FERC Issues Civil Penalties for Demand Response Rule Breaches

FERC, the US Federal power and gas market regulator, has penalized an Arkansas-based steel mill, Big River Steel LLC (BRS), and a contracted market facing entity, Entergy Arkansas LLC (EAL), for breaching market rules around demand response provision in the Midcontinent Independent System Operator (MISO) ISO/RTO market. The activity in question took place between September 2016 and April 2022. The facts of the case (click here) are briefly summarized as follows:

• BRS is a large power consumer peaking some days around 300MW - the power is used to drive its arc furnaces. Under MISO market rules, BRS participates as a Demand Response Resource – or officially as a "DRR-1" participant that is expected to supply specific amounts of power through behind-the-meter generation and/or controllable load. Since 2014 EAL acted as the sponsor to BRS’s DRR-1 participation and receives a 10% administrative fee for energy not consumed. BRS submitted its demand response offers through EAL and received payments from MISO through EAL – BRS however decided what offers to submit in MISO’s Day Ahead and Real Time markets and what to do if its offers were accepted;
• BRS and EAL entered into an agreement in 2016 giving BRS direct access to the MISO web portal and making them responsible for load reductions in line with MISO‘s instructions. But with the exception of a seven-day period during Winter Storm Uri (16 - 22 February 2021), BRS did not change its mill operations in order to alter its power consumption levels when MISO accepted its demand response offers but rather continued to operate as normal during the entire five and half year period;
• BRS believed that it was permissible to explicitly align its demand response participation with planned outages of the mill, claiming that a MISO presentation to BRS staff in 2016 explicitly stated that “planned outages can be utilized by offering into the energy market.” At one point, when failing to receive a payment from MISO, BRS was told by MISO to file a settlement dispute (suggesting clearly that MISO knew about BRS’s practices);
• From mid-2020 BRS began submitting 100MW demand response offers daily based on a “theoretical possibility” of an unplanned outage for the following day. With the exception of the Storm Uri week, BRS received payments for whenever BRS’s offers were cleared and BRS’s load was below the “normal” baseline of operations. BRS received these payments through EAL who earned their 10% for the load reduction;
• The order also notes that from September 2019, BRS also began trading small (1MW volumes) in the Day Ahead market as well as larger offers in the Real Time market which allowed BRS to obtain increased revenues from MISO for participating in the demand response market by virtue of MISO’s tariff calculation methodology. You may consult the original order for more details if of interest, however this behaviour is notably absent from the list of violations BRS was penalized for hence is likely to be symptomatic of the many grey areas in ISO/RTO market rules rather than a direct violation;
• MISO paid BRS a total of $USD20,974,179 their demand response participation over the period. EAL’s share of this amount, through their 10% fee agreement with BRS, was deemed to be $USD5,033,780. EAL was charged, as a power distributor, $USD13,215,679 by MISO for BRS’s demand response participation and that this was passed on to EAL’s retail customers through the state regulatory process. The order concludes that the net amount paid by EAL retail customers was $USD8,181,899 (i.e. the difference between the two amounts).
• The order concludes that BRS did not, with the exception of seven days in February 2021 (due to Storm Uri), reduce energy consumption levels in response to MISO accepting its demand response offers. Instead, BRS operated at the load levels at which it would have operated if it were not a DRR-1 unit in violation of §38.2.5(d)(ii)(e) of the MISO Tariff rules. It also concluded that because EAL was the designated “Market Participant” for BRS’s participation as a demand response provider, EAL is responsible for BRS’s conduct that violated the MISO Tariff as the MISO Tariff makes a Market Participant financially responsible to [MISO] for all of its Market Activities and obligations;

These violations resulted in a series of heavy fines and disgorgements:

• BRS agreed to pay a $USD 6,000,000 fine and to provide compliance training to its traders if it intends to continue participating as a DRR-1 demand response provider in the MISO market;
• BRS will pay a disgorgement of $USD 15,940,399 based on the payments it received through its participation as a demand response provider;
• EAL will pay disgorgements of $USD 5,033,780 (per above) which will be credited to retail customers;
• The order notes that both parties cooperated fully in the investigation.

RegTrail Insights

It is notable that the FERC recognizes the ambiguity introduced by the information conveyed to BRS by MISO concerning demand response bidding in anticipation of planned outages. The order explicitly states that “Enforcement did not consider this to be a defense to a tariff violation [but] Enforcement considered it in evaluating the appropriate penalty“. Participants in demand response markets should ensure that process and controls are in place to ensure that accepted bids and associate load instructions are fully acted upon.