By Michael Brooks

WASHINGTON — RTOs will be required to align their settlement and dispatch intervals and implement shortage pricing during any shortage period under new price formation rules approved last week by FERC (RM15-24).

FERC Order 825 requires RTOs to settle real-time energy, operating reserves and intertie transactions in the same time interval it dispatches, prices and schedules them, respectively. Although all RTOs currently 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.

This misalignment distorts price signals, as compensation is based on average hourly prices rather than specific periods, including those of greatest need. “These distorted price signals can mute a resource’s financial reward for being able to quickly respond to system needs and create a disincentive for resources to respond to price signals,” Stanley Wolf, of FERC’s Office of Energy Policy and Innovation, said at the commission’s open meeting Thursday.

Additionally, in some RTOs, an energy or reserve shortage is required to last a minimum amount of time before shortage pricing is triggered. “Due to such delays, short-term prices fail to reflect potential reliability costs, as well as fail to reflect the value of both internal and external market resources responding to a dispatch signal,” Wolf said.

Commissioner Colette Honorable called the order — the first final rule in the commission’s efforts to reform price formation in the organized electricity markets — a “milestone.” The commission began evaluating price formation in 2014 and issued a Notice of Proposed Rulemaking in September. (See NOPR Requires RTOs Switch to 5-Minute Settlements.)

“These requirements will help ensure that rates for energy and operating reserves are just and reasonable and will align prices with resource dispatch instructions and operating needs, provide appropriate incentives for resource performance and maintain reliability,” FERC said.

The final order clarifies that the rules would apply to all supply resources, including demand response.

The new requirements take effect 75 days after publication in the Federal Register. Each RTO will be required to make a compliance filing 120 days after that detailing the tariff changes needed to implement the new rules. The order stipulates that FERC will allow an additional year after the compliance filing deadline for the settlement interval changes to go into effect, while it will allow another 120 days for the shortage pricing changes.

“I know that it will take some time and effort for the RTOs to comply with the portion of the rule on settlement intervals; it won’t necessarily be easy,” Commissioner Cheryl LaFleur said. “However, I think it’s critically important that markets send clear, accurate, timely and undiluted price signals.”