[Federal Register Volume 79, Number 122 (Wednesday, June 25, 2014)]
[Notices]
[Pages 36051-36052]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14845]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. AD14-14-000]


Price Formation in Energy and Ancillary Services Markets Operated 
by Regional Transmission Organizations and Independent System Operators

    Take notice that the Federal Energy Regulatory Commission 
(Commission) is initiating a proceeding in the above-captioned docket 
to evaluate issues regarding price formation in the energy and 
ancillary services markets operated by Regional Transmission 
Organizations (RTOs) and Independent System Operators (ISOs).
    On September 25, 2013, the Commission held a technical conference 
to consider how current centralized capacity market rules and 
structures in the eastern RTO/ISO regions are supporting the 
procurement and retention of resources necessary to meet future 
reliability and operational needs.\1\ At that conference and in 
subsequent comments, a number of parties suggested that the Commission 
should not assess capacity markets in isolation, noting that the energy 
and ancillary services markets constitute significant revenue streams 
for supply resources participating in the organized capacity markets. 
These commenters requested that the Commission also evaluate whether 
the energy and ancillary services markets are being operated in a way 
that produces accurate price signals. Similar concerns were raised at a 
technical conference held on April 1, 2014, regarding market 
performance during the 2013-2014 winter.\2\ At that conference and in 
subsequent comments, market participants again expressed concerns 
regarding price formation across the energy and ancillary services 
markets of various RTOs/ISOs, with some offering specific examples of 
price formation issues they experienced during extreme weather events 
this past winter.\3\
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    \1\ Technical Conference on Centralized Capacity Markets in 
Regional Transmission Organizations and Independent System 
Operators, September 25, 2013, Docket No. AD13-7-000. The Commission 
received over 1,000 pages of post-technical conference comments and 
continues to evaluate what steps may be appropriate to take with 
respect to capacity markets in light of those comments.
    \2\ Technical Conference on Winter 2013-2014 Operations and 
Market Performance in Regional Transmission Organizations and 
Independent System Operators, April 1, 2014, Docket No. AD14-8-000. 
See Technical Conference on Winter 2013-2014 Operations and Market 
Performance in Regional Transmission Organizations and Independent 
System Operators, Transcript (April 1, 2014), Statements of Michael 
Kormos as113-115, Peter Brandien at 116-119, Wes Yeomans at 121-122, 
Bruce Rew at 125, and Brad Bouillon at 125-126.
    \3\ See Comments of the Electric Power Supply Association, 
Winter 2013-2014 Operations and Market Performance in Regional 
Transmission Organizations and Independent System Operators, Docket 
No. AD14-8-000 (filed May 14, 2014).
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    Ideally, the locational energy market prices in the energy and 
ancillary services markets would reflect the true marginal cost of 
production, taking into account all physical system constraints, and 
these prices would fully compensate all resources for the variable cost 
of providing service. The RTO/ISO would not need to commit any 
additional resources beyond those resources scheduled economically. 
Further, load would reduce consumption in response to price signals 
such that market prices would reflect the value of electricity 
consumption without the need to administratively curtail load.
    In reality, RTO/ISO energy and ancillary services market outcomes 
are impacted by a number of technical and operational 
considerations.\4\ For example, technical limitations in the market 
software prevent RTOs/ISOs from fully modeling all of the system's 
physical constraints, such as a voltage constraint. If physical 
constraints are not accurately reflected in the system model used to 
clear the market, the market software outcome may not clear the 
resources needed to resolve all such constraints. In such a case, 
system operators may have to manually dispatch a resource that is 
needed to resolve a constraint (and manually re-dispatch or de-commit 
other resources), with resulting energy and ancillary service prices 
not reflecting the marginal cost of production. In addition, market 
clearing prices do not typically reflect certain components of a 
resource's actual operating costs (e.g., startup costs) or operating 
limits (e.g. minimum run times). As a result, RTOs/ISOs provide make-
whole payments, or uplift payments, to resources whose commitment and 
dispatch by an RTO/ISO resulted in a shortfall between the resource's 
offer and the revenue earned through market clearing prices. Further, 
demand is largely price insensitive, requiring RTOs/ISOs to set market 
price based on administrative rules during periods of scarcity. These 
limitations are to some extent inherent in the complexity of the 
electric system and the tools available today to maintain

[[Page 36052]]

reliable operations, and we are unlikely to be able to fully address 
these issues for the foreseeable future.\5\
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    \4\ Although the discussion herein focuses on RTO/ISO markets, 
similar technical and operational limitations impact the efficient 
commitment of resources by electric utilities operating in other 
market structures, such as vertically integrated utilities.
    \5\ Other efforts, like staff's annual meeting with RTO/ISO 
operations staff and the annual market software conference, are 
intended to make progress on these longer term issues. See http://www.ferc.gov/industries/electric/indus-act/market-planning.asp.
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    Notwithstanding the foregoing technical limitations and operational 
realities, the Commission believes there may be opportunities for RTOs/
ISOs to improve the energy and ancillary service price formation 
process. To that end, the Commission directs staff to convene workshops 
as necessary to commence a discussion with industry on the existing 
market rules and operational practices related to the following topics:
     Use of uplift payments: Use of uplift payments can 
undermine the market's ability to send actionable price signals. 
Sustained patterns of specific resources receiving a large proportion 
of uplift payments over long periods of time raise additional concerns 
that those resources are providing a service that should be priced in 
the market or opened to competition.
     Offer price mitigation and offer price caps: All RTOs/ISOs 
have protocols that endeavor to identify resources with market power 
and ensure that such resources bid in a manner consistent with their 
marginal cost. As a backstop to offer price mitigation, RTOs/ISOs also 
employ offer price caps that are designed to be consistent with 
scarcity and shortage pricing rules. These protocols require that the 
RTO/ISO's measure of marginal cost be accurate and allow a resource to 
fully reflect its marginal cost in its bid. To the extent existing 
rules on marginal cost bidding do not provide for this, bids and 
resulting energy and ancillary service prices may be artificially low.
     Scarcity and shortage pricing: All RTOs/ISOs have tariff 
provisions governing operational actions (e.g., dispatching emergency 
demand response, voltage reductions, etc.) to manage operating reserves 
as they approach a reserve deficiency. These actions often are tied to 
administrative pricing rules designed to reflect degrees of scarcity in 
the energy and ancillary services markets. In addition, in the event of 
an operating reserve shortage, all RTOs/ISOs have adopted separate 
administrative pricing mechanisms designed to set prices that reflect 
the economic value of scarcity. To the extent that actions taken to 
avoid reserve deficiencies are not priced appropriately or not priced 
in a manner consistent with the prices set during a reserve deficiency, 
the price signals sent when the system is tight will not incent 
appropriate short- and long-term actions by resources and loads.
     Operator actions that affect prices: RTO/ISO operators 
regularly commit resources that are not economic to address reliability 
issues or un-modeled system constraints. Some activity may be necessary 
to maintain system reliability and security. However, to the extent 
RTOs/ISOs regularly commit excess resources, such actions may 
artificially suppress energy and ancillary service prices or otherwise 
interfere with price formation.
    The Commission directs its staff to engage in outreach and, as 
appropriate, convene workshops and technical conferences to explore 
improvements to market designs and operational practices in the areas 
identified above, as well as other topics raised in discussions with 
RTOs/ISOs and market participants. The Commission anticipates that the 
first workshop will explore the topic of uplift in detail, while also 
providing an opportunity to begin a discussion on the remaining topics 
identified above. Additional workshops will be announced in the coming 
months on other price formation topics. To the extent practicable, the 
Commission may release staff analysis of various topics to help guide 
the workshop discussions. Based on information gathered by staff, the 
Commission may take action regarding the foregoing or other issues in 
future orders.

For Further Information Please Contact Individuals Identified For Each 
Topic:

Use of Uplift

William Sauer, Office of Energy Policy and Innovation, Federal Energy 
Regulatory Commission, 888 First Street NE., Washington, DC 20426, 
(202) 502-6639, [email protected].

Offer Price Mitigation, Offer Price Caps and Operator Actions

Emma Nicholson, Office of Energy Policy and Innovation, Federal Energy 
Regulatory Commission, 888 First Street NE., Washington, DC 20426, 
(202) 502-8846, [email protected].

Scarcity/Shortage Pricing

Robert Hellrich-Dawson, Office of Energy Policy and Innovation, Federal 
Energy Regulatory Commission, 888 First Street NE., Washington, DC 
20426, (202) 502-6360, [email protected].

    Dated: June 19, 2014.
Kimberly D. Bose,
Secretary.
[FR Doc. 2014-14845 Filed 6-24-14; 8:45 am]
BILLING CODE 6717-01-P