FERC Assessment of Demand Response & Advanced Metering 2006 APPA Business & Financial Conference September 18, 2006 – Session 11 (PMA) Presented by: Larry NyquistJohn Kelly Manager of Planning & RatesDirector, Economics and Research SMMPAAPPA Rochester, MNWashington, DC

FERC Assessment Parameters Section 1252(e)(3) of the Energy Policy Act of 2005 required the FERC to prepare a report by appropriate region to assess electric demand response resources, including those available to all customer classes. To aid in preparing the report, FERC staff developed and implemented a national survey of electric demand response and advanced metering. The survey included 3,365 organizations in all 50 states representing every aspect of the electric delivery industry. The survey had a response rate of approximately 55%. Page 1

FERC Survey Parameters The following items were identified and reviewed as a result of the FERC survey: Saturation and penetration rate of advanced meters and communication technologies, devices and systems; Existing demand response and time-based rate programs; The annual resource contribution of demand resources; The potential for demand response as a quantifiable, reliable resource for regional planning purposes; Page 2

Steps taken to insure that, in regional transmission planning and operations, demand resources are provided equitable treatment as a quantifiable, reliable resource relative to the resource obligations of any load-serving entity, transmission provider, or transmitting party; and Regulatory barriers to improved customer participation in demand response, peak reduction and critical period pricing programs. FERC Survey Parameters (continued) Page 3

Advanced Metering Advanced metering is defined as a metering system that records customer consumption [and possibly other parameters] hourly or more frequently and that provides for daily or more frequent transmittal of measurements over a communication network to a central collection point. Page 4

FERC Survey indicates that advanced metering currently has a penetration rate of about six percent of total installed electric meters in the United States. The estimate of market penetration of advanced metering is highest among rural electric cooperatives at about 13 percent. Investor-owned utilities have the next highest penetration rate at close to six percent. Advanced Metering (continued) Page 5

Advanced Metering (continued) Page 6

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Existing Demand Response Programs and Time- Based Rates Demand Response is defined as changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized. Demand response under this definition can be categorized into two groups: 1. incentive-based demand response; and 2. time-based rates. Page 10

Existing Demand Response Programs and Time-Based Rates (continued) FERC staff found that use of demand response is not widespread. Only approximately five percent of customers are on some form of time-based rates or incentive-based program. Nationally, the total potential demand response resource contribution from existing programs is estimated to be about 37,500 MW. The vast majority of this resource potential is associated with incentive-based demand response. Page 11

Existing Demand Response Programs and Time-Based Rates (continued) Page 12

Existing Demand Response Programs and Time-Based Rates (continued) Page 13

Demand Response is not treated in transmission planning uniformly across regions, and demand response is typically not directly assessed during transmission planning. The eligibility of demand response resources to provide operating reserves has been limited in most regions and is typically limited to providing supplemental (non-spinning) and slower reserves. Demand Response in Regional Transmission Planning and Operations Page 14

FERC staff has identified the following actions and steps that could be taken to enable greater use of demand resources: Assure that regions that schedule resources to meet either energy or reserve needs properly recognize the capabilities and characteristics of demand resources. Assure that requirements are specified in terms of functional needs rather than in terms of the technology that is expected to fill the need. Accommodate the inherent characteristics of demand response resources. Demand Response in Regional Transmission Planning and Operations (continued) Page 15

Allow appropriately designed response resources to provide all ancillary services including spinning reserve, regulation, and frequency response reserves. Allow for the consideration of demand response alternatives for all transmission enhancement proposals at both the state and ISO/RTO level. When appropriate, treat demand response as a permanent solution, similar to transmission enhancements. Develop better demand response forecasting tools for system operators, to increase the usefulness and acceptability of demand response. Demand Response in Regional Transmission Planning and Operations (continued) Page 16

FERC staff identified the following regulatory barriers to improved customer participation in demand response, peak reduction and critical peak pricing programs: Disconnect between retail pricing and wholesale markets. Utility disincentives associated with offering demand response. Cost recovery and incentives for enabling technologies. The need for additional research on cost-effectiveness and measurement of reductions. Regulatory Barriers Page 17

The existence of specific state-level barriers to greater demand response. Specific retail and wholesale rules that limit demand response. Barriers to providing demand response services by third parties. Insufficient market transparency and access to data. Better coordination of federal-state jurisdiction affecting demand response. Regulatory Barriers (continued) Page 18

The potential immediate reduction in peak electric demand that could be achieved from existing demand response resources is between three and seven percent of peak electric demand in most regions. Conclusions Page 19

FERC staff recommends the following action be taken: 1. Explore how to better accommodate demand response in wholesale markets; 2. Explore how to coordinate with utilities, state commissions and other interested parties on demand response in wholesale and retail markets; and 3. Consider specific proposals for compatible regulatory approaches, including how to eliminate regulatory barriers to improved participation in demand response, peak reduction, and critical peak pricing programs. Conclusions (continued) Page 20