By Rich Heidorn Jr.

FERC issued a preliminary order Thursday that would require RTOs and ISOs to align their settlement and dispatch intervals, saying it was the first of a number of proposals the commission plans to act on based on what it learned from the price formation proceeding it began last year.

The Notice of Proposed Rulemaking (RM15-24) would require organized markets to settle real-time energy and operating reserve transactions financially at the same five-minute time interval that it dispatches those resources. It would also require the markets to eliminate any lag between declaring a shortage and beginning shortage pricing.

Inaccurate Price Signals

The commission said current practices in some markets are not resulting in appropriate price signals.

Although all organized markets dispatch resources in five-minute intervals, ISO-NE, MISO and PJM settle those transactions based on the average price for all dispatch intervals during the hour (“hourly integrated prices”).

“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.

In addition, some markets do not trigger shortage pricing unless the shortage lasts a minimum time — resulting in a delay before prices begin reflecting the shortage. The rule would require a shortage of any duration to be reflected in prices.

FERC said the changes “will help provide correct incentives for market participants to follow commitment and dispatch instructions, to make efficient investments in facilities and equipment, and to maintain reliability. The proposed reforms will also help provide transparency and certainty so that market participants understand how prices reflect the actual marginal cost of serving load and the operational constraints of reliably operating the system.”

“Requiring settlement intervals to match dispatch intervals would make resource compensation more transparent by, among other things, increasing the proportion of resource payment provided through payments of energy and operating reserves rather than uplift,” the commission continued. “This increased transparency, in turn, better informs decisions to build or maintain resources and enhances consumers’ ability to hedge.”

Comments on the proposed rule will be due 60 days after its publication in the Federal Register.

Offer Cap Issue Coming to FERC

FERC’s price formation proceeding included workshops and staff reports touching on a variety of obscure — but often controversial — issues, including offer caps and uplift allocation. (See FERC Sets Feb. 19 Deadline on Price Formation Comments.

In its Thursday order, FERC said it “expects to undertake further action addressing various price formation topics, including offer price caps, mitigation, uplift transparency and uplift drivers,” though it gave no schedule for future action.

But the commission will be facing the offer cap issue shortly, with PJM planning to seek a rule change — with or without stakeholder consensus — by the end of October. The Markets and Reliability Committee will discuss the issue in a special meeting Thursday. (See PJM Stakeholders Weigh 4 Options on Offer Cap; No Agreement in Sight.)

MISO also plans a filing on the cap before winter. (See related story, MISO Focused on Gas-Electric Coordination, Fuel Assurance for Winter.)

Commissioner Tony Clark had indicated his desire for a gradualist approach last month. (See FERC’s Clark: Energy Markets Need Tweaks, not Overhaul.)

But Commissioner Philip Moeller was impatient. “I wish we had done a little bit more and a little bit sooner,” he said Thursday. Moeller’s term expired June 30, but he has remained on the panel awaiting a new nominee from President Obama.

Industry, RTO Reactions

The Edison Electric Institute praised the commission’s action.

“We thought [the NOPR] was a good start to a really comprehensive look at these issues,” said Richard McMahon, EEI’s vice president of energy supply and finance. “The fact that they teed up these other important issues [for future action] is very encouraging.”

The current disconnect means resources will be under-compensated for energy produced during price spikes, or overpaid for energy produced during low prices in an hour where most intervals have high prices.

MISO

MISO’s Market Monitor David Patton has been recommending five-minute settlements since his 2012 State of the Markets Report.

“Even though a very small share (1 to 2%) of the energy produced and consumed in MISO is settled through the real-time market, the spot prices produced by the real-time market affect the outcomes and prices in all other markets,” Patton said in his 2014 report in June. “For example, prices in the day-ahead market, where most of the energy is settled, should reflect the expected prices in the real-time market. Similarly, longer-term forward prices will be determined by expectations of the level and volatility of prices in the real-time market. Therefore, one of the highest priorities from an economic efficiency standpoint must be to produce real-time prices that accurately reflect supply, demand, and network conditions.”

Patton said MISO has the metering and data necessary to make the change, which he said will require “only modest changes to MISO’s existing settlement calculations.”

At its Market Subcommittee meeting in August, MISO categorized the switch to five-minute settlements for generation schedules as “planned” and said that it was evaluating the “market efficiency benefits” and “process and system impacts.”

MISO implemented five-minute settlements for interchange schedules, as required by FERC Order 764, on June 30.

“We’re in the process of reviewing the NOPR now and will begin discussions with stakeholders soon about the implementation and timing,” MISO spokesman Andy Schonert said. The RTO addressed the implications of sub-hourly settlements in its comments to FERC on the price formation initiative in March. (See pp. 17-18 of the comments.)

PJM

In an April order on pricing of reserves, FERC rejected as out of scope a call from Public Service Enterprise Group that PJM implement five-minute settlements (ER15-643).

PJM Executive Vice President and COO Mike Kormos said in an interview after the FERC meeting that the change “was on the radar for sure.”

He noted that the order may require generators to make software changes and update old meters.

“It’s not just going to be ‘What’s the impact on PJM?’” he said. “It’s ‘What’s the impact on everybody?’”

ISO-NE

ISO-NE is already discussing with market participants a switch to five-minute settlements. At the Sept. 2 New England Power Pool Markets Committee meeting, RTO officials said they plan to settle generation, pump hydro and imports and exports on a five-minute basis but will continue to settle load assets and bilaterals hourly in real-time.

ISO-NE spokeswoman Marcia Blomberg said the idea of settling bilaterals subhourly also is under discussion.

Real-time reserve payments and inadvertent energy also would be settled every five minutes but the charge allocations would remain hourly.

On Sept. 2, the RTO told the NEPOOL Markets Committee that it plans to present Tariff language changes in November with a vote in December and implementation in 2017.

“We’re still reviewing the NOPR and evaluating what’s needed for compliance, but in terms of the proposal we’re discussing with participants, significant changes to the ISO’s settlement systems would be required to accommodate new calculations and significantly increased data volume, and market participants’ information systems would also require changes,” Blomberg said Monday.