In an effort to prevent what is ostensibly described as "anti-competitive" behavior, the Public Utility Commission of Texas could be asked to pass a rule which prohibits retail electric providers from preventing their customers from choosing a third-party (and non-LSE) provider of demand response services.

REPs must strongly resist any such regulatory interference in the competitive market which, rather than curbing anti-competitive behavior, would tilt the playing field in favor of non-LSE demand response providers (who, if this market design is implemented, would already enjoy an advantage in being able to offer their services without taking on the responsibility, costs, and risks of actually serving the customer's load).

We've feared such since the Texas demand response bills were introduced this session which specifically provided that the PUCT was to ensure that, "customers in all customer classes have the option to contract for participation in demand response either directly with one or more demand response providers, including retail electric providers, with scheduling entities qualified by the independent system operator, or with a combination of entities consisting of the independent system operator and one or more demand response providers"

Although the language clearly does not state such (providing that customers merely have the "option"), we saw such language as clearly an attempt to build a statutory foundation for a prohibition on REPs preventing their customers from contracting with a non-LSE demand response provider.

Now the specter of such a rule has been raised in a new draft concept paper on the payment mechanism LMP-G in ERCOT, submitted for review by the Loads in SCEDv2 Subgroup.

Specifically, in discussing one of the options, the draft concept paper notes, "PUCT rules may also be required to ensure that REPs and DR QSEs don’t engage in anti-competitive behavior, taking advantage of customer ignorance of DR concepts to insert contractual provisions that limit a customer’s flexibility in choosing his or her DR QSE."

The draft concept paper does not expound on why, "contractual provisions that limit a customer’s flexibility in choosing his or her DR QSE," are, "anti-competitive," or more specifically, anti-competitive enough to compel government interference in private contracts.

Requiring customers to take a bundle of services (or preventing a customer from using an alternative add-on service when you offer the same add-on service) is a legal and well-used technique in multiple markets.

The most notable example would be mobile phone service. When the much-beloved iphone was introduced, in the U.S., the physical device could only be used with AT&T service. Although several lawsuits were filed alleging that this practice violated law, we are aware of none that were successful. Because customers did not have to buy an iphone, if they were displeased in being locked into AT&T service they could shop elsewhere.

The same applies to Texas demand response services. If a REP wants to prevent its customers from engaging a third-party demand response QSE -- one that will be compensated in the ERCOT market (which is another problem altogether to be addressed in another commentary) -- that is the REP's right. The customer can vote with their feet if they feel such a restriction is disadvantageous to them.

A REP's case for prohibiting demand response participation via a third-party non-LSE is even stronger than some iphone exclusivity agreement, because demand management is integral to serving load (for which the REP has been contracted), and the two issues cannot be simply or easily "split." While an AT&T exclusivity agreement may have just been a revenue stream for Apple, for REPs, prohibiting customers from using non-LSE demand response providers isn't just about providing those services themselves -- it's about ensuring accurate cost allocation, accounting, and risk sharing.

It's REPs who must schedule for the customers' full load. It's REPs who must buy expensive balancing power (or make costly hedging/insurance arrangements to mitigate this risk) if the customer uses load above their forecast (or, presumably, fails to curtail when expected). It's REPs whose exposure to potentially super-peak balancing prices imposes enormous sums of collateral or credit obligations on them. And if REPs don't actually get to serve the load, they can't bill for those megawatt-hours, leaving costs unrecovered.

Meanwhile, what obligations does a non-LSE offering economic demand response take on? What obligations does it have to the customer and to the market?

The need for a REP to protect itself against non-LSEs which only cherry-pick margin, without taking on the risks of serving the customer as an LSE, is obvious. REPs protecting themselves against competitors should not be deemed anti-competitive and necessary of government rule.

Put it another way. There are numerous competing third-party billing providers in the market. With the deployment of smart meters, various of these companies are offering unique and innovative billing products to help customers better understand, and therefore manage, energy usage. Would anyone ever consider a rule mandating that the supply-billing function should be split, and customers should be able to pick their billing provider -- in order to obtain some value-added information related to usage data -- and separately be able to pick a retail supplier? And the REP would have to live with whatever billing provider the customer selected?

Of course not. Texas has made a single entity responsible for retail electric service, from supply to billing. Customers don't even interact with the TDU in a service-related fashion. The REPs take on that responsibility, as they serve the customer end-to-end with respect to the market design. (Meanwhile, third parties may access SMT data and provide services enabled by such data; however, any compensation for such service is handled directly with the customer, not through a re-work of the market design)

REPs, as customers demand, can then work with third-party providers who offer the REP, and their customers, the best service. This means REPs select certain billing providers or other related vendors based on what they can offer the REPs' customers, and compensation is directly handled between the REP and vendor. Why should demand response -- which uses power procured by the REP to serve the REP's customer whose title does not even pass to the customer (as such would occur upon consumption and billing) -- be any different?

We pause here to stress that just because a REP may prohibit a customer from using a third-party, non-LSE demand response provider compensated by ERCOT, this does not foreclose the customer's use of third-party demand response providers; it only forecloses (or more likely conditions) the use of a certain kind of third-party demand response provider that is compensated in a specific manner -- e.g. the ERCOT market.

The REP, customer, and demand response provider can come to various arrangements concerning compensation without inserting the non-LSE DR provider into the ERCOT market. We think REPs will have a strong incentive to make such arrangements if their customers voice displeasure that the REP isn't accommodating the customer's chosen demand response provider, and that the customer will look elsewhere for their supply services unless the REP changes its tune.

Let customer choice solve this, not government fiat.

The LMP-G draft concept paper addresses various alternatives and issues as if retail customers are compensated, “as if they had entered into a long-term contract to purchase electricity at their retail rate but instead, during a peak demand period, resold the electricity to others at the market rate (LMP),” and includes a discussion of potential methods for how customers eligible for LMP-G are identified, including various obligations on REPs

See A Copy Of The Full Draft Paper Here