Market Power and Demand Responsiveness: Letting Customers Protect Themselves

Tue May 20 16:24:38 EDT 2003
By Jonathan Falk, Hamish Fraser, and Dr. Michael Rosenzweig with Dr. Sarah Voll

One of the primary criticisms of the Federal Energy Regulatory Commission's Standard Electricity Market Design (SMD) Notice of Proposed Rulemaking (NOPR) was the lack of attention to the demand side of power markets. The authors of this article assert that the NOPR reflected too much the effects of one of the notable "failures" of early restructuring efforts in the U.S., when California experienced extraordinarily high prices and reliability problems. The sensitivity to protecting customers that this incident engendered caused the Commission to focus on market mitigation and monitoring, rather than addressing a real solution that could address market failure: resolving the inability of the demand side of the market to respond to price.

In this article the authors recommend an approach aimed at solving this problem, and propose to enable sufficient customers to respond to price changes when power markets are under stress. They term their proposal a "demand-response mechanism" (DRM), and argue that this DRM will provide customers with a way to react to high prices but will not interfere with the normal supply-side corrective market process, i.e., investment in additional capacity.

This article is republished with permission from Electricity Journal, Volume 16, Issue 5, May 2003, Copyright (c) 2003 Elsevier Science, Inc., http://www.elsevier.com/locate/tej. All rights reserved.