FERC Files for Pricing Reforms

by | Sep 23, 2015

The Federal Energy Regulatory Commission (FERC) filed a Notice of Proposed Rulemaking (NOPR) on September 17 intended to more properly align pricing in real-time markets with resource dispatch instructions and operating needs.

The agency stated that the goals of its price formation initiative are to:

  • Maximize market surplus for consumers and suppliers;
  • Offer correct incentives for market participants to follow commitment and dispatch instructions, make efficient investments in facilities and equipment, and maintain reliability;
  • Provide transparency, so that market participants understand how prices reflect the actual marginal cost of serving load, and the operational constraints of reliably operating the system; and
  • Ensure proper compensation, under a system that guarantees that all suppliers have an opportunity to recover their costs.

In doing so, the commission proposes [Docket No. RM15-24-000] to address “two existing practices that may fail to compensate resources at prices that reflect the value of the service [they] provide to the system, thereby distorting price signals”. In certain instances, FERC said, the current practices create “a disincentive for resources to respond to dispatch signals.”

One problem that the federal agency identified is that , while all regional transmission operators (RTOs) and independent system operators (ISOs) dispatch resources on a sub-hourly basis, some of them settle those transactions based on an hourly integrated price – a price that equals the average price for all individual dispatch intervals across an hour.

“This misalignment between dispatch and settlement intervals may distort the price signals sent to resources and fail to reflect the actual value of resources responding to operating needs ––because compensation will be based on average output and average prices across an hour rather than output and prices during the periods of greatest need within a particular hour,” the commission said.

Another problem is that, in some markets, a power shortage is required to last a minimum amount of time before shortage pricing is triggered. As a result, there is a delay between the time when a system experiences a shortage of energy and operating reserves and the time when prices reflect those shortages.

“This can be particularly problematic when, for example, a shortage is required to last a minimum time period before shortage pricing is triggered,” the commission stated in its NOPR, adding, “ In this instance, short-term prices may fail to reflect potential reliability costs, as well as the value of both internal and external market resources responding to a dispatch signal.”

Specifically, the NOPR proposes to address these two matters by requiring that each organized market:

  • Settle energy transactions in its real-time markets at the same time interval at which it dispatches energy, and settle operating reserves transactions in its real-time markets at the same time interval at which it prices operating reserves, and
  • Trigger shortage pricing for any dispatch interval during which a shortage of energy or operating reserves occurs.

In issuing the NOPR, FERC Commissioner Cheryl LaFleur noted, “Today’s Notice of Proposed Rulemaking on settlement intervals and shortage pricing marks an important next step arising from the commission’s price formation proceeding. I strongly support this order.

“ The reforms we propose today are intended to help ensure that real-time prices reflect the true value of providing energy at that time, and thus provide appropriate signals for resources to respond to the operating needs of the market,” LaFleur stated, adding, “It is critically important that markets send proper price signals to compensate both new and existing resources, especially given the substantial changes underway in the nation’s resource mix and the need for investment in new resources in several regions to sustain reliability.”

The commissioner promised further reforms ahead. “In addition, as today’s order indicates, the Commission expects to take further action, addressing other price formation topics, including price caps, mitigation, uplift transparency, and uplift drivers,” she said.

Comments on the NOPR are due 60 days from publication in the Federal Register.

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