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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

March 2014: 

Electricity Markets: 

Demand-Response Activities Have Increased, but FERC Could Improve Data 
Collection and Reporting Efforts: 

GAO-14-73: 

GAO Highlights: 

Highlights of GAO-14-73, a report to congressional requesters. 

Why GAO Did This Study: 

Electricity demand fluctuates throughout the day and year and, as GAO 
has reported, electricity is generated first at U.S. power plants with 
the lowest operating costs, and, as demand rises, at more costly 
plants. Prior to being sold to retail consumers such as households and 
businesses, electricity is traded in wholesale markets. Regulation of 
electricity markets is divided; states oversee retail markets, and 
FERC oversees wholesale markets. In 2004, GAO reported on the benefits 
of encouraging consumers to reduce demand when the cost to generate 
electricity is high. These activities are known as “demand-response 
activities,” which can reduce the costs of producing electricity, 
improve market functions, and enhance reliability. 

GAO was asked to examine demand-response activities. This report 
provides an update since 2004 and discusses: (1) federal efforts to 
facilitate demand-response activities, (2) FERC efforts to collect and 
report data on demand-response activities, (3) changes in the extent 
of demand-response activities, and (4) key benefits and challenges of 
current efforts. GAO reviewed documents and conducted interviews with 
government officials and industry stakeholders with demand-response 
expertise. 

What GAO Found: 

Since 2004, the federal government has made efforts to facilitate 
demand-response activities, including expanding their use in wholesale 
electricity markets. Among these efforts, the Federal Energy 
Regulatory Commission (FERC) issued regulatory orders affecting 
Regional Transmission Organizations (RTO)-—entities that operate the 
transmission system and administer wholesale markets in some parts of 
the country. For example, FERC issued orders approving RTO rules for 
quantifying the extent of demand-response activities and compensating 
consumers for their demand-response activities. 

FERC collects and reports data on demand-response activities in 
accordance with the Energy Policy Act of 2005, but these efforts have 
limitations. Electricity markets and demand-response activities have 
changed since FERC began collecting and reporting this data in 2006, 
but FERC has not reviewed the scope of its efforts to determine 
whether they could better reflect changes in electricity markets and 
demand-response activities. For example, FERC has reported that the 
limited number of retail consumers paying rates that vary with the 
cost of serving them is a barrier to expanding demand-response 
activities, but its report provides limited data on the number of 
consumers doing so. GAO has reported that evaluation of programs or 
efforts with a specific focus-—such as FERC's demand-response data 
collection efforts—-can play a key role in management and oversight. 
FERC, in some cases, adjusts the data it collects before making them 
available to the public—-using its judgment to improve the data's 
consistency, for example—-but does not fully document these 
adjustments. Best practices for data management advise that data 
modifications be documented. By not addressing these limitations, FERC 
is missing opportunities to make its data more informative and 
transparent to users for analysis of trends in demand-response 
activities and the extent to which progress has been made in 
addressing barriers. 

Since GAO's 2004 report, FERC data show that the extent of demand-
response activities has increased, with demand-response activities in 
wholesale and retail markets more than doubling from a total of 29,653 
megawatts (MW) of potential reduction in peak demand in 2005 to more 
than 66,350 MW in 2011-—about 8.5 percent of total peak demand. Demand-
response activities in retail markets have increased 81 percent from a 
reported 20,754 MW of potential reduction in 2005 to a reported 37,543 
MW in 2011. In wholesale markets, demand-response activities more than 
tripled from 2005 through 2011—increasing from 8,899 MW of potential 
reduction in 2005 to 28,807 MW of potential reduction in 2011—but the 
extent of demand-response activities has varied by RTO region. 

According to stakeholders, current demand-response efforts provide 
benefits for consumers, including increasing reliability and lowering 
prices, but these efforts also pose a number of challenges for 
wholesale markets. For example, FERC's efforts to encourage demand-
response activities in the markets it oversees have made these markets 
more complex by introducing administrative functions that, according 
to stakeholders, have led to challenges. Challenges include the need 
to develop estimates of the amount of electricity a consumer would 
have used in order to quantify the reduction in electricity use from 
demand-response activities. FERC has taken some steps to address these 
challenges, but it is too soon to tell whether these steps will be 
effective. 

What GAO Recommends: 

GAO recommends FERC review the scope of its data collection and 
improve the transparency of its reporting efforts. In commenting on a 
draft of this report, FERC stated that it would take the report's 
recommendations and findings under advisement. GAO believes in the 
importance of fully implementing these recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-14-73] For more 
information, contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Federal Government Has Made Efforts to Facilitate Demand-Response 
Activities, Including Expanding Their Use in Wholesale Markets: 

FERC Collects Data and Reports on Demand-Response Activities, but 
These Efforts Have Limitations: 

Demand-Response Activities Have Increased Overall, but Their 
Characteristics Have Varied: 

Demand-Response Efforts Have Resulted in Benefits, but Current Efforts 
Continue to Pose Challenges in Wholesale Markets: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Stakeholders Interviewed: 

Appendix III: Comments from the Federal Energy Regulatory Commission: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Three Key FERC Orders Related to Demand-Response Activities: 

Table 2: Examples of Operator-Initiated Approaches: 

Table 3: Examples of Consumer-Initiated Approaches: 

Figures: 

Figure 1: Functions of the Electricity Industry: 

Figure 2: United States Regional Transmission Organizations (RTO): 

Figure 3: Regional Transmission Organization Demand-Response Capacity 
as a Percentage of Total System Capacity (2006-2012): 

Figure 4: Demand-Response Resources in Regional Transmission 
Organization Regions in 2011 Used to Provide Ancillary Services, 
Capacity, and Energy, Measured in Megawatts of Reported Potential 
Reduction in Peak Demand: 

Abbreviations: 

DOE: Department of Energy: 

EIA: Energy Information Administration: 

EPA: Environmental Protection Agency: 

ERCOT: Electric Reliability Council of Texas: 

FERC: Federal Energy Regulatory Commission: 

GW: gigawatt: 

ISO: Independent System Operator: 

MW: megawatt: 

NERC: North American Electric Reliability Corporation: 

PURPA: Public Utility Regulatory Policies Act of 1978: 

RTO: Regional Transmission Organization: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

March 27, 2014: 

The Honorable Thomas R. Carper: 
Chairman: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Susan M. Collins: 
United States Senate: 

The Honorable Peter Welch: 
House of Representatives: 

Electricity is vital to the nation's economy and central to the lives 
of all Americans. Businesses--from large industrial manufacturers to 
small businesses--rely on electricity to produce trillions of dollars 
in products and services. Residential consumers rely on electricity to 
power household appliances and other devices important to their daily 
lives.[Footnote 1] Given its importance, the price and reliability of 
electricity can have substantial impacts on consumers and the broader 
economy. 

Electricity is supplied through a complex network of power plants and 
power lines--the electricity grid--managed by utility companies and 
other operators. Since electricity cannot be easily stored, power 
plants' electricity output must be matched precisely with demand, 
which varies significantly depending on the time of day and year. To 
maintain a reliable supply of electricity, operators of the 
electricity grid take steps to ensure that power plants will be 
available to generate electricity when needed. In doing so, they 
typically ensure availability exceeds estimated demand so that any 
unexpected increases in demand or power plant outages can be 
accommodated without consumers losing access to electricity. As demand 
for electricity varies throughout the day and year, grid operators 
respond by continually increasing or decreasing the amount of 
electricity that they call upon power plants to generate. As we have 
previously reported, the cost of generating electricity varies, and 
grid operators generally rely on plants that are the least costly to 
operate first and most often and plants that are the most costly to 
operate last and least often.[Footnote 2] Because the plants used to 
meet the highest levels of demand are generally much more expensive to 
operate, there is significant variation in the costs of serving 
consumers throughout the day and year. 

Responsibility for regulating electricity is divided between states 
and the federal government. Most electricity consumers are served by 
retail markets that are regulated by the states, generally through 
state public utility commissions or equivalent organizations. As the 
primary regulator of retail markets, state commissions approve many 
aspects of utility operations, such as the siting and construction of 
new power plants, as well as the prices consumers pay and how those 
prices are set.[Footnote 3] In 2004, we reported that most retail 
consumers paid electricity prices that reflected the average cost of 
serving them for an extended period.[Footnote 4] Such extended periods 
could be a year or longer. Prior to being sold to these retail 
consumers, such as households and businesses, electricity is bought, 
sold, and traded in wholesale electricity markets by companies that 
own power plants, as well as utilities and other companies that sell 
electricity directly to retail consumers. Wholesale buyers may 
purchase electricity at prices that vary throughout the day and year 
and are largely determined by the interaction of supply and demand. 
Wholesale electricity markets are regulated by the federal government. 
The Federal Energy Regulatory Commission (FERC), which oversees 
wholesale electricity sales, among other things, has statutory 
responsibility to ensure that wholesale electricity rates are "just 
and reasonable" and not "unduly discriminatory or preferential." 
[Footnote 5] Historically, FERC met this responsibility by approving 
electricity rates based on utilities' costs of production plus a rate-
of-return that it determined to be reasonable. Beginning in the late 
1990s, FERC took a series of significant steps to restructure the 
wholesale electricity markets to increase the role of competition--
market forces of supply and demand--in setting prices.[Footnote 6] 

We previously reported that, while regulation of retail and wholesale 
markets is divided, these markets are interconnected and operationally 
joined, with generation and consumption of electricity separated by 
milliseconds.[Footnote 7] We also reported that encouraging consumers 
to change their demand for electricity in response to changes in 
varying prices and the availability of other incentives can offer cost 
savings and operating advantages over relying solely upon increases in 
the production of electricity to meet demand. These activities are 
collectively known as "demand-response activities," and they can be 
integrated into both retail and wholesale markets. For example, to 
encourage retail consumers to reduce demand when costs are high, such 
as on summer afternoons, utilities may charge prices that vary 
throughout the day and year to reflect the costs of serving consumers. 
Alternatively, utilities may provide consumers with financial or other 
incentives to install technologies on certain equipment--such as pool 
pumps, air conditioners, and water heaters--that allow the utility to 
directly lower electricity consumption of these devices during times 
of high demand. Similarly, in wholesale markets, grid operators may 
provide compensation to consumers for actions they take to use less 
electricity than expected during periods of peak demand.[Footnote 8] 

Our August 2004 report found that demand-response activities could 
benefit consumers by improving market functions and enhancing the 
reliability of the electricity system (e.g., the ability to meet 
consumers' electricity demand).[Footnote 9] We also found that such 
demand-response activities could encourage consumers to reduce demand 
when the cost to generate electricity is high. However, we highlighted 
three main barriers to expanding demand-response activities: (1) state 
regulations that shield consumers from short-term variations in the 
cost of producing electricity or wholesale prices; (2) the absence of 
equipment required for participation in demand-response programs at 
consumers' sites, such as advanced meters that can measure electricity 
consumption on a more frequent basis;[Footnote 10] and (3) consumers' 
limited awareness of demand-response programs and their potential 
benefits. In 2005, through the Energy Policy Act, Congress encouraged 
time-based pricing of electricity--prices that vary with the cost of 
serving electricity consumers--and other forms of demand-response 
activities.[Footnote 11] The act also provides that it is the policy 
of the United States that the deployment of technology and devices 
that enable electricity consumers to participate in such pricing and 
demand-response programs are to be facilitated, and that unnecessary 
barriers to expanding demand-response activities in electricity 
markets are to be eliminated. In addition, the act required that FERC 
prepare and publish an annual report that assesses demand-response 
resources in the United States. Additionally, we reported in 2012 that 
2 to 12 percent of coal-fueled capacity may be retired and other 
plants may be modified to reduce environmental impacts and that demand-
response could provide a way to mitigate potential reliability impacts 
of these actions.[Footnote 12] 

In this context, you asked us to examine U.S. efforts to expand demand-
response activities. This report provides an update on the status of 
demand-response activities since we reported on them in 2004 and 
assesses: (1) the federal government's efforts to facilitate demand-
response activities; (2) FERC efforts to collect and report data on 
demand-response activities; (3) changes, if any, in the extent of 
demand-response activities in retail and wholesale markets; and (4) 
key benefits and challenges, if any, of current demand-response 
efforts. 

To do this work, we reviewed federal demand-response policies and 
interviewed officials from FERC, the Environmental Protection Agency 
(EPA), and the Department of Energy (DOE). In addition, we reviewed 
FERC demand-response data about how overall levels of demand-response 
activities have changed over time. We also analyzed data from a 2012 
FERC survey of utility demand-response activities to identify the 
primary demand-response approaches in use at the retail level. To 
assess the reliability of these data, we interviewed FERC officials 
and performed electronic testing of the data. We found some elements 
of the data to be sufficiently reliable for our purposes. In other 
cases, we were unable to determine the quality of the data and, 
therefore, did not include related analyses in our report. In 
addition, we reviewed current literature, including reports about 
demand-response activities. We also interviewed a nonprobability 
sample of 37 electricity stakeholders with expertise on demand-
response activities from trade associations and public interest 
organizations, academics and consultants, state government officials, 
industry representatives, and grid operators. We selected these five 
types of stakeholders to represent different perspectives on demand-
response activities. Within each stakeholder group, we spoke with a 
diverse set of stakeholders to maintain balance on key issues--for 
example, their views on how to compensate those who participate in 
demand-response activities. Because this was a nonprobability sample, 
the information and perspectives that we obtained from the interviews 
are not generalizable to similar groups of stakeholders. We also 
interviewed an additional 5 stakeholders who had specialized knowledge 
about certain aspects of the electricity industry relevant to our 
study--for example, experience evaluating the competitiveness of the 
FERC-regulated wholesale markets. A more complete discussion of our 
objectives, scope, and methodology is provided in appendix I of this 
report. 

We conducted this performance audit from September 2012 to March 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

This section describes (1) the balancing of supply and demand in 
regional electricity systems, (2) restructuring of the electricity 
sector and the expanding role of competition in markets, and (3) two 
key demand-response approaches. 

Balancing Supply and Demand in Regional Electricity Systems: 

The electricity industry includes four distinct functions: generation, 
transmission, distribution, and system operations (see fig. 1). 
Electricity may be generated at power plants by burning fossil fuels; 
through nuclear fission; or by harnessing wind, solar, geothermal, or 
hydroenergy. Once electricity is generated, it is sent through the 
electricity grid, which consists of high-voltage, high-capacity 
transmission systems to areas where it is transformed to a lower 
voltage and sent through the local distribution system for use by 
business and residential consumers. Throughout this process, a grid 
operator, such as a local utility, must constantly balance the 
generation and consumption of electricity. To do so, grid operators 
monitor electricity consumption from a centralized location using 
computerized systems and send minute-by-minute signals to power plants 
to adjust their output to match changes in the demand for electricity. 

Figure 1: Functions of the Electricity Industry: 

[Refer to PDF for image: illustration] 

Flow of power: 
Generation (Power plants); 
Transmission system (Grid); 
System operations; 
Substation: 
Distribution system; 
To final consumer: 
Factory; 
Homes; 
Offices. 

System operations coordinates the balancing of the generation and 
consumption of power for final consumers. 

Source: GAO. 

[End of figure] 

Balancing the generation and consumption of electricity is challenging 
for grid operators because consumers use sharply different amounts of 
electricity through the course of the day and year. Although there are 
regional variations, demand typically rises through the day and 
reaches its highest point--called the peak--in late afternoon or early 
evening. In some parts of the country, average hourly demand can be up 
to twice as high during late afternoon and early evening as it is 
during the middle of the night and early morning hours. In addition to 
these daily variations in demand, electricity demand varies 
seasonally, mainly because air-conditioning during the summer accounts 
for a large share of overall electricity usage in many parts of the 
country. In some areas, peak usage can be twice as high during the 
summer as it is during the winter. 

The power plants that grid operators use to meet this varying demand 
include baseload plants and peakers. Baseload plants are generally the 
most costly to build but have the lowest hourly operating 
costs.[Footnote 13] In general, grid operators maximize the amount of 
electricity supplied by the baseload plants, which are often used 
continuously for long periods of time. As demand rises through the day 
and through the year and exceeds the amount of electricity generation 
that can be delivered from baseload power plants, grid operators 
increasingly rely on electricity supplied by peakers. Peakers are 
usually less costly to build but more costly to operate.[Footnote 14] 
As grid operators' reliance on peakers rises, the cost of meeting 
demand can increase considerably. For example, the wholesale price of 
electricity can rise almost 10-fold in the late afternoon and early 
evening, when demand is at its highest and more peakers are being 
utilized, compared to nighttime and early morning, when demand is at 
its lowest and few, if any, peakers are being utilized. Peak periods 
are generally short and account for only a few hours per day and, 
overall, a small percentage of the hours during a year, but can 
significantly contribute to the overall costs of serving consumers. 
According to a 2012 report by DOE's Lawrence Berkeley National 
Laboratory, spikes in demand during peak periods have a significant 
economic impact.[Footnote 15] This report estimates that, in many 
electricity systems, 10 percent or more of the costs of generating 
electricity are incurred to meet levels of demand that occur less than 
1 percent of the time. 

Maintaining a reliable supply of electricity is a complex process 
requiring the grid operator to coordinate three broad types of 
services as follows: 

* Energy. Operators schedule which power plants will produce 
electricity--referred to as energy scheduling--to maintain the balance 
of electricity generation and consumption. As a general rule, grid 
operators will schedule the least costly baseload power plants first 
and run them longest, and schedule the most costly peaker plants last 
and run them less often. 

* Capacity. Operators procure capacity--long-term commitments to 
provide specific amounts of electricity generation to ensure that 
there will be sufficient electricity to reliably meet consumers' 
expected future electricity needs. Procuring capacity may involve 
operators of power plants committing that existing or new power plants 
will be available to generate electricity, if needed, at a particular 
future date. To provide for potential unexpected increases in demand 
or any problems that prevent some power plants from providing 
electricity or transmission lines from delivering electricity as 
expected, the commitments to provide electricity may exceed expected 
demand by a specified percentage or safety margin. 

* Ancillary services. Operators procure several ancillary services to 
maintain a reliable electricity supply. Ancillary services encompass 
several highly technical functions required for grid operators to 
ensure that electricity produced can be delivered and used by 
consumers. Some ancillary services help ensure that electricity can be 
delivered within technical standards--for example, at the right 
voltage and frequency--to keep the grid stable and be useful for 
consumers who may have equipment that needs to operate at specific 
voltage and frequency levels. 

Restructuring of the Electricity Sector and the Expanding Role of 
Competition and Markets: 

Over the last 2 decades, some states and the federal government have 
taken steps to restructure the regulation of their electric systems 
with the goals of increasing the roles of competition in markets, 
lowering prices, and giving consumers access to a wider array of 
services. The electricity industry was historically characterized by 
integrated utilities that oversaw the four functions of electricity 
service--generation, transmission, distribution, and system 
operations--in a monopoly service territory in exchange for providing 
consumers with electricity at regulated retail prices. In certain 
parts of the country, states and the federal government restructured 
the electricity industry to one in which the wholesale price for 
electricity generation is determined largely by supply and demand in 
competitive markets. More specifically, historically, at the retail 
level, integrated monopoly utilities provided consumers with 
electricity at regulated prices, and state regulators generally set 
retail electricity prices based on a utility's cost of production plus 
a fair rate of return on the utility's investment in its 
infrastructure, including power plants and power lines. However, 
beginning in the late 1990s, some states chose to restructure the 
retail markets they oversee to allow the price of electricity to be 
determined largely by supply and demand in competitive markets. In 
parts of the country where electricity markets have restructured, new 
entities called retail service providers compete with existing 
utilities to provide electricity to consumers by offering electricity 
plans with differing prices, terms, and incentives. 

At the wholesale level, FERC is required by law to ensure that the 
rates it oversees are "just and reasonable" and not "unduly 
discriminatory or preferential," among other things.[Footnote 16] 
Prior to restructuring the wholesale electricity markets in the late 
1990s, FERC met this requirement by approving rates for transmission 
and wholesale sales of electricity in interstate commerce based on the 
utilities' costs of production plus a fair rate of return on the 
utilities' investment.[Footnote 17] After restructuring wholesale 
electricity markets, FERC continued to develop transmission rates in 
this same way. In addition, FERC provided authority for many entities-
-for example, independent owners of power plants--to sell electricity 
at prices determined by supply and demand where FERC determined that 
the markets were sufficiently competitive or that adequate procedures 
were in place to mitigate the effect of companies with a large market 
share and the ability to significantly control or affect prices in the 
markets. As a result, these entities can now compete with existing 
utilities and one another to sell electricity in wholesale markets. 

As part of this restructuring process, FERC also encouraged the 
voluntary creation of new entities called Regional Transmission 
Organizations (RTO) to manage regional networks of electric 
transmission lines as grid operators--functions that, in these areas, 
had traditionally been carried out by local utilities.[Footnote 18] 
Figure 2 indicates the location of major RTOs that have developed in 
certain regions of the United States. As grid operators, RTOs are 
responsible for managing transmission in their regions, which includes 
establishing and implementing rules and pricing related to 
transmission, as well as considering factors, such as weather 
conditions and equipment outages, that could affect the reliability of 
electricity supply and demand.[Footnote 19] 

Figure 2: United States Regional Transmission Organizations (RTO): 

[Refer to PDF for image: illustrated U.S. map] 

Map depicts geographic boundaries of the following RTO's: 

ISO New England; 
New York Independent System Operator; 
PJM Interconnection; 
Electric Reliability Council of Texas; 
Southwest Power Pool; 
Midcontinent Independent System Operator (ISO); 
California Independent System Operator. 

Sources: ISO/Regional Transmission Organization Council (data); Map 
Resources (map). 

Note: This graphic reflects RTO borders based on available information 
as of February 2014, but these borders may change as territory is 
added or subtracted from RTO regions. The transmission grid that the 
Electric Reliability Council of Texas (ERCOT) administers is located 
solely within the state of Texas and constitutes a separate grid from 
the two other main grids in the continental United States. As a 
result, ERCOT is largely unregulated by FERC and is instead subject to 
oversight by the Public Utility Commission of Texas. ERCOT performs 
similar functions as the RTOs in this map, including managing Texas' 
transmission system and overseeing wholesale sales of electricity. 

[End of figure] 

Like other grid operators, such as utilities, RTOs take steps to 
schedule and procure energy, capacity, and ancillary services. RTOs 
often do so using the three broad types of markets they manage--energy 
markets; capacity markets; and markets for several different ancillary 
services, including voltage support and frequency support. In the 
energy markets, for example, sellers--such as owners of power plants--
place offers with RTOs to supply an amount of electricity at a 
specific price. Potential buyers of this electricity, such as retail 
service providers, also place bids with RTOs defining their 
willingness to pay for it. RTOs periodically--hourly, for example--
"stack" the offers to supply electricity from lowest offered price to 
highest until the RTO estimates that it has sufficient electricity to 
meet the total demand. The market clearing price, or the highest 
supply bid needed to satisfy the last unit of demand, is paid for each 
unit of electricity produced for that time period. Regions with RTOs 
are referred to as having "organized wholesale markets," because the 
RTOs centrally coordinate these transactions between buyers and 
sellers according to rules the RTOs have established and FERC has 
approved. 

In regions of the country without RTOs, electric utilities generally 
continue to serve the role of grid operator. In these regions, the 
local utility often integrates the delivery of electricity services--
energy to maintain the balance of electricity generation and 
consumption, capacity to meet demand and provide a safety margin, and 
a range of ancillary services. Utilities in these regions may build 
and operate power plants to provide electricity to serve their retail 
customers. These utilities may also buy electricity from other power 
plant owners. 

Two Key Demand-Response Approaches: 

According to a 2006 FERC report on utilities' demand-response 
activities, programs focused on reducing consumer demand for 
electricity as part of grid operators' and utilities' efforts to 
balance supply and demand have been in place for decades.[Footnote 20] 
FERC reported that demand-response activities--known as load 
management or demand-side management--increased markedly in the 1980s 
and early 1990s. This increase was driven by a combination of a 
directive in the Public Utility Regulatory Policies Act of 1978 
(PURPA) to examine standards for time-based pricing and by state and 
federal policy focused on managing consumer demand and planning future 
resource availability for providing electricity.[Footnote 21] However, 
according to data from NERC, estimates of certain demand-response 
activities generally declined between 1998 and 2003, just as FERC was 
beginning to restructure wholesale electricity markets. 

Demand-response activities may occur within both retail and wholesale 
markets. The actions taken by retail and wholesale demand-response 
program participants are often not substantially different and 
typically involve consumers reducing their electricity consumption by 
delaying or stopping the use of electricity-consuming appliances, 
processes, or machinery during periods of high demand. As with 
electricity prices, FERC and state regulators each have interest in 
and responsibility for overseeing aspects of these demand-response 
activities, at the wholesale and retail levels, respectively. 

There are two broad approaches to demand-response: (1) consumer-
initiated and (2) operator-initiated. Specifically, these approaches 
are as follows: 

* Consumer-initiated approaches. With consumer-initiated demand-
response approaches, consumers determine when they will take specific 
actions to reduce the amount of electricity they consume. There are 
various types of consumer-initiated demand-response approaches. For 
example, retail consumers may pay time-based prices that vary with the 
cost of serving them with the goal of encouraging them to choose to 
reduce their use of electricity when prices are high.[Footnote 22] 
Time-based prices include time-of-use prices, which vary at broad 
intervals, such as peak and off-peak times, and real-time prices, 
which vary at least hourly in response to changes in market conditions 
such as the cost of producing electricity at that time. Consumers' 
actions to reduce demand may be manual--such as turning off lights or 
delaying use of the clothes dryer--or automatic--such as using 
thermostats or other automated systems that are preprogrammed to 
reduce air conditioning use when prices reach a certain level. To 
participate in programs that use consumer-initiated approaches, 
consumers may need access to certain technology, such as the internet 
or a home display that provides information about changing prices. In 
addition, they may need a type of electric meter known as an advanced 
meter, which measures and records data on consumers' electricity use 
at closer intervals than standard electricity meter--typically at 
least hourly--and provides these data to both consumers and 
electricity suppliers. 

* Operator-initiated approaches. Operator-initiated approaches allow 
grid operators to call on participating consumers to reduce demand--
for example, by shutting down equipment--during periods of tight 
supply in exchange for a payment or other financial incentive. These 
approaches can minimize the number of consumers losing access to 
electricity during periods of extremely high demand, reduce stress on 
a distribution network, or help accommodate the unexpected shut down 
of a power plant or transmission line. Incentives for participation in 
these approaches may include a payment, a bill credit, or a lower 
electricity price. Although participation in programs that use these 
approaches is typically voluntary, participating consumers may incur 
financial penalties if they do not reduce demand as they agreed to. 

The Federal Government Has Made Efforts to Facilitate Demand-Response 
Activities, Including Expanding Their Use in Wholesale Markets: 

Since 2004, the federal government has undertaken efforts to 
facilitate demand-response activities. These efforts include actions 
to address barriers to expanding demand-response activities by funding 
the installation of advanced meters and facilitating coordination 
between FERC and state regulators. In addition, FERC has undertaken 
efforts to remove barriers to expanding, as well as encouraging 
consideration of demand-response activities in wholesale markets by 
approving the use of various demand-response approaches in individual 
RTO markets it regulates and, more recently, taking steps to establish 
more consistent rules for all RTOs. 

DOE and FERC Have Taken Certain Actions to Help Address Barriers to 
Expanding Demand-Response Activities: 

DOE, which formulates national energy policy and funds research and 
development on various energy-related technologies, among other 
things, has taken a key step to address one barrier we identified in 
our 2004 report--the lack of advanced meters.[Footnote 23] 
Specifically, in 2010, DOE began providing $3.4 billion in funds 
appropriated under the 2009 American Recovery and Reinvestment Act to 
install, among other things, advanced meters, communications systems, 
and programmable thermostats in homes, businesses, and other locations 
where electricity is used. Recipients of these DOE funds, such as 
utilities, provided additional funding to total $7.9 billion of 
investment. In recent years, the installation of advanced meters has 
grown substantially. Data from FERC indicate that the installation of 
advanced meters as a percentage of total meters installed has grown 
from 0.7 percent in 2005 to 22.9 percent in 2011.[Footnote 24] 

FERC has also taken action to collaborate with state regulators on 
demand-response policies, best practices, and other issues. In 2004, 
we noted the importance of FERC continuing to work with grid 
operators, RTOs, and interested state commissions, among others, to 
develop compatible policies regarding demand-response 
activities.[Footnote 25] In 2006, FERC and the state public utility 
commissions--through the National Association of Regulatory Utility 
Commissioners[Footnote 26]--took steps to coordinate their regulatory 
activities through a joint collaborative. This collaborative explored 
how federal and state regulators can better coordinate their 
respective approaches to demand-response policies and practices. In 
2013, the focus of this collaborative was broadened to include 
additional topics that cut across the retail and wholesale electricity 
sectors to build more understanding between and amongst regulators. 

In addition to their steps to address these barriers, FERC and DOE 
also took a series of steps to study how the federal government could 
encourage demand-response activities. The Energy Independence and 
Security Act of 2007 directed FERC to conduct a national assessment of 
demand-response potential, develop a national action plan on demand-
response activities, and with DOE, develop a proposal to implement the 
National Action Plan.[Footnote 27] FERC completed A National 
Assessment of Demand Response Potential in 2009 and identified 
significant potential for demand-response activities to reduce peak 
energy demand under several different scenarios. Under one scenario, 
called the "full participation scenario," FERC estimated that peak 
demand could be reduced by 188 gigawatts (GW)[Footnote 28] compared 
with a scenario with no demand-response activities within 10 
years.[Footnote 29] This reduction is equal to approximately 2,500 
peaking power plants.[Footnote 30] The national assessment also 
identified remaining barriers to the adoption of demand-response 
approaches--such as the divided federal and state oversight 
responsibilities and the absence of a direct connection between 
wholesale and retail prices. In 2010, FERC completed its National 
Action Plan on Demand Response, which identified proposed activities 
and strategies for demand-response approaches across three broad 
areas: assistance to the states, national communications, and 
providing tools and materials.[Footnote 31] One proposed action--the 
national communications program--has objectives focused on increasing 
consumer awareness and understanding of energy-consuming behavior and 
demand-response activities. FERC and DOE jointly completed the 
Implementation Proposal for the National Action Plan on Demand 
Response, identifying specific roles for DOE, FERC, and other 
entities. For example, DOE and FERC agreed to provide support for 
informational and educational sessions for regulators and policymakers. 

FERC Has Approved the Use of More Demand-Response Activities in RTO 
Markets: 

Since we last reported in 2004, FERC has formally acknowledged that 
demand-response activities are important in electricity markets in 
general and in particular, in wholesale markets overseen by RTOs. 
[Footnote 32] FERC has also reported that electricity markets are more 
effective when retail rates vary with the cost of serving 
consumers.[Footnote 33] However, as retail markets are generally 
outside the scope of its authority, FERC historically focused its 
efforts on remaining barriers to participation of demand-response and 
encouraging RTOs to identify how demand-response activities could be 
incorporated into the wholesale markets they operate.[Footnote 34] 
FERC has found that demand-response activities directly affect 
wholesale electricity prices; therefore, facilitating demand-response 
activities is essential to FERC fulfilling its responsibility for 
ensuring wholesale prices are just and reasonable.[Footnote 35] 

Since 2004, FERC has taken steps to remove barriers to further expand 
demand-response activities in RTO markets. Prior to our 2004 report, 
FERC had approved a few demand-response programs coordinated by the 
RTOs, but, as we reported, demand-response activities were in limited 
use.[Footnote 36] Since our report was issued in 2004, individual RTOs 
have continued to develop opportunities for demand-response resources 
to provide specific services (e.g., energy, capacity, and ancillary 
services) through the markets they operate. According to FERC 
officials, FERC has reviewed these proposals on a case-by-case basis 
and, when FERC believed it to be appropriate, approved them. FERC has 
also addressed demand-response activities in broad orders related to 
other electricity regulation topics.[Footnote 37] 

As a result of FERC's approval of changes to individual RTOs' market 
rules, RTOs have utilized demand-response resources provided by 
various entities including both large electricity consumers and 
intermediaries. For example, demand-response resources may be provided 
directly by large consumers such as steel mills or other manufacturing 
facilities that purchase electricity directly from wholesale markets. 
These large consumers may delay the use of highly electricity 
intensive equipment, such as an electric arc furnace used to melt 
steel, until later in the day than they had planned in exchange for 
payments or other incentives. Demand-response resources may also be 
provided by intermediaries that combine the demand-response 
activities--for example, reductions in use of air-conditioning or 
household appliances at peak times--of multiple retail consumers to 
provide the quantity of demand-response resources required to 
participate in wholesale markets.[Footnote 38] These intermediaries 
may include retail service providers or utilities that have made 
arrangements with their customers through retail demand-response 
programs they administer to reduce demand in exchange for compensation 
or lower prices. It may also include third-party entities referred to 
as "aggregators" that perform similar functions by combining the 
demand-response activities of independent retail consumers. In some 
cases, these intermediaries combine a large number of small reductions 
made by many consumers. In other cases, they seek out medium and 
larger businesses to identify profitable opportunities to reduce 
larger amounts of demand when needed. Collectively, we refer to these 
entities as "demand-response providers". 

In addition, demand-response resources can be used in wholesale 
markets to provide a wide range of services. Specifically, individual 
RTOs have allowed demand-response resources to be used to provide 
energy, capacity, and ancillary services to varying degrees. For 
example, according to documentation from PJM Interconnection,[Footnote 
39] demand-response resources are used to provide each of the three 
services within PJM Interconnection. Specifically, these services are 
as follows: 

* Energy. Demand-response activities can help ensure that the 
generation and consumption of electricity remain in balance, with 
demand-response resources providing an alternative to energy scheduled 
from power plants. In RTO markets, demand-response providers can place 
offers to provide specified amounts of electricity during specific 
hours at specific prices. They provide this electricity by reducing 
their or their customers' demand from levels they had expected to 
consume. Unlike the generators that are also bidding in these markets, 
which produce additional electricity by increasing the electricity 
generation of a power plant, demand-response providers make 
electricity available to the market by not consuming it. Demand-
response resources may be scheduled if they are among the least costly 
options for addressing energy needs at a particular location. 

* Capacity. Demand-response resources can act as an alternative to 
power plant operators agreeing to be available to generate electricity 
at a future time. Demand-response providers agree to reduce their own 
or their customers' electricity consumption at a future time when the 
grid operator determines such actions are needed. 

* Ancillary services. Demand-response resources can act as an 
alternative to using changes in the amount of electricity generated to 
stabilize the grid. Grid operators may use demand-response resources 
for a short period of time to help stabilize the grid and ensure that 
electricity generated matches demand on a moment-to-moment basis. 

FERC Has Taken Recent Steps to Make Demand-Response Rules More 
Consistent: 

Beginning in 2008, FERC issued a series of regulatory orders that 
establish more consistent rules related to demand-response activities 
for all RTOs. As shown in table 1, these orders establish a more 
standardized framework of rules for, among other things, how RTOs 
quantify and compensate demand-response activities in the markets they 
administer. 

Table 1: Three Key FERC Orders Related to Demand-Response Activities: 

FERC order: Order 719; 
Date: 2008; 
Description of key actions: 
* Requires Regional Transmission Organizations (RTO) to accept bids 
for demand-response resources in their markets for certain ancillary 
services, among other things; 
* Permits entities called aggregators that combine the demand-response 
activities of multiple retail consumers into RTO markets, assuming 
such activity is not precluded by state law. 

FERC order: Order 745[A]; 
Date: 2011; 
Description of key actions: 
* Requires RTOs to pay providers of demand-response (including 
consumers) in wholesale energy markets the market price for 
electricity if doing so: (1) displaces electricity generation in a way 
that helps an RTO balance supply and demand and (2) is deemed cost-
effective, meaning that the benefit from the reduction of the market 
price resulting from demand-response activities is greater than any 
money paid for the demand-response activities. 

FERC order: Order 676-G; 
Date: 2013; 
Description of key actions: 
* Incorporated by reference certain standards related to quantifying 
demand-response activities--including specific processes to help with 
measurement and verification of demand-response activities and common 
definitions and processes regarding demand-response activities in 
organized wholesale electric markets. 

Sources: GAO analysis of FERC orders and other filings. 

[A] Order 745 is currently being contested in the U.S. Court of 
Appeals for the D.C. Circuit. 

[End of table] 

These orders have addressed several aspects of demand-response 
activities. For example, in Order 676-G, FERC adopted standards 
established by the North American Energy Standards Board that provide 
detailed guidance about quantifying consumers' demand-response 
activities.[Footnote 40] Quantifying demand-response activities 
requires creating baselines--administrative estimates of consumers' 
expected electricity consumption for every hour of every day of the 
year against which any reductions in electricity use from demand-
response activities are measured. Because consumer electricity use 
typically varies throughout the day, RTOs have no way of knowing 
exactly how much electricity a consumer is planning to use at specific 
times. The baseline--that is, the estimated amount of electricity a 
consumer would have used if not participating in demand-response 
activities--is key to determining the amount of electricity reduction 
for which a demand-response provider will be compensated. 
Additionally, through Order 745, FERC established a framework for 
determining the level of compensation for consumers' demand-response 
activities. The order generally requires that, when certain conditions 
are met, demand-response providers receive the market price for 
electricity, equal to what owners of power plants would be paid. 

FERC Collects Data and Reports on Demand-Response Activities, but 
These Efforts Have Limitations: 

Since 2006, FERC has taken steps to collect data and report on demand-
response activities, but these efforts have limitations. In 
particular, electricity markets have changed substantially since FERC 
began undertaking these efforts, but FERC has not reviewed the scope 
of its data collection and reporting efforts to determine whether 
additional data should be included. Further, FERC has, in some limited 
instances, made certain adjustments after these data are collected and 
before making them available to the public but does not fully document 
these adjustments or the reasons for making them. 

FERC Has Taken Steps to Collect and Report Data on Demand-Response 
Activities: 

In accordance with the Energy Policy Act of 2005, FERC has collected 
data used to develop annual reports--FERC's Assessment of Demand 
Response and Advanced Metering--about the extent to which advanced 
meters are used and consumers' demand-response activities in the 
United States.[Footnote 41] To support the development of these annual 
reports, FERC has conducted a nationwide, voluntary survey every other 
year to collect information from utilities and other entities, such as 
RTOs, on their use of advanced meters, consumer participation in 
demand-response programs, and the extent to which consumers' demand-
response activities reduce peak demand. FERC makes the original survey 
data available on its website and summarizes key statistics about 
demand-response activities and advanced metering based on this survey 
and other sources in its annual report.[Footnote 42] For example, 
FERC's 2012 report included statistics on the potential reduction in 
peak demand from consumers' participation in demand-response 
activities in total, by program approach (e.g., specific time-based 
pricing approaches),[Footnote 43] by market (e.g., wholesale and 
retail), and, for retail demand-response activities, by class (e.g., 
commercial, industrial, and residential). The FERC survey data and 
report are the only source of broad data on demand-response activities 
we identified with this much detailed information by program approach. 
According to FERC officials, they are not aware of any other 
comprehensive data sources with data on demand-response activities and 
consumer participation by program approach. 

Other sources of data on demand-response activities, while useful, are 
more limited in scope. For example, RTOs collect some data, but they 
focus only on a specific RTO region, and the RTOs may not collect 
consistent information for purposes of comparison across RTOs. The EIA 
also collects some data on demand-response activities; however, these 
data only focus on retail markets. Additionally, the North American 
Electric Reliability Corporation, known as NERC, collects some data 
but has only performed mandatory data collections since 2011. These 
data primarily focus on operator-initiated approaches, although a 2011 
report from NERC states that there are plans to expand reporting to 
include additional consumer-initiated approaches in the future. 

FERC Has Not Reviewed the Scope of Its Data Collection and Reporting: 

Since it initially designed its survey 8 years ago, FERC has 
considered some potential improvements to the survey, but it has not 
comprehensively reviewed the scope of its data collection and 
reporting efforts to address certain data limitations and changes in 
electricity markets over this period. FERC officials told us that, 
when designing the initial 2006 survey and annual report format, FERC 
sought to collect and report data that were consistent with the 
statutory requirements outlined in the Energy Policy Act while 
minimizing respondent burden to improve the response rate for its 
voluntary survey. The Energy Policy Act requires FERC to report on 
existing demand-response approaches, the annual size of demand 
resources, and regulatory barriers to improving consumer participation 
in demand-response activities and peak reduction programs, among other 
things. FERC's report generally addresses these issues but, in some 
cases, the information it provides is limited and does not include 
some additional information or details that may be useful to data 
users--such as regulators, utilities, and the public--for further 
documenting changes in trends in demand-response activities and 
progress in addressing certain barriers. Examples are as follows: 

* FERC collects and reports data on the extent to which demand-
response activities at utilities and other entities surveyed reduce 
peak demand in megawatts (MW), but it does not collect or report data 
on what the total peak demand is for these reporting utilities and 
other entities. Without these data, the potential reduction in peak 
demand that reporting utilities' and other entities' demand-response 
activities achieve cannot be calculated as a percentage of their total 
peak demand, potentially limiting users' ability to understand the 
impact of consumers' demand-response activities. 

* FERC reported in its 2012 report that the limited number of retail 
consumers paying prices that vary with the cost of serving them is an 
ongoing barrier to expanding demand-response activities, but its 
report provides limited data on consumer participation in approaches, 
such as real-time pricing programs, that could potentially address 
this barrier. Specifically, the report provides information on the 
number of utilities and other entities offering certain programs with 
prices that vary with the cost of serving consumers, such as time-of-
use prices and real-time prices. However, the report does not provide 
much information on the number of consumers participating in these 
approaches over time--information needed to understand trends in the 
use of these approaches and whether steps are needed to encourage 
additional consumer participation.[Footnote 44] 

* FERC does not collect some potentially valuable data about the 
characteristics of consumers providing demand-response resources. For 
example, FERC officials told us they do not collect data about the 
class of consumers--e.g., residential, commercial, and industrial--
providing demand-response resources in the RTO markets they regulate, 
although FERC does collect this information about consumers 
participating in retail programs. In addition, FERC does not collect 
data on the size of consumers--for example, small businesses compared 
with large industrial manufacturers--participating in demand-response 
activities. Not having these data limits data users' understanding of 
the extent to which different types of consumers are participating in 
demand-response activities and whether additional opportunities exist 
for increasing the participation of certain types of consumers. Based 
on estimates the individual RTOs provided, demand-response resources 
are typically provided by larger consumers, such as industrial and 
commercial facilities. Each RTO collects data about consumers in 
different categories and groups the data in different ways. For 
example, data collected by one RTO--New York ISO--indicate that 
approximately 57 percent of the demand-response resources in its 
region are from the industrial sector and 14 percent are from the 
commercial sector.[Footnote 45] Other RTOs told us that no data were 
available on the categories of customers providing demand-response 
resources. Another RTO--ISO New England--told us that all the demand-
response resources in its region are provided by industrial and 
commercial consumers, but that disaggregated data are not available. 
[Footnote 46] 

Moreover, FERC officials agreed that there have been significant 
changes in the electricity markets and participation in demand-
response activities since the survey was initially developed. FERC 
staff considered some potential improvements to the survey instrument, 
including ways to make questions less burdensome and improve data 
quality. However, these officials told us that FERC did not 
comprehensively review the content of the survey or its final report, 
instead seeking to make its reporting consistent across years. FERC 
officials also noted that changes to its survey will need to be 
approved by the Office of Management and Budget.[Footnote 47] 

We have previously reported that evaluation can play a key role in 
program management and oversight--including evaluation of activities 
with an identifiable purpose.[Footnote 48] In this context, FERC's 
data collection and reporting efforts to comply with the Energy Policy 
Act of 2005 would benefit from such an evaluation in light of the 
changes FERC acknowledges have occurred in electricity markets and in 
demand-response activities more specifically. Such an evaluation can 
provide feedback on program design and execution, and the results may 
be used to improve the design of the program. In addition, the 
National Research Council's Committee on National Statistics has 
reported in its Principles and Practices for a Federal Statistical 
Agency, that statistical agencies should continually look to improve 
their data systems to provide information that is accurate, timely, 
and relevant for changing public policy and data user needs. Although 
FERC is not a federal statistical agency, we believe the practices 
outlined in this publication are relevant to its data collection and 
reporting efforts because FERC is uniquely positioned to collect these 
data, and they remain the only source of broad demand-response data we 
identified with detailed information about demand-response approaches. 
Other federal agencies that are not statistical agencies may find it 
useful to periodically reassess the data they collect. For example, 
the Merit Systems Protection Board, which is also not a federal 
statistical agency, has periodically reassessed the content of a key 
survey it produces. Specifically, the Merit Systems Protection Board 
has been administering its Merit Principles Survey for the past 30 
years to capture the attitudes, opinions, and views of the federal 
workforce and has stated that it has included a core set of items in 
its survey repeatedly, allowing comparisons over time, but has changed 
the survey considerably, reflecting the need to cover timely research 
topics. By not reviewing the contents of its survey on demand-response 
activities and annual report in light of the significant changes in 
the electricity market and demand-response activities over the last 8 
years, FERC cannot ensure that its survey and report fully capture 
information that is most useful to data users today. As a result, 
information that could assist regulators in determining how to focus 
their oversight efforts--data on the impact of demand-response 
activities; the extent to which progress has been made in addressing 
barriers to expanding demand-response activities, such as the limited 
number of retail consumers paying prices that vary with the cost of 
serving them; and trends in consumer participation--may not be readily 
available. Without additional evaluation of its program activity 
responsible for its annual Assessment of Demand Response and Advanced 
Metering--the only data collection we identified with this level of 
detailed information--FERC may be missing opportunities to improve the 
report and survey's design, which could limit users' ability to 
understand the impact of demand-response activities and determine 
whether changes are needed to improve the effectiveness of demand-
response efforts. 

FERC Does Not Fully Document Adjustments It Makes to Its Data: 

FERC adjusts some survey data collected for its annual Assessment of 
Demand Response and Advanced Metering report before publishing them; 
however, these adjustments are not well documented. The original data 
FERC collects from its survey are available to the public on its 
website, but these data do not always match data in FERC's reports. 
FERC officials told us that, in some limited cases, they used their 
judgment to adjust the original survey data to improve their quality 
and accuracy prior to using these data in the reports FERC issues to 
the public. For example, FERC staff told us that they have previously 
modified the survey data to ensure duplicate data on demand-response 
activities are not reported in both the retail and wholesale market 
categories and to improve the consistency of the data. However, FERC 
neither fully documents these adjustments, or the reasons for them 
internally or in its annual reports, nor makes its final, modified 
data set available to the public. As a result, it is difficult for 
data users to replicate the statistics in FERC's annual reports, which 
could limit the usefulness of the data to these users. We compared key 
statistics included in FERC's 2012 report and the associated original 
survey data reported on FERC's website and were unable to replicate 
FERC's results in some cases. For example, in some cases, our analysis 
of the original survey data yielded different results about the extent 
to which certain demand-response approaches are used at the wholesale 
level than what FERC published in its annual report. 

Best practices for data management advise that key steps to modify 
data be documented. Specifically, the Office of Management and 
Budget's 2006 Standards and Guidelines for Statistical Surveys advises 
that data collected through surveys should be coded to indicate any 
actions taken during editing or that copies of the unedited data, 
along with the edited data, be retained. Because FERC neither fully 
documents the modifications it makes to the data or maintains a final 
version of the modified data, FERC officials could not provide reasons 
for many of the specific differences we identified between the 
original survey data and the data reported in FERC's 2012 annual 
report or verify whether these differences were the result of 
appropriate modifications or errors. These officials told us they had 
not identified a need to document this information to date, but that 
they would consider documenting it in the future. Although the 
rationale for FERC's data modifications may be sound, because they are 
not fully documented, it is unclear what changes were made, the 
reasons they were made, and whether these changes are appropriate. 
Furthermore, since the users of these data, such as state regulators 
and the public, may not have the means or ability to easily replicate 
FERC's efforts to modify the survey data, they must either analyze the 
original survey data or rely on only the statistics that FERC included 
in its final report--options which may be less informative. This 
could, for example, limit data users' understanding of how the number 
of consumers participating in certain demand-response approaches has 
changed over time--information that could be useful to regulators for 
understanding the extent to which consumer willingness to participate 
in certain approaches is, or is not, changing. By not fully 
documenting the adjustments made to its data, FERC is limiting the 
usefulness of these data to users and limiting their transparency for 
analysis. Greater transparency of these data could provide a better 
foundation for analysis of trends in specific demand-response 
approaches and the extent to which progress has been made in 
addressing barriers to demand-response activities. 

Demand-Response Activities Have Increased Overall, but Their 
Characteristics Have Varied: 

The extent of demand-response activities has increased overall since 
our 2004 report, more than doubling between 2005 and 2011. 
Specifically, according to data reported in FERC's 2012 Assessment of 
Demand Response and Advanced Metering report, the extent of demand-
response activities reported by utilities and other entities 
responding to FERC's survey more than doubled from a total of 29,653 
MW of potential reduction in peak demand in 2005 to 66,351 MW in 2011, 
[Footnote 49] or about 8.5 percent of the peak U.S. demand in 2011. 
[Footnote 50] Of this 66,351 MW, 57 percent (37,543 MW) was provided 
through retail demand-response activities, while 43 percent (28,807 
MW) was provided through wholesale demand-response activities. 
[Footnote 51] Demand-response activities in both retail and wholesale 
markets have increased over this same period, but their 
characteristics have varied. In retail markets, FERC data indicate 
that the quantity of demand-response activities increased 81 percent 
from 2005 through 2011. Further, operator-initiated approaches were 
more widely used than consumer-initiated approaches. In wholesale 
markets, FERC data indicate that demand-response activities more than 
tripled from 2005 through 2011, but the extent of demand-response 
activities has varied by RTO region over time and by the services 
provided. 

Demand-Response Activities in Retail Markets Have Increased Overall, 
but Consumer Type and Approaches Varied: 

FERC data indicate that the extent of demand-response activities in 
retail markets has increased overall but varied by consumer type and 
approach. Specifically, data from FERC's 2012 Assessment of Demand 
Response and Advanced Metering report indicate that the extent of 
retail demand-response activities has increased 81 percent overall 
from a reported 20,754 MW of potential reduction in peak demand in 
2005 to a reported 37,543 MW in 2011. Commercial and industrial 
consumers were responsible for more of these retail demand-response 
activities than residential consumers. For example, of the 37,543 MW 
of potential reduction in peak demand from retail demand-response 
activities in 2011, 28,088 MW (75 percent) was from commercial and 
industrial consumers, while 8,134 MW was from residential consumers 
(22 percent).[Footnote 52] The relatively lower contribution in MW of 
demand-response activities by residential consumers is particularly 
notable because, according to a 2009 FERC report, residential 
consumers represent the most untapped potential for demand-response 
activities.[Footnote 53] Demand-response activities from residential 
consumers can be particularly important because residential consumers 
can be responsible for a large share of peak demand, which can 
strongly affect prices during the hours of peak electricity 
consumption. For example, according to data from the Texas grid 
operator, over 50 percent of peak demand during Texas summers may come 
from residential consumers. 

Data from FERC and EIA also indicate that retail consumer 
participation in demand-response programs varies by approach, with 
operator-initiated approaches more widely used than consumer-initiated 
approaches.[Footnote 54] Data collected for FERC's 2012 report 
indicate that approximately 6.5 percent of retail consumers of 
utilities and other entities responding to the survey--about 8.5 
million of 130.6 million consumers--were enrolled in a demand-response 
program in 2011.[Footnote 55] Of these 8.5 million consumers, 
approximately 6.0 million (71 percent) participated in programs that 
used operator-initiated approaches.[Footnote 56] Consumers enrolled in 
demand-response programs using operator-initiated approaches accounted 
for approximately 27,422 MW of potential reduction in peak demand for 
2011. Industrial and commercial retail consumers provided 19,089 MW 
(70 percent) of this potential reduction, and residential consumers 
provided 7,151 MW (26 percent).[Footnote 57] Table 2 shows the extent 
to which consumers participate in two key operator-initiated 
approaches. 

Table 2: Examples of Operator-Initiated Approaches: 

Name: Direct demand control; 
Description: Compensates consumers for allowing the utility or grid 
operator to remotely interrupt electricity use by one or more 
electrical devices, such as pool pumps or air conditioners. In some 
cases, electricity may be interrupted for an hour or more; 
in other cases, the operator may "cycle" the equipment--that is, shut 
it down for several short periods, which can have less impact on the 
consumer; 
Number of consumers enrolled in this approach (as a percentage of 
consumers enrolled in operator-initiated approaches): 5.8 million (97 
percent); 
Potential reduction in peak demand (as a percentage of potential 
reduction in peak demand from all operator-initiated approaches): 
9,112 MW (33 percent). 

Name: Interruptible prices; 
Description: Participants--typically, large industrial or commercial 
consumers--receive a discount on electricity prices paid in exchange 
for agreeing to interrupt electricity use when directed to do so by 
the grid operator. In some cases, consumers give grid operators the 
ability to interrupt their electricity use directly by a 
preestablished amount for a certain number of hours per year; 
Number of consumers enrolled in this approach (as a percentage of 
consumers enrolled in operator-initiated approaches): .04 million 
(about 1 percent); 
Potential reduction in peak demand (as a percentage of potential 
reduction in peak demand from all operator-initiated approaches): 
14,960 MW (55 percent). 

Sources: GAO analysis of 2011 FERC survey data collected for FERC's 
2012 Assessment of Demand Response and Advanced Metering and other 
sources. 

[End of table] 

Of the 8.5 million consumers who utilities and other entities reported 
as participating in demand-response programs, approximately 2.3 
million (27 percent) participated in programs that used consumer-
initiated approaches, including some retail pricing plans that sought 
to better align consumer prices with the cost of serving those 
consumers.[Footnote 58] According to our analysis of FERC's survey 
data for 2011, consumers enrolled in demand-response programs that 
used these approaches accounted for approximately 9,920 MW of 
potential reduction in peak demand for the given year. Industrial and 
commercial retail consumers provided 8,893 MW (90 percent) of this 
9,920 MW of the potential reduction. Table 3 shows the extent to which 
consumers participate in three key types of consumer-initiated 
approaches. 

Table 3: Examples of Consumer-Initiated Approaches: 

Name: Time-of-use prices; 
Description: Sets preestablished prices for predetermined parts of the 
day (i.e., off-peak, often during the night and early morning; 
midpeak, often during the day and late evening; peak, often in the 
late afternoon and early evening). The highest prices are established 
for peak periods when demand and the cost of serving consumers are 
generally highest, based on historical and projected cost and 
consumption information. Periods may vary seasonally, for example, 
with different peak periods in the summer than in the winter. Prices 
generally remain consistent throughout a given period, regardless of 
specific levels of hourly demand or changes in the cost of serving 
consumers; 
Number of consumers enrolled in this approach (as a percentage of 
consumers enrolled in consumer-initiated approaches): 2.2 million (98 
percent); 
Potential reduction in peak demand (as a percentage of potential 
reduction in peak demand from all consumer-initiated approaches): 
7,373 MW (74 percent). 

Name: Critical peak prices[A]; 
Description: In some cases, in addition to the time-of-use prices, a 
utility may also establish a "critical peak price," which is higher 
than the on-peak price and is designed to encourage consumers to make 
even more significant reductions in their electricity use during a few 
specific hours. Such a price would be initiated in response to 
particularly high costs of serving consumers or reliability concerns. 
A critical peak price is generally used only for a limited number of 
days and hours as determined by the utility, and consumers may not 
know that a critical peak price will go into effect until the day 
before or day of; 
Number of consumers enrolled in this approach (as a percentage of 
consumers enrolled in consumer-initiated approaches): 0.02 million 
(about 1 percent); 
Potential reduction in peak demand (as a percentage of potential 
reduction in peak demand from all consumer-initiated approaches): 431 
MW (4 percent). 

Name: Real-time prices; 
Description: Consumers are charged prices that typically vary at least 
hourly based on their utility or retail service providers' cost of 
serving them. For example, this may include prices that vary with the 
wholesale price of electricity; 
Number of consumers enrolled in this approach (as a percentage of 
consumers enrolled in consumer-initiated approaches): 0.02 million 
(about 1 percent); 
Potential reduction in peak demand (as a percentage of potential 
reduction in peak demand from all consumer-initiated approaches): 
1,905 MW (19 percent). 

Sources: GAO analysis of 2011 FERC survey data collected for FERC's 
2012 Assessment of Demand Response and Advanced Metering and other 
sources. 

[A] This included what FERC called "critical peak pricing" and 
"critical peak pricing with load control" in its 2012 report. 

[End of table] 

In addition to FERC's 2011 survey data, data from an EIA survey of 
utilities in 2011 also indicate that more consumers reported 
participating in programs that use operator-initiated approaches than 
consumer-initiated approaches.[Footnote 59] According to the EIA data, 
3.7 percent of retail consumers (5.4 million of 144.5 million) of 
utilities that responded to the survey reported participating in 
operator-initiated approaches in 2011, and 2.8 percent of retail 
consumers (4.0 million of 144.5 million) of such utilities reported 
participating in consumer-initiated approaches. EIA data show that 
reported retail demand-response activities resulted in the potential 
to reduce peak electricity demand by 26,596 MW in 2011. Actual 
reductions in peak electricity demand--a result of consumers' actual 
demand-response activities--in 2011 were much lower--12,126 MW. 

Wholesale Demand-Response Activities Have Increased Overall and Have 
Varied by Region and the Service Provided: 

Data from FERC and the RTOs indicate that the extent of wholesale 
demand-response activities has increased overall but varies regionally 
and by the service provided. In its 2012 Assessment of Demand Response 
and Advanced Metering report, FERC reported data that show that the 
extent of wholesale demand-response activities has increased overall, 
more than tripling from a reported 8,899 MW of potential reduction in 
peak demand in 2005 to 28,807 MW of potential reduction in peak demand 
in 2011. According to RTO data, these demand-response resources in 
wholesale markets overseen by each RTO have varied over time, as shown 
in figure 3. 

Figure 3: Regional Transmission Organization Demand-Response Capacity 
as a Percentage of Total System Capacity (2006-2012): 

[Refer to PDF for image: multiple line graph] 

Demand response capacity as a percentage of total system capacity: 

Year: 2006; 
Independent System Operator (ISO) New England: 1.76%; 
Midcontinent ISO: 2.62%; 
New York ISO[B]: 3.1%; 
PJM Interconnection: 0.8%; 
California ISO[C]: 3.3%. 

Year: 2007; 
Independent System Operator (ISO) New England: 3.35%; 
Midcontinent ISO: 3.1%; 
New York ISO[B]: 3.4%; 
PJM Interconnection: 1.1%; 
Southwest Power Pool[A]: 2.39%; 
California ISO[C]: 3.5%. 

Year: 2008; 
Independent System Operator (ISO) New England: 4.49%; 
Midcontinent ISO: 3.52%; 
New York ISO[B]: 4.5%; 
PJM Interconnection: 2.1%; 
Southwest Power Pool[A]: 2.5%; 
California ISO[C]: 3.6%. 

Year: 2009; 
Independent System Operator (ISO) New England: 5.34%; 
Midcontinent ISO: 3.78%; 
New York ISO[B]: 6.6%; 
PJM Interconnection: 4.4%; 
Southwest Power Pool[A]: 2.18%; 
California ISO[C]: 3.6%. 

Year: 2010; 
Independent System Operator (ISO) New England: 6.47%; 
Midcontinent ISO: 3.21%; 
New York ISO[B]: 6.7%; 
PJM Interconnection: 5.5%; 
Southwest Power Pool[A]: 2.31%; 
California ISO[C]: 3.9%. 

Year: 2011; 
Independent System Operator (ISO) New England: 6.58%; 
Midcontinent ISO: 4.08%; 
New York ISO[B]: 5.8%; 
PJM Interconnection: 5.7%; 
Southwest Power Pool[A]: 2.22%; 
California ISO[C]: 4%. 

Year: 2012; 
Independent System Operator (ISO) New England: 6.44%; 
Midcontinent ISO: 4.1%; 
New York ISO[B]: 4.9%; 
PJM Interconnection: 4.1%; 
Southwest Power Pool[A]: 1.95%; 
California ISO[C]: 3.9%. 

Source: Data provided by the above Regional Transmission Organizations 
(RTO). 

Note: This figure shows the percentage of each RTO's demand-response 
capacity as a percentage of each RTO system's total capacity to meet 
consumer demand (i.e., "total installed capacity"). These numbers were 
initially prepared by the RTOs for FERC as a part of two annual 
reports on RTO performance metrics. The RTOs provided data for more 
recent years to us. Given the unique nature of each RTO region, 
including the markets RTOs offer and opportunities for demand-response 
activities, each RTO's methodology for calculating this metric may 
vary. Because most Electric Reliability Council of Texas activities 
are not regulated by FERC, the Electric Reliability Council of Texas 
was not required to submit information to FERC for this performance 
metric. 

[A] The Southwest Power Pool provided updated data to us for this 
metric. As a result, its data do not match the data reported in the 
FERC annual reports on RTO performance metrics. Additionally, because 
the Southwest Power Pool's markets were not active in 2006, data are 
not available for that year. 

[B] Beginning with the 2010 data, New York ISO made modifications to 
its approach for calculating this metric. 

[C] As initially reported to FERC, the California Independent System 
Operator included retail demand-response activities and interruptible 
load programs in its calculation of regional demand-response 
activities. With one exception, these retail programs are not operated 
or triggered by the California ISO. 

[End of figure] 

The extent of wholesale demand-response activities in RTOs also varies 
by the service they provide, with demand-response resources used to 
provide capacity being the most common. Demand-response resources that 
provide capacity involve demand-response providers making commitments 
to the RTO to reduce their or their customers' use of electricity when 
the grid operator directs them to do so, for example, because of 
reliability concerns from higher than expected demand or a generating 
unit that was expected to produce electricity but could not do so. 
According to stakeholders, these commitments to reduce demand are 
functionally similar to power plant operators agreeing to increase 
their generation of electricity. As shown in figure 4, data from FERC 
and the RTOs indicate that 76 percent of the wholesale demand-response 
resources in the RTO regions were used to provide capacity.[Footnote 
60] Less common are demand-response resources to provide ancillary 
services, which, according to our analysis of FERC data, accounted for 
5 percent of the demand-response resources in RTO markets in 2011. 
Likewise, demand-response resources to provide energy accounted for 
about 17 percent of demand-response resources in RTO markets, 
according to our analysis of FERC's data. 

Figure 4: Demand-Response Resources in Regional Transmission 
Organization Regions in 2011 Used to Provide Ancillary Services, 
Capacity, and Energy, Measured in Megawatts of Reported Potential 
Reduction in Peak Demand: 

[Refer to PDF for image: stacked vertical bar graph] 

Potential reduction in peak demand (megawatts): 

Ancillary services[A]: 
Electric Reliability Council of Texas: 1,150; 
PJM Interconnection: 439. 

Capacity[B]: 
Electric Reliability Council of Texas: 420; 
ISO New England[E]: 1,029; 
Midcontinent ISO: 8,052; 
New York Independent System Operator (ISO): 1,976; 
PJM Interconnection: 11,821. 

Energy[C]: 
ISO New England[E]: 203; 
Midcontinent ISO: 1,005; 
New York Independent System Operator (ISO): 234; 
PJM Interconnection: 2,252; 
Southwest Power Pool: 1,454. 

Other[D]: 
Midcontinent ISO: 1,20l; 
ISO New England[E]: 472. 		 

Sources: GAO analysis of data from the Federal Energy Regulatory 
Commission and the above Regional Transmission Organizations
(RTO). 

Note: This figure provides data on the potential reduction in peak 
demand from demand-response resources in RTO areas. These demand-
response resources are reflected in both the retail and wholesale 
demand-response activity totals presented in other parts of this 
report. The RTOs provided these data to the Federal Energy Regulatory 
Commission (FERC) in the survey associated with FERC's 2012 Assessment 
of Demand Response and Advanced Metering report. With assistance from 
the RTOs, we categorized RTO demand-response programs based on whether 
they addressed a need for ancillary services, capacity, energy, or 
other. In some cases, demand-response programs have been updated or 
changed by the RTOs since this information was reported to FERC. 
Additionally, FERC took various steps to modify reported categories 
for the purpose of improving data quality prior to reporting similar 
information in its 2012 Assessment of Demand Response and Advanced 
Metering report. Because these modifications were not documented, we 
were unable to verify their appropriateness for inclusion in this 
analysis. As such, in all cases but one, we used the original survey 
data reported on FERC's website for this analysis. In the case of data 
from the Midcontinent Independent System Operator, FERC staff informed 
us that the data reported on the agency website was not correct and 
provided us with the corrected survey data. 

[A] Ancillary services involve demand-response providers making small 
adjustments in the amount of electricity used or delivered for short 
periods of time to help stabilize the grid. 

[B] Capacity involves demand-response providers making commitments to 
the RTO to reduce their or their customers' use of electricity when 
the grid operator directs them to. In some cases when requested by the 
grid operator, for example, due to a concern about reliability, these 
commitments may result in demand-response activities for energy, which 
are not reflected in this graphic. 

[C] Energy involves demand-response providers lowering their or their 
customers' use of electricity, which can help maintain the overall 
balance of electricity generation and consumption. 

[D] The other category includes demand-response resources from 
Midcontinent Independent System Operator and California Independent 
System Operator that are used to provide both energy or ancillary 
services. To avoid double counting, we included these demand-response 
activities in the other category. 

[E] For ISO New England, we excluded 877 MW of potential reduction in 
peak demand reported to FERC because ISO New England explained that 
this is more properly categorized as energy efficiency, rather than 
demand-response activities. 

[End of figure] 

Demand-Response Efforts Have Resulted in Benefits, but Current Efforts 
Continue to Pose Challenges in Wholesale Markets: 

According to stakeholders, current demand-response efforts provide 
benefits for consumers, including increasing reliability, lower 
prices, and delaying the need to develop new power plants and 
transmission lines. However, FERC's efforts to remove barriers and to 
encourage demand-response activities have made wholesale markets more 
complex by introducing administrative functions that, according to 
stakeholders, have led to challenges, and it is too soon to tell 
whether FERC's steps to address these challenges will be effective. In 
addition, according to some stakeholders and reports we reviewed, 
retail prices remain largely unresponsive to market conditions, which 
poses challenges by limiting the potential for consumers to respond to 
changes in the cost of producing electricity or prices in wholesale 
markets. 

Stakeholders Identified Examples of Benefits Provided by Demand-
Response Efforts: 

Stakeholders we interviewed identified examples of how demand-response 
efforts have resulted in benefits, including increased reliability, 
lower prices, and delayed need to develop additional power plants and 
transmission lines. Specifically, examples are as follows: 

* Increased reliability. Many stakeholders noted that demand-response 
activities can enhance the reliability of the electricity system by 
providing an additional tool to manage emergencies, such as 
electricity shortages. For example, according to documentation from 
PJM Interconnection, the demand-response activities of consumers in 
its region helped the RTO maintain reliability in 2013 during an 
unusual September heat wave that led to two of the highest electricity 
use days of the year since July. According to this documentation, 
demand-response activities estimated to total 5,949 MW--comparable to 
the electricity output of five nuclear power plants--helped stabilize 
the grid. In addition, in January 2014, cold temperatures and power 
plant outages in Texas triggered an emergency reliability alert. 
ERCOT--Texas' grid operator--utilized the demand-response activities 
of consumers in the region, in addition to voluntary requests for 
consumers to conserve activity, to help stabilize the grid. 

* Lower prices. Several stakeholders noted that demand-response 
activities lower wholesale market prices by helping grid operators 
avert the need to use the most costly power plants during periods of 
otherwise high electricity demand. For example, according to 
representatives from PJM Interconnection, prices spiked on July 17, 
2012, during a heat wave, when electricity demand rose to its highest 
levels that year. According to these representatives, demand-response 
activities served as an alternative to generating additional 
electricity, which lowered prices, although given the complex set of 
factors like weather and location that affect prices, the 
representatives could not quantify the extent of the price reduction 
attributable to demand-response activities. 

* Delayed need for power plants and transmission lines. Several 
stakeholders we spoke with--including representatives from PJM 
Interconnection; Midcontinent Independent System Operator;[Footnote 
61] and ISO New England--noted that demand-response activities may 
help delay the need to develop additional power plants and 
transmission lines. For example, according to documents from the 
Midcontinent Independent System Operator, demand-response activities 
in its region delayed the need to construct new power plants, which 
amounted to an estimated annual benefit of between $112 and $146 
million. 

FERC's Efforts to Remove Barriers and Encourage Demand-Response 
Activities Have Made Wholesale Markets More Complex and Introduced 
Challenges, and It Is Too Soon to Evaluate Steps to Address Challenges: 

FERC's efforts to remove barriers and to encourage demand-response 
activities in wholesale markets have added complexity to these markets 
by introducing administrative functions that, according to 
stakeholders, have led to challenges. Stakeholders identified key 
challenges to quantifying and compensating wholesale demand-response 
activities, and it is too soon to evaluate whether FERC's steps to 
address these challenges will be effective. 

Stakeholders Stated That Quantifying Wholesale Demand-Response 
Activities Poses Two Key Challenges That Require Time and Resources to 
Address: 

Stakeholders we spoke with highlighted two key challenges to 
quantifying demand-response activities: (1) developing baselines and 
(2) the potential for manipulation of baselines. FERC has taken steps 
to address these challenges by adopting standards for quantifying 
demand-response activities and undertaking enforcement activities, but 
these steps require time and resources, and it is too soon to tell 
whether they will be effective. 

First, several stakeholders said that developing baselines in 
electricity markets--that is, an estimate of how much electricity a 
consumer would have consumed if not for their demand-response 
activities--can be difficult. Individual electricity consumption 
reflects factors unique to individual consumers that are inherently 
difficult to predict. Specifically, consumers' past electricity use 
does not necessarily predict future use because electricity use 
depends on many variables, such as weather and, for large industrial 
consumers, production cycles. For example, the electricity demand of 
some industrial and commercial consumers is difficult to estimate 
because their electricity consumption varies based on changes in the 
demand for the products they produce. Further, determining when to 
measure a baseline can be difficult since consumers' electricity use 
may vary frequently and electricity use before and after a consumer's 
demand-response activities may not accurately reflect the extent of 
the consumer's demand-response contribution. For example, comments 
from an industrial coalition and two demand-response aggregators to 
FERC describe a potential situation in which a steelmaker has a 
furnace temporarily out of service for maintenance. After maintenance 
is completed, if the steelmaker chooses to take a demand-response 
action by delaying its next production cycle, measuring this 
steelmaker's baseline immediately before the steelmaker took the 
demand-response action--when its furnace was out of service--would not 
reflect the steelmaker's contribution. Baselines can have significant 
implications for demand-response activities. If a baseline is set too 
high, consumers may be compensated for a greater quantity of 
electricity resulting from their demand-response actions than the 
quantity they actually provided, potentially raising costs to all 
electricity consumers who ultimately pay for demand-response 
activities. If the baseline is set too low, consumers may not be 
credited with providing the quantity of electricity resulting from the 
demand-response actions they actually provided, and they may be less 
willing to take demand-response actions in the future, limiting the 
potential benefits. As a result, RTOs and demand-response providers 
must devote resources to the efforts of developing reasonable and fair 
baselines for demand-response programs to operate effectively. 

Second, some stakeholders noted that using baselines as a key 
component of compensation for demand-response activities subjects them 
to manipulation, which requires RTOs and FERC to devote time and 
resources to oversight and enforcement. For example, in recent years, 
FERC has identified multiple instances in which consumers manipulated 
their baseline to receive additional financial compensation for demand-
response activities or to avoid financial penalties for not providing 
the quantity of demand-response activities they agreed to. 
Specifically, in June 2013, FERC reported what it believed were 
irregular activities by a company that manages sports and 
entertainment facilities. According to a FERC document, witnesses 
reported that stadium lighting at one of the company's baseball 
stadiums was turned on 2 hours before a demand-response event was 
scheduled to begin.[Footnote 62] No games were scheduled for that day, 
indicating that the increased electricity use was not needed for 
operations at the ballpark. These actions could have artificially 
inflated the company's baseline, thereby increasing the company's 
compensation for the reduction in demand that resulted from switching 
the lights off during the demand-response event. FERC recently 
approved a $1.3 million settlement with the company.[Footnote 63] More 
recently, FERC fined two Maine paper mills after concluding that they 
had manipulated New England's demand-response programs.[Footnote 64] 
In both cases, FERC determined that the paper mills had improperly set 
their baseline electricity usage by lowering their use of on-site 
generation below what was their normal practice. According to FERC, 
doing so increased their consumption of electricity from the grid and 
inflated their baselines. Once the baseline was set, FERC determined 
that the mills returned to their normal practice of using their on-
site generation, which made it appear that they had taken demand-
response actions by lowering their use of electricity from the grid. 
FERC recently approved an approximately $3 million settlement with one 
paper mill, and the other case is currently being contested in court. 
FERC officials told us that FERC's enforcement office continues to 
pursue investigations related to fraudulent demand-response 
activities. As a result of the potential for such manipulations, RTOs 
and FERC must devote time and resources toward oversight and 
enforcement tasks, such as monitoring, investigating, and adjudicating 
potential violations of the rules for demand-response activities. 

Stakeholders Stated That Compensating Wholesale Demand-Response 
Activities Also Poses Challenges and Disagreed about FERC's Approach: 

Stakeholders we spoke with also highlighted challenges to compensating 
demand-response activities. The stakeholders we spoke with disagreed 
on the value of demand-response activities relative to electricity 
generation and how to compensate consumers for their demand-response 
activities. FERC sought to address these challenges in Order 745, 
issued in 2011, which provides rules for compensating consumers in 
wholesale energy markets, but it is too soon to tell if this will be 
effective.[Footnote 65] 

Some stakeholders noted that reasonable compensation for demand-
response activities is needed to ensure an appropriate amount of 
participation. If the quantity of electricity reduced as a result of 
demand-response activities is too small, the price and reliability 
benefits that demand-response activities provide may be reduced. In 
contrast, if the quantity of electricity reduced as a result of demand-
response activities is too high, it may dampen the incentives to 
invest in new power plants, which could reduce their availability for 
meeting demand in the long run. Central to the issue of reasonable 
compensation is the fact that, because both demand-response activities 
and electricity generation from power plants can be used to help meet 
demand for electricity, they compete for compensation in the wholesale 
market. 

Some stakeholders told us that they believe that demand-response 
providers should receive less compensation than power plants for the 
services they provide. Specifically, these stakeholders said the 
following: 

* Some stakeholders noted that power plants--assets with long useful 
lives--are more dependable in the long run than demand-response 
resources. For example, these stakeholders told us that owners of 
power plants are typically obligated to ensure that power plants are 
available to generate electricity. In contrast, these stakeholders 
noted that there may not be such a requirement for mandatory 
participation by demand-response providers. For example, 
representatives from one RTO noted that consumers enter into 
agreements to provide demand-response resources through aggregators 
and may change their availability on a month-to-month basis. As a 
result, they said that the RTO is not able to accurately predict how 
many demand-response resources its region will have in the future. In 
addition, while the amount of electricity generation that power plants 
can generally provide is known, there may be limits to how often 
consumers can be requested to curtail their electricity consumption 
and for how long. For example, the market rules for PJM 
Interconnection's most widely subscribed demand-response program limit 
PJM's requests of customers for demand-response activities to no more 
than 10 interruptions from June through September with a maximum 
interruption of 6 hours. Representatives from PJM Interconnection told 
us they are attempting to increase the use of demand-response 
approaches with fewer restrictions.[Footnote 66] 

* Several stakeholders noted that providing equal compensation for 
demand-response activities as electricity generation may result in 
benefits to demand-response providers in excess of what would be 
economically justified. Several stated that, in their view, if these 
resources are compensated equally, the providers are effectively 
benefiting twice--once when they are paid for their demand-response 
activities and a second time because they save money by not having to 
purchase as much electricity as they were originally planning to. One 
stakeholder noted that while it may be reasonable to provide 
compensation to demand-response providers at a level equal to power 
plants if the providers had first purchased the electricity and were 
just reselling it, demand-response providers may have not done so. In 
essence, demand-response providers may be compensated for agreeing to 
reduce their use of electricity that they may not have purchased in 
the first place. Some stakeholders noted that providing equal 
compensation could result in more demand-response resources than are 
economically justified. 

Some stakeholders told us they believe that demand-response providers 
should receive compensation equal to the compensation power plants 
receive for generating electricity. Specifically, stakeholders said 
the following: 

* Some stakeholders noted that providing equal compensation can 
encourage demand-response resources to participate in wholesale 
markets in which they provide benefits. According to one stakeholder, 
demand-response activities can provide reliability benefits, including 
addressing localized reliability concerns. Localized reliability 
concerns sometimes arise when the transmission lines leading to a 
local area do not have the capability to transport sufficient 
electricity for that area. Even though adequate electricity is 
available to meet overall demand, there may not be sufficient 
transmission available to deliver the electricity at certain points 
during the day or year. One stakeholder told us that, in these 
instances, the demand-response activities of consumers living in the 
local area could help resolve the reliability concern. Two other 
stakeholders--a representative of a demand-response aggregator and a 
state public utility commission official--told us that, without equal 
compensation, the quantity of demand-response activities in the 
wholesale energy markets would likely be smaller. 

* Some stakeholders told us that, although demand-response activities 
and electricity generation are different kinds of resources, providing 
equal compensation is appropriate since demand-response activities 
provide a benefit to the market by replacing the need to have power 
plants provide additional electricity. One stakeholder said that equal 
compensation always provides an economic benefit to consumers since 
FERC requires demand-response activities to be cost-effective. This 
means that the estimated benefit from the reduction of the wholesale 
market price attributable to demand-response activities should be 
greater than the amount of compensation paid for the demand-response 
activities. Another stakeholder noted that equal compensation in 
electricity markets is designed to provide a competitive price that 
balances supply and demand in the marketplace in an unbiased manner. 
The purpose of equal compensation is not to provide equal benefit to 
all resources, since each resource--including power plants with 
different fuel types--has varying costs and will, therefore, benefit 
from equal compensation to varying degrees. 

In 2011, FERC issued Order 745 generally requiring that, when certain 
conditions are met, demand-response providers should receive equal 
compensation. Prior to issuance, FERC issued a Notice of Proposed 
Rulemaking and provided an opportunity for the public to comment. In 
the final order, FERC acknowledged divergent opinions on the 
appropriate level of compensation, but it determined that equal 
compensation should generally be provided for demand-response 
activities that provide the same services as generation. It may take 
time to determine whether Order 745 will have the desired effect. 

Stakeholders Identified Two Additional Challenges as a Result of 
Demand-Response Efforts: 

Stakeholders identified the following two additional challenges that 
have developed related to demand-response efforts: 

* Environmental impacts of backup or replacement generation.[Footnote 
67] Some stakeholders highlighted challenges associated with the use 
of backup generators for demand-response activities. Some consumers 
may use backup generators--on-site generating units that replace 
electricity that would have been provided by the grid--to generate 
electricity to offset some or all of their demand reductions. Although 
these backup generators can play an important role in maintaining 
reliability, they may be more polluting than the power plants serving 
the grid. EPA officials told us that they did not know the 
environmental impact of backup generation being used to offset demand-
response activities and said that the impact will depend on how often 
backup generators are used for this purpose and their individual 
emissions profiles. According to an EPA final rule, starting with 
calendar year 2015, owners and operators of backup generators subject 
to EPA's rules must annually report data on the extent to which their 
generators are used for demand-response activities.[Footnote 68] 

* Demand-response dependability. As demand-response activities 
increase and become a larger percentage of overall system demand, the 
likelihood increases that a consumer will be called upon more often 
for their demand-response activities. Some stakeholders noted that 
consumers may become fatigued as the number of demand-response events 
increases, making them less likely to reduce electricity demand to 
agreed-upon levels. NERC has recently begun taking steps to collect 
data about this issue.[Footnote 69] 

Retail Prices Remain Unresponsive to Market Conditions, which Poses 
Challenges in Wholesale Markets, Including Higher Demand and Prices: 

Retail prices, which are outside of FERC's jurisdiction, remain 
largely unresponsive to wholesale market conditions, which poses 
challenges in wholesale markets. These unresponsive retail prices 
limit the potential for consumers to respond to changes in the cost of 
producing electricity or prices in wholesale markets which, in turn, 
leaves electricity consumption and wholesale prices higher than they 
otherwise would be. In our 2004 report,[Footnote 70] we reported that 
a barrier to demand-response activities is that retail electricity 
prices generally did not vary with wholesale market conditions--such 
as changing demand for electricity and the cost of serving consumers--
but were instead based on average electricity costs over an extended 
period.[Footnote 71] In particular, in 2004, we concluded that retail 
prices that did not vary with wholesale market conditions resulted in 
electricity markets that do not work as well as they could, producing 
prices that are higher than they would be if more consumers paid 
varying prices. Since that time, others have also concluded that 
having a limited number of consumers paying prices that are responsive 
to market conditions may lead to higher consumer demand for 
electricity than would otherwise be the case. Specifically, according 
to a 2008 FERC report about demand-response activities, some 
stakeholders, and other reports we reviewed, consumers paying average, 
unvarying prices may use more electricity at times of the day when the 
cost of serving consumers is high than they would if the price they 
paid reflected this higher cost of serving them.[Footnote 72] More 
recently, some stakeholders we spoke with and reports we reviewed also 
concluded that if consumers' electricity use is higher than it 
otherwise would be, electricity prices for all consumers will also be 
higher. Furthermore, two stakeholders and reports we reviewed noted 
that higher levels of consumption must be served by building 
additional power plants and transmission lines, which further drives 
up costs and ultimately retail prices paid by consumers. 

FERC has also concluded that prices that are aligned with overall 
market conditions could provide substantial benefits. For example, in 
a 2009 assessment of demand-response potential, FERC estimated that 
forecasted peak demand in 2019 could drop by 14 percent if two types 
of consumer-initiated demand-response approaches--real-time prices and 
critical-peak prices--became the default pricing approach for 
consumers.[Footnote 73] Consistent with this view, some stakeholders 
we interviewed, reports by economists, and a FERC Advance Notice of 
Proposed Rulemaking,[Footnote 74] reported that increasing the number 
of consumers enrolled in consumer-initiated demand-response 
approaches, particularly real-time pricing programs, has the potential 
to lower average electricity prices for all consumers as well as 
provide other benefits. For example, such an approach could eliminate 
"cross subsidies" in which one type of consumer--consumers that 
currently use little electricity at high-cost times--subsidizes the 
behavior of other consumers--those that use larger amounts of 
electricity at high-cost times. In addition, such an approach could 
provide consumers with the incentive to make more permanent shifts in 
the way they consume electricity, such as by making changes to 
electricity consumption habits, including precooling buildings prior 
to peak hours rather than cooling continuously throughout the day. We 
also previously reported that such pricing can provide incentives for 
the installation of more energy efficient equipment to replace 
equipment that consumes large quantities of electricity during periods 
of high demand, such as air conditioners that run during peak periods 
during the summer.[Footnote 75] Such pricing may also make it cost-
effective for some consumers to invest in renewable energy 
technologies such as solar panels. The times solar power can be 
generated often coincide with times of peak demand, when the cost of 
generating electricity is higher, which may make the use of solar 
panels more cost-effective when consumers pay real-time prices. 

In particular, FERC's data indicate that 6.5 percent of retail 
consumers participate in demand-response programs and approximately 2 
percent in consumer-initiated approaches such as time-of-use or real-
time pricing. Some stakeholders we spoke to told us that expanding the 
number of consumers paying prices that are responsive to market 
conditions--such as real-time prices--would be a more straightforward 
and less administratively costly alternative to FERC's demand-response 
efforts. 

Some stakeholders highlighted the difficulties of shifting retail 
pricing toward prices that more closely mirror the cost of serving 
consumers. For example, representatives from a large industrial 
company told us that it is difficult to manage their operations when 
paying prices that vary frequently throughout the day because 
electricity comprises a large portion of this company's business 
expenses, and frequently varying prices make it difficult to plan 
production cycles. Two other stakeholders commented that if consumers' 
expected cost savings from shifting their electricity use are small, 
they may decide that it is not worth the effort to shift their 
electricity use in response to changing prices. When making this 
determination, consumers may consider the costs associated with 
managing their electricity usage in response to prices that vary 
frequently, including the costs of installing any needed technological 
infrastructure--for example, energy management control systems that 
allow them to automatically respond to varying prices with 
preprogrammed demand-response curtailment actions. 

Efforts are under way in several areas to evaluate different ways of 
pricing electricity for retail consumers with some utilities 
initiating pilots. For example, Baltimore Gas and Electric completed a 
pilot program--converted to a permanent program in July 2013--in which 
residential consumers earn a bill credit for energy conserved compared 
with their normal usage on days identified by the utility when energy 
demand is high. Furthermore, Pacific Gas and Electric, which serves 
much of Northern and Central California, began offering a critical 
peak pricing program in 2008 after advanced meters had been installed. 
Additionally, as a part of the DOE Smart Grid Investment Grant 
program, DOE is helping to coordinate studies to assess consumers' 
responses to these new approaches. 

Conclusions: 

Since our last report on demand-response activities in 2004, FERC has 
made efforts to remove barriers to expand the use of demand-response 
activities in wholesale markets, recognizing the importance of 
connecting consumers' decisions about electricity consumption to the 
wholesale markets FERC oversees. FERC has also undertaken efforts to 
study demand-response activities and collect data on the range of 
demand-response activities across the United States and report them 
annually, as required under the Energy Policy Act. However, the data 
FERC collects and reports--the only source of broad data we identified 
with detailed information by demand-response approach--have two key 
limitations. First, FERC has not reviewed the scope of its data 
collection and reporting efforts to determine whether they could be 
improved to better reflect changes in electricity markets and 
participation in demand-response activities. Second, in some cases, 
FERC makes certain adjustments after collecting these data but before 
using them in their reports required by Congress; however, it does not 
fully document these adjustments or the reasons for them. By taking 
steps to address these limitations, FERC could make its data more 
informative and transparent to data users and ensure that Congress has 
a better picture of demand-response activities--something it sought in 
the Energy Policy Act. Improvements in its data collection and 
reporting process could also benefit regulators--such as FERC and 
state regulators--in determining how to focus their demand-response 
efforts. 

Recommendations for Executive Action: 

We are making recommendations to improve the quality of FERC's annual 
reports required by Congress on demand-response and advanced metering 
activities and the data collected to support these reports. In 
particular, we recommend that the Chairman of FERC take the following 
two actions: 

* Review the scope of FERC's efforts to prepare and publish an annual 
report that assesses demand-response resources and consider whether 
revisions to the data it collects could better inform users and 
improve the effectiveness of demand-response activities. 

* Take steps to ensure that FERC staff fully document any 
modifications made to survey data prior to public reporting, including 
considering making its final, modified data set available to the 
public. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to FERC for review and comment, and 
FERC provided written comments, which are reproduced in appendix III. 
In its comments, FERC did not disagree with our findings or 
recommendations and stated that it would take them under advisement as 
it considers how best to fulfill the requirements of the Energy Policy 
Act of 2005. We believe in the importance of fully implementing these 
recommendations. FERC also provided technical comments, which we 
incorporated, as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
Chairman of FERC, the appropriate congressional committees, and other 
interested parties. In addition, this report will be available at no 
charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix VI. 

Signed by: 

Frank Rusco: 
Director, Natural Resources and Environment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report examines efforts to expand demand-response activities in 
the U.S. electricity markets and provides an update on the status of 
demand-response activities since we previously reported on them in 
2004. Specifically, this report assesses: (1) the federal government's 
efforts to facilitate demand-response activities; (2) Federal Energy 
Regulatory Commission (FERC) efforts to collect and report data on 
demand-response activities; (3) changes, if any, in the extent of 
demand-response activities in retail and wholesale markets; and (4) 
key benefits and challenges, if any, of current demand-response 
efforts. 

To assess the federal government's efforts to facilitate demand-
response since our 2004 report, we reviewed federal demand-response 
policies and interviewed officials from FERC, the Department of Energy 
(DOE), and the Environmental Protection Agency (EPA), key agencies 
involved in demand-response policy setting. These policies included 
FERC demand-response orders that summarize FERC's review of demand-
response proposals from individual Regional Transmission Organizations 
(RTO), as well as FERC orders that address demand-response activities 
more broadly. We also spoke with FERC officials to understand their 
current approach to demand-response activities in wholesale markets, 
including decisions about how to eliminate barriers to demand-response 
activities in these markets. We reviewed relevant laws that outlined 
requirements related to demand-response efforts for FERC and others. 

To assess FERC's efforts to collect and report data on demand-response 
activities, we reviewed FERC's approach to gathering data for its 
Assessment of Demand Response and Advanced Metering reports, which 
involved analyzing various aspects of the data, analyzing FERC's 
approach for collecting and modifying the data, and conducting 
interviews with FERC officials about FERC's data collection and 
reporting process. 

To assess the changes, if any, in the extent of demand-response 
activities in retail and wholesale markets since 2004, we reviewed and 
analyzed data on demand-response activities from FERC and the Energy 
Information Administration (EIA), among others. Specifically, we 
reviewed FERC data on demand-response approaches and related reports, 
including FERC's 2012 Assessment of Demand Response and Advanced 
Metering report. Where appropriate, we used these data in our report 
to provide information on how overall levels of demand-response 
activities have changed over time. We also analyzed data from FERC's 
survey of utility demand-response activities conducted for this 2012 
assessment to identify the primary demand-response approaches in use 
at the retail level. FERC conducted a voluntary survey of utilities to 
gather data on their demand-response activities and their use of 
advanced meters. The response rate to FERC's survey was 59 percent. 
Unless otherwise noted, the data we present in our report from FERC's 
2012 report and associated survey reflects information reported by 
those utilities responding to the survey. The data do not represent 
the extent of demand-response activities throughout the United States. 
Furthermore, our analysis of survey results to identify the primary 
demand-response approaches at the retail level may not match what was 
reported in FERC's 2012 Assessment of Demand Response and Advanced 
Metering report because FERC modified these data prior to publication, 
as we discuss in this report. Because these modifications were not 
documented, we could not verify their accuracy or relevance to our 
analysis. As a result, when providing data about specific retail 
demand-response approaches, we chose to report results from the 
original survey data reported by the utilities, which reflect the 
original, unmodified survey responses. To assess the reliability of 
the data, we interviewed FERC officials and performed electronic 
testing of the data. We found some elements of the data to be 
sufficiently reliable for our purposes. In other cases, we were unable 
to determine the quality of the data and, therefore, did not include 
related analyses in our report. In addition to the FERC data, we 
reviewed EIA's 2011 data on retail demand-response activities. We 
reviewed related documentation about these data and interviewed EIA 
about their collection, and we found them to be sufficiently reliable 
for our purposes. We also reviewed data collected by the North 
American Electric Reliability Corporation (NERC) through its Demand 
Response Availability Data System. These data primarily focused on 
operator-initiated approaches, although a report from NERC says there 
are plans to expand reporting to include additional consumer-initiated 
approaches in the future. For this reason, and because the data were 
not categorized in a way that aligned with the specific analysis we 
were performing, we did not include them in our report. 

We also reviewed RTOs' data on the development of demand-response 
activities in their region, what consumers provide demand-response 
activities, and documentation on available RTO demand-response 
approaches. We supplemented these data with our own analysis of data 
on RTO demand-response resources available through the FERC survey of 
utility demand-response activities. To analyze the FERC data, we 
categorized each RTO's demand-response resources according to whether 
they were designed to provide capacity, energy, or ancillary services 
and confirmed these categorizations with the RTOs. In some cases, RTO 
demand-response approaches had been updated or changed by the RTOs 
since this information was reported to FERC. Additionally, FERC took 
various steps to modify reported categories prior to reporting similar 
information in their 2012 Assessment of Demand Response and Advanced 
Metering report. As previously noted, because these modifications were 
not documented, we were unable to verify their appropriateness for 
inclusion in our analysis. As such, for this analysis of RTO demand-
response activities, we primarily used the original survey data 
reported on FERC's website. In the case of the Midcontinent 
Independent System Operator data, FERC informed us that the data 
reported on its website was not correct and provided us with the 
corrected survey data. We interviewed FERC officials about their data 
and performed electronic testing of the data, which we found 
sufficiently reliable for our purposes. As a result, the data included 
in our report may not always match what was reported in FERC's 2012 
Assessment of Demand Response and Advanced Metering report. 

To assess key benefits and challenges, if any, of current demand-
response efforts, we conducted semistructured interviews with a 
nonprobability sample of 37 diverse stakeholders with expertise on 
demand-response issues from five categories: trade associations and 
public interest organizations; academics and consultants; state 
government, including state public utility commissions; industry, 
including demand-response aggregators, large users of electricity, 
independent power producers, and integrated utilities; and RTOs. (See 
app. II for a list of these stakeholders). We selected these groups to 
maintain balance on key issues. Often, because of business interests, 
these groups have different perspectives on electricity industry 
issues, including demand-response activities. When possible, we used a 
standard set of questions to discuss topics such as the strengths and 
limitations of U.S. demand-response approaches, barriers to expanding 
demand-response activities, and steps the federal government should 
take to develop or refine demand-response policies. However, as 
needed, we also sought perspectives on additional questions tailored 
to these stakeholders' area of expertise and sought opinions from 
stakeholders on controversial key issues, for example, their views on 
how to best compensate consumers for their demand-response activities. 
In addition to interviewing the aforementioned 37 stakeholders from 
the five categories, we had supplementary conversations with 
stakeholders who did not easily fit in one of the previous five 
categories. These stakeholders had specialized knowledge about certain 
aspects of the electricity industry relevant to our study, for 
example, experience evaluating the competitiveness of the FERC-
regulated wholesale markets. In total, we spoke with 42 stakeholders 
as outlined in appendix II. Throughout the report we use the 
indefinite quantifiers, "some," "several," and "many" to inform the 
reader of the approximate quantity of stakeholders that agreed with a 
particular idea or statement. We refer to "some" as 3-6 stakeholders, 
"several" as 7-12 stakeholders, and "many" as 12-27 stakeholders. 
Because this was a nonprobability sample, the information and 
perspectives that we obtained from the interviews cannot be 
generalized to similar groups of stakeholders. Such an approach, 
however, allowed us to get more in depth responses about certain key 
issues related to our objectives, including the connection between 
retail electricity prices and the cost of serving consumers. We also 
reviewed current reports--including empirical studies--on demand-
response issues. We identified these reports during the course of our 
own research, by recommendation from stakeholders, and through a 
literature review of retail and wholesale demand-response approaches. 

We conducted this performance audit from September 2012 to March 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Stakeholders Interviewed: 

Trade Associations and Public Interest Organizations: 

* American Public Power Association: 
* Compete Coalition: 
* Demand Response and Smart Grid Coalition: 
* Edison Electric Institute: 
* Electricity Consumers Resource Council: 
* Electric Power Supply Association: 
* ISO/RTO Council: 
* National Association of Regulatory Utility Commissioners: 
* The National Rural Electric Cooperative Association: 
* Public Citizen: 

Academics and Consultants: 

* The Brattle Group: 
* Charles Goldman, Lawrence Berkeley National Laboratory: 
* NERA Economic Consulting: 
* Dr. Frank Wolak, Stanford University: 
* Dr. Jay Zarnikau, University of Texas at Austin: 

State Government: 

* Illinois Commerce Commission: 
* Maryland Office of People's Counsel: 
* Maryland Public Service Commission: 
* Pennsylvania Public Utility Commission: 
* Public Utility Commission of Texas: 

Industry: 

* EnerNOC: 
* Energy Curtailment Specialists: 
* CBRE: 
* Gerdau Corporation: 
* Linde Energy Services: 
* American Electric Power: 
* Calpine: 
* CPS Energy: 
* Exelon Corporation: 
* Southern Company: 

RTOs: 

* California Independent System Operator: 
* Electric Reliability Council of Texas: 
* ISO New England: 
* Midcontinent Independent System Operator: 
* New York Independent System Operator: 
* PJM Interconnection: 
* Southwest Power Pool: 

Others: 

* Scott Hempling: 
* Monitoring Analytics: 
* Potomac Economics: 
* North American Electric Reliability Corporation: 
* Vermont Energy Investment Corporation: 

[End of section] 

Appendix III: Comments from the Federal Energy Regulatory Commission: 

Federal Energy Regulatory Commission: 
Office of the Chairman: 
Washington, DC 20426: 

March 7, 2014: 

Mr. Frank Rusco: 
Director, Natural Resources and Environment: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Rusco: 

Thank you for your February 6, 2014 electronic transmission of the 
draft report, Electricity Markets: Demand-Response Activities Have 
Increased, but FERC Could Improve Data Collection and Reporting 
Efforts, I welcome the opportunity to comment on the draft report, the 
stated purpose of which is to examine U.S. efforts to expand demand 
response activities since GAO last reported on this topic in 2004 and 
to assess: (1) the federal government's efforts to facilitate demand-
response activities; (2) FERC efforts to collect and report data on 
demand response activities; (3) changes, if any, in the extent of 
demand-response activities in retail and wholesale markets; and (4) 
key benefits and challenges, if any, of current demand-response 
efforts. 

I appreciate that the draft report acknowledges the work of FERC to 
remove barriers to the participation of demand response in the 
organized wholesale energy markets. The inclusion of demand response 
in the organized wholesale markets has not been without controversy, as
evidenced by the stakeholder comments captured in the draft report. I 
note that the draft report makes no recommendations in this regard. 

The draft report makes two specific recommendations regarding FERC's 
efforts to collect and report data on demand response activities: 
first, that the scope of the data collection and reporting effort be 
reviewed to expand the collection of information beyond the survey's 
initial scope and improve usefulness to a broader audience, and 
second, that steps be taken to fully document modifications to the 
reported data. I note and appreciate that the draft report states
that while FERC is not a federal statistical agency, its survey effort 
is the only source of broad demand response data, with detailed 
information by demand response approach, identified by GAO. Given 
this, I am taking the draft report's recommendations and findings 
under advisement as we contemplate haw in the future to best fulfill 
the requirements of the Energy Policy Act of 2005. 

Again, I appreciate the opportunity to review and comment on the draft 
report. 

Sincerely, 

Signed by: 

Cheryl A. LaFleur: 
Acting Chairman: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Frank Rusco, 202-512-3841 or ruscof@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Jon Ludwigson (Assistant 
Director), Margaret Childs, Alysia Davis, Philip Farah, Cindy Gilbert, 
Paige Gilbreath, Catherine Hurley, Alison O'Neill, Dan C. Royer, Kiki 
Theodoropoulos, and Barbara Timmerman made key contributions to this 
report. 

[End of section] 

Footnotes: 

[1] Electricity consumers are divided into four groups: industrial, 
commercial, residential, and other. According to the Energy 
Information Administration (EIA), the industrial sector encompasses 
manufacturing, agriculture, mining, and construction--and a wide range 
of activities, such as processing and assembly, space conditioning, 
and lighting. According to the EIA, the commercial sector consists of 
businesses, institutions, and organizations that provide services, 
encompassing many different types of buildings and a wide range of 
activities. Examples of commercial sector facilities include schools, 
stores, office buildings, and sports arenas. According to EIA, the 
residential sector includes households and excludes transportation. In 
the residential sector, energy is used for heating, cooling, lighting, 
water heating, and many other appliances and equipment. Other includes 
uses not captured in the other three categories, including 
transportation. 

[2] GAO, Electricity Markets: Consumers Could Benefit from Demand 
Programs, but Challenges Remain, [hyperlink, 
http://www.gao.gov/products/GAO-04-844] (Washington, D.C.: Aug. 13, 
2004). 

[3] The price consumers pay for electricity is often a combination of 
rates determined by regulators and prices determined by markets. Rates 
are generally approved by regulators and set to recover the cost of 
providing a service plus a rate-of-return. Prices are market-based, 
determined based on the interaction of supply and demand. For the 
purposes of this report, we generally use "prices" to refer to both 
rates and prices, except when specifically discussing FERC's oversight 
authority. 

[4] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[5] FERC is also responsible for regulating transmission of 
electricity in interstate commerce by privately owned utilities. FERC 
does not regulate transmission or wholesale electricity sales in most 
of the state of Texas because Texas' grid is separate from the two 
other U.S. grids. In addition, FERC does not regulate transmission or 
wholesale electricity sales in Alaska or Hawaii because of their 
geographical isolation. 

[6] These steps included the development of the following two orders: 
(1) Order 888, Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery of 
Stranded Costs by Public Utilities and Transmitting Utilities. Apr. 
24, 1996, and (2) Order 2000, Regional Transmission Organizations. 
Dec. 20, 1999. 

[7] [hyperlink, http://www.gao.gov/products/GAO-04-844]. GAO, 
Electricity Restructuring: 2003 Blackout Identifies Crisis and 
Opportunity for the Electricity Sector, [hyperlink, 
http://www.gao.gov/products/GAO-04-204] (Washington, D.C.: Nov. 18, 
2003). 

[8] Grid operators may provide compensation for demand-response 
activities to a wide range of market participants, including consumers 
and others. Throughout this report, we use the term "consumers" to 
capture the range of market participants including the consumers that 
reduce demand, as well as others. 

[9] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[10] In general, traditional electric meters measure electricity 
consumption on an ongoing basis, but the measurements may only be 
captured monthly to calculate bills for consumers. Advanced meters are 
capable of measuring and recording consumption on a more frequent 
basis, hourly or less. 

[11] Pub. L. No. 109-58, § 1252(f), 119 Stat. 594, 966 (Aug. 8, 2005). 

[12] GAO, EPA Regulations and Electricity: Better Monitoring by 
Agencies Could Strengthen Efforts to Address Potential Challenges, 
[hyperlink, http://www.gao.gov/products/GAO-12-635] (Washington, D.C.: 
July 17, 2012). 

[13] The types of technologies used by baseload power plants can vary 
by region but often include plants using coal, nuclear, hydroelectric, 
or combined-cycle natural gas technologies--units that utilize a 
combustion turbine in conjunction with a steam turbine to produce 
electricity. 

[14] The types of technologies used by peaker power plants can vary by 
region but often include plants using natural gas combustion turbines. 

[15] DOE, Ernest Orlando Lawrence Berkeley National Laboratory, and 
EnerNOC, Addressing Energy Demand through Demand Response: 
International Experiences and Practices (June 2012). This work was 
also supported by two authors from EnerNOC, a company in the demand-
response industry. 

[16] Sections 205 and 206 of the Federal Power Act, 16 U.S.C. §§ 824d -
824e. 

[17] Under section 205 of the Federal Power Act, FERC oversees rates 
for the transmission of electric energy in interstate commerce and the 
sale of electric energy at wholesale in interstate commerce. 16 U.S.C. 
§ 824. 

[18] Prior to the creation of RTOs, FERC approved the creation of 
entities called Independent System Operators (ISO). ISOs perform many 
similar functions to RTOs and for the purposes of this report, we 
refer to all ISOs and RTOs as "RTOs". However, many RTOs that 
originally took on names that include "ISO" have maintained them. 

[19] The North American Electric Reliability Corporation (NERC), which 
has been designated by FERC as the principal reliability authority for 
the United States, oversees the reliability of key parts of the U.S. 
electricity grid, including establishing mandatory standards of 
reliability. RTOs, utility grid operators, and other participants in 
the electricity markets must take various actions to comply with these 
standards. 

[20] FERC, Assessment of Demand Response and Advanced Metering. Staff 
Report. Docket Number: AD-06-2-000, August 2006(revised 2008). 

[21] Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-
617, 92 Stat. 3121 (1978) (codified at 16 U.S.C. § 2621). 

[22] The cost of serving consumers depends on the cost of producing 
electricity, which is based on the costs associated with the last 
generating plant needed to meet consumer demand. In restructured 
regions, the cost of serving consumers varies with the wholesale price 
of electricity. 

[23] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[24] FERC, Assessment of Demand Response and Advanced Metering, 2012. 

[25] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[26] The National Association of Regulatory Utility Commissioners 
represents state public service commissions that regulate the 
utilities that provide energy, telecommunications, water, and 
transportation services. 

[27] Energy Independence and Security Act of 2007, Pub. L. No. 110-
140, §529, 121 Stat. 1492, 1664-65 (codified at 42 U.S.C. § 8279). 

[28] One gigawatt is equal to 1,000 megawatts, 1,000,000 kilowatts, 
and 1,000,000,000 watts. One traditional incandescent light bulb 
consumes about 60 watts, and a comparable compact fluorescent light 
bulb consumes approximately 15 watts. 

[29] This scenario estimates the extent of cost-effective demand-
response activities if advanced metering infrastructure were 
universally deployed; if consumers, by default, paid prices that vary 
with the cost of serving them; and if consumers were offered and used 
enabling technologies where it is cost-effective. 

[30] In its 2009 assessment, FERC compared the size of potential 
reductions in peak demand from demand-response activities with the 
size of a peaking power plant, which it estimated to be about 75 MW in 
size. 

[31] According to FERC officials, when developing the National Action 
Plan, FERC undertook a multiyear, collaborative process. FERC and DOE 
then worked with a diverse group of state officials, industry 
representatives, members of a National Action Plan Coalition, and 
experts from research organizations to develop tools and suggested 
approaches to implement recommendations made in the National Action 
Plan. 

[32] Specifically, in a 2007 FERC Advance Notice of Proposed 
Rulemaking addressing Wholesale Competition in Regions with Organized 
Electric Markets, FERC highlighted the importance of demand-response 
activities in organized wholesale markets by describing potential 
benefits such as reduced wholesale prices. More broadly, in FERC's 
2009 National Assessment of Demand Response Potential, FERC stated 
that demand-response resources can play an important role in 
operational and long-term planning, as well as providing emergency 
response and ancillary services. 

[33] FERC, Advance Notice of Proposed Rulemaking. Wholesale 
Competition in Regions with Organized Electric Markets, RM07-19-000 
and AD07-7-000, 72 Fed. Reg. 36276 (Jun. 22, 2007). 

[34] Though FERC officials told us FERC efforts to promote demand-
response activities have largely been in RTO regions, they also told 
us that FERC took some steps to address demand-response activities in 
orders that apply to both RTO and non-RTO regions. For example, in two 
orders related to transmission, FERC required entities providing 
access to transmission lines--for example, RTOs and utilities--to 
consider transmission and nontransmission alternatives, including 
demand-response activities, on a comparable basis when identifying 
transmission needs as part of their local and regional transmission 
planning processes. Order 890, Preventing Undue Discrimination and 
Preference in Transmission Service, 72 Fed. Reg. 12266 (Mar. 15, 
2007); Order 1000, Transmission Planning and Cost Allocation by 
Transmission Owning and Operating Public Utilities, 76 Fed. Reg. 
49,842 (Aug. 11, 2011). State regulators, utilities, and others have 
also taken steps to promote demand-response activities both in and out 
of RTO regions. 

[35] FERC, Order 745-A, Demand Response Compensation in Organized 
Markets; Order on Rehearing and Clarification, RM10-17-001 (Dec. 15, 
2011). 

[36] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[37] For example, FERC addressed demand-response activities in Order 
890 related to transmission planning by, among other things, allowing 
qualified demand-response resources to participate in regional 
transmission planning processes. In Order 693, FERC required that the 
North American Electric Reliability Corporation--the U.S. electric 
reliability organization--revise reliability standards so that all 
technically feasible resource options, including demand-response 
resources, be employed in the management of grid operations and 
emergencies. 

[38] For example, in PJM Interconnection's energy markets, which 
operate in the Mid-Atlantic and parts of the Midwestern United States, 
the minimum amount of demand-response activities needed to participate 
is 100 kilowatts. Intermediaries may combine the demand-response 
activities of retail consumers in order to meet the offer minimum of 
100 kilowatts. 

[39] PJM Interconnection is an RTO that coordinates markets and the 
movement of wholesale electricity in all or parts of Delaware, 
Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North 
Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and 
the District of Columbia. 

[40] The North American Energy Standards Board serves as an industry 
forum for the development and promotion of standards for wholesale and 
retail natural gas and electricity, as recognized by its customers, 
business community, participants, and regulatory entities. The North 
American Energy Standards Board developed standards related to the 
measurement and verification of demand-response activities, which FERC 
incorporated by reference in Order 676-G. Measurement and verification 
involves quantifying consumers' demand-response activities. As a 
result, in this report, we refer to measurement and verification as 
quantifying demand-response activities. 

[41] In section 1252(e)(3) of the Energy Policy Act of 2005, Congress 
required FERC to prepare an annual report, by appropriate region, that 
assesses demand-response resources, including those available from all 
consumer classes. Pub. L. No. 109-58, § 1252(e)(3), 119 Stat. 966 
(2005). The report is to identify and review the following for the 
electric power industry: (1) saturation and penetration rate of 
advanced meters and communications technologies; (2) existing demand-
response programs and time-based rate programs; (3) the annual 
resource contribution of demand resources; (4) the potential for 
demand-response resources as a quantifiable, reliable resource for 
regional planning purposes; (5) steps taken to ensure that, in 
regional transmission planning and operations, demand resources are 
provided equitable treatment; and (6) regulatory barriers to improve 
customer participation in demand-response activities. 

[42] In years where FERC does not conduct a survey, its annual report 
consists of updates based on publicly available information and 
discussions with market participants and industry experts. 

[43] The potential to reduce peak electricity demand describes the 
capability of consumers participating in demand-response programs to 
reduce their electricity use which, in turn, may reduce the system's 
peak electricity demand. Actual reductions in peak electricity demand 
indicate the amount that peak demand was actually reduced as a result 
of consumers' actual demand-response activities. In many cases, 
consumers agree in advance to provide grid operators with a certain 
amount of demand-response resources, which reflects their demand-
response potential. However, in practice, grid operators determine, 
based on system needs, whether and when to call upon consumers to 
provide the agreed-to amount of demand-response activities. Consumers 
may or may not provide the agreed-to amount of demand-response 
activities, but they may face a penalty if they do not. 

[44] FERC's 2012 Assessment of Demand Response and Advanced Metering 
report includes data on the number of residential consumers 
participating in time-of-use programs. It does not include data on 
other consumer types, for example, commercial and industrial 
consumers, participating in this type of program, and it does not 
include data on consumers participating in other programs, such as 
real-time pricing programs, where prices vary with the cost of serving 
consumers. However, FERC provides access to these other data through 
data spreadsheets posted on its website. 

[45] The New York ISO reported other categories of data that could 
potentially be combined with the above categories, including light 
manufacturing (10 percent) and other commercial (5 percent). 

[46] ISO New England is an RTO serving Connecticut, Maine, 
Massachusetts, New Hampshire, Rhode Island, and Vermont. 

[47] Federal agencies must obtain approval from the Office of 
Management and Budget under the Paperwork Reduction Act (Pub. L. No. 
96-511, 94 Stat. 2812 (1980), codified at 44 U.S.C. §3501 et seq.) 
before requesting information from the public, such as through a 
survey. The Paperwork Reduction Act was enacted to minimize the 
paperwork burden resulting from the collection of information by or 
for the federal government. The act generally provides that every 
federal agency must obtain approval from the Office of Management and 
Budget before using identical questions to collect information from 10 
or more persons. To obtain approval, agencies must provide to the 
Office of Management and Budget: (1) a description of the information 
to be collected, (2) the reason the information is needed, and (3) 
estimates of the time and cost for the public to answer the request. 
Examples of information collections include surveys, permits, 
questionnaires, and reports. 

[48] GAO, Program Evaluation: Strategies to Facilitate Agencies' Use 
of Evaluation in Program Management and Policy Making, [hyperlink, 
http://www.gao.gov/products/GAO-13-570] (Washington, D.C.: June 26, 
2013). Additionally, in a 2012 report, GAO stated that a program can 
be defined in various ways, including an activity or project with an 
identifiable purpose or set of objectives. GAO, Designing Evaluations 
(2012 revision) [hyperlink, http://www.gao.gov/products/GAO-12-208G] 
(Washington D.C.: January 2012). 

[49] We were not able to identify a single data source that 
comprehensively quantifies the extent and type of demand-response 
activities in retail and wholesale markets. For this reason, for 
information on the extent to which demand-response activities have 
changed over time, we provide data from FERC's annual Assessment of 
Demand Response and Advanced Metering report. These data were gathered 
through surveys FERC conducted and, unless otherwise noted, the data 
we present reflect the data reported by the 59 percent of utilities 
and other entities responding to the survey, rather than the extent of 
demand-response activities throughout the United States. In addition, 
most of the demand-response statistics FERC included in its 2012 
report relate to potential reduction in peak demand. As a result, we 
have also focused our analysis of FERC data on potential reductions in 
peak demand. 

[50] FERC does not collect data in its survey on peak electricity 
demand for all reporting utilities and other entities. As a result, we 
were unable to compare FERC's estimate of the potential of demand-
response activities to reduce peak electricity demand to the actual 
peak demand of the utilities and other entities responding to its 
survey. According to data from DOE's EIA--which collects and analyzes 
a variety of energy and electricity data nationwide about topics such 
as energy supply and demand--2011 summer peak demand for the 
continental United States was 782,469 MW. 

[51] Totals in the draft may not sum exactly due to rounding. 

[52] Demand-response activities from consumers FERC categorized as 
"other" were responsible for the remaining 1,321 MW (4 percent) of 
this potential reduction in peak demand from retail demand-response 
activities. 

[53] FERC, A National Assessment of Demand Response Potential, June 
2009. 

[54] We were not able to identify a data source that comprehensively 
quantifies the extent of consumer participation in various demand-
response approaches in retail markets. For this reason, to analyze the 
extent of consumer participation in various demand-response 
approaches, we analyzed survey data FERC collected to develop its 2012 
report. Unless otherwise noted, the data we present reflect the data 
reported by the 59 percent of utilities and other entities responding 
to the survey. They do not represent the extent of demand-response 
activities throughout the United States. Furthermore, the data we 
report may not match what was reported in FERC's 2012 Assessment of 
Demand Response and Advanced Metering report, since the agency made 
modifications to improve data quality prior to publication. Because 
these modifications were not documented, we could not verify their 
relevance to our analysis and instead chose to report the original 
survey data. More information on our approach to analyzing these data 
can be found in appendix I. 

[55] In many cases, consumers were not able to participate in demand-
response programs through their utilities. Of the 130.6 million 
consumers of utilities responding to FERC's 2012 survey, 16.5 million 
or 13 percent were from utilities that did not offer demand-response 
programs. 

[56] The 6.0 million consumers that used operator-initiated approaches 
represent approximately 5 percent of the 130.6 million consumers of 
utilities responding to FERC's survey. 

[57] Consumers identified as "other" were responsible for the 
remaining 1,182 MW (4 percent) of potential reduction in peak demand 
from operator-initiated approaches. 

[58] The approximately 2.3 million consumers that used consumer-
initiated approaches represent approximately 2 percent of the 130.6 
million consumers from utilities responding to FERC's survey. 

[59] EIA collected this information through a mandatory 2011 survey it 
conducted of utilities. In this survey, it asked 3,287 utilities how 
many consumers participated in what it called "incentive-based" demand-
response approaches and "time-based rate" approaches. Examples EIA 
provided of "incentive-based" approaches included financial 
incentives, direct demand control, and interruptible prices, among 
other things. Examples EIA provided of "time-based rate" approaches 
included real-time prices, critical peak prices, and time-of-use 
rates, among other things. EIA does not ask those surveyed to provide 
more detailed information about demand-response approaches. We believe 
that these approaches generally align with the two demand-response 
approaches presented in our report: operator-initiated and consumer-
initiated, respectively. 

[60] According to our analysis of FERC data, 76 percent of demand-
response activities were from consumer agreements to provide capacity 
in the future. When requested by the grid operator, for example, due 
to a concern about reliability, these agreements may result in demand-
response activities used for energy, which are not reflected in this 
graphic. 

[61] The Midcontinent Independent System Operator is an RTO that 
coordinates the markets and the movement of wholesale electricity. It 
operates in all or parts of the following U.S. states: Arkansas, 
Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, 
Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and 
Wisconsin. 

[62] 143 FERC ¶ 61,218, Order Approving Stipulation and Consent 
Agreement, June 7, 2013, Docket No. IN12-15-000. 

[63] FERC's enforcement office identified violations of the RTO tariff 
and FERC's antimanipulation rule. Furthermore, according to the FERC 
enforcement order, the aggregator received unjust profits. As a 
condition of the agreement, the aggregator neither admitted nor denied 
these violations but agreed to the penalties imposed by FERC. 

[64] In addition, an energy consulting firm and an executive with the 
consulting firm were also charged with fraudulent behavior for their 
support of one of the paper mills. FERC commenced an action in the 
U.S. District Court for an order affirming a combined penalty of $8.75 
million. 

[65] Order 745 is currently being contested by a number of electricity 
stakeholders in the U.S. Court of Appeals for the D.C. Circuit. 

[66] According to a PJM representative, beginning on June 1, 2014, two 
additional demand-response programs with fewer limitations will be 
available. 

[67] Demand-response activities can result in environmental benefits; 
however, determining the net environmental benefits of demand-response 
activities was beyond the scope of this report. In general, the extent 
of environmental benefits depends on many factors, for example, 
whether electricity use is reduced outright or shifted to other hours. 
In addition, whether consumers use backup generators to offset their 
reductions in electricity use, will also affect environmental benefits. 

[68] National Emission Standards for Hazardous Air Pollutants for 
Reciprocating Internal Combustion Engines; New Source Performance 
Standards for Stationary Internal Combustion Engines; Final Rule, 78 
Fed. Reg. 6674 (Jan. 30, 2013), codified at 40 C.F.R. Parts 60 and 63. 

[69] NERC is collecting this data through its Demand Response 
Availability Data System initiative. 

[70] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[71] Under the basic model for designing unvarying, average retail 
electricity prices, all the costs of producing electricity are 
combined. The resulting amount is divided among various classes of 
consumers, for example, industrial, commercial, and residential 
consumers, and consumers within each class pay an unvarying, averaged 
price regardless of when their electricity consumption occurs. This 
leads to some consumers paying more and others less than the actual 
cost of serving them. 

[72] FERC, Assessment of Demand Response and Advanced Metering 
(December 2008). 

[73] Under this scenario, FERC estimated that advanced metering 
infrastructure was universally deployed, and consumers, by default, 
paid real-time or critical-peak prices. Additionally, FERC estimated 
that other demand-response programs were available to consumers who 
opted-out of the above pricing approaches. FERC compared the results 
of this scenario with one in which no customers participated in demand-
response programs. 

[74] Advance Notice of Proposed Rulemaking. Wholesale Competition in 
Regions with Organized Electric Markets, RM07-19-000 and AD07-7-000 
(Jun. 22, 2007). According to FERC, "where a load serving entity 
offers retail customers some form of time-of-use rates, the retail 
customers' response to rates during a higher-priced period reduces the 
load serving entities' wholesale demand and helps lower wholesale 
prices." 

[75] [hyperlink, http://www.gao.gov/products/GAO-04-844]. 

[End of section] 

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