FERC REQUIRES GREATER TRANSPARENCY REGARDING RTO/ISO UPLIFT CHARGES TO ENHANCE EFFICIENCY OF ORGANIZED MARKETS

Participants in organized wholesale power markets across the United States have long complained about the level of “uplift costs” passed through to them and the processes by which such costs are incurred and allocated. Uplift costs are incurred when a regional transmission organization (RTO) or independent system operator (ISO) has to take out-of-market actions (i.e., operator-initiated commitments of resources priced too high to clear the market) to ensure system needs are met as a result of the market software’s inability to resolve operational challenges, such as unplanned transmission and generation outages, or to maintain adequate voltage throughout the system. Uplift costs are charged to market participants in various ways, including on the basis of load ratio share and deviations from day-ahead schedules.

To at least begin addressing market participant concerns about uplift, the Federal Energy Regulatory Commission (FERC) issued a new rulemaking (Order 844) on April 19, 2018. Order 844 will require RTOs and ISOs to begin publishing, on a monthly basis, (1) a Zonal Uplift Report showing total uplift payments for each transmission zone, broken out by day and uplift category; (2) a Resource-Specific Uplift Report showing total uplift payments for each resource; and (3) an Operator- Initiated Commitment Report showing, for each operator-initiated commitment, the size of the commitment, transmission zone, commitment reason and commitment start time.

Additionally, each RTO and ISO will be required to file tariff sheets showing the transmission constraint penalty factors used in its market software, the circumstances under which those factors can set locational marginal prices and any process by which those penalty factors can be changed. FERC’s stated rationale for these requirements is that increased transparency will help market participants tailor their investments in facilities and equipment with the needs of the system, as well as better understand and suggest changes to RTO/ISO uplift and commitment practices, and that such actions might ultimately help shift some of the costs of serving load out of uplift and into market prices, resulting in a more efficient market and lower prices for consumers. As a legal matter, FERC’s rulemaking is based on a determination that current prices in RTO/ISO-administered markets are unjust and unreasonable because they do not reflect the efficiencies that can be achieved from the increased transparency FERC is requiring.

Zonal Uplift Report

The Zonal Uplift Report will provide more granular information about the location, timing and causes of uplift than is currently given to market participants in most of the organized markets. FERC has determined that such information should facilitate more informed stakeholder discussions in RTO/ISO planning processes, improve the ability of market participants to raise concerns regarding RTO/ISO uplift payments, and promote cost-effective solutions to system needs by allowing market participants to make more informed investment decisions.

The transmission zones used in Zonal Uplift Reports will need to correspond with geographic areas that are used for the local allocation of charges, such as a load zone that is used to settle charges for energy. Understanding that a particular category of uplift is concentrated in a limited area may provide information to market participants about the nature of the reliability need or may inform discussions about uplift cost allocation, which could lead to more efficient market outcomes in the future.

To safeguard each resource’s commercially sensitive energy offer or cost information, RTOs and ISOs will be permitted to aggregate transmission zones having fewer than four resources with one or more neighboring transmission zones until each aggregated zone has at least four resources. This report must be posted in machine-readable format on a publicly accessible portion of the RTO’s/ISO’s website within 20 calendar days of the end of each month.
 

ISO RTO Operating Region
Source: The Sustainable FERC Project
(click to enlarge)
 

Resource-Specific Uplift Report

The Resource-Specific Uplift Report is intended to complement the Zonal Uplift Report by providing more granular technology-type and geographic information, allowing market participants to identify potential system needs at specific locations that may not otherwise be revealed through price signals. FERC found that the combination of the Zonal Uplift Report and the Resource-Specific Uplift Report can improve market efficiency by providing information signaling where market participants should site new resources, transmission facilities or demand response. FERC further determined that knowing, for example, that uplift is concentrated in combustion turbines rather than steam units could provide insights into the nature of the system need that is being addressed through actions that led to uplift.

The Resource-Specific Uplift Report will contain the resource name and total amount of uplift paid in dollars aggregated across the month to each resource that received uplift payments. To reduce the likelihood that the information could be used to harm competition or individual market participants, RTOs and ISOs are not required to post their Resource-Specific Uplift Reports until the 90th calendar day after the end of each month. FERC found that any inferred information regarding a resource’s offers or costs becomes less likely to be used to harm competition or individual market participants with the passage of time because fuel prices and other market conditions change.

FERC noted that with the 90-day lag, the report wil be released in a season different from that in which the uplift was incurred, increasing the likelihood that transient issues will be resolved, and thus decreasing the likelihood that any deduced resource-specific cost or offer data can be used to harm the competition or individual market participants.

Operator-Initiated Commitment Report

The Operator-Initiated Commitment Report will provide granular information about the location, timing, causes and size of operator-initiated commitments. Specifically, this report must list the commitment size, transmission zone, commitment reason and commitment start time of each operator-initiated commitment, whether manual or automated. FERC determined that such information would allow stakeholders to better understand the connections between system needs and operator actions and to make investments in facilities and equipment, where most needed by the system, thus potentially improving market efficiency.

An operator-initiated commitment is defined as a commitment made after the day-ahead market, for a reason other than minimizing the total production costs of serving load. Market software may make commitments to meet needs for additional supply due to changing market conditions or variations from forecast after the day-ahead market. These commitments reflect the next marginal supply to meet load and minimize total production costs and are thus exempt from this reporting requirement. On the other hand, some constraints cannot be included in market software, and as a result, RTOs/ISOs are often required to make commitments to address reliability considerations that have not been modeled. Because these considerations are not included in the software, they may not minimize total production costs and therefore must be reported in the Operator-Initiated Commitment Report.

Commitment reasons must include system-wide capacity, constraint management and voltage support. FERC dropped its proposed requirement that such report be posted within four hours after an operator-initiated commitment, finding that such a timeline might place an unnecessary burden on some RTOs/ISOs. Instead, the rulemaking requires that this report be posted in machine-readable format on a publicly accessible portion of the RTO’s/ISO’s website as soon as practicable and no later than 30 calendar days after the end of each month. However, FERC added the requirement that the report include the commitment start time in order to enable stakeholders to understand system conditions surrounding the commitment.

Each RTO/ISO is required to include in its tariff the type of zone that it proposes to use in its Operator-Initiat¬ed Commitment Report, explain how the chosen type of zone meets the definition of transmission zone adoptedin the rulemaking, and provide justification for any dif¬ferences between the sets of zones used for this report and the Zonal Uplift Report. The rulemaking does not require RTOs/ISOs to identify resource names or specific constraints in the Operator-Initiated Commitment Report. In addition, each RTO/ISO is permitted to propose, upon compliance, modifications to the report to avoid disclosing information that could be used to harm system security.

Transmission Constraint Penalty Factor Requirements

Transmission constraint penalty factors are the values at which an RTO’s/ISO’s market software will relax the limit on a transmission constraint rather than continue to re-dispatch resources to relieve congestion associated with that constraint. FERC found that transmission constraint penalty factors have the potential to materially affect energy and ancillary services prices, so those factors should be included in each RTO/ISO tariff. FERC also noted that greater transparency into transmission constraint penalty factors will allow market participants to understand how an RTO’s/ISO’s actions and practices affect clearing prices.

The rulemaking requires that each RTO/ISO file tariff sheets showing its transmission constraint penalty factor values; the circumstances, if any, under which the transmission constraint penalty factors can set locational marginal prices; and the procedure, if any, for temporarily changing the transmission constraint penalty factor values. Thus, if an RTO/ISO currently has the flexibility to temporarily override transmission constraint penalty factor values, for example, to account for reliability concerns, the circumstances under which the factors may be changed, and any procedures for doing so must be included in the RTO’s/ISO’s tariff. The rulemaking also requires that any process for temporarily changing transmission constraint penalty factor values must provide for notice of the change to market participants as soon as practicable.

Uplift Cost Allocation

In its Notice of Proposed Rulemaking (NOPR) that preceded this order, FERC proposed to require that each RTO/ISO currently allocating the costs of real-time uplift to deviations must allocate such real-time uplift costs only to those market participants whose transactions are reasonably expected to have caused the real-time uplift costs. In its rulemaking, however, FERC states that it is withdrawing that proposal and declining to take generic action on that issue due to comments filed that raised substantial concerns as to how the proposed allocation rule would be applied in certain RTOs and ISOs in light of the reasons for uplift in those markets, and whether certain RTOs and ISOs could reasonably implement the proposed uplift cost allocation reforms. FERC’s rulemaking backtracked from a number of other proposals in its NOPR that would have made the reporting requirements more challenging for RTOs and ISOs on various grounds, some relating to feasibility and others to protection of sensitive information.

Conclusion

Because out-of-market actions and the resulting uplift costs are not reflected in market prices, there has been an unjust and unreasonable lack of transparency in certain of the organized markets concerning these costs and the reasons for their incurrence. Out-of-market actions can mask system conditions, which, as FERC recognized, “limits the ability of competitive electric markets to send appropriate price signals to compensate and financially encourage investment in resource attributes that respond to system needs.” Furthermore, lack of transparency concerning both uplift costs and operator-initiated actions can impair the ability of stakeholders to provide valuable input during RTO/ISO transmission planning processes and in committees that review RTO/ISO resource adequacy. While FERC’s decision to punt with respect to uplift cost allocation is disappointing, it is not surprising, given the difficulties of adopting a generic mandate to address an issue so fraught with controversy and region-specific differences. Nevertheless, ensuring system needs are transparent to market participants is a critical first step in finding cost-effective solutions to the operational challenges RTOs/ISOs face in ensuring reliable operations. The reporting of more granular information about uplift and operator-initiated commitments that the rulemaking does require will facilitate more efficient market entry and planning for the betterment of the markets.

The views expressed in this article are those of the authors and not necessarily those of BakerHostetler or its clients.