Offer Caps in Markets Operated by Regional Transmission Organizations and Independent System Operators, 5951-5965 [2016-01813]
Agencies
[Federal Register Volume 81, Number 23 (Thursday, February 4, 2016)] [Proposed Rules] [Pages 5951-5965] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 2016-01813] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF ENERGY Federal Energy Regulatory Commission 18 CFR Part 35 [Docket No. RM16-5-000] Offer Caps in Markets Operated by Regional Transmission Organizations and Independent System Operators AGENCY: Federal Energy Regulatory Commission, Energy. ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: The Federal Energy Regulatory Commission is proposing to revise its regulations to require that each regional transmission organization (RTO) and independent system operator (ISO) cap each resource's incremental energy offer to the higher of $1,000/MWh or that resource's verified cost-based incremental energy offer. DATES: Comments are due April 4, 2016. ADDRESSES: Comments, identified by docket number, may be filed in the following ways:Electronic Filing through https://www.ferc.gov. Documents created electronically using word processing software should be filed in native applications or print-to-PDF format and not in a scanned format. Mail/Hand Delivery: Those unable to file electronically may mail or hand-deliver comments to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street NE., Washington, DC 20426. Instructions: For detailed instructions on submitting comments and additional information on the rulemaking process, see the Comment Procedures Section of this document. FOR FURTHER INFORMATION CONTACT: Emma Nicholson (Technical Information), Office of Energy Policy and Innovation, Federal Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 502-8846, emma.nicholson@ferc.gov. Pamela Quinlan (Technical Information), Office of Energy Market Regulation, Federal Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 502-6179, pamela.quinlan@ferc.gov. Anne Marie Hirschberger (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 502-8387, annemarie.hirschberger@ferc.gov. SUPPLEMENTARY INFORMATION: Table of Contents Paragraph Nos. I. Background........................................ 6. A. Offer Caps and Market Power Mitigation in RTOs/ 8. ISOs............................................ B. Offer Cap Waivers and Tariff Changes.......... 12. C. Comments About Offer Caps..................... 18. 1. Need To Modify the Offer Cap.............. 19. 2. Role of the Offer Cap in Market Power 23. Mitigation.................................. 3. Alternative Offer Cap Designs............. 27. 4. RTO/ISO Seams and the Offer Cap........... 38. 5. Other Considerations...................... 40. II. Need for Reform and Commission Proposal.......... 42. A. Need for Reform............................... 43. [[Page 5952]] B. Alternative Offer Cap Proposals Discussed in 49. Comments........................................ C. Commission Proposal........................... 52. 1. Offer Cap Structure....................... 53. 2. Cost-Based Incremental Energy Offer 56. Verification................................ 3. Resource Neutrality....................... 69. 4. Seams Issues.............................. 70. 5. Other Considerations...................... 72. 6. Comments Sought on This Proposal.......... 73. III. Compliance...................................... 74. IV. Information Collection Statement................. 76. V. Regulatory Flexibility Act Certification.......... 80. VI. Environmental Analysis........................... 82. VII. Comment Procedures.............................. 83. VIII. Document Availability.......................... 87. Appendix A:.......................................... List of Short Names/Acronyms of Commenters........... 1. In this Notice of Proposed Rulemaking (NOPR), the Federal Energy Regulatory Commission (Commission) is proposing to revise its regulations to require that each regional transmission organization (RTO) and independent system operator (ISO) cap each resource's incremental energy offer \1\ to the higher of $1,000/MWh or that resource's verified cost-based incremental energy offer. Under this proposal, verified cost-based incremental energy offers above $1,000/ MWh would be used for purposes of calculating Locational Marginal Prices (LMPs). --------------------------------------------------------------------------- \1\ The incremental energy offer is the portion of a resource's energy supply offer that varies with the output of the generator. --------------------------------------------------------------------------- 2. The Commission preliminarily finds that the offer cap \2\ on incremental energy offers (offer cap) may no longer be just and reasonable for several reasons. The offer cap may unjustly prevent a resource from recouping its costs by not permitting that resource to include all of its short-run marginal costs within its energy supply offer (supply offer). The offer cap may result in unjust and unreasonable rates because it can suppress LMPs to a level below the marginal cost of production. Further, because of the offer cap, a resource with short-run marginal costs above that cap may choose not to offer its supply to the RTO/ISO, even though the market may be willing to purchase that supply.\3\ Finally, when several resources have short- run marginal costs above the offer cap but are unable to reflect those costs within their incremental energy offers due to the offer cap, the RTO/ISO is not able to dispatch the most efficient set of resources because it will not have access to the underlying costs associated with the multiple incremental energy offers above the offer cap. --------------------------------------------------------------------------- \2\ The offer cap for purposes of this NOPR refers to the $/MWh limit on day-ahead and real-time incremental energy offers, and not any limits or penalty rates that may apply in the capacity or ancillary services markets. \3\ Resources that are subject to must-offer requirements, such as resources with a capacity supply obligation, are required to submit a supply offer to the energy market. Many resources are subject to must-offer requirements in either the day-ahead or real- time markets. The proposed reform would ensure that such a resource has an economic incentive that matches its tariff obligation. It would also provide an economic incentive to those resources that are not subject to a must-offer requirement. --------------------------------------------------------------------------- 3. To remedy these potential problems associated with the offer cap, the Commission proposes to require that each RTO/ISO cap each resource's incremental energy offer to the higher of $1,000/MWh or an incremental energy offer based on that resource's short-run marginal cost (cost-based incremental energy offer). Under the proposal, the costs underlying each cost-based incremental energy offer above $1,000/ MWh must be verified before that offer could be used for purposes of calculating LMPs. Under this proposal, the Market Monitoring Unit or the RTO/ISO, as prescribed in the RTO/ISO tariff and consistent with Order No. 719,\4\ must verify the costs within a cost-based incremental energy offer.\5\ The proposed offer cap would be resource neutral, that is, any resource, regardless of fuel-type, would be eligible to submit a cost-based incremental energy offer above $1,000/MWh. --------------------------------------------------------------------------- \4\ Wholesale Competition in Regions with Organized Electric Markets, Order No. 719, FERC Stats. & Regs. ] 31,281, at PP 370-375 (2008), order on reh'g, Order No. 719-A, FERC Stats. & Regs. ] 31,292 (2009), order on reh'g, Order No. 719-B, 129 FERC ] 61,252 (2009). See also 18 CFR 35.28(g)(3)(iii)(B) (2015). \5\ Pursuant to 18 CFR 35.28(g)(3)(iii)(B), either the internal or external market monitor can ``provide the inputs required to conduct prospective mitigation . . . including, but not limited to reference levels, identification of system constraints, and cost calculations.'' 18 CFR 35.28(g)(3)(iii)(B) (2015). However, prospective mitigation may only be carried out by an internal market monitor if the RTO/ISO has a hybrid Market Monitoring Unit structure. 18 CFR 35.28(g)(3)(iii)(D) (2015). --------------------------------------------------------------------------- 4. The Commission proposes to make a generic change to the offer cap applicable to all RTOs/ISOs through a rulemaking to avoid exacerbating seams issues. Seams issues could arise if one RTO/ISO has an offer cap that materially differed from a neighboring RTO/ISO's offer cap. Different offer caps in neighboring RTOs/ISOs could result in flows that depend on the level of the two offer caps as opposed to economics or reliability needs. 5. The Commission seeks comment on these proposed reforms sixty (60) days after publication of this NOPR in the Federal Register. I. Background 6. On June 19, 2014, the Commission initiated the price formation proceeding.\6\ In initiating that proceeding, the Commission stated that there may be opportunities for the RTOs/ISOs to improve the energy and ancillary service price formation process. Staff conducted outreach and convened technical workshops on the following four general issues: (1) Use of uplift payments; (2) offer price mitigation and offer caps; (3) scarcity and shortage pricing; and (4) operator actions that affect prices.\7\ During the fall of 2014, Commission staff convened three technical workshops and Commission staff issued reports on these topics. At the October 28, 2014 technical workshop, Commission staff explored, among other topics, the $1,000/MWh offer cap, including the purpose of the offer cap and the role it plays in market power mitigation.\8\ [[Page 5953]] While this action proposes to address mitigation relevant to energy offers above $1,000/MWh in RTO/ISO markets, the Commission has also instructed staff to undertake a more comprehensive review of the market power mitigation rules in the RTO/ISO markets. --------------------------------------------------------------------------- \6\ Price Formation in Energy and Ancillary Services Markets Operated by Regional Transmission Organizations and Independent System Operators, Notice, Docket No. AD14-14-000 (June 19, 2014) (Price Formation Notice). \7\ Id. at 1, 3-4. \8\ See Supplemental Notice of Workshop on Price Formation: Scarcity and Shortage Pricing, Offer Mitigation, and Offer Caps in RTO and ISO Markets, Docket No. AD14-14-000 (Oct. 10, 2014). --------------------------------------------------------------------------- 7. Two of the Commission's goals in the price formation proceeding are relevant here. First, clearing prices in the energy and ancillary services markets should ideally ``reflect the true marginal cost of production, taking into account all physical system constraints.'' \9\ Second, LMPs should ``ensure that all suppliers have an opportunity to recover their costs.'' \10\ Establishing LMPs that accurately reflect the marginal cost of production is a central goal of the price formation effort. This goal is important because LMPs are an effective way to communicate information to market participants about the cost of providing the next unit of energy. In the short-run, accurate price signals from LMPs are particularly important during high price periods because they provide a signal to customers to reduce consumption and a signal to suppliers to increase production or to offer new supplies to the market. In the long-run, accurate price signals from LMPs are important because they inform investment decisions. It is also important that RTOs/ISOs give resources the opportunity to recover their costs because failing to do so may discourage resources from participating in RTO/ISO energy markets. Adequate investment in resources and participation of resources in RTO/ISO energy markets are necessary to ensure economic and reliable energy for consumers. --------------------------------------------------------------------------- \9\ Price Formation Notice at 2. \10\ See Price Formation in Energy and Ancillary Servs. Mkts. Operated by Reg'l Transmission Orgs. & Indep. Sys. Operators, 153 FERC ] 61,221, at P 2 (2015); see also Price Formation Notice at 2. --------------------------------------------------------------------------- A. Offer Caps and Market Power Mitigation in RTOs/ISOs 8. Supply offers in day-ahead and real-time energy markets consist of both physical components and financial components. The physical components of a supply offer describe the resource's physical operating parameters, such as its minimum and maximum operating limits in a given day-ahead or real-time interval, and are denominated in MW, MWh, time, or some combination thereof. The financial components of a supply offer are denominated in dollars (e.g., $/start and $/MWh) and represent the costs underlying a resource's offer to supply electricity in a given interval. The key financial components of a supply offer are the start- up cost, no-load cost, and incremental energy offers. A resource includes its costs that vary with output in its incremental energy offer, which typically consists of a supply curve made up of multiple (price, quantity) pairs that indicate the price, expressed in $/MWh, that a resource is willing to accept to produce a given quantity of energy.\11\ --------------------------------------------------------------------------- \11\ RTOs/ISOs typically restrict incremental energy supply curves to ten price and quantity pairs (i.e., ($/MWh, MW)). --------------------------------------------------------------------------- 9. The LMP reflects the marginal cost of serving load at a specific location, given the set of generators that are dispatched and the limitations of the transmission system.\12\ The LMP is calculated by an RTO/ISO as the sum of three components: An energy charge, a congestion charge, and a charge for transmission losses. The energy and congestion components of the LMP are established based on several factors, including the marginal resource's incremental energy offer, specifically the $/MWh price associated with the MW output of the marginal resource. --------------------------------------------------------------------------- \12\ See Federal Energy Regulatory Commission, Division of Energy Market Oversight Office of Enforcement, Energy Primer, at 60 (Nov. 2015), https://www.ferc.gov/market-oversight/guide/energy-primer.pdf. --------------------------------------------------------------------------- 10. All six Commission-jurisdictional RTOs/ISOs have imposed a $1,000/MWh cap on incremental energy offers.\13\ The offer cap remains at $1,000/MWh in all RTOs/ISOs except PJM because, as discussed further below, the Commission recently approved PJM's proposal to raise the offer cap on cost-based offers in PJM to $2,000/MWh.\14\ In each RTO/ ISO, a resource's incremental energy offer is subject not only to the offer cap, but also to market power mitigation provisions.\15\ The Market Monitoring Unit for each RTO/ISO currently oversees, and in some cases implements, the market power mitigation provisions. In general, when a resource's incremental energy offer is mitigated, that offer is replaced with an estimate of a competitive offer or an estimate of that resource's short-run marginal cost.\16\ In most instances, once mitigated, a resource's offer is eligible to set LMP.\17\ Mechanically, the RTOs/ISOs have adopted mitigation rules that either develop a proxy for a competitive offer or explicitly estimate short-run marginal cost. Because we expect that a competitive offer will closely track a resource's short-run marginal cost, both methods for mitigating offers should arrive at roughly the same result. The Market Monitoring Units in CAISO, MISO, ISO-NE., and NYISO typically mitigate the resource's incremental energy offer to the proxy of a competitive offer that is calculated by the Market Monitoring Unit.\18\ However, these RTOs/ISOs also have provisions whereby the Market Monitoring Unit, often after consultation with the resource itself, can estimate the resource's short-run marginal cost, which will form the basis of that resource's mitigated incremental energy offer. In PJM and SPP, resource owners develop cost-based incremental energy offers consistent with the requirements of these RTOs' tariffs and business practice manuals and those cost-based offers are subject to review by the Market Monitoring Unit.\19\ --------------------------------------------------------------------------- \13\ See, e.g., California Independent System Operator Corporation (CAISO), eTariff, 39.6.1.1 (11.0.0); ISO New England Inc. (ISO-NE), Transmission, Markets and Services Tariff, Market Rule 1, III.1.10.1A(d)(ix), III,1.10.IA(c)(iv), III.2.6(b)(i), and III.A.15.1(b) (27.0.0); Midcontinent Independent System Operator, Inc. (MISO), FERC Electric Tariff, 39.2.5 (35.0.0), 39.2.5A (34.0.0), 39.2.5B (34.0.0), 40.2.5 (35.0.0), 40.2.6 (35.0.0) and 40.2.7 (33.0.0); New York Independent System Operator, Inc. (NYISO), NYISO Tariffs, NYISO Markets and Services Tariff, 21.4 and 21.5.1 (7.0.0); PJM Interconnection, L.L.C. (PJM), Intra-PJM Tariffs, OATT, Tariff Operating Agreement, Attachment K, Appendix, 1.10.1A(d) (24.0.0); Southwest Power Pool, Inc. (SPP), OATT, Sixth Revised Volume No. 1, Attachment AE, Section 4.1.1 (2.0.0). \14\ PJM Interconnection L.L.C., 153 FERC ] 61,289, at P 25 (2015) (PJM 2015/16 Offer Cap Order). The tariff provisions related to the offer cap do not have a sunset date. \15\ See 18 CFR 35.28(g)(3)(iii)(B)-(D) (2015). \16\ The RTOs/ISOs use different terms for a mitigated offer. ISO-NE., MISO, and NYISO mitigate supply offers to a ``Reference Level.'' See ISO-NE., Transmission Markets and Services Tariff, Market Rule 1, III.A.7.2; MISO FERC Electric Tariff, 64.1.4 (30.0.0); NYISO, NYISO Tariffs, NYISO Markets and Services Tariff, 23.3.1.4 (11.0.0). CAISO mitigates supply offers to ``Default Energy Bids.'' See CAISO, eTariff, 39.7.1 (11.0.0). PJM mitigates supply offers to a ``cost-based offer.'' See PJM Operating Agreement, Schedule 1, 1.10.1A (24.0.0) and 6.4.1 (7.0.0). SPP mitigates supply offers to a ``Mitigated Energy Bid.'' See SPP OATT, Sixth Revised Volume No. 1, Attachment AF, 3.2 (7.0.0). For purposes of this NOPR, the offers RTOs/ISOs use for purposes of mitigation will be referred to as ``cost-based offers.'' \17\ There are exceptions to this eligibility, for instance, when a resource is committed outside of the market clearing process. \18\ See supra n.16. \19\ PJM resources develop cost-based offers pursuant to PJM Manual 15: Cost Development Guidelines. SPP resources develop Mitigated Energy Bids pursuant to SPP's Mitigated Offer Guidelines in the SPP Market Protocols. --------------------------------------------------------------------------- 11. While the offer cap restricts incremental energy offers, the offer cap does not limit LMPs to the level of the offer cap (be it $1,000/MWh or $2,000/MWh) because the congestion and loss components of the LMP can cause the LMP to exceed the offer cap. Scarcity pricing and emergency purchases can [[Page 5954]] also cause LMPs to exceed the offer cap even though incremental energy offers are limited by the offer cap. B. Offer Cap Waivers and Tariff Changes 12. The $1,000/MWh offer cap dates back to 1999 when PJM first launched its market.\20\ According to PJM's market monitor, PJM's offer cap was then set to a level that stakeholders considered ``beyond the possible pale'' of a resource's short-run marginal cost.\21\ PJM states that its $1,000/MWh offer cap was never intended to limit incremental energy offers below a resource's marginal cost to produce energy.\22\ --------------------------------------------------------------------------- \20\ See Docket Nos. OA97-261-000 and ER97-1082-000 (Apr. 1, 1997); Pennsylvania-New Jersey-Maryland Interconnection, 81 FERC ] 61,257 (1997). \21\ Scarcity and Shortage Pricing, Offer Mitigation and Offer Caps Workshop, Docket No. AD14-14-000, Tr. 209:18-22 (Oct. 28, 2014). \22\ PJM Comments at 2. All comments cited herein were submitted in Docket No. AD14-14-000 on or about March 6, 2015. --------------------------------------------------------------------------- 13. Extreme weather during the winter of 2013/14, dubbed the ``Polar Vortex,'' caused PJM and NYISO to request tariff waivers associated with the $1,000/MWh offer cap. During the Polar Vortex, various weather-related conditions led to a significant increase in the price of natural gas.\23\ Natural gas prices at two key pricing points in PJM rose above $120 per million British Thermal Units (MMBtu), which could have caused some PJM resources with must-offer requirements to operate at a loss because their short-run marginal costs were above the $1,000/MWh offer cap.\24\ --------------------------------------------------------------------------- \23\ See, e.g., FERC Staff, Commission and Industry Actions Relevant to Winter 2013-14 Weather Events (Oct. 16, 2014), https://www.ferc.gov/media/news-releases/2014/2014-4/10-16-14-A-4-presentation.pdf. \24\ PJM Interconnection, L.L.C., 146 FERC ] 61,041, at P 2, order on reh'g, 149 FERC ] 61,059 (2014). For example, a natural gas resource with a heat rate of 8,350 Btu/kWh could have short-run marginal fuel costs above $1,000/MWh if the natural gas price exceeds $120/MMBtu. --------------------------------------------------------------------------- 14. In response, on January 23, 2014, PJM filed concurrently two tariff waiver requests related to its offer cap. In its first request, which the Commission granted for the January 24-February 10, 2014 period, PJM requested that certain resources with cost-based offers above $1,000/MWh receive uplift payments to recoup those costs.\25\ In its second request, which the Commission granted for the February 11- March 31, 2014 period, PJM requested that certain resources be allowed to submit cost-based offers in excess of $1,000/MWh and cost-based offers were used for purposes of calculating LMPs.\26\ --------------------------------------------------------------------------- \25\ Id. P 1. \26\ PJM Interconnection, L.L.C., 146 FERC ] 61,078, at PP 3-4 (2014). --------------------------------------------------------------------------- 15. Similarly, high natural gas prices in New York prompted NYISO to file a waiver request related to its offer cap.\27\ Natural gas prices at the Transco Zone 6 NY hub in New York rose above $120/MMBtu in January 2014. In response, NYISO requested that resources be permitted to recover any unrecovered costs above $1,000/MWh through uplift payments. The Commission granted NYISO's requested waiver for the January 22-February 28, 2014 period.\28\ --------------------------------------------------------------------------- \27\ N.Y. Indep. Sys. Operator, Inc., 146 FERC ] 61,061, at PP 2-4 (2014). \28\ Id. P 24. --------------------------------------------------------------------------- 16. In the following winter of 2014/15, citing concerns about the potential for a repeat of the high natural gas prices experienced during the Polar Vortex, PJM and MISO submitted fillings to allow recovery of costs above $1,000/MWh during the winter months. Both PJM \29\ and MISO \30\ expressed concerns that the $1,000/MWh offer cap could prevent a resource from recouping its short-run marginal costs. The Commission accepted tariff provisions that temporarily raised PJM's offer cap on cost-based offers to $1,800/MWh during the January 16- March 31, 2015 period.\31\ The Commission granted a waiver that permitted resources in MISO to include incremental energy costs in excess of $1,000/MWh in the no-load component of their supply offers during the December 20, 2014-April 30, 2015 period.\32\ When accepting PJM's proposal and granting MISO's waiver request, the Commission reasoned that market conditions during the previous 2013/14 winter demonstrated that the $1,000/MWh offer cap could prevent resources from submitting incremental energy offers that reflect their marginal costs and could therefore force resources to offer to sell electricity below cost.\33\ Tariff provisions related to the offer cap in both MISO and PJM reverted back to their original form in spring 2015. --------------------------------------------------------------------------- \29\ PJM Interconnection L.L.C., 150 FERC ] 61,020, at P 5 (2015) (PJM 2014/15 Offer Cap Order). \30\ Midcontinent Indep. Sys. Operator, Inc., 150 FERC ] 61,083, at P 3 (2015) (MISO 2014/15 Offer Cap Order). \31\ PJM 2014/15 Offer Cap Order, 150 FERC ] 61,020. \32\ MISO 2014/15 Offer Cap Order, 150 FERC ] 61,083. \33\ See PJM 2014/15 Offer Cap Order, 150 FERC ] 61,020 at P 34; MISO 2014/15 Offer Cap Order, 150 FERC ] 61,083 at P 17. --------------------------------------------------------------------------- 17. For the winter of 2015/16, PJM \34\ and MISO \35\ again filed requests to modify their respective offer caps. The Commission accepted tariff revisions in PJM that would raise the offer cap on cost-based offers to $2,000/MWh for purposes of calculating LMPs going forward.\36\ In accepting the changes, the Commission reasoned that PJM's proposal would send transparent market signals, promote efficient resource selection, and address the risks caused by high natural gas prices while protecting consumers by requiring cost verification of incremental energy offers above $1,000/MWh.\37\ The Commission granted MISO's request to waive provisions related to the offer cap for the January 1, 2016-April 30, 2016 period. The MISO waiver for the winter of 2015/16 was virtually identical to the waiver for the winter of 2014/15 and allowed MISO resources to include incremental energy costs in excess of $1,000/MWh in the no-load component of their offers.\38\ --------------------------------------------------------------------------- \34\ PJM, Proposed Tariff Revisions, Docket No. ER16-76-000 (filed Oct. 14, 2015). \35\ MISO, Request for Waiver, Docket No. ER16-248-000 (filed Nov. 2, 2015). \36\ PJM 2015/16 Offer Cap Order, 153 FERC ] 61,289 at P 25. The tariff provisions related to the offer cap do not have a sunset date. \37\ Id. PP 25-26. Resources can submit cost-based offers above $2,000/MWh and PJM will use such offers for merit order dispatch, but incremental energy offers used for purposes of calculating LMP are capped at $2,000/MWh. \38\ Midcontinent Indep. Sys. Operator, Inc., 154 FERC ] 61,006 (2015) (MISO 2015/16 Offer Cap Order). --------------------------------------------------------------------------- C. Comments About Offer Caps 18. In its January 2015 notice inviting post-technical workshop comments in the price formation proceeding, the Commission asked specific questions about the $1,000/MWh offer cap and asked stakeholders to comment on various alternative offer cap designs.\39\ Comments about the $1,000/MWh offer cap focus on the need to modify the offer cap, the role that the offer cap plays in market power mitigation, alternative offer cap designs, potential seams issues, and other considerations. --------------------------------------------------------------------------- \39\ Price Formation in Energy and Ancillary Services Markets Operated by Regional Transmission Organizations and Independent System Operators, Notice Inviting Post-Technical Workshop Comments, Docket No. AD14-14-000, at 2-3 (Jan. 16, 2015). A list of commenters and the abbreviated names the Commission will use for them in this document appears in Appendix A. --------------------------------------------------------------------------- 1. Need To Modify the Offer Cap 19. Commenters differ about the need to raise or remove the $1,000/ MWh offer cap. Several commenters argue that the $1,000/MWh offer cap should be raised or removed entirely, given recent occurrences of high natural gas prices. [[Page 5955]] Some commenters cite the recent offer cap waiver orders as evidence that the current offer cap is not just and reasonable.\40\ Several commenters reference the Polar Vortex in the winter of 2013/14, when resources experienced marginal production costs in excess of $1,000/ MWh, as evidence that the current offer cap is inappropriate.\41\ For example, OMS states that it is appropriate to consider an upward revision or removal of the offer cap to ensure supply adequacy during extreme events such as those that occurred during the winter of 2013/ 14.\42\ --------------------------------------------------------------------------- \40\ ANGA Comments at 2; Brookfield Comments at 7; EPSA Comments at 24; Entergy Nuclear Power Marketing Comments at 11-12; Exelon Comments at 10-11; PJM Comments at 2-3; PJM Power Providers Comments at 2-4; SPP Comments at 1; Western Power Trading Forum Comments at 5-6. \41\ EPSA Comments at 21-24; Exelon Comments at 10-12; OMS Comments at 2; PJM Comments at 2-3; PJM Power Providers Comments at 2. \42\ OMS Comments at 2. --------------------------------------------------------------------------- 20. Several commenters also assert that the offer cap distorts price signals and creates market inefficiencies.\43\ Commenters state that the offer cap artificially suppresses clearing prices.\44\ Some commenters believe that the offer cap restricts market participants from receiving appropriate compensation for costs incurred legitimately.\45\ --------------------------------------------------------------------------- \43\ PJM Utilities Coalition Comments at 3-4; Western Power Trading Forum Comments at 5. \44\ Direct Energy Comments at 2; EPSA Comments at 21. \45\ ANGA Comments at 2-3; Xcel Comments at 2. --------------------------------------------------------------------------- 21. Several commenters stress that the offer cap should be high enough to ensure that resources can reflect their actual costs in supply offers.\46\ EPSA maintains that the offer cap was never intended to suppress marginal cost bidding.\47\ MISO states that the offer cap should be modified to ensure that all resources are able to recover at least the costs they incur to produce energy.\48\ MISO and PJM contend that an offer cap that prevents resource cost recovery can increase the likelihood that resources will be unavailable to system operators.\49\ SPP and Western Power Trading Forum state that raising the offer cap might reduce out-of-market operator actions and uplift.\50\ --------------------------------------------------------------------------- \46\ ANGA Comments at 2; Brookfield Comments at 7; Entergy Nuclear Power Marketing Comments at 11-12; ISO-NE Comments at 5; IRC Comments at 2-3; MISO Comments at 4; PJM Comments at 2; PJM Power Providers Group Comments at 2-4; Potomac Economics Comments at 3; Powerex Comments at 29-30; PSEG Companies Comments at 5-6; Western Power Trading Forum Comments at 5-6. \47\ EPSA Comments at 21-22. \48\ MISO Comments at 4. \49\ Id.; PJM Comments at 2. \50\ SPP Comments at 1; Western Power Trading Forum Comments at 5-6. --------------------------------------------------------------------------- 22. Some commenters oppose modifying the $1,000/MWh offer cap.\51\ CAISO, ISO-NE, and NYISO assert that, because resource marginal costs are well below $1,000/MWh, there is no evidence that the $1,000/MWh offer cap should be raised in their respective markets.\52\ CAISO opposes any effort to increase the offer cap until sufficient benefits are identified.\53\ NCPA, PG&E, and SCE state that the current offer cap ensures just and reasonable rates and mitigates market power in CAISO.\54\ NCPA and SCE state that the offer cap is sufficient in CAISO because generators there have never experienced costs above $1,000/ MWh.\55\ SCE adds that the marginal cost of the least efficient CAISO resource at the highest natural gas price seen in the region is only $390/MWh.\56\ APPA and NRECA assert that there is insufficient justification to remove offer caps nationwide.\57\ --------------------------------------------------------------------------- \51\ APPA and NRECA Comments at 30; CAISO Comments at 3; ELCON Comments at 6. \52\ CAISO Comments at 3; ISO-NE Comments at 3 & n.2; NYISO Comments at 4. \53\ CAISO Comments at 3. \54\ NCPA Comments at 2; PG&E Comments at 3; SCE Comments at 3; see also California State Water Project Comments at 2; New York Transmission Owners Comments at 2. \55\ NCPA Comments at 2-3; SCE Comments at 2. \56\ SCE Comments at 2. According to SCE, the $390/MWh figure assumes a heat rate of 17,000 Btu/kWh, slightly higher than the least efficient unit in CAISO, and a natural gas price of $23/MMBtu. \57\ APPA and NRECA Comments at 32. --------------------------------------------------------------------------- 2. Role of the Offer Cap in Market Power Mitigation 23. At the October 28, 2014 price formation technical workshop, several market monitors discussed the backstop role that the $1,000/MWh offer cap plays in market power mitigation. NYISO's internal market monitor stated that the offer cap provided a ``backstop'' assurance to protect consumers in the event that NYISO's market mitigation measures fail.\58\ Similarly, ISO-NE's internal market monitor stated that the offer cap is a device that limits the potential damage to consumers or the market in the event that market power mitigation measures are unsuccessful.\59\ CAISO's internal market monitor stated that the offer cap primarily functions as a ``damage control cap'' but also noted that the offer cap affects the penalty prices of constraints in CAISO's market software.\60\ Potomac Economics, which serves as an external market monitor for MISO, ISO-NE., and NYISO, stated that the offer cap is too high to address general market power concerns, but explained that the offer cap addresses gaming strategies that market participants may engage in to collect undue uplift payments.\61\ --------------------------------------------------------------------------- \58\ Scarcity and Shortage Pricing, Offer Mitigation and Offer Caps Workshop, Docket No. AD14-14-000, Tr. 205:6-15 (Oct. 28, 2014). \59\ Id. at 206:24-207:7. \60\ Id. at 210:14-23. \61\ Id. at 211:25-212:14. --------------------------------------------------------------------------- 24. In response to the Commission's request for comments on price formation topics, several commenters suggest that the offer cap's purpose has been supplanted by improvements in market monitoring and mitigation and the Commission's enforcement activity.\62\ Wisconsin Electric asserts that the offer cap is irrelevant because RTO/ISO market monitors have effective mitigation measures in place and can refer suspected manipulation to the Commission's Office of Enforcement.\63\ Direct Energy states that an offer cap is not necessary when resources cannot exercise market power because competition will discipline offers.\64\ GDF SUEZ argues that offer caps are the least efficient method of protection against uncompetitive offers because offer caps are indifferent to the specifics of a supply offer and do not reflect potentially changed circumstances since the offer cap level was established over ten years ago.\65\ --------------------------------------------------------------------------- \62\ ANGA Comments at 2-3; Entergy Nuclear Power Marketing Comments at 11; EPSA Comments at 22-23; Exelon Comments at 11-12; Wisconsin Electric Comments at 2-3; Xcel Comments at 2. \63\ Wisconsin Electric Comments at 2. \64\ Direct Energy Comments at 2. \65\ GDF SUEZ Comments at 3. --------------------------------------------------------------------------- 25. Several other commenters assert that the offer cap is a backstop measure to protect consumers against the exercise of market power during tight system conditions.\66\ Other commenters emphasize the importance of strengthening market monitoring and mitigation provisions if offer caps are eliminated or increased.\67\ ISO-NE asserts that while the offer cap has become less important with market power mitigation, the offer cap still serves as a ``fail-safe'' mechanism to protect consumers in the unlikely event that the market is not competitive and market power mitigation fails to assure competitive supply offers.\68\ OMS warns that any effort to raise or remove the offer cap must be based on the Commission's confidence not only in the ability of RTO/ISO market power mitigation provisions to prevent [[Page 5956]] generator market power abuses, but also in whether the prices of input costs were developed in a competitive market.\69\ --------------------------------------------------------------------------- \66\ ISO-NE Comments at 4; MISO Comments at 5-6; New York Transmission Owners Comments at 2-3; NYISO Comments at 3; TAPS Comments at 10-11; California State Water Project Comments at 2-3. \67\ Direct Energy Comments at 2; MISO Comments at 9; NCPA Comments at 3; New York Transmission Owners Comments at 4; Wisconsin Electric Comments at 2-3. \68\ ISO-NE Comments at 4. \69\ OMS Comments at 2. --------------------------------------------------------------------------- 26. Potomac Economics maintains that the offer cap is necessary to keep resources from exploiting any previously unknown flaws in market rules.\70\ Some commenters assert that due to load's inelastic demand for electricity, offer caps are necessary to protect consumers from excessive prices and to maintain confidence that rate structures are fair and nondiscriminatory.\71\ TAPS states that on normal days when there are no generators with marginal costs ``anywhere close to'' $1,000/MWh, there are still 3,000 to 4,000 MW offered at the offer cap.\72\ TAPS suggests that weakening the offer cap is particularly dangerous because energy markets cannot be halted, so if widespread abuse occurs, after-the-fact resettlements incur massive costs and diversion of resources.\73\ APPA and NRECA assert that the offer cap should only be increased if RTOs/ISOs can guarantee that all offers are cost-based in order to guarantee appropriate prices and prevent the need to re-run markets after-the-fact.\74\ --------------------------------------------------------------------------- \70\ Potomac Economics Comments at 3-4. \71\ ELCON Comments at 6; TAPS Comments at 10-11. \72\ TAPS Comments at 12-13 (citing Scarcity and Shortage Pricing, Offer Mitigation and Offer Caps Workshop, Docket No. AD14- 14-000, Tr. 217:17-21 (Oct. 28, 2014)). \73\ TAPS Comments at 11 (citing Written Statement of Patrick T. Connors on Behalf of WPPI Energy and the Transmission Access Policy Study Group Regarding Impacts of Offer Caps and Market Power Mitigation, at 5 (Dec. 3, 2014)). \74\ APPA and NRECA Comments at 31-32. --------------------------------------------------------------------------- 3. Alternative Offer Cap Designs 27. In its January 2015 notice inviting post-technical workshop comments in the price formation proceeding, the Commission sought comment on potential alternative offer cap designs, including (1) maintaining the $1,000/MWh offer cap and compensating resources for incremental energy costs above the $1,000/MWh offer cap through uplift; (2) adopting a floating offer cap that changes with natural gas prices; (3) raising the offer cap to a higher fixed level; and (4) allowing resources to submit cost-based offers above $1,000/MWh and allowing verified cost-based offers above $1,000/MWh to set LMP. a. Maintain Current Offer Cap With Uplift 28. Some commenters assert that infrequent events where production costs exceed $1,000/MWh can be addressed effectively through uplift payments without raising the offer cap or otherwise including such costs in the LMP.\75\ APPA and NRECA state they support generator recovery of legitimate and verified costs but assert that such costs should not necessarily be included in LMP.\76\ APPA and NRECA add that uplift will ensure cost recovery without risking market power abuse and what APPA and NRECA say would be the attendant increased unjust and unreasonable rates.\77\ --------------------------------------------------------------------------- \75\ Id. at 29-31; California State Water Project Comments at 2- 3; New York Transmission Owners Comments at 2-3. \76\ APPA and NRECA Comments at 31. \77\ Id. at 31. --------------------------------------------------------------------------- 29. APPA and NRECA assert that the market clearing process does not allow sufficient time to verify whether incremental energy offers above $1,000/MWh are in fact cost-based; thus, these commenters argue, such cost verification should occur after-the-fact, with costs in excess of the offer cap recovered through uplift.\78\ SCE and PG&E state that CAISO has tools to accommodate the rare instances when the $1,000/MWh offer cap is insufficient to recover a resource's costs.\79\ --------------------------------------------------------------------------- \78\ Id. at 31-32. \79\ PG&E Comments at 3-4; SCE Comments at 3. --------------------------------------------------------------------------- b. Floating Offer Cap 30. Several commenters support a floating offer cap that changes with generator input costs, such as the price of natural gas. Calpine asserts that offer caps should be flexible and responsive to changes in natural gas prices,\80\ and recommends that the Commission encourage each RTO/ISO to implement a floating offer cap.\81\ Powerex suggests that the offer cap could equal the higher of $1,000/MWh or some multiple of a pre-defined regional natural gas index.\82\ SPP states that a seasonal fixed offer cap might be appropriate.\83\ Similarly, OMS maintains that the offer cap need not be constant throughout the year if resource costs vary throughout the year.\84\ --------------------------------------------------------------------------- \80\ Calpine Comments at 4-6. \81\ Id. at 21. \82\ Powerex Comments at 30. \83\ SPP Comments at 1. \84\ OMS Comments at 3. --------------------------------------------------------------------------- 31. ISO-NE and MISO, however, argue that a floating offer cap would be difficult to implement.\85\ ISO-NE opposes basing the offer cap on an index that attempts to track fuel prices, arguing that doing so would be complex and difficult to implement because intra-day natural gas indices are opaque and day-ahead natural gas indices, while arguably less opaque, can become ``stale'' during the operating day.\86\ MISO argues that although it may consider a floating offer cap in the longer term, a transition to such an offer cap would likely require substantial system changes.\87\ ISO-NE asserts that if the Commission is concerned that a fixed offer cap lacks flexibility, the Commission should revisit the offer cap over time as the markets for the major fuels used in power generation continue to evolve.\88\ --------------------------------------------------------------------------- \85\ ISO-NE Comments at 4-6; MISO Comments at 5-7. \86\ ISO-NE Comments at 6. \87\ MISO Comments at 5-6. \88\ ISO-NE Comments at 6-7. --------------------------------------------------------------------------- c. Higher Fixed Offer Cap 32. Some commenters support raising the offer cap to a higher level. ANGA states that, at a minimum, the offer cap should be increased significantly to reduce unnecessary market distortions.\89\ Exelon argues that the current $1,000/MWh cap on market-based offers in PJM should be eliminated, but maintains that, if the offer cap remains in place, it should be raised to account for the highest reasonably expected offer, and that cost-based offers should be allowed to exceed the market-based offer cap.\90\ --------------------------------------------------------------------------- \89\ ANGA Comments at 3. \90\ Exelon Comments at 12. --------------------------------------------------------------------------- 33. If the Commission chooses to raise the offer cap, ISO-NE urges using a simple numerical value rather than a more complicated formula.\91\ ISO-NE is neutral on raising the offer cap but suggests that any changes to the offer cap level be made in a straightforward manner so that participants know with certainty what the offer cap will be when they make advance fuel-supply arrangements.\92\ MISO does not oppose raising the offer cap but favors a fixed offer cap to a floating offer cap in the short term.\93\ MISO states that a fixed offer cap simplifies the process of implementing related market mechanisms such as scarcity or shortage pricing, ancillary services, and transmission demand curves and notes that MISO's current market software systems were designed based upon a fixed offer cap.\94\ --------------------------------------------------------------------------- \91\ ISO-NE Comments at 6. \92\ Id. at 3-4. \93\ MISO Comments at 4-5. \94\ Id. at 5. --------------------------------------------------------------------------- 34. TAPS asserts that permanently increasing the offer cap to allow incremental energy offers above $1,000/MWh ``day-in and day-out'' would sacrifice the benefits of the current offer cap as a ``backstop'' protection against market power abuse to address ``extreme circumstances'' that rarely, if ever, [[Page 5957]] occur.\95\ APPA and NRECA argue that it is not necessary to increase the offer cap broadly because APPA and NRECA say there is no evidence that the $1,000/MWh offer cap is persistently flawed.\96\ APPA and NRECA add that resources' incremental energy offers only exceeded $1,000/MWh in PJM on ``just a few days in one month of one year.'' \97\ --------------------------------------------------------------------------- \95\ TAPS Comments at 13. \96\ APPA and NRECA Comments at 30-31. \97\ Id. at 30-31. --------------------------------------------------------------------------- d. Permitting Cost-Based Incremental Energy Offers Above $1,000/MWh 35. Some commenters argue that cost-based incremental energy offers should not be capped.\98\ PJM states that cost-based offers should not be subject to offer caps because offer caps impose arbitrary limits.\99\ PJM suggests that one approach may be to set a market-based offer cap on an annual basis at some percentage above the highest cost- based incremental energy offer from previous time periods.\100\ PJM Power Providers and PSEG Companies assert that cost-based offers should not be capped and should be eligible to set the LMP.\101\ APPA and NRECA state that if the Commission wishes to revise the offer cap, it should limit any increase in the offer cap to periods when production costs exceed $1,000/MWh and ensure that any changes to the offer cap are accompanied by assurances that protect consumers against market power abuse.\102\ Although TAPS does not support increasing the $1,000/ MWh offer cap, TAPS similarly states that if the Commission wants to take temporary or seasonal action, the Commission should at the very least require that any incremental energy offer above $1,000/MWh be verified by the market monitor to be cost-justified.\103\ --------------------------------------------------------------------------- \98\ Direct Energy Comments at 2; Exelon Comments at 12; PJM Comments at 3; PJM Power Providers Comments at 3-4; PSEG Companies Comments at 5. \99\ PJM Comments at 2-3. \100\ Id. at 4. \101\ PJM Power Providers Comments at 4; PSEG Companies Comments at 6. \102\ APPA and NRECA Comments at 30-32. \103\ TAPS Comments at 13-14. --------------------------------------------------------------------------- 36. APPA and NRECA, CAISO and NCPA, however, argue that cost-based incremental offers must be verified before the market clears in order to avoid potentially disruptive after-the-fact corrections to clearing prices, and these commenters raise concerns that it is not feasible to do so.\104\ CAISO does not believe there is a firm basis to verify the natural gas price included in supply offers because market participants might not purchase natural gas before submitting offers and because natural gas quotes might not be available. CAISO also states that natural gas prices and quotes may be subject to manipulation, thereby making fuel cost verification difficult.\105\ CAISO requests that if the Commission directs RTOs/ISOs to pay resources uplift for fuel costs above the offer cap, then only incremental fuel costs associated with the incremental energy offer be reimbursable. In contrast, CAISO states that costs such as natural gas pooling, imbalance penalties, or risk premiums should be recovered through capacity payments.\106\ --------------------------------------------------------------------------- \104\ APPA and NRECA Comments at 32; CAISO Comments at 6-7, NCPA Comments at 2. \105\ CAISO Comments at 4-6. \106\ Id. at 6. --------------------------------------------------------------------------- 37. TAPS contends that advance review and verification of cost- based incremental offers should be possible for most generators.\107\ Direct Energy states that RTOs/ISOs have sufficient time to verify natural gas costs in the day-ahead and real-time markets and suggests that LMPs can be ``flagged'' and revised after-the-fact should the RTOs/ISOs have any concerns.\108\ --------------------------------------------------------------------------- \107\ TAPS Comments at 14-15. \108\ Direct Energy Comments at 3-4. --------------------------------------------------------------------------- 4. RTO/ISO Seams and the Offer Cap 38. Most commenters state that offer caps should be the same for each RTO/ISO, to minimize potential seams issues.\109\ IRC, PJM, and PSEG Companies assert that transmission congestion and other market-to- market coordination will be disrupted if offer caps differ across markets.\110\ ISO-NE and NYISO contend that different offer caps in neighboring markets could create perverse interchange flows resulting from the level of the offer caps instead of based on economic merit or reliability needs.\111\ NYISO states that materially different offer caps between regions that depend on the same natural gas supply could require out-of-market operator actions to avoid reliability issues when natural gas prices are high.\112\ MISO maintains that consistent offer caps across RTOs/ISOs will also establish consistent shortage pricing between neighboring RTOs/ISOs.\113\ --------------------------------------------------------------------------- \109\ Brookfield Comments at 8; Calpine Comments at 5; EEI Comments at 9; EPSA Comments at 21; Exelon Comments at 13-14; IRC Comments at 2; ISO-NE Comments at 6-7; MISO Comments at 8; New York Transmission Owners Comments at 3-4; NYISO Comments at 4; PJM Comments at 4; PJM Power Providers Comments at 5-6; PJM Utilities Coalition Comments at 6; PSEG Companies Comments at 6-7; Potomac Economics Comments at 5; Western Power Trading Forum Comments at 6; Wisconsin Electric Comments at 4. \110\ IRC Comments at 2; PJM Comments at 4; PSEG Companies Comments at 6-7. \111\ ISO-NE Comments at 7; NYISO Comments at 5. \112\ NYISO Comments at 4-5. \113\ MISO Comments at 8. --------------------------------------------------------------------------- 39. In contrast, APPA and NRECA and NCPA state that offer cap levels should be set according to the needs of each individual RTO/ ISO.\114\ APPA and NRECA assert that the Commission should only consider raising the offer cap on a region-by-region basis where the evidence demonstrates a need for a higher offer cap.\115\ Direct Energy and PJM Utilities Coalition, respectively, state that different offer caps may be appropriate if the RTOs/ISOs use the same methodology to determine the offer caps or where the different offer cap levels represent true differences in cost.\116\ --------------------------------------------------------------------------- \114\ APPA and NRECA Comments at 29-30; NCPA Comments at 3. \115\ APPA and NRECA Comments at 32. \116\ Direct Energy Comments at 4; PJM Utilities Coalition Comments at 6. --------------------------------------------------------------------------- 5. Other Considerations 40. CAISO and MISO note that the offer cap level impacts other market parameters that affect LMPs, such as penalty prices associated with violating thermal or operating constraints that are contained in the RTO/ISO software used to calculate LMPs. SCE explains that when CAISO relaxes a transmission constraint, it uses the offer cap to set the congestion price.\117\ CAISO states it would have to increase constraint penalty prices, currently set to levels above the offer cap, to ensure that the market operators would dispatch economic offers prior to relaxing transmission constraints.\118\ MISO notes that some market parameters may be intrinsically tied to the maximum LMP in the energy market, including transmission constraint demand curves, emergency or scarcity pricing regimes, and some pricing of ancillary services.\119\ --------------------------------------------------------------------------- \117\ SCE Comments at 2. \118\ CAISO Comments at 5. \119\ MISO Comments at 5. --------------------------------------------------------------------------- 41. IRC and New York Transmission Owners state that changing the offer cap could affect natural gas markets.\120\ New York Transmission Owners argue that allowing higher offers to set the LMP might increase the price generators will pay for spot natural gas beyond competitive levels since there is no mitigation procedure to test whether resources paid too much for natural gas.\121\ IRC states that the Commission should focus on ensuring transparency and flexibility in natural gas markets to [[Page 5958]] assist RTOs/ISOs with gas price verification and to ameliorate natural gas price spikes.\122\ --------------------------------------------------------------------------- \120\ IRC Comments at 3; New York Transmission Owners Comments at 5. \121\ New York Transmission Owners Comments at 5. \122\ IRC Comments at 3. --------------------------------------------------------------------------- II. Need for Reform and Commission Proposal 42. In the following section, the Commission first explains the need to reform the current offer caps. The Commission next summarizes the alternative proposals that the Commission considered but declined to adopt. Finally, the Commission describes its proposal and the three requirements that underlie it. A. Need for Reform 43. As stated above, five of the six Commission-jurisdictional RTOs/ISOs currently have a $1,000/MWh offer cap.\123\ As noted previously, PJM currently has a $2,000/MWh offer cap on cost-based incremental energy offers used for purposes of calculating LMPs.\124\ When the Commission first accepted these offer caps, the Commission did so, in many instances, as temporary measures until larger market reforms were implemented.\125\ The offer caps have persisted, and are now viewed as a component of the market power mitigation measures adopted by RTOs/ISOs.\126\ The Commission has reviewed the offer caps and preliminarily finds that the offer caps currently in effect in all RTOs/ISOs are unjust and unreasonable for several reasons. --------------------------------------------------------------------------- \123\ See supra P 10. \124\ See supra P 17. \125\ See, e.g., Midwest Indep. Transmission Sys. Operator, Inc., 108 FERC ] 61,163, at PP 380-381, order on reh'g, 109 FERC ] 61,157 (2004), order on clarification, 111 FERC ] 61,367 (2005); N.Y. Indep. Sys. Operator, Inc., 97 FERC ] 61,095, at 61,496-97 (2001); ISO New England, Inc., 97 FERC ] 61,090, at 61,471. \126\ See supra PP 23-26. --------------------------------------------------------------------------- 44. First, the offer cap can prevent a resource from recouping its short-run marginal costs. With the current $1,000/MWh offer cap, a resource whose short-run marginal cost exceeds $1,000/MWh may operate at a loss. For example, in January 2014, resources in PJM faced high natural gas prices that caused their short-run marginal costs to exceed the $1,000/MWh offer cap in place at the time.\127\ Similarly, MISO states that high natural gas prices in January and March 2014 caused some MISO resources to experience costs in excess of the $1,000/MWh offer cap.\128\ --------------------------------------------------------------------------- \127\ PJM 2014/15 Offer Cap Order, 150 FERC ] 61,020 at P 2. \128\ MISO 2014/15 Offer Cap Order, 150 FERC ] 61,083 at P 2. --------------------------------------------------------------------------- 45. Second, the offer cap can impair price formation because it can result in LMPs that are suppressed below the marginal cost of production. An LMP that is less than the marginal cost of production may not be just and reasonable because it sends an inaccurate signal to load about the actual cost of producing the electricity, and to resources about the value of the next increment of supply. For example, if the marginal resource at a given location has a $1,100/MWh short-run marginal cost but faces a $1,000/MWh cap, that resource's incremental energy offer will be constrained to $1,000/MWh, and as a result, the energy component of LMP will be $100/MWh below the marginal cost of production. In a properly functioning market, the LMP should accurately reflect the costs of serving load and both customers and resources will be aware of that cost through an accurate and transparent price signal. 46. Third, the offer cap may discourage resources from offering their supply to the RTO/ISO when their short-run marginal costs exceed the offer cap, even though market participants may be willing to purchase that supply. For example, a resource may not be subject to a must-offer requirement, and thus be under no obligation to offer its supply to the energy market and therefore simply decide not to offer its supply to the market if its short-run marginal cost exceeds the offer cap. Both PJM and MISO state that an offer cap that prevents cost recovery can reduce the likelihood that resources with short-run marginal costs above the cap will offer their supply to the RTO/ ISO.\129\ --------------------------------------------------------------------------- \129\ MISO Comments at 4; PJM Comments at 2. --------------------------------------------------------------------------- 47. Fourth and finally, if several resources have short-run marginal costs above $1,000/MWh, the $1,000/MWh offer cap requires those resources to submit incremental energy offers equal to $1,000/ MWh, even if the resources face different costs. Under this scenario, the $1,000/MWh offer cap will prevent the RTO/ISO from observing the cost differences among these resources and the RTO/ISO will not be able to select the most efficient resources because the resources with costs above $1,000/MWh were not able to submit incremental energy offers consistent with their short-run marginal cost. For these reasons, the Commission preliminarily finds that the current offer caps result in rates that are unjust and unreasonable. In addition, these reasons illustrate that the current offer caps may not achieve the price formation goals discussed above. 48. The Commission considered several alternatives to achieve the price formation goals. On balance, the Commission has preliminarily determined that the alternative that best achieves the price formation goals is to retain the existing $1,000/MWh offer cap except in circumstances when a resource has verifiable short-run marginal costs in excess of $1,000/MWh. The discussion at the technical workshop and subsequent comments received suggest that the $1,000/MWh offer cap is appropriate in most circumstances and serves as an appropriate backstop to the existing market power mitigation rules. However, recent experience also suggests that some resources may face short-run marginal costs greater than $1,000/MWh and, in such infrequent circumstances, the $1,000/MWh offer cap inappropriately limits those resources' incremental energy offers and the resulting LMP. To the extent incremental energy offers can be verified, we believe a generic reform to allow offers and LMPs to exceed $1,000/MWh will enhance market efficiency and mitigate the potential for seams issues. B. Alternative Offer Cap Proposals Discussed in Comments 49. This section briefly discusses why the Commission has not proposed the other alternative offer cap designs. The Commission is not proposing the alternative that uses uplift payments to compensate resources with costs above the offer cap because, while uplift payments may ensure that a resource recoups its costs, such a proposal would not ensure that LMPs accurately reflect the marginal cost of production--a key goal of the price formation effort.\130\ --------------------------------------------------------------------------- \130\ Price Formation in Energy and Ancillary Services Markets Operated by Regional Transmission Organizations and Independent System Operators, Notice Inviting Post-Technical Workshop Comments, Docket No. AD14-14-000, at 2 (Jan. 16, 2015). --------------------------------------------------------------------------- 50. The Commission is not proposing a floating offer cap that would change with natural gas prices. This alternative proposal would be unduly preferential to natural gas-fueled resources and discriminatory towards resources that do not use natural gas as fuel because such a cap would only vary with the cost inputs of resources that use natural gas as fuel. As such, this alternative proposal could prevent a resource that does not use natural gas as a fuel to generate electricity from submitting a legitimate cost-based incremental energy offer if that offer is above the natural gas-based floating cap. Although natural gas fueled resources are currently the most likely resources to have short-run marginal costs above $1,000/MWh, this may not always be [[Page 5959]] the case. Furthermore, setting the offer cap for all resources based on the price of natural gas would allow non-natural gas resources to submit offers above $1,000/MWh and below the natural-gas based offer cap with no cost basis for doing so, thereby potentially allowing them to exercise market power when natural gas prices rise but when these resources' costs do not similarly rise. 51. Finally, the Commission is not proposing to raise the offer cap to a higher fixed level. A higher fixed offer cap could still limit a resource's increment
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