FERC issued a Notice of Proposed Rulemaking ("NOPR") on February 22, 2008, in which FERC proposes to improve the operation of organized wholesale electric markets in the areas of: (1) demand response and market pricing during a period of operating reserve shortage; (2) long-term power contracting; (3) market-monitoring policies; and (4) the responsiveness of regional transmission organizations ("RTO") and independent system operators ("ISO") to stakeholders and customers. Comments are due by April 21, 2008 (i.e., 45 days after publication of the NOPR in today's Federal Register).

(1) The Role of Demand Response: In order to further eliminate barriers to demand response and encourage the use of market prices to elicit demand response, FERC proposes that ISOs and RTOs comply with the following requirements:

  • accept bids from demand response resources in their markets for certain ancillary services, comparable to any other resource;
  • eliminate, during a system emergency, a charge to a buyer in the energy market for taking less electric energy in the real-time market than purchased in the day-ahead market;
  • permit an aggregator of retail customers to bid demand response on behalf of retail customers directly into the organized energy market, which would allow small retail loads that otherwise could not participate on an individual basis to participate in the markets by pooling their loads together;
  • modify their market rules, as necessary, to allow the market-clearing price, during periods of operating reserve shortage, to reach a level that rebalances supply and demand so as to maintain reliability while providing sufficient provisions for mitigating market power; and
  • study whether further reforms are necessary to eliminate barriers to demand response in organized markets. The Commission has been generally supportive of demand response. Demand response has the potential to help discipline prices by increasing demand elasticity. This is an evolving area of market rules among ISOs and RTOs.

(2) Long-Term Power Contracting: FERC proposes to require ISOs and RTOs to dedicate a portion of their web sites for market participants to post offers to buy or sell power on a long-term basis. This proposal would involve the development of an RTO/ISO web site "bulletin board" for posting long-term offers to sell or buy designed to facilitate the long-term contracting process by increasing the transparency of available sellers and buyers for market participants. FERC believes that the resulting improved information flow would increase liquidity among buyers and sellers and allow parties to post offers to sell or buy without making the RTO or ISO responsible for the content of the offers.

Finding the right solution for forward capacity markets has been a work in progress. The promise of long-term forward contracting would help projects obtain financing, manage risks and decrease the overall cost of capital for such projects, as well as help promote price stability. Voluntary bulletin boards represent an experiment capable of evolution. Many utilities and load serving entities, however, will not make financial commitments to long-term supplies absent confidence in the regulatory treatment, at the state level, of such investments or in the long-term viability of competitive retail markets.

(3) Methods to Strengthen Market Monitoring: With this proposal, FERC aims to enhance the independence of market monitoring and to increase the transparency of monitoring activities. FERC proposes to enhance the independence of market monitoring units by: (a) having the market monitoring unit report to the board of directors instead of to the management of the ISO/RTO; (b) guaranteeing adequate resources, access to market data and personnel; and (c) removing market power mitigation and tariff administration responsibilities from market monitoring units. In addition, FERC proposes that the market monitoring unit functions should include:

  • identifying ineffective market rules and recommending proposed rules and tariff changes;
  • reviewing and reporting on the performance of the wholesale markets to the RTO or ISO, FERC and other interested entities; and
  • notifying FERC's Office of Enforcement staff of instances in which a market participant's behavior requires investigation.

It will be left up to the ISO, RTO and their stakeholders to determine if its market monitoring unit should have an internal, external or hybrid structure. It will take time to see how these proposed changes, if adopted, would impact the market monitoring function and to determine who will handle market power mitigation and how. To the extent there was concern that independent market advisors were not consulted on issues on which ISOs/RTOs did not want critical, expert evaluation, the buck will stop at the board level under FERC's proposal.

(4) RTO/ISO Responsiveness to Customers and Stakeholders: FERC proposes to establish new criteria intended to ensure that an RTO or ISO is responsive to its customers and stakeholders, and ultimately to the customers who benefit from and pay for electricity services. These principles will include: (a) inclusiveness; (b) fairness in balancing diverse interests; (c) representation of minority positions; and (d) ongoing responsiveness. FERC proposes to require each RTO or ISO to submit a compliance filing demonstrating that it has in place or will adopt practices and procedures to ensure compliance with the above-referenced principles and that it is responsive to stakeholders and customers.

ISOs and RTOs must balance maintaining their independence and responsiveness to market participants, which can be challenging. ISOs and RTOs do not have shareholders and administer markets in which they cannot have a financial interest. The elusiveness of the goal does not make it any less worthy of attention. Bright ideas to impart accountability, while not causing confidentiality problems, may gain traction at FERC.

For More Information

  • Click here for the complete Notice of Proposed Rulemaking in RM07-19 (PDF)

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