Concerned with Bundled Customer Impact, Michigan PSC to Take Another Look at End-Use Customer Participation in RTO Demand Response Programs

The Michigan PSC is reviewing its prior determinations regarding the participation of end-use retail customers in RTO demand response (DR) programs in light of recent FERC orders.

On December 2, 2010, the PSC issued an order stating that Michigan retail customers or aggregators of retail customers (ARCs) shall not participate in any RTO wholesale power markets until further order of the Commission. The PSC directed the creation of contested case proceedings for each utility concerning the issue, with the affected utility directed to file proposed tariffs allowing such retail customers to participate in wholesale power markets along with an application for the approval of the respective retail tariff.

However, the PSC said that FERC's order requiring that demand response (DR) shall be paid the full LMP establishes a compensation method for retail aggregation of DR that differs in fundamental ways from what was originally proposed by MISO prior to the PSC's prior order on customer DR participation.

"The Commission is concerned that the FERC's compensation method is disadvantageous to the Michigan hybrid electric market in which choice and bundled sales coexist. It appears that the FERC's full LMP pricing policy over-compensates DR resources offered by ARCs into the wholesale market during periods of operating reserve shortages. Although the payment of full LMP for DR creates an apparent equity between DR resources and generation resources, which is the end result that the FERC desired, DR is not a fungible commodity as is a generation resource, and has a disparate cost impact on the retail customers of a load-serving entity (LSE). Under the FERC DR compensation structure, non-participating retail customers will likely see a cost-of-service increase if DR and generation are equivalently priced at LMP and DR offered into the market by ARCs is substituted for generation," the PSC said.

"In addition, the FERC rejected the cost allocation principle that ARC payments would be borne by the LSE from which the DR originates, i.e., 'load reconstitution.' Rather, the FERC mandated that DR compensation be allocated to the broader market area benefiting from the presence of DR in the market. In other words, DR compensation should be allocated to the market area in which LMPs may be lowered by means of DR bids that clear the market," the PSC said.

"This Commission believes the FERC incorrectly assumed that the presence of DR in the market would substantially impact the total cost of generation because all generation at a pricing node is priced at the same LMP, thus justifying the broader cost allocation scheme. However, the FERC's broader allocation scheme is inconsistent with the fact that during periods of operating reserve shortages, Michigan's regulated utilities essentially self-supply their own generation, relying upon the wholesale market primarily for balancing services. Because DR resources would only impact the LMP for any imbalance services, the limited benefits to Michigan LSEs during operating reserve shortages may result in: (1) cross-subsidization between LSEs; and (2) net market benefits that may not offset the increased cross-subsidization between customers that participate with ARCs and those that do not," the PSC said.

The PSC sought additional public comments in light of the above issues.

In particular, the Commission requests comments regarding the potential impact on the regulated utilities and their customers if the Commission were to issue an order requiring the filing of retail tariffs implementing the new FERC-approved method for DR participation in PJM's and MISO's wholesale energy markets for regulated electric utilities having an annual load in excess of four million MWhs in the previous calendar year.

The Commission also requests comments on the pros and cons of any alternatives, such as continuing the ban on retail customer or ARC DR participation in organized wholesale markets subject to the creation of a retail DR program that provides for both customer and ARC participation. This program would be available to retail customers or ARCs whose usage or aggregated usage meets a reasonable demand threshold. Proposed tariffs would be filed by utilities having an annual retail load of four million MWhs or more. All aspects of such retail DR programs would be subject to Commission jurisdiction.

Commenters should address how a retail DR program allowing for ARC participation should be designed so that all customers benefit from the increased DR response, e.g., both participating customers and non-participating customers. The proposals should address compensation and cost allocation issues, in addition to any other implementation issues related to the program, such as measurement and verification and cost-based program fees.

In addition, the Commission is concerned that compensation at full LMP for retail customer DR resources may present significant hurdles to Michigan utilities that are in the process of implementing advanced metering infrastructure (AMI). The Commission requests comments on the impact that DR compensation at full LMP in MISO and PJM markets, or a retail DR program allowing for ARC participation, would have on the development and implementation of time-of-use tariffs that are intended to create a transparent and accurate communication of market signals between the wholesale and retail markets. The Commission is aware that utilities may rely heavily on cost-savings benefits of such price-responsive retail DR programs to significantly offset the cost of AMI implementation. The Commission is concerned that overcompensation of DR from retail customers and ARCs that clears the wholesale market will reduce cost-of-service benefits that would otherwise flow to all customers

Lastly, the Commission requests comments on whether the uneven nature of DR resources bid into the wholesale market by ARCs would allow LSEs to reduce their need for future capacity requirements. Michigan's LSEs could continue to incur the cost of maintaining capacity reserves associated with the full retail customer demand, irrespective of any direct, or ARC, participation in wholesale energy markets. The opportunity to reduce future capacity requirements is a key benefit of the participation of DR resources in energy markets, one which will take on an increased degree of importance due to recent federal initiatives in air quality standards.

The Commission anticipates that DR resources supplied by retail DR programs could be bid by a utility into regional wholesale markets pursuant to the relevant RTO's FERC- approved tariff, or could be designated as load-modifying resources at the utility's discretion. In view of the FERC's DR compensation policy, the former result raises the broader issue of the impact on other utilities in the state of Michigan. Thus, the Commission requests commenters to address how those utilities who intend to bid retail DR program resources into wholesale markets could do so without adverse impact to other utilities in the state.

Case No. U-16020