[Federal Register Volume 76, Number 40 (Tuesday, March 1, 2011)]
[Proposed Rules]
[Pages 11177-11187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4267]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket Nos. RM11-7-000; AD10-11-000]


Frequency Regulation Compensation in the Organized Wholesale 
Power Markets

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to revise its regulations to remedy undue discrimination in 
the procurement of frequency regulation service in the organized 
wholesale electricity markets. The emergence of technologies capable of 
responding more quickly than the generators that have historically 
provided frequency regulation service has prompted the

[[Page 11178]]

Commission to evaluate market rules to ensure that they are not unduly 
discriminatory or fail to provide just and reasonable compensation for 
the service being provided. If found, the Commission proposes to remedy 
the undue discrimination by requiring a uniform price for regulation 
capacity paid to all cleared resources and a performance payment for 
the provision of frequency regulation, with such payment reflecting a 
resource's accuracy of performance. This proposed action helps to 
ensure that market rules do not present unnecessary barriers to the 
participation of all resource types in the wholesale ancillary services 
markets. The Commission seeks comment on the proposed regulations.

DATES: Comments are due May 2, 2011.

ADDRESSES: You may submit comments, identified by docket number by any 
of the following methods:
     Agency Web Site: http://ferc.gov. Documents created 
electronically using word processing software should be filed in native 
applications or print-to-PDF format and not in a scanned format.
     Mail/Hand Delivery: Commenters unable to file comments 
electronically must mail or hand deliver their comments to: Federal 
Energy Regulatory Commission, Secretary of the Commission, 888 First 
Street, NE., Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT:

Robert Hellrich-Dawson (Technical Information), Office of Energy Policy 
& Innovation, 888 First Street, NE., Washington, DC 20426, (202) 502-
6360, [email protected].
Eric Winterbauer (Legal Information), Office of the General Counsel, 
888 First Street, NE., Washington, DC 20426, (202) 502-8329, 
[email protected].

SUPPLEMENTARY INFORMATION:

Notice of Proposed Rulemaking

    1. Pursuant to section 206 of the Federal Power Act (FPA),\1\ the 
Commission is proposing to revise its regulations to ensure just, 
reasonable and not unduly discriminatory or preferential rates in the 
procurement of frequency regulation in the organized wholesale electric 
markets. Maintaining the frequency of the transmission system within an 
acceptable range is critical to reliable operations. Historically, 
generators have provided the power to regulate or correct frequency 
deviations. Non-traditional technologies that have the capability to 
respond quickly and accurately to certain transmission system needs are 
being deployed in regional transmission organization (RTO) and 
independent system operator (ISO) \2\ markets to varying degrees. 
Resources such as large-scale battery systems, flywheels, electric 
vehicle-to-grid (V2G) systems, and demand-side processes have the 
ability to ramp \3\ up or down faster than some traditional resources 
and, as such, are able to provide frequency regulation services more 
accurately than traditional resources.\4\
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    \1\ 16 U.S.C. 824e (2006). Accord 16 U.S.C. 824d (providing that 
rates must be just and reasonable).
    \2\ The following RTOs and ISOs have organized wholesale 
electricity markets: PJM Interconnection, LLC (PJM); New York 
Independent System Operator, Inc. (NYISO); Midwest Independent 
Transmission System Operator, Inc. (Midwest ISO); ISO New England 
Inc. (ISO-NE); California Independent System Operator Corp. (CAISO); 
and Southwest Power Pool, Inc. (SPP).
    \3\ ``Ramping'' or the ability to ``ramp'' is traditionally 
defined as the ability to change the output of real power from a 
generating unit per some unit of time, usually measured as MW/
minute. A generator ramps up to produce more energy and ramps down 
to produce less. A storage device ramps up by discharging energy and 
ramps down by charging. A demand response resource, in the context 
of the provision of frequency regulation, ramps up by consuming less 
energy, and ramps down by consuming more.
    \4\ In this instance, the ability to provide more accurate 
frequency regulation service means to follow the system operator's 
dispatch signal more closely.
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    2. Taking advantage of the capabilities of faster-ramping resources 
can improve the operational and economic efficiency of the transmission 
system and has the potential to lower costs to consumers in the 
organized wholesale energy markets.\5\ However, current compensation 
methods for regulation service in ISO and RTO markets may not 
acknowledge the inherently greater amount of Area Control Error (ACE) 
\6\ correction being provided by faster-ramping resources.\7\ Frequency 
regulation is the tool used to manage ACE. In addition, some RTOs 
currently provide unit-specific opportunity cost payments to regulating 
resources rather than incorporate the marginal resource's opportunity 
cost into the uniform market clearing price, resulting in an 
economically inefficient economic dispatch.
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    \5\ See infra n.32-33 and corresponding text.
    \6\ ACE comprises two components, one measuring the difference 
between a balancing authority's scheduled and actual interchange, 
and another measuring the balancing authority's share in correcting 
the frequency of the interconnection. In order to keep ACE within 
acceptable ranges, entities will pre-schedule resources in 
anticipation of load changes and use frequency regulation resources 
to make up the difference. The frequency regulation resources are 
sent a signal to increase or decrease their provision of energy (or 
discharge or charge in the case of a storage device, or consume more 
or less energy in the case of a demand response resource). This is 
done through what is known as Automatic Generation Control (AGC). 
Because the Balancing Area Authority must respond rapidly to correct 
ACE deviations, fast responding resources are particularly well-
suited to maintaining system frequency.
    \7\ Both existing market participants and potential entrants are 
affected by inefficient pricing. It is possible that existing market 
participants would offer faster ramping capabilities to the system 
operator in response to a pricing scheme that recognized the service 
this provides.
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    3. The Commission is concerned that frequency regulation 
compensation practices may be resulting in rates that are unjust and 
unreasonable and unduly discriminatory or preferential. Therefore, the 
Commission proposes to require regional RTOs and ISOs to adopt tariff 
revisions that will ensure that resources providing frequency 
regulation service are appropriately compensated.\8\ The Commission 
seeks public comment on these proposed reforms.
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    \8\ This NOPR is limited to the RTOs and ISOs. In an RTO/ISO 
region (except SPP, which currently does not have a frequency 
regulation market), the frequency regulation market is designed to 
select and compensate the resources needed to provide frequency 
regulation service. The RTO/ISO market design sends a price signal 
in order to incent particular resource behavior that leads to the 
reliable, least-cost provision of frequency regulation. By contrast, 
in non-RTO/ISO regions, frequency regulation is provided by the 
transmission provider on a cost-of-service basis through Schedule 3, 
with the transmission provider selecting the mix of resources it 
uses to provide frequency regulation service.
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I. Background

A. Frequency Regulation Service

    4. Frequency regulation service is the injection or withdrawal of 
real power by facilities capable of responding appropriately to a 
transmission system's frequency deviations or interchange power 
imbalance, both measured by the ACE. When generation dispatch does not 
equal actual load and losses on a moment-by-moment basis, the imbalance 
will result in the grid's frequency deviating from the standard (60 
Hertz). Minor frequency deviations affect energy consuming devices; 
major deviations cause generation and transmission equipment to 
separate from the grid, in the worst case leading to a cascading 
blackout. Frequency regulation service can prevent these adverse 
consequences by rapidly correcting deviations in the transmission 
system's frequency to bring it within the acceptable range.\9\
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    \9\ A balancing authority achieves acceptable ranges by being in 
compliance with Control Performance Standards 1 and 2 as defined in 
the Commission-approved Reliability Standard BAL-001-0.1a.
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    5. Frequency regulation is distinguishable from Frequency 
response.\10\ Frequency response

[[Page 11179]]

involves the automatic, autonomous and rapid action of turbine governor 
control to change a generator's output and of technically capable 
demand response resources that can automatically change consumption to 
respond to changes in frequency. These changes occur independent of any 
dispatch signal from a system operator. Frequency regulation service, 
in contrast, requires a dispatch signal sent by the system operator to 
those resources capable of and dispatched to provide frequency 
regulation service.
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    \10\ On January 20, 2011, the Commission released for public 
comment a staff study evaluating the use of frequency response 
metrics as a tool to assess the reliability impacts of varying 
resource mixes on the transmission grid.
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    6. Today, frequency regulation is largely provided by generators 
(e.g., water, steam and combustion turbines) that are specially 
equipped for this purpose. Provision by other resources is emerging, as 
technologies develop and tariff and market rules are appropriately 
adapted to accommodate new resources. For example, the Electric 
Reliability Council of Texas (ERCOT) and Midwest ISO currently use 
controllable demand response in addition to generators to provide 
frequency regulation service.\11\ Such ``regulation capable'' 
generation, storage devices, and demand response resources can respond 
automatically to signals sent by the RTO or ISO, through AGC, to 
increase or decrease real power injections or withdrawals to correct 
frequency deviations or interchange schedule imbalance, as measured by 
the ACE. The faster a resource can ramp up or down, the more accurately 
it can respond to the AGC, or ACE correction, signal and avoid 
overshooting ACE correction needs.\12\ When a resource ramps too 
slowly, its ramping limitations may cause it to work against ACE 
correction needs and force the system operator to commit additional 
regulation resources to compensate.
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    \11\ In Midwest ISO, Alcoa's Warrick metallurgic induction 
(smelting) operation provides approximately 70 MW of frequency 
regulation. Alcoa Comments, Docket AD10-11-000, at 2 (June 16, 
2010). In ERCOT's model, controllable loads are a type of Load 
Acting as a Resource (LaaR) that is capable of reducing or 
increasing consumption under dispatch control (similar to AGC) and 
able to immediately respond proportionally to frequency changes 
(similar to generator governor action) to provide Ancillary 
Services. See Electric Reliability Council of Texas, Controllable 
Load Resource Qualification (2007), available at http://www.ercot/
content/services/programs/load/laar/
Controllable%20Load%20Resource%20Qualification.doc.''
    \12\ Frequency Regulation Compensation in the Organized 
Wholesale Power Markets, Technical Conference, Beacon Speaker 
Materials, Docket No. AD10-11-000, at Figure 3 (May 26, 2010), which 
shows the difference between ISO-NE's ACE control signal, Beacon's 
flywheel response, and the allowable response rate under current 
ISO-NE rules. Here, ``allowable response rate'' means the rate at 
which the resource must respond to be considered in compliance with 
the dispatch signal.
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B. Current ISO and RTO Practices

    7. In the ISO and RTO markets, compensation for frequency 
regulation service is presently based on several components. Depending 
on the ISO or RTO, these payments include consideration for capacity 
set aside to provide the service, as well as some of the following: The 
net energy the resource injects into the system; accurately following 
the ISOs or RTOs dispatch signal; and/or the absolute (rather than net) 
amount of energy injected or withdrawn. These payments are intended to 
cover the range of costs incurred in order to provide this service: 
Operation and maintenance costs for providing frequency regulation and 
loss of potential revenue from foregone sales of electricity.
    8. With regard to the payment for capacity set aside, this is 
essentially an option payment \13\ to the resource to keep a certain 
amount of capacity out of the energy market in order to provide 
frequency regulation service (based on a market clearing price per MW 
of capacity sold). ISO-NE, NYISO, Midwest ISO, and PJM incorporate into 
this payment the opportunity cost of foregone energy sales incurred by 
a resource that provides frequency regulation service; though in ISO-NE 
and PJM, opportunity costs are not applied uniformly to all cleared 
resources.
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    \13\ This type of capacity payment, based on day-ahead offers to 
sell ancillary services, is distinguishable from a long-term 
capacity payment such as provided for in PJM's reliability pricing 
model or ISO-NE's forward capacity market.
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    9. Compensation for regulation service also generally includes 
payments for the net energy the resource injects into the system. RTOs 
and ISOs currently provide a payment for the net energy injected by a 
resource providing regulation service during the operating hour, 
calculated as the amount of energy injected less energy withdrawn 
multiplied by the real-time energy price.
    10. Accuracy of performance can be incorporated into payments for 
regulation service. Currently, NYISO incorporates accuracy into its 
compensation for regulation service through a penalty that reflects the 
accuracy with which the resource follows its dispatch instruction.\14\ 
This is done through a performance index that tracks how accurately a 
resource follows the dispatch signal.\15\
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    \14\ NYISO, Market Services Tariff, Sec.  15.3.5.5.
    \15\ NYISO uses telemetry data to track how closely a frequency 
regulation resource's output is to the dispatch signal. NYISO then 
weights the resource's payments to reflect its accuracy. For 
example, if the resource's response falls outside an acceptable 
range 10 percent of the time, for a performance index of 0.9, it 
will receive 90 percent of its payment.
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    11. ISO-NE makes payments for regulation service to reflect the 
amount of work performed by a resource by reflecting the absolute 
amount of energy injected and withdrawn. Regulating resources receive a 
``mileage'' payment that reflects the amount of ACE correction 
provided.\16\
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    \16\ ISO-NE, Transmission, Markets and Services Tariff, Sec.  
III.3.5.5.
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    12. In general, when a resource submits its bid, the bid is 
typically required to include its ramp rate in MW per minute, its cost 
per MWh of ramping ability, and the total capacity it is offering for 
frequency regulation.\17\ The resource's total amount of capacity is 
based on and limited by its ability to ramp up or down in 5 
minutes.\18\ For example, a resource with a relatively large amount of 
capacity, but a relatively slow ramp rate would be limited in how much 
capacity it could offer as regulation. If the resource can ramp one MW 
per minute, it would only be able to offer 5 MW of regulation capacity 
(for a five minute dispatch) even if it has a total capacity of many 
hundreds of megawatts. On the other hand, a smaller capacity, fast-
ramping resource might not face such a constraint. For instance, a 
storage device that can hold a 20 MW charge and ramp at 10 MW per 
minute, could offer its full 20 MW of capacity for five minutes.
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    \17\ See, e.g., NYISO, Ancillary Services Manual, Manual 2, at 
4-8 (Nov. 2010).
    \18\ A resource's capacity is limited by the amount it can ramp 
in 5 minutes because the system operator in most RTOs and ISOs 
dispatch resources every 5 minutes. CAISO dispatches every 10 
minutes, and so a frequency regulation resource's capacity in that 
market is bound by the total capacity it can ramp in 10 minutes.
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    13. Some RTOs and ISOs are actively discussing changes to their 
frequency regulation markets or stated at the technical conference that 
changes might be appropriate.\19\ For example, CAISO has recently 
approved a new Regulation Energy Management proposal.\20\ Likewise, the 
Commission is aware that ISO-NE is preparing new rules for frequency 
regulation compensation to formalize the participation of energy

[[Page 11180]]

storage devices, something that has been only a pilot project to 
date.\21\
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    \19\ See PJM, Market and Reliability Committee Meeting 
Materials, (Jan. 2011), http://www.pjm.com/~/media/committees-
groups/committees/mrc/20110119/20110119-item-05-regulation-market-
performance-incentive-problem-statement-clean.ashx.
    \20\ CAISO, Board of Governors, Decision on Regulation Energy 
Management (Feb. 3, 2011), available at http://www.caiso.com/2b1a/2b1acd6d20610.pdf.
    \21\ ISO-NE, Report of ISO New England Inc. Regarding the 
Implementation of Market Rule Changes to Permit Non-Generating 
Resources to Participate in the Regulation Market, Docket No. ER08-
54-014, at 5 (Dec. 17, 2010).
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C. Commission Inquiries into Faster-Ramping Resources

    14. The Commission began its inquiry into faster-ramping resources 
in May 2010. On May 26, 2010, the Commission hosted a publicly noticed 
technical conference \22\ inviting various stakeholders, including 
representatives from the RTOs and ISOs, industry, and academia to share 
their views on whether current frequency regulation market designs 
reflect the value of the service provided, and whether the use of 
faster-ramping resources for frequency regulation has the potential to 
provide benefits to the organized markets. Interested parties were 
permitted to file comments after the technical conference. Separately, 
the Commission on June 11, 2010 issued a request for comments regarding 
potential approaches to categorizing storage service for compensation 
purposes.\23\
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    \22\ See Final Agenda, Frequency Regulation Compensation in the 
Organized Wholesale Power Markets, Docket No. AD10-11-000 (May 26, 
2010).
    \23\ Request for Comments Regarding Rates, Accounting and 
Financial Reporting for Electric Storage Technologies, Docket No. 
AD10-13-000 (June 11, 2010).
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1. Market Design and the Value of the Service Provided
    15. With regard to market designs for frequency regulation service, 
participants at the technical conference generally agreed that 
compensation for regulating resources ought to reflect the service they 
perform for the system operator. However, there was disagreement 
regarding whether current market designs accomplish this objective. 
Some current market design features were cited as resulting in 
efficient price signals and appropriately differentiating between the 
amount of ACE correction that is provided by different regulating 
resources,\24\ while others were said to be deficient.\25\
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    \24\ Tr. 93: 2-5 (Walawalkar); Tr. 103: 6-10 (Capp).
    \25\ Tr. 72: 1-11 (Ott).
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    16. At the technical conference and in written comments, Beacon 
Power Corporation (Beacon) provided data on the amount of ACE 
correction provided by a faster-ramping resource relative to the 
generator response allowable under the ISO tariff.\26\ According to 
Beacon's analysis of resources performing in the ISO-NE market, it is 
possible for a faster-ramping resource to provide more frequency 
regulation service than a slower-ramping resource. Beacon presents data 
showing, over a one hour period, a faster-ramping resource providing a 
total of 0.48 MWh of movement in response to the system operator's 
dispatch signal. If this same signal had been sent to a slower-ramping 
resource, it could have provided only 0.18 MWh and still been within 
ISO-NE's allowable response rate.
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    \26\ Beacon, Technical Conference Speaker Materials, at 7, Data 
from 1 MW in ISO-NE Alternative Regulation Pilot (May 26, 2010) 
(attached hereto as Appendix A).
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    17. In addition, under certain circumstances a slower-ramping 
resource could actually be working against the system operator's need 
for ACE correction, so that only a portion of the energy produced 
positively contributes to correcting the ACE signal. By contrast, the 
faster-ramping resource can respond to the system's control needs more 
exactly. In the example discussed above, the allowed generator response 
produces 0.18 MWh, but 0.07 MWh of that is working against the system's 
ACE correction needs because of its slow-ramping capability. Therefore, 
only 0.11 MWh (61 percent) actually contributes to correcting ACE. At 
the same time, the fast-ramping resource is being dispatched more often 
and all of the energy it produces helps to correct ACE. Both resources 
are considered, from the perspective of ISO-NE's current tariff, to be 
100 percent accurate, even though at times the slower-ramping resource 
is working against the system operator's ACE control needs.
    18. In this example, Beacon asserted that the fast-ramping resource 
actually is providing more than four times as much ACE correction 
relative to the allowable response from an existing generator providing 
frequency regulation. With the exception of ISO-NE, the RTOs and ISOs 
limit compensation to frequency regulation resources to a capacity 
payment and net energy balancing. ISO-NE includes a payment for the 
amount of frequency service provided. As a result, these ISOs and RTOs 
would pay the fast-ramping resource and the slow-ramping resource the 
same amount, assuming both resources set aside the same amount of 
capacity to provide the service.
    19. During the technical conference, PJM stated that it has no 
compensation structure for how much it asks a resource to move when 
providing frequency regulation and, as a result, it is likely under-
compensating resources for speed and accuracy.\27\
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    \27\ Tr. 84:9-16 (Ott), 72:1-11 (Ott).
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    20. On the other hand, representatives of Midwest ISO and NYISO 
indicated that they believe their current market designs are 
sufficient, because the amount of regulating capacity a resource is 
allowed to sell is based on its ramp rate, so faster-ramping resources 
are allowed to sell more regulating capacity.\28\
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    \28\ Tr. 72-73 (Ramey); Tr. 132: 8-11 (Ramey); Tr. 75-77 (Pike).
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    21. Alcoa noted that MISO and NYISO's rationale is only relevant to 
resources that are ramp constrained. Alcoa stated that its demand 
response-based regulating resource is capacity constrained, but not 
ramp constrained. Alcoa added that because Midwest ISO and NYISO both 
net the regulation up and regulation down that a regulating resource 
provides, neither compensates for the resource's actual ramping 
contribution. As a result, Alcoa's fast ramp rate does not allow it to 
sell any additional regulating capacity, and Alcoa has no incentive to 
bid into the market its true ability to ramp, instead offering a lower 
ramp rate.\29\
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    \29\ Tr. 68:13-22 (Todd).
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    22. Several entities responding to the June request for comments 
also addressed market design issues for frequency regulation 
service.\30\ These commenters argue that the market should place a 
monetary value on the service provided by the speed and accuracy with 
which certain storage technologies can respond to a regulation signal. 
Commenters also identified the potential benefits of using faster-
ramping resources to provide frequency regulation service.\31\
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    \30\ Beacon, Comments, Docket No. AD10-13-000, at 8 (Aug. 9, 
2010); NEMA, Comments, Docket No. AD10-13-000, at 2 (Aug. 9, 2010); 
Xtreme Power, Comments, Docket No. AD10-13-000, at 5 (Aug. 9, 2010); 
A123 Systems, Comments, Docket No. AD10-13-000, at 5-7 (Aug. 9, 
2010); ESA, Comments, Docket No. AD10-13-000, at 2 (Aug. 9, 2010); 
NAATBatt, Comments, Docket No. AD10-13-000, at 4-5 (Aug. 9, 2010).
    \31\ MegaWatt Storage Farms Comments Docket No. AD10-13-000, at 
8-9 (Aug. 9, 2010); Xtreme Power, Comments, Docket No. AD10-13-000, 
at 2-3 (Aug. 9, 2010); A123 Systems, Comments, Docket No. AD10-13-
000, at 4 (Aug. 9, 2010); ESA, Comments, Docket No. AD10-13-000, at 
2 (Aug. 9, 2010).
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2. Potential Cost and Reliability Benefits
    23. Participants at the technical conference stated that the use of 
faster-ramping resources for frequency regulation has the potential to 
provide benefits to the organized markets. These benefits include 
allowing RTOs and ISOs to use less regulation capacity to meet current 
NERC standards, thus lowering regulation costs.\32\ Further, use of 
faster-ramping resources frees slower-

[[Page 11181]]

ramping resources to operate at stable output levels and, therefore, at 
more efficient heat rates which allows them to submit lower bids into 
energy markets, thereby lowering energy prices.\33\
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    \32\ Tr. 35-36 (Ott); Tr. 30-31 (Kathpal); Tr. 37-39 (Ramey).
    \33\ Id.
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    24. To illustrate the efficiency of faster-ramping resources, some 
industry representatives--during the technical conference and in 
comments--referred to a Pacific Northwest National Laboratory study 
that examined the ability of faster-ramping resources to replace 
traditional generation resources in providing frequency regulation 
service in the CAISO.\34\ The study defined an ``ideal resource'' as 
one that has a ramp rate equal to its entire capacity in one minute. 
The study's authors determined the ramping ability for various resource 
types in the current CAISO generation fleet that provide frequency 
regulation service, including hydro, combustion turbine, steam turbine, 
and combined cycle. The authors then estimated how many megawatts of 
these types of capacity can be replaced by 1 MW from an ideal resource. 
In one case, the ideal resource was assumed to have no limits on its 
ability to sustainably provide energy. In a second case, the resource's 
ability to sustain energy reflects the actual ability of a flywheel, 
i.e., it reflects an energy-limited resource. In either case, the 
authors concluded that a faster-responding resource is able to provide 
more effective regulation capacity than most other resources, including 
the current generation fleet mix in the CAISO. When replacing these 
resources for frequency regulation service with an ideal resource, the 
authors found that 1 MW of an ideal resource with limited energy could 
replace 1.43 MW of an average hydro unit. The authors state that 
effectiveness increases as the ideal resource is compared to even 
slower ramping resources, reaching a maximum when 1 MW of an ideal 
resource with limited energy replaces more than 24 MW of an average 
steam turbine. Compared to the current CAISO fleet mix providing 
frequency regulation, which includes fast-responding hydro units, the 
authors found that 1 MW of a limited energy ideal resource could 
replace 1.17 MW of the current generation mix.
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    \34\ Makarov, Y.V., Ma, J., Lu, S., and T.B. Nguyen, ``Assessing 
the Value of Regulation Resources Based on Their Time Response 
Characteristics,'' Pacific Northwest National Laboratory, PNNL-
17632, June 2008.
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    25. Representatives from some RTOs and ISOs, however, questioned at 
the technical conference whether procuring more fast-response resources 
would materially improve their ability to meet NERC ACE control 
performance standards.\35\ For example, ISO-NE and NYISO acknowledged 
that using a combination of faster-responding resources has allowed 
them to meet their NERC standards by procuring relatively less 
regulation capacity than they would otherwise need.\36\
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    \35\ For example, NERC reliability requirement CPS1 requires 
each balancing authority to operate within a specific limit, taking 
into consideration clock-minute averages of ACE, frequency bias, and 
interconnection frequency error. NERC reliability requirement CPS2 
requires each balancing authority to operate such that its average 
ACE is within a specific limit, during a calendar month, for at 
least 90 percent of clock-ten-minute periods.
    \36\ Tr. 49:2-14 (Pike); Tr. 53:24-25 (Potishnak).
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II. Discussion

A. The Need for Reform

    26. The Commission proposes to adopt a frequency regulation 
compensation mechanism, as set forth below, for compensating regulation 
providers in organized wholesale electricity markets in order to 
eliminate undue discrimination and ensure just and reasonable rates. 
Faster-ramping resources provide more ACE correction to system 
operators than slower ramping resources and are, at least in some RTOs 
and ISOs, explicitly given priority in the dispatch order. Yet these 
resources do not appear to be receiving compensation for all of the 
service they provide as a result of pricing mechanisms that may be 
unduly discriminatory. Further, the Commission believes there are 
market efficiencies to be gained by ensuring efficient price signals 
for regulation resources that forego the opportunity to earn revenues 
in the energy markets.
1. Unduly Discriminatory Pricing
    27. The Commission is concerned that current rules that govern 
pricing and compensation for frequency regulation services in RTOs and 
ISOs may be unjust and unreasonable because faster-ramping resources 
are compensated at the same level as slower ramping resources, even 
though they can respond more quickly and provide more ACE 
correction.\37\
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    \37\ See Promoting Wholesale Competition Through Open Access 
Non-Discriminatory Transmission Services by Public Utilities; 
Recovery of Stranded Costs by Public Utilities and Transmitting 
Utilities, Order No. 888, 61 FR 21540, at 21569 (May 10, 1996), FERC 
Stats. & Regs. ] 31,036 (1996), order on reh'g, Order No. 888-A, 62 
FR 12274 (Mar. 14, 1997), FERC Stats. & Regs. ] 31,048, order on 
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, 
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub 
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002) 
(``In the context of an emerging competitive market in generation, 
discriminatory practices that once did not constitute undue 
discrimination must be reviewed to determine whether they are being 
used to prevent the benefits of competition in generation from being 
achieved.'').
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    28. Specifically, the Commission is concerned that under some 
existing frequency regulation compensation methods, a faster-ramping 
resource may not be compensated for all of the service it provides. For 
example, CAISO, NYISO, Midwest ISO, and PJM net the regulation up and 
regulation down provided by resources. This compensation method does 
not acknowledge the inherently greater amount of ACE correction being 
provided by faster-ramping resources.\38\ As a result, slower-
responding resources are compensated as if they are providing the same 
amount of ACE correction when, in reality, they are not.
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    \38\ A simplified example would be to consider two resources 
that clear with the same amount of capacity and are directed to 
provide regulation up and regulation down over the course of a five-
minute interval. The fast-ramping resource might be directed, for 
example, to move around an initial set-point up five MW, then down 
three MW, up one MW, down ten MW, and finally up nine MW. A netting 
approach to compensation would determine that the resource provided 
an additional two MW of energy to the system (+ 5 - 3 + 1 - 10 + 9 = 
+2) uring that five minute interval. Meanwhile, a slower-ramping 
resource may be directed to move up three MW and then down one MW 
for a net of two MW in relation to its set-point. The operator is 
not able to direct more movement because the slower-ramping resource 
would not be able to respond in the requisite timeframe. Both 
resources would receive identical compensation for their movement, 
despite the first resource providing more ACE correction.
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    29. Some ISOs and RTOs dispatch faster-ramping resources earlier 
than other resources to take advantage of their enhanced operation 
capabilities, i.e., their ability to ramp faster, yet pay all resources 
at the same rate, i.e., the same clearing price for capacity and the 
same price per MWh of net energy.\39\ Again, this could lead to 
providing different amounts of ACE correction, yet receiving the same 
compensation due to netting practices.
---------------------------------------------------------------------------

    \39\ See, e.g., Tr. 83:9-24 (Ramey).
---------------------------------------------------------------------------

    30. The Commission acknowledges that a resource's ability to sell 
capacity into the regulation market is dependent on its ramping 
ability, such that a faster-responding resource is able to offer a 
relatively greater amount of capacity. This does not, however, 
alleviate our concerns about potential undue discrimination toward 
resources that provide more ACE correction. For example, some new 
market entrants are relatively small in terms of capacity (capacity-
constrained), but are capable of responding rapidly to AGC signals (not 
ramp-constrained), so a compensation scheme that does not reflect work 
performed will lead to inadequate compensation when compared to larger, 
slower responding

[[Page 11182]]

generators.\40\ The Commission preliminarily finds that slower, larger 
resources are being given a compensatory advantage for their size while 
faster, smaller resources do not similarly receive compensation for 
their ramping speed. The Commission believes compensation should take 
into account the greater amount of service that is being provided by 
faster-ramping resources, through more frequent provision of both up 
and down regulation; this greater amount of ACE correction is lost when 
positive and negative contributions to ACE correction are netted and no 
additional payment is made to reflect performance. Therefore, the 
Commission proposes to reform current market designs that lack a 
payment that reflects the amount of ACE correction provided by a 
resource, thereby under-compensating faster-ramping resources when 
compared to payments made to slower-ramping resources.
---------------------------------------------------------------------------

    \40\ A resource that is capacity constrained but is able to ramp 
at a very high rate will clear its relatively small amount of 
capacity in the regulation market and then be paid for providing 
regulation service in real-time. But this performance payment does 
not acknowledge ramping ability due to netting. On the other hand, a 
ramp constrained resource with a large amount of capacity to sell 
could clear its relatively large amount of regulation capacity (and, 
thus, receive a higher capacity payment) and get paid at the same 
rate for providing regulation service in real-time. Expanding the 
hypothetical scenario provided above, see supra n.37, assume that 
the first (faster) resource is capacity constrained and can offer 
only 10 MW of regulation, while the second (slower) resource, while 
ramp-constrained, can offer 30 MW of regulation. The 30 MW resource 
will receive a larger capacity payment for offering more regulation, 
but the two resources will receive identical net payments for their 
actual movement if they are directed as indicated above. In other 
words, the slower, larger resource receives a compensatory advantage 
for its size, but the faster, smaller resource does not similarly 
receive a compensatory advantage for its ramping speed.
---------------------------------------------------------------------------

    31. Additionally, the Commission believes that the manner in which 
some resources that provide frequency regulation service are 
compensated for their opportunity costs may be unjust and unreasonable 
and unduly discriminatory.\41\ For instance, PJM provides ex post 
``make whole'' payments based on individual unit opportunity costs, 
something that is not reflected in the uniform market clearing price 
calculation.\42\ ISO-NE pays opportunity costs on a resource-specific 
basis. Both of these methods have the potential to inefficiently select 
regulating resources and also fail to reflect the marginal unit's full 
marginal cost (including opportunity cost) that should set the market 
clearing price that is paid to all cleared suppliers. In addition, as 
is noted by ISO-NE in comments submitted after the technical 
conference, failing to pay a uniform clearing price that includes the 
marginal unit's opportunity costs could result in inefficient price 
signals being sent that will result in inappropriate long-term 
investment.\43\ Therefore, the Commission proposes to require that all 
resource bids include opportunity costs and that all cleared frequency 
regulation resources be paid the single market clearing price, which 
will reflect the total marginal costs of the marginal cleared unit. We 
believe that this proposal will result in just and reasonable rates and 
correct potential undue discrimination.
---------------------------------------------------------------------------

    \41\ By participating in the regulation market, an energy market 
resource is dispatched at a set-point below its maximum capacity. 
Because this amount of capacity is held in reserve to provide 
regulation, the resource misses the opportunity to provide energy at 
the current LMP.
    \42\ PJM, Manual 18: Operating Agreement Accounting, at 12-16, 
available at http://www.pjm.com/~/media/documents/manuals/m28.ashx.
    \43\ ISO-NE Comments at 8.
---------------------------------------------------------------------------

2. Potential Market Efficiencies
    32. The Commission preliminarily finds that the use of faster-
ramping resources for frequency regulation has the potential to improve 
operational and economic efficiency and, in turn, lower costs to 
consumers in the organized markets. As described above, faster-ramping 
resources may be able to replace resources that currently provide 
frequency regulation, so RTOs and ISOs may be able to procure less 
regulation capacity, thereby lowering costs to load. This can be seen 
in both ISO-NE and NYISO. Both have a relatively higher concentration 
of faster-ramping resources, easily meet NERC reliability standards, 
and yet procure less regulation capacity, as a percentage of peak load, 
than other RTOs and ISOs.\44\ When dispatching faster-ramping 
resources, the system operator is better able to rely on those 
resources to quickly and accurately follow the AGC signal, without 
overshooting, thus avoiding the need for additional regulation 
resources to compensate.
---------------------------------------------------------------------------

    \44\ See Tr. 53:24-25 (Potishnak), Tr. 54:1-2 (Potishnak), Tr. 
49:6-14 (Pike).
---------------------------------------------------------------------------

    33. The Commission also anticipates a secondary effect on energy 
markets: as slower ramping resources move out of the frequency 
regulation market and are able to focus on providing sustained energy, 
they should be able to operate at more efficient heat rates.\45\ For 
example, for traditional thermal generators, providing frequency 
regulation results in both operating at inefficient heat rates and 
additional wear and tear on equipment.\46\ If these modes of operation 
are avoided, costs can be reduced and lower energy bids offered, 
thereby lowering prices in the energy market. The Commission notes 
that, at the May 2010 technical conference, some participants 
questioned the value of procuring only faster-ramping, but short 
duration resources, for frequency regulation. Accordingly, the 
Commission seeks comment on the benefits that faster-ramping resources, 
no matter their exact type, can and do bring to the RTO and ISO 
markets. Likewise, the Commission seeks comments on the drawbacks of 
using faster-ramping resources, if any.\47\
---------------------------------------------------------------------------

    \45\ Participants at the May 26, 2010 technical conference noted 
that it was unlikely that any frequency regulation market would 
comprise only fast-ramping storage resources due to the need for 
sustained energy. Tr. 23:8-25 (Pike).
    \46\ Xcel Energy's Pawnee coal plant shows maintenance and 
capital costs (i.e., wear and tear) for load following of 
approximately $1.5k per load following cycle. Aptech Engineering 
Services, Inc., Cost of Cycling Analysis for Pawnee Station Unit 1 
Phase 1: Top-Down Analysis, at vii (November 2008), available at 
http://www.xcelenergy.com/SiteCollectionDocuments/docs/CRPExhibit4CostofCyclingExecutiveSummary.pdf.
    \47\ Tr. 28:13-24 (Potishnak); Tr. 40:9-15 (Ott).
---------------------------------------------------------------------------

B. Specific Proposals

    34. In light of the foregoing concerns the Commission proposes to 
amend its regulations to provide a frequency regulation compensation 
mechanism for the RTO and ISO markets to ensure that pricing and 
compensation of frequency regulation service is just and reasonable and 
not unduly discriminatory or preferential. Specifically, the Commission 
proposes to require ISOs and RTOs to change their tariffs so that 
regulation resources receive a two-part payment. This two-part payment 
structure is based on what the Commission preliminarily finds are 
``best practices'' used by the RTOs and ISOs. As further described 
below, the first part of the payment is a capacity, or option, payment 
to have a certain amount of capacity held in reserve and not 
participate in the energy market in order to provide frequency 
regulation service. While all RTOs and ISOs with a centrally-procured 
frequency regulation market currently provide for a capacity payment to 
frequency regulation resources, the payment varies by RTO or ISO. To 
produce the efficient market outcome, this payment must include the 
marginal regulating resource's opportunity costs. The second part of 
the payment is a performance payment based on the amount of up and down 
movement, in megawatts, the resource provides in response to a control 
signal.\48\ This

[[Page 11183]]

performance payment should also take into consideration a resource's 
accuracy in providing ACE correction. The Commission preliminarily 
finds that this compensation structure is necessary to ensure that 
pricing schemes for frequency regulation service in the organized 
wholesale electricity markets result in rates that are just and 
reasonable, and not unduly discriminatory or preferential.
---------------------------------------------------------------------------

    \48\ This applies whether an RTO or ISO allows resources to sell 
regulation up and regulation down separately or requires resources 
to offer both regulation up and regulation down.
---------------------------------------------------------------------------

1. Capacity Payment and Opportunity Cost
    35. The Commission proposes to require that each regulating 
resource is paid a uniform capacity payment that includes the 
opportunity cost of the marginal regulating resource. As discussed 
above, some ISOs and RTOs currently pay resource-specific opportunity 
costs in addition to or as part of a capacity payment, while others 
incorporate the marginal unit's opportunity cost into a uniform 
frequency regulation market clearing price for capacity. In order to 
send an efficient price signal to frequency regulation resources, the 
Commission proposes that RTOs and ISOs base the clearing price for 
frequency regulation on the marginal resource's marginal cost, 
including opportunity cost. Paying a unit-specific opportunity cost 
distorts the market by basing the commitment of regulating units on 
incomplete market information, potentially leading to committing units 
with higher costs than other units not committed. Accordingly, the 
Commission preliminarily finds that a frequency regulation compensation 
mechanism that includes a uniform clearing price with accurately-
determined opportunity costs will reduce errors in selecting the 
optimal portfolio of regulation suppliers each hour (and each day), 
which reduces total regulation costs to consumers and ensures that 
rates are just and reasonable and not unduly discriminatory or 
preferential.
    36. In addition, the Commission preliminarily finds that cross-
product opportunity costs \49\ should be calculated by the RTO or ISO, 
as it has the best information to determine a frequency regulation 
resource's cross-product opportunity cost due to not participating in 
the energy market. Further, where appropriate, resources should be 
permitted to include inter-temporal opportunity costs in their capacity 
bid.\50\ The Commission seeks comment on its proposal to require each 
regulating resource to be paid a uniform capacity payment that includes 
the opportunity cost of the marginal regulating resource.
---------------------------------------------------------------------------

    \49\ A cross-product opportunity cost, in this case, is the 
revenue a regulation provider loses because it is on stand-by to 
provide regulation and is not providing energy.
    \50\ An inter-temporal opportunity cost represents the foregone 
value when a resource must operate at one time, and therefore must 
either forego a profit from selling energy at a later time or incur 
costs due to consuming at a later time. The trade-off presented to 
thermal storage provides an example of inter-temporal opportunity 
costs. A thermal storage operator would prefer to ``charge'' (heat 
bricks or freeze water) when prices are low. If such a resource were 
to provide frequency regulation, it could be asked to stop charging 
during low price periods and then be forced to charge during high 
price periods.
---------------------------------------------------------------------------

2. Payment for Performance with Accuracy Adjustment
    37. The Commission preliminarily finds that requiring a component 
in the frequency regulation compensation mechanism that recognizes the 
resource's contribution to ACE correction is necessary to remedy undue 
discrimination and ensure just and reasonable rates in the organized 
wholesale electricity markets. Resources that provide more value to the 
grid by doing more of the work to correct ACE deviations should be paid 
more than resources doing less work. Accordingly, taking performance 
into consideration is a key element of ensuring that any frequency 
regulation compensation mechanism is just and reasonable and not unduly 
discriminatory or preferential. We, therefore, propose to require that 
all regulating resources be paid for their performance, with this 
payment taking the form of a payment for each MW, up or down, provided 
by the resource in response to the system operator's dispatch signal. 
Specifically, an RTO or ISO would determine the total movement up and 
down and then multiply that sum by a price-per-MW of ACE correction. We 
seek comment on the proposed method and whether there are alternative 
payments for performance that can address our concern about undue 
discrimination.
    38. The Commission proposes that the price-per-MW of ACE correction 
be market-based. Specifically, resources would specify the capacity (in 
MW) available to provide regulation, a ramp rate (in MW/minute), and 
bid into the market a price-per-MWh ramping capability and price-per-MW 
of ACE correction. The RTO or ISO would then determine the least cost 
set of resources and set the price-per-MW of ACE correction based on 
the bid of the marginal regulating resource. We note that there was 
little discussion at the technical conference about how to design the 
price-per-MW of ACE correction.\51\ The alternative to a market-based 
price is to use an administratively set price-per-MW of ACE correction. 
We seek comment on this proposal as well as the alternative of an 
administratively determined price, including how an administratively 
determined price could be set. We note that some commenters stressed 
the importance of the ISO's and RTO's energy and ancillary service co-
optimization algorithms in producing the least-cost portfolio of 
resources.\52\ We therefore seek comment on how this proposal will 
integrate with the ISO's and RTO's existing co-optimization algorithms.
---------------------------------------------------------------------------

    \51\ See, e.g., Tr.124:10-131:19.
    \52\ EPSA Comments at 9-10 (``Going forward co-optimizaton and 
how that is evaluated will be important to generation resources 
because the rules that result will play an important role in 
determining whether and when the resource will provide energy or 
ancillary services.'').
---------------------------------------------------------------------------

    39. The Commission also proposes that the performance payment must 
reflect the resource's accuracy in following the system operator's 
dispatch signal. Specifically, we propose that the accuracy be measured 
by the RTO or ISO using currently available telemetry technology. If an 
RTO or ISO receives telemetry data every 10 seconds, for instance, it 
would be able to measure over the course of 5 minutes how often the 
resource was delivering exactly the megawatts requested. The resource 
would then be compensated for the fraction of its energy injected or 
withdrawn that met the dispatch signal. This method accepts as given 
the resource's stated ramping ability and provides a disincentive to 
deviate from the dispatch signal, which incorporates actual ramping 
performance.
    40. We note that there was little agreement among the technical 
conference panelists on how accuracy should be incorporated into the 
frequency regulation market design.\53\ Therefore, we seek comments on 
alternative methods, including methods to incorporate accuracy into the 
ACE correction calculation. It is possible to approximate how a 
resource contributes to correcting ACE by taking the difference between 
the energy it provides that was in the direction needed to correct ACE 
at any moment and the energy that was in the direction opposite to what 
was needed to correct ACE. If ACE indicates that the system requires 
regulation up, yet a resource is still providing regulation down due to 
its slow ramping ability, that resource could be considered to not be

[[Page 11184]]

contributing to ACE correction. Thus, its payment for ACE correction 
would only include the MWh that were actually correcting ACE. The 
Commission seeks comments on how to structure payments for frequency 
regulation that compensate a resource for its contribution to ACE 
correction. We seek comment on whether this method could result in a 
resource being penalized through lower measured ACE correction even 
when it is following the system operator's dispatch signal.
---------------------------------------------------------------------------

    \53\ See Tr. 85-86 (Potishnak) and Tr. 117-118 (Ott).
---------------------------------------------------------------------------

3. Net Energy
    41. Currently, regulating resources receive a payment (or charge) 
for the net energy injected (or withdrawn) as a result of providing 
regulation service in every RTO and ISO market. The Commission seeks 
comment on the appropriateness of retaining net energy payments in 
light of the two-part payment proposed here. Specifically, the 
Commission seeks comment on whether the provisions in existing tariffs 
for net energy payments are redundant given the proposed requirement 
discussed herein that all RTOs and ISOs must pay regulating resources a 
mileage payment for the ACE correction they provide, or whether this 
payment is a necessary, appropriate feature of day-ahead and real-time 
energy account balancing and settlement.

III. Information Collection Statement

    42. The following collection of information contained in this 
Proposed Rule are subject to review by the Office of Management and 
Budget (OMB) under section 3507(d) of the Paperwork Reduction Act of 
1995.\54\ OMB's regulations require approval of certain information 
collection requirements imposed by agency rules.\55\ The Commission 
solicits comments on the Commission's need for this information, 
whether the information will have practical utility, the accuracy of 
the burden estimates, ways to enhance the quality, utility, and clarity 
of the information to be collected or retained, and any suggested 
methods for minimizing respondents' burden, including the use of 
automated information techniques.
---------------------------------------------------------------------------

    \54\ 44 U.S.C. 3507(d) (2006).
    \55\ 5 CFR 1320.11 (2010).
---------------------------------------------------------------------------

    43. Additionally, the Commission encourages comments regarding the 
time burden expected to be required to comply with the proposed rule 
regarding the requirement for ISOs and RTOs to change their tariffs so 
that the regulation resources receive just and reasonable compensation 
for the services provided, and the potential time burden on regulation 
resources to conform to new or modified bidding requirements. 
Specifically, the Commission seeks comment on: (1) The additional 
burden and cost (human, hardware and software) associated with 
implementation, operation and maintenance of this new provision in ISO/
RTO tariffs; and (2) the additional burden and cost (human, hardware 
and software) on regulation resources, if any, associated with changes 
to the type of information submitted in the bid or the manner in which 
the bid is submitted.
    Burden Estimate: The additional estimated public reporting burdens 
for the proposed reporting requirements in this rule are as follows.

----------------------------------------------------------------------------------------------------------------
                                    Number of
        Data collection            respondents       Number of       Hours per          Total annual hours
                                       \56\          responses       response
FERC 516                                     [1]             [2]             [3]  [1 x 2 x 3]
----------------------------------------------------------------------------------------------------------------
Conforming tariff changes (18                  5               1             100  500
 CFR 35.28(g)(3)). One time
 burden.
                                --------------------------------------------------------------------------------
    Totals.....................  ...............  ..............  ..............  500 one time burden.
----------------------------------------------------------------------------------------------------------------

    Cost to Comply: The Commission has projected the cost of compliance 
to be $57,000. Total Annual Hours for Collection in initial year (500 
hours) @ $114 an hour [average cost of attorney ($200 per hour), 
consultant ($150), technical ($80), and administrative support ($25)] = 
$57,000
---------------------------------------------------------------------------

    \56\ SPP is not included in the respondents because they 
currently do not have a frequency regulation compensation mechanism 
in their tariff and independent of this proceeding they have 
indicated that they are already planning to implement such a 
mechanism. Therefore, it is expected that any additional burden on 
SPP due to this proceeding is expected to be de minimus.
---------------------------------------------------------------------------

    Title: FERC-516, Electric Rate Schedules and Tariff Filings.
    Action: Proposed Collection.
    OMB Control No. 1902-0096.
    Respondents for this Rulemaking: Businesses or other for profit 
and/or not-for-profit institutions.
    Frequency of Information: As indicated in the table.
    Necessity of Information: The Federal Energy Regulatory Commission 
is proposing to require ISOs and RTOs to change their tariffs to 
provide for compensation of frequency regulation in a manner that 
remedies undue discrimination in the procurement of such service in the 
organized wholesale electricity markets.
    Internal Review: The Commission has reviewed the proposed changes 
and has determined that the changes are necessary. These requirements 
conform to the Commission's need for efficient information collection, 
communication, and management within the energy industry. The 
Commission has assured itself, by means of internal review, that there 
is specific, objective support for the burden estimates associated with 
the information collection requirements.
    44. Interested persons may obtain information on the reporting 
requirements by contacting the following: Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426 [Attention: 
Ellen Brown, Office of the Executive Director], e-mail: 
[email protected], Phone: (202) 502-8663, fax: (202) 273-0873.
    45. Comments on the collections of information and the associated 
burden estimates in the proposed rule should be sent to the Commission 
in this docket and may also be sent to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, DC 20503 
[Attention: Desk Officer for the Federal Energy Regulatory Commission]. 
For security reasons, comments to OMB should be submitted by e-mail to: 
[email protected]. Comments submitted to OMB should include 
Docket Number RM11-7 and OMB Control Number 1902-0096.

IV. Environmental Analysis

    46. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\57\ The 
Commission has

[[Page 11185]]

categorically excluded certain actions from this requirement as not 
having a significant effect on the human environment.\58\ The proposed 
regulations are categorically excluded as they address rate filings 
submitted under section 206 of the FPA and the establishment of just 
and reasonable rates, terms and conditions of jurisdictional service 
under this section of the FPA.\59\ Accordingly, no environmental 
assessment is necessary and none has been prepared for this NOPR.
---------------------------------------------------------------------------

    \57\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs. 
Preambles 1986-1990 ] 30,783 (1987).
    \58\ 18 CFR 380.4.
    \59\ See 18 CFR 380.4(a)(15).
---------------------------------------------------------------------------

V. Regulatory Flexibility Act

    47. The Regulatory Flexibility Act of 1980 (RFA) \60\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small entities. 
The RFA mandates consideration of regulatory alternatives that 
accomplish the stated objectives of a proposed rule and that minimize 
any significant economic impact on a substantial number of small 
entities. The Small Business Administration's (SBA) Office of Size 
Standards develops the numerical definition of a small business.\61\ 
The SBA has established a size standard for electric utilities, stating 
that a firm is small if, including its affiliates, it is primarily 
engaged in the transmission, generation and/or distribution of electric 
energy for sale and its total electric output for the preceding twelve 
months did not exceed four million megawatt hours.\62\ Five ISOs and 
RTOs, not small entities, are impacted directly by this rule.
---------------------------------------------------------------------------

    \60\ 5 U.S.C. 601-612.
    \61\ 13 CFR 121.101.
    \62\ 13 CFR 121.201, Sector 22, Utilities & n.1.
---------------------------------------------------------------------------

    48. CAISO is a non-profit organization with over 54,000 megawatts 
of capacity and over 25,000 circuit miles of power lines.
    49. NYISO is a non-profit organization that oversees wholesale 
electricity markets, dispatches over 500 generators, and manages a 
nearly 11,000-mile network of high-voltage lines.
    50. PJM is comprised of more than 600 members including power 
generators, transmission owners, electricity distributors, power 
marketers, and large industrial customers, serving 13 states and the 
District of Columbia.
    51. Midwest ISO is a non-profit organization with over 145,000 
megawatts of installed generation. Midwest ISO has over 57,000 miles of 
transmission lines and serves 13 states and one Canadian province.
    52. ISO-NE is a regional transmission organization serving six 
states in New England. The system is comprised of more than 8,000 miles 
of high-voltage transmission lines and over 350 generators.
    53. The Commission certifies this rule will not have a significant 
economic impact on a substantial number of small entities, and 
therefore no initial regulatory flexibility analysis is required.

VI. Comment Procedures

    54. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice to be adopted, including 
any related matters or alternative proposals that commenters may wish 
to discuss. Comments are due 60 days from publication in the Federal 
Register. Comments must refer to Docket No. RM11-7-000, and must 
include the commenter's name, the organization they represent, if 
applicable, and their address in their comments.
    55. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing 
formats. Documents created electronically using word processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    56. Commenters that are not able to file comments electronically 
must send an original to: Federal Energy Regulatory Commission, 
Secretary of the Commission, 888 First Street, NE., Washington, DC 
20426.
    57. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

VII. Document Availability

    58. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through the Commission's Home Page (http://www.ferc.gov) and 
in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, 
Washington, DC 20426.
    59. From the Commission's Home Page on the Internet, this 
information is available on eLibrary. The full text of this document is 
available on eLibrary in PDF and Microsoft Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    60. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours from FERC Online Support at (202) 
502-6652 (toll free at 1-866-208-3676) or e-mail at 
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
[email protected].

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By direction of the Commission. Commissioner Spitzer dissenting 
in part with a separate statement attached.
Kimberly D. Bose,
Secretary.

    In consideration of the foregoing, the Commission proposes to amend 
Part 35 Chapter I, Title 18 of the Code of Federal Regulations as 
follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

    1. The authority citation for Part 35 continues to read as follows:

    Authority:  16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

    2. Amend Sec.  35.2 by adding a new paragraph (g) to read as 
follows:


Sec.  35.2  Definitions.

* * * * *
    (g) Frequency regulation. The term frequency regulation as used in 
this part will mean the capability to inject or withdraw real power by 
resources capable of responding to a balancing area's frequency 
deviations or interchange power imbalance, measured by the Area Control 
Error.
    3. Amend Sec.  35.28 by adding a new paragraph (g)(3) to read as 
follows:


Sec.  35.28  Non-discriminatory open access transmission tariff.

* * * * *
    (g) * * *
    (3) Frequency regulation compensation in ancillary services 
markets. Each Commission-approved independent system operator or 
regional transmission organization that has a tariff that provides for 
the compensation of frequency regulation must provide such compensation 
based on the actual service provided, including a capacity

[[Page 11186]]

payment that includes the marginal unit's opportunity costs and a 
payment for performance that reflects a frequency regulating resource's 
contribution to correcting the relevant balancing area's Area Control 
Error (when the resource is accurately following the dispatch signal) 
when providing regulation service.

    Note:  The following appendixes will not appear in the Code of 
Federal Regulations:

[GRAPHIC] [TIFF OMITTED] TP01MR11.009

    SPITZER, Commissioner, dissenting in part:
    In the Notice of Proposed Rulemaking, the majority is concerned 
that current mechanisms for compensating frequency regulation 
service in regional transmission organization (RTO) and independent 
system operator (ISO) regions may not adequately compensate for the 
true value of the frequency regulation service provided. I share the 
majority's concern. Resources that have faster-ramping capability 
have the potential to respond quicker and more accurately to certain 
transmission system needs.
    However, the majority concludes, based on the existing record, 
that the Commission should require a standard formula through which 
all RTO/ISO regions must compensate frequency regulation service. I 
believe the record is not adequate to propose a specific proposal at 
this time. Accordingly, I believe the Commission should have taken a 
preliminary step (such as the issuance of a Notice of Inquiry or 
Advanced Notice of Proposed Rulemaking) before moving forward with 
the specific proposal in a Notice of Proposed Rulemaking.
    I disagree with the majority that the record is sufficiently 
robust to make a specific proposal at this time to change our 
regulations. Although the record provides some data regarding 
potential reliability and efficiency benefits of faster-ramping 
resources providing frequency regulation service, I am concerned 
this evidence may be incomplete.\1\ In the existing record, several 
commenters raise concerns about the lack of hard data; these 
commenters argue that more study is needed to demonstrate 
incremental value.\2\ Even RTO/ISOs examining these issues express 
reservations that the evidence may be inadequate to support the 
conclusions asserted in the NOPR.\3\
---------------------------------------------------------------------------

    \1\ Compare Notice of Proposed Rulemaking at P 16-18, P 24 with 
Transcript of May 26, 2010 Technical Conference (Transcript) at 
24:2-16 (Pike); Transcript at 18:13-25 and 29-1-21 (Potishnak).
    \2\ Electric Power Supply Association (EPSA) June 16, 2010 
Comments at 2; Xcel Energy Services Inc. (XES) June 16, 2010 
Comments at 3, 5-7; Transcript at 59:15-24 (Lowell); Transcript at 
124:4-9 (Pike).
    \3\ Notice of Proposed Rulemaking at P 25; ISO New England Inc. 
(ISO-NE) June 16, 2010 Comments at 5-6; California Independent 
System Operator Corporation (CAISO) June 16, 2010 Comments at 2-3.
---------------------------------------------------------------------------

    The May 26, 2010 Staff Technical Conference and subsequent 
outreach provided some feedback on these issues. However, I am 
concerned that the limited participation from entities other than 
the RTOs/ISOs and non-traditional technologies undermines the record 
on which to base a change to our regulations. There are 
``traditional'' resources, such as pumped-storage hydro and certain 
combustion turbine resources that provide this type of ``faster-
ramping'' service,\4\ but we have received only limited feedback 
from these types of resources so far. In addition, there may be 
proponents of new technologies that we have not heard from whose 
role with regard to frequency regulation may warrant a different 
change to our regulations than proposed in the Notice of Proposed 
Rulemaking. Initiation of a Notice of Inquiry or Advanced Notice of 
Proposed Rulemaking may better allow evidence regarding those 
technologies.
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    \4\ ISO-NE June 16, 2010 Comments at 4-6; Transcript at 14:18-22 
(Masiello); Transcript at 49:3-14 (Pike).
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    Appropriately, the Notice of Proposed Rulemaking asks questions 
to develop a more complete record. However, the nature of the 
questions posed is an indication that we should do more prior to 
issuing a specific proposal. While the Notice of Proposed Rulemaking 
asks some generic questions in this regard, the majority fails to 
address the concerns already in the record about co-

[[Page 11187]]

optimization,\5\ sustainability \6\ and potential limitations of 
faster-ramping resources.\7\
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    \5\ Notice of Proposed Rulemaking at P 38; EPSA June 16, 2010 
Comments at 9-10; Southern Company Services, Inc. (Southern) June 
16, 2010 Comments at 6-8; Southern California Edison Company (SCE) 
June 16, 2010 Comments at 3.
    \6\ Notice of Proposed Rulemaking at P 33; ISO-NE June 16, 2010 
Comments at 5; EPSA June 16, 2010 Comments at 6-8; XES June 16, 2010 
Comments at 5; Transcript at 15:13-15 (Potishnak); Transcript at 
18:18-25 and 19:1-5 (Ramey); Transcript at 23:18-25 and 24:1 (Pike); 
Transcript at 75:15-25 and 76:4 (Pike); Transcript at 86:18-20 
(Potishnak).
    \7\ Notice of Proposed Rulemaking at P 33, n.51; ISO-NE June 16, 
2010 Comments at 5; EPSA June 16, 2010 Comments at 8-9; Transcript 
at 17:20-25 (Ramey); Transcript at 73:4-16 (Ramey).
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    Moreover, I believe there is no basis to propose a single, one-
size-fits-all approach for frequency regulation compensation. In 
fact, several commenters caution specifically against such an 
approach.\8\ In addition, I have concerns that the majority decision 
could detract from, or otherwise delay, efforts ongoing at the RTO/
ISO stakeholder level.\9\
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    \8\ ISO-NE June 16, 2010 Comments at 7-8; SCE June 16, 2010 
Comments at 2,5; Southern June 16, 2010 Comments at 3.
    \9\ Notice of Proposed Rulemaking at P 13; SCE June 16, 2010 
Comments at 3-4; CAISO June 16, 2010 Comments at 1-2.
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    It is essential that this Commission address frequency 
regulation compensation to ensure appropriate compensation for 
service provided. Moreover, new technologies could offer substantial 
benefits. While I recognize the majority's desire to move quickly, I 
believe it is more important to ``measure twice, cut once.'' 
Accordingly, I believe the Commission should have taken a 
preliminary step (such as the issuance of a Notice of Inquiry or 
Advanced Notice of Proposed Rulemaking) before moving forward with 
the specific proposal in a Notice of Proposed Rulemaking. For these 
reasons, I respectfully dissent in part from this Order.

Marc Spitzer,
Commissioner.

[FR Doc. 2011-4267 Filed 2-28-11; 8:45 am]
BILLING CODE 6717-01-P