FERC moves ahead with campaign to promote energy efficiency and renewable energy

Whatever other messages the November election sent, it isn't signaling the Federal Energy Regulatory Commission to slow down, FERC Chairman Jon Wellinghoff says.

Wellinghoff was in Portland, Ore., for a smart grid conference last week, pressing his campaign to pay consumers who conserve electricity equally with companies that generate it, and to promote transmission projects that serve wind and solar power. Both issues figure to dominate the commission's agenda next year.

"Quite frankly, FERC is sort of operating independently of the electoral process," Wellinghoff said in an interview in Portland. "We've been acting under our statutory federal authority to move forward toward what I see as our responsibilities under the Federal Power Act, and that is to ensure rates are just and reasonable. And part of that I see as improving efficiency and competition in the markets, and incorporating new resources into the markets, including renewables and the demand side.

"That's been my strategic plan. That's been my focus, and I plan to continue that focus regardless of the change in Congress unless and until Congress would change our authorization legislation, and of course I would have to follow whatever Congress set out as policy."

The two missions are expressed in separate notices of proposed rulemaking (NOPRs) issued by FERC that Wellinghoff expects to be settled next year -- after FERC's staff and commissioners resolve an intense debate among electricity industry players about the policy proposals.

Spreading out the costs of large transmission lines

The proposed rule on transmission cost allocation and planning (docket RM10-23) would make state renewable energy generation mandates a factor in approving new high-voltage transmission projects, giving them equal footing with reliability and economic factors.


It would declare as policy that the largest transmission lines benefit wide geographic areas and interests, and thus their costs can be widely spread. The proposal would also strip away transmission line owners' current "right of first refusal" when new transmission lines are called for in their territories. The current privilege may be unfair to independent transmission owners, notably those hoping to build lines to new wind power farms, according to FERC's proposal.

This plan triggered protest from utility transmission owners, which say FERC ignores the utilities' obligation to serve their customers. Regional interests want the rule modified in their favor. And Atlanta-based Southern Co. has made a frontal attack, contending that FERC has no authority to impose its transmission planning policy on the Southeastern region, where state-regulated power companies produce and deliver electricity. One energy attorney called the Southern paper a "Fort Sumter declaration," pointing toward an all-out court challenge.

FERC's proposed rule on demand response programs (docket RM10-17) would mandate that consumers who reduce electricity consumption in the wholesale power markets FERC regulates -- or energy aggregators that arrange to do that for them -- would be paid the full market price for the power, as if they were generators.

Companies bent on strategically managing their electricity usage, like Wal-Mart and the growing corps of power aggregators, enthusiastically support this initiative. Leading generators and power marketers oppose it just as stiffly: Consumers would be getting a double dip, saving money by forgoing purchases of power, and then being paid again with the market price for the power they never used.

The debate over what some experts call "negawatts" has engaged two academic giants of regulatory policy, Harvard University's William Hogan, an architect of electricity deregulation theory, and retired Cornell University professor Alfred Kahn, whose deregulation of airfares while heading the Civil Aeronautics Board in the Carter administration energized the deregulation movement.

Their sparring is recounted in a Sept. 10 blog post by Bruce Radford of Public Utilities Fortnightly, titled "The Nutty Professors: Bill, Fred, and the Strange Case of Demand Response." Hogan argues, "In the market for shoes, there is no need to pay consumers for reducing the number of shoes they purchase." Kahn replies that selling shoes and selling electric power are hardly the same. FERC's plan would create a fairer market -- and cheaper electricity -- for consumers, he argues.

2 contentious issues

Wellinghoff predicts that FERC's staff can finish its report to the commission on demand response early next year, with commission action to follow. The transmission case will take more time -- more than 18,000 pages of argument were filed in the initial comment period. So that proposed ruling probably won't go to the commission before spring, he said.

It remains to be seen what FERC's staff will present to the commission, when they can do it, and how the commission will respond, but Wellinghoff said he is confident on both policy fronts:

"Just from talking to a number of companies, the right of first refusal is a very contentious issue, but to a limited number of companies. For example, Southern Co. -- a huge, multi-state company -- they have no problem with taking away the right of first refusal, because they don't have a right of first refusal right now in their tariff. A lot of companies [in] the Midwest are forming transmission subsidies to do transmissions in other utilities' jurisdictions, and they have no problem with it, either. It seems to me there are selective companies in certain areas that may have some concern ... but I don't think it's a united front."

The positions on demand response also are split, he agreed. "But it seems to be sort of divided between the customers and the generators. All the customers obviously are very interested in ensuring that they can bid in demand response at a fair price -- what they conceive to be a fair price -- which would be the full LMP [the locational marginal or market price].

"And the generators and their consultants are very concerned that that may take away some revenue from them and actually incent more demand response that would then lower the amount of generation that would be required in the markets.

"That's kind of expected, that those people who have their ox gored are going to be the ones who are most concerned."

A simplified version of the argument holds that the pure approach is to create real-time market prices for retail consumers, and let them decide whether to buy or conserve electricity, rather than giving power aggregators a subsidy to boost demand response in the wholesale markets FERC oversees. That is in line with Hogan's approach. Demand response providers should get the market price minus the cost of generation that is part of the retail power rate.

Kahn speaks for Wellinghoff and others who believe that real-time retail electricity pricing is a long, long way off in most of the country, and if it did appear, price shocks could push state regulators to stop it. FERC is intervening on the wholesale side because that's its arena.

A path that probably leads to court

"We certainly are in a transition phase, and right now, the wholesale demand response market has the upper hand," Wellinghoff said in the interview. "If you're a purist with respect to markets, then if you sell into a market with an equivalent product, you get the market price. That, to me, is a purist view of things, and so I'm a little confused by Bill Hogan's view that, no, you look behind that market price somehow and determine, gee, what's happening to you otherwise."

"By pricing demand response at a market price, it puts demand response in competition with the supply side, and the suppliers are pushing back big time," said Susan Court, an energy attorney who was FERC's director of enforcement when she left the commission last year, after 28 years on the staff.

"This throws long," she says of the FERC demand response initiative.

"This pushes the envelope for the stated purpose of encouraging demand response. That can be counterbalanced by the other implications and the impact on the market, but FERC will have to explain that in order to defend it successfully in the courts," she said in an interview.

"They have to provide an adequate explanation, and the decision has to be based on substantial evidence in the record."

FERC will meet that test, its chairman says. "I don't want to speak for the rest of the commission," Wellinghoff said. "Other commissioners are on the record expressing some concerns [about the demand response proposal]. So we'll see where we come out at the end of the day."

"I think we've made every effort to get as diverse views on the record as possible," he said, "so with that divergence of views, we're able to exercise pretty broad discretion as to where we move with respect to a particular rulemaking. As long as we have views that express multiple sides of the issues -- and I think we certainly do in both these NOPRs -- it's going to allow us to go pretty much either way, I believe."

"We can go pretty far. We are, I think, going quite far with the demand response compensation NOPR with the transmission planning and cost allocation NOPR."

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