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FERC withdraws fast-start resource pricing rule, will focus on just 3 regions

The Federal Energy Regulatory Commission on Dec. 21 withdrew a proposal to reform the pricing policies for generation resources that can get up and running quickly to provide power in response to unforeseen system needs in markets operated by regional transmission organizations and independent system operators.

The agency decided the pricing rules already in place for so-called fast-start" resources in the Midcontinent ISO, ISO New England and California ISO do not need to be revised. FERC therefore withdrew the proposed rule (FERC docket RM17-3) that would have established a uniform set of fast-start pricing requirements for all RTO and ISO regions.

However, FERC launched separate investigations under Federal Power Act Section 206 to take a closer look at the fast-start pricing policies in the New York ISO, PJM Interconnection and Southwest Power Pool regions. Noting that the pricing policies in those regions differ in certain aspects, the commission said the separate investigations will consider whether their policies are unjust and unreasonable.

Under the proposed rule, released in December 2016, RTOs and ISOs would have had to adopt market rules meeting certain requirements when pricing fast-start resources. The problem the proposed rule sought to address is that market rules in some regions do not allow fast-start resources to set the market clearing price even when they are the marginal resource. And when they can set the market clearing price, that price may not be high enough to cover the fast-start resources' costs.

FERC said such a result is unjust and unreasonable because the clearing prices are not reflecting the value fast-start resources provide in maintaining grid reliability. In addition, the agency said such pricing fails to provide the proper investment incentives and creates the need for out-of-market uplift payments to make the resources whole. While several RTOs and ISOs have taken steps to address the issue, others have not, and FERC therefore proposed to set five standard pricing requirements.

Before voting to withdraw the proposed rule during the agency's Dec. 21 monthly open meeting, Commissioner Cheryl LaFleur said that while FERC initiatives to reform its pricing policies have not "been around as long as Star Wars," the current "batch" of efforts began in 2014. She stressed the importance of sending price signals that reflect the costs of providing power to meet unexpected needs, which are occurring more frequently given the changing power generation resource mix.

As for why FERC is not requiring any changes to MISO's and the ISO-NE's pricing policies, she said that over the past couple of years, those two regions already have largely implemented the best practices outlined by the commission. With respect to CAISO, LaFleur said she was persuaded by that grid operator's comments on the notice of proposed rulemaking that "this line of reform would provide limited benefit for them relative to their other priorities that they have going on right now."

Conversely, LaFleur said that while the NYISO was an early leader in dealing with fast-start pricing issues, "I still see the possibility through targeted reform to improve certain aspects of their tariff that may not be just and reasonable." She also believes that PJM and SPP could do more to conform their pricing rules to best practices.

FERC staff elaborated on that point during the FERC meeting by saying that because the NYISO, PJM and SPP implement fast-start pricing in different ways, the three investigative orders address different aspects of fast-start pricing that are specific to each RTO or ISO.

However, the three orders (EL18-33, EL18-34 and EL18-35) also address some common issues, such as whether the grid operators' tariffs should be revised to include fast-start resources' commitment costs in fast-start pricing and "to allow the relaxation of fast-start resources' economic minimum operating limits by up to 100 percent for purposes of setting prices."

The PJM and SPP orders also ask whether fast-start resources are being dispatched in a manner that minimizes production costs.

Suggesting that the power supply problems created by the polar vortex that hit the PJM region several years earlier have often been cited as the impetus for the U.S. Department of Energy's proposal to provide financial support to struggling nuclear and coal-fired power plants, Commissioner Robert Powelson stressed that fast-start resources can provide grid resiliency.

Having the ability to dispatch fast-start resources during system emergencies, such as those resulting from the polar vortex or recent hurricanes, shows the value they provide to the grid, Powelson said. But he also stressed the need to provide regional flexibility and said the commission struck the appropriate balance in the orders at issue.

The orders are "all part of us doing the boring good" to sustain the long-term viability of organized markets, Powelson said.

The fast-start pricing initiative was the third major pricing reform the agency officially pursued as part of its effort to improve price formation to support efficient investments in wholesale power markets. The first initiative was a final rule (FERC docket RM15-24) requiring grid operators to better coordinate when they settle real-time energy and operating reserves transactions with their dispatch of energy and the pricing of operating reserves. Another final rule (FERC docket RM16-5) revised the $1,000/MWh cap on energy supply offered in the day-ahead and real-time markets run by RTOs and ISOs.