FERC Electric Demand Response Final Rule Reflects Thinking of Late NERA Special Consultant Dr. Alfred Kahn
24 March 2011
New York -- The Final Rule issued by the US Federal Energy Regulatory Commission (FERC) related to compensation for reductions in electricity consumption is consistent with the approach advocated by the late Dr. Alfred Kahn, a NERA Economic Consulting founder who remained a Special Consultant with the firm for many years.
Dr. Kahn, with the assistance of NERA staff, submitted extensive testimony to FERC supporting the rule that the Commission ultimately decided to adopt. The rule requires regional transmission organizations and independent system operators under certain conditions to pay demand response providers the same price that generators are paid -- so-called locational marginal price, or LMP -- when doing so will reduce costs for all customers. The proposed rule was derived, in great part, from earlier testimony Dr. Kahn submitted in a predecessor case.
FERC quotes Dr. Kahn extensively in support of the rulemaking's approach, and essentially adopts Dr. Kahn's position that because consuming one megawatt less of electricity has the same market impact as generating one megawatt more, "providers" of reduced consumption should be compensated at the same market rates as providers of electricity. Regional transmission operators and independent system operators are now required to pay such demand response providers the market price for electricity for reducing consumption below what would normally be expected.
"This rulemaking once again underscores Fred Kahn's role as a giant in the field of energy industry regulation," said Mike King, Chair of NERA’s Global Energy, Environment, and Network Industries Practice. "He would be very gratified with the FERC's decision on this issue, and we at NERA are pleased that Fred's intellect and insight are still having an impact and will continue to influence regulation for the better for years to come."
Dr. Kahn was affiliated with NERA for almost 50 years, and was a key influence on the regulation and deregulation of several industries, including energy, airlines, and telecommunications.
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