Demand Response Aggregators and the MISO Wholesale Markets: A Survey of State Laws

Date01 December 2017
Author
12-2017 NEWS & ANALYSIS 47 ELR 11065
Demand
Response
Aggregators and
the MISO
Wholesale
Markets:
A Survey of
State Laws
by Michael Gallagher
Michael Gallagher received his J.D. from Notre Dame
Law School in 2017 and B.A. in History and Political
Science from Duquesne University in 2013.

Demand response—programs designed to encourage
end-users to reduce electricity use during peak peri-
ods—has played a large role in contemporary energy
markets. is growing market has created a new mar-
ket actor: demand response aggregators. ese aggre-
gators have not enjoyed success in many of the states
in the Midcontinent Independent System Operator
(MISO): at least 10 of the 15 states prohibit aggrega-
tors from directly bidding into MISO wholesale mar-
kets, and these prohibitions vary signicantly in their
rationale. is Article argues that legislatures are in the
best position to clarif y the role for demand response
aggregators in the current regulatory structure. If leg-
islatures do not act, other institutional actors may take
action to ll the void: utility commissions could allow
aggregators to bid into wholesale markets, or FERC
could issue an order overruling the state’s veto. Time
will tell how the legal system chooses to keep up with
rapid technological developments in this area.
The United States is cu rrently in a rapidly changing
electricity market.1 Part of this change is techno-
logical: new technologies, coupled with energy-e-
ciency goals, are changing the way users think about
energy.2 But another part of this changing dynamic is reg-
ulatory: traditionally, the regulation of public utilities fell
exclusively within the purview of state regulatory author-
ity. More recently, the federal government, acting through
the Federal Energy Regulatory Commission (FERC), has
increasingly played a role in regulating the electricity sec-
tor. Challenges have arisen as both actors—state and fed-
eral governments—have attempted to respond to emerging
technologies and energy-eciency goals.
Regional transmission organizations (RTOs) and inde-
pendent system operators (ISOs) fall at t he center of this
changing market.3 ese organizations operate transmis-
sion lines, ensuring both that transmission lines are not
discriminatory and that the grid remains reliable.4 e
system works as follows: RTOs accept bids from elec-
tricity generators and match them up with “load serving
entities” (LSEs)—those wishing to purchase electricity
in the marketplace.5 Because electricity cannot be stored,
this involves a constant ba lancing of supply and demand.
RTOs are the organiz ations responsible for juggling that
supply and demand.
1. , Sharon B. Jacobs, Bypassing Federalism and the Administrative Law
, 100 I L. R. 885, 891 (2015) (describing the “dramatic
shifts that have taken place in the United States electricity markets in the
past several decades”); Giovanni S. Saarman González, Evolving Jurisdiction
  , 63 UCLA L.
R. 1422, 1434 (2016) (“While the jurisdictional divide established by the
[Federal Power Act] has demonstrated underlying tensions from its incep-
tion, regulatory developments beginning in 1978 with the passage of [the
Public Utility Regulatory Policies Act] and continuing with the restructur-
ing of the electricity sector have shifted its application and importance.”).
2. Fact Sheet, e White House, Obama Administration Announces Initia-
tive to Scale Up Investment in Clean Energy Innovation (Feb. 10, 2015)
(providing an overview of the Barack Obama Administration’s clean en-
ergy initiatives), https://obamawhitehouse.archives.gov/the-press-oce/
2015/02/10/fact- sheet-obama-administ ration-announces-in itiative-scale-
investment-cl; Sebastien Malo,   -
 , R, Mar. 29, 2017 (outlining a New York
City local eort to produce and sell solar energy), http://www.reuters.com/
article/us-energy-usa-blockchain-idUSKBN171003; Jackie Wattles, Where
, CNN, Apr. 23, 2017 (de-
scribing Apple’s eort to implement clean energy initiatives), http://money.
cnn.com/2017/04/22/technology/apple-clean-energy.
3. RTOs and ISOs are technically distinct. ese dierences will be addressed
later in the Article. To avoid repeating “RTOs and ISOs” throughout the Ar-
ticle, and because the Midcontinent Independent System Operator (MISO)
is an RTO, they will be referred to as RTOs—unless otherwise stated.
4.  notes 62-81 and accompanying text (describing the role of RTOs).
5. J B. E  ., E, E,   E 652
(4th ed. 2015).
         


    Environmental Law Reporter   
work throughout the editing process.
Copyright © 2017 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
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 benets. 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
benets 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 specied 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-
use consumers.
is A rticle surveys state laws within MISO t hat pro-
hibit aggregators from directly bidding into wholesale
markets, and oers suggestions about where states should
go from here. Par t I begins by briey 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.
10. Id.
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 briey 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 benets 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 oers 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 eectu-
ate meaningful change in this area of the law. Legislatures
have an opportunity to provide much-needed clarication
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-
eral governments.
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 Oce 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
sources.”), https://energy.gov/oe/information-center/educational-resources/
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.

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