trending Market Intelligence /marketintelligence/en/news-insights/trending/16ivzatzKrhTIol3DjuoGw2 content esgSubNav
In This List

FERC's proposal to modify offer caps raises cost verification, other concerns

Blog

Insights Weekly: Midstream sector gains; loan growth momentum; insurance M&A on the rise

Blog

Global M&A By the Numbers: Q3 2021

Blog

Insight Weekly: Global stock performance; hydrogen pilot projects; Powell's Fed future unsure

Blog

Insight Weekly Labor market recovery hurdles power market integration nonbank MA hunt


FERC's proposal to modify offer caps raises cost verification, other concerns

A FERCproposal to revise a $1,000/MWh cap on supply offered in the day-ahead and real-timemarkets run by RTOs and ISOs received both cheers and jeers in recent comments.

The commissionis considering making the change after some generators had difficulty recoveringtheir costs during the 2013-2014 winter's polar vortex and because of a need tosend proper price signals.

Underthe proposed rule, all resources would be able to submit offers above $1,000/MWhif they can verify that their costs exceed that level. If a resource's costs cannotbe verified before the market-clearing process begins, the offer may not be usedto calculate the market clearing price. However, the resource would still be eligiblefor a make-whole (uplift) payment if it clears the energy market and its costs areverified after the fact.

Currently,the California ISO, , ,New York ISO and all have$1,000/MWh caps on incremental energy offers. However, FERC recently a PJM Interconnection LLC proposal requiring all incrementalenergy offers above $1,000/MWh to be cost-based and placing a $2,000/MWh hard capon cost-based offers used for purposes of calculating clearing prices.

FERCin January asked interestedparties to answer a series of questions related to its proposal, including whetherPJM's hard cap should be extended to other regions. It also said that it consideredbut rejected various alternatives, such as implementing a floating offer cap thatwould change with natural gas prices and raising the offer cap to a higher fixedlevel regardless of cost. In addition, FERC stressed that is not proposing to eliminatethe $1,000/MWh offer cap entirely because it said the cap functions as a backstopfor existing market power mitigation rules and therefore is needed to protect consumers.

Some don't see the problem

A largenumber of industrial consumer groups, including the Electricity Consumers ResourceCouncil, the PJM Industrial Customer Coalition and the Coalition of MISO TransmissionCustomers, told FERCthey strongly oppose allowing offers exceeding the $1,000/MWh cap to set market-clearingprice under any circumstances at this time given the state of organized markets.

"Inthe organized markets as they are currently structured, the benefits of a $1,000cap … vastly outweigh any benefit that would be achieved by relaxing the $1,000cap to accommodate a highly unlikely occurrence such as the isolated supply constraintsof the 2014 polar vortex," the industrials insisted.

The industrialsnoted that the polar vortex conditions experienced during January 2014 were unprecedented,yet even then FERC adequately addressed the cost recovery issues that arose by grantinggeneric, short-term tariff waivers. Thus, they suggested that FERC's proposal isa solution looking for a problem that no longer exists and may never exist again.If a rare event like the polar vortex should reoccur, the industrials said, costrecovery issues could be addressed through advance waivers or legitimate and verifiedcost-based uplift payments.

"Aprocess limiting payments to the resources that are necessary to actually balancethe market, rather than to all resources, achieves cost recovery objectives forthese units without engendering the multiple disadvantages of increasing the $1,000cap," the industrials maintained.

Moreover,the groups predicted that allowing offers above the $1,000/MWh cap to set the market-clearingprice "is unlikely to improve the functioning of the organized markets as theyare currently structured, especially in view of the practical challenges to implementthat change effectively, and the proposed change would risk unintended and unforeseenconsequences."

If themany shortcomings of organized markets could be rectified, the industrials said,administrative constraints such as offer caps may become unnecessary. "However,as that is not the present state of the markets, the current offer caps should remainin place" they maintained.

In particular,the industrials asserted that offer caps are needed to protect against market manipulationand ensure that consumers do not pay excessive prices during times when limitedsupply options exist, given the general inelasticity of electric demand.

Likethose tendered by the industrials, commentssubmitted collectively by the American Public Power Association, the National RuralElectric Cooperative Association and AmericanMunicipal Power Inc. said the commission's proposal "to force ageneric energy offer cap for all RTOs and ISOs ignores regional differences andis based on hypothetical concerns and theory as opposed to real evidence."

The publicpower groups also repeated the industrials' argument that mechanisms are availablefor addressing cost recovery issues arising from anomalous weather conditions withouthaving to increase locational marginal prices, or LMPs.

In anycase, the groups argued that FERC has not shown that the existing region-specificoffer caps are no longer just and reasonable and why the proposed "higher of"offer cap is just and reasonable. Like many other commenters, they also questionedthe ability of RTOs and ISOs and/or their market monitors to verify costs in advanceof day-ahead or real-time energy market clearing.

Thus,the public power groups said, rather than burdening consumers "with yet anotheradditional payment to generators," FERC should adopt a $1,000/MWh offer capas a rebuttable presumption, subject to individual filings by an RTO/ISO demonstratingthat a different cap is warranted.

Others say cap is an 'anachronism'

But accordingto the Electric Power Supply Association, Independent Energy Producers Association,Independent Power Producers of New York Inc., New England Power Generators AssociationInc., and the Western Power Trading Forum, the existing generic energy offer capof $1,000/MWh "is an outdated restriction distorting energy price formation… and requires reform across all the ISOs/RTOs in order to avoid seams concernsbetween markets."

The jointfiling by the trade groupsrepresenting competitive suppliers said they therefore strongly support FERC's proposal."As the commission has reiterated over nearly two decades, reliance on a singleuniform clearing price supported by market-based solutions best results in efficientand reliable operations," they insisted. The competitive suppliers then tickedoff many reasons why they believe that the current offer cap results in unjust andunreasonable rates, including price suppression of market prices below the marginalcost of production, which they claimed in turn provides a disincentive for resourceswith short-run marginal costs above the cap to offer into the market, hinders efficientdispatch and discourages efficient investments and retirements.

Citingalleged significant improvements in electric market pricing and market monitoringsince establishment of the current caps, the competitive suppliers said FERC needsto eliminate the offer cap mechanism entirely.

The EdisonElectric Institute saidit also supports the commission's proposal, insisting that a cap on incrementalenergy offers "unjustly prevents a resource from recouping its costs … andmay result in unjust and unreasonable rates by suppressing LMPs below the marginalcost of production."

Cost verification seen as a problem

However,the trade group asked the agency to offer more guidance about the cost verificationprocess. In particular, EEI said the commission's proposal to allow cost-based offercaps over $1,000/MWh to be included in the LMP calculation is heavily dependenton a verification process "that is not so cumbersome as to prevent cost basedoffers from actually being used in the LMP calculation."

Whilemake-whole payments for generators that cannot timely complete the verificationprocess would theoretically make the affected resource whole, EEI said that approachwould not serve the commission's goal of having clearing prices "reflect thetrue marginal cost of production, taking into account all physical system constraints."

EEI thereforeurged FERC to clarify how the ex-ante verification process should work, such asoffering guidance on what the agency means by the phrases "allow for timelycost verification" and "submitted within a reasonable period of time."

MISOsaid while it recognizesthe need for the energy offer cap, it would prefer that the administrative capsbe gradually relaxed to provide incentives for competitive offers and to supportefficient market operations.

LikeEEI and others, MISO also raised concerns about the cost verification process, notingthat some costs cannot be verified in a timely fashion prior to the submission ofoffers. The RTO also opposed the idea of establishing a secondary hard cap, insistingthat the proposed "soft cap" of $1,000/MWh should provide sufficient safeguardsfor the market, "while the secondary hard cap's limitations and implementationcosts would likely overshadow any benefits."

Alsoraising the cost verification issue, the ISO/RTO Council urged the commission to refrain from establishing a uniformverification process rule that might not be compatible with each ISO's and RTO'smarket design and its respective market power mitigation regime.

The IRCalso asked FERC to clarify that "verification" should not mean the reviewof actual fuel invoices before the corresponding energy offer can be used for purposesof calculating LMPs, citing the difficulties of conducting such review within theposting time constraints of the various markets.

The grouptherefore urged FERC to clarify the intended goals of verification "so therespective ISOs and RTOs and their stakeholders may better identify what processescurrently in place support these goals and what challenges and concerns relatedto verification within the respective markets may need to be further considered."

"EachISO and RTO can have different methodologies for cost verification yet still maintainuniform pricing signals. This is no different from today within the $1,000/MWh caplimit. The ISO and RTOs do not all evaluate cost based or reference bids used formitigation in the same way," the IRC maintained.

Madeup of state commissions in the region, the Organization of PJM States all cost-based energy offersabove $1,000/MWh need to be verified before being allowed to set energy market pricesand recommended that both PJM's market monitor and the RTO share the responsibilityfor doing so.

Similarly,a group comprised of state officials in New England generally supported the proposedrule, saying it "appearsto achieve an appropriate balance" by allowing for regional variations. Inthat regard, the New England States Committee on Electricity noted that its regionalready has a process in place for allowing cost-based offers to set locationalmarginal prices and said the same process could be used for any offers above thecap.

Others disagree

Consumeradvocates from Indiana, Iowa, Michigan and Minnesota jointly FERC that they are supportive of establishinga soft offer cap of $1,000/MWh or the resource's verified cost-based incrementalenergy offer, saying that doing so provides "the best balance between keepingenergy prices reasonable and ensuring reliability in the unlikely event that energyprices would exceed the $1,000/MWh soft cap."

The advocatesnoted that MISO apparently has not needed to call on generators or accept bids thatexceeded $1,000/MWh, even during the polar vortex of January 2014, which coincidedwith both the concurrent explosion of TransCanada's natural gas pipeline and extremeshortages of propane. They therefore said the risk of costs rising above the $1,000/MWhoffer cap should be limited "and only under very extreme conditions would thissoft cap be exceeded."

As fora $2,000/MWh hard cap, the advocates said it is not needed in the MISO region giventhat energy prices have not exceeded the $1,000/MWh level. They also expressed concernthat a hard cap of $2,000/MWh "may cause a creeping issue by indicating thatprices could rise up to the $2,000/MWh cap."

Moreover,addressing concerns about the difficulties of verifying costs, the advocates notedthat MISO's market monitor is currently tracking daily, and sometimes more oftenthan daily, hubs and delivery points prices for gas/fuel and is already using thatinformation to make dynamic adjustments to gas/fuel cost included in energy offerscurrently in the MISO region. Thus, validating gas/fuel prices in a timely mannershould not be a problem, they said.

The NuclearEnergy Institute took aimat the proposal to allow for after-the-fact payments for resources that had costsin excess of $1,000/MWh but were unable to verify their costs prior to settlement."This approach risks exacerbating the distortions caused by uplift paymentsthat the commission is seeking to address in other elements of its efforts on priceformation," NEI said.

Morespecifically, NEI said that a resource facing costs in excess of $1,000/MWh mayhave little immediate incentive to go through the process of pre-settlement validationof costs if those costs can be recovered after the fact through make-whole payments."Going through the verification process would provide a public good to allmarket participants by producing a more accurate price signal but the private gainsfor the marginal producer are scant," NEI said.

"Ratherthan trying to concoct verification schemes that would enable the price signal toreflect market conditions," NEI urged FERC instead to raise the caps to sucha level that they do not produce an artificial constraint on LMP calculation. "Removingthe caps allows the market price to convey the appropriate information on the stateof the system even in times of great stress," NEI insisted.(RM16-5)