FERC Initiates Proceeding to Evaluate Price Formation

by Akin Gump Strauss Hauer & Feld LLP
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On June 19, 2014, the Federal Energy Regulatory Commission (FERC) initiated a proceeding with the aim of evaluating price formation issues in the wholesale energy and ancillary services markets.  The new initiative comes in the wake of this year’s so-called “polar vortex,” during which many of the FERC-jurisdictional markets experienced dramatic price spikes amid record-setting levels of demand for power.  Recent input from stakeholders has suggested that inefficient market rules prevented the markets from effectively responding to these conditions.  FERC’s new initiative also looks to build upon a proceeding initiated last year to address problems in the organized wholesale capacity markets. 

FERC will hold a series of workshops aimed at gathering stakeholder input on a variety of issues related to price formation, including: (1) the use of uplift payments; (2) offer price mitigation and offer price caps; (3) scarcity and shortage pricing; and (4) operator actions that affect prices.  The first workshop will be held in September, with the remaining ones stretching into the fall and winter.

In theory, clearing prices in the FERC jurisdictional energy markets should reflect the marginal cost of producing power.  FERC acknowledged that, for a number of operational reasons, some of which are inherent in energy markets and more or less unavoidable, the actual clearing prices often fall short of this ideal.  Nevertheless, FERC is hoping to improve price formation to the extent possible through this initiative so that clearing prices can more accurately reflect the value of the underlying product.  For example, while some amount of uplift (or out-of-market “make-whole”) payments may be inevitable, FERC plans to examine “sustained patterns” of specific resources receiving large uplift payments.  FERC stated that these types of patterns indicate that a resource is “providing a service that should be priced in the market or opened to competition.”  FERC also appears interested in examining, among other things, the extent to which administratively determined offer cap and shortage pricing rules are appropriately valuing energy and reserves during shortage conditions.

Any changes to market rules resulting from this initiative likely will not be in place before next winter, however.  In the meantime, and in response to an April technical conference held to assess performance during the winter season, FERC has encouraged regional transmission organizations (RTOs) to examine short-term solutions to these problems as well.

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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