United States: FERC Issues Final Rule Regarding Transparency In Price Formation

On April 19, 2018, FERC issued a final rule ("Order No. 844") addressing transparency in markets operated by Regional Transmission Organizations ("RTOs") and Independent System Operators ("ISOs"). FERC required that each RTO/ISO establish in its tariff: requirements to report information about uplift payments for each resource and transmission zone; requirements to report information on each operator-initiated commitment; and the transmission constraint penalty factors used in its market software. Order No. 844 will become effective 75 days after publication in the Federal Register.

On January 19, 2017, FERC issued a Notice of Proposed Rulemaking ("NOPR") that addressed uplift cost allocation practices that it believed were inconsistent with cost causation principles and may distort market outcomes, resulting in rates that are not just and reasonable (see January 24, 2017 edition of the WER). Uplift refers to payments that a regional grid operator tenders to a resource whose commitment and dispatch result in a shortfall between the costs in the resource's offer and the revenue earned during the market clearing process. In the NOPR, FERC proposed reporting and transparency requirements related to uplift payments and operator-initiated commitments, and further proposed that RTOs/ISOs include transmission constraint penalty factors in their tariffs. FERC also proposed in the NOPR an uplift cost allocation, where uplift would be allocated to those market participants whose transactions caused the uplift.

In Order No. 844, FERC adopted many of the NOPR's transparency requirements related to uplift payments and operator-initiated commitments. FERC determined that current transparency requirements result in rates that are likely unjust and unreasonable because out-of-market actions and the resulting uplift costs are not reflected in market prices. Because out-of-market actions can mask system conditions and cause competitive electric markets to send incorrect price signals to compensate and encourage investment in resource attributes that respond to system needs, FERC reasoned that imposing transparency requirements is a critical step in finding cost-effective solutions to the operational challenges facing RTOs and ISOs.

FERC also adopted proposals to require RTOs and ISOs to include in their tariffs information about transmission constraint penalty factors. In the NOPR, FERC stated that including transmission constraint penalty factors and associated practices can affect prices. In Order No. 844, FERC reasoned that without tariff information related to transmission constraint penalty factors, "market participants may not be able to hedge transactions appropriately or raise concerns into RTO/ISO practices through the stakeholder process." In addition, FERC stated that it was adopting those requirements because market participants currently "cannot understand the impact of these factors on [locational marginal prices]."

FERC declined to act on the NOPR proposal that RTOs and ISOs implement the uplift cost allocation. The uplift cost allocation would have required grid operators to allocate uplift costs only to market participants whose transactions are reasonably expected to have caused the costs. In the Final Rule, FERC stated that "some commenters raised substantial concerns about the uplift cost allocation reforms proposed in the NOPR" and, as a result, FERC noted that it "find[s] those concerns sufficiently persuasive to decline to take generic action at this time."

Each RTO and ISO must submit compliance filings to FERC within 60 days from the effective date of the Final Rule that establishes in their tariffs the transparency requirements and the requirement related to transmission constraint penalty factors.

The Final Rule will become effective 75 days after publication in the Federal Register. A copy of Order No. 844 can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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