Let Customers Fix Electricity Markets

Mon Nov 03 15:24:38 EST 2003
By Hamish Fraser and Dr. Michael Rosenzweig with Dr. Sarah Voll

The Federal Energy Regulatory Commission's (FERC's) Standard Market Design proposal, an attempt to address weaknesses in the U.S. electricity system, has been stalled by jurisdictional and regional squabbling. The ultimate goal of the proposal is to create structurally competitive and efficient markets that are immune to price manipulation.

However, this article argues that the FERC's proposed burdensome structure of regulatory oversight is keeping the Commission from addressing the fundamental problem: the inability of the demand side of the market to respond to price.

The authors propose that the FERC address this problem more directly by letting customers take action through a Demand Response Mechansim (DRM). By responding to a scarcity of supply with a 2-5% demand reduction, the DRM could reduce wholesale price spikes by half or more. DRM customers would reduce demand either by switching energy sources, cancelling shifts or even shutting down entirely -- and receive the benefit for not using the electricity they would have otherwise consumed.

This article was published in the Mercer Management Journal, Vol. 1, No. 16, November 2003.