This paper presents a demand response (DR) algorithm for regulating system frequency using responsive customer loads, while minimizing the amount of manipulated loads. The dynamic model for a small islanded microgrid and an improved hill climbing controller are developed in MATLAB/Simulink® to show the proof of concept. Simulation results show that the improved DR control strategy provides frequency and voltage regulation while minimizing the amount of manipulated responsive loads. As a result, customer quality-of-service (QoS) is not compromised, while a higher percentage of responsive loads (more non-spinning reserve) would be available for additional control for responding to unexpected disturbances.