UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION

Price Formation in Energy and Ancillary Services Markets Operated by Regional Transmission Organizations and Independent System Operators

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Docket No. AD14-14-000

COMMENTS OF THE EDISON ELECTRIC INSTITUTE

I.

INTRODUCTION On June 19, 2014, the Federal Energy Regulatory Commission’s (“Commission” or

“FERC”) issued a Notice directing Staff “to convene workshops as necessary to commence a discussion with industry on existing market rules and operational practices” related to use of uplift payments, offer price mitigation and offer price caps, scarcity and shortage pricing and operator actions that affect prices.1 Staff held workshops on September 8, 2014, October 28, 2014 and December 9, 2014 to discuss these issues. Pursuant to the Commission’s January 16, 2015 Notice Inviting Post-Technical Workshop Comments and the February 9, 2015 Notice Granting Extension of Time, the Edison Electric Institute (“EEI”) submits the following comments on the issues raised during the workshops in the above-referenced proceeding. EEI is the association of U.S. shareholder-owned electric companies. Our members serve approximately 99 percent of the ultimate customers in the shareholder-owned segment of the industry, and represent approximately 70 percent of the U.S. electric power industry. EEI’s diverse membership includes electric utilities operating in the energy and ancillary services markets operated by Regional Transmission Organizations (“RTO”) and Independent System 1

Notice, Price Formation in Energy and Ancillary Services Markets Operated by Regional Transmission Organizations and Independent System Operators, Docket No. AD14-14-000 (June 19, 2014) (“Notice”) at 3.

Operators (“ISO”). As such, EEI members are directly affected by the market rules and operational practices associated with price formation in the energy and ancillary services markets. EEI commends the Commission for holding the workshops to discuss the important issues associated with price formation in the energy and ancillary service markets in the wholesale markets operated by RTOs and ISOs. The discussion during the workshops illustrated the concerns that stakeholders had with price formation issues and the regional nature of many of the issues associated with price formation. Accordingly, answering the individual questions posed by the Commission is best left to each ISO/RTO and its market participants. Despite these differences, there are, however, some common principles that should be applied to guide the resolution of these issues: 

Dispatch-Based Pricing – Wholesale energy markets should provide accurate dayahead and real-time price signals in order to promote efficient operation and resource adequacy



Commitment – Getting the day-ahead commitment correct, including cooptimizing energy and reserves, creates and supports the right dispatch at the right price in the real-time market.

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Transparency – Out of market actions and payments in the real-time and dayahead markets should be minimized. To the extent possible, there should be transparency as to the reasons for out of market payments so that stakeholders and market participants are confident that the prices reflect market conditions and that the market is operating efficiently.

The RTOs and ISOs should consider these principles as they work to address price formation issues in their region. The Commission should to continue to focus on these issues and to provide the oversight needed to ensure that these issues are identified, prioritized and resolved.

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II.

COMMENTS Proper price formation is critical to efficient markets. Concerns with RTO/ISO price

formation have been noted in other technical conferences such as the one held in September 2013 to discuss capacity market issues2 and the one held on April 1, 2014 to discuss the impacts of the cold weather events during the winter of 2013 -2014.3 The discussion during these workshops highlighted the inter-related nature of these issues with other market issues and the need for continued Commission focus. The Commission has previously found that a single uniform clearing price method allows a market operator to select the most efficient units in the market.4 As the Commission has noted, “[i]deally, the locational energy market prices in the energy and ancillary services markets would reflect the true marginal cost of production, taking into account all physical system constraints, and these prices would fully compensate all resources for the variable cost of providing service.”5 EEI supports this goal and, as described below, recommends that the Commission require RTOs and ISOs to move towards achieving it. At the same time, EEI recognizes that there may be technical challenges associated with implementing all possible improvements to price formation in the immediate term to ensure that all costs are included in the market clearing price.6

2

Notice of Technical Conference, Centralized Capacity Markets in Regional Transmission Organizations and Independent System Operators, Docket No. AD13-7-000 (June 17, 2013). 3

Supplemental Notice of Technical Conference, Winter 2013-2014 Operations and Market Performance in Regional Transmission Organizations and Independent System Operators, Docket No AD14-8-000 (March 19, 2014). 4

See Midwest Independent Transmission System Operator, Inc., 102 FERC ¶ 61,196 at P 32 (2003).

5

Notice at 2.

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See, Midcontinent Independent System Operator Corp.,150 FERC ¶ 61,083 at P 18 (2015) (finding “MISO makes clear, and we agree, that MISO’s proposed solution is less desirable than an accurate inclusion of costs in the market

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The existing market rules for each region have generally been developed in consultation with stakeholders to address the issues in that region. As such, RTOs and ISOs will need to work with their stakeholders to determine the changes needed to the market rules. With these limitations in mind, EEI recognizes that implementing market rule changes necessary to achieve these objectives may be complicated, take time and may be inefficient if the implementation costs exceed the effect of the uplift. Nonetheless, RTOs and ISOs should be required to work towards achieving these objectives, as needed within their region.

The Commission’s efforts in

this proceeding have helped to identify areas in which improvements are needed to improve price formation and the Commission should continue to guide efforts in this area. A. Accurate Price Signals are Important for Guiding Investment Decisions The goal of the energy markets is to ensure that the market clearing prices reflect economic fundamentals and provide the market signals necessary to maintain reliability in the electric markets. This is especially important during this period of low natural gas prices and U.S. Environmental Protection Agency (“EPA”) regulations that are causing substantial changes in the generation fuel mix. Price signals in the energy and ancillary services markets, among other factors, can contribute to and inform investment decisions and affect reliability. Generators in RTO/ISO markets rely on these market signals to make investment and retirement decisions. As such, competitive wholesale energy markets should provide accurate price signals, in both the day-ahead and real-time markets, in order to promote efficient operation and resource adequacy. Ensuring that the day-ahead commitment is correct, including co-optimizing energy and

clearing prices. However, we find that, given technical limitations and lack of time available to test and mitigate the risks involved in modifying software and related systems, raising the cap would place the MISO system at undue risk”)

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reserves, is necessary to create and support dispatch signals in the real-time market. Cooptimized energy and reserve prices should provide market signals that encourage proper dayahead and real-time reliability planning, reserve planning, unit commitment, system dispatch and customer-based consumption decisions. EEI would encourage the markets to observe the principles of dispatch based pricing so that cleared LMPs are as consistent as possible with marginal cost of operating the system and that they reflect actual system operating conditions. This means that the market clearing price should reflect the cost of operating the marginal unit committed by the market operator in both the day-ahead and real-time markets. This could include ensuring that the market clearing prices reflect: all actions taken by system operators, including those taken for reliability events; the costs of all units that are run, taking account of costs such as start-up or no load costs; and the value of the services provided to the electric system such as operating reserves, voltage support, reactive power or, block-loaded or ramping units. The market clearing prices should also reflect shortage or emergency situations so that generators are provided accurate price signals and generators should be able to recover reasonable and supportable costs incurred in unexpected circumstances, particularly when such costs are incurred in response to operator directives. In addition to owning and operating generation resources, EEI members are also responsible for serving end use customers. Accurate price signals will help ensure that market participants are basing investment decisions on the true cost of serving load. Accurate price signals will also inform decisions regarding technology choices, generation investment decisions, transmission investment decisions, customer curtailment and retirement, which in the long term may lower prices for end use consumers as all market participants will be provided the price

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signals for investment.7 As William Berg, Exelon Corporation, indicated in his speaker materials: “If costs of dispatching units out-of-merit to support system needs are reflected in clearing prices, the transparency of these actions will encourage a market response that is efficient and competitive.”8 EEI would encourage the Commission to work with the RTOs and ISOs to help ensure that market clearing prices are accurate and reflective of the cost of serving load and the units committed. This will help ensure that the market provides efficient price signals that will help facilitate efficient and competitive outcomes that benefit both market participants and consumers. B. Out of Market Solutions and Payments Should be Minimized and Transparency Increased

In order to ensure that the market signals reflect all the units that are committed by the market operator, RTOs and ISOs should work to minimize out of market solutions and payments as they interfere with the competitive price signals needed for efficient dispatch in the day-ahead and real-time wholesale markets. Generating units can be dispatched out of merit for a number of reasons such as committing plants to run at minimum levels to maintain ramping capabilities; dispatching units to address local reliability issues; or tight operating conditions . Providing out of market payments for these generating units’ means that the costs to operate these units are not included in the LMP and that the market signals are not provided to incent the most efficient solutions to address these concerns.

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See PJM Interconnection. L.L.C., 117 FERC ¶ 61,33,1 at P 141(2006) (noting that single, market-clearing auctions “benefit customers, because over time it results in an industry with more efficient sellers and lower prices.”) 8

Mitigating Uplift - FERC Price Formation Workshop on Uplift Payments, Speaker Material of William Berg, Exelon Corporation, Docket No. AD14-14-000 (September 8, 2014) at 4.

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In addition to minimizing out of market payments, RTOs and ISOs should also increase transparency and provide additional information on the out of market payments that are made by system operators. While the type and format of the information provided will have to be determined by each RTO and ISO in conjunction with their stakeholders, providing information and increasing transparency will help inform market design decisions and provide information that will facilitate investment decisions whether in new generation resources, in broader grid infrastructure investment or in customer based-load management. Increased transparency will also help ensure that market participants have the information necessary to work with RTOs and ISOs to develop the most effective solution for the issue necessitating the out of market payment. EEI encourages the Commission to work with the RTOs and ISOs to minimize and improve transparency of the out of market solutions used by RTOs and ISOs and the out of market payments made to market participants; consistent with confidentiality concerns. As Ivan Kimball, Consolidated Edison Co. of New York, indicated: “So I think it's important that we look at trying to identify the areas that are of large concern for the markets, that we use the information and work through that in the stakeholder process to try [to] identify and eliminate the systemic issues. There's always going to be uncertainty and volatility in the market. Getting that to a manageable place that's sustainable for the long term is I think in everybody's interest[.]”9

9

Id at 167:16-24.

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C. Next Steps While EEI recognizes that RTOs and ISOs are working on and discussing price formation issues with their stakeholders and with other RTOs and ISOs,10 some stakeholders feel a sense of urgency on these important issues. As such, EEI recommends that the Commission require each of the RTOs and ISOs to consult with their stakeholders and file by a specified date an annual status report that lists the price formation issues within their region that have already been addressed and those that remain to be addressed. For the issues that remain to be addressed, all of the RTOs and ISOs should provide a work plan which lists the issues by priority along with possible solutions, stakeholder positions, cost of implementation and the timeframe in which the RTO/ISO could reasonably address each issue. The Commission should monitor the progress being made on the work plans by requiring periodic reporting to the Commission. This reporting process will allow the Commission to continue to monitor the progress being made on the price formation issues, provide focus on these issues and provide policy direction to the RTOs, ISOs and stakeholders if needed. This process would be similar to one that has already been employed by the Commission on other issues. For example, the Commission required the NYISO to work with its neighboring RTOs/ ISOs to develop a comprehensive report on the loop flow issues around Lake Erie and develop an action plan;11 the Commission’s required status reports and issued an order on the PJM and

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For example, a pricing forum was held by the CA ISO on April 22, 2014 during which these issues were discussed with stakeholders with participation by other RTOs and ISOs. https://www.caiso.com/Pages/documentsbygroup.aspx?GroupID=F08E965E-2FFd-40CD-AC09-84815E210B9 11

See e.g. Order on Compliance Filing, New York Independent System Operator, Docket No. ER08-1281-004 (July 15, 2010).

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MISO Joint and Common Market Initiative;12 and the Commission’s continued focus on the issues arising in the capacity market technical conference and winter 2013-2014 cold weather events.13 The process used in these cases can be used as a template to monitor and provide structure and guidance on these price formation issues. If the Commission feels that progress is not being made by a RTO or ISO, it would then have the information necessary to take any needed action. Since the RTOs and ISOs have different market rules and constructs reflecting the needs in their region, efforts to improve price formation should consider regional-specific issues. Nonetheless, there may be some areas where a consistent approach should be followed particularly with respect to seams issues that may arise where consistency may benefit market participants that are located in or that participate in more than one RTO/ISO. Issues that may fall into this category include offer caps, transparency, and scarcity/shortage pricing. Requiring the RTOs and ISOs to file comprehensive status reports, as described herein, will help the Commission and stakeholders identify the issues that may benefit from a broader discussion and allow the Commission to facilitate development of solutions. As such, EEI encourages the Commission to continue to focus on these issues and to ensure that RTOs and ISOs continue to address these issues by implementing a reporting process. This will help the Commission monitor progress on these issues and provide stakeholders with a forum to approach the Commission if needed. 12

See Midcontinent Independent System Operator, Inc. (MISO) – PJM Interconnection, L.L.C. (PJM) Joint and Common Market Initiative, Docket No. AD14-3-000. 13

Order on Technical Conferences, Centralized Capacity Markets in Regional Transmission Organizations and Independent System Operators, Docket No. AD13-7-000 and Winter 2013-2014 Operations and Market Performance in Regional Transmission Organizations and Independent System Operators, Docket No AD14-8-000 (November 20, 2014).

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III.

CONCLUSION EEI appreciates the Commission’s focus on these issues and the opportunity to submit

comments. EEI encourages the Commission to continue to work with the RTOs and ISOs and to establish policy goals that promotes accurate price signals, unit commitment and transparency while minimizing out of market solutions and payments.

Respectfully Submitted,

Richard F. McMahon, Jr. Vice President Lopa Parikh Director, Regulatory Affairs Edison Electric Institute 701 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Phone: (202) 508-5058 Email: [email protected]

March 6, 2015

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