FERC Relaxes Rules for Sales of Ancillary Services at Market-Based Rates

by Davis Wright Tremaine LLP
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The Federal Energy Regulatory Commission has expanded the ability of owners of generation facilities to sell certain generation-related ancillary services needed by public utility transmission providers at market-based rates. In its order, the FERC explained that it was doing so to foster competition and transparency in ancillary services markets. The revised rules are expected to increase the supply of these services needed to meet regulatory requirements in regions in which region-wide organized wholesale electricity markets do not exist. The revised rules, which were adopted in Third-Party Provision of Ancillary Services; Accounting and Financial Reporting for New Electric Storage Technologies, Order No. 784 will become effective 120 days after publication in the Federal Register.

In its landmark Order No. 888, which was issued by the FERC in 1996, the FERC required transmission operators to offer seven specified ancillary services that are associated with open access transmission service at cost-based rates. Transmission customers are required either to purchase those ancillary services from the transmission provider or to self-supply such services. In Order No. 784, the FERC ruled that generators not affiliated with the transmission provider may offer some of these ancillary services to the transmission provider at market-based rates if certain conditions are met.

Energy Imbalance Service and Generator Imbalance Service

Energy imbalance service involves the supply of energy to compensate for differences between the scheduled amount and actual delivery of energy within a balancing authority area over a single hour. In accordance with Order No. 784, the FERC will allow third-party sellers that are authorized to sell capacity and energy at market-based rates to sell Energy Imbalance and Generator Imbalance services at market-based rates to a public utility transmission provider in the same balancing authority area. Such sellers may also sell Energy Imbalance and Generator Imbalance services at market-based rates to a public utility transmission provider in a different balancing authority area if the balancing authority area in which the seller is located and that in which the transmission provider is located have implemented intra-hour scheduling for transmission service. Where needed, such authorization includes both the capacity and the energy associated with supply of Energy Imbalance and Generator Imbalance services.

Operating Reserve-Spinning and Operating Reserve Supplemental Services

Operating Reserve-Spinning and Operating Reserve Supplemental services involve the availability of unloaded generation capacity that can be called upon on short notice in the event of certain contingencies. In general, the same generation resources that are used to supply capacity and energy may also be used to supply Operating Reserve-Spinning and Operating Reserve Supplemental services. The FERC therefore ruled that third-party sellers passing existing market power screens for energy and capacity for a given market may sell Operating Reserves-Spinning and Operating Reserves-Supplemental services at market-based rates to a public utility transmission provider within the same balancing authority area, or to a public utility transmission provider in a different balancing authority area, if within-hour transmission scheduling practices in those areas support delivery of operating reserves from one balancing authority area to another.

Before being permitted to sell operating reserves at market-based rates, potential sellers of operating reserves must explain in their market-based rate applications for such authority how the scheduling practices in their regions support the use of operating reserves. The FERC explained in this regard that while 15-minute intervals for intra-hour scheduling of transmission service might be sufficient to accommodate the transmission of Operating Reserve-Supplemental service, it may be inadequate to support transmission of Operating Reserve-Spinning service, which must be available within a shorter period of time.

Regulation and Reactive Power Services

Because not all generators are capable of supplying Regulation and Frequency Response Service and/or Reactive Supply and Voltage Control Service from Generation Sources, the FERC declined to permit third-party generators to offer these services at market-based rates without first demonstrating that they lack horizontal market power with respect to such services. Nevertheless, because transmission providers are required to offer each of these services at cost-based rates, third party generators may sell such services under their market-based rate power sales tariffs to public utility transmission provides at rates that do not exceed the buying public utility transmission provider’s OATT rate for the same service. Such generators may also sell such services to a transmission provider at market-based rates if the transmission provider is purchasing such services pursuant to a competitive solicitation that meets specified guidelines involving (1) transparency; (2) product definition; (3) standardized evaluation criteria; (4) independent oversight; and (5) competitiveness through adequate seller interest. However, the requirement for independent oversight is inapplicable if an affiliate of the purchasing transmission provider does not participate in the solicitation.

Resource Speed and Accuracy

Transmission customers seeking to self-supply Regulation and Frequency Response Service currently must demonstrate that they have available resources capable of providing this service that are “comparable” to those of the transmission provider. The FERC ruled in Order No. 784 that each public utility transmission provider must add to its OATT Schedule 3 a statement that it will take into account the speed and accuracy of regulation resources in its determination of reserve requirements for Regulation and Frequency Response Service. In addition, each public utility transmission provider is required to post specified one-minute and ten-minute Area Control Error data for the most recent calendar year on its OASIS.

Compliance

Sellers that currently offer some ancillary services at market-based rates are required to list those services in their market-based rate power sales tariffs. Such sellers may begin the sale of additional ancillary services at market-based rates upon the effective date of Order No. 784, but must modify their tariffs as set forth below the next time they make a market-based rate filing with the FERC to expand the list of ancillary services being offered:

Third-party ancillary services:  Seller offers [include all of the following that the seller is offering: Regulation and Frequency Response Service, Reactive Supply and Voltage Control Service, Energy and Generator Imbalance Service, Operating Reserve-Spinning, and Operating Reserve- Supplemental]. Sales will not include the following: (1) sales to an RTO or an ISO, i.e., where that entity has no ability to self-supply ancillary services but instead depends on third parties; and (2) sales to a traditional, franchised public utility affiliated with the third-party supplier, or sales where the underlying transmission service is on the system of the public utility with the third party supplier; and (3) sales to a public utility that is purchasing ancillary services to satisfy its own open access transmission tariff requirements to offer ancillary services to its own customers. Sales of Operating Reserve-Spinning and Operating Reserve-Supplemental will not include sales to a public utility that is purchasing ancillary services to satisfy its own open access transmission tariff requirements to offer ancillary services to its own customers, except where the Commission has granted authorization. Sales of Regulation and Frequency Response Service and Reactive Supply and Voltage Control Service will not include sales to a public utility that is purchasing ancillary services to satisfy its own open access transmission tariff requirements to offer ancillary services to its own customers, except at rates not to exceed the buying public utility transmission provider’s OATT rate for the same service or where the Commission has granted authorization.

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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