ORDER ON TECHNICAL CONFERENCES
(Issued November 20, 2014)

1. The Commission, through this order, is acting to address an issue that has been
raised over the course of the last several months in various venues, including the
Commission’s September 25, 2013 technical conference on centralized capacity markets
in regional transmission organizations and independent system operators (RTO/ISO)
(Capacity Markets Technical Conference) and the Commission’s April 1, 2014 technical
conference on winter 2013/2014 operations and market performance in RTOs/ISOs
(Polar Vortex Technical Conference). Fuel assurance was a consistent theme at both
technical conferences and has a direct and immediate impact on generator performance
and thus, system reliability. Failure to address this issue can potentially lead to volatile
and often high fuel prices or costly RTO/ISO actions to ensure reliability. In light of
these potential risks to reliability and just and reasonable rates, the Commission believes
it is appropriate at this time to initiate a review of how each RTO/ISO is addressing fuel
assurance.

2. In this order, we direct RTOs/ISOs to file reports on the status of their efforts to
address fuel assurance issues. We also provide guidance to assist RTOs/ISOs in those
efforts.

Background

3. The Commission convened the September 25, 2013 Capacity Markets Technical Conference to consider how centralized capacity market rules are supporting the
procurement and retention of resources necessary to meet future reliability and

Docket Nos. AD13-7-000 and AD14-8-000- 2 -

operational needs.1 The Commission stated its intention to examine the effects of the
evolving mix of resources and changing market conditions, including low natural gas
prices, the retirement of aging generation resources, and compliance with state and
federal environmental policies. During the conference, and in post-technical conference
comments, commenters discussed four broad topics: (1) the role of centralized capacity
markets in assuring resource adequacy; (2) mechanics of current centralized capacity
markets; (3) adapting to industry changes; and (4) considerations for the future.

4. The Commission convened the April 1, 2014 Polar Vortex Technical Conference
subsequent to the events of winter 2013/2014, in which generator outages and fuel supply
issues led to tight system conditions. At the conference, RTOs/ISOs gave presentations
on how they prepared for and operated during cold weather events, followed by
stakeholder discussion on the lessons learned and future implications. During the
conference, and in post-technical conference comments, commenters identified several
aspects of fuel assurance as significant contributors to generator outages, including
assurance of fuel supply, natural gas pipeline transportation, high natural gas prices
caused by extreme cold weather, and cost recovery of high fuel prices.

Discussion

5. Out of the set of issues explored in both conferences, generator performance and
efficient market operations are among the most pressing concerns to the Commission.
Throughout the conferences and subsequent post-technical conference comments, and in
continued analysis by the RTOs/ISOs and the Commission, generator access to sufficient
fuel supplies and the firmness of generator fuel arrangements (referred to generally here
as “fuel assurance”) has been identified as a significant issue contributing to poor

generator performance and inefficient market operations. For example, PJM

Interconnection, L.L.C. (PJM) cited lack of fuel as a key reason for generator forced
outages that occurred during January 2014 cold weather events.2 Commission staff
further identified fuel deliverability and fuel handling problems as contributing to high

1 In August 2013, staff released a white paper evaluating the design of the
centralized capacity markets in the three eastern RTOs/ISOs. Commission Staff,
Centralized Capacity Market Design Elements, Docket No. AD13-7-000 (Aug. 23,
2013).

2 PJM Interconnection, L.L.C., Analysis of Operational Events and Market

Impacts During the January 2014 Cold Weather Events, at 24 (May 8, 2014); available
at http://www.pjm.com/~/media/documents/reports/20140509-analysis-of-operational-
events-and-market-impacts-during-the-jan-2014-cold-weather-events.ashx.

Docket Nos. AD13-7-000 and AD14-8-000- 3 -

levels of forced generation outages in several RTOs/ISOs.3 These issues were also

identified as contributing to the stressed conditions in the markets that led operators to resort to out of market unit commitments and emergency actions, which contributed to higher prices and high levels of uplift during the same cold weather events.4

6. In addition, commenters in the Capacity Markets Technical Conference and Polar
Vortex Technical Conference questioned whether the existing markets value fuel
assurance. In particular, commenters raised concerns as to whether the current resource
adequacy constructs in place in the RTOs/ISOs, including the eastern centralized capacity
markets,5 can address these significant challenges effectively. Commenters raised
specific concerns focused on the ability of capacity markets to address a range of
reliability and operational needs, including valuing firmer fuel supplies. As currently
designed, the eastern capacity market auctions establish capacity prices based on
economic bids of sellers, but do not directly take into account generator type, fuel supply
arrangements, or operational characteristics. The Midcontinent Independent System
Operator, Inc.’s (MISO) resource adequacy construct operates similarly in that it does not
directly account for fuel assurance concerns. Additionally, experiences in RTO/ISO
regions without centralized capacity markets, such as the California Independent System
Operator Corporation (CAISO)6 and the Southwest Power Pool, Inc. (SPP)7 suggest that
similar fuel assurance concerns may exist in those regions. In addition, commenters in
the Capacity Markets Technical Conference proceeding raised concerns regarding the
performance of energy and ancillary services markets, including the effectiveness of the

3 Commission Staff, Winter 2013-2014 Operations and Market Performance in RTOs and ISOs, at 8, Docket No. AD14-8-000 (Apr. 3, 2014).

4 See id. at 6-7, 9.

5 The three eastern RTOs/ISOs, PJM, ISO New England Inc. (ISO-NE) and New York Independent System Operator, Inc. (NYISO), have all implemented mandatory centralized capacity markets.

6 For example, CAISO recently filed with the Commission a proposal to enhance
its commitment cost recovery tariff provisions to, among other things, allow CAISO to
use updated natural gas price data in its day-ahead market when natural gas prices exceed
a specified threshold. CAISO October 1, 2014 Proposal, Docket No. ER15-15-000.

7 SPP, Southwest Power Pool: Winter 2013-2014, Docket No. AD14-8-000, at 9-
10, 16 (Apr. 3, 2014) (noting the operational challenges associated with limited natural gas supply during extreme cold events).

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markets in setting prices during reserve shortage conditions.8 Following the severe cold
weather events experienced during winter 2013-2014, concerns were raised regarding the
impact of offer caps and other RTO/ISO practices on the ability of generators to recover
their fuel costs.

7. As explained above, we use the term “fuel assurance” to describe the broad set of
issues that have emerged in the RTOs/ISOs with respect to generator access to sufficient
fuel supplies and the firmness of generator fuel arrangements. Fuel assurance is a broad
concept that includes a range of generator-specific and system-wide issues, including the
overall ability of an RTO’s/ISO’s portfolio of resources to access sufficient fuel to meet
system needs and maintain reliability. These issues have become of greater concern

given the increased reliance on natural gas-fired generators due to low average natural
gas prices, compliance with environmental regulations, and other factors. However,
while issues surrounding increased reliance on natural gas act as important drivers of
current fuel assurance concerns, the need to address fuel assurance continues to apply to
all resources, regardless of fuel type. Fuel assurance may also encompass impacts on fuel
availability of any industry in the supply chain, including contingencies and other risks
stemming from those industries. While it is valuable for RTOs/ISOs, as well as the
Commission, to be aware of the impacts on fuel availability of any industry in the supply
chain, there may be issues that individual resources or RTOs/ISOs cannot control, and, in
fact, only a subset of such impacts on fuel availability may be within the confines of the
Commission’s jurisdiction.

8. Fuel assurance is a key to ensuring generator performance, which directly

contributes to the overall reliability of the grid and just and reasonable rates. Failure to
address fuel assurance could lead RTOs/ISOs to take costly actions to ensure reliability.
Failure to address fuel assurance could also result in volatile (and often high) prices to
consumers when generation resources are forced to procure fuel supplies at the last
minute in a volatile natural gas market. The events of winter 2013/2014 provide an
example of this potential. To the extent that energy and ancillary services markets,
centralized capacity markets, or resource adequacy constructs fail to address fuel
assurance concerns, reforms may be necessary to ensure that these markets or resource
adequacy constructs meet their reliability objectives and result in just and reasonable
wholesale rates.

8 See, e.g., Exelon Corporation, Post-Technical Conference Comments, Docket
No. AD13-7-000, at 8-14 (filed Jan. 8, 2014); Electric Power Supply Association, Post-
Technical Conference Comments, Docket No. AD13-7-000, at 9 (filed Jan. 8, 2014);
Vitol, Inc., Post-Technical Conference Comments, Docket No. AD13-7-000, at 7-8 (filed
Jan. 8, 2014).

Docket Nos. AD13-7-000 and AD14-8-000- 5 -

9. While the comments from the Capacity Markets Technical Conference and Polar
Vortex Technical Conference brought recent attention to the issue of fuel assurance in
RTOs/ISOs, the Commission has highlighted such concerns in the past. For example, as
early as 2006, the Commission met with utility and railroad representatives to discuss
railroad coal-delivery matters and their impact on markets and electric reliability.9 More
recently, the Commission has acted in several individual proceedings to put in place a

number of market rule and tariff changes that can help address fuel assurance concerns.10
These incremental steps include providing greater market incentives to encourage
generators to enter into firmer fuel arrangements, clarifying the obligations of capacity
resources with respect to fuel procurement, and providing greater fuel cost recovery
certainty.

10. For example, the Commission recently acted on market rule changes proposed by
ISO New England Inc. (ISO-NE) and the New England Power Pool (NEPOOL) to
provide greater market incentives, in both the capacity market and energy and ancillary
services markets, for generators to be available and meet their obligations during reserve
shortages.11 The capacity market rule changes, called “pay for performance,” more
closely link capacity revenues to real-time performance, paying capacity resources more
when they deliver energy or reserves during reserve shortages and penalizing capacity
resources that fail to perform during such events. In addition, the Commission required
ISO-NE to adopt a NEPOOL proposal to increase Reserve Constraint Penalty Factors to
provide better price signals in the energy and ancillary services markets during reserve
shortage events. The potential additional market revenues to generators available in real-
time shortage conditions, and the potential for significant penalties when not available,
are intended to spur investments in fuel assurance, dual-fuel capability, improved
maintenance and staffing, and other enhancements to improve resource performance.

11. With respect to clarifying the obligations of capacity resources, the Commission
(in response to a complaint) clarified that the ISO-NE tariff imposes a strict performance
obligation on capacity resources and that capacity resources may not take “economic”
outages, including outages based on economic decisions not to procure fuel or fuel
transportation.12 This clarification provided important certainty to the market regarding

9 Discussions with Utility and Railroad Representatives On Market and Reliability Matters, Notice of Discussions, Docket No. AD06-8-000 (May 30, 2006).

10 See cases cited infra notes 11-18.

11 ISO New England Inc., 147 FERC ¶ 61,172 (2014).

12 New England Power Generators Association, Inc. v. ISO New England, Inc., 144 FERC ¶ 61,157, at P 47 (2013).

Docket Nos. AD13-7-000 and AD14-8-000- 6 -

the obligations of capacity resources in ISO-NE with respect to procuring fuel and fuel transportation.

12. The Commission has also addressed incremental steps intended to provide

generators with greater certainty of their ability to recover fuel costs. For example, the
Commission issued an order conditionally accepting enhancements to ISO-NE’s energy
market to provide greater flexibility for market participants to structure and modify their
supply offers in the day-ahead and real-time markets.13 One of those enhancements will
permit market participants the flexibility to update their offers on an hourly basis in real
time, allowing them to reflect updated fuel costs in their offers.14 The Commission also
granted a request by Dominion Energy Marketing, Inc. (Dominion) for the recovery of
fuel costs incurred when generating units at one of Dominion’s facilities ran beyond their
day-ahead schedules at the direction of ISO-NE.15 Further, during the severe cold

weather events of last winter, the Commission granted several requests submitted by

RTOs/ISOs to temporarily waive bid caps that could prevent generators from reflecting
their full fuel costs in their offers, providing generators with greater certainty that they
would be permitted to recover higher fuel costs caused by the extreme cold weather.16
Finally, the Commission has accepted two Winter Reliability Programs filed by ISO-NE
to encourage generators to maintain onsite fuel inventories, addressing concerns about
generator reliance on pipeline deliveries of fuel during periods of high natural gas

demand and stresses on pipeline systems.17

13 ISO New England Inc. and New England Power Pool, 147 FERC ¶ 61,073
(2014).

14 See id. P 3.

15 Dominion Energy Marketing, Inc. and ISO New England, Inc., 143 FERC

¶ 61,233, at PP 24-25, order on compliance, ISO New England Inc., 145 FERC ¶ 61,110
(2013).

16 PJM Interconnection, L.L.C., 146 FERC ¶ 61,041; PJM Interconnection, L.L.C.,
146 FERC ¶ 61,078, at P 40 (2014); New York Indep. Sys. Operator, Inc., 146 FERC
¶ 61,061, at P 20 (2014); Cal. Indep. Sys. Operator, Inc., 146 FERC ¶ 61,184, at P 20
(2014).

17 ISO New England Inc. and New England Power Pool Participants Committee,
148 FERC ¶ 61,179 (2014). The program also provides cost recovery for dual-fuel
audits, market monitoring changes to the must-burn requirement for dual-fuel resources,
and incentives for commissioning of dual-fuel capacity and additional demand response
participation.

Docket Nos. AD13-7-000 and AD14-8-000- 7 -

13. While we expect that these incremental steps will help to address market and

system performance concerns associated with fuel assurance, the Commission would like to consider these issues, and the efforts RTOs/ISOs have undertaken or plan to undertake to address them, on a more comprehensive basis. Thus, as explained in more detail
below, we direct the RTOs/ISOs to file reports on the status of their efforts to address fuel assurance issues within 90 days of the date of this order.

14. Having considered the incremental improvements that RTOs/ISOs have

implemented to date (as discussed above), we note that there are a number of potential approaches - in the capacity markets and resource adequacy constructs, energy and ancillary services markets, or both - RTOs/ISOs could consider to address market and system performance concerns associated with fuel assurance. The options can range from those focused on providing incentives to encourage greater fuel assurance to approaches that are more administrative in nature.

15. With respect to potential reforms to capacity markets or resource adequacy

constructs, RTOs/ISOs could pursue a range of options. On one end of the spectrum,
RTOs/ISOs could reform their centralized capacity markets to provide greater price
incentives for capacity resources to be available, and impose stiff penalties for failure to
perform, to encourage capacity resources to enter into firmer fuel arrangements. As
explained above, the Commission has already approved one such proposal in ISO-NE.
On the other end of the spectrum, RTOs/ISOs could take a more administrative approach
by reforming their capacity markets and/or resource adequacy mechanisms to specifically
require that capacity resources have certain fuel arrangements in place to be eligible to
provide resource adequacy. For example, RTOs/ISOs might require that, to be eligible to
participate in a centralized capacity market or to satisfy resource adequacy obligations in
other constructs, a generator would have to demonstrate that it has in place the fuel
arrangements required in the RTO’s/ISO’s definition of the capacity product or resource
adequacy obligation. RTOs/ISOs could also combine aspects of both approaches. One
way an RTO/ISO might consider implementing this approach is to discount the value of
capacity resources (by lowering their capacity rating or some other means) based on their
fuel arrangements.

16. Tradeoffs exist between the different approaches that must be considered in

determining what additional changes to capacity markets or resource adequacy constructs
to address fuel assurance may be appropriate. For example, an administrative approach
may offer RTOs/ISOs more certainty regarding the expected performance of resources
but requires that the RTO/ISO correctly identify all future system needs and the best
methods for meeting those needs. The ability of the RTO/ISO to do so correctly has cost
consequences for consumers. On the other hand, providing incentives to resources places
the risk and obligation on resource owners to determine how each resource can best fulfill
its fuel assurance needs but provides the RTO/ISO with less certainty regarding how

Docket Nos. AD13-7-000 and AD14-8-000- 8 -

resources will perform in the future. Resource owners will also price risk into their market offers, which could have cost consequences for consumers.

17. Regardless of the method, if fuel assurance is expressly valued in capacity markets
or resource adequacy constructs, additional changes may also be required. For example,
it may be appropriate to adjust capacity market offer caps, if applicable, to allow offers to
include investments required for fuel assurance. Additionally, clarifications may be
needed regarding rules such as the timing of the day-ahead market and unit commitment
process.

18. With respect to potential reforms to energy and ancillary services markets,

shortage pricing measures that accurately reflect the value to consumers of avoiding an
involuntary curtailment could provide incentives for resources to pursue firmer fuel
arrangements. Specifically, the potential to earn revenues to cover their costs and earn a
return in a few high priced hours each year provides a strong incentive for resources to
take steps (including firming their fuel arrangements) to ensure that they are available
during those hours. In addition, the risk of higher prices during peak demand hours could
provide a strong incentive for load to take steps to hedge against that risk, including
entering into bilateral arrangements to support additional infrastructure needed to ensure
fuel availability. Further, as described above, RTOs/ISOs can adjust market rules to
provide greater certainty that generators will be able to recover their fuel costs, giving
them greater incentives to make timely fuel procurement decisions. As with capacity
markets, we encourage RTOs/ISOs to evaluate whether changes to energy market rules
are necessary to ensure sufficient fuel cost recovery, thereby enhancing fuel assurance.
We recognize that any solution involves a balance of interests, such as weighing the
benefits of a particularly high level of fuel assurance with the associated costs, and
encourage RTOs/ISOs to account for these trade-offs in their approaches to fuel
assurance.

19. While the Commission could take action to impose solutions, and may need to in
the future if the steps RTOs/ISOs have taken or plan to take prove inadequate, we find
that the appropriate next step is for each RTO/ISO to provide the Commission with
additional information to explain how its market rules address fuel assurance challenges.
Although there are some common issues affecting all the RTOs/ISOs, there are also
significant differences in the nature and scope of the fuel assurance issues among the
RTOs/ISOs and it may be that there is more than one right answer for addressing fuel
assurance. Therefore, we allow each RTO/ISO the opportunity to identify the fuel
assurance issues most relevant to its markets and comprehensively describe the set of
actions it has already undertaken or proposes to undertake to address these issues.

20. We direct each RTO/ISO to file a report on the status of its efforts to address
market and system performance associated with fuel assurance issues within 90 days of
the date of this order. The RTO/ISO report should describe the nature of fuel assurance
concerns specific to its regions. The report should also describe the comprehensive

Docket Nos. AD13-7-000 and AD14-8-000- 9 -

strategy or strategies the RTO/ISO has implemented or plans to implement to address market and system performance in light of each of its fuel assurance concerns. Finally, the report should detail the specific programs and mechanisms that the RTO/ISO will use to carry out its strategies. Following the submission of the RTO/ISO reports, there will be a 30-day public comment period.

The Commission orders:

The RTOs/ISOs are hereby directed to file reports, as discussed in the body of this order, within 90 days of the date of this order.

By the Commission.

( S E A L )

Kimberly D. Bose,
Secretary.