[Federal Register Volume 81, Number 126 (Thursday, June 30, 2016)]
[Rules and Regulations]
[Pages 42881-42910]
[FR Doc No: 2016-15196]

Vol. 81

Thursday,

No. 126

June 30, 2016

Part III

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Part 35

Settlement Intervals and Shortage Pricing in Markets Operated by
Regional Transmission Organizations and Independent System Operators;
Final Rule

Federal Register / Vol. 81 , No. 126 / Thursday, June 30, 2016 /
Rules and Regulations

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM15-24-000; Order No. 825]

Settlement Intervals and Shortage Pricing in Markets Operated by
Regional Transmission Organizations and Independent System Operators

AGENCY:  Federal Energy Regulatory Commission.

ACTION:  Final rule.

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SUMMARY:  The Federal Energy Regulatory Commission (Commission) is
revising its regulations to address certain practices that fail to
compensate resources at prices that reflect the value of the service
resources provide to the system, thereby distorting price signals, and
in certain instances, creating a disincentive for resources to respond
to dispatch signals. We require that each regional transmission
organization and independent system operator align settlement and
dispatch intervals by: Settling energy transactions in its real-time
markets at the same time interval it dispatches energy; settling
operating reserves transactions in its real-time markets at the same
time interval it prices operating reserves; and settling intertie
transactions in the same time interval it schedules intertie
transactions. We also require that each regional transmission
organization and independent system operator trigger shortage pricing
for any interval in which a shortage of energy or operating reserves is
indicated during the pricing of resources for that interval. Adopting
these reforms will align prices with resource dispatch instructions and
operating needs, providing appropriate incentives for resource
performance.

DATES:  This rule will become effective September 13, 2016.

FOR FURTHER INFORMATION CONTACT:
Stanley Wolf (Technical Information), Office of Energy Policy and
Innovation, Federal Energy Regulatory Commission, 888 First Street NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Pamela Quinlan (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Alicia Cobb (Legal Information), Office of the General Counsel--Energy
Markets, Federal Energy Regulatory Commission, 888 First Street NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Order No. 825

Final Rule

Table of Contents

                                                         Paragraph No.

I. Introduction......................................                  1
II. Background.......................................                  9
III. Discussion......................................                 13
    A. Settlement Interval Reform....................                 13
        1. Need for Reform...........................                 13
        2. Settlement Interval Reform for Energy                      17
         Transactions and Operating Reserves.........
            a. Proposal..............................                 17
                i. Energy Transactions...............                 17
                ii. Operating Reserves...............                 21
            b. Current Practices in the RTOs/ISOs....                 22
                i. Energy Transactions...............                 22
                ii. Operating Reserves...............                 23
            c. Comments on the Proposed Settlement                    27
             Interval Reform.........................
                i. Comments From the RTOs/ISOs.......                 28
                ii. Comments by Market Monitors......                 36
                iii. Comments Supporting the Proposed                 39
                 Settlement Interval Reform..........
                iv. Comments Opposed to the Proposed                  49
                 Settlement Interval Reform..........
            d. Commission Determination..............                 53
                i. Energy Transactions...............                 53
                ii. Operating Reserves...............                 69
        3. Interties.................................                 74
            a. Commission Request for Comments.......                 74
                i. Comments by RTOs/ISOs.............                 75
                ii. Comments by Market Monitors......                 80
                iii. Comments in Support of Applying                  82
                 Settlement Reform to Interties......
                iv. Comments Opposed To Applying                      86
                 Settlement Reform to Interties......
            b. Commission Determination..............                 88
        4. Demand Response Resources.................                 92
            a. Comments..............................                 92
            b. Commission Determination..............                 98
        5. Load......................................                100
            a. Comments..............................                100
            b. Commission Determination..............                104
    B. Shortage Pricing Reform.......................                105
        1. Need for Reform...........................                105
        2. NOPR Proposal.............................                109
        3. Comments on the Proposed Shortage Pricing                 110
         Reform......................................
            a. Comments by RTOs/ISOs.................                110
            b. Comments by Market Monitors...........                121
            c. Comments Supporting the Shortage                      127
             Pricing Reform..........................
            d. Comments Recommending Changes to the                  137
             Shortage Pricing Reform.................
            e. Comments Opposed to the Proposed                      141
             Shortage Pricing Reform.................
        4. Commission Determination..................                161
    C. Compliance and Implementation.................                181
        1. Commission Proposal.......................                181

        2. Comments..................................                182
            a. Comments From RTOs/ISOs...............                183
            b. Comments Urging Flexibility in                        188
             Implementation..........................
            c. Compliance Filing Deadline............                191
            d. Implementation Deadline...............                192
            e. Simultaneous Implementation...........                200
            f. Costs.................................                201
        3. Commission Determination..................                204
    D. Requests Beyond the Scope of This Proceeding..                211
        1. Comments..................................                211
        2. Commission Determination..................                230
IV. Information Collection Statement.................                231
V. Environmental Analysis............................                236
VI. Regulatory Flexibility Act.......................                237
VII. Document Availability...........................                240
VIII. Effective Date and Congressional Notification..                243
APPENDIX: List of Commenters.........................

I. Introduction

    1. In this Final Rule, we address certain practices that fail to
compensate resources at prices that reflect the value of the service
resources provide to the system, thereby distorting price signals, and
in certain instances, creating a disincentive for resources to respond
to dispatch signals. We require, pursuant to section 206 of the Federal
Power Act (FPA),\1\ that each regional transmission organization (RTO)
and independent system operator (ISO) align settlement and dispatch \2\
intervals by: (1) Settling energy transactions in its real-time markets
at the same time interval it dispatches energy;
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    \1\ 16 U.S.C. 824e (2012).
    \2\ As mentioned in the Notice of Proposed Rulemaking, the
Commission sometimes uses the term ``dispatch'' as shorthand when
describing how RTOs/ISOs acquire and price energy and operating
reserves. With respect to operating reserves, the Commission uses
dispatch to describe the intervals at which they are acquired and
priced. See Settlement Intervals and Shortage Pricing in Markets
Operated by Regional Transmission Organizations and Independent
System Operators, 80 FR 58,393 (Sept. 29, 2015), FERC Stats. & Regs.
] 32,710, at P 1 (2015) (NOPR).
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    (2) settling operating reserves transactions in its real-time
markets at the same time interval it prices operating reserves; \3\ and
(3) settling intertie transactions \4\ in the same time interval it
schedules intertie transactions (settlement interval requirements). We
also require, pursuant to section 206 of the FPA, that each RTO/ISO
establish a mechanism to trigger shortage pricing for any interval in
which a shortage of energy or operating reserves is indicated during
the pricing of resources for that interval (shortage pricing
requirement).
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    \3\ Operating reserves refer to certain ancillary services
procured in the wholesale market, although they are often defined
differently in each RTO/ISO. Operating reserves typically include:
(a) Regulating Reserve, used to account for very short-term
deviations between supply and demand (e.g., 4 to 6 seconds); (b)
Spinning, or Synchronous Reserve, which is capacity held in reserve
and synchronized to the grid and able to respond within a relatively
short amount of time (e.g., within 10 minutes), to be used in case
of a contingency, such as the loss of a generator; and (c) Non-
Spinning Reserve, capacity that is not synchronized to the grid and
which can take longer to respond (e.g., within 10-30 minutes) in
case of a contingency. Federal Energy Regulatory Commission, Price
Formation in Organized Wholesale Electricity Markets: Staff Analysis
of Shortage Pricing, Docket No. AD14-14-000, at 3 n.7 (Oct. 2014),
http://www.ferc.gov/legal/staff-reports/2014/AD14-14-pricing-rto-iso-markets.pdf (Shortage Pricing Paper).
    \4\ Intertie transactions are transactions across RTO/ISO
borders, including imports, exports and wheel-through transactions.
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    2. Some current RTO/ISO settlement practices fail to reflect the
value of providing a given service, thereby distorting price signals
and failing to provide appropriate signals for resources to respond to
the actual operating needs of the market. One such practice occurs when
RTOs/ISOs dispatch resources every five minutes but perform settlements
based on an hourly integrated price, or when RTOs/ISOs schedule
intertie transactions every fifteen minutes, but perform settlements on
an hourly integrated price. This misalignment between dispatch and
settlement intervals distorts the price signals sent to resources and
fails to reflect the actual value of resources responding to operating
needs because compensation will be based on average output and average
prices across an hour, rather than output and prices during the periods
of greatest need within a particular hour.
    3. We also find that a second problem occurs if there is a mismatch
between the time when a system experiences a shortage of energy and
operating reserves and the time when prices reflect the shortage
condition. This can be particularly problematic when, for example, an
RTO's/ISO's market rules require a shortage to last a minimum time
period before triggering shortage pricing. In this instance, short-term
prices fail to reflect system conditions and potential reliability
costs, as well as the value of both internal and external market
resources responding to a dispatch signal. In addition, inaccurate
price signals are provided to market participants if shortage pricing
is still in effect after the shortage has been resolved.
    4. To address these problems associated with differing dispatch
intervals and settlement intervals, as well as with shortage pricing
triggers, we are setting forth the settlement interval requirements and
the shortage pricing requirement in this Final Rule.\5\ These
settlement interval and shortage pricing requirements will help ensure
that resources have price signals that provide incentives to conform
their output to dispatch instructions, and that prices reflect
operating needs at each dispatch interval.
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    \5\ We are not at this time proposing to change the price paid
by any RTO/ISO when shortage pricing is triggered.
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    5. As set forth in the NOPR, we reiterate the goals of price
formation are to: (1) Maximize market surplus for consumer and
suppliers; (2) provide correct incentives for market participants to
follow commitment and dispatch instructions, make efficient investments
in facilities and equipment, and maintain reliability; (3) provide
transparency so that market participants understand how prices reflect
the actual marginal cost of serving load and the operational
constraints of reliably operating the system; and, (4) ensure that all
suppliers have an opportunity to recover their costs.\6\
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    \6\ See Notice Inviting Post-Technical Workshop Comments, Docket
No. AD14-14-000, at 1 (Jan. 16, 2015); Notice, Docket No. AD14-14-
000 (June 19, 2014).
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    6. As noted in the NOPR, the reforms adopted in this Final Rule
advance at least two of the Commission's goals

with respect to price formation. First, the proposed reforms will help
provide correct incentives for market participants to follow commitment
and dispatch instructions,\7\ to make efficient investments in
facilities and equipment, and to maintain reliability. Specifically,
requiring RTOs/ISOs to align the settlement and dispatch intervals will
more accurately reward resources that are providing energy and
ancillary services in periods of the greatest need and will discourage
provision of energy and ancillary services immediately following
periods of system stress. Doing so will enhance the incentive to follow
an RTO's/ISO's dispatch signal and thus help maintain system
reliability. This reform will also reward resources that can flexibly
respond to system needs, thus creating an incentive for resources to
make efficient investments in facilities and equipment. Similarly,
implementing shortage pricing for any dispatch interval during which a
shortage of energy or operating reserves occurs will provide an
incentive for resources to ensure that they are available to respond to
high prices, which should help alleviate shortages and avoid shortage
pricing during subsequent dispatch intervals. This reform would also
ensure that resources operating during a shortage are compensated for
the value of the service that they provide, regardless of whether the
shortage is short-lived.
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    \7\ The Commission notes that the reforms proposed herein would
further augment existing mechanisms in each RTO/ISO market that
provide incentives to follow dispatch instructions, such as
penalties for excessive or deficient energy and the allocation of
commitment and dispatch costs to deviations from energy dispatch
targets. See, e.g., MISO, FERC Electric Tariff, 40.3.3(a) (36.0.0)
(allocating Revenue Sufficiency Guarantee costs to, inter alia,
resources providing excessive or deficient energy), 40.3.4 (33.0.0)
(charges for excessive or deficient energy deployment).
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    7. Second, the proposed reforms will also help provide transparency
and certainty so that market participants understand how compensation
and prices reflect the actual marginal cost of serving load and the
operational constraints of reliably operating the system. Requiring
settlement intervals to match dispatch intervals will make resource
compensation more transparent by, among other things, increasing the
proportion of resource payment provided through payments of energy and
operating reserves rather than uplift. Further, requiring RTOs/ISOs to
trigger shortage pricing for an interval in which a shortage of energy
or operating reserves is indicated during the pricing of resources for
that interval will ensure that prices transparently reflect the
operational constraints of reliably operating the system. This
increased transparency, in turn, better informs decisions to build or
maintain resources and enhances consumers' ability to hedge. The
benefits summarized above and discussed in detail below would
ultimately help to ensure just and reasonable rates.
    8. As discussed below, we require each RTO/ISO to submit a
compliance filing with the tariff changes needed to implement this
Final Rule within 120 days of the Final Rule's effective date. We will
allow a further 12 months from the compliance filing date for the
tariff changes implementing reforms to settlement intervals to be
effective, and 120 days from that same compliance filing date for the
tariff changes implementing shortage pricing reforms to be
effective.\8\
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    \8\ The Commission has followed a similar approach with the
timelines for compliance and implementation in the past. See, e.g.,
Frequency Regulation Compensation in the Organized Wholesale Power
Markets, Order No. 755, FERC Stats. & Regs. ] 31,324, at P 201
(2011), reh'g denied, Order No. 755-A, 138 FERC ] 61,123 (2012).
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II. Background

    9. The Commission has addressed price formation in organized
markets on prior occasions. For example, in Order No. 719, the
Commission addressed shortage pricing \9\ and required RTOs/ISOs to
develop and implement shortage pricing rules that would apply during
operating reserve shortages to ``ensure that the market price for
energy reflects the value of energy during an operating reserve
shortage.'' \10\ The Commission required such rules out of concern that
inappropriate price signals during an operating reserve shortage would
provide an insufficient incentive for market participants to take
appropriate actions.
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    \9\ Wholesale Competition in Regions with Organized Electric
Markets, Order No. 719, FERC Stats. & Regs. ] 31,281, at PP 192-194
(2008), order on reh'g, Order No. 719-A, FERC Stats. & Regs. ]
31,292, order on reh'g, Order No. 719-B, 129 FERC ] 61,252 (2009).
    \10\ Order No. 719, FERC Stats. & Regs. ] 31,281 at P 194.
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    10. In June 2014, the Commission initiated a proceeding, in Docket
No. AD14-14-000, to evaluate issues regarding price formation in the
energy and ancillary services markets operated by RTOs/ISOs (price
formation proceeding). In the notice initiating that proceeding, the
Commission stated that there may be opportunities for the RTOs/ISOs to
improve the energy and ancillary services price formation process. As
set forth in the notice, locational marginal prices (LMP) and market-
clearing prices used in energy and ancillary services markets ideally
``would reflect the true marginal cost of production, taking into
account all physical system constraints, and these prices would fully
compensate all resources for the variable cost of providing service.''
\11\ Pursuant to the notice, staff conducted outreach and convened
technical workshops on the following four general issues: (1) Use of
uplift payments; (2) offer price mitigation and offer price caps; (3)
scarcity and shortage pricing; and (4) operator actions that affect
prices.\12\ The Commission also released staff reports on these topics.
In one of those reports, issued in October 2014, staff analyzed
shortage pricing issues.\13\
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    \11\ Notice, Docket No. AD14-14-000, at 2 (June 19, 2014).
    \12\ Id. at 1, 3-4.
    \13\ See Shortage Pricing Paper.
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    11. In its January 2015 Notice Inviting Comments, the Commission
requested comments on questions that arose from the price formation
technical workshops.\14\ In response, among other price formation
issues, commenters addressed settlement intervals and shortage pricing.
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    \14\ Notice Inviting Post-Technical Workshop Comments, Docket
No. AD14-14-000 (Jan. 16, 2015).
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    12. On September 17, 2015, the Commission issued a NOPR proposing
to require that each RTO/ISO: (1) Settle energy transactions in its
real-time markets at the same time interval it dispatches and prices
energy, and settle operating reserves transactions in its real-time
markets at the same time interval it prices operating reserves; and (2)
trigger shortage pricing for any dispatch interval during which a
shortage of energy or operating reserves occurs.\15\ The Commission
sought comments on these proposals, and sought comment on: (1) Whether
settlement interval reforms are appropriate for intertie transactions
that are scheduled on intervals different from the intervals on which
RTOs/ISOs dispatch internal real-time energy; and (2) whether it is
appropriate to align the settlement interval for intertie transactions
with external scheduling intervals, e.g., fifteen minutes.\16\
Additionally, the Commission sought comment on whether to require that
RTOs/ISOs settle real-time operating reserves transactions at the same
interval as real-time energy dispatch and settlement intervals or
whether a settlement interval that differs from an RTO's/ISO's real-
time energy dispatch interval would be appropriate for some operating
reserves transactions.\17\

Finally, the Commission sought comment on the implementation schedule
and the costs of implementation.\18\ A list of commenters and the
abbreviated names used for them in this Final Rule appears in the
Appendix.
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    \15\ NOPR, FERC Stats. & Regs. ] 32,710 at P 14.
    \16\ NOPR, FERC Stats. & Regs. ] 32,710 at P 39.
    \17\ NOPR, FERC Stats. & Regs. ] 32,710 at P 40.
    \18\ NOPR, FERC Stats. & Regs. ] 32,710 at PP 56, 60.
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III. Discussion

A. Settlement Interval Reform

1. Need for Reform
    13. In the NOPR,\19\ the Commission preliminarily found that the
current RTO/ISO settlement practice of using hourly integrated prices
for real-time settlement and five-minute dispatch instructions may fail
to reflect the value of providing a given service, and may contribute
to lack of a response to the actual operating needs of those markets.
In addition, the Commission stated that the use of hourly integrated
prices for real-time settlement may discourage resources from following
five-minute dispatch instructions, and may increase the need for uplift
payments. Therefore, the Commission preliminarily found that the use of
hourly integrated prices for real-time settlement may result in rates
that are unjust and unreasonable.
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    \19\ NOPR, FERC Stats. & Regs. ] 32,710 at PP 26-33.
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    14. Commenters generally agree with the Commission's preliminary
finding regarding the settlement interval proposal. For example, EPSA
states that ``[w]hen real-time settlements for generation or
dispatchable demand are calculated based on hourly prices that are the
simple average of sub-hourly prices resulting from the actual dispatch,
there is a distortion to the real-time price signal impacting both
reliability and efficiency.'' \20\ Similarly, Potomac Economics states
that the inconsistency between five-minute dispatch instructions and
hourly-average price settlement intervals ``creates incentives for
generators to not follow the dispatch signal or to simply be inflexible
by (a) restricting dispatch range (the difference between a generator's
minimum dispatch level and maximum dispatch level) or (b) offering a
slower dispatch ramp rate.'' \21\ Potomac Economics notes that while
MISO makes uplift payments to generators to alleviate these incentive
issues, such payments are ``an inferior substitute for a true alignment
where each generator, importer or exporter would settle based on the
actual value of energy corresponding with its production or
transactions in each five-minute interval.'' \22\ ELCON asserts that
hourly prices do not ``reflect system needs and costs, and may result
in over or under recovery of costs depending on how the shortage plays
out during the hour. When SPP moved to sub-hourly settlements, overall
system costs were lower.'' \23\
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    \20\ EPSA Comments, Pope Aff. at 2-3.
    \21\ Potomac Economics Comments at 4.
    \22\ Potomac Economics Comments at 4-5.
    \23\ ELCON Comments at 2.
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    15. In some instances, commenters assert that the Commission should
not affirm its preliminary finding on the settlement interval proposal.
APPA and NRECA assert that Commission approval of any five-minute
settlement implementation process should require vetting and approval
by the RTOs'/ISOs' stakeholders.\24\ Direct Energy asserts that the
Commission should solicit further information from the RTOs/ISOs before
determining whether or not to direct settlement interval reforms.\25\
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    \24\ APPA and NRECA Comments at 4.
    \25\ Direct Energy Comments at 6.
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    16. Based on analysis of the record, we adopt our preliminary
findings, and, as described in detail below, conclude that certain RTO/
ISO settlement practices are not just and reasonable and are unduly
discriminatory and preferential. Accordingly, we direct each RTO/ISO to
align its settlement and dispatch intervals by settling energy
transactions in its real-time markets at the same time interval it
dispatches energy, settling operating reserves transactions in its
real-time markets at the same time interval it prices operating
reserves, and settling intertie transactions in the same time interval
it schedules intertie transactions, as discussed further herein.
2. Settlement Interval Reform for Energy Transactions and Operating
Reserves
a. Proposal
i. Energy Transactions
    17. In the NOPR, the Commission proposed to require that each RTO/
ISO settle energy transactions in its real-time markets at the same
time interval it dispatches energy. The Commission preliminarily found
the use of hourly integrated prices for real-time settlement may have
the unintended effect of distorting price signals, and, in certain
instances, contributing to market participants' failing to respond
appropriately to operating needs.\26\ Specifically, the Commission
stated that hourly integrated prices for real-time settlement may: (1)
Not accurately reflect the value a resource provides to the system; (2)
discourage resources from following dispatch instructions; and (3)
cause increased uplift payments. Therefore, the Commission
preliminarily found that the use of hourly integrated prices for real-
time settlement may result in rates that are unjust and unreasonable.
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    \26\ NOPR, FERC Stats. & Regs. ] 32,710 at PP 26-33.
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    18. To remedy any potentially unjust and unreasonable rates caused
by the use of hourly integrated prices for real-time settlement, the
Commission proposed in the NOPR to require that each RTO/ISO settle
energy transactions in its real-time markets at the same time interval
it dispatches energy.\27\
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    \27\ NOPR, FERC Stats. & Regs. ] 32,710 at P 34.
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    19. The Commission explained that in the short-term, the settlement
interval proposal should improve incentives for resources to respond
quickly to dispatch instructions, which should in turn lead to
operators taking fewer out-of-market actions to ensure that supply
meets demand. The Commission noted that by improving resources'
response to dispatch instructions, the settlement interval proposal
would result in a more efficient use of generation resources to the
benefit of all consumers. In the long-term, the Commission maintained
that these reforms should provide more accurate price signals, which
should provide, together with other market price signals, the
appropriate incentives to build or maintain resources that can respond
to energy or operating reserve deficiencies.\28\
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    \28\ NOPR, FERC Stats. & Regs. ] 32,710 at P 35.
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    20. In addition, the Commission noted, where settlement and
dispatch intervals are aligned, resources dispatched economically
during high-priced periods would receive those higher prices rather
than an hourly average of the dispatch interval LMPs, thereby reducing
the need to make uplift payments.
ii. Operating Reserves
    21. The Commission proposed requiring that each RTO/ISO ``settle
operating reserves transactions in its real-time markets at the same
time interval it prices operating reserves.'' \29\ Although the
Commission noted that dispatch and pricing of energy and operating
reserves are closely linked through co-optimization in the real-time
market, it also noted that certain RTOs/ISOs acquire operating reserves
on a different time interval than they dispatch energy.\30\ The
Commission sought comment on whether the Commission should require
RTOs/ISOs to settle all real-time operating reserves transactions at
the same time interval as real-time energy dispatch and

settlement intervals, or whether a settlement interval that differs
from an RTO's/ISO's real-time energy dispatch interval would be
appropriate for some operating reserves transactions.\31\
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    \29\ NOPR, FERC Stats. & Regs. ] 32,710 at P 34.
    \30\ NOPR, FERC Stats. & Regs. ] 32,710 at P 40.
    \31\ NOPR, FERC Stats. & Regs. ] 32,710 at P 40.
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b. Current Practices in the RTOs/ISOs
i. Energy Transactions
    22. The following table describes how each RTO/ISO currently
dispatches and settles real-time energy transactions:

      Table 1--RTO/ISO Dispatch and Settlement Intervals for Energy
------------------------------------------------------------------------
                               Real-time
                                dispatch
                                  \32\       Real-time settlement \33\
                               (minutes)
------------------------------------------------------------------------
CAISO                                   5  5 minute.
ISO-NE                                  5  hourly average.
MISO                                    5  hourly average.
NYISO                                   5  5 minute.
PJM                                     5  hourly average.
SPP                                     5  5 minute.
------------------------------------------------------------------------

ii. Operating Reserves
    23. The RTOs/ISOs vary in how they settle and treat operating
reserves. For example, CAISO represents that it settles its operating
reserve transactions on fifteen-minute intervals and dispatches energy
on five-minute intervals.\34\ MISO states that it currently calculates
settlements for real-time operating reserves transactions at the same
interval that they are dispatched, i.e., five minutes, but that actual
settlements are on an hourly basis due to the specific calculations
MISO makes.
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    \32\ See CAISO, eTariff, 34.5 (17.0.0); ISO-NE., Transmission,
Markets and Services Tariff, Market Rule 1, III.2.3 (15.0.0); MISO,
FERC Electric Tariff, 40.2 (34.0.0); NYISO Markets and Services
Tariff, <IP_ADDRESS> (17.0.0); PJM OATT, Attachment K, Appendix, 2.3
(2.0.0); SPP, OATT, Sixth Revised Volume No. 1, Attachment AE, 6.2.2
(1.0.0).
    \33\ See CAISO, eTariff, 11.5 (2.0.0), Appendix A, Settlement
Interval (2.0.0); ISO-NE., Transmission, Markets and Services
Tariff, Market Rule 1, III.2.2(b) (15.0.0); MISO, FERC Electric
Tariff, 40.3 (32.0.0), 40.3.1 (32.0.0), 40.3.3 (36.0.0); NYISO,
NYISO Tariffs, NYISO Markets and Services Tariff, <IP_ADDRESS>, <IP_ADDRESS>
(17.0.0); PJM, Intra-PJM Tariffs, OATT, Attachment K, Appendix,
2.5(e), (4.0.0), 3.2.1(e), (f) (28.0.0); SPP, OATT, Sixth Revised
Volume No. 1, Attachment AE, 8.6, 8.6.1 (2.1.0). The above tariff
citations refer to internal transactions. CAISO settles its intertie
interchange transactions on fifteen-minute intervals. See CAISO,
eTariff, HASP Block Intertie Schedule (0.0.0).
    \34\ CAISO Comments at 8.
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    24. The PJM Market Monitor explains that the synchronized and
regulation reserves markets in PJM clear hourly but already incorporate
five-minute LMP data for calculating opportunity costs. The PJM Market
Monitor states that the offer price in PJM's synchronized reserve
market includes both the direct short-run marginal cost of providing
synchronized reserves, which does not vary every five minutes, and the
opportunity cost of providing synchronized reserves, which does vary
with five-minute LMPs. The PJM Market Monitor explains that PJM
currently updates the opportunity cost every five minutes using five-
minute LMP data for the Tier 2 synchronized reserve market and
recalculates the market clearing price every five minutes, with
settlement based on the average of the five-minute clearing price.\35\
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    \35\ PJM Market Monitor Comments at 8.
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    25. The PJM Market Monitor explains that, in PJM's regulation
market, the offer price includes both the direct short-run marginal
cost of providing regulation, which does not vary every five minutes,
and the opportunity cost of providing regulation, which varies with
five-minute LMPs. The PJM Market Monitor adds that PJM currently
updates the opportunity cost every five minutes using five-minute LMP
data for the regulation market and recalculates the clearing price
every five minutes, with settlement based on the average of five-minute
clearing prices. The PJM Market Monitor also notes that PJM purchases
other forms of operating reserves on a cost basis, including Tier 1
synchronized reserves, non-synchronized reserves, and day-ahead
scheduling reserves.\36\
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    \36\ PJM Market Monitor Comments at 8.
---------------------------------------------------------------------------

    26. NYISO explains that it uses five-minute intervals to settle its
real-time markets for energy, regulation service, and operating
reserves.\37\ ISO-NE currently has hourly integrated settlement for its
real-time energy transactions and its real-time operating reserves.
However, ISO-NE states it intends to implement five-minute settlement
of real-time operating reserves in connection with implementing five-
minute settlement of real-time energy transactions, which is a current
discussion among ISO-NE stakeholders.\38\ SPP prices and settles
operating reserve products in its real-time market on a dispatch
interval, or five minute, basis.\39\
---------------------------------------------------------------------------

    \37\ NYISO Comments at 2-3.
    \38\ ISO-NE Comments at 2-3.
    \39\ SPP Market Protocols, Sections 4.5.4 and 4.5.9.
---------------------------------------------------------------------------

c. Comments on the Proposed Settlement Interval Reform
    27. Twenty-seven of the thirty commenters providing input on this
issue generally support the NOPR's proposed settlement interval
reform.\40\ As described below, many assert that the proposed reform
will align the price signals with system conditions and provide
accurate incentives for generation units to follow dispatch
instructions.\41\ Others point to additional benefits.
---------------------------------------------------------------------------

    \40\ Ameren Comments at 1, 3-4; ANGA Comments at 2-5; CAISO
Comments at 2; CEA Comments at 3-6; Dominion Comments at 1-2; DTE
Comments at 3-4; EDP Renewables Comments at 2; EEI Comments at 2;
ESA Comments at 2-4; Entergy Nuclear Power Marketing Comments at 2;
EPSA Comments at 1-5; Exelon Comments at 4; Financial Marketers
Coalition Comments at 1; Golden Spread Initial Comments at 1-3;
Inertia Power and DC Energy Comments at 2; ISO-NE Comments at 1;
MISO Comments at 2, 9; NEI Comments at 1; NGSA Comments at 2-5; ODEC
Comments at 3; PJM Power Providers Comments at 2-5; Potomac
Economics Comments at 2; Powerex Comments at 6; PSEG Comments at 3;
Public Interest Organizations Comments at 5; SPP Market Monitor
Comments at 2; Westar Comments at 1.
    \41\ Inertia Power and DC Energy Comments at 2; Potomac
Economics Comments at 1; Westar Comments at 1; PSEG Comments at 3.
---------------------------------------------------------------------------

i. Comments From the RTOs/ISOs
    28. The ISO/RTO Council supports the Commission's goals of aligning
prices with resource dispatch instructions and operating needs and
specifically supports the settlement interval proposal for energy
transactions. The ISO/RTO Council states that the proposed settlement
interval reform will make resource compensation more transparent by
increasing the proportion of payments to resources through the price
paid for energy as opposed to uplift.\42\
---------------------------------------------------------------------------

    \42\ ISO/RTO Council Comments at 2.
---------------------------------------------------------------------------

    29. In separate comments, NYISO, ISO-NE., MISO, and PJM support the
settlement interval proposal for both energy and operating reserve
transactions. Likewise, in separate comments, CAISO supports the
settlement interval proposal for energy transactions, but does not
support requiring RTOs/ISOs to settle all real-time operating reserves
transactions at the same interval as real-time energy dispatch and
settlement intervals.
    30. CAISO states that the settlement interval proposal would
improve market efficiency, and that accurate price signals provide
market participants with incentives to develop needed capabilities and
to offer those capabilities into the market.\43\ CAISO states that
where settlement and dispatch intervals are aligned, resources
dispatched economically during high-priced periods should receive high
prices, thus reducing the need to pay uplift caused by non-alignment of
settlement and dispatch intervals.\44\
---------------------------------------------------------------------------

    \43\ CAISO Comments at 7.
    \44\ CAISO Comments at 7.
---------------------------------------------------------------------------

    31. However, CAISO does not support requiring RTOs/ISOs to settle
all real-time operating reserves transactions at the same interval as
real-time energy dispatch and settlement intervals.

Instead, CAISO asserts that it is appropriate to maintain its current
fifteen-minute procurement and settlement interval for operating
reserves transactions, which differs from the five-minute real-time
energy dispatch interval. CAISO explains that its current settlement
methodology aligns ancillary services commitment with internal
generation commitment and intertie transactions scheduling so that the
market accurately reflects the overall amount of supply resources
available to provide energy and ancillary services.\45\
---------------------------------------------------------------------------

    \45\ CAISO Comments at 17-18.
---------------------------------------------------------------------------

    32. NYISO supports the settlement interval proposal and asserts
that its use of five-minute intervals to settle its real-time markets
for energy, regulation service, and operating reserves, has provided
significant incentives for resources to follow dispatch instructions
and opportunities for supply resources to obtain full payment for their
performance based on actual system conditions.\46\
---------------------------------------------------------------------------

    \46\ NYISO Comments at 2-3.
---------------------------------------------------------------------------

    33. ISO-NE contends that settling on sub-hourly or five-minute
intervals would help to improve price signals and resource
compensation.\47\ ISO-NE states that five-minute settlements will help
improve price formation by ensuring that compensation for real-time
performance sends more accurate market signals of power system
conditions when energy is provided.\48\ ISO-NE supports the settlement
interval proposal for operating reserve transactions. It asserts that
settling all real-time operating reserves transactions at the same
interval as real-time energy dispatch and settlement intervals would
assist in aligning dispatch following incentives in markets that
simultaneously co-optimize energy and reserve dispatch in real-time.
ISO-NE states it intends to implement five-minute settlement of real-
time operating reserves in connection with implementing five-minute
settlement of real-time energy transactions, which is a current
discussion among ISO-NE stakeholders.\49\
---------------------------------------------------------------------------

    \47\ ISO-NE Comments at 2.
    \48\ ISO-NE Comments at 2.
    \49\ ISO-NE Comments at 2-3.
---------------------------------------------------------------------------

    34. MISO asserts that the inconsistency between dispatch and
settlements may produce financial outcomes that do not align with the
guiding principles of co-optimized (energy and ancillary services)
security constrained economic dispatch.\50\ If the Commission requires
five-minute settlements of operating reserves, MISO states that it
would modify its operating reserves settlements from its current hourly
method of settling operating reserves to align with real-time energy
transactions.\51\
---------------------------------------------------------------------------

    \50\ MISO Comments at 2.
    \51\ MISO Comments at 7-8.
---------------------------------------------------------------------------

    35. PJM states that ancillary services, including operating
reserves, should settle on the same interval as energy because they are
co-optimized. PJM argues that not doing so could yield discrepancies
between the prices used to settle each product and could therefore undo
enhancements made since implementation of Order No. 719, reduce market
efficiencies, disrupt operations, and hinder proper price
formation.\52\ PJM states that it intends to change its market rules to
settle energy and ancillary services transactions in its real-time
energy market at the same interval on which it dispatches
resources.\53\
---------------------------------------------------------------------------

    \52\ PJM Comments at 9.
    \53\ PJM Comments at 2.
---------------------------------------------------------------------------

ii. Comments by Market Monitors
    36. The PJM Market Monitor agrees that it would be appropriate to
implement five-minute pricing for the reasons stated in the NOPR, and
that implementing five-minute settlements will contribute significantly
to reducing uplift payments in PJM, an ongoing goal in the PJM
region.\54\ The PJM Market Monitor states that, while it is appropriate
to include the impact of five-minute LMP changes on the cost of
operating reserves in the form of synchronized reserves and regulation,
the PJM design for these markets currently incorporates those impacts.
The PJM Market Monitor asserts that no additional changes to PJM market
and non-market mechanisms for acquiring operating reserves are
currently necessary to incorporate changes in five-minute LMPs.\55\
---------------------------------------------------------------------------

    \54\ PJM Market Monitor Comments at 2, 4.
    \55\ PJM Market Monitor Comments at 8-9.
---------------------------------------------------------------------------

    37. Potomac Economics, which serves as the market monitor for ISO-
NE., MISO, and NYISO, argues that hourly settlements encourage
resources not to follow dispatch instructions or to decrease their
flexibility by restricting dispatch ranges and offering slower ramp
rates, and states that MISO pays uplift to alleviate these issues.
Potomac Economics cites its 2014 MISO State of the Market Report to
show how five-minute settlements would change total payments to
resources compared to current hourly settlements. This analysis showed
that fossil-fueled resources in 2014 received settlements that were $35
million less than they would have received if the settlement were based
on five-minute prices and output, and that only one-fifth of this lost
value was paid via uplift. In contrast, Potomac Economics represents
that non-fossil resources were paid on net in hourly revenues slightly
above what they would have received with five-minute settlements.
Potomac Economics asserts that five-minute settlement provides greater
compensation to fossil resources, more accurately representing the
flexibility fossil resources provide to the system. In contrast,
Potomac Economics argues that hourly settlement overvalues wind
resources because such resources cannot ramp up in response to higher
prices, are negatively correlated with load and contribute to higher
congestion at higher output levels.\56\ Potomac Economics states that
the settlement interval proposal will provide incentives for better
resource performance, will improve price signals, and will improve
markets' short-run commitment and dispatch of existing resources.\57\
---------------------------------------------------------------------------

    \56\ Potomac Economics Comments at 6.
    \57\ Potomac Economics Comments at 1.
---------------------------------------------------------------------------

    38. The SPP Market Monitor agrees with the Commission's preliminary
finding that aligning settlement and dispatch intervals would make
resource compensation more transparent by increasing the proportion of
resource payments made through energy and operating reserve payments
instead of uplift.\58\ The SPP Market Monitor states that aligning
dispatch and settlement intervals in neighboring markets would enhance
price signals at seams and enhance market efficiency.\59\
---------------------------------------------------------------------------

    \58\ SPP Market Monitor Comments at 2.
    \59\ SPP Market Monitor Comments at 2-3.
---------------------------------------------------------------------------

iii. Comments Supporting the Proposed Settlement Interval Reform
    39. Many commenters expressly support the NOPR's settlement
interval proposal, citing many of the benefits that were outlined in
the NOPR.\60\ They generally argue that the settlement interval
proposal will provide incentives for generators to follow dispatch more
precisely, thus leading to

better resource performance, and improved reliability.\61\ They also
assert that the settlement interval proposal will properly compensate
resources for the service they provide and will more fully recognize
the value of flexible or fast-ramping resources.\62\ In addition, they
generally state that the settlement interval proposal will lead to
fewer out-of-market payments, will increase transparency, and will
support more efficient market outcomes.\63\
---------------------------------------------------------------------------

    \60\ Ameren Comments at 1, 3-4; ANGA Comments at 2-5; CAISO
Comments at 2; CEA Comments at 3-6; Dominion Comments at 1-2; DTE
Comments at 3-4; EDP Renewables Comments at 2; EEI Comments at 2;
ESA Comments at 2-4; Entergy Nuclear Power Marketing Comments at 2;
EPSA Comments at 1-5; Exelon Comments at 4; Financial Marketers
Coalition Comments at 1; Golden Spread Initial Comments at 1-3;
Inertia Power and DC Energy Comments at 2; ISO-NE Comments at 1;
MISO Comments at 2, 9; NEI Comments at 1; NGSA Comments at 2-5; PJM
Power Providers Comments at 2-5; Potomac Economics Comments at 2;
Powerex Comments at 6; PSEG Comments at 3; Public Interest
Organizations Comments at 5; SPP Market Monitor Comments at 2;
Westar Comments at 1; AEMA Comments at 2; XO Energy Comments at 1;
PJM Market Monitor at 2; ODEC at 3.
    \61\ Inertia Power and DC Energy Comments at 2; Westar Comments
at 1, 3; EEI Comments at 6-7; Exelon Comments at 4-5.
    \62\ Public Interest Organizations Comments at 2-3; ELCON
Comments at 2-3; EDP Renewables Comments at 2-3; ESA Comments at 3;
NEI Comments at 14.
    \63\ See supra note 60; ELCON Comments at 3; Exelon Comments at
4-5.
---------------------------------------------------------------------------

    40. More specifically, Exelon asserts that the settlement interval
proposal will support ongoing market improvements, such as ISO-NE's
performance incentive mechanism, effective in June 2018, that will pay
resources bonuses or impose penalties based on performance during
operating reserve shortages that last five minutes or longer. Exelon
argues that ISO-NE's market must settle at five-minute intervals to
implement this mechanism completely.\64\
---------------------------------------------------------------------------

    \64\ Exelon Comments at 5.
---------------------------------------------------------------------------

    41. According to EDP Renewables, greater participation of fast
ramping renewable resources will also enhance resource adequacy,
produce cost savings for consumers, and improve grid resilience.\65\
---------------------------------------------------------------------------

    \65\ EDP Renewables Comments at 3.
---------------------------------------------------------------------------

    42. Some commenters also argue that the settlement interval
proposal will reduce market inefficiencies and lead to greater
investment. PSEG asserts that the proposed reforms correct market flaws
that have caused inefficiencies in both price signals and resource
dispatch decisions.\66\ ELCON states that the proposed settlement
reform addresses an embedded inconsistency in market operation that
promotes gaming and other forms of ill behavior or inefficiencies.\67\
EDP Renewables argues that the proposed reforms will also yield
savings, remove opportunities for market manipulation, and encourage
investment in new services and new technologies, all of which will
result in a more robust and resilient grid and help both consumers and
suppliers through more efficient market operation.\68\
---------------------------------------------------------------------------

    \66\ PSEG Comments at 3.
    \67\ Public Interest Organizations Comments at 2-3; ELCON
Comments at 2-3.
    \68\ EDP Renewables Comments at 2.
---------------------------------------------------------------------------

    43. EPSA argues that implementing sub-hourly settlement intervals
is needed to obtain the full benefits of other price formation reforms
to improve the accuracy with which real-time prices communicate the
time-dependent and location-dependent value of incremental energy and
ancillary services.\69\
---------------------------------------------------------------------------

    \69\ EPSA Comments at 6-7, Pope Aff. at 4-5.
---------------------------------------------------------------------------

    44. TAPS does not oppose the settlement interval proposal, as long
as it does not impose an undue burden on load serving entities.\70\
---------------------------------------------------------------------------

    \70\ TAPS Comments at 4.
---------------------------------------------------------------------------

    45. EPSA supports the settlement interval proposal for operating
reserves. It argues that real-time operating reserves should be co-
optimized in the dispatch and settled with energy for every hourly sub-
interval (generally five minutes) to ensure that resources are
compensated for following RTO/ISO instructions and are indifferent to
providing either energy or operating reserves during periods of high
energy or operating reserves prices.\71\ EPSA emphasizes the importance
of sending sub-hourly price signals to ensure that operating reserves
are available in sub-hourly intervals due to their contribution to
maintaining reliability, further stating that sub-hourly settlements
for operating reserves send information to the market relating to the
potential profitability of incremental investments to enhance the sub-
hourly availability of such reserves.\72\ EPSA argues that to ensure
accurate prices for both energy and operating reserves, RTOs/ISOs
should be required to co-optimize these products in real-time because
suppliers should be indifferent to providing incremental energy and
operating reserves in each sub-hourly interval to allow the RTO/ISO to
perform a reliable least-cost dispatch.\73\
---------------------------------------------------------------------------

    \71\ EPSA Comments, Pope Aff. at 11.
    \72\ EPSA Comments, Pope Aff. at 11.
    \73\ EPSA Comments, Pope Aff. at 12-13.
---------------------------------------------------------------------------

    46. Dominion supports the settlement interval proposal for
operating reserves. However, Dominion argues that only specific reserve
products should settle at the same interval that they are priced and
that other types of settlement provisions, such as make-whole payments,
should not.\74\ Dominion explains that, in PJM, for example,
``balancing Operating Reserves'' includes the costs to dispatch
resources out-of-merit for reliability or to cover deficiencies in the
day-ahead market solution.\75\ According to Dominion, these resources
do not provide a specific reserve product; rather, these resources are
made whole when they are dispatched to address a mismatch between day-
ahead commitment and real-time requirements. Dominion therefore
requests that the Commission not require the settlement intervals for
these types of operating reserve to change.\76\
---------------------------------------------------------------------------

    \74\ Dominion Comments at 3.
    \75\ Dominion Comments at 3.
    \76\ Dominion Comments at 3.
---------------------------------------------------------------------------

    47. PSEG supports applying the proposed settlement intervals to
both real-time energy transactions and real-time operating reserves.
PSEG explains that given the linkage between energy transactions and
reserve services, settling those products on different intervals would
introduce dislocations, and incent resource actions that could disrupt
these co-optimization objectives, essentially undermining the
Commission's objectives in the NOPR.\77\
---------------------------------------------------------------------------

    \77\ PSEG Comments at 4-5.
---------------------------------------------------------------------------

    48. The New Jersey Board concurs with the PJM Market Monitor that
no changes should be made in PJM's synchronized reserve and regulation
markets given that the opportunity cost component in these ancillary
services markets, which is the only cost component subject to five-
minute changes in LMP, already accounts for the five-minute interval
changes.\78\ Duke acknowledges potential benefits from aligning
operating reserve transactions with their respective settlement
intervals but argues that stakeholders should consider whether
operating reserves transactions should be aligned with settlement
intervals for energy given the costs of doing so.\79\ Although it takes
no position on the operating reserves proposal, EEI states that
additional clarity from the Commission on the definition of operating
reserve transactions would be helpful, given the varied definitions of
reserve products among regions. EEI states that such regional variation
warrants further consideration.\80\
---------------------------------------------------------------------------

    \78\ New Jersey Board Comments at 4.
    \79\ Duke Comments at 5.
    \80\ EEI Comments at 9-10 & n.16.
---------------------------------------------------------------------------

iv. Comments Opposed to the Proposed Settlement Interval Reform
    49. Several commenters oppose the settlement interval proposal.
Direct Energy states that the Commission should solicit information
from RTOs/ISOs to determine whether existing generation resources are
able to respond effectively to five-minute price signals before
determining whether any settlement interval reform is warranted.\81\
Direct Energy doubts the ability of longer lead-time resources to
respond to five-minute price signals

during periods of extreme price volatility, and surmises that look-
ahead unit commitment and dispatch software results could exacerbate
swings in generation and load balance. Direct Energy states that a
high-priced dispatch interval could encourage dispatch of peaking
generation, which would take several minutes with longer ramp times and
cause other resources to ramp up more quickly. Direct Energy argues
that this could lead to an oversupply and to depressed prices, thus
making the longer-ramping resources responding to the original signal
uneconomic by running below their costs and incurring uplift--the
opposite of the goal of the settlement interval proposal.\82\
---------------------------------------------------------------------------

    \81\ Direct Energy Comments at 6.
    \82\ Direct Energy Comments at 3-5.
---------------------------------------------------------------------------

    50. Duke, APPA and NRECA, and Concerned Cooperatives argue that the
Commission should refrain from requiring a one-size-fits-all
approach.\83\ Duke, APPA and NRECA, and Concerned Cooperatives contend
that RTO/ISO stakeholder processes should vet this issue and consider
issues such as the costs, benefits, types of changes needed to
implement this reform, price formation issues more generally, and
unintended consequences.\84\ Duke states that this approach would
notify the Commission with regard to possible solutions, cost of
implementation, and the timeframe in which the RTO/ISO could reasonably
address each issue.\85\ Additionally, Concerned Cooperatives disagree
with the Commission's conclusion that reforming the settlement
intervals will result in more efficient use of generating resources.
---------------------------------------------------------------------------

    \83\ Duke Comments at 2-3; APPA and NRECA Comments at 4-5;
Concerned Cooperatives Comments at 4-5.
    \84\ Duke Comments at 4; APPA and NRECA Comments at 3; Concerned
Cooperatives Comments at 1.
    \85\ Duke Comments at 4-5.
---------------------------------------------------------------------------

    51. Concerned Cooperatives argue that the benefits of moving to
five-minute settlements will not offset the cost. They state that the
Potomac Economics report cited in the NOPR shows that switching to
matching intervals would force MISO market participants to expend
millions of dollars on upgrades and operation and maintenance (O&M)
costs, without realizing lower rates. Instead, those participants would
face an annual increase of approximately $28 million, after netting the
estimated $6.6 million system benefit from the increased payments to
generators of about $35 million dollars.\86\
---------------------------------------------------------------------------

    \86\ Concerned Cooperatives Comments at 10 (citing Potomac
Economics, 2014 State of the Market Report for the MISO Electricity
Markets, at 43-44, Figure 19 (2015)).
---------------------------------------------------------------------------

    52. Concerned Cooperatives further argue that the Commission relies
solely upon a letter filed in Docket No. AD14-14-000 \87\ to support
its finding with no analysis as to whether the observed increase in
capacity factors for internal combustion engines in SPP was the result
of SPP's adoption of five-minute settlement intervals or other
factors.\88\ Concerned Cooperatives argue that, even if there was some
marginal benefit to the settlement interval proposal, many market
participants would not benefit from the reform even though they would
be responsible for funding it.\89\ Concerned Cooperatives represent
that 90 to 95 percent of their transactions take place in the day-ahead
market, which settles on an hourly basis, and that adopting five-minute
settlement intervals in the real-time market does not help Concerned
Cooperatives hedge prices.\90\ Concerned Cooperatives also state that
the National Renewable Energy Laboratory study cited in the NOPR in
support of adopting five-minute settlement intervals also recognizes
that limiting market complexity may be a reason to maintain hourly
settlements, and that RTOs/ISOs already have tools to encourage
resources to follow efficient schedules, such as uninstructed deviation
penalties and ex post pricing rules. Concerned Cooperatives recommend
that the Commission instead identify objectives and allow RTOs/ISOs to
pursue options for achieving those objectives.\91\
---------------------------------------------------------------------------

    \87\ Concerned Cooperatives Comments at 11 (citing Comments of
W[auml]rtsil[auml] North America, Inc., Docket No. AD14-14-000, at
1-2 (Mar. 6, 2015)).
    \88\ Concerned Cooperatives Comments at 11.
    \89\ Concerned Cooperatives Comments at 11.
    \90\ Concerned Cooperatives Comments at 11.
    \91\ Concerned Cooperatives Comments at 12.
---------------------------------------------------------------------------

d. Commission Determination
i. Energy Transactions
    53. We adopt the NOPR proposal to require that each RTO/ISO settle
energy transactions in its real-time markets at the same time interval
it dispatches energy, as discussed below.\92\ We find that the
settlement interval requirement for energy transactions will meet the
Commission's price formation goals by more accurately reflecting the
value of the service a resource provides to the system, which, in so
doing, helps to ensure that rates are just and reasonable and not
unduly discriminatory or preferential.
---------------------------------------------------------------------------

    \92\ NOPR, FERC Stats. & Regs. ] 32,710 at P 34.
---------------------------------------------------------------------------

    54. As discussed below, providing the correct incentives for market
participants to follow commitment and dispatch instructions, make
efficient investments in facilities and equipment, maintain
reliability, and increase transparency is fundamental to proper
formation of energy prices, helping to ensure just and reasonable
rates, terms and conditions of service.
    55. One important element of ensuring reliable grid operations is
resources following dispatch instructions. The requirement that each
RTO/ISO settle energy transactions at the same interval it dispatches
energy sends accurate market signals of power system conditions, thus
encouraging resources to follow commitment and dispatch instructions, a
point noted by ISO-NE.\93\
---------------------------------------------------------------------------

    \93\ ISO-NE Comments at 2.
---------------------------------------------------------------------------

    56. The settlement interval requirement for energy transactions
also provides an incentive to make efficient investments in facilities
and equipment.\94\ In the long-term, we expect that appropriate
compensation would help to encourage efficient investments in
facilities and equipment, enabling reliable service. We also find that
the settlement interval requirement will provide incentives to more
flexible resources, thus leading to more efficient markets, as noted by
several commenters.\95\ More flexible resources will help system
operators address transient system conditions. We find that greater
participation of these more flexible resources should generally enhance
resource adequacy because it allows the participation of diverse
resources and improves reliability, as noted by EDP Renewables.\96\
---------------------------------------------------------------------------

    \94\ EPSA Comments, Pope Aff. at 4.
    \95\ Public Interest Organizations Comments at 2-3; ELCON
Comments at 2-3; EDP Renewables Comments at 2-3; ESA Comments at 3;
NEI Comments at 14.
    \96\ EDP Renewables Comments at 2-3.
---------------------------------------------------------------------------

    57. The settlement interval requirement for energy transactions
should help in maintaining reliability because resources will have a
greater incentive to follow dispatch instructions, as noted by
Exelon.\97\ In addition, these reforms will provide resource owners
with a greater incentive to adequately maintain their equipment,
conduct maintenance during non-peak periods, and invest in new and
upgraded equipment. As noted by CAISO, linking prices with compensation
will pay resources for providing needed flexibility to the market
operator and would motivate these resources to improve their
operational performance.\98\
---------------------------------------------------------------------------

    \97\ Exelon Comments at 4-5.
    \98\ CAISO Comments at 7.
---------------------------------------------------------------------------

    58. The settlement interval requirement for energy transactions
also results in more accurate market prices, reducing the need for out-
of-market operator actions. Under an hourly

settlement system, resources do not have the same incentive to follow
five-minute prices since compensation is based on an hourly average.
Therefore, system operators are more likely to take out-of-market
actions in real-time, such as increasing the use of regulating reserves
or committing additional resources, to ensure that adequate resources
are available to meet system needs. Such actions may result in uplift.
By providing incentives to follow dispatch instructions, the settlement
interval requirement should reduce such operator actions and, thereby,
reduce uplift.\99\ When this occurs, energy prices are based on more
observable market fundamentals--such as the marginal cost of serving
load and the operational constraints of reliably operating the system--
and not on less observable operator action.\100\ As a result of a
reduction in out-of-market uplift payments, resources will perceive
stronger financial incentives to perform, especially during stressed
system conditions, when the performance of all resources is paramount.
Further, we note, this increased transparency, in turn, better informs
decisions to build or maintain resources.
---------------------------------------------------------------------------

    \99\ Reducing out-of-market uplift payments can be beneficial to
RTOs'/ISOs' market participants because, among other reasons,
charges to market participants for uplift are often volatile. As a
result, market participants may build risk premiums into their
resource bids in the real-time energy market to shield them from the
uncertainty associated with unexpected uplift charges. See Staff
Analysis of Uplift in RTO and ISO Markets, Docket No. AD14-14-000,
at 18 (Aug. 2014), http://www.ferc.gov/legal/staff-reports/2014/08-13-14-uplift.pdf. In addition, making system conditions and
compensation more transparent through market prices will make that
price apparent to all available resources and thus encourage them to
fully participate in the market, which is likely to reduce
generation costs incurred by load.
    \100\ In addition to greater transparency, reducing uplift is a
goal generally. For example, ``[t]he implementation of five minute
settlements would contribute significantly to the reduction of
uplift payments, which is an ongoing goal of PJM, of the Market
Monitor and of PJM members.'' PJM Market Monitor Comments at 4.
---------------------------------------------------------------------------

    59. Taken together, the benefits we expect as a result of this
settlement reform will ensure that rates are just and reasonable and
not unduly discriminatory or preferential.
    60. We are not persuaded by the arguments opposing the settlement
interval proposal. Underlying much of the opposition is the assumption
that many resources cannot take advantage of five-minute settlement
intervals because they are not flexible enough to respond to five-
minute dispatch. For example, Direct Energy argues that RTOs/ISOs
should report the types of resources able to effectively modify their
output to respond to five-minute price signals.\101\ The concern Direct
Energy identifies is, in fact, one of the objectives of this reform.
Specifically, resources that are not able to respond quickly enough to
address acute system needs should not receive the same level of
compensation as those resources that are able to flexibly respond.\102\
Further, we note that all RTOs/ISOs have a combination of resources,
some of which can respond within five minutes and some that cannot, and
that knowing the exact percentages of resources available to respond to
prices is not determinative of whether the reforms adopted here will
prove beneficial. Instead, we believe it is important to ensure
settlement practices do not distort existing five-minute pricing
signals.
---------------------------------------------------------------------------

    \101\ Direct Energy Comments at 6.
    \102\ This rule does not require resources to be dispatched more
quickly than they are now, but it does increase the incentive for
those resources that can and do respond quickly.
---------------------------------------------------------------------------

    61. We are not persuaded by Concerned Cooperatives' argument that
the settlement interval proposal should be rejected because market
participants, such as Concerned Cooperatives, funding the reform do not
have a large fraction of their positions in the real-time market and
therefore will not benefit significantly from it.\103\ We find that
aligning prices and settlement intervals will enhance the operation of
markets by ensuring resources respond to actual system condition
regardless of the percentage of resources that clear in the day-ahead
market.
---------------------------------------------------------------------------

    \103\ Concerned Cooperatives Comments at 11.
---------------------------------------------------------------------------

    62. We also disagree with Concerned Cooperatives' statement that
the Commission relied upon a single document to support its finding
without additional analysis.\104\ Commenters supporting the reform have
provided sound economic analysis and examples demonstrating the value
of the proposed settlement reform.\105\ Though Concerned Cooperatives
state that many market participants would not benefit from the reform
even though they would be responsible for funding it,\106\ we believe
that many market participants are likely to benefit from the reform
through improved economic incentives to respond to system needs.
Potomac Economics' analysis of fossil-fueled and non-fossil-fueled
resources \107\ demonstrates that settlement reform will incentivize
generator flexibility, improve generators' dispatch performance, and
increase investments in more flexible resources.
---------------------------------------------------------------------------

    \104\ Concerned Cooperatives Comments at 11.
    \105\ EPSA Comments, Pope Aff. at 2-14; Potomac Economics
Comments at 3-7; See also supra note 60.
    \106\ Concerned Cooperatives Comments at 11.
    \107\ Potomac Economics Comments at 5-6.
---------------------------------------------------------------------------

    63. Concerned Cooperatives express concern that adopting five-
minute settlement intervals could result in errors and disputes that
could lead to resettlement and uncertainty for the market.\108\ All
RTOs/ISOs currently compute five-minute LMPs. Therefore, there is no
new data being generated or calculated that would lead to additional
need for resettlement or increased uncertainty. Concerned Cooperatives
have cited neither examples of more errors and disputes on RTO/ISO
systems currently using five-minute settlement intervals, nor examples
of additional resettlement and uncertainty for the market. Also, we
find that, while administratively-determined uninstructed deviation
penalties (which Concerned Cooperatives suggest could be used in lieu
of settlement reform) are appropriate in certain contexts, settlements
based on the actual value of energy corresponding with its production
or transaction in each five-minute interval provide more accurate
incentives for resources to respond to price signals.
---------------------------------------------------------------------------

    \108\ Concerned Cooperatives Comments at 12.
---------------------------------------------------------------------------

    64. Concerned Cooperatives also assert that the objective of
incenting market participants to follow dispatch instructions or invest
in upgrades must be considered in the context of existing market rules
that already may provide incentives for investment in faster ramping
capability.\109\ To the extent an RTO/ISO has a functional mechanism to
encourage the installation of fast-ramping resources, this Final Rule
will augment the existing RTO/ISO mechanisms.
---------------------------------------------------------------------------

    \109\ Concerned Cooperatives Comments at 6.
---------------------------------------------------------------------------

    65. Contrary to Concerned Cooperatives' argument, we are not
persuaded to abandon the settlement interval proposal because a Potomac
Economics report indicates that it would have resulted in an additional
$28 million in increased energy costs on the MISO system in 2014.\110\
First, we recognize that that there could be higher revenues to
generators, but we believe that this is the correct reflection of value
provided in these circumstances and would send an improved signal for
long-term investment and short-term performance, to the overall benefit
of the market. Second, it is important to note that the Potomac
Economics report indicates that for many settlement intervals during
2014, MISO resources were paid an hourly settlement rate lower than
what five-minute settlements would justify. Thus, the Potomac

Economics report should be viewed as indicating a need to correct
settlement practices, rather than indicating a windfall to resources.
Third, it is not clear that the proposal will result in generally
increased energy payments to generators. For example, an ISO-NE study
for the year 2013 found that the net increase in real-time energy
credits on its system (once the decrease in real-time reserve credits
was considered) would have been only $600,000.\111\ Finally, due to the
increased efficiencies resulting from improving incentives to respond
to market price signals, total costs to electric wholesale customers
over time are likely to decrease.
---------------------------------------------------------------------------

    \110\ Concerned Cooperatives Comments at 10.
    \111\ ISO-NE., Subhourly Real-Time Market Settlements, A11 ISO
Presentation 05-07-14 Revision 1, Matt Brewster, at 11 (May 8,
2014), http://www.iso-ne.com/committees/key-projects/subhourly-real-time-settlement.
---------------------------------------------------------------------------

    66. Additionally, some commenters argue that other types of
settlement provisions, such as make-whole payments, should not be
subject to settlement interval reform. We would like to clarify that
the Final Rule does not apply to make-whole payments for units
dispatched out-of-merit.
    67. We disagree with the recommendation of some commenters that the
decision to modify settlement intervals should be subject to a
stakeholder process.\112\ RTOs/ISOs implementing this Final Rule are
free to use a stakeholder process within the implementation timelines
specified herein, but we see no need to further delay this reform. This
does not limit stakeholders' input as RTOs/ISOs form their compliance
filings in response to this aspect of the Final Rule.
---------------------------------------------------------------------------

    \112\ APPA and NRECA Comments at 4.
---------------------------------------------------------------------------

    68. We conclude that the settlement interval requirement for energy
transactions should ensure that hourly settlement practices do not
distort five-minute price signals in RTOs/ISOs. Instead, the
compensation provided to resources must reflect the value of a resource
providing given services to ensure appropriate economic incentives to
meet system needs.
ii. Operating Reserves
    69. We adopt the proposal in the NOPR that RTOs/ISOs settle real-
time operating reserves transactions at the same time interval that
they price operating reserves. This requirement for operating reserves
will accomplish the Commission's price formation goals and thereby
ensure just and reasonable rates, and will further preserve the co-
optimization of operating reserves with energy. Under the settlement
interval requirement for operating reserves, to the extent that an RTO/
ISO prices operating reserves transactions at a different time interval
than it prices internal real-time energy transactions, that RTO/ISO
need only settle operating reserves transactions at the same time
interval that they are priced. Thus, we will not require an RTO/ISO to
settle operating reserves transactions on the same time interval as it
settles energy transactions. This will preserve the existing energy and
operating reserves co-optimization methodologies of the various RTOs/
ISOs.
    70. The settlement interval requirement increases transparency and
provides the correct incentives to maintain reliability. It also meets
the Commission's other price formation goals of encouraging resources
to follow the RTO's/ISO's commitment and dispatch instructions and to
make efficient investments. The reform to the settlement interval for
operating reserves will increase reliability because resource owners
will have a greater incentive to adequately maintain their equipment,
conduct maintenance during non-peak periods, and invest in new and
upgraded equipment. Similar to energy settlement intervals, requiring
settlement intervals of operating reserves transactions to match the
intervals upon which those reserves are priced will reduce the need for
payments made through uplift, make resource compensation more
transparent and help ensure that there are adequate operating reserves
to maintain reliability. Finally, co-optimized energy and reserve
prices are designed so that a resource is indifferent between providing
energy or operating reserves. Ensuring that energy and operating
reserve settlements are done on the same basis will preserve this
indifference and create an incentive for a resource to provide the
service the RTO/ISO has instructed it to provide. The reform to
operating reserve settlements will, by achieving the Commission's price
formation goals and preserving the co-optimization of energy and
operating reserves, ensure that rates are just and reasonable.
    71. While, as discussed above, some commenters also support RTOs/
ISOs settling all real-time operating reserves transactions at the same
time interval that they dispatch real-time energy,\113\ we are not
requiring that these settlement intervals align. CAISO, in defending
its current practices, states that it procures operating reserves and
settles them on a fifteen-minute basis and distinguishes this type of
ancillary service from five-minute real-time energy dispatch.\114\
However, CAISO, along with all of the other RTOs/ISOs, supports the
requirement that they settle operating reserves transactions at the
same time interval that they price these transactions, which
accommodates both RTOs/ISOs that currently settle co-optimized reserve
transactions on a five-minute basis and those that currently settle
these transactions on a fifteen-minute basis. Accordingly, we clarify
that CAISO's understanding in this regard is consistent with how
operating reserves and energy on its system are ``priced,'' as
contemplated by the wording of the settlement interval regulations
adopted by this Final Rule.
---------------------------------------------------------------------------

    \113\ PSEG Comments at 4-5; EPSA Comments, Pope Aff. at 11-13.
    \114\ CAISO Comments at 17-18.
---------------------------------------------------------------------------

    72. NYISO states that, although it uses sub-hourly settlements in
its real-time market, in certain cases, the Commission has approved
NYISO performing settlements on an hourly basis, and NYISO argues it
should not be required to bring those settlements into alignment with
its normal dispatch intervals.\115\ NYISO cites limited energy storage
resources as an example of services that currently settle hourly and
yet follow dispatch instructions and provide resource response in real-
time. To the extent NYISO or other RTOs/ISOs seek to argue on
compliance that their existing market rules are consistent with or
superior to the Final Rule reforms adopted herein, the Commission will
entertain those at that time.\116\
---------------------------------------------------------------------------

    \115\ NYISO Comments at 3-4.
    \116\ See, e.g., Demand Response Compensation in Organized
Wholesale Energy Markets, Order No. 745, FERC Stats. & Regs. ]
31,322, at P 4 & n.7, order on reh'g and clarification, Order No.
745-A, 137 FERC ] 61,215 (2011), reh'g denied, Order No. 745-B, 138
FERC ] 61,148 (2012), vacated sub nom. Elec. Power Supply Ass'n v.
FERC, 753 F.3d 216 (D.C. Cir. 2014), rev'd & remanded sub nom. FERC
v. Elec. Power Supply Ass'n, 136 S. Ct. 760 (2016).
---------------------------------------------------------------------------

    73. Although generally supporting the settlement interval
requirement for operating reserves, some commenters question whether
such a requirement should apply to all reserve products or assert that
regional variations should be considered.\117\ We appreciate that
regional variations may exist among the many different reserve products
in the RTOs/ISOs and we clarify that all operating reserve products
that have a market-based price are subject to the settlement interval
reform.
---------------------------------------------------------------------------

    \117\ See, e.g., Dominion Comments at 3; EEI Comments at 10.
---------------------------------------------------------------------------

3. Interties
a. Commission Request for Comments
    74. The Commission sought comment on whether the proposed reforms
are appropriate for intertie transactions scheduled on intervals
different from

the intervals on which RTOs/ISOs dispatch internal real-time
energy.\118\
---------------------------------------------------------------------------

    \118\ NOPR, FERC Stats. & Regs. ] 32,710 at P 39.
---------------------------------------------------------------------------

i. Comments by RTOs/ISOs
    75. The ISO/RTO Council asserts that aligning dispatch and pricing
should also apply to intertie transactions, adding that this would
prevent price discrepancies and may reduce uplift.\119\
---------------------------------------------------------------------------

    \119\ ISO/RTO Council Comments at 2.
---------------------------------------------------------------------------

    76. PJM asserts that intertie transactions should be included in
the scope of the Final Rule, noting that it plans to settle intertie
transactions on a five-minute basis, consistent with its proposal for
its real-time energy market. PJM suggests that, where a transaction is
curtailed or the MW quantity is reduced during a fifteen-minute
interval due to a reliability directive, each five-minute interval in
the transaction should settle on the integrated transaction MW quantity
that flowed during the five-minute interval.\120\
---------------------------------------------------------------------------

    \120\ PJM Comments at 8.
---------------------------------------------------------------------------

    77. ISO-NE argues that external interties should settle no less
often than the intervals for which they are scheduled. ISO-NE
represents that its proposals to implement sub-hourly settlements would
fully meet this objective at all its external interfaces.\121\ NYISO
argues that intertie and internal transactions should have the same
settlement interval because this alignment will promote competition,
identify the most economic supply option, provide equal incentives to
respond to the same operating conditions, and improve the efficiency of
interregional transactions.\122\
---------------------------------------------------------------------------

    \121\ ISO-NE Comments at 2.
    \122\ NYISO Comments at 5.
---------------------------------------------------------------------------

    78. CAISO notes that it already schedules and settles intertie
transactions and internal resources on a fifteen-minute basis.\123\
However, CAISO also provides three options for scheduling imports and
exports on an hourly basis: (1) Economic-bid hourly block; (2)
economic-bid hourly block with a single intra-hour schedule change that
will be dispatched to zero within the hour if a fifteen-minute price is
less than an import's bid price or greater than an export's bid price;
and (3) self-scheduled hourly.\124\ CAISO requests that the Commission
state that CAISO's current market design with granular dispatch and
settlement of its real-time energy market is consistent with the
settlement interval proposal.\125\
---------------------------------------------------------------------------

    \123\ CAISO Comments at 12.
    \124\ CAISO Comments at 9.
    \125\ CAISO Comments at 10.
---------------------------------------------------------------------------

    79. CAISO asserts that a blanket requirement that hourly intertie
schedules revert to hourly pricing, as was previously the case under
its prior market design, would result in the same adverse market
outcomes it resolved through its fifteen-minute market
enhancement.\126\ CAISO requests that the Commission clarify that the
availability of hourly block intertie bidding options would not violate
the settlement interval proposal because its current market design
ensures all internal and external transactions are cleared and settled
based on fifteen-minute market intervals that optimize all transactions
in its markets.\127\
---------------------------------------------------------------------------

    \126\ CAISO Comments at 14.
    \127\ CAISO Comments at 15.
---------------------------------------------------------------------------

ii. Comments by Market Monitors
    80. The PJM Market Monitor asserts that intertie transactions in
PJM cannot be measured accurately enough to support five-minute
settlements, noting that accurate measurement is difficult because of
differences between actual and scheduled flows. The PJM Market Monitor
thus recommends that settlements be based on the same fifteen-minute
interval used for external scheduling intervals. The PJM Market Monitor
asserts that this approach would more accurately reflect LMP during the
actual time period of the transaction and would make the period and
settlement of the transaction consistent.\128\
---------------------------------------------------------------------------

    \128\ PJM Market Monitor Comments at 7.
---------------------------------------------------------------------------

    81. The PJM Market Monitor states that alternative settlement
approaches include using the integrated price over the same fifteen-
minute interval used in scheduling and using five-minute interval
settlements.\129\
---------------------------------------------------------------------------

    \129\ The PJM Market Monitor in its comments provides examples
of these alternatives. PJM Market Monitor Comments at 5-7.
---------------------------------------------------------------------------

iii. Comments in Support of Applying Settlement Reform to Interties
    82. The New Jersey Board, EEI, EPSA, Dominion, and EDP Renewables
concur with the PJM Market Monitor that intertie settlements should be
at fifteen-minute intervals, the same interval as external
scheduling.\130\
---------------------------------------------------------------------------

    \130\ New Jersey Board Comments at 3-4; EEI Comments at 9; EPSA
Comments, Pope Aff. at 9; Dominion Comments at 4; EDP Renewables
Comments at 5.
---------------------------------------------------------------------------

    83. Golden Spread states that alignment between dispatch and
settlement intervals is generally desirable for the reasons listed in
the NOPR, and notes that it believes SPP already aligns dispatch and
settlement intervals for intertie transactions on a five-minute
basis.\131\
---------------------------------------------------------------------------

    \131\ Golden Spread Initial Comments at 2.
---------------------------------------------------------------------------

    84. ANGA, PSEG, and the Financial Marketers Coalition assert that
the logic underlying the proposed settlement reform as applied to
internal transactions should apply equally to intertie transactions,
and ANGA recommends that the Commission consider evolving these
interfaces to five-minute dispatch and settlement, perhaps over the
next three to five years.\132\
---------------------------------------------------------------------------

    \132\ ANGA Comments at 3-4; Financial Marketers Coalition
Comments at 3-4; PSEG Comments at 5.
---------------------------------------------------------------------------

    85. Although it generally agrees that the settlement interval
proposal should apply equally to internal and intertie transactions,
Financial Marketers Coalition states that, in CAISO, clearing some
transactions (such as load and generation) on a five-minute price and
others (such as internal and intertie convergence bids) on a fifteen-
minute price has yielded price divergence instead of convergence.
iv. Comments Opposed To Applying Settlement Reform to Interties
    86. Inertia Power and DC Energy argue that intertie economic
dispatch intervals cannot easily be aligned with internal real-time
energy dispatch but emphasize the importance of maintaining the highest
possible consistency across the seams to ensure a more efficient,
resilient, and reliable electrical system.\133\
---------------------------------------------------------------------------

    \133\ Inertia Power and DC Energy Comments at 4-5.
---------------------------------------------------------------------------

    87. Duke states that the issue of whether to apply the settlement
interval proposal to intertie transactions should be discussed in the
RTO/ISO stakeholder processes and that they should be treated
comparably to reforms to internal transactions.\134\
---------------------------------------------------------------------------

    \134\ Duke Comments at 5.
---------------------------------------------------------------------------

b. Commission Determination
    88. Based upon the comments received on this issue, we modify the
regulatory text proposed in the NOPR to require each RTO/ISO to settle
intertie transactions in the same time interval that it schedules
intertie transactions. The settlement interval requirement for intertie
transactions will facilitate the coordination of the scheduling and
settlement of intertie transactions, and will discourage inefficient
practices such as the chasing of inaccurate intertie prices. For
example, if there are very high prices in the first fifteen minutes of
an hour, resources will know that for that entire operating hour, there
will be a high integrated hourly price. This provides an incentive for
resources to increase the volume of intertie transactions for the
remainder of the hour, even if the price for the subsequent fifteen-
minute interval is much lower reflecting that it may no

longer be efficient to schedule such intertie transactions. Most
commenters, as described above, agree that such a requirement will aid
in the achievement of these goals.
    89. However, a difference of opinion exists between PJM and the PJM
Market Monitor. PJM supports moving to a five-minute settlement
interval for intertie transactions while the PJM Market Monitor
supports aligning the settlement interval for intertie transactions
with the fifteen-minute scheduling interval for these transactions.
    90. If an RTO/ISO settles or proposes to settle intertie
transactions using a shorter time interval than by which it schedules
such transactions, the RTO/ISO may propose to do so in its compliance
filing and demonstrate that such a proposal is consistent with or
superior to the Commission's intertie reforms. The compliance filing
proceeding will provide a forum in which to consider alternative
practices and resolve disputes that may arise within regions, as well
as provide for the development of a more complete record on these
issues.
    91. We decline to clarify for CAISO that the availability of hourly
block intertie bidding options would not violate the settlement
interval requirement for interties. Such a determination is more
appropriately made upon reviewing CAISO's compliance filing and CAISO
should justify its proposed treatment for intertie transactions there.
4. Demand Response Resources
a. Comments
    92. Several commenters discuss the application of the settlement
interval proposal to demand response resources even though the
Commission did not specifically solicit those comments and did not make
a separate proposal concerning demand response resources apart from
other resources considered in the NOPR.
    93. The PJM Market Monitor, with the New Jersey Board concurring,
recommends that five-minute pricing in energy markets explicitly cover
all resources providing energy, including demand side and storage
resources.\135\ PJM Market Monitor recommends that the Commission
require any associated, necessary metering associated with applying the
requirement to demand resources.\136\
---------------------------------------------------------------------------

    \135\ PJM Market Monitor Comments at 2; New Jersey Board
Comments at 2.
    \136\ PJM Market Monitor Comments at 2; New Jersey Board
Comments at 2.
---------------------------------------------------------------------------

    94. Public Interest Organizations also urge the Commission to make
clear that its proposed reforms apply to all resources able to
participate in wholesale energy markets.\137\ PSEG similarly supports
the application of the settlement interval proposal to demand response
resources. PSEG states that real-time settlements for demand response
resources, or any other load-side resources that are price responsive
in wholesale markets, should be based on five-minute intervals, in the
same manner as the supply resources with which it competes.\138\ PSEG
acknowledges that some demand resources will lack necessary meters and/
or communication, and states that it would be reasonable to allow these
resources a transition period to install them without delaying overall
implementation.\139\
---------------------------------------------------------------------------

    \137\ Public Interest Organizations at 5.
    \138\ PSEG Comments at 5.
    \139\ PSEG Comments at 5.
---------------------------------------------------------------------------

    95. AEMA states that it recommends that demand response resources
have the option to continue to settle on the basis of one-hour meter
readings. AEMA asserts that demand resources use hourly intervals
because only hourly interval metering may be available and even new
advanced metering infrastructure is only capable of fifteen minute
interval data, whereas settling on five-minute intervals could entail
adding an expense that is an economic barrier to entry for some
resources.\140\
---------------------------------------------------------------------------

    \140\ AEMA Comments at 4.
---------------------------------------------------------------------------

    96. AEMA also states that few demand response resources have the
operational communications to modify their demand at frequent intervals
and that frequent demand changes would require more robust
communications than may be economic.\141\ AEMA further states that the
Net Benefits Price Threshold that many RTOs/ISOs established in
response to FERC Order No. 745 is applied on an hourly basis and that
the industry has universally adopted hourly baseline methodologies for
demand response resources.\142\
---------------------------------------------------------------------------

    \141\ AEMA Comments at 4.
    \142\ AEMA Comments at 3-5 (citing Order No. 745, FERC Stats. &
Regs. ] 31,322).
---------------------------------------------------------------------------

    97. AEMA explains that much of the current energy-related demand
response participation relies on the commitment to dispatch for one or
more hours and if the bid-offer is accepted for demand response
resources, those resources are eligible for uplift payments if the
energy prices fall below their bid-offer during their committed
dispatch time. AEMA requests that these bid offer guarantees continue
to be incorporated in the Final Rule.\143\
---------------------------------------------------------------------------

    \143\ AEMA Comments at 5.
---------------------------------------------------------------------------

b. Commission Determination
    98. In using the term ``resource'' in the NOPR, the Commission
intended for the settlement interval proposal to apply to all supply
resources, including demand response resources. We find that, as with
other resources, aligning the price signal and dispatch signal provides
demand response resources capable of following a given dispatch signal
the incentive to do so, resulting in a more efficient use of demand
response resources in the real-time energy and operating reserve
markets. As stated above, all RTOs/ISOs have a combination of
resources, some of which can respond within five minutes and some that
cannot, and that includes demand response resources. It is important to
provide a price signal to all resources, regardless of type or
capability, as this will provide proper compensation to those resources
capable of responding to five-minute dispatch signals, and will
incentivize such capability to those resources that do not currently
have it.
    99. In response to concerns about the need to upgrade metering
technology for demand response resources, we note that this Final Rule
does not contemplate requiring any new metering capability, such as
five-minute revenue quality metering, and that such metering is not
necessary for implementation given RTOs'/ISOs' ability to create five-
minute load and generation profiles using telemetry and hourly revenue
quality data. We also do not require any changes to baseline
methodologies. Although a more granular baseline may provide additional
value, RTOs/ISOs need not change their baseline methodology to comply
with this Final Rule. Finally, we find that AEMA's arguments regarding
the Net Benefits Price Threshold \144\ and ``make whole'' rules are
beyond the scope of this Final Rule because it does not require any
changes to the Net Benefits Price Threshold or make-whole payments.
Even if modest changes to these provisions were required for RTOs/ISOs
to comply with this Final Rule, the benefits of this rule would justify
such modifications.
---------------------------------------------------------------------------

    \144\ AEMA Comments at 3.
---------------------------------------------------------------------------

5. Load
a. Comments
    100. A number of commenters state the proposed rule did not specify
whether the settlement interval proposal would apply to load,\145\ or,
in other

words, whether it would change how load is settled and measured.
---------------------------------------------------------------------------

    \145\ For purposes of this Final Rule, the term ``load''
generally refers to consumption of electricity in the wholesale
markets, but not to demand response acting as a supply resource in
the wholesale markets.
---------------------------------------------------------------------------

    101. EEI, PSEG, SCE, AEMA, EPSA and CAISO recommend that the
Commission not apply the settlement reform to load.\146\ The primary
arguments these commenters cite against applying the settlement
interval proposal to load include: (1) The benefit of settling load on
an interval basis is not likely to outweigh the cost, which may include
the need for new expensive metering; \147\ (2) settlement reform alone
will not encourage price responsive load without corresponding changes
to state-jurisdictional retail rate design; \148\ and (3) because load
is not dispatchable, there is no dispatch interval that aligns with
load.\149\ Direct Energy recommends either not applying the settlement
reform to load or delaying implementation until the majority of load
has the ability, incentive and information necessary to respond to
five-minute settlements.\150\ EEI specifically requests that the
Commission clarify that it is not proposing to change how load is
metered.\151\
---------------------------------------------------------------------------

    \146\ EEI Comments at 8-9; PSEG Comments at 5-6; SCE Comments at
2; AEMA Comments at 4-5; EPSA Comments, Pope Aff. at 6-7; CAISO
Comments at 16-17.
    \147\ SCE Comments at 2.
    \148\ SCE Comments at 2.
    \149\ CAISO Comments at 16-17.
    \150\ Direct Energy Comments at 7. See also Supplemental
Comments of Direct Energy (filed Mar. 4, 2016).
    \151\ EEI Comments at 8-9.
---------------------------------------------------------------------------

    102. PJM, however, states that it is advantageous to apply the
proposed rule to load, and proposes to settle load on the same interval
as dispatch intervals by using a combination of state-estimator and
telemetry data for each settlement interval.\152\ PJM states that it
thus does not foresee changes being required for market participants'
metering.\153\
---------------------------------------------------------------------------

    \152\ PJM Comments at 5.
    \153\ PJM Comments at 5.
---------------------------------------------------------------------------

    103. Mr. Centolella states that advancing load settlements to
reflect the actual interval demand of each load serving entity's
customers could remove an important barrier to developing the next
generation of responsive demand. Mr. Centolella also encourages the
Commission to work with states to optimize collecting customer data,
and to evaluate how to support efficient price formation related to the
load data used in wholesale settlements.\154\
---------------------------------------------------------------------------

    \154\ Mr. Centolella Comments at 4-6.
---------------------------------------------------------------------------

b. Commission Determination
    104. We clarify that the Commission did not propose to apply the
settlement interval proposal to load. We also clarify that adoption of
the settlement interval requirements are not intended to change how
load is metered. The Commission's basis for requiring changes to the
settlement interval focused exclusively on supply resources rather than
load. As a result, we have no record to require any changes to the
settlement interval for load. However, we are not prohibiting settling
load on a five-minute basis, and will evaluate any such proposals on a
case-by-case basis in separate proceedings submitted pursuant to
section 205 of the FPA.

B. Shortage Pricing Reform

1. Need for Reform
    105. In the NOPR, the Commission stated that shortage prices send a
short-term price signal to provide an incentive for the performance of
existing resources and help to maintain reliability. The Commission
noted that some RTOs/ISOs currently restrict the use of shortage
pricing to certain causes of shortages, or some RTOs/ISOs require a
shortage to exist for a minimum amount of time before triggering
shortage pricing.\155\ The Commission further noted that not invoking
shortage pricing when there is a shortage (regardless of the duration
or cause of that shortage) distorts price signals that are designed to
elicit increased supply and to compensate resources for the value of
the services they provide when the system needs energy or operating
reserves. Because these price signals fail to reflect adequately the
value that a resource provides to the system, the Commission
preliminarily found in the NOPR that the resulting price is not just
and reasonable.\156\
---------------------------------------------------------------------------

    \155\ NOPR, FERC Stats. & Regs. ] 32,710 at P 46.
    \156\ NOPR, FERC Stats. & Regs. ] 32,710 at P 47.
---------------------------------------------------------------------------

    106. The Commission also noted that its rationale regarding
shortage pricing was similar to the rationale the Commission relied on
in Order No. 719, in which the Commission determined that ``rules that
do not allow for prices to rise sufficiently during an operating
reserve shortage to allow supply to meet demand are unjust,
unreasonable, and may be unduly discriminatory'' and that such rules
``may not produce prices that accurately reflect the value of energy.''
\157\
---------------------------------------------------------------------------

    \157\ NOPR, FERC Stats. & Regs. ] 32,710 at P 48 (citing Order
No. 719, FERC Stats. & Regs. ] 31,281 at P 192).
---------------------------------------------------------------------------

    107. Commenters generally support the rationale provided by the
Commission in support of the need for reform. For example, as discussed
below, MISO, NYISO and ISO-NE all support the need for reform, and
CAISO supports the conceptual need, but requests further
clarifications. EEI and EPSA also support the Commission's shortage
pricing proposal. Conversely, SPP and PJM, in joint comments, oppose
implementing shortage pricing in all dispatch intervals, and request
revisions if the Commission adopts its proposed reforms.
    108. Based on analysis of the record, we adopt our preliminary
findings and conclude that existing shortage pricing triggers that do
not invoke shortage pricing when there is a shortage (regardless of
duration or cause) are unjust and unreasonable and are unduly
discriminatory and preferential. Thus, there is a need to reform the
use of shortage pricing in RTO/ISO markets, as discussed further
herein.
2. NOPR Proposal
    109. In order to remedy the potentially unjust and unreasonable
rates caused by restrictions on shortage pricing, the Commission
proposed to require that RTOs/ISOs institute mechanisms that trigger
shortage pricing for any dispatch interval during which a shortage of
energy or operating reserves occurs.
3. Comments on the Proposed Shortage Pricing Reform
a. Comments by RTOs/ISOs
    110. MISO states that it supports shortage pricing reform and
maintains that MISO's current practices are already consistent with the
Commission's proposal. Specifically, MISO states its operating reserve
demand curve is used in the five-minute dispatch interval and triggers
shortage pricing in any five-minute interval in which operating reserve
requirements cannot be fully satisfied, regardless of duration or
causation.\158\ MISO also states that its recent implementation of
extended locational marginal pricing (ELMP) considers offline fast-
start resources in its price setting algorithm to more accurately
reflect the cost of the next MW to meet demand during scarcity
conditions.\159\ MISO notes that if no economic offline fast-start
resources are eligible, it will rely upon the operating reserve demand
curve values for shortage pricing. MISO states that it is already
compliant with the proposed rule on shortage pricing.\160\
---------------------------------------------------------------------------

    \158\ MISO Comments at 10.
    \159\ See MISO, Extended Locational Marginal Pricing, Docket No.
ER12-668-000 (filed Dec. 22, 2011).
    \160\ MISO Comments at 11-12.

---------------------------------------------------------------------------

    111. ISO-NE supports the shortage pricing proposal and asserts that
its current market rules and real-time pricing systems already comply
with the proposed requirement.\161\
---------------------------------------------------------------------------

    \161\ ISO-NE Comments at 3.
---------------------------------------------------------------------------

    112. NYISO supports the shortage pricing proposal, and states that
it uses demand curves to price all reserve shortages, regardless of
their duration. NYISO adds that it currently implements shortage
pricing in its day-ahead and real-time markets using various demand
curves for operating reserves, regulating reserves, and transmission
security, where the demand curves represent the escalating value of
each product as the level of any shortage increases.\162\ NYISO also
states that it does not interpret the NOPR to be addressing the use of
offline resources in real-time pricing or to be implying that
practices, such as the NYISO's ``Hybrid Pricing'' rules,\163\ are
inconsistent with the NOPR.\164\
---------------------------------------------------------------------------

    \162\ NYISO Comments at 6.
    \163\ NYISO's Hybrid Pricing rules were adopted in 2001. See New
York Indep. Sys. Operator, Inc., 95 FERC ] 61,121 (2001). The Hybrid
Pricing rules apply to Real-Time Market pricing and relax the
minimum operating limits of certain fast-start, block-loaded
resources in order to permit them to be eligible to set price based
on the incremental need that required their commitment.
    \164\ NYISO Comments at 7.
---------------------------------------------------------------------------

    113. CAISO agrees with the concept behind the shortage pricing
reform and supports its implementation, subject to certain
clarifications. CAISO expects that its existing tariff provisions
implementing scarcity pricing for energy and ancillary services already
comply with the NOPR's proposal. CAISO explains that, in any fifteen-
minute interval of the fifteen-minute market, it will co-optimize the
procurement of energy and ancillary services based on submitted supply
bids and the forecast of demand and its ancillary services
requirements. CAISO further explains that, in any given fifteen-minute
interval, if effective supply bids are insufficient to clear forecasted
demand, scarcity pricing will trigger and thereby indicate a shortage
of supply for that applicable fifteen-minute interval. CAISO states
that, similarly, if ancillary services bids are not sufficient to meet
the ancillary services procurement target, ancillary services scarcity
pricing will trigger for that interval.\165\
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    \165\ CAISO Comments at 20.
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    114. CAISO notes that within a fifteen-minute operating interval it
may need to deploy operating reserves to address a contingency in the
case of operating reserves, or in the case of regulation to
continuously balance supply and demand. CAISO states that it is
important that the Final Rule clarify that the deployment of operating
reserves or regulation does not necessarily mean a shortage exists.
CAISO notes that in some cases the deployment of reserves is made
through alternative deployment mechanisms and not in the co-
optimization function of the market.\166\ CAISO also explains that in
any given fifteen-minute market interval, if a shortage is observed,
shortage pricing will trigger within that interval and CAISO will not
wait for the shortage to materialize beyond that interval before
triggering shortage pricing. However, CAISO states that not all price
signals triggered by ``transient shortages'' provide incentives to
resources that have the capability to respond to brief-duration
shortages.\167\
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    \166\ CAISO explains that during each fifteen-minute interval in
which the resources are deployed, the system is not actually short
of supply bids when the operating reserves for that interval are
procured. Also, CAISO states that once the reserves are deployed, to
the extent that the market allows for full recovery of the required
reserves, the contingency event itself does not trigger scarcity
pricing for ancillary services. According to CAISO, this is because
no actual shortage of operating reserves exists unless there are
insufficient resources to meet operational needs for operating
reserves in the next applicable fifteen-minute market interval.
CAISO Comments at 21-22.
    \167\ CAISO Comments at 23.
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    115. PJM and SPP filed joint comments opposing triggering shortage
pricing in any dispatch interval in which a shortage of energy or
operating reserves occurs. First, PJM and SPP state that they support
shortage pricing only when ``a shortage of a particular product exists
that presents reliability concerns.'' \168\ PJM and SPP argue that
applying shortage prices to shortage events that do not cause
reliability concerns allows price increases even when such events are
transitory, do not pose reliability concerns, and cannot be addressed
due to limitations on resource response. PJM and SPP maintain that
applying shortage pricing to some transient shortages will give
inaccurate prices and could potentially degrade system reliability, and
may also result in market pricing and operations that are contrary to
the Commission's stated goals.\169\
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    \168\ PJM and SPP Comments at 1.
    \169\ PJM and SPP Comments at 1-2.
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    116. PJM and SPP further state that they have in place rules
related to this issue consistent with the principles and goals of
shortage pricing. PJM and SPP urge the Commission to provide
flexibility by allowing RTOs/ISOs to implement shortage pricing in the
context of their regional rules. This, PJM and SPP assert, will ensure
that inefficient pricing does not result.\170\
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    \170\ PJM and SPP Comments at 2-3.
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    117. PJM and SPP argue that allowing transient periods of shortage
to trigger shortage pricing could overstate the severity of the
operating condition and result in prices that do not accurately reflect
operating conditions on the system, or last long enough to allow market
participants responding to them to take meaningful action. In fact, PJM
and SPP assert that responses may occur after the relevant interval has
passed, which could be counterproductive operationally and
economically. PJM and SPP pose two examples to illustrate this point.
As the first example, they posit: PJM carrying the required amount of
reserves when a market seller of a generation resource lowers the
resource's economic maximum capability, for a brief time (ten minutes
or less), causing PJM to have less reserves than its requirement.
Currently, PJM can recover these reserves by re-executing its dispatch
engine and re-dispatching its system; but under the shortage pricing
reform, this could invoke shortage pricing, which would then attract
more suppliers than needed and create disincentives for resources to
back down once the event was over. In another example, they posit: PJM
has scheduled a resource with a ten-minute start-up time to come online
to provide energy so that another resource may be reduced to provide
reserves; but if the resource scheduled to come online actually takes
twenty minutes instead of ten, shortage pricing would be triggered
under the shortage pricing proposal, and the second resource, instead
of having its output reduced to provide reserves would now need to
continue to provide energy, thus potentially leaving PJM short on
reserves for a brief period.\171\
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    \171\ PJM and SPP Comments at 4.
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    118. PJM and SPP introduce another hypothetical scenario from the
SPP region. PJM and SPP state that SPP can temporarily use operating
reserves to meet energy requirements during transient periods when
system conditions do not present reliability concerns. PJM and SPP
argue that while this may technically compromise the operating reserve
requirement, the condition is transient and is recovered in less than
ten minutes. According to PJM and SPP, this is not an operating reserve
shortage, but rather a transient reallocation of capacity to manage
temporary energy needs caused by the operational characteristics of
resources. PJM and SPP further state that the examples described above
do not present emergency conditions or

reliability concerns that would justify shortage pricing.\172\
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    \172\ PJM and SPP Comments at 5-6.
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    119. In order to ``recognize and respect the fact that not all
instances of shortages justify shortage pricing,'' PJM and SPP propose
alternative language for any Final Rule on shortage pricing:

    Each RTO/ISO must establish tariff provisions that implement
shortage pricing for pre-defined operating conditions related to a
shortage of energy or operating reserves. The Commission will allow
each RTO/ISO to develop those provisions based on their regional
circumstances, provided that the rules are consistent with shortage
pricing principles and are designed to facilitate the goals of this
[Final Rule]. The Commission expects that each RTO/ISO will explain
why their provisions, or why their current rules, comply with this
rule.\173\
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    \173\ PJM and SPP Comments at 7.

    120. PJM and SPP further assert that a universal shortage pricing
rule requiring shortage pricing even for transient circumstances would
require the implementation of operating reserve demand curves that
distinguish prices relative to varying degrees of shortage. PJM and SPP
explain further that in PJM's case, the current operating reserve
demand curves are a step function, which would need to be changed, and
in SPP's case it would likely consider the implementation of a pricing
gradient demand curve based on different degrees of shortages and their
impact on reliability, rather than steep step curves.\174\
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    \174\ PJM and SPP Comments at 8.
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b. Comments by Market Monitors
    121. Potomac Economics explains that all the markets that it
monitors (ISO-NE, NYISO, and MISO) are designed to price all shortages,
regardless of duration.\175\ Potomac Economics states that it strongly
supports the shortage pricing reform and argues that pricing all
shortages, regardless of duration, provides efficient incentives for
resources to be flexible and to perform well, which ultimately lowers
costs to consumers and improves reliability.\176\ Potomac Economics
states that, together with the alignment of dispatch and settlement
intervals, a requirement for RTOs/ISOs to price ``transitory
shortages'' rewards units that can respond quickly to help the RTO/ISO
remedy the shortage and, in doing so, addresses the diminished
reliability caused by the shortage.\177\
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    \175\ Potomac Economics Comments at 9.
    \176\ Potomac Economics Comments at 7.
    \177\ Potomac Economics Comments at 7.
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    122. Potomac Economics states that transitory shortages typically
occur when the system is ramp-constrained, and that these are true
shortages, because if a large contingency occurs during this period
(e.g., a generator tripping off-line), the RTO/ISO will not have the
ability to replace the capacity because its other generators are
already ramping as quickly as possible. Potomac Economics states that
the Commission's proposal will lead to resources offering faster ramp
rates, offering wider dispatch ranges and not self-scheduling
resources, and offering shorter start times for natural gas turbines.
Potomac Economics states that the proposal also has important long-term
implications as it provides efficient incentives for participants to
build more flexible, fast-ramping generating resources, and to make
maintenance decisions on existing resources to increase their
flexibility.\178\
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    \178\ Potomac Economics Comments at 8.
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    123. Potomac Economics also states that allowing offline resources
to set real-time energy and ancillary services prices can be efficient,
but there are also conditions under which the use of these resources
can artificially lower energy prices and obscure shortages.\179\
Potomac Economics explains that if an RTO's/ISO's pricing model allows
infeasible or uneconomic units to set prices, the offline units
represent an artificial increase in real-time supply that will depress
real-time prices. Further, Potomac Economics explains that the
artificial increase in real-time supply can have a large effect when
the system is experiencing an operating reserve or transmission
shortage, which is ultimately not priced as a shortage because an
offline unit has set the price.\180\
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    \179\ Potomac Economics Comments at 9.
    \180\ Potomac Economics Comments at 10.
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    124. Potomac Economics recommends that the Commission require RTOs/
ISOs to demonstrate that their real-time pricing models do not allow
offline units to set prices in a manner that undermines its real-time
shortage pricing. Potomac Economics believes that this can be
demonstrated by the RTO/ISO describing how and when offline units set
real-time prices and showing that when offline units have set price
historically that they are generally committed and dispatched as well.
Potomac Economics further asserts that if the RTOs/ISOs cannot
demonstrate this in their compliance filing, then they may need to make
changes to their pricing models to ensure that they satisfy the
Commission's price formation goals.\181\