FERC Finalizes Rule to Strengthen and Improve Organized Wholesale Market Operations

October 22, 2008

On October 17, 2008, FERC issued Order No. 719, a Final Rule on Wholesale Competition in Regions with Organized Energy Markets. This Rule addresses four key aspects of the wholesale power market:

• demand response and market pricing during periods of operating reserve shortage; 
  
• long-term power contracting;
  
• market-monitoring policies; and 
  
• the responsiveness of regional transmission organizations (RTOs) and independent system operators (ISOs) to their customers and other stakeholders, and ultimately to the consumers who benefit from and pay for electricity services.

Those involved in energy trading will be particularly interested in the Commission's endorsement of reforms in RTO and ISO markets to ensure that the market price for energy reflects the value of energy during an operating reserve shortage. An RTO or ISO may phase the new pricing rules in over a period of years as long as the period is not protracted. The Commission did not mandate the method by which an RTO or ISO should achieve this "scarcity" pricing objective but suggested four approaches that an RTO or ISO may use to develop market rule changes to be filed with the Commission for consideration and approval. The four approaches are:

• RTOs and ISOs would increase the energy supply and demand bid caps above the current levels only during an emergency;
  
• RTOs and ISOs would increase bid caps above the current level during an emergency only for demand bids while keeping generation bid caps in place; 
  
• RTOs and ISOs would establish a demand curve for operating reserves, which has the effect of raising prices in a previously agreed-upon way as operating reserves grow short; and
  
• RTOs and ISOs would set the market-clearing price during an emergency for all supply and demand response resources dispatched equal to the payment made to participants in an emergency demand response program.