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Money for Nothing? Why FERC Order 745 Should have Died

Open Access Article

Abstract:
Customer baseline load (CBL) measurement is designed to represent participants' expected usage in a number of electricity demand response (DR) programs. Our empirical results, however, show that CBLs can be systematically higher than DR participants' estimated load, especially for those experienced in DR activities, likely due to manipulation behaviors. Thus, the integrity of CBL may degrade over time. With an inflated CBL, the impact of DR programs may therefore be highly exaggerated, and consumers can be paid money when they are not actually reducing their demand. In particular, we design a manipulation-indicating variable "seemingly unattractive free-money opportunity" (SUFO) and discover system-wide manipulative behaviors that increase with time and are widely adopted by experienced DR participants. We suggest that policy makers in FERC, RTOs, and states regulatory agencies consider the threat of manipulation when modifying DR market rules following the Supreme Court's recent upholding of FERC Order 745.

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Energy Specializations: Energy Modeling – Forecasting and Market Analysis; Natural Gas – Policy and Regulation; Electricity – Markets and Prices ; Electricity – Generation Technologies; Electricity – Transmission and Network Management; Energy and the Economy – Energy as a Productive Input

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, D44: Auctions, C70: Game Theory and Bargaining Theory: General, C72: Noncooperative Games

Keywords: Demand response, Customer baseline load (CBL), Market manipulation, Electricity markets, FERC Order 745

DOI: 10.5547/01956574.37.2.xche

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Published in Volume 37, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.