FERC Initiates Proceeding Regarding Price Formation In Organized Markets

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On June 19, 2014, the Federal Energy Regulatory Commission ("FERC") initiated a proceeding to evaluate issues regarding price formation in the organized electric energy and ancillary services markets operated by regional transmission organizations ("RTOs") and independent system operators ("ISOs"). FERC did so in response to concerns raised in other proceedings about whether the energy and ancillary services are producing accurate price signals.

FERC stated, "Ideally, the locational energy market prices in the energy and ancillary services markets would reflect the true marginal cost of production, taking into account all physical system constraints, and these prices would fully compensate all resources for the variable cost of providing service." In such an ideal scenario, the RTOs/ISOs would not need to commit resources beyond those whose offers cleared the market, and customers would adjust consumption in response to price without the need for administrative curtailment. FERC recognized, however, that technical and operational limitations may preclude achieving this ideal "for the foreseeable future." For example, until market software can model all of the electric transmission system's constraints, RTOs/ISOs will continue to be required to manually dispatch resources to resolve some constraints, and to make uplift payments to cover the shortfall between a resource's offer and the market clearing price. Nevertheless, FERC suggested that "there may be opportunities for RTOs/ISOs to improve the energy and ancillary service price formation process."

Accordingly, FERC directed its Staff to convene a series of workshops and technical conferences to explore improvements to the RTO/ISO market designs and operational practices relating to the following topics: the use of uplift payments; offer price mitigation and offer price caps; scarcity and shortage pricing; and operator actions that affect prices. The first workshop is anticipated to take place in September 2014, and is expected to address the issue of uplift.

Neil L. Levy
Washington, D.C.
+1 202 626 5452
nlevy@kslaw.com

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David G. Tewksbury
Washington, D.C.
+1 202 626 5454
dtewksbury@kslaw.com

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Stephanie S. Lim
Washington, D.C.
+1 202 626 8991
slim@kslaw.com

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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