Energy Price Formation

On June 16, 2016, FERC implemented Price Formation Fixes for Organized Markets when we issued the following orders:

• Order No. 825 
• Order No. 831 
• Order No. 844 
   

Information on Market Rules and Operational Practices
 

• Use of uplift payments: Use of uplift payments can undermine the market’s ability to send actionable price signals. Sustained patterns of specific resources receiving a large proportion of uplift payments over long periods of time raise additional concerns that those resources are providing a service that should be priced in the market or opened to competition.
• Offer price mitigation and offer price caps: All RTOs/ISOs have protocols that endeavor to identify resources with market power and ensure that such resources bid in a manner consistent with their marginal cost. As a backstop to offer price mitigation, RTOs/ISOs also employ offer price caps that are designed to be consistent with scarcity and shortage pricing rules. These protocols require that the RTO/ISO’s measure of marginal cost be accurate and allow a resource to fully reflect its marginal cost in its bid. To the extent existing rules on marginal cost bidding do not provide for this, bids and resulting energy and ancillary service prices may be artificially low.
• Scarcity and shortage pricing: All RTOs/ISOs have tariff provisions governing operational actions (e.g., dispatching emergency demand response, voltage reductions, etc.) to manage operating reserves as they approach a reserve deficiency. These actions often are tied to administrative pricing rules designed to reflect degrees of scarcity in the energy and ancillary services markets. In addition, in the event of an operating reserve shortage, all RTOs/ISOs have adopted separate administrative pricing mechanisms designed to set prices that reflect the economic value of scarcity. To the extent that actions taken to avoid reserve deficiencies are not priced appropriately or not priced in a manner consistent with the prices set during a reserve deficiency, the price signals sent when the system is tight will not incent appropriate short- and long-term actions by resources and load.
• Operator actions that affect prices: RTOs/ISO operators regularly commit resources that are not economic to address reliability issues or un-modeled system constraints. Some activity may be necessary to maintain system reliability and security. However, to the extent RTOs/ISOs regularly commit excess resources, such actions may artificially suppress energy and ancillary service prices or otherwise interfere with price formation.