Renowned Regulatory Economist Supports Federal Energy Regulatory Commission Proposal for Demand Response Parity

30 August 2010

New York, NY, 30 August 2010-In an affidavit filed today with the Federal Energy Regulatory Commission (FERC) on demand response compensation in organized wholesale markets, the “father of regulatory economics” Dr. Alfred E. Kahn testified in support of FERC’s Notice of Proposed Rulemaking (NOPR) to require that organized wholesale markets compensate demand response in the same manner as generation. In his testimony, Dr. Kahn emphasizes that “demand response is in all essential respects economically equivalent to supply response,” and that “economic efficiency requires, as the NOPR recognizes, that it should be rewarded with the same Locational Marginal Price (LMP) that clears the market.”

Dr. Kahn further advocates that “any increase in the efficient responsiveness of demand (to prices competitively determined, as in the ISO-conducted auctions) will move us in the direction of correcting the most severe deficiency in most such markets in the US, the lack of an adequately, price-responsive demand side.”

Dr. Kahn’s testimony comes on the heels of comments filed by opponents to demand response parity, including the Electric Power Supply Association, which, according to Dr. Kahn, mischaracterized full LMP compensation for demand response as a “subsidy” rather than a legitimate investment.

 “That electricity generators have opposed this plan should not be surprising: their primary business is to sell power, not to encourage its conservation, and I have myself publicly cited evidence that they reap the preponderance of their profits on those occasions when demand is at its peak,” said Dr. Kahn in his comments.

Dr. Kahn is a world-renowned economist and the Robert Julius Thorne Professor of Political Economy, Emeritus, at Cornell University. He served as an economic advisor to President Carter, the Chairman of the New York Public Service Commission, and the Chairman of the Council on Wage and Price Stability. Dr. Kahn is the author of many publications including The Economics of Regulation, the first comprehensive integration of the economic theory and institutional practice of economic regulation.

“Having Dr. Kahn, one of our country’s most respected economists, advocate so articulately for full LMP compensation for demand response as set forth in the FERC NOPR is a significant win for ratepayers, for the demand response industry, and for the businesses and organizations that provide this valuable service to the grid,” said David Brewster, President of EnerNOC.

Audrey Zibelman, President and CEO of Viridity Energy, added, “I am pleased to see such a strong statement from Professor Kahn highlighting the impact of demand response in bringing greater levels of competition to the organized electricity markets and in improving the operation of the markets for consumers."  

“EnergyConnect commends Dr. Kahn for his vision to empower energy users to be part of the solution that improves the competitiveness and reliability of the smart grid,” said Kevin R. Evans, President and CEO, EnergyConnect. “When price-responsive demand is adequately compensated for the service it provides to grid operators, everyone wins.”

"Dr. Kahn's testimony provides a strong foundation for FERC adoption of the demand response compensation approach that FERC proposed in the NOPR. Dr. Kahn makes abundantly clear that paying market-clearing prices for demand response is an economically efficient and practically superior way to help ensure just and reasonable pricing outcomes, as required by the Federal Power Act," commented Robert A. Weishaar, Jr., who serves as counsel to industrial customers that operate facilities in the MISO and PJM regions. 

Read the affidavit

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