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Say Goodbye To $1,000 Price Caps in FERC-Jurisdictional RTOs; FERC To Allow Offers Above $1,000 Set LMP

January 22, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

FERC has issued a proposed rule to require that all of the FERC jurisdiction RTOs increase their offer caps above $1,000.

Specifically, FERC proposes that each jurisdictional RTO/ISO cap a resource's incremental energy offer used for purposes of setting LMPs to the higher of $1,000/MWh or that resource's verified cost-based incremental energy offer. The proposed offer cap would apply to incremental energy offers in both the day-ahead and real-time energy markets.

Noting that PJM recently adopted a hard cap of $2,000/MWh for offers (with LMPs allowed to be set higher in scarcity conditions), FERC sought comment on whether such a hard cap should be included in its generic rule regarding offer caps, and, if so, whether the hard cap should equal $2,000/MWh or another value.

Under FERC's proposal, the Market Monitoring Unit or the RTO/ISO would be required to verify the costs within a cost-based incremental energy offer above $1,000/MWh before that offer is used for purposes of calculating LMPs. The Commission sought comment regarding the Market Monitoring Unit's or the RTO/ISO's ability to timely verify the costs within incremental energy offers above $1,000/MWh prior to the day-ahead or real-time market clearing process, including whether the verification of physical offer components is also necessary.

FERC said to the extent the MMU or RTO cannot verify costs of an offer in excess of $1,000 prior to market clearing, but if they are later able to verify the costs in excess of $1,000, RTOs may provide a make-whole payment to the specific resource making the offer as backstop.

FERC said that all incremental energy offers above $1,000/MWh would be subject to market power mitigation and the attendant requirement that the offer be equal to the short-run marginal cost of the associated resource. Incremental energy offers at or below $1,000/MWh will continue to be subject to existing market power mitigation provisions.

FERC also preliminarily found that, as financial instruments, virtual transactions have no short-run marginal production costs and, thus, could not provide a cost-basis for a virtual transaction above $1,000/MWh. Accordingly, virtual transactions in RTOs/ISOs which currently limit virtual transaction bid/offer caps to existing incremental energy offer caps, could not exceed $1,000/MWh under the proposal. To the extent they currently exist, this proposal would not affect existing RTO/ISO tariff provisions that permit virtual transactions to exceed $1,000/MWh.

The Commission sought comment on whether prohibiting virtual transactions above $1,000/MWh could limit hedging opportunities, present opportunities for manipulation or gaming, create market inefficiencies, or have other undesirable consequences. Additionally, the Commission sought comment on alternatives which would allow virtual increment offers and decrement bids to be submitted and cleared at prices above $1,000/MWh.

FERC also said that it would consider other market design changes, such as changes to scarcity or shortage pricing or other penalty prices, associated with adopting the offer cap proposal which may be proposed by individual RTOs in their compliance filings.

Docket RM16-5

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