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FERC takes first step to reform energy markets

Proposal aligns market settlement with dispatch intervals

Rockville, MD (September 28, 2015) – FERC took its first steps to reform energy markets at its open meeting recently, releasing a NOPR to align market settlement with dispatch intervals and require all ISO/RTOs to trigger shortage conditions when any interval meets the criteria. The commission made clear other changes are likely to come, including a proposal on offer caps.

"One thing that I think the commission signaled in the NOPR is that it expects to look at a variety of other issues and that would include offer caps, mitigation, transparency, uplift – a whole bunch of other things," FERC Chairman Norman Bay told reporters after the meeting. "I think it would be fair to say that we expect our work to be continuing on price formation."

While ISO/RTO markets dispatch resources in five-minute intervals, they sometimes pay resources at an average hourly rate. That misalignment may distort price signals due to the hourly average and it could create a disincentive for resources to respond to dispatch signals.

Aligning settlement and dispatch intervals would give resources better incentives to follow dispatch instructions and it would also pay resources in a way that better reflects their value to the system.

The other main change in the NOPR is to require each ISO/RTO to trigger shortage pricing whenever those conditions happen in an interval. Some markets require shortage conditions be present for more than one interval before that pricing mechanism starts.

Delaying shortage pricing, or skipping it all together if the conditions are brief enough, means prices may fail to reflect potential reliability costs and fail to reflect the value of having resources respond during those intervals.

The proposed reforms would advance two of FERC's goals on its energy market efforts:

  • Improving price signals to better reflect system conditions and enhance incentives for resources to respond, and
  • Providing transparency and certainty so that market participants understand how prices reflect the actual costs of meeting load.

Not every ISO/RTO will have to make changes to comply with the NOPR issued, and some might already be in compliance with whatever else FERC comes up with on energy market reforms in the future.

"I think it's important to note that over time, FERC has always tried – in an incremental fashion – to make the markets more efficient and more transparent," Bay said.

Cal-ISO, NYISO and the Southwest Power Pool already align their settlement and dispatch intervals, he added. ISO-NE and MISO are considering moving to five-minute settlements, but before the NOPR, PJM was not going to make the change.

ISO-NE and NYISO already have rules in line with FERC's NOPR on shortage pricing – they trigger their pricing mechanisms no matter how quick the event.

"One advantage for the commission, frankly, is that we can look to see what some of the RTO/ISOs are doing and we can examine whether or not those approaches are proving to be beneficial," Bay said.

The energy price formation effort got started when Commissioner Cheryl LaFleur was the chairman of the commission and yesterday she put the effort in the context of the major changes the industry is going through.

"Obviously it's critically important that prices send proper price signals to compensate both new and existing resources for the value that they actually deliver to customers," LaFleur said, "and particularly at a time when our nation is seeing so much turnover of resources, so much change in our resource mix.

"It's very important that we get these market signals right."

This story was originally published in Utility Markets Today ( September 18, 2015 and has been slightly edited for this format. To read more articles like this one, sign up for a Free Trial to Utility Markets Today.

UTILITY MARKETS TODAY is published 245 times per year on business days by Modern Markets Intelligence Inc. UMT's mission is to deliver exclusive news chronicling ongoing efforts to build competitive wholesale and retail energy markets with in-depth analysis on why some fail and others succeed.


James Downing
Editor, Utility Markets Today
Modern Markets Intelligence Inc.

Season Crawford
VP of Marketing
Modern Markets Intelligence Inc.


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