47 ELR 11066 ENVIRONMENTAL LAW REPORTER 12-2017
Recently, RTOs began taking on another role: imple-
menting demand response programs. Demand response
programs a re systems designed to encourage end-users to
reduce electricity use during peak periods. ese programs
seek to accomplish this goal through one of two ways:
(1) an incentive payment, or (2) charging higher prices
during peak periods. Advocates of demand response claim
that it has the potential to reduce costs, enhance grid reli-
ability, and even produce environmental benets. Critics of
demand response question these premises by pointing out
that users may simply shift their electricity consumption
to non-peak periods. Whatever one makes of the cost s or
benets of the program, one thing is clear: it is here to stay
and “will only grow in importance.”6
Demand response aggregators have emerged as key play-
ers in this new electricity market. Essentially, their business
model breaks down as follows: ese aggregators represent
several clients and make demand response bids into RTOs.
ese bids are essentially commitments not to consume
energy during specied periods.7 In exchange, the RTO
provides the incentive payment to the power aggregator.
e aggregator retains a portion of the payment from the
RTO a s its fee a nd distributes the rest to its cu stomers.
e aggregator serves an important function by ma king
demand response available to smaller customers.
ese forces set the stage for the federal government
to enter the picture. In 2005, the U.S. Congress did just
that and “added to the chorus of voices praising whole-
sale demand response.”8 Essentially, it declared that its
policy was to encourage demand response. Responding to
this ca ll to arms, FERC issued Order 719, which requires
RTOs to “receive demand response bids” from aggregators,
except when doing so would be contrar y to state law.9 A s
the U.S. Supreme Court recently upheld Order 745—an
order that builds on Order 719—in Federal Energy Regula-
,10 it seems
like demand response is here to stay.
However, an important caveat on Order 719 remains:
states are free to restrict an aggregator’s ability to place
retail customers’ bids directly into the wholesale market.
Some states have done just t hat. is challenge is par-
ticularly acute in the Midcontinent Independent System
Operator (MISO), which is an RTO that operates in the
midwestern and southern United States. Currently, at least
nine of the 15 states in MISO prohibit aggregators from
participating in wholesale markets on behalf of their end-
is A rticle surveys state laws within MISO t hat pro-
hibit aggregators from directly bidding into wholesale
markets, and oers suggestions about where states should
go from here. Par t I begins by briey describing the basic
structure of the electrical grid: generation, transmission,
6. Jacobs, supra note 1, at 888.
7. notes 103-07 (describing the aggregator business model).
8. Federal Energy Regulatory Comm’n v. Electric Power Supply Ass’n, 136 S.
Ct. 760, 770, 46 ELR 20021 (2016).
9. , e.g., id. at 771.
and distribution. It then outlines the traditional model of
utility regulation and a subsequent period of restructur-
ing. is period of restructuring resulted in a need for new
market actors: RTOs. Part I then describes both (1) the
forces that led to the creation of RTOs and (2)RTO opera-
tions. e part concludes by briey introducing MISO.
Part II introduces demand response, a system designed
to encourage consumers of electricity to reduce their usage
during peak periods. It also outlines the potential costs
and benets of demand response. e part continues by
discussing demand response aggregators a nd the role they
currently play in energy markets. Part II concludes by dis-
cussing the federal government’s policy toward demand
response, including Order 719.
Part III sur veys the state laws that continue to prohibit
aggregators from operating in the marketplace. A s men-
tioned, at least nine out of 15 states within MISO have
issued such prohibitions. ese prohibitions usually take
the form of a utility commission decision. In these deci-
sions, state uti lity commissions have provided va rious
rationales for denying aggregators t he opportunity to bid
into the wholesale marketplace.
Part IV oers both modest suggestions for states on how
to proceed and insights as to what will happen next. I argue
that the state legislature is the actor best-situated to eectu-
ate meaningful change in this area of the law. Legislatures
have an opportunity to provide much-needed clarication
for both utility commissions and aggregators. If legislatures
do not act, utility commission courts still may eventually
allow ag gregators into the wholesale market. However, as
progress ha s been slow, this is unlikely to happen at a ny
point in the near future. FERC, a nother important actor,
claims it has the authority to override states on this issue,
but it likely will not do so because of federalism issues.
I. The Electric Grid, Applicable Laws,
and the Need for RTOs
is part provides background information necessary to
understand the dynamic between all of the releva nt actors
in the electrical grid: aggregators, RTOs, and state and fed-
A. The Basic Structure of the Electrical Grid
Electricity is a “secondary” energy source, meaning that it
is converted from other sources of energy.11 e electricity
11. , e.g., Erich W. Struble,
, 113 P. S. L. R. 575, 580-81
(2008); U.S. Dep’t of Energy Oce of Elec. Delivery & Energy Reliability,
Electricity 101 (“Electricity is a secondary energy source which means that
we get it from the conversion of other sources of energy, like coal, natural
gas, oil, nuclear power and other natural sources, which are called primary
electricity-101 (last visited Oct. 6, 2017); see also E ., supra note 5,
at 2 (“e laws of thermodynamics tell us that we cannot create energy; we
can only it. We must start with the resources found in nature and
convert them to forms suitable to meet our needs.”).
Copyright © 2017 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.