FERC Proposes Revisions to the Pricing of Ancillary Services for Electric Transmission Support

by Davis Wright Tremaine LLP
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[author: Brian R. Gish]

In an effort to advance competitive markets for the sales of certain electric power products that are necessary to support the transmission of electricity, the Federal Energy Regulatory Commission (FERC) has issued a Notice of Proposed Rulemaking (NOPR) to change its current rules governing the sales of such “ancillary services.” While FERC allows market-based rates  for most sales of energy and capacity when a seller can demonstrate that it does not possess market power, the use of market-based rates to sell ancillary services to transmission providers outside of organized ISO/RTO markets has been limited because proving the absence of market power has been difficult. FERC proposes revisions to its regulations and policies to facilitate the development of competitive markets for these products, and is requesting comments on its proposals by Sept. 7, 2012.

 

Background

When FERC ordered that public utilities “unbundle” transmission service from electric energy sales in Order 888, it recognized that certain power products are necessary to support transmission service, and that transmission customers must bear cost responsibility for them. FERC calls these power products “ancillary services,” which term also includes services that are not power products, such as scheduling, system control, and dispatch. FERC’s terms for these ancillary services are: Reactive Supply and Voltage Control from Generation Sources, Regulation and Frequency Response (instantaneous load following); Energy Imbalance (makes up for hourly differences between a transmission customer's energy supply and its load in the control area), Operating Reserve - Spinning (provided by generating units that are on-line and available to serve load immediately in an unexpected contingency); Operating Reserve - Supplemental (provided by generating units able to supply power generally within 15 minutes of an event); and Generator Imbalance (makes up for hourly differences between energy scheduled for delivery from a generator and the amount of energy actually generated).

 

FERC requires that the transmission provider offer these services to transmission customers at cost-based rates and also requires that transmission customers procure them, but in most cases customers have the option to self-supply or purchase them from third parties. Transmission providers may also purchase the services from third party suppliers to meet their obligation to offer them to transmission customers.

 

From the outset, FERC was reluctant to allow sales of these services at market-based prices because the specialized nature of the products might result in too few sellers to support a competitive market. FERC said it would allow sales of ancillary services at market-based rates only if the seller could provide an analysis to show that it lacked market power in each relevant product market. FERC subsequently acknowledged that the lack of data concerning who was capable of providing these services often made it impossible for sellers to analyze market shares for these specialized products. FERC thus adopted its “Avista” policy which allowed sales of ancillary service power products (excluding reactive power) at market-based prices except in three situations. These situations are sales to an RTO or ISO, sales to an affiliated franchised public utility, and sales to a transmission provider who will offer the services to its transmission customers under its tariff. Under Avista, any sales in these situations, and all sales of reactive power, would need to be under cost-based rates unless a market analysis demonstrated absence of market power with respect to the specific product sought to be sold.

 

Since the Avista policy was adopted, most of the ISOs and RTOs (including PJM, New York, New England, California, and MISO) have developed markets that FERC has found to be competitive for at least some of the ancillary services. Sellers in these markets are granted market-based rate authority for these ancillary services as part of their market-based rate tariff for energy and capacity. The revisions proposed in this NOPR thus do not affect sales of ancillary services traded in these ISO and RTO markets, but apply to sales of services that are outside those approved for the five ISOs/RTOs mentioned above.
 
The NOPR
In its NOPR, FERC states that it wants to reevaluate its Avista restriction on market-based sales of ancillary services to transmission providers in order to further its effort to foster the developments of competitive markets for such services. FERC noted that this was especially important in light of new technologies seeking to provide ancillary services and the growing interest of sellers and buyers to have more flexibility in meeting ancillary service needs. The NOPR also addresses two other fairly distinct proposals relating to consideration of the speed and accuracy of a resource used for regulation and frequency response service, and the appropriate accounting for energy storage projects. This advisory discusses only the part of the NOPR pertaining to pricing for ancillary services.
 
For energy and generator imbalance ancillary services, FERC proposes to revise its regulations to provide that sellers that pass FERC’s two market screens for sales of energy and capacity generally in a given geographic market would have a rebuttable presumption that they lack horizontal market power for sales of imbalance ancillary services in that market. FERC’s rationale is that generating units capable of producing imbalance services are not technically distinct from generating units selling energy and capacity, so the presumption of lack of market power for the latter should also apply to the former. FERC states that this would not be an alteration of the Avista policy, but a determination that the standard market screens are sufficient for imbalance services. FERC asks for comments on its assumption that generators used for imbalances are not technically different from typical generators.
 
As for operating reserves, reactive power, and regulation services, FERC does not believe that its two market screens for general market-based rate authority would be adequate to analyze market power, because of the specific technical requirements necessary for a generator to produce these products. FERC notes that units that provide these services may need to have special features for ramp rates, loading, and geographic proximity to where the service is required, thus limiting the pool of potential suppliers. Sales of these products thus may involve a different geographic market or different set of resources than those analyzed to determine market power for sales of energy and capacity.
 
Therefore, for this latter group of ancillary services, FERC proposes a different market power screen to assess market power. This optional market power screen would analyze the market for each specific service by requiring all transmission providers to publicly post the aggregate amount of each ancillary service it has historically required in its balancing authority area, including any geographic limitations on where the source for the service must be located. If a seller’s capability to supply a service is no more than 20 percent of the transmission provider’s aggregate requirement for that service, there would be a rebuttable presumption that the seller does not have horizontal market power for that service.
 
As alternatives to demonstrating lack of market power for ancillary services, or to mitigate a finding that a seller does have market power, FERC proposes two methods that might be used to ensure prices remain just and reasonable: (1) permit sellers who have general market-based rate authority in that market to propose price caps for their sales of ancillary service to transmission providers; and (2) allow competitive solicitations by transmission providers to establish ancillary service prices. A price cap could be proposed by the ancillary service seller as being either the buying transmission provider’s approved tariff rate for selling the same ancillary service to its customers, or the highest approved tariff rate of any transmission provider within a market area in which the services could be physically traded. The latter cap would require the seller to demonstrate what the proper market area should be.
 
The second method FERC proposes to allow non-cost-based sales of ancillary services in the absence of a favorable market power analysis is where the seller would bid into a competitive solicitation conducted by the transmission provider. To qualify as producing acceptable results, the competitive solicitation would have to be set up to meet guidelines established by FERC to ensure that the result was transparent and competitive.
 
The NOPR poses many general questions about the revisions it is proposing, both with respect to the technical assumptions it is relying upon as to the production of ancillary service products, and with respect to appropriate pricing methodologies for such services. Anyone affected by these proposals should consider filing comments.

 

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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