On October 23, the Federal Energy Regulatory Commission largely approved the Midcontinent Independent System Operator’s overhaul of the penalties it imposes on demand-side resources that fail to perform when called. The framework takes effect June 1, 2027, with the 2027/28 Planning Year, and it caps a series of FERC-approved changes to MISO’s demand response rules that followed a string of enforcement cases involving bogus or overstated demand response. The message of the order, in Docket No. ER26-1882-001, is blunt: a capacity payment is a promise, and MISO has spent the last three years learning how cheaply that promise could be broken.
The resources at issue are Load Modifying Resources — demand response and behind-the-meter generation that receive capacity payments for agreeing to respond to MISO’s orders during grid emergencies. They are not a marginal corner of MISO’s capacity market. In the most recent Planning Resource Auction, LMRs backed by demand resources cleared 9.1 GW of capacity and those backed by behind-the-meter generation contributed 4.3 GW for the summer season. Together they made up 9.4 percent of all planning resources in that season, and in the 2025/26 Planning Year they accounted for slightly less than 10 percent of all planning resources. When nearly a tenth of the capacity MISO counts on is a promise to turn something off, the credibility of that promise is a reliability question, not an accounting one.
What changed
The approved framework makes three substantive changes. First, MISO will expand its existing participation restrictions, tightening who can offer an LMR into the auction in the first place. Second, it will differentiate between partial and complete performance failures, so that a resource that delivers most of its obligation is treated differently from one that delivers almost nothing. Third, it adds a new financial penalty based on auction clearing prices, assessed at the end of each season — on top of the existing real-time penalty, which stays in place.
The details give the framework its teeth. Under the order, an LMR that achieves less than 25 percent of its obligation has a complete performance failure. And an LMR disqualified twice within a three-year period is barred from the auction for three additional Planning Years. The new auction-price penalty is designed to scale with the value of the capacity the resource was paid for, rather than with the real-time energy price at the moment of the failure — a distinction that matters, because the real-time penalty is where the old regime’s weakness lived.
FERC accepted the proposal subject to a condition. The Commission gave MISO 30 days to address an inconsistency in its proposed process for calculating two types of penalties for underperforming LMRs, and directed MISO to add to the tariff its proposed language on how the denominator of the performance ratio used in the auction-price penalty is calculated. The order also accepts MISO’s revision lowering the lower bound of the DRR-Type I Excessive Energy and Deficient Energy thresholds from 6 MW to 0.1 MW. The filing arrived March 20, 2026, and was amended June 22, 2026, when MISO moved the requested effective date from June 1, 2026 to June 1, 2027 — a delay that means the new penalties do not reach the 2026/27 Planning Year at all.
The arithmetic that made fraud rational
FERC’s reasoning for approving the overhaul starts from a simple observation, supplied by MISO itself: the existing penalty structure does little to discourage fraud and other manipulative behavior because LMRs are called on so infrequently compared with the capacity payments they receive. A resource can collect four seasons of payments and face consequences only on the rare day it is actually dispatched — and even then, the penalty was small relative to what it had already banked.
MISO illustrated the point with an example FERC repeated in the order. A 1 MW resource that provides only 10 percent of its required load reduction for four hours would pay $36,000 in penalties under the old structure — against nearly $80,000 in capacity payments across all four seasons of the 2025/26 Planning Year. In other words, a resource could deliver a tenth of what it promised, on the one day it mattered, and still keep more than half the money. That is not a penalty structure. It is a discount on non-performance, and any market participant who could do the arithmetic could see it.
The new framework is designed to close that gap by tying the penalty to the auction clearing price — the price at which the capacity was sold — rather than leaving the real-time penalty to do work it was never sized to do. The layering is deliberate: the real-time penalty punishes the failure in the moment, and the seasonal auction-price penalty recovers the value of capacity that was paid for and not delivered.
Protesters argued the penalties were too extreme. Advanced Energy United, American Municipal Power, and the Michigan Public Power Agency all objected, and FERC disagreed. The Commission acknowledged that multiple components of the proposed penalty structure may apply concurrently, but found that “this layering is not overly severe or unduly punitive because the proposed penalties will incentivize LMRs to perform when called and backfill LMR capacity that MISO otherwise expects to be available for deployment, thus increasing system reliability.” The point of the penalty, in FERC’s reading, is not to punish, but to make the capacity real — either the resource performs, or the money is there to replace it.
The enforcement record that forced the issue
The penalty overhaul did not arrive in a vacuum. It caps a series of FERC-approved changes that followed a string of enforcement actions starting in 2023, involving demand response participants in MISO. The cases, taken together, read as a catalog of the ways a capacity payment could be collected for capacity that did not exist.
In one case, Voltus agreed to pay a $10.9 million penalty and return $7.1 million in profits to settle allegations that it registered uncontracted and overstated demand response resources with MISO. In another, Big River Steel agreed to pay nearly $22 million. Northern Indiana Public Service Co. and Linde Inc. agreed to pay $66.7 million to settle market gaming charges. And FERC ordered Ketchup Caddy and its owner to pay about $27 million for using bogus demand response resources to make offers in MISO’s capacity market.
The combined total across those four cases is roughly $127 million — a figure that dwarfs the penalties any single non-performance event could generate under the old framework, and that is precisely the point. Enforcement is retrospective and episodic; it catches a participant after the fact, and only the ones the Office of Enforcement investigates. A penalty structure is prospective and universal; it changes the calculation for every participant before the event happens. FERC’s order is, in that sense, the Commission’s admission that enforcement alone could not fix the problem. The cases proved the fraud was real and the money was large. The penalty overhaul is the attempt to make the fraud unprofitable in the first place.
The penalty framework is the last piece of that sequence, and the one that gives the earlier pieces their force. Earlier FERC-approved changes tightened demand response participation rules — including revisions filed in March 2025 and accepted that July — and clarified when and how market participants can replace LMRs during a Planning Year. Participation rules decide who gets in; penalties decide what happens when the participant who got in does not show up.
What the stakes look like from the other side
The Commission did not approve the framework unanimously in spirit, even if the order itself carried the day. Commissioners Judy Chang and David Rosner filed a joint concurring statement urging MISO and market participants to monitor the effects of the new performance penalties and the previously approved LMR reforms — and warning, explicitly, that the severity of the new framework could drive well-performing demand-side resources out of the market.
“If performance incentives or penalties create excessive economic risks for resources to participate, they will exit MISO’s markets, which in turn, would significantly increase the cost of meeting resource and energy adequacy,” Chang and Rosner wrote. “We strongly encourage MISO to continue to improve its market rules to ensure that all valuable demand-side resources have adequate opportunities to participate and help MISO meet its resource and energy adequacy targets at the lowest cost possible.”
The concurrence is not a dissent — Chang and Rosner did not vote against the framework. But their warning names the real trade-off in the order, and it is one FERC’s majority opinion does not fully resolve. A penalty structure that deters fraud also deters participation, and the line between the two is not marked in the tariff. A demand response aggregator with a portfolio of small commercial customers faces genuine performance risk: a customer can go out of business, a facility can change its operations, a load can simply not be there on the day MISO calls. Under the old framework, that risk was cheap. Under the new one, a complete failure — less than 25 percent of the obligation — carries a seasonal auction-price penalty plus disqualification exposure, and two disqualifications in three years means three Planning Years out of the auction entirely.
The risk is not evenly distributed. A large industrial customer with a single, well-understood load can model its performance with reasonable confidence. An aggregator assembling hundreds of small loads cannot, and the portfolio’s performance is only as reliable as its weakest participants. The resources most likely to exit under the new framework are, by that logic, the aggregated portfolios — which are also the resources that bring demand response to the customers who cannot participate on their own.
Rao Konidena, president of the consulting firm Rakon Energy, captured the tension in comments to Utility Dive. FERC “got this right,” he said — “MISO needs LMRs it can count on when load shed is on the line, and FERC was deliberate, even sending MISO back to fix inconsistencies in its tariff language.” But, he added, stiffer penalties could push good resources out of the market.
That last point deserves emphasis, because it is the one the order does not address. The penalty framework governs what happens after a resource is in the market. It does nothing about the front-end friction — the node designations, the registration timelines, the utility cooperation — that determines whether a resource can get in at all. A market that is hard to enter and expensive to fail in will attract only the participants who can afford both risks. In MISO’s case, that may mean a demand response fleet that is smaller, more concentrated, and more industrial — and less representative of the load it is supposed to reflect.
The PJM parallel, and why MISO’s timing matters
MISO is not the only grid operator rewriting its demand-side rules this year. PJM’s capacity market has been consumed by its own large-load questions — a registry for loads of 50 MW and above, a rejected curtailment framework, a suspended backstop procurement — all turning on the same underlying problem: the operator needs to know what its largest loads will actually do. PJM’s answer has been visibility first, obligation later. MISO’s answer, for its demand-side resources, is obligation now, with the penalty as the enforcement mechanism. Both point to the same structural weakness in capacity markets built around promises: the market pays for the promise at auction time, and discovers whether the promise was real only in the emergency, when it is too late to buy a replacement.
What to watch
Four things, in the order they will become visible. First, MISO’s compliance filing, due within 30 days of the October 23 order — a deadline falling in late November. Watch whether it resolves the penalty-calculation inconsistency cleanly, and whether the tariff language on the performance-ratio denominator is precise enough to survive the next protest. A sloppy compliance filing would invite the same litigation the order was meant to settle.
Second, the 2027/28 Planning Resource Auction, and specifically the LMR offer volumes. The baseline is 9.1 GW of demand-backed LMRs and 4.3 GW of behind-the-meter generation in the most recent auction. Any material decline from that level — and any shift in composition away from aggregated portfolios toward single-site industrial resources — will be the first evidence of the exit risk the concurrence flagged.
Third, the first season in which the new auction-price penalty is actually assessed. The framework’s design assumes the penalty will be large enough to matter and predictable enough to price. The first seasonal assessment will test both assumptions.
Fourth, and most consequentially, whether MISO takes up the concurrence’s invitation to keep improving its demand response rules. Chang and Rosner urged the operator to remain open to additional changes, including if the penalties drive well-performing resources out. The front-end barriers Konidena flagged — node designations without firm timelines, dependence on load-serving entities for registration — are the obvious place to start. MISO has now fixed the back end. The front end is still open, and the resources the market needs most are watching both.