On October 20, 2011, FERC issued Order No. 755, revising its regulations in order to remedy undue discrimination in the procurement of frequency regulation in the organized wholesale electric markets and to ensure that providers of frequency regulation receive just and reasonable rates. FERC finds that regional transmission organization ("RTO") methods for compensating regulation service fails to compensate generators for all of the service they provide, or to appropriately compensate for the performance of the resources. For example, FERC said that RTOs compensate resources that closely follow dispatch instructions at the same rate as resources with inferior response rates. Accordingly, FERC found existing RTO compensation methods to be unjust, unreasonable, or unduly discriminatory. FERC ordered the RTOs to make compliance filings within 120 days from publication in the Federal Register to revise their tariffs to reflect the guidance provided by FERC.
FERC defined "frequency regulation" as the injection or withdrawal of real power by facilities that are capable of responding appropriately to the transmission system's frequency deviations or interchange power imbalances, measured by the balancing authority's "area control error" ("ACE"). Transmission systems operate at a frequency of 60 Hertz, and deviations outside of an acceptable range can damage equipment or cause power outages. Maintaining an acceptable ACE range is critical to system reliability; the North American Electric Reliability Corporation reliability rules approved by FERC set the permissible parameters for ACE under Control Performance Standards 1 and 2. Balancing authorities must have access to enough generation with short-term response capability to be able to keep the frequency of their systems in balance and, generally speaking, resources that can inject or withdraw energy quickly in response to the dispatch signal of the operator, called the ramp rate, are better at balancing the system than facilities with slower response times.
FERC faulted RTOs for not properly compensating generators for all of the regulation capacity that they provide (whether through "up" regulation when they inject energy, or "down" regulation when they effectively withdraw energy). It also said that RTOs fail to provide compensation that differentiates between resources with slower ramp rates from those that can respond more quickly.
FERC directed RTOs to make several changes. FERC said the RTOs must compensate frequency regulation resources based on the actual service provided. The payments must have two components: (1) a capacity payment that reflects the capacity held back from participation in the energy markets, and (2) a performance payment that reflects the amount of up and down regulation provided in response to the RTO's dispatch signals. FERC held that the capacity payments must be set at a uniform market clearing price that includes opportunity costs; RTOs were left to decide how best to calculate opportunity costs. FERC indicated that the opportunity cost calculation will reflect the opportunity to participate in the RTO's energy markets as well as other ancillary services markets.
FERC also required the performance payment to be market-based with all resources that are dispatched to be paid the same market clearing price. FERC said that each RTO is free to develop its own method to compensate resources for performance, and that such compensation need not be tied to the amount of ACE correction provided by the resource. Compensation, however, must be based on the absolute amount of up- and down-regulation the resource provides in response to the RTO's dispatch signal.