At its recent public meeting, FERC opened a staff-led proceeding to address price formation and related issuesin the RTO/ISO wholesale electricity energy markets. Concerns with whether these organized markets are attracting appropriate levels and types of new generation capacity and the markets’ performance during last winter’s Polar Vortex have raised questions regarding their designs and operational practices.

The RTOs and ISOs run hourly energy auction markets to call forth, through price signals, the generators that will run, and the demand that is willing to be cut, to keep the grid in balance.  The operators also ensure that sufficient resources are committed over some future periods; some accomplish this through capacity auction markets.  There have been concerns recently that the capacity markets are attracting mostly low-cost gas generators and not taking into account the need for fuel diversity and for generators that can serve as workhorse “base load” resources.  During a FERC conference on the capacity markets, it was suggested that pricing rules in the energy markets also play a role in attracting investment and should be examined.  Subsequently, comments during FERC’s conference on market performance during the Polar Vortex suggested that energy market pricing rules and operational practices may have interfered with the markets’ response to the extreme conditions.

Accordingly, FERC has directed its staff to engage in outreach and convene workshops and technical conferences to explore improvements to market designs and operational practices of RTOs/ISOs.  This initiative is to focus on the following topics, as well as others:

• Uplift payments: Uplift payments are “out of market” payments to resources to take actions the need for which were not identified in the normal market process.  This can result, for example, from system conditions that were not predicted or otherwise accounted for in the grid models used to clear the markets.  Uplift payments can undermine the market’s price signals, and sustained patterns of specific resources receiving a large proportion of uplift payments 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: RTOs/ISOs use offer price caps as a backstop protection against market power exercises.  The caps are generally based on marginal costs.  But if the RTO/ISO’s measure of marginal cost does not allow a resource to fully reflect its marginal cost in its bid, the resulting energy prices may be artificially low.  This occurred in some markets during the Polar Vortex conditions when natural gas prices soared to historic levels and gas-fired generator costs exceeded the bid caps and the resulting market prices were too low to allow costs to be recovered.
• Scarcity and shortage pricing: All RTOs/ISOs have administrative pricing mechanisms designed to set prices that reflect the economic value of scarcity as the operator acts to manage generation operating reserves as they approach deficiency levels. If the grid operator’s actions to avoid deficiencies are not priced appropriately, 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. If operators regularly commit excess resources, such actions may suppress energy prices or otherwise interfere with price formation.

The first workshop in FERC’s initiative is expected to be held in September and will focus on uplift but also allow discussion to begin on the remaining topics.