Federal regulators want to reward consumers and companies for using less electricity, a switch in approach that many in the industry see as politically driven even as some argue it boosts competition.

The Federal Energy Regulatory Commission, an independent agency charged with regulating interstate electricity, natural gas and oil markets, has recently taken the lead on power market issues championed by the White House.

FERC has initiated several reforms to the electric sector over the past year that Chairman Jon Wellinghoff believes would make electric markets more “fair and balanced.”

He says his reforms would bring more renewables onto the grid and help develop an interactive smart grid by which consumers can lower their electricity usage based on the price of the commodity at any given time.

During a roundtable discussion with reporters in early April, Wellinghoff repeated sentiments about how the wholesale electric market is “anticompetitive,” and restricts developers of alternative energy. “We want to foster more competition,” the Chairman said.

All of FERC’s new orders are coming down the pipe behind the backdrop of President Obama’s plans for a “secure energy future.”

“Today, about two-fifths of our electricity comes from clean energy sources. But we can do better than that,” Obama said during a speech at Georgetown University in March when he unveiled his Blueprint for a Secure Energy Future.

His Blueprint outlines national energy plans already in the works. But the Blueprint also highlights efforts of an independent agency not under his administration-FERC.

Obama touts FERC’s moves to modernize the grid, make it more reliable, and to find ways to integrate renewables onto that grid.

Wellinghoff is certainly a champion. He wants transmission planning and cost allocation to be clarified so costs are spread evenly among beneficiaries. FERC has wrangled with the contentious issue for years.

The Chairman wants generators to have more latitude in scheduling transmission. He wants to try out a new supply/demand tool designed by The Lawrence Berkeley National Laboratory that would presumably bring more wind and solar power onto the grid by improving supply/demand planning and operations.

Wellinghoff wants to expand energy storage and increase distributed generation, all of which would ultimately bring more renewables onto the grid and put “competitive structures in place.”

But it is Order 745 that has become one of Wellinghoff’s most celebrated issues. The order requires grid operators in all six organized electricity markets to pay the same locational marginal price to demand response providers for taking load off the grid, reducing power consumption, as it does to generators that provide electricity to the grid.

“We think it’s an important part of our strategic plan to make markets more competitive,” Wellinghoff said.

In a June 2009 congressionally-mandated report, FERC assessed demand response potential. FERC discovered the potential for peak electricity demand could drop up to 20 percent with the use of demand response programs, which could reduce the need for more baseload power plants.

But the clarity ends there. Order 745 has set the battlefield and generated a vigorous debate.

In support are large industrials such as Walmart, and demand response companies, such as EnerNOC, Viracity among others.

Companies associated with development of an interactive smart grid support Order 745 because they support any strategy that increases electricity market price signals and power cost transparency.

Utilities, generators and some Midwestern states are not keen on the idea. They think demand response providers are being subsidized by electricity producers which will eventually lead to higher electricity prices and costs for consumers.

Nowhere have the two sides of this battle been more pronounced than at the FERC itself.
In his dissent to the March 15 order, commissioner Philip Moeller faced off with the Chairman.

Moeller said Order 745 actually “conflicts,” with the Chairman’s intentions to promote “competitive markets.”

He said “comparability” is at the heart of this rulemaking. Moeller said he believes in “comparable compensation for a comparable service.” But in this case, he believes demand response providers will end up getting more money for not producing electricity.

“The characteristics of a megawatt and a ‘negawatt’ are different, both in terms of physics and in economic impact,” Moeller said.

Suppose a generator and demand resource bid into the energy market and both bids are accepted and paid the LMP of $100, he said.

But, the demand resource would pocket that $100 from the wholesale market, and it would pocket $25 by not purchasing generation at the retail rate.

He said Order 745 “effectively ignores” the fact that the demand resource will actually receive a total compensation of $125 as a result of its decision not to consume.

“The decision to pay demand resources the full LMP…actually results in overcompensation that is economically inefficient, preferential to demand resources, and unduly discriminatory towards other market resources,” Moeller said.

While Moeller was alone among Commissioners in his dissent, market participants’ rehearing requests this month show he is not alone in his opinion.

Wellinghoff told reporters earlier this month he is prepared for a fight.

“We’ll do what we need to do to address the legal challenge,” he said. “We’ve had resistance to rules in the past.”

One of the largest resistors is the Electric Power Supply Association, which filed for rehearing of FERC’s order on April 14.

EPSA’s spokesman, Dan Dolan, said the problem with FERC’s Order 745 is three-fold.

First, he said FERC is stepping out of its wholesale jurisdiction and reaching for state authority to reduce electricity consumption in the retail market.

The independent power generators and marketers joined with a large swatch of the electric industry, including municipal utilities and rural electric cooperatives, to appeal FERC’s decision.

“We never agree the sun rises in the East with the munis and coops, and yet this is an issue with which we all have concern,” Dolan said. And, they agree that Order 745 is “a major regulatory overreach.”

Secondly, FERC’s objective–incorporating more renewables onto the grid–is not going to work with this order.

“I don’t think this helps renewables. It helps demand response providers. We [generators] are going to be subsidizing these demand response providers to be in the market.”

Thirdly, EPSA shares Moeller’s concern about how demand response providers will get a double payment, once in the wholesale market for electricity not used, and again in the retail market because generation is a component of the retail rate.

Dolan said gaming is also a major concern among interruptible service customers. For example, a steel factory in Pennsylvania may decide to take load off the PJM Interconnection for a particular time of day.

That factory still needs power, so it could start up its own on-site unregulated diesel generator behind the meter and ultimately get paid twice. It’s still using electricity, but still getting paid for taking load off the PJM grid. “They are still consuming electricity,” Dolan said.

“It’s the grandmother in western Pennsylvania that is now subsidizing U.S. Steel.”

Electricity is a commodity, Dolan said. “In no other commodity do you get paid for not using it,” he said. This order, “inextricably alters the marketplace.”

The issue is actually rooted in an old PJM regulation that sunsetted in 2008. The regulation allowed industrial customers to get paid full locational marginal price for power not used. So, in 2007, a coalition of customers appealed to FERC to force PJM to continue to offer them full LMP after the old provision sunsets.

Then-FERC Chairman Joe Kelliher did not support full LMP for demand response.

Boston-based demand response giant EnerNOC Inc. said it’s only fair that demand response providers should receive equal compensation as generators because demand response has same impact economically on the system as an additional megawatt of generation.

“Demand response service provides the same value to the market by bringing supply and demand in balance, and the price it receives should be the same as generation,” the company’s vice president of regulatory affairs, Ken Schisler, said “Grid operators do not care whether supply and demand are brought into balance by adding more electricity or contracting with customers to reduce, as long as system balance is maintained.”

EnerNOC is a demand response aggregator that contracts with several thousand sites and then bids demand response into the organized markets.

“The grid doesn’t care. It just needs to know that if it asks for 10 megawatts, it’ll get 10 megawatts [of curtailment],” Schisler said.

Wellinghoff said he’s confident that by July, grid operators will report to FERC how they will compensate the demand response providers and still perform the feat of balancing load with supply.

The Chairman expects regional transmission organizations like the New England ISO to work closely with FERC over the next few months.

Wellinghoff’s actions are not completely unexpected. When he was acting chairman in April 2009, he made waves when he said baseload power is an “anachronism.”

“You don’t need fossil fuel or nuclear [plants] that run all the time,” Wellinghoff said. “We may not need any, ever.”

Surprising words from an acting chairman that have defined his term since.