An RTO for Gas?

by Akin Gump Strauss Hauer & Feld LLP
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On April 1, 2014, the Federal Energy Regulatory Commission (FERC) held a technical conference on “Winter 2013-2014 Operations and Market Performance in Regional Transmission Organizations and Independent System Operators.” FERC’s Office of Enforcement presented its preliminary observations and analysis, available here of the operations of the natural gas and the Regional Transmission Organization and Independent Systems Operators markets during the first three months of 2014, which were marked by historically cold weather, record high natural gas and electric demand, and record high natural gas prices, which translated into abnormally high electricity prices.

According to FERC staff’s preliminary analysis, cold weather combined with high levels of generation outages placed some regions near their capacity to meet system demand.  Mechanical failures in generator systems, fuel deliverability and fuel handling problems led to high levels of forced generation outages which contributed to the stressed conditions in the markets. The RTOs and ISOs declared emergency conditions on several occasions and some implemented emergency procedures, including emergency demand response, voltage reduction, emergency energy purchases, and public appeals for conservation.

Among other issues, FERC has focused on the performance of the gas pipeline transportation system during these events.  According to FERC staff’s preliminary analysis, customers who had firm transportation capacity on natural gas pipelines generally managed to secure natural gas deliveries. However, many gas-fired generators rely on interruptible transportation, and fuel supply issues forced many of these units offline.

At the technical conference, the participants discussed FERC’s recent initiatives to improve coordination of the scheduling processes of interstate pipelines, public utilities, and ISOs / RTOs, and its recent show cause order regarding posting by interstate pipelines of offers to purchase released capacity. In addition, Commissioner Norris suggested the possibility of a rulemaking to establish a new natural gas trading platform. Commissioner Norris’s statement came in response to comments from Donald Sipe, of American Forest and Paper, regarding the need for improved information sharing and trading practices. Could we be headed toward the establishment of an RTO for gas?

Many commenters emphasized that, in addition to optimizing the existing natural gas transportation network, new infrastructure will be needed to support our increasing reliance on gas-fired generation. Audrey Zibelman, Chair of the New York Public Service Commission, suggested that expedited permitting processes may be appropriate in some cases to alleviate shortages and scarcity pricing.

In addition, several commenters, including Donald Schneider of FirstEnergy Solutions and John Sturm of ACES Power Marketing, pointed out that organized capacity markets, as currently structured, do not recognize the value of fuel diversity. Commissioner Moeller expressed particular interest in the premature retirement of existing coal-fired resources due to environmental regulations. At the close of the technical conference, Commissioner LaFleur, FERC’s acting chair, suggested that more study may be warranted with respect to recognizing the benefits of “fuel security” and “fuel diversity” in capacity prices.

 

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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