Recent FERC Complaint Filed by Demand Response Aggregator Could Significantly Impact MISO Wholesale Market

November 5, 2020

By Kurt R. Rempe, Fredrikson & Byron and Rao Konidena, Rakon Energy LLC

Kilowatt hour electric meters power supply meterThe nonprofit legal aid organization Earthjustice recently filed a complaint with the Federal Energy Regulatory Commission (FERC) on behalf of Voltus Inc. (Voltus) against the Midcontinent Independent System Operator, Inc. (MISO). The complaint asks FERC to reverse its rule allowing MISO states to “opt-out” of permitting third-party aggregators of demand response services to participate in the wholesale markets. Voltus is one of these third-party aggregators. It aggregates commercial and industrial customers throughout the United States and Canada that are willing to reduce their power consumption during periods of high demand in exchange for payments that they receive from the MISO wholesale market. These payments are provided under FERC Order Nos. 719 and 745 in recognition that demand response programs can lower wholesale power prices, promote renewable energy, increase awareness and conservation of energy use, and enhance the reliability of the power grid.

However, those same orders provided states the right to “opt-out” of allowing third-party aggregators from signing up demand response customers to take advantage of these payments. Twelve of the fifteen states in MISO have elected to opt-out, leaving only MISO Illinois, Michigan (serving the 10 percent of load that is allowed to buy competitive electricity supply), MISO Texas, and a limited set of municipal and cooperative utilities that have consented to allow Voltus to operate in their service territories. The states that opted-out did not want their rate payers funding demand response programs that provide benefits that extend beyond their borders and onto the entire MISO system or simply found it too difficult to come up with a workable model to allow third-party demand response aggregators to participate in the wholesale market that did not have potential adverse impacts to the reliability and operation of the distribution system downstream. As result, demand response remains the exclusive domain of these states’ regulated utilities which have little incentive to enter into agreements with third-party demand response aggregators.

Voltus contends that without the opt-out, it could be delivering over 9,000 MWs of demand response in MISO, and that if it were delivering the same demand response that utilities currently provide, it would save ratepayers $130 million annually. Voltus further maintains that the pervasive extent of state opt-outs in MISO has resulted in an anemic market for wholesale demand response, which, in light of ongoing changes to the resource mix, now pose an imminent threat to efficient and reliable operation of the grid.

The complaint argues that the opt-out runs afoul of the Federal Power Act which does not grant states the right to determine who is permitted to participate in RTO/ISO markets. The complaint also argues that the opt-out provision is unduly discriminatory because it treats demand response resources different than energy storage and other distributed energy resources which defies FERC’s longstanding commitment to technology-neutral market rules.

The complaint seeks fast track processing in order for Voltus to participate in the next MISO Planning Resource Auction in March that allows demand response to bid into the market alongside supply-side capacity resources. Voltus requests that FERC remedy these issues by issuing a notice of proposed rulemaking to repeal the provisions of 18 C.F.R. § 35.28(g)(iii) that permit states to bar third-party demand response providers along with an order interpreting this regulation to find that current prohibitions against third-party demand response providers that have been put in place by the MISO states must be struck down.

FERC has been on a winning streak lately in the courts over its authority to implement rules for storage and distributed resources to participate in the RTO/ISO wholesale markets. This summer, the U.S. Court of Appeals for the D.C. Circuit rejected a jurisdictional challenge to FERC Order No. 841, which was designed to remove the barriers to participation for electrical storage resources by opening up capacity, energy and ancillary service markets. The Court found that because FERC has exclusive authority over wholesale market participation, the Supremacy Clause bars states from interfering with that jurisdiction by banning electric storage facilities connected to state-jurisdictional distribution systems from participating in federally regulated wholesale markets.

As a result, it would not be surprising to see FERC grant this complaint and eliminate the state opt-out right to align with the rationale in Order No. 841. Further, the opt-out provision does not fully sync with Order No. 2222 that FERC issued in September. Order No. 2222 directs RTOs/ISOs to adopt reforms to remove barriers to allow distributed energy resources to be aggregated and sold into U.S. wholesale power markets and does not include an opt-out provision. However, the opt-out provision arguably would still apply if demand response is included as a component of any distributed resource aggregation.

MISO has more demand response resources than the other RTO/ISOs. Yet it cannot keep pace with the amount of capacity that is currently needed on the system and will be needed in the near future as highlighted in the latest MISO Organization of MISO States (OMS) survey. This capacity shortfall is due in part to the retirement of conventional baseload generation that has narrowed MISO’s capacity reserve margin and lead to extremely high prices as illustrated by the Michigan 2020 auction prices that cleared at the Cost of New Entry (CONE) value of $250 per MW-day.

Voltus sees a tremendous market opportunity here and a promising path to securing a favorable FERC order. That optimism is based on prior orders and court precedent that makes it difficult to support the opt-out for demand response when it does not apply to storage and other distributed generation resources. There is functionally no difference in terms of power system impacts between a battery taking power off the grid to relieve congestion and flexible demand response resources cutting back during periods of peak demand.

It will be interesting to see how the MISO states and other stakeholders respond to this complaint. Many states have been pushing MISO on transmission planning and expansion along with regional cost allocation to support renewable power, so some states may be more receptive to the complaint than others. MISO’s general counsel made an initial statement in support of its tariff and the demand response opt-out provision. However, MISO may not be too resistant to the complaint as it has seen a rapid growth in wind and solar. Demand response and storage can quickly respond and reduce the resource adequacy risks associated with greater reliance on these variable and intermittent resources.