The all-day conference held this week at FERC on how to compensate demand response resources in wholesale power markets proceeded more or less as expected, as the witnesses took sides along the lines set out in the prior post, The Nutty Professors: Bill, Fred and the Strange Case of Demand Response.

But the salon erupted in fireworks during the very last five minutes, treating this reporter and others still on hand in the FERC meeting room to an unrehearsed and quite emotional give-and-take between commission chairman Jon Wellinghoff and senior commissioner Philip Moeller – highlighting a rift among FERC’s leaders on how best to move forward with the vision known as the Smart Grid.

The exchange began when the Ohio Public Utilities Commissioner Paul Centolella, sitting next to his intellectual ally Professor William (Bill) Hogan, voiced concern that putting too much focus at the wholesale level – through what he saw was an excessive and subsidizing incentive for demand response equal to full LMP (the full market-clearing locational marginal price) – might distort markets and discourage appliance makers and automated controls vendors from gong forward with software and technology development at the ratepayer level.

That sparked an immediate rebuttal from a gesticulating and clearly agitated Wellinghoff – evoking the opinions of Professor Alfred (Fred) Kahn that politics and grassroots ratepayer opposition will likely derail such efforts – only for Wellinghoff to meet with a measured dissent from his colleague sitting to his left.

Here we go.

Ohio Commissioner Centolella: I guess I wanted to respond again to something that Ken said [Kenneth Schisler, Sr. Dir., Regulatory Affairs, EnerNOC]. You talked about how consumers would enjoy the fact that LMPs would be lower.

 One of the assumptions … is that the only way that demand is going to respond is somehow if we get a bid into the wholesale market.   I have a significant concern that we are putting a big weight on one side of the scale on how demand response develops, and ignoring potential other ways in which demand could simply respond to price and develop much more efficiently.

We have appliance manufacturers out there who are working on smart grid who tell us if they could simply see prices they would have their appliances automatically respond to them. We have controls vendors … we have companies like Microsoft and Google who are ready to automate peoples’ houses … we have buildings that are being automated to provide regulation in PJM … that don’t depend on having an intermediary come in and be subsidized by this extra incentive in order to bid into a wholesale market program.

I am concerned that we are potentially distorting innovation on the demand side of this market if what we do is that we are potentially distorting innovation on the demand side of this market if what we do is selectively say we are going to pay an additional incentive to people who participate in economic RTO programs when that same incentive is not available to consumers who are simply responding to a dynamic retail price.

I think that ought to be a significant concern in terms of the competitiveness of the U.S. economy and where we are in terms of encouraging innovation in this country going forward. If we are going to talk about additional incentives we need to think about how we do this in a more neutral fashion and in a way that will potentially get us further ahead rather than assuming the only way we are going to do this is by having an aggregator bid that into a wholesale market, because we may be passing up even more demand response benefits by putting a weight on that side of the scale.

Whereupon Wellinghoff demanded equal time.

Chairman Wellinghoff: Paul I can’t resist. With that speech I’m going to have to jump in here.

Angie Beehler [Sr. dir. Energy Regulation/Legislation, Wal-Mart] didn’t put in all the technology she put in because of dynamic retail prices. Jay Brew’s people [Steel Manufacturers Association] didn’t put in all the technology they put in because of dynamic retail prices. They put it in because they had the opportunity to bid in wholesale markets.

With all due respect, I believe the complete opposite. I think wholesale markets for demand response have in fact fostered technology … in fact will foster it much faster than states will because I have no assurances as to when the states will put in dynamic retail prices with the controversies that are going on … all the political problems of getting this in place. I think the only way we are going to get this technology in place and move forward with it is to move forward with it in wholesale markets.

Then came a follow-up from Moeller that drew gasps.

Commissioner Moeller: I’m all with you Paul. I think without dynamic pricing we have the serious potential of residential consumers subsidizing wholesale consumers and that worries me greatly. I think the key is shifting demand, and we’ve got to do it through dynamic pricing, and if we do this wrong we’ll have the opposite effect. I respectfully disagree with my chairman.

Stay tuned for more.