In these comments filed with the Federal Energy Regulatory Commission, the authors focus on a single element of the Commission’s Standard Electricity Market Design (SMD) Notice of Proposed Rulemaking: the demand side of power markets. While the authors support the process to create a standard set of market arrangements for US power markets, they argue that the Commission’s proposed SMD ignores the market forces inherent in functional markets that provide both price discipline and reliability. The authors state that the Commission is resorting to “administrative band-aids” to cover the problem rather than addressing the absence of a demand response directly.

The authors propose a demand response mechanism (DRM) with the following characteristics:

• It will apply to a minimum number of the largest consumers;
• It will only be triggered under predetermined conditions of supply scarcity;
• DRM participants will be entitled to purchase a “baseline” quantity of energy at pre-existing tariff (or contract) prices during the DRM period;
• Consumption in excess of the baseline will be charged market prices; and
• Customers can offer to consume less than their baseline amount and the difference will be “sold back” at market prices.

In contrast to the administrative mechanisms currently proposed by the Commission, it provides more accurate short and long-term price signals to market participants and allows customers to choose whether consuming electricity at increased prices is economically or commercially worthwhile—and even to profit from a decision to reduce consumption.