FERC’s Enforcement in Demand Response Case a Lesson for Utilities

For energy consumers that have flexibility to modify their energy use in response to direction from a utility or the relevant transmission operator (i.e., to reduce load by changing or rescheduling what they are doing), selling demand response (DR) can be a lucrative additional revenue stream.

Depending on the location, such consumers may have multiple options for participation.  But this activity should not be taken lightly.  The Federal Energy Regulatory Commission (FERC), which oversees the wholesale energy markets, including wholesale DR, possesses civil penalty authority exceeding $1 million per violation, per day.

COMMENTARY

Against this backdrop, the settlement of FERC Enforcement’s investigation into Big River Steel LLC’s participation as DR in the Midcontinent Independent System Operator’s (MISO’s) energy market presents a teachable moment for utilities and commercial/industrial load reducers alike.  All facts discussed herein come from the publicly filed stipulation and consent agreement approved by the Commission in Docket No. IN23-11-000.

The Facts

Big River operates a steel mill in Osceola, Arkansas, that uses up to 300 MW in its day-to-day industrial operations. Entergy Arkansas is the load-serving entity providing retail service to Big River, and also served as the MISO market participant through which Big River offered DR into the MISO market.

Big River offered into MISO as a Demand Response Resource Type-1 (DRR-1) from September 2016 to April 2022. Under the settlement, Big River is to disgorge about $16 million and pay a civil penalty of $6 million, while Entergy will disgorge approximately $5 million. The facts involved are at the same time simple and nuanced.

First, the simple overview: Big River participated in the MISO day-ahead and real-time energy markets as a DRR-1 for several years through its retail utility/MISO market participant Entergy. Although Big River’s DR offers frequently cleared, and it collected more than $14 million in energy revenues, it never made any adjustments to its operations or power consumption in response to direction from MISO. FERC Enforcement concluded that this violated the MISO tariff provision requiring market participants to respond to MISO’s directives, as specified in the resource’s offer.

There are additional details worth mentioning. First, MISO staff apparently delivered a presentation to Big River in 2016 containing the language “planned outages can be utilized by offering into the energy market.” From 2016 to 2020, Big River participated by offering energy (in the form of DR) during periods when it expected to be on outages.

Second, Entergy gave Big River access to the MISO portal, where Big River placed its own energy offers. Entergy’s involvement seems to have been limited to serving as the MISO market participant, though its compensation for this was directly based on Big River’s energy revenues. These profits were passed through to Entergy’s ratepayers.

Insight #1: Utilities should know that if you act as market participant for your customers, you could be subject to enforcement action based on their activity. Plan and draft accordingly.

There is no indication from the settlement that Entergy ever advised Big River about how it could participate in MISO, how to offer its DR, or whether what it was doing was permissible. Entergy’s role in Big River’s activity appears to have been limited to serving as the MISO market participant and, notably, collecting a portion of the revenues from such participation.

Under the MISO tariff, it is the market participant that is selling energy into the market and that has the obligation to ensure that the products or services sold are delivered. Other regional transmission organizations, or RTOs, have similar frameworks. If a utility is facilitating retail customer access to a wholesale market, it should be clear-eyed about the potential risks and consider appropriate terms around indemnification, collateral, activity monitoring, and how the utility is compensated for acting as market participant.

Would Entergy have had to disgorge $5 million if it had been compensated for acting as market participant in a way that was not directly sharing in the profits from Big River’s allegedly violative behavior? Maybe, maybe not.

It Could Have Been Worse

Note that while the enforcement group could have exercised discretion to completely spare Entergy, the sanctions also could have been higher! Entergy was not assessed any civil penalty, but it could have been. Rote application of FERC’s penalty guidelines could have easily yielded a civil penalty in the millions to accompany the disgorgement.

Insight #2: Even if it comes from the independent system operator, or ISO, informal guidance is not a “get out of jail free card” and does not trump the tariff or FERC regulations.

Informal guidance—even if written, even if directly on-point—does not foreclose the possibility of enforcement action. Here, Big River’s DR activity between 2016 and late 2019 was consistent with guidance communicated directly to the company by MISO. A reasonable person could have interpreted MISO’s language to mean: “you can offer DR into the market and get paid for load reduction associated with a period where you were already planning to be on an outage.” Yet the settlement requires Big River and Entergy to disgorge profits relating to this period and Big River’s civil penalty likely was determined taking those profits into consideration. Why?

Informal guidance from the ISO does not render compliant behavior that otherwise violates the tariff or FERC’s rules, regulations, or orders. Here, offering DR and then not reducing load consistent with the cleared offer violates the clear language of the MISO tariff, regardless of whether MISO suggested this was permissible.

It is critically important that DR participants—or any kind of market participant—take a step back and consider holistically whether and how their strategy poses enforcement risks. By all appearances, Big River’s participation in MISO consisted of getting paid for doing what it already planned to do. For FERC’s enforcement group, this is a huge red flag.

Insight #3: Apologies to fans of the band Dire Straits, but there is no such thing as money for nothing in the energy markets. FERC calls that market gaming.

Because of its nature, demand response is susceptible to abuse and has been an area of focus for FERC’s enforcement since early days (see e.g., Competitive Energy Services, 140 FERC 61,032 (2012) [relating to behavior in 2007]). This is unlikely to change.

Any transaction or strategy where that could potentially be viewed as receiving payments without doing or providing anything in return should be approached with extreme caution, even if it is consistent with, or not explicitly prohibited by, the relevant tariff.

Here, FERC concluded there was a tariff violation. But even if there wasn’t, the commission’s enforcement group would likely take a hard look at whether Big River’s behavior constituted a “gaming” type market manipulation. Experienced counsel can help ventilate potential strategies and analyze both the risk of enforcement and potential mitigating measures.

—Maxwell Multer, a Charlotte, N.C., and Washington, D.C.-based counsel with Bryan Cave Leighton Paisner, represents energy and financial clients in regulatory and enforcement matters before the Federal Energy Regulatory Commission, as well as state utility commissions, and other regulatory authorities. He previously served as an attorney-adviser in FERC’s Office of Enforcement as well as in-house counsel at a large combination utility.