How the regional power grid works
The regional power grid for West Virginia and 12 other states is operated by a company called the PJM Interconnection. PJM’s bidding process involves almost all of the power plants in those states, including coal, gas, nuclear and solar. The owners of those power-generating facilities submit the lowest price that they can accept from PJM in order to keep those plants available and ready to produce electricity.
The Federal Energy Regulatory Commission has also recently allowed “demand response” resources — businesses willing to stop using electricity — to submit their lowest-priced bids into the market, which informs PJM how much money the companies need to receive in order to shut down operations.
When PJM gets those bids, it sorts them by price. PJM accepts the lowest-cost bids first, and works its way up the list until it gets enough generated power and/or demand response to meet peak winter and summer electricity demands. PJM has rules and penalties in place to make sure these various resources provide reliable energy, or energy reductions, to the grid.
Some power generators argue that demand response companies are able charge a lower price to not use electricity than power companies are able to charge for maintaining a coal-fired power plant or other generation plants.
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West Virginia Attorney General Patrick Morrisey has joined a legal brief awaiting the U.S. Supreme Court in a case that could impact regional electricity prices, the power grid’s resiliency and the ability of West Virginia businesses to offset rising utility rates.
The case — Federal Energy Regulatory Commission v. Electric Power Supply Association — deals with “demand response,” in which groups of electric users, usually large industrial or commercial businesses, sign an agreement to stop using electricity when the grid needs them to.
The lawsuit itself stems from federal orders from 2008 and 2011 that allowed companies to use their demand response — or their reduction in electricity use — to compete in regional powers markets with traditional energy generators like coal and natural gas plants.
Those moves have helped reduce wholesale prices, balance electricity supply and demand and allowed participating businesses to benefit financially by shutting down operations when called upon. But many power producers don’t like companies with demand response competing with coal and other generation plants in the regional markets.
West Virginia businesses supply the regional grid with 587 megawatts of demand response. In 2015-16, those participating businesses (which ones they are aren’t known) stand to make roughly $20 million from demand response contracts, based on current pricing.
Historically, regional electric grids relied solely on new power plants to meet customer demands for electricity. But with the federal orders, grid operators are now able to require the contracted businesses, like industrial manufacturers or commercial warehouses, to stop using electricity, usually during times of peak demand. That means less power is needed from traditional suppliers.
Some power producers argue it reduces the amount of profit they can make from the facilities and can push some power plants, which might be needed in the future, out of business. Engineers, consumer advocates and grid operators argue that the use of demand response saves customers money, is more effective than additional generation at times and often out-competes plants that are the “oldest and most polluting in the fleet.”
Andrew Ott, the incoming CEO of PJM Interconnection, which operates the electric grid in West Virginia, 12 other states and the District of Columbia, said demand response helps both the businesses offering to shut down power and customers who don’t pay to have as many new power plants built to meet demand in the future.
“Demand response has provided a lot of innovation,” said Ott, who is an engineer by training. “That flexibility has value to the grid.”
In the case, which is set for oral arguments before the U.S. Supreme Court on Wednesday, Morrisey and 11 other Republican attorneys general came down in support of the disgruntled power producers, arguing that businesses should not be able to bid demand response directly into the regional markets.
“As the chief legal officer of the State of West Virginia, Attorney General Morrisey will always stand up against any overreaching federal agency that violates the law and infringes on powers reserved to our state,” said Anthony Martin, Morrisey’s senior deputy attorney general.
The attorneys general, led by Scott Pruitt of Oklahoma and Gregory Zoeller of Indiana, couch their arguments against regionally-marketed demand response by evoking states’ rights and disputing FERC’s authority to regulate what they believe is a retail transaction.
“This case does not require judicial evaluation of whether demand response is a good idea. All believe that it is, properly calibrated to the circumstances,” the attorneys general wrote in their brief filed on Sept. 8. “Rather this is about what sovereign is best suited to manage consumer demand response.”
“Our job is to ensure FERC’s policy decision is in accordance with the law,” Martin said. “In this case, it was not.”
The position of the attorneys general, the traditional electricity producers and several public service and utility commissions is disputed by a host of parties including a group of energy law professors, consumer advocates, 14 utility companies from the Northeast and PJM, which manages the largest energy market in the world for 61 million people, including West Virginians.
These groups argue that FERC has the authority to allow companies to bid demand response into regional wholesale markets. They note that the Energy Policy Act of 2005, signed into law by President George W. Bush, required federal regulators to eliminate “unnecessary barriers” for demand response. Federal regulators also allowed state governments that didn’t want to participate in regional demand-response markets to opt out; West Virginia did not do that.
Beyond the legal arguments, supporters of demand response say not letting businesses sign agreements with PJM and other grid operators would have real-world implications.
“Demand response resources play an increasingly important role in ensuring the reliable and cost-effective availability of electricity,” members of Grid Engineers and Experts, a group of nationally-recognized grid consultants, wrote in a brief to the Supreme Court.
An independent market analyst in 2010 found that allowing demand response in the PJM bidding process reduced prices by roughly $11 billion in the 2013-2014 capacity auction. Supporters also point out that businesses offering demand response to the grid stopped blackouts from occurring in 2014 following the polar vortex, when more than 20 percent of PJM’s power producers were temporarily out of service.
If the Supreme Court rules for the side favored by Morrisey, lawyers representing some of West Virginia’s largest businesses say that it could remove an option for several of the state’s large industrial manufacturers and other businesses that have used demand response to offset rate increases approved by the West Virginia Public Service Commission.
“In being able to receive value for the ability to interrupt, these large electric users are able to offset to a degree the massive rate increases they have borne here in West Virginia over the last few years,” said Derrick Williamson, a lawyer representing the West Virginia Energy Users Group. “It is good for West Virginia businesses who are able to participate in PJM Demand Response because it gives them a better ability to maintain their competitive viability to provide jobs, tax payments, and other contributions to the West Virginia economy.”
Williamson, who has worked in utility law for 24 years, said the names of the West Virginia businesses providing demand response to the grid is considered proprietary information, along with how much each business makes from demand-response contracts.
But if the number of demand response megawatts accepted by the PJM stays the same over the next three years, West Virginia businesses could continue to make roughly $10 million to $25 million annually, based on market pricing and cost-sharing estimations.
Energy producers, including representatives from FirstEnergy, the parent company of MonPower and Potomac Edison, argue that the bidding process by PJM over-values demand response, artificially driving down the price that companies receive for their power plants, or what they call “steel in the ground.” They say any type of demand response should be controlled by electric utilities, not the regional market.
“When it was created it was for power plants,” said Doug Colafella, FirstEnergy’s regulatory communications director, referring to the regional capacity market, “it was a way for power plants to essentially generate revenue with a promise to be available down the road.”
The attorneys general mirror those arguments, writing that the states are better at maximizing benefits and preventing “undesirable results like over-incentivizing non-use and under-incentivizing production.”
Companies like FirstEnergy, whose subsidiaries often bid all of their power onto the grid and buy back what they need to supply their customers, have made it known that they want demand response completely removed from the regional market if the Supreme Court upholds the favorable circuit court ruling.
Only hours after the circuit court decision on May 23, 2014, FirstEnergy filed a complaint with FERC requesting all demand response providers be banned from the PJM.
American Electric Power and its West Virginia subsidiaries Appalachian Power Company and Wheeling Power Company are less invested in the case, because they don’t bid all of their electricity generation onto the grid. But Melissa McHenry, AEP’s director of external communications, said the case does affect the amount of excess energy AEP companies can sell to the grid.
“We’re largely agnostic about it,” McHenry said. “But we believe that demand response should be handled by the states.”
First Energy and other state-regulated electric providers point out some businesses already contract with utilities for demand response, or what they refer to as an interruptible rate, but supporters of regional demand response markets argue that utility-by-utility service doesn’t provide the same benefits.
While utilities could bid their interruptible rate customers onto the grid, they often don’t. Colafella said the only reason First Energy does bid its interruptible rate customers onto the grid in Ohio is because the Ohio Public Utilities Commission ordered the company to.
That is why proponents of demand response believe curtailment service providers — third-party companies that group businesses together and bid the combine power reductions onto the grid — are so important. They argue that demand response on a utility-by-utility basis won’t allow the participating businesses or the regional electric grids to benefit as much.
“The grid doesn’t have state boundaries,” said Katherine Hamilton, the executive director for the Advanced Energy Management Alliance, a group that represents curtailment service providers.
If the Supreme Court rules against FERC, Hamilton said, it will “decimate” demand response programs in regional markets and eliminate a way to save money.
“It seems to me that maintaining the availability of PJM Demand Response as an option — in addition to utility-specific programs —is better for West Virginia business and industry that is trying to remain competitive in the face of seemingly constant electric rate increases,” Williamson said.
Ott, the incoming CEO of PJM, said he was confident that the reliability of the electric grid can be maintained no matter which way the Supreme Court rules, but he said the justices’ decision will ultimately impact the market price and flexibility of grid operators.
“At the end of the day, the system will be reliable because we will make it so,” he said. “The point is how flexible customers can be based on the various jurisdictional rules.”
Reach Andrew Brown at email@example.com, 304-348-4814 or follow @Andy_Ed_Brown on Twitter.