules and Regulations

[[Page 64100]]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket Nos. RM07-19-000 and AD07-7-000]


Wholesale Competition in Regions With Organized Electric Markets

Issued October 17, 2008.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final Rule.

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SUMMARY: In this Final Rule, the Federal Energy Regulatory Commission 
(Commission) is amending its regulations under the Federal Power Act to 
improve the operation of organized wholesale electric markets in the 
areas of: Demand response and market pricing during periods of 
operating reserve shortage; long-term power contracting; market-
monitoring policies; and the responsiveness of regional transmission 
organizations (RTOs) and independent system operators (ISOs) to their 
customers and other stakeholders, and ultimately to the consumers who 
benefit from and pay for electricity services. Each RTO and ISO will be 
required to make certain filings that propose amendments to its tariff 
to comply with the requirements in each area, or that demonstrate that 
its existing tariff and market design already satisfy the requirements.

DATES: Effective Date: This Final Rule will become effective December 
29, 2008.

FOR FURTHER INFORMATION CONTACT:
    Russell Profozich (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, Russell.Profozich@ferc.gov, (202) 502-6478.
    Tina Ham (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, Tina.Ham@ferc.gov, (202) 502-6224.

SUPPLEMENTARY INFORMATION: 

Table of Contents

 
                                                              Paragraph
                                                               Numbers
 
 I. Introduction...........................................            1
 II. Background............................................           10
 III. Discussion...........................................           15
     A. Demand Response and Pricing During Periods of                 15
     Operating Reserve Shortages in Organized Markets......
         1. Background.....................................           16
         2. Ancillary Services Provided by Demand Response            20
         Resources.........................................
             a. Ancillary Services Market..................           21
             b. New Bidding Parameters.....................           64
             c. Small Demand Response Resource Assessment..           90
         3. Eliminating Deviation Charges During System              100
         Emergencies.......................................
             a. Deviation Charges..........................          100
             b. Virtual Purchasers.........................          122
         4. Aggregation of Retail Customers................          128
             a. Commission Proposal........................          128
             b. Comments...................................          132
             c. Commission Determination...................          154
         5. Market Rules Governing Price Formation During            165
         Periods of Operating Reserve Shortage.............
             a. Price Formation During Periods of Operating          169
             Reserve Shortage..............................
             b. Four Approaches............................          208
             c. The Commission's Proposed Criteria.........          238
             d. Phase-In of New Rules......................          254
         6. Reporting on Remaining Barriers to Comparable            259
         Treatment of Demand Response Resources............
             a. Comments...................................          263
             b. Commission Determination...................          274
     B. Long-Term Power Contracting in Organized Markets...          277
         1. Background.....................................          278
         2. Commission Proposal............................          283
         3. Comments.......................................          286
         4. Commission Determination.......................          301
     C. Market-Monitoring Policies.........................          310
         1. Background.....................................          314
         2. Independence and Function......................          317
             a. Structure and Tools........................          318
             b. Oversight..................................          333
             c. Functions..................................          345
             d. Mitigation and Operations..................          361
             e. Ethics.....................................          380
             f. Tariff Provisions..........................          388
         3. Information Sharing............................          395
             a. Enhanced Information Dissemination.........          395
             b. Tailored Requests for Information..........          425
             c. Commission Referrals.......................          460
         4. Pro Forma Tariff...............................          470
             a. Commission Proposal........................          470
             b. Comments...................................          471
             c. Commission Determination...................          473
     D. Responsiveness of RTOs and ISOs to Customers and             477
     Other Stakeholders....................................
         1. Background.....................................          479
         2. Commission Proposal............................          481
             a. Responsiveness Obligation and Proposed               481
             Criteria......................................

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         3. Comments.......................................          484
         4. Commission Determination.......................          501
         5. Board Advisory Committee and Hybrid Board......          516
             a. Comments...................................          517
             b. Commission Determination...................          534
         6. Supermajority Requirement......................          538
             a. Comments...................................          539
             b. Commission Determination...................          546
         7. Posting Mission Statement or Organizational              547
         Charter on Web site...............................
             a. Comments...................................          548
             b. Commission Determination...................          556
         8. Executive Compensation.........................          558
             a. Comments...................................          559
             b. Commission Determination...................          561
         9. Compliance Filing Requirement..................          562
             a. Comments...................................          563
             b. Commission Determination...................          565
     E. Other Comments.....................................          568
         1. Comments.......................................          568
         2. Commission Determination.......................          573
 IV. Applicability of the Final Rule and Compliance                  574
 Procedures................................................
     A. NOPR Proposal......................................          574
     B. Comments...........................................          575
     C. Commission Determination...........................          578
 V. Information Collection Statement.......................          584
 VI. Environmental Analysis................................          587
 VII. Regulatory Flexibility Act Certification.............          588
     A. NOPR Proposal......................................          593
         1. Comments.......................................          596
         2. Commission Determination.......................          602
 VIII. Document Availability...............................          606
 IX. Effective Date and Congressional Notification.........          609
 Regulatory Text
 APPENDIX: Abbreviated Names of Commenters
 

I. Introduction

    1. This Final Rule addresses reforms to improve the operation of 
organized wholesale electric power markets.\1\ Improving the 
competitiveness of organized wholesale markets is integral to the 
Commission fulfilling its statutory mandate to ensure supplies of 
electric energy at just, reasonable and not unduly discriminatory or 
preferential rates. Effective wholesale competition protects consumers 
by providing more supply options, encouraging new entry and innovation, 
spurring deployment of new technologies, promoting demand response and 
energy efficiency, improving operating performance, exerting downward 
pressure on costs, and shifting risk away from consumers. National 
policy has been, and continues to be, to foster competition in 
wholesale electric power markets. This policy was embraced in the 
Energy Policy Act of 2005 (EPAct 2005),\2\ and is reflected in 
Commission policy and practice. The Commission balances the mix of 
regulation and competition based on changing circumstances, taking into 
account such factors as the opportunities for competition to control 
market power, advances in technology, changes in economies of scale, 
and new state and federal laws that affect the energy industry.
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    \1\ Organized market regions are areas of the country in which a 
regional transmission organization (RTO) or independent system 
operator (ISO) operates day-ahead and/or real-time energy markets. 
The following RTOs and ISOs have organized markets: 
PJMInterconnection, LLC (PJM), New York Independent System Operator, 
Inc. (NYISO), Midwest Independent Transmission System Operator, Inc. 
(Midwest ISO), ISO New England, Inc. (ISO New England), California 
Independent Service Operator Corp. (CAISO), and Southwest Power 
Pool, Inc. (SPP).
    \2\ Pub. L. 109-58, 119 Stat. 594 (2005).
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    2. The Commission has a duty to improve the operation of wholesale 
power markets. To that end, in this Final Rule, the Commission is 
making reforms to improve the operation of organized wholesale electric 
markets in the areas of demand response, long-term power contracting, 
market monitoring policies, and RTO and ISO responsiveness. By making 
these reforms, the Commission is not seeking to fundamentally redesign 
organized markets; rather, these reforms are intended to be incremental 
improvements to the operation of organized markets without undoing or 
upsetting the significant efforts that have already been made in 
providing demonstrable benefits to wholesale customers.
    3. In the areas of demand response and the use of market prices to 
elicit demand response, the Commission is requiring RTOs and ISOs to: 
(1) Accept bids from demand response resources in RTOs' and ISOs' 
markets for certain ancillary services on a basis comparable to other 
resources; (2) eliminate, during a system emergency, a charge to a 
buyer that takes less electric energy in the real-time market than it 
purchased in the day-ahead market; (3) in certain circumstances, permit 
an aggregator of retail customers (ARC) \3\ to bid demand response on 
behalf of retail customers directly into the organized energy market; 
(4) modify their market rules, as necessary, to allow the market-
clearing price, during periods of operating reserve shortage, to reach 
a level that rebalances supply and demand so as to maintain reliability 
while providing sufficient provisions for mitigating market power; and 
(5) study whether further reforms are necessary to

[[Page 64102]]

eliminate barriers to demand response in organized markets.
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    \3\ We will use the phrase ``aggregator of retail customers,'' 
or ARC, to refer to an entity that aggregates demand response bids 
(which are mostly from retail loads).
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    4. With regard to long-term power contracting, the Commission is 
requiring RTOs and ISOs to dedicate a portion of their Web sites for 
market participants to post offers to buy or sell power on a long-term 
basis. This requirement will promote greater use of long-term contracts 
by improving transparency among market participants.
    5. To improve market monitoring, the Commission is requiring that 
RTOs and ISOs provide their Market Monitoring Units (MMU) with access 
to market data, resources and personnel sufficient to carry out their 
duties, and that the MMU (or the external MMU in a hybrid structure) 
report directly to the RTO or ISO board of directors.\4\ In addition, 
the Commission is requiring that the MMU's functions include: (1) 
Identifying ineffective market rules and recommending proposed rules 
and tariff changes; (2) reviewing and reporting on the performance of 
the wholesale markets to the RTO or ISO, the Commission, and other 
interested entities; and (3) notifying appropriate Commission staff of 
instances in which a market participant's behavior may require 
investigation. The Commission is also expanding the list of recipients 
of MMU recommendations regarding rule and tariff changes, and 
broadening the scope of behavior to be reported to the Commission.
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    \4\ Our use of the phrase ``board of directors'' also includes 
the board of managers, board of governors, and similar entities.
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    6. The Commission is also modifying MMU participation in tariff 
administration and market mitigation, requiring each RTO and ISO to 
include ethics standards for MMU employees in its tariff, and requiring 
each RTO and ISO to consolidate all its MMU provisions in one section 
of its tariff. The Commission is expanding the dissemination of MMU 
market information to a broader constituency, with reports made on a 
more frequent basis than they are now, and reducing the time period 
before energy market bid and offer data are released to the public.
    7. Finally, the Commission establishes an obligation for each RTO 
and ISO to make reforms, as necessary, to increase its responsiveness 
to customers and other stakeholders and will assess each RTO's or ISO's 
compliance using four responsiveness criteria: (1) Inclusiveness; (2) 
fairness in balancing diverse interests; (3) representation of minority 
positions; and (4) ongoing responsiveness.
    8. In each of these four areas, the Commission is requiring each 
RTO or ISO to consult with its stakeholders and make a compliance 
filing that explains how its existing practices comply with the Final 
Rule in this proceeding, or its plans to attain compliance.
    9. Significant differences exist between regions, including 
differences in industry structure, mix of ownership, sources of 
electric generation, population densities, and weather patterns. Some 
regions have organized spot markets administered by an RTO or ISO, and 
others rely solely on bilateral contracting between wholesale sellers 
and buyers. We recognize and respect these differences across various 
regions. At the same time, wholesale competition can serve customers 
well in all regions. The focus of this Final Rule is to further improve 
the operation of wholesale competitive markets in organized market 
regions.

II. Background

    10. The Commission has acted over the last few decades to implement 
Congressional policy to expand the wholesale electric power markets to 
facilitate entry of new generators and to support competitive markets. 
Absent a single national power market, the development of regional 
markets is the best method of facilitating competition within the power 
industry, and the Commission has made sustained efforts to recognize 
and foster such markets.
    11. In 2007, the Commission held several public conferences to 
gather information and address issues on competition at the wholesale 
level and other related issues.\5\ At these conferences, the Commission 
examined issues affecting competition in the RTO and ISO regions, 
including the levels of wholesale prices, the need for long-term power 
contracts, the effectiveness of market monitoring, and the lack of 
adequate demand response. The Commission also addressed concerns 
related to the RTO and ISO board of directors' responsiveness to their 
customers and other stakeholders.
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    \5\ Three technical conferences were held on February 27, 2007, 
April 5, 2007, and May 8, 2007.
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    12. On June 22, 2007, the Commission issued an Advance Notice of 
Proposed Rulemaking (ANOPR),\6\ identifying four specific issues in 
organized market regions that were not being adequately addressed or 
were not under consideration in other proceedings. These areas were: 
(1) The role of demand response in organized markets and greater use of 
market prices to elicit demand response during periods of operating 
reserve shortage; (2) increasing opportunities for long-term power 
contracting; (3) strengthening market monitoring; and (4) enhancing the 
responsiveness of RTOs and ISOs to customers and other stakeholders, 
and ultimately to the consumers who benefit from and pay for 
electricity services. The Commission presented preliminary views on 
proposed reforms for these areas and sought comment on them.
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    \6\ Wholesale Competition in Regions with Organized Electric 
Markets, Advance Notice of Proposed Rulemaking, FERC Stats. & Regs. 
] 32,617 (2007).
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    13. After receiving and considering over a hundred comments on the 
ANOPR, on February 22, 2008, the Commission issued a Notice of Proposed 
Rulemaking (NOPR).\7\ In the NOPR, pursuant to the Commission's 
responsibility under sections 205 and 206 of the Federal Power Act 
(FPA),\8\ the Commission proposed reforms in the four specific areas 
identified above that were designed to ensure just and reasonable 
rates, to remedy undue discrimination and preference, and to improve 
wholesale competition in regions with organized markets. As noted in 
the NOPR, these proposed reforms are intended to improve the operation 
of wholesale competition in organized markets.\9\
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    \7\ Wholesale Competition in Regions with Organized Electric 
Markets, Notice of Proposed Rulemaking, 73 FR 12,576 (March 7, 
2008), FERC Stats. & Regs. ] 32,628 (2008).
    \8\ 16 U.S.C. 824d--824e.
    \9\ NOPR, FERC Stats. & Regs. ] 32,628 at P 11.
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    14. In the NOPR, the Commission also noted that the reforms 
proposed in this proceeding do not represent its final effort to 
improve the functioning of competitive organized markets for the 
benefit of consumers; rather, the Commission will continue to evaluate 
specific proposals that may strengthen organized markets.\10\ To that 
end, for example, the Commission proposed to require each RTO or ISO to 
study whether further reforms are necessary to eliminate barriers to 
demand response in organized markets. Any reforms must ensure that 
demand response resources are treated on a basis comparable to other 
resources. The Commission also ordered two staff technical conferences: 
(1) One to investigate proposals by American Forest and the Portland 
Cement Association, et al. to modify the design of organized markets; 
\11\ and (2) a separate conference to consider several issues related 
to demand response participation in wholesale

[[Page 64103]]

markets.\12\ Further, the Commission directed each RTO or ISO to 
provide a forum for affected consumers to voice specific concerns (and 
to propose regional solutions) on how to improve the efficient 
operation of competitive markets.\13\
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    \10\ Id. P 1.
    \11\ The technical conference was held on May 7, 2008. See 
Supplemental Notice of Technical Conference, Capacity Markets in 
Regions with Organized Electric Markets, Docket No. AD08-4-000 
(April 25, 2008).
    \12\ The technical conference was held on May 21, 2008. See 
Supplemental Notice of Technical Conference, Demand Response in 
Organized Electric Markets, Docket No. AD08-8-000 (May 13, 2008).
    \13\ NOPR, FERC Stats. & Regs. ] 32,628 at P 11.
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III. Discussion

A. Demand Response and Pricing During Periods of Operating Reserve 
Shortages in Organized Markets

    15. This section of the Final Rule makes several reforms to further 
eliminate barriers to demand response participation in organized energy 
markets. These reforms are to ensure that demand response is treated 
comparably to other resources. To that end, the Commission will require 
RTOs and ISOs to: (1) Accept bids from demand response resources in 
their markets for certain ancillary services, on a basis comparable to 
other resources; (2) eliminate, during a system emergency, certain 
charges to buyers in the energy market for voluntarily reducing demand; 
(3) permit ARCs to bid demand response on behalf of retail customers 
directly into the RTO's or ISO's organized markets; and (4) modify 
their rules governing price formation during periods of operating 
reserve shortage to allow the market-clearing price during periods of 
operating reserve shortage to more accurately reflect the true value of 
energy.
1. Background
    16. Commission policy does not favor granting preference for demand 
response; rather, our goal is to eliminate barriers to the 
participation of demand response in the organized power markets by 
ensuring comparable treatment of resources. This policy reflects the 
Commission's view that the cost of producing electricity and the value 
to customers of electric power varies over time and from place to 
place.\14\ Demand response can provide competitive pressure to reduce 
wholesale power prices; increases awareness of energy usage; provides 
for more efficient operation of markets; mitigates market power; 
enhances reliability; and in combination with certain new technologies, 
can support the use of renewable energy resources, distributed 
generation, and advanced metering. Thus, enabling demand-side 
resources, as well as supply-side resources, improves the economic 
operation of electric power markets by aligning prices more closely 
with the value customers place on electric power. A well-functioning 
competitive wholesale electric energy market should reflect current 
supply and demand conditions.
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    \14\ That is, for two customers at the same time and place, one 
customer may prefer to reduce consumption if the price is high, and 
the other may be willing to pay a high price to avoid curtailment in 
an emergency.
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    17. The Commission's policy also reflects its responsibility under 
sections 205 and 206 of the FPA to remedy any undue discrimination and 
preference in organized markets. To that end, the Commission explicitly 
addressed demand response in its Open Access Transmission Tariff (OATT) 
Reform (Order No. 890) \15\ and reliability standards (Order No. 
693).\16\
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    \15\ Preventing Undue Discrimination and Preference in 
Transmission Service, Order No. 890, FERC Stats. & Regs. ] 31,241 
(2007), order on reh'g, Order No. 890-A, 73 FR 2,984 (Jan. 16, 
2008), FERC Stats. & Regs. ] 31,261 (2007), order on reh'g, Order 
No. 890-B, 73 FR 39,092 (July 8, 2008), 123 FERC ] 61,299 (2008).
    \16\ See Mandatory Reliability Standards for the Bulk-Power 
System, Order No. 693, FERC Stats. & Regs. ] 31,242, order on reh'g, 
Order No. 693-A, 120 FERC ] 61,053 (2007).
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    18. Additionally, on numerous occasions, the Commission has 
expressed the view that the wholesale electric power market works best 
when demand can respond to the wholesale price.\17\ Also, the 
Commission has issued numerous orders over the last several years on 
various aspects of electric demand response in organized markets, with 
the goal of removing unnecessary obstacles to demand response 
participating in the wholesale power markets of RTOs and ISOs.\18\ To 
that end, some of these orders approved various types of demand 
response programs, including programs to allow demand response to be 
used as a capacity resource \19\ and as a resource during system 
emergencies,\20\ to allow wholesale buyers and qualifying large retail 
buyers to bid demand response directly into the day-ahead and real-time 
energy markets and certain ancillary service markets, particularly as a 
provider of operating reserves, as well as programs to accept bids from 
ARCs.\21\ The Commission also has approved special demand response 
applications such as use of demand response for synchronized reserves 
and regulation service.\22\ The theme underlying the Commission's 
approval of these programs has been to allow demand response resources 
to participate in these markets on a basis that is comparable to other 
resources.
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    \17\ See, e.g., New England Power Pool and ISO New England, 
Inc., 101 FERC ] 61,344, at P 44-49 (2002), order on reh'g, 103 FERC 
] 61,304, order on reh'g, 105 FERC ] 61,211 (2003); PJM 
Interconnection, LLC, 95 FERC ] 61,306 (2001); PJM Interconnection, 
LLC, 99 FERC ] 61,227 (2002); Southwest Power Pool, Inc., 116 FERC ] 
61,289 (2006).
    \18\ See, e.g., New York Indep. Sys. Operator, Inc., 92 FERC ] 
61,073, order on clarification, 92 FERC ] 61,181 (2000), order on 
reh'g, 97 FERC ] 61,154 (2001); New England Power Pool and ISO New 
England, Inc., 100 FERC ] 61,287, order on reh'g, 101 FERC ] 61,344 
(2002), order on reh'g, 103 FERC ] 61,304, order on reh'g, 105 FERC 
] 61,211 (2003); PJM Interconnection, LLC, 95 FERC ] 61,306 (2001); 
PJM Interconnection, LLC, 99 FERC ] 61,139 (2002); PJM 
Interconnection, LLC, 99 FERC ] 61,227 (2002).
    \19\ See, e.g., PJM Interconnection, LLC, 117 FERC ] 61,331 
(2006); Devon Power LLC, 115 FERC ] 61,340, order on reh'g, 117 FERC 
] 61,133 (2006), appeal pending sub nom. Maine Pub. Utils. Comm'n v. 
FERC, No. 06-1403 (DC Cir. 2007).
    \20\ See, e.g., New York Indep. Sys. Operator, Inc., 95 FERC ] 
61,136 (2001); NSTAR Services Co. v. New England Power Pool, 95 FERC 
] 61,250 (2001); New England Power Pool and ISO New England, Inc., 
100 FERC ] 61,287, order on reh'g, 101 FERC ] 61,344 (2002), order 
on reh'g, 103 FERC ] 61,304, order on reh'g, 105 FERC ] 61,211 
(2003); PJM Interconnection, LLC, 99 FERC ] 61,139 (2002).
    \21\ See, e.g., New York Indep. Sys. Operator, Inc., 95 FERC ] 
61,223 (2001); New England Power Pool and ISO New England, Inc., 100 
FERC ] 61,287, order on reh'g, 101 FERC ] 61,344 (2002), order on 
reh'g, 103 FERC ] 61,304, order on reh'g, 105 FERC ] 61,211 (2003); 
PJM Interconnection, LLC, 99 FERC ] 61,227 (2002).
    \22\ See, e.g., PJM Interconnection, LLC, 114 FERC ] 61,201 
(2006).
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    19. While the Commission and the various RTOs and ISOs have done 
much to eliminate barriers to demand response in organized power 
markets, more needs to be done to ensure comparable treatment of all 
resources. Therefore, as discussed below, the Commission is taking 
action in this Final Rule to further eliminate barriers to demand 
response in organized power markets.
2. Ancillary Services Provided by Demand Response Resources
    20. The Commission included several components in the NOPR 
obligating RTOs and ISOs to accept bids from demand response resources 
for ancillary services. First, demand response resources were required 
to meet necessary technical requirements established by the RTO or ISO 
in order to participate in these markets. Second, the Commission 
proposed that demand response resources be allowed to specify the 
frequency and duration of their service through the use of additional 
bidding parameters. Finally, the Commission proposed that RTOs and ISOs 
perform a small demand response resource assessment to evaluate the 
technical feasibility and value to the market of such smaller 
resources. Comments in response to these issues are addressed below.

[[Page 64104]]

a. Ancillary Services Market
    21. In the NOPR, the Commission proposed to obligate each RTO or 
ISO to accept bids from demand response resources, on a basis 
comparable to any other resources, for ancillary services that are 
acquired in a competitive bidding process, if the demand response 
resources: (1) are technically capable of providing the ancillary 
service and meet the necessary technical requirements; and (2) submit a 
bid under the generally-applicable bidding rules at or below the 
market-clearing price, unless the laws or regulations of the relevant 
electric retail regulatory authority do not permit a retail customer to 
participate.\23\ The Commission stated that this proposal would apply 
to competitively-bid markets, if any, for energy imbalance, spinning 
reserves, supplemental reserves, reactive supply and voltage control, 
and regulation and frequency response as defined in the pro forma OATT, 
or to the markets for their functional equivalents in an RTO or ISO 
tariff.\24\
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    \23\ NOPR, FERC Stats. & Regs. ] 32,628 at P 56.
    \24\ Id.
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    22. The Commission proposed that, on compliance, an RTO or ISO must 
either propose amendments to its tariff to comply with the proposed 
requirement or demonstrate that its existing tariff and market design 
already satisfy the requirement. This filing would be submitted within 
six months of the date the Final Rule is published in the Federal 
Register. The Commission proposed to assess whether each filing 
satisfies the proposed requirement and issue additional orders as 
necessary.\25\
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    \25\ Id. P 63.
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i. Comments
    23. Many commenters support the Commission's proposal and agree 
that allowing demand response resources to participate in ancillary 
services markets would increase competition, enhance system 
reliability, and lower the overall price for ancillary services.\26\ 
For instance, Public Interest Organizations assert that the presence of 
demand response in these markets will mitigate the exercise of market 
power and allow large amounts of variable resources (e.g., wind and 
solar) to be integrated into the grid.\27\ DRAM states that allowing 
demand response to participate in ancillary services markets and other 
types of wholesale markets would lead to a more viable and sustainable 
demand response industry, and to the availability of a larger overall 
demand response resource.\28\ Comverge maintains that the Commission's 
proposal is particularly appropriate because it enables market 
participants to simultaneously participate in capacity markets (or 
resource adequacy) and operating reserve markets.\29\ DRAM and APPA, 
while in support of the Commission's proposal, state that demand 
response resources must be able to meet the appropriate technical 
requirements.\30\
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    \26\ E.g., American Forest at 5; BlueStar Energy at 1-2; 
California PUC at 9; Cogeneration Parties at 2-3; Dominion at 4; 
Duke Energy at 3; Integrys Energy at 9; ISO/RTO Council at 3-4; 
Industrial Coalitions at 9; Midwest Energy at 2-3; North Carolina 
Electric Membership at 3-4; NYISO at 5; Public Interest 
Organizations at 5-6; Reliant at 3; and Wal-Mart at 5.
    \27\ Public Interest Organizations at 4-5.
    \28\ DRAM at 5-6.
    \29\ Comverge at 11.
    \30\ DRAM at 4-5; APPA at 31-32.
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    24. Several commenters state that they support the Commission's 
clarification in the NOPR that the proposal would not require the 
adoption of competitive bidding processes in areas where they were not 
previously used.\31\ APPA states that it opposes the development of new 
RTO or ISO markets for ancillary services just so demand response 
resources could participate in them.\32\ Similarly, EEI asserts that 
this proposal should be limited to competitively-bid markets only, as 
defined in the proposal.\33\ Comverge also agrees with the Commission's 
proposed requirement that this provision apply only to competitively-
bid markets, but asks the Commission to include two other services 
within its proposal: Out-of-Market \34\ and Scarcity Pricing.\35\
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    \31\ NOPR, FERC Stats. & Regs. ] 32,628 at P 58.
    \32\ APPA at 34-35.
    \33\ EEI at 11.
    \34\ It is not entirely clear what service Comverge is referring 
to here. It is possible that Comverge is referring to Out-Of-Market 
Dispatch, i.e., RTO or ISO dispatch actions that are not reflected 
in the ISO's real-time market prices. In CAISO, for example, 
dispatchers procure energy to make up for imbalances by contacting 
selected resources or control area operators that chose not to 
submit any bids into the ISO's or RTO's markets. This practice 
results in bilateral trades negotiated by the RTO or ISO.
    \35\ Comverge at 13-14. Similarly, it is not clear to the 
Commission what service Comverge is referring to, as Scarcity 
Pricing is not an ancillary service.
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    25. Xcel requests that the Commission clarify that the proposed 
rule does not require a demand response provider to offer its potential 
demand response into the market.\36\ Xcel argues that a demand response 
provider should be free to evaluate its willingness to bid its offering 
into the market.
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    \36\ Xcel at 7.
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    26. In its reply comments, Allied Public Interests Groups note that 
providing for comparable treatment of demand-side resources in 
wholesale markets is critical to making those markets competitive, 
efficient, reliable and sustainable. Therefore, they ask the Commission 
to clarify the meaning and implication of the term ``comparable 
treatment.'' \37\
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    \37\ Allied Public Interest Groups at 1.
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    27. NARUC argues that the state-law exemption within the NOPR 
should be modified to avoid displacing state authority and state policy 
decisions on demand response.\38\ NARUC explains that this exemption 
places the burden on state regulators to show that the demand response 
proposal conflicts with state laws or regulations. NARUC would like to 
see this reversed, and the burden placed on the RTO or ISO to obtain 
the state regulator's permission to allow the demand response proposal. 
Similarly, Pennsylvania PUC states that the state exemption highlights 
a jurisdictional issue and recommends that the Commission continue to 
work with state authorities to eliminate these types of barriers to 
demand response.\39\
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    \38\ NARUC at 7. The proposal for ancillary services market 
states: ``The Commission proposed to obligate each RTO or ISO to 
accept bids from demand response resources, on a basis comparable to 
any other resources, for ancillary services that are acquired in a 
competitive bidding process, if the demand response resources (1) 
are technically capable of providing the ancillary service and meet 
the necessary technical requirements, and (2) submit a bid under the 
generally-applicable bidding rules at or below the market-clearing 
price, unless the laws or regulations of the relevant electric 
retail regulatory authority do not permit a retail customer to 
participate.'' NOPR, FERC Stats. & Regs. ] 32,628 at P 56 (emphasis 
added).
    \39\ Pennsylvania PUC at 11.
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    28. Some commenters recommend that each RTO and ISO should 
determine new rules for ancillary services.\40\ Dominion states that 
each RTO and ISO should have flexibility to develop the necessary rules 
to modify existing ancillary services markets within its stakeholder 
processes.\41\ Comverge suggests that these rules be determined by each 
RTO and ISO, but initially framed in a Commission technical conference, 
consistent with the Commission's substantive recommendations to amend 
RTO and ISO bidding rules.\42\ SoCal Edison-SDG&E argue that an overly 
prescriptive national approach may be counterproductive.\43\
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    \40\ See, e.g., Comverge at 17; Dominion at 4; and SoCal Edison-
SDG&E at 3.
    \41\ Dominion at 4.
    \42\ Comverge at 17.
    \43\ SoCal Edison-SDG&E at 3.
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    29. While Midwest Energy supports the proposal, it is concerned 
that the quest for comparability may evolve into a program that treats 
demand response preferentially with respect to competitive resource 
providers. It states

[[Page 64105]]

that any such preferential treatment could lead to overall increases in 
costs to customers through the subsidization of demand response.\44\ 
Therefore, Midwest Energy asks that the Commission require that: (1) 
each RTO or ISO demand response program be subject to a net-benefits 
test and (2) all demand-side resources be subject to a performance 
evaluation.\45\
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    \44\ Midwest Energy at 3.
    \45\ Id.
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    30. Reliant comments that demand response resources should be 
subject to penalties for non-performance comparable to those that 
supply resources face. Reliant also states that demand response 
resources that supply ancillary services should participate in RTO and 
ISO ancillary services markets primarily via the entity that schedules 
and financially settles the load for their meters.\46\ Allied Public 
Interest Groups agrees that demand response resources should face 
comparable penalties for non-performance, but notes in reply comments 
that ``comparable'' penalties does not mean ``the same'' penalties.\47\
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    \46\ Reliant at 4.
    \47\ Allied Public Interest Groups at 4.
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    31. Public Interest Organizations urge the Commission to expand the 
demand response provisions to include energy efficiency resources, 
environmentally benign behind-the-meter distributed generation, and all 
other demand-side resources that are capable of providing the 
service.\48\ Public Interest Organizations explain in their comments 
that ``energy efficient resources produce load reductions for the 
length of their measured lives, relieving congestion, reducing market 
costs, and increasing system reliability.'' They state that ``a bundle 
of energy efficient resources that reduces energy use on a large 
scale--an `efficiency power plant' or EPP--can achieve energy savings 
that are just as predictable and substantial as the energy output of a 
conventional power plant. The consistent savings from these energy 
efficiency programs and investments can be thought of as a virtual 
power plant.'' \49\ Allied Public Interest Groups assert that the 
comparable treatment proposed for demand response in the NOPR should be 
expanded to cover all reliable and efficient demand response resources 
that are technically capable of providing the service needed. Allied 
Public Interest Groups notes that limiting participation in ancillary 
services markets to ``traditional'' demand response resources may 
unintentionally exclude innovative new technologies that can help 
achieve goals of system reliability and efficiency.\50\
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    \48\ Public Interest Organizations at 4.
    \49\ Id. at 13-14.
    \50\ Allied Public Interest Groups at 7.
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    32. TAPS asserts that behind-the-meter generation can perform as a 
demand resource in ancillary services markets. TAPS states that the 
regulatory language should be modified to include this type of 
resources as well as reliability-based demand response. They note that 
reliability-based demand response, or demand response that is not in 
reaction to an increase in the price of electric energy or to incentive 
payments, is currently not included in the regulatory definition of 
Demand Response contained within this proceeding.\51\
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    \51\ TAPS at 9.
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    33. Some supporters state that the Commission should address in the 
Final Rule compensation for demand response resources. For instance, 
Industrial Consumers suggest that the payment structure for demand 
response resources should be comparable to the payment of a 
generator.\52\ They also note that to promote the development of demand 
response resources and fairly compensate these resources for their 
ancillary services, a methodology for calculating and accurately 
representing customer baselines must be developed on a consistent 
basis.\53\ EnerNOC agrees and asks the Commission to require RTOs and 
ISOs to demonstrate in future compliance filings that customer baseline 
methodologies appropriately address concerns of accuracy, integrity, 
and comparable treatment of demand response resources.\54\
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    \52\ Industrial Consumers at 13.
    \53\ Id. at 14.
    \54\ EnerNOC at 11.
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    34. E.ON U.S. does not support the Commission's proposal. E.ON U.S. 
believes that the Commission's proposal mandates the purchase of demand 
response products regardless of price, and that such a practice will 
distort the market and create additional costs for end-use 
customers.\55\ E.ON U.S. argues that the Commission should only require 
comparable treatment of demand response resources and not place any 
extra emphasis or incentive on their use.
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    \55\ E.ON U.S. at 14.
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    35. Several commenters request that the Commission develop a pro 
forma tariff regarding demand response participation in ancillary 
services markets. Industrial Consumers argue that the Commission should 
prescribe specific pro forma tariff language for RTOs and ISOs to adopt 
within 30 days of the Final Rule's effective date. Otherwise, they 
assert that piecemeal implementation by RTOs and ISOs may result in 
delay, inefficiency, and inconsistency.\56\ Similarly, Industrial 
Coalitions state that the Commission should incorporate into a pro 
forma demand response tariff appropriate minimum standards to enable 
demand response resources to provide, and be comparably compensated 
for, ancillary services. Industrial Coalitions and Steel Manufacturers 
contend that the Commission should obligate RTOs and ISOs to 
demonstrate that their own tariffs are consistent with or superior to 
the pro forma provisions and any deviations from the pro forma tariff 
should only be permitted if they can provide a clear justification for 
doing so.\57\
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    \56\ Industrial Consumers at 7-8. Industrial Consumers note that 
the Commission's practice extending back to Order No. 888 has been 
to standardize rules and procedures for generators and other 
transmission users with the pro forma OATT as necessary to promote 
consistency and to avoid undue discrimination. Id.
    \57\ Industrial Coalitions at 11; Steel Manufacturers at 10.
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    36. A few commenters express concern about the Western Electricity 
Coordinating Council's (WECC) regional reliability standard addressing 
operating reserve requirements because WECC currently allows demand 
response to supply only non-spinning reserves.\58\ For example, CAISO 
points out that WECC's standard is inconsistent with the Commission's 
directive in Order No. 890 that a transmission provider must permit 
non-generation resources to provide ancillary services to the extent 
they are capable of doing so. It argues that WECC is non-compliant with 
Order No. 693, which includes a requirement explicitly providing that 
demand-side management may be used as a resource for contingency 
reserves. Therefore, CAISO comments that the Commission should direct 
the Electric Reliability Organization (ERO) to effect a change in WECC 
requirements.\59\
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    \58\ California DWR at 8; CAISO at 5; California PUC at 9-10; 
and PG&E at 6 -7.
    \59\ CAISO at 5; see also California PUC at 10.
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    37. Several entities ask that the Final Rule not disturb or replace 
ongoing proceedings in individual regions. Midwest ISO states that the 
Commission recently approved its integration of demand response 
resources to participate in Midwest ISO ancillary services markets, on 
a basis comparable to other resources (ASM Proposal).\60\ Given this, 
Midwest ISO requests that the Commission find that its ASM Proposal 
satisfies the NOPR's

[[Page 64106]]

requirement that each RTO and ISO submit for Commission approval 
standards by which demand response resources are able to participate 
and bid in the ancillary service markets on comparable terms as other 
resources.\61\ CAISO states that it will comply with the NOPR 
requirement in the Release 1A enhancements to its Markets Redesign & 
Technology Upgrade (MRTU).\62\ It asks the Commission to clarify that 
it does not intend to replace the specific schedule that it has 
accepted for the CAISO's implementation of MRTU with the generic 
compliance schedule proposed in the NOPR.\63\
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    \60\ Midwest Independent Transmission System Operator, Inc., 112 
FERC ] 61,283 (2005), order on reh'g, 123 FERC ] 61,297 (2008) (ASM 
Order).
    \61\ Midwest ISO at 9.
    \62\ Cal. Indep. Sys. Operator Corp., 116 FERC ] 61,274 (2006), 
order on reh'g, 119 FERC ] 61,076 (2007).
    \63\ CAISO at 2-4.
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    38. In addition, while Maine PUC agrees that demand response is 
important to the efficient functioning of wholesale electric markets, 
it states that the Commission should allow ISO New England to work with 
state regulators and NEPOOL Participants to make existing programs more 
robust and to eliminate barriers to demand response participation.\64\ 
Maine PUC notes that demand response programs in New England are 
achieving price savings and reducing the need for additional generation 
and transmission, demonstrated by the significant participation of 
demand response resources in the forward capacity market. Therefore, 
Maine PUC states that the Commission should not impose the NOPR's 
specific requirements for demand response on ISO New England.
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    \64\ Maine PUC at 3-4.
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    39. SPP states that it does not currently have an ancillary 
services market; however, it reports that consideration and 
incorporation of demand response in future market development is 
currently being undertaken by SPP's Working Groups and Task Forces.\65\
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    \65\ SPP at 5.
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    40. Alcoa maintains that the Commission's proposal is well-
intended, but falls short of what is needed to ensure non-
discriminatory treatment of demand response bids by industrial 
customers. Alcoa asserts that the Commission's proposal is incomplete 
because it relies too heavily on vague concepts such as comparability 
of resources and reasonable requirements to increase access to 
ancillary services. Alcoa argues that there should be no restriction on 
the amount of participation by demand response resources in organized 
wholesale markets, and suggests that, at a minimum, regional operators 
should be required to justify such restrictions to the Commission and 
demonstrate that they are necessary for technical reasons.\66\
---------------------------------------------------------------------------

    \66\ Alcoa at 2-3.
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    41. Several commenters support the Commission's conclusion that it 
is not appropriate for the Commission to develop a standardized set of 
technical requirements.\67\ California PUC stresses the importance of 
allowing RTOs and ISOs the flexibility to modify requirements in the 
future, as experience is gained with demand response programs. EEI 
believes that standardization of these requirements could result in 
unnecessary expense and delay in implementation by requiring 
incompatible infrastructure across different RTOs and ISOs. EnerNOC 
believes that the Commission struck the appropriate balance by 
requiring coordination among the RTOs and ISOs without mandating 
standardization.
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    \67\ E.g., California PUC at 9; EEI at 12; EnerNOC at 9; NYISO 
at 6; and North Carolina Electric Membership at 4.
---------------------------------------------------------------------------

    42. North Carolina Electric Membership states that the Commission 
should require RTOs and ISOs to develop technical requirements in 
conjunction with stakeholders to ensure that all interests are properly 
considered. Old Dominion also states that any standards developed in 
response to the Commission's requirement should be comprehensive and 
result from a stakeholder process.
    43. LPPC supports the Commission's recognition that demand response 
resources must be technically capable of providing ancillary services. 
In addition, LPPC agrees with the Commission's statement that RTOs and 
ISOs need to impose requirements on telemetry and metering to allow 
demand response resources to fully participate in ancillary services 
markets. LPPC adds that an important element of any RTO-or ISO-led 
ancillary services program must be performance monitoring to ensure 
that demand response resources truly respond when called upon.\68\ 
Also, Old Dominion argues that the ability to accurately measure and 
verify demand response is necessary to guarantee that these resources 
are providing real benefits to the market.\69\
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    \68\ LPPC at 6-7.
    \69\ Old Dominion at 7.
---------------------------------------------------------------------------

    44. APPA supports the Commission's overall proposal, but states 
that the Commission should recognize that metering, telemetry and 
performance requirements that may have to be imposed on demand-side 
resources to ensure their reliable performance will be more stringent 
than the requirements most retail customers are used to accommodating. 
APPA questions whether end-use customers will offer ancillary services 
that may require them to reduce consumption substantially on very short 
notice. APPA asserts that program participants may drop out when called 
upon too frequently. APPA states that it may prove difficult to 
reconcile the rigorous technical requirements for end users 
necessitated by the instantaneous nature of certain ancillary services 
with the desire of many larger loads for reliability, flexibility and 
convenience.\70\
---------------------------------------------------------------------------

    \70\ APPA at 33-34.
---------------------------------------------------------------------------

    45. NYISO recommends that the Final Rule clarify the NOPR's 
proposed regulatory language to specify that demand response resources 
must also meet applicable reliability requirements before they are 
permitted to bid into markets.\71\ NYISO states that this language 
would clearly articulate the Commission's support for the integration 
of demand resources into ancillary services markets without overriding 
requirements adopted by NERC or the New York State Reliability Council. 
Further, it notes that this approach would be consistent with Order 
890-A, which allows RTOs and ISOs to adopt reasonable reliability 
related limitations on demand resource participation.\72\
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    \71\ NYISO at 5-6.
    \72\ Id. at 6 (citing Order No. 890-A, 73 FR 2984 (Jan. 16, 
2008), FERC Stats. & Regs. ] 31,261 at P 499).
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    46. Comverge requests that the Commission ensure that any 
requirements imposed on demand response resources are not overly 
technical and burdensome.\73\ California PUC states that telemetry, for 
example, is necessary for resources offering ancillary services, but a 
telemetry requirement for every participant (such as small commercial 
and residential customers) may be excessive and could erect a barrier 
to entry for these smaller customers, particularly when not every 
demand response supplier has the money to install real-time telemetry 
and metering.\74\ EnerNOC also mentions this concern, and asks that the 
Commission clarify that its ``reasonableness'' requirement is aimed at 
ensuring that reasonable technical requirements not be unduly 
restrictive on demand response resources, such as those that may add 
unwarranted and unnecessary costs to participation. EnerNOC states that 
technical standards should focus on the reliability parameters of the

[[Page 64107]]

particular ancillary service and allowing demand response resources to 
utilize alternative methods to meet these standards.\75\
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    \73\ Comverge at 13.
    \74\ California PUC at 11.
    \75\ EnerNOC at 10-11.
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ii. Commission Determination
    47. In this Final Rule, the Commission adopts the NOPR proposal to 
require each RTO or ISO to accept bids from demand response resources, 
on a basis comparable to any other resources, for ancillary services 
that are acquired in a competitive bidding process, if the demand 
response resources: (1) are technically capable of providing the 
ancillary service and meet the necessary technical requirements; and 
(2) submit a bid under the generally-applicable bidding rules at or 
below the market-clearing price, unless the laws or regulations of the 
relevant electric retail regulatory authority do not permit a retail 
customer to participate. All accepted bids would receive the market-
clearing price.
    48. The Commission's policy has been, and continues to be, to 
identify and eliminate barriers to participation of demand response 
resources in organized power markets. Development of demand response 
resources provides benefits to consumers by providing competitive 
pressure to reduce wholesale power prices, providing for the more 
efficient operation of organized markets, helping to mitigate market 
power and enhance system reliability, and encouraging development and 
implementation of new technologies, including renewable energy and 
energy efficiency resources, distributed generation and advanced 
metering. The reforms implemented in this Final Rule will benefit 
energy consumers by removing several barriers to the development and 
use of demand response resources in organized wholesale electric power 
markets.
    49. As noted in the NOPR, this requirement would apply to 
competitively-bid markets, if any, for energy imbalance, spinning 
reserves, supplemental reserves, reactive supply and voltage control, 
and regulation and frequency response as defined in the pro forma OATT, 
or to the markets of their functional equivalents in an RTO or ISO 
tariff.\76\ The Commission requires that demand response resources that 
are technically capable of providing the ancillary service within the 
response time requirements,\77\ and that meet reasonable requirements 
adopted by the RTO or ISO as to size, telemetry, metering and bidding, 
be eligible to bid to supply energy imbalance, spinning reserves, 
supplemental reserves, reactive and voltage control, and regulation and 
frequency response.\78\
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    \76\ NOPR, FERC Stats. & Regs. ] 32,628 at P 56.
    \77\ Some technologies may be capable of responding to an RTO's 
or ISO's control signal and providing certain ancillary services, 
such as regulation and frequency response service, more quickly than 
under existing response time requirements.
    \78\ The RTO or ISO may specify certain requirements, such as 
registration with the RTO or ISO, creditworthiness requirements, and 
certification that participation is not precluded by the relevant 
electric retail regulatory authority. The RTO or ISO should not be 
in the position of interpreting the laws or regulations of a 
relevant electric retail regulatory authority.
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    50. In response to Allied Public Interest Groups, we decline to 
define ``comparable treatment.'' Each RTO and ISO is unique, and the 
Commission hesitates to impose a uniform definition. Each RTO and ISO 
therefore should establish policies and procedures in cooperation with 
its customers and other stakeholders that ensure that demand response 
resources are treated comparably to supply-side resources. The 
Commission will have ample opportunity to evaluate concerns that may 
arise when it reviews the compliance filings required by this Final 
Rule.
    51. In light of APPA's comments, we clarify that this requirement 
applies only to competitively-bid markets for those ancillary services 
specified, as well as to the markets of their functional equivalents in 
an RTO or ISO tariff. This requirement does not obligate RTOs or ISOs 
to create new competitively-bid ancillary services markets.
    52. In response to Xcel and E.ON U.S., we note that the Commission 
proposed in the NOPR to obligate RTOs and ISOs to accept bids from 
demand response resources on a comparable basis to supply resources for 
ancillary services. For Xcel, we clarify that demand response providers 
are not required to offer potential demand response into the ancillary 
services markets. Demand response resources may evaluate market prices 
and other factors before making a determination to bid or not. 
Regarding E.ON U.S.'s comments, the Commission did not propose (and 
does not require) that RTOs or ISOs must purchase ancillary services 
from demand response resources without regard to whether these 
resources are lower-bid alternatives to supply resources.
    53. In response to NARUC and others who comment that the 
Commission's proposal would place the burden on retail regulatory 
authorities to show that a demand response proposal conflicts with 
state or local laws or regulations, we clarify that we will not require 
a retail regulatory authority to make any showing or take any action in 
compliance with this rule.\79\ Rather, this rule merely requires an RTO 
or ISO to accept bids for ancillary services from demand response 
resources, unless the laws or regulations of the relevant electric 
retail regulatory authority do not permit a retail customer to 
participate.
---------------------------------------------------------------------------

    \79\ In reply to the Pennsylvania PUC's recommendation that the 
Commission continue to work with state authorities to eliminate 
barriers to demand response, we note that NARUC and the Commission, 
through their Demand Response Collaborative, are working to outline 
options to coordinate retail and wholesale regulatory policies in 
order to stimulate participation in demand response by reducing or 
eliminating jurisdictional barriers.
---------------------------------------------------------------------------

    54. We disagree with commenters who argue that requiring RTOs and 
ISOs to allow demand response resources to participate in ancillary 
services markets may be counterproductive or unnecessary.\80\ This 
requirement removes a barrier to participation of demand response 
resources in organized wholesale markets and allows these resources to 
provide ancillary services on a basis comparable to generation sources. 
This requirement would potentially expand the resource pool in these 
organized markets, thereby lowering the overall market price for 
ancillary services, as well as potentially mitigating the exercise of 
market power. The competitiveness within ancillary services markets, as 
well as the system reliability, would be enhanced through increased 
participation.
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    \80\ The Commission has approved actions by some RTOs and ISOs 
to incorporate demand response into their ancillary services 
markets. See, e.g., California Indep. Sys. Operator, 116 FERC ] 
61,274 (2006); PJM Interconnection, LLC, 114 FERC ] 61,201 (2006).
---------------------------------------------------------------------------

    55. Contrary to Midwest Energy's comments, we do not find that this 
requirement will lead to any preferential treatment for demand response 
resources or supply-side resources. Both sets of resources would be 
treated and penalized comparably in instances of non-performance.
    56. In response to Public Interest Organizations, the Commission 
has not excluded from eligibility any type of resource that is 
technically capable