United States: FERC Initiates Inquiry Into Gas-Electric Coordination Issues

Originally published November 2006

On October 25, the Federal Energy Regulatory Commission ("FERC") initiated a formal inquiry into whether scheduling and compensation provisions in the tariffs of six independent system operators ("ISOs") and regional transmission organizations ("RTOs") are appropriate for periods when natural gas supplies for essential electric generation facilities may be constrained or gas prices are volatile.¹ Given the substantial reliance on natural gas-fired generation in certain regions, and increasing demand on the gas delivery infrastructure, the FERC inquiry could have significant implications for practices in the affected ISOs and RTOs.

Background. Underlying FERC’s inquiry is a concern that severe weather or other abnormal events could cause simultaneous peak demands on certain electric and natural gas systems, thereby potentially threatening the reliability of the electric grid. The New England ISO experienced such concerns during a January 2004 cold snap, when simultaneous peak gas demand for heating and electric generation (a very high proportion of electric generation in New England is natural gas-fired) threatened the integrity of both the electric grid and the gas distribution system. FERC identified several factors which appear to contribute to the problem:

• Peaking generators (because they operate relatively infrequently) may only be able to afford interruptible gas pipeline transportation.

• Mismatches between ISO/RTO market clearing times and pipeline scheduling times may preclude gas-fired generators from meeting pipeline nomination deadlines.

• Volatile gas prices, combined with ISO/RTO price caps, may mean that gas has a higher value in the gas markets than in electric generation.

FERC’s Inquiry. FERC has ordered the following entities to propose, by January 16, 2007, appropriate changes to their scheduling and compensation systems to address these concerns or to explain why such changes are unnecessary: California ISO, New England ISO, PJM, Midwest ISO, New York ISO, and Southwest Power Pool. FERC views these proceedings as providing a forum to examine whether the ISO/RTO procedures are adequate, and is allowing interested parties to intervene in the specific ISO/RTO proceedings within 21 days. A wide range of market participants likely will intervene and assert varying – and potentially conflicting – views on the issues. FERC expects to issue a final order in these investigations within six months.

Concurrent with the initiation of its inquiry, FERC approved New England ISO’s procedures based on the lessons learned from its 2004 experience.² Among other things, those procedures provide for the following during a cold weather emergency: modified offer and bid times that would allow gas-fired generators to know when they would be dispatched in time to buy and schedule gas; an extraordinary fuel expense procedure that would allow recovery of gas costs above those contemplated by normal price caps; and increased coordination between the RTO and gas pipelines. FERC acknowledged that the New England ISO procedures may provide a good starting point but recognized that each ISO and RTO faces different circumstances that may require different approaches.

Additionally, FERC has proposed that pipeline tariffs and public utility transmission tariffs be modified to incorporate by reference certain business practice standards approved by the North American Energy Standards Board ("NAESB") that provide for coordination and communication between gas pipelines and various electric industry operators, including ISOs, RTOs and gas-fired electric generators.³ The intent of these standards is to "help improve the reliability of both the gas and electric industries by ensuring that all parties have information relevant to their scheduling and dispatch." However, NAESB was unable to agree upon modifications to ISO and RTO scheduling protocols to address the issues identified in the ISO/RTO inquiry. Accordingly, those issues will be addressed in FERC’s inquiry.

Although the FERC inquiry is limited to the six specific ISOs/RTOs, it addresses a topic that has wider implications. For example, a 2003 cold snap in Texas caused a coincident peak demand on the TXU gas and electric systems that resulted in significant curtailments and had the potential for more serious problems. Additionally, other regions subject to FERC jurisdiction, such as Florida, exhibit a high proportion of natural gas-fired generation and could face serious problems during abnormal events. Thus, FERC’s actions in this proceeding may be widely watched.