134 FERC ¶ 61,124 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Part 35 

Frequency Regulation Compensation in the Docket Nos. RM11-7-000 

Organized Wholesale Power Markets AD10-11-000 

(February 17, 2011) 

AGENCY: Federal Energy Regulatory Commission. 

ACTION: Notice of Proposed Rulemaking. 

SUMMARY: The Federal Energy Regulatory Commission (Commission) is proposing 

to revise its regulations to remedy undue discrimination in the procurement of frequency 

regulation service in the organized wholesale electricity markets. The emergence of 

technologies capable of responding more quickly than the generators that have 

historically provided frequency regulation service has prompted the Commission to 

evaluate market rules to ensure that they are not unduly discriminatory or fail to provide 

just and reasonable compensation for the service being provided. If found, the 

Commission proposes to remedy the undue discrimination by requiring a uniform price 

for regulation capacity paid to all cleared resources and a performance payment for the 

provision of frequency regulation, with such payment reflecting a resource’s accuracy of 

performance. This proposed action helps to ensure that market rules do not present 

unnecessary barriers to the participation of all resource types in the wholesale ancillary 

services markets. The Commission seeks comment on the proposed regulations. 

DATES: Comments are due 60 days after publication in the FEDERAL REGISTER
Docket Nos. RM11-7-000 and AD10-11-000 - 2 - 

ADDRESSES: You may submit comments, identified by docket number by any of the 

following methods: 

 Agency Web Site: http://ferc.gov. Documents created electronically using word 

processing software should be filed in native applications or print-to-PDF format 

and not in a scanned format. 

 Mail/Hand Delivery: Commenters unable to file comments electronically must 

mail or hand deliver their comments to: Federal Energy Regulatory Commission, 

Secretary of the Commission, 888 First Street, NE, Washington, DC 20426. 

FOR FURTHER INFORMATION CONTACT: 

Robert Hellrich-Dawson (Technical Information) 

Office of Energy Policy & Innovation 

888 First Street, NE 

Washington, DC 20426 

(202) 502-6360 

bob.hellrich-dawson@ferc.gov 

Eric Winterbauer (Legal Information) 

Office of the General Counsel 

888 First Street, NE 

Washington, DC 20426 

(202) 502-8329 

eric.winterbauer@ferc.gov 

SUPPLEMENTARY INFORMATION:
134 FERC ¶ 61,124 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Frequency Regulation Compensation in the 

Organized Wholesale Power Markets 

Docket Nos. RM11-7-000 

AD10-11-000 

NOTICE OF PROPOSED RULEMAKING 

(February 17, 2011) 

1. Pursuant to section 206 of the Federal Power Act (FPA),1

 the Commission is 

proposing to revise its regulations to ensure just, reasonable and not unduly 

discriminatory or preferential rates in the procurement of frequency regulation in the 

organized wholesale electric markets. Maintaining the frequency of the transmission 

system within an acceptable range is critical to reliable operations. Historically, 

generators have provided the power to regulate or correct frequency deviations. Nontraditional technologies that have the capability to respond quickly and accurately to 

certain transmission system needs are being deployed in regional transmission 

organization (RTO) and independent system operator (ISO)2

 markets to varying degrees. 

Resources such as large-scale battery systems, flywheels, electric vehicle-to-grid (V2G) 

 1

 16 U.S.C. 824e (2006). Accord 16 U.S.C. 824d (providing that rates must be just 

and reasonable). 

2

 The following RTOs and ISOs have organized wholesale electricity markets: 

PJM Interconnection, LLC (PJM); New York Independent System Operator, Inc. 

(NYISO); Midwest Independent Transmission System Operator, Inc. (Midwest ISO); 

ISO New England Inc. (ISO-NE); California Independent System Operator Corp. 

(CAISO); and Southwest Power Pool, Inc. (SPP). 
Docket No. RM11-7-000 and AD10-11-000 - 2 - 

systems, and demand-side processes have the ability to ramp3

 up or down faster than 

some traditional resources and, as such, are able to provide frequency regulation services 

more accurately than traditional resources.4

2. Taking advantage of the capabilities of faster-ramping resources can improve the 

operational and economic efficiency of the transmission system and has the potential to 

lower costs to consumers in the organized wholesale energy markets.5

 However, current 

compensation methods for regulation service in ISO and RTO markets may not 

acknowledge the inherently greater amount of Area Correction Error (ACE)6

 correction 

 3

 “Ramping” or the ability to “ramp” is traditionally defined as the ability to 

change the output of real power from a generating unit per some unit of time, usually 

measured as MW/minute. A generator ramps up to produce more energy and ramps 

down to produce less. A storage device ramps up by discharging energy and ramps down 

by charging. A demand response resource, in the context of the provision of frequency 

regulation, ramps up by consuming less energy, and ramps down by consuming more. 

4

 In this instance, the ability to provide more accurate frequency regulation service 

means to follow the system operator’s dispatch signal more closely. 

5 See infra n.32-33 and corresponding text. 

6

 ACE comprises two components, one measuring the difference between a 

balancing authority’s scheduled and actual interchange, and another measuring the 

balancing authority’s share in correcting the frequency of the interconnection. In order to 

keep ACE within acceptable ranges, entities will pre-schedule resources in anticipation of 

load changes and use frequency regulation resources to make up the difference. The 

frequency regulation resources are sent a signal to increase or decrease their provision of 

energy (or discharge or charge in the case of a storage device, or consume more or less 

energy in the case of a demand response resource). This is done through what is known 

as Automatic Generation Control (AGC). Because the Balancing Area Authority must 

respond rapidly to correct ACE deviations, fast responding resources are particularly 

well-suited to maintaining system frequency. 
Docket No. RM11-7-000 and AD10-11-000 - 3 - 

being provided by faster-ramping resources.7

 Frequency regulation is the tool used to 

manage ACE. In addition, some RTOs currently provide unit-specific opportunity cost 

payments to regulating resources rather than incorporate the marginal resource’s 

opportunity cost into the uniform market clearing price, resulting in an economically 

inefficient economic dispatch. 

3. The Commission is concerned that frequency regulation compensation practices 

may be resulting in rates that are unjust and unreasonable and unduly discriminatory or 

preferential. Therefore, the Commission proposes to require regional RTOs and ISOs to 

adopt tariff revisions that will ensure that resources providing frequency regulation 

service are appropriately compensated.8

 The Commission seeks public comment on 

these proposed reforms. 

 7

 Both existing market participants and potential entrants are affected by 

inefficient pricing. It is possible that existing market participants would offer faster 

ramping capabilities to the system operator in response to a pricing scheme that 

recognized the service this provides. 

8

 This NOPR is limited to the RTOs and ISOs. In an RTO/ISO region (except 

SPP, which currently does not have a frequency regulation market), the frequency 

regulation market is designed to select and compensate the resources needed to provide 

frequency regulation service. The RTO/ISO market design sends a price signal in order 

to incent particular resource behavior that leads to the reliable, least-cost provision of 

frequency regulation. By contrast, in non-RTO/ISO regions, frequency regulation is 

provided by the transmission provider on a cost-of-service basis through Schedule 3, with 

the transmission provider selecting the mix of resources it uses to provide frequency 

regulation service. 
Docket No. RM11-7-000 and AD10-11-000 - 4 - 

I. Background

A. Frequency Regulation Service

4. Frequency regulation service is the injection or withdrawal of real power by 

facilities capable of responding appropriately to a transmission system’s frequency 

deviations or interchange power imbalance, both measured by the ACE. When 

generation dispatch does not equal actual load and losses on a moment-by-moment basis, 

the imbalance will result in the grid’s frequency deviating from the standard (60 Hertz). 

Minor frequency deviations affect energy consuming devices; major deviations cause 

generation and transmission equipment to separate from the grid, in the worst case 

leading to a cascading blackout. Frequency regulation service can prevent these adverse 

consequences by rapidly correcting deviations in the transmission system’s frequency to 

bring it within the acceptable range. 9

 

5. Frequency regulation is distinguishable from Frequency response.10 Frequency 

response involves the automatic, autonomous and rapid action of turbine governor control 

to change a generator’s output and of technically capable demand response resources that 

can automatically change consumption to respond to changes in frequency. These 

changes occur independent of any dispatch signal from a system operator. Frequency 

 9

 A balancing authority achieves acceptable ranges by being in compliance with 

Control Performance Standards 1 and 2 as defined in the Commission-approved 

Reliability Standard BAL-001-0.1a. 

10 On January 20, 2011, the Commission released for public comment a staff study 

evaluating the use of frequency response metrics as a tool to assess the reliability impacts 

of varying resource mixes on the transmission grid. 
Docket No. RM11-7-000 and AD10-11-000 - 5 - 

regulation service, in contrast, requires a dispatch signal sent by the system operator to 

those resources capable of and dispatched to provide frequency regulation service. 

6. Today, frequency regulation is largely provided by generators (e.g., water, steam 

and combustion turbines) that are specially equipped for this purpose. Provision by other 

resources is emerging, as technologies develop and tariff and market rules are 

appropriately adapted to accommodate new resources. For example, the Electric 

Reliability Council of Texas (ERCOT) and Midwest ISO currently use controllable 

demand response in addition to generators to provide frequency regulation service.11 

Such “regulation capable” generation, storage devices, and demand response resources 

can respond automatically to signals sent by the RTO or ISO, through AGC, to increase 

or decrease real power injections or withdrawals to correct frequency deviations or 

interchange schedule imbalance, as measured by the ACE. The faster a resource can ramp 

up or down, the more accurately it can respond to the AGC, or ACE correction, signal 

 11 In Midwest ISO, Alcoa’s Warrick metallurgic induction (smelting) operation 

provides approximately 70 MW of frequency regulation. Alcoa Comments, Docket 

AD10-11-000, at 2 (June 16, 2010). In ERCOT’s model, controllable loads are a type of 

Load Acting as a Resource (LaaR) that is capable of reducing or increasing consumption 

under dispatch control (similar to AGC) and able to immediately respond proportionally 

to frequency changes (similar to generator governor action) to provide Ancillary 

Services. See Electric Reliability Council of Texas, Controllable Load Resource 

Qualification (2007), available at 

http://www.ercot/content/services/programs/load/laar/Controllable%20Load%20Resourc

e%20Qualification.doc.” 
Docket No. RM11-7-000 and AD10-11-000 - 6 - 

and avoid overshooting ACE correction needs.12 When a resource ramps too slowly, its 

ramping limitations may cause it to work against ACE correction needs and force the 

system operator to commit additional regulation resources to compensate. 

B. Current ISO and RTO Practices

7. In the ISO and RTO markets, compensation for frequency regulation service is 

presently based on several components. Depending on the ISO or RTO, these payments 

include consideration for capacity set aside to provide the service, as well as some of the 

following: the net energy the resource injects into the system; accurately following the 

ISOs or RTOs dispatch signal; and/or the absolute (rather than net) amount of energy 

injected or withdrawn. These payments are intended to cover the range of costs incurred 

in order to provide this service: operation and maintenance costs for providing frequency 

regulation and loss of potential revenue from foregone sales of electricity. 

8. With regard to the payment for capacity set aside, this is essentially an option 

payment13 to the resource to keep a certain amount of capacity out of the energy market 

in order to provide frequency regulation service (based on a market clearing price per 

MW of capacity sold). ISO-NE, NYISO, Midwest ISO, and PJM incorporate into this 

 12 Frequency Regulation Compensation in the Organized Wholesale Power 

Markets, Technical Conference, Beacon Speaker Materials, Docket No. AD10-11-000, at 

Figure 3 (May 26, 2010), which shows the difference between ISO-NE’s ACE control 

signal, Beacon’s flywheel response, and the allowable response rate under current ISONE rules. Here, “allowable response rate” means the rate at which the resource must 

respond to be considered in compliance with the dispatch signal. 

13 This type of capacity payment, based on day-ahead offers to sell ancillary 

services, is distinguishable from a long-term capacity payment such as provided for in 

PJM’s reliability pricing model or ISO-NE’s forward capacity market. 
Docket No. RM11-7-000 and AD10-11-000 - 7 - 

payment the opportunity cost of foregone energy sales incurred by a resource that 

provides frequency regulation service; though in ISO-NE and PJM, opportunity costs are 

not applied uniformly to all cleared resources. 

9. Compensation for regulation service also generally includes payments for the net 

energy the resource injects into the system. RTOs and ISOs currently provide a payment 

for the net energy injected by a resource providing regulation service during the operating 

hour, calculated as the amount of energy injected less energy withdrawn multiplied by the 

real-time energy price. 

10. Accuracy of performance can be incorporated into payments for regulation 

service. Currently, NYISO incorporates accuracy into its compensation for regulation 

service through a penalty that reflects the accuracy with which the resource follows its 

dispatch instruction.14 This is done through a performance index that tracks how 

accurately a resource follows the dispatch signal.15

11. ISO-NE makes payments for regulation service to reflect the amount of work 

performed by a resource by reflecting the absolute amount of energy injected and 

withdrawn. Regulating resources receive a “mileage” payment that reflects the amount 

of ACE correction provided.16

 14 NYISO, Market Services Tariff, § 15.3.5.5. 

15 NYISO uses telemetry data to track how closely a frequency regulation 

resource’s output is to the dispatch signal. NYISO then weights the resource’s payments 

to reflect its accuracy. For example, if the resource’s response falls outside an acceptable 

range 10 percent of the time, for a performance index of 0.9, it will receive 90 percent of 

its payment. 

16 ISO-NE, Transmission, Markets and Services Tariff, § III.3.5.5. 
Docket No. RM11-7-000 and AD10-11-000 - 8 - 

12. In general, when a resource submits its bid, the bid is typically required to include 

its ramp rate in MW per minute, its cost per MWh of ramping ability, and the total 

capacity it is offering for frequency regulation.17 The resource’s total amount of capacity 

is based on and limited by its ability to ramp up or down in 5 minutes.18 For example, a 

resource with a relatively large amount of capacity, but a relatively slow ramp rate would 

be limited in how much capacity it could offer as regulation. If the resource can ramp 

one MW per minute, it would only be able to offer 5 MW of regulation capacity (for a 

five minute dispatch) even if it has a total capacity of many hundreds of megawatts. On 

the other hand, a smaller capacity, fast-ramping resource might not face such a constraint. 

For instance, a storage device that can hold a 20 MW charge and ramp at 10 MW per 

minute, could offer its full 20 MW of capacity for five minutes. 

13. Some RTOs and ISOs are actively discussing changes to their frequency 

regulation markets or stated at the technical conference that changes might be 

appropriate.19 For example, CAISO has recently approved a new Regulation Energy 

 17 See, e.g., NYISO, Ancillary Services Manual, Manual 2, at 4-8 (Nov. 2010). 

18 A resource’s capacity is limited by the amount it can ramp in 5 minutes because 

the system operator in most RTOs and ISOs dispatch resources every 5 minutes. CAISO 

dispatches every 10 minutes, and so a frequency regulation resource’s capacity in that 

market is bound by the total capacity it can ramp in 10 minutes. 

19 See PJM, Market and Reliability Committee Meeting Materials, (Jan. 2011), 

http://www.pjm.com/~/media/committees-groups/committees/mrc/20110119/20110119-

item-05-regulation-market-performance-incentive-problem-statement-clean.ashx. 
Docket No. RM11-7-000 and AD10-11-000 - 9 - 

Management proposal.20 Likewise, the Commission is aware that ISO-NE is preparing 

new rules for frequency regulation compensation to formalize the participation of energy 

storage devices, something that has been only a pilot project to date.21

C. Commission Inquiries into Faster-Ramping Resources

14. The Commission began its inquiry into faster-ramping resources in May 2010. On 

May 26, 2010, the Commission hosted a publicly noticed technical conference22 inviting 

various stakeholders, including representatives from the RTOs and ISOs, industry, and 

academia to share their views on whether current frequency regulation market designs 

reflect the value of the service provided, and whether the use of faster-ramping resources 

for frequency regulation has the potential to provide benefits to the organized markets. 

Interested parties were permitted to file comments after the technical conference. 

Separately, the Commission on June 11, 2010 issued a request for comments regarding 

potential approaches to categorizing storage service for compensation purposes.23 

 20 CAISO, Board of Governors, Decision on Regulation Energy Management 

(Feb. 3, 2011), available at http://www.caiso.com/2b1a/2b1acd6d20610.pdf. 

21 ISO-NE, Report of ISO New England Inc. Regarding the Implementation of 

Market Rule Changes to Permit Non-Generating Resources to Participate in the 

Regulation Market, Docket No. ER08-54-014, at 5 (Dec. 17, 2010). 

22 See Final Agenda, Frequency Regulation Compensation in the Organized 

Wholesale Power Markets, Docket No. AD10-11-000 (May 26, 2010). 

23 Request for Comments Regarding Rates, Accounting and Financial Reporting 

for Electric Storage Technologies, Docket No. AD10-13-000 (June 11, 2010). 
Docket No. RM11-7-000 and AD10-11-000 - 10 - 

1. Market Design and the Value of the Service Provided 

15. With regard to market designs for frequency regulation service, participants at the 

technical conference generally agreed that compensation for regulating resources ought to 

reflect the service they perform for the system operator. However, there was 

disagreement regarding whether current market designs accomplish this objective. Some 

current market design features were cited as resulting in efficient price signals and 

appropriately differentiating between the amount of ACE correction that is provided by 

different regulating resources,24 while others were said to be deficient.25 

16. At the technical conference and in written comments, Beacon Power Corporation 

(Beacon) provided data on the amount of ACE correction provided by a faster-ramping 

resource relative to the generator response allowable under the ISO tariff.26 According to 

Beacon’s analysis of resources performing in the ISO-NE market, it is possible for a 

faster-ramping resource to provide more frequency regulation service than a slowerramping resource. Beacon presents data showing, over a one hour period, a fasterramping resource providing a total of 0.48 MWh of movement in response to the system 

operator’s dispatch signal. If this same signal had been sent to a slower-ramping 

resource, it could have provided only 0.18 MWh and still been within ISO-NE’s 

allowable response rate. 

 24 Tr. 93: 2-5 (Walawalkar); Tr. 103: 6-10 (Capp). 

25 Tr. 72: 1-11 (Ott). 

26 Beacon, Technical Conference Speaker Materials, at 7, Data from 1 MW in 

ISO-NE Alternative Regulation Pilot (May 26, 2010) (attached hereto as Appendix A). 
Docket No. RM11-7-000 and AD10-11-000 - 11 - 

17. In addition, under certain circumstances a slower-ramping resource could actually 

be working against the system operator’s need for ACE correction, so that only a portion 

of the energy produced positively contributes to correcting the ACE signal. By contrast, 

the faster-ramping resource can respond to the system’s control needs more exactly. In 

the example discussed above, the allowed generator response produces 0.18 MWh, but 

0.07 MWh of that is working against the system’s ACE correction needs because of its 

slow-ramping capability. Therefore, only 0.11 MWh (61 percent) actually contributes to 

correcting ACE. At the same time, the fast-ramping resource is being dispatched more 

often and all of the energy it produces helps to correct ACE. Both resources are 

considered, from the perspective of ISO-NE’s current tariff, to be 100 percent accurate, 

even though at times the slower-ramping resource is working against the system 

operator’s ACE control needs. 

18. In this example, Beacon asserted that the fast-ramping resource actually is 

providing more than four times as much ACE correction relative to the allowable 

response from an existing generator providing frequency regulation. With the exception 

of ISO-NE, the RTOs and ISOs limit compensation to frequency regulation resources to a 

capacity payment and net energy balancing. ISO-NE includes a payment for the amount 

of frequency service provided. As a result, these ISOs and RTOs would pay the fastramping resource and the slow-ramping resource the same amount, assuming both 

resources set aside the same amount of capacity to provide the service. 
Docket No. RM11-7-000 and AD10-11-000 - 12 - 

19. During the technical conference, PJM stated that it has no compensation structure 

for how much it asks a resource to move when providing frequency regulation and, as a 

result, it is likely under-compensating resources for speed and accuracy.27 

20. On the other hand, representatives of Midwest ISO and NYISO indicated that they 

believe their current market designs are sufficient, because the amount of regulating 

capacity a resource is allowed to sell is based on its ramp rate, so faster-ramping 

resources are allowed to sell more regulating capacity.28 

21. Alcoa noted that MISO and NYISO’s rationale is only relevant to resources that 

are ramp constrained. Alcoa stated that its demand response-based regulating resource is 

capacity constrained, but not ramp constrained. Alcoa added that because Midwest ISO 

and NYISO both net the regulation up and regulation down that a regulating resource 

provides, neither compensates for the resource’s actual ramping contribution. As a result, 

Alcoa’s fast ramp rate does not allow it to sell any additional regulating capacity, and 

Alcoa has no incentive to bid into the market its true ability to ramp, instead offering a 

lower ramp rate.29

 27 Tr. 84:9-16 (Ott), 72:1-11 (Ott). 

28 Tr. 72-73 (Ramey); Tr. 132: 8-11 (Ramey); Tr. 75-77 (Pike). 

29 Tr. 68:13-22 (Todd). 
Docket No. RM11-7-000 and AD10-11-000 - 13 - 

22. Several entities responding to the June request for comments also addressed 

market design issues for frequency regulation service.30 These commenters argue that 

the 

market should place a monetary value on the service provided by the speed and accuracy 

with which certain storage technologies can respond to a regulation signal. Comm

also identified the potential bene

enters 

fits of using faster-ramping resources to provide 

freque reg ncy ulation service.31

2. Potential Cost and Reliability Benefits

23. Participants at the technical conference stated that the use of faster-ramping 

resources for frequency regulation has the potential to provide benefits to the organized 

markets. These benefits include allowing RTOs and ISOs to use less regulation capacity

to meet current NERC standards, thus lowering regulation costs.32 Further, use of fasterramping resources frees slower-ramping resources to operate at stable output levels and, 

 30 Beacon, Comments, Docket No. AD10-13-000, at 8 (Aug. 9, 2010); NEMA, 

Comments, Docket No. AD10-13-000, at 2 (Aug. 9, 2010); Xtreme Power, Comments, 

Docket No. AD10-13-000, at 5 (Aug. 9, 2010); A123 Systems, Comments, Docket No. 

AD10-13-000, at 5-7 (Aug. 9, 2010); ESA, Comments, Docket No. AD10-13-000, at 2 

(Aug. 

ug. 9, 

, at 2-3 (Aug. 9, 2010); 

A123 Systems, Comments, Docket No. AD10-13-000, at 4 (Aug. 9, 2010); ESA, 

Comm

5-36 (Ott); Tr. 30-31 (Kathpal); Tr. 37-39 (Ramey). 

9, 2010); NAATBatt, Comments, Docket No. AD10-13-000, at 4-5 (Aug. 9, 2010). 

31 MegaWatt Storage Farms Comments Docket No. AD10-13-000. at 8-9 (A

2010); Xtreme Power, Comments, Docket No. AD10-13-000

ents, Docket No. AD10-13-000, at 2 (Aug. 9, 2010). 

32 Tr. 3
Docket No. RM11-7-000 and AD10-11-000 - 14 - 

therefore, at more efficient heat rates which allows them to submit lower bids 

markets, thereby lowering energy prices.

into energy 

c 

ers found 

age 

33 

24. To illustrate the efficiency of faster-ramping resources, some industry 

representatives – during the technical conference and in comments – referred to a Pacifi

Northwest National Laboratory study that examined the ability of faster-ramping 

resources to replace traditional generation resources in providing frequency regulation 

service in the CAISO.34 The study defined an “ideal resource” as one that has a ramp

rate equal to its entire capacity in one minute. The study’s authors determined the 

ramping ability for various resource types in the current CAISO generation fleet that 

provide frequency regulation service, including hydro, combustion turbine, steam turbine, 

and combined cycle. The authors then estimated how many megawatts of these types of

capacity can be replaced by 1 MW from an ideal resource. In one case, the ideal resource

was assumed to have no limits on its ability to sustainably provide energy. In a second 

case, the resource’s ability to sustain energy reflects the actual ability of a flywheel, i.e., 

it reflects an energy-limited resource. In either case, the authors concluded that a fast

responding resource is able to provide more effective regulation capacity than most other 

resources, including the current generation fleet mix in the CAISO. When replacing 

these resources for frequency regulation service with an ideal resource, the author

that 1 MW of an ideal resource with limited energy could replace 1.43 MW of an aver

 33 Id.

34 Makarov, Y.V., Ma, J., Lu, S., and T.B. Nguyen, “Assessing the Value of 

Regulation Resources Based on Their Time Response Characteristics,” Pacific Northwest 

National Laboratory, PNNL-17632, June 2008. 
Docket No. RM11-7-000 and AD10-11-000 - 15 - 

hydro unit. The authors state that effectiveness increases as the ideal resource is 

compared to even slower ramping resources, reaching a maximum when 1 MW of an 

ideal resource with limited energy replaces more than 24 MW of an average steam 

ve 

formance standards.35 For example, ISO-NE 

ledged that using a combination of faster-responding resources has 

ndards by procuring relatively less regulation 

turbine. Compared to the current CAISO fleet mix providing frequency regulation, 

which includes fast-responding hydro units, the authors found that 1 MW of a limited 

energy ideal resource could replace 1.17 MW of the current generation mix. 

25. Representatives from some RTOs and ISOs, however, questioned at the technical 

conference whether procuring more fast-response resources would materially impro

their ability to meet NERC ACE control per

and NYISO acknow

allowed them to meet their NERC sta

capacity than they would otherwise need.36

II. Discussion

A. The Need for Reform

26. The Commission proposes to adopt a frequency regulation compensation 

mechanism, as set forth below, for compensating regulation providers in organized 

wholesale electricity markets in order to eliminate undue discrimination and ensure just

 35 For example, NERC reliability requirement CPS1 requires each balancing 

authority to operate within a specific limit, taking into consideration clock-minute 

averages of ACE, frequency bias, and interconnection frequency error. NERC reliability 

requirement CPS2 requires each balancing authority to operate such that its average ACE 

is within a specific limit, during a calendar month, for at least 90 percent of clock-tenminute periods. 

36 Tr. 49:2-14 (Pike); Tr. 53:24-25 (Potishnak). 
Docket No. RM11-7-000 and AD10-11-000 - 16 - 

and reasonable rates. Faster-ramping resources provide more ACE correction to

operators than slower ramping resources and are, at least in some RTOs and ISOs, 

explicitly given priority in the dispatch order. Yet these resources do not appear to be

receiving compensation for all of the service they provide as a result of pricing 

 system 

mechanisms t ma r, the Commission believes there 

tion 

hat y be unduly discriminatory. Furthe

are market efficiencies to be gained by ensuring efficient price signals for regula

resources that forego the opportunity to earn revenues in the energy markets. 

1. Unduly Discriminatory Pricing

27. The Commission is concerned that current rules that govern pricing and 

compensation for frequency regulation services in RTOs and ISOs may be unjust and 

r 

 

unreasonable because faster-ramping resources are compensated at the same level as 

slower ramping resources, even though they can respond more quickly and provide more 

ACE correction.37

28. Specifically, the Commission is concerned that under some existing frequency 

regulation compensation methods, a faster-ramping resource may not be compensated fo

37 See Promoting Wholesale Competition Through Open Access NonDiscriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by 

Public Utilities and Transmitting Utilities, Order No. 888, 61 FR 21540, at 21569 (May 

10, 1996), FERC Stats. & Regs. ¶ 31,036 (1996), order on reh’g, Order No. 888-A, 62 

FR 12274 (Mar. 14, 1997), FERC Stats. & Regs. ¶ 31,048, order on reh’g, Order No. 

888-B, 81 FERC ¶ 61,248 (1997), order on reh’g, Order No. 888-C, 82 FERC ¶ 61,046 

(1998), aff’d in relevant part sub nom. Transmission Access Policy Study Group v. 

FERC, 225 F.3d 667 (D.C. Cir. 2000), aff’d sub nom. New York v. FERC, 535 U.S. 1 

(2002) (“In the context of an emerging competitive market in generation, discriminatory 

practices that once did not constitute undue discrimination must be reviewed to determine 

whether they are being used to prevent the benefits of competition in generation from 

being achieved.”). 
Docket No. RM11-7-000 and AD10-11-000 - 17 - 

all of the service it provides. For example, CAISO, NYISO, Midwest ISO, and PJM net 

the regulation up and regulation down provided by resources. This compensation method 

does not acknowledge the inherently greater amount of ACE correction being prov

by faster-ramping resources.

ided 

d 

re not. 

r 

ll resources at the same rate, i.e., the same clearing price for 

n due 

 

38 As a result, slower-responding resources are compensate

as if they are providing the same amount of ACE correction when, in reality, they a

29. Some ISOs and RTOs dispatch faster-ramping resources earlier than othe

resources to take advantage of their enhanced operation capabilities, i.e., their ability to 

ramp faster, yet pay a

capacity and the same price per MWh of net energy.39 Again, this could lead to 

providing different amounts of ACE correction, yet receiving the same compensatio

to netting practices. 

30. The Commission acknowledges that a resource’s ability to sell capacity into the 

regulation market is dependent on its ramping ability, such that a faster-responding 

resource is able to offer a relatively greater amount of capacity. This does not, however,

38 A simplified example would be to consider two resources that clear with the 

same amount of capacity and are directed to provide regulation up and regulation down 

over the course of a five-minute interval. The fast-ramping resource might be directed, 

for example, to move around an initial set-point up five MW, then down three MW, up 

one MW, down ten MW, and finally up nine MW. A netting approach to compensation 

would determine that the resource provided an additional two MW of energy to the 

system (+ 5 – 3 + 1 – 10 + 9 = +2) during that five minute interval. Meanwhile, a slowerramping resource may be directed to move up three MW and then down one MW for a 

net of two MW in relation to its set-point. The operator is not able to direct more 

movement because the slower-ramping resource would not be able to respond in the 

requisite timeframe. Both resources would receive identical compensation for their 

movement, despite the first resource providing more ACE correction. 

39 See, e.g., Tr. 83:9-24 (Ramey). 
Docket No. RM11-7-000 and AD10-11-000 - 18 - 

alleviate our concerns about potential undue discrimination toward resources that prov

more ACE correction. For example, some new market entrants are relatively small i

ide 

n 

AGC 

wer 

ller 

nal 

mmission proposes to reform 

current market designs that lack a payment that reflects the amount of ACE correction 

 

terms of capacity (capacity-constrained), but are capable of responding rapidly to 

signals (not ramp-constrained), so a compensation scheme that does not reflect work 

performed will lead to inadequate compensation when compared to larger, slo

responding generators.40 The Commission preliminarily finds that slower, larger 

resources are being given a compensatory advantage for their size while faster, sma

resources do not similarly receive compensation for their ramping speed. The 

Commission believes compensation should take into account the greater amount of 

service that is being provided by faster-ramping resources, through more frequent 

provision of both up and down regulation; this greater amount of ACE correction is lost

when positive and negative contributions to ACE correction are netted and no additio

payment is made to reflect performance. Therefore, the Co

40 A resource that is capacity constrained but is able to ramp at a very high rate 

will clear its relatively small amount of capacity in the regulation market and then be paid 

for providing regulation service in real-time. But this performance payment does not 

acknowledge ramping ability due to netting. On the other hand, a ramp constrained 

resource with a large amount of capacity to sell could clear its relatively large amount of 

regulation capacity (and, thus, receive a higher capacity payment) and get paid at the 

same rate for providing regulation service in real-time. Expanding the hypothetical 

scenario provided above, see supra n.37, assume that the first (faster) resource is capacity 

constrained and can offer only 10 MW of regulation, while the second (slower) resource, 

while ramp-constrained, can offer 30 MW of regulation. The 30 MW resource will 

receive a larger capacity payment for offering more regulation, but the two resources will 

receive identical net payments for their actual movement if they are directed as indicated 

above. In other words, the slower, larger resource receives a compensatory advantage for 

its size, but the faster, smaller resource does not similarly receive a compensatory 

advantage for its ramping speed. 
Docket No. RM11-7-000 and AD10-11-000 - 19 - 

provided by a resource, thereby under-compensating faster-ramping resources when 

compared to payments made to slower-ramping resources. 

31. Additionally, the Commission believes that the manner in which some resources 

that provide frequency regulation service are compensated for their opportunity costs 

may be unjust and unreasonable and unduly discriminatory.41 For instance, PJM 

provides ex post “make whole” payments based on individual unit opportunity costs, 

something that is not reflected in the uniform market clearing price calculation.42 ISONE pays opportunity costs on a resource-specific basis. Both of these methods have the 

potential to inefficiently select regulating resources and also fail to reflect the marginal 

unit’s full marginal cost (including opportunity cost) that should set the market clearing

price that is paid to all cleared suppliers. In addition, as is noted by ISO-NE in comment

submitted after the technical conference, failing to pay a uniform clearing price that 

includes the marginal unit’s opportunity costs could result in inefficient price signals 

being sent that will result in inappropriate long-term investment.

s 

learing price, which 

will reflect the total marginal costs of the marginal cleared unit. We believe that this 

 

43 Therefore, the 

Commission proposes to require that all resource bids include opportunity costs and that

all cleared frequency regulation resources be paid the single market c

41 By participating in the regulation market, an energy market resource is 

dispatched at a set-point below its maximum capacity. Because this amount of capacity 

is held in reserve to provide regulation, the resource misses the opportunity to provide 

energy at the current LMP. 

42 PJM, Manual 18: Operating Agreement Accounting, at 12-16, available at

http://www.pjm.com/~/media/documents/manuals/m28.ashx. 

43 ISO-NE Comments at 8. 
Docket No. RM11-7-000 and AD10-11-000 - 20 - 

proposal will ult i res n just and reasonable rates and correct potential undue 

discrimination. 

2. Potential Market Efficiencies

32. The Commission preliminarily finds that the use of faster-ramping resources fo

frequency regulation has the potential to improve operational and economic effici

and, in turn, lower costs to consumers in the organized markets. As described above, 

faster-ramping resources may be able to replace resources that currently provide 

frequency regulation, so RTOs and ISOs may be able to procure less regulation ca

thereby lowering costs to load. This can be seen in both ISO-NE and NYISO. Both h

a relatively higher concentration of faster-ramping resources, easily meet NERC 

reliability standards, and yet procure less regulation capacity, as a percentage of peak 

load, than other RTOs and ISOs. When dispatching faster-ramping resources, the 

system operator is better ab

r 

ency 

pacity, 

ave 

le to rely on those resources to quickly and accurately follow 

providing sustained energy, they should be able to operate at more efficient heat rates.45 

For example, for traditional thermal generators, providing frequency regulation results in 

 

44

the AGC signal, without overshooting, thus avoiding the need for additional regulation 

resources to compensate. 

33. The Commission also anticipates a secondary effect on energy markets: as slower 

ramping resources move out of the frequency regulation market and are able to focus on 

 44 See Tr. 53:24-25 (Potishnak), Tr. 54:1-2 (Potishnak), Tr. 49:6-14 (Pike). 

45 Participants at the May 26, 2010 technical conference noted that it was unlikely 

that any frequency regulation market would comprise only fast-ramping storage resources 

due to the need for sustained energy. Tr. 23:8-25 (Pike). 
Docket No. RM11-7-000 and AD10-11-000 - 21 - 

both operating at inefficient heat rates and additional wear and tear on equipment.46 If 

these modes of operation are avoided, costs can be reduced and lower energy bids 

offered, thereby lowering prices in the energy market. The Commission notes that, at the 

May 2010 technical conference, some participants questioned the value of procuring only 

faster-ramping, but short duration resources, for frequency regulation. Accordingly, the 

Commission seeks comment on the benefits that faster-ramping resources, no matter their 

exact type, can and do bring to the RTO and ISO markets. Likewise, the Commission 

seeks comments on the drawbacks of using faster-ramping resources, if any.47 

B. Specific Proposals

34. In light of the foregoing concerns the Commission proposes to amend its 

regulations to provide a frequency regulation compensation mechanism for the RTO and 

ISO markets to ensure that pricing and compensation of frequency regulation service is 

just and reasonable and not unduly discriminatory or preferential. Specifically, the 

Commission proposes to require ISOs and RTOs to change their tariffs so that regulation 

resources receive a two-part payment. This two-part payment structure is based on what 

the Commission preliminarily finds are “best practices” used by the RTOs and ISOs. As 

further described below, the first part of the payment is a capacity, or option, payment to 

 46 Xcel Energy’s Pawnee coal plant shows maintenance and capital costs (i.e., 

wear and tear) for load following of approximately $1.5k per load following cycle. 

Aptech Engineering Services, Inc., Cost of Cycling Analysis for Pawnee Station Unit 1 

Phase 1: Top-Down Analysis, at vii (November 2008), available at

http://www.xcelenergy.com/SiteCollectionDocuments/docs/CRPExhibit4CostofCyclingE

xecutiveSummary.pdf. 

47 Tr. 28:13-24 (Potishnak); Tr. 40:9-15 (Ott). 
Docket No. RM11-7-000 and AD10-11-000 - 22 - 

have a certain amount of capacity held in reserve and not participate in the energy market 

in order to provide frequency regulation service. While all RTOs and ISOs with a 

centrally-procured frequency regulation market currently provide for a capacity payment 

to frequency regulation resources, the payment varies by RTO or ISO. To produce the 

efficient market outcome, this payment must include the marginal regulating resource’s 

opportunity costs. The second part of the payment is a performance payment based on 

the amount of up and down movement, in megawatts, the resource provides in response 

to a control signal.48 This performance payment should also take into consideration a 

resource’s accuracy in providing ACE correction. The Commission preliminarily finds 

that this compensation structure is necessary to ensure that pricing schemes for frequency 

regulation service in the organized wholesale electricity markets result in rates that are 

just and reasonable, and not unduly discriminatory or preferential. 

1. Capacity Payment and Opportunity Cost

35. The Commission proposes to require that each regulating resource is paid a 

uniform capacity payment that includes the opportunity cost of the marginal regulating 

resource. As discussed above, some ISOs and RTOs currently pay resource-specific 

opportunity costs in addition to or as part of a capacity payment, while others incorporate 

the marginal unit’s opportunity cost into a uniform frequency regulation market clearing 

price for capacity. In order to send an efficient price signal to frequency regulation 

resources, the Commission proposes that RTOs and ISOs base the clearing price for 

 48 This applies whether an RTO or ISO allows resources to sell regulation up and 

regulation down separately or requires resources to offer both regulation up and 

regulation down. 
Docket No. RM11-7-000 and AD10-11-000 - 23 - 

frequency regulation on the marginal resource’s marginal cost, including opportunity 

cost. Paying a unit-specific opportunity cost distorts the market by basing the 

commitment of regulating units on incomplete market information, potentially leading to 

committing units with higher costs than other units not committed. Accordingly, the 

Commission preliminarily finds that a frequency regulation compensation mechanism 

that includes a uniform clearing price with accurately-determined opportunity costs will 

reduce errors in selecting the optimal portfolio of regulation suppliers each hour (and 

each day), which reduces total regulation costs to consumers and ensures that rates are 

just and reasonable and not unduly discriminatory or preferential. 

36. In addition, the Commission preliminarily finds that cross-product opportunity 

costs49 should be calculated by the RTO or ISO, as it has the best information to 

determine a frequency regulation resource’s cross-product opportunity cost due to not 

participating in the energy market. Further, where appropriate, resources should be 

permitted to include inter-temporal opportunity costs in their capacity bid.50 The 

Commission seeks comment on its proposal to require each regulating resource to be paid 

 49 A cross-product opportunity cost, in this case, is the revenue a regulation 

provider loses because it is on stand-by to provide regulation and is not providing energy. 

50 An inter-temporal opportunity cost represents the foregone value when a 

resource must operate at one time, and therefore must either forego a profit from selling 

energy at a later time or incur costs due to consuming at a later time. The trade-off 

presented to thermal storage provides an example of inter-temporal opportunity costs. A 

thermal storage operator would prefer to “charge” (heat bricks or freeze water) when 

prices are low. If such a resource were to provide frequency regulation, it could be asked 

to stop charging during low price periods and then be forced to charge during high price 

periods. 
Docket No. RM11-7-000 and AD10-11-000 - 24 - 

a uniform capacity payment that includes the opportunity cost of the marginal regulating 

resource. 

2. Payment for Performance with Accuracy Adjustment

37. The Commission preliminarily finds that requiring a component in the frequency 

regulation compensation mechanism that recognizes the resource’s contribution to ACE 

correction is necessary to remedy undue discrimination and ensure just and reasonable 

rates in the organized wholesale electricity markets. Resources that provide more value 

to the grid by doing more of the work to correct ACE deviations should be paid more 

than resources doing less work. Accordingly, taking performance into consideration is a 

key element of ensuring that any frequency regulation compensation mechanism is just 

and reasonable and not unduly discriminatory or preferential. We, therefore, propose to 

require that all regulating resources be paid for their performance, with this payment 

taking the form of a payment for each MW, up or down, provided by the resource in 

response to the system operator’s dispatch signal. Specifically, an RTO or ISO would 

determine the total movement up and down and then multiply that sum by a price-perMW of ACE correction. We seek comment on the proposed method and whether there 

are alternative payments for performance that can address our concern about undue 

discrimination. 

38. The Commission proposes that the price-per-MW of ACE correction be marketbased. Specifically, resources would specify the capacity (in MW) available to provide 

regulation, a ramp rate (in MW/minute), and bid into the market a price-per-MWh 

ramping capability and price-per-MW of ACE correction. The RTO or ISO would then 

determine the least cost set of resources and set the price-per-MW of ACE correction 
Docket No. RM11-7-000 and AD10-11-000 - 25 - 

based on the bid of the marginal regulating resource. We note that there was little 

discussion at the technical conference about how to design the price-per-MW of ACE 

correction.51 The alternative to a market-based price is to use an administratively set 

price-per-MW of ACE correction. We seek comment on this proposal as well as the 

alternative of an administratively determined price, including how an administratively 

determined price could be set. We note that some commenters stressed the importance of 

the ISO’s and RTO’s energy and ancillary service co-optimization algorithms in 

producing the least-cost portfolio of resources.52 We therefore seek comment on how 

this proposal will integrate with the ISO’s and RTO’s existing co-optimization 

algorithms. 

39. The Commission also proposes that the performance payment must reflect the 

resource’s accuracy in following the system operator’s dispatch signal. Specifically,

propose that the accuracy be measured by the RTO or ISO using currently available 

telemetry technology. If an RTO or ISO receives telemetry data every 10 seconds, for 

instance, it would be able to measure over the course of 5 minutes how often th

was delivering exactly the megawatts requested. The resource would then be 

compensated for the fraction of its energy injected or withdrawn that met the dispatch 

 we 

e resource 

signal. This method accepts as given the resource’s stated ramping ability and provides a 

 51 See, e.g., Tr.124:10-131:19. 

52 EPSA Comments at 9-10 (“Going forward co-optimizaton and how that is 

evaluated will be important to generation resources because the rules that result will play 

an important role in determining whether and when the resource will provide energy or 

ancillary services.”). 
Docket No. RM11-7-000 and AD10-11-000 - 26 - 

disincentive to deviate from the dispatch signal, which incorporates actual ramping 

performance. 

40. We note that there was little agreement among the technical conference panelists 

on how accuracy should be incorporated into the frequency regulation market design.53 

Therefore, we seek comments on alternative methods, including methods to incorporate 

accuracy into the ACE correction calculation. It is possible to approximate how a 

resource contributes to correcting ACE by taking the difference between the energy it 

provides that was in the direction needed to correct ACE at any moment and the energy 

that was in the direction opposite to what was needed to correct ACE. If ACE indicates 

that the system requires regulation up, yet a resource is still providing regulation down 

due to its slow ramping ability, that resource could be considered to not be contributing to 

ACE correction. Thus, its payment for ACE correction would only include the MWh that 

were actually correcting ACE. The Commission seeks comments on how to structure 

payments for frequency regulation that compensate a resource for its contribution to ACE 

correction. We seek comment on whether this method could result in a resource being 

penalized through lower measured ACE correction even when it is following the system 

operator’s dispatch signal. 

3. Net Energy

41. Currently, regulating resources receive a payment (or charge) for the net energy 

injected (or withdrawn) as a result of providing regulation service in every RTO and ISO 

market. The Commission seeks comment on the appropriateness of retaining net energy 

 53 See Tr. 85-86 (Potishnak) and Tr. 117-118 (Ott). 
Docket No. RM11-7-000 and AD10-11-000 - 27 - 

payments in light of the two-part payment proposed here. Specifically, the Commission 

seeks comment on whether the provisions in existing tariffs for net energy payments are 

redundant given the proposed requirement discussed herein that all RTOs and ISOs must 

pay regulating resources a mileage payment for the ACE correction they provide, or 

whether this payment is a necessary, appropriate feature of day-ahead and real-time 

energy account balancing and settlement. 

III. Information Collection Statement

42. The following collection of information contained in this Proposed Rule are 

subject to review by the Office of Management and Budget (OMB) under section 3507(d) 

of the Paperwork Reduction Act of 1995.54 OMB’s regulations require approval of 

certain information collection requirements imposed by agency rules.55 The Commission 

solicits comments on the Commission’s need for this information, whether the 

information will have practical utility, the accuracy of the burden estimates, ways to 

enhance the quality, utility, and clarity of the information to be collected or retained, and 

any suggested methods for minimizing respondents’ burden, including the use of 

automated information techniques. 

43. Additionally, the Commission encourages comments regarding the time burden 

expected to be required to comply with the proposed rule regarding the requirement for 

ISOs and RTOs to change their tariffs so that the regulation resources receive just and 

reasonable compensation for the services provided, and the potential time burden on 

 54 44 U.S.C. 3507(d) (2006). 

55 5 C.F.R. 1320.11 (2010). 
Docket No. RM11-7-000 and AD10-11-000 - 28 - 

regulation resources to conform to new or modified bidding requirements. Specifically, 

the Commission seeks comment on: (1) the additional burden and cost (human, hardware 

and software) associated with implementation, operation and maintenance of this new 

provision in ISO/RTO tariffs; and (2) the additional burden and cost (human, hardware 

and software) on regulation resources, if any, associated with changes to the type of 

information submitted in the bid or the manner in which the bid is submitted. 

Burden Estimate: The additional estimated public reporting burdens for the proposed 

reporting requirements in this rule are as follows. 

Data Collection 

FERC 516 

Number of 

Respondents56

 [1] 

Number of 

Responses 

[2] 

Hours per 

Response 

[3] 

Total Annual 

Hours 

[1 X 2 X 3] 

Conforming tariff 

changes (18 CFR 

35.28(g)(3)). One 

time burden. 

5 1 100 500 

Totals 500 one time 

burden 

Cost to Comply: The Commission has projected the cost of compliance to be $57,000. 

Total Annual Hours for Collection in initial year (500 hours) @ $114 an hour [average 

cost of attorney ($200 per hour), consultant ($150), technical ($80), and administrative 

support ($25)] = $57,000 

Title: FERC-516, Electric Rate Schedules and Tariff Filings 

Action: Proposed Collection. 

 56 SPP is not included in the respondents because they currently do not have a 

frequency regulation compensation mechanism in their tariff and independent of this 

proceeding they have indicated that they are already planning to implement such a 

mechanism. Therefore, it is expected that any additional burden on SPP due to this 

proceeding is expected to be de minimus. 
Docket No. RM11-7-000 and AD10-11-000 - 29 - 

OMB Control No. 1902-0096 

Respondents for this Rulemaking: Businesses or other for profit and/or not-for-profit 

institutions. 

Frequency of Information: As indicated in the table. 

Necessity of Information: The Federal Energy Regulatory Commission is proposing to 

require ISOs and RTOs to change their tariffs to provide for compensation of frequency 

regulation in a manner that remedies undue discrimination in the procurement of such 

service in the organized wholesale electricity markets. 

Internal Review: The Commission has reviewed the proposed changes and has 

determined that the changes are necessary. These requirements conform to the 

Commission’s need for efficient information collection, communication, and 

management within the energy industry. The Commission has assured itself, by means of 

internal review, that there is specific, objective support for the burden estimates 

associated with the information collection requirements. 

44. Interested persons may obtain information on the reporting requirements by 

contacting the following: Federal Energy Regulatory Commission, 888 First Street, NE, 

Washington, DC 20426 [Attention: Ellen Brown, Office of the Executive Director], 

e-mail: DataClearance@ferc.gov, Phone: (202) 502-8663, fax: (202) 273-0873. 

45. Comments on the collections of information and the associated burden estimates 

in the proposed rule should be sent to the Commission in this docket and may also be sent 

to the Office of Information and Regulatory Affairs, Office of Management and Budget, 

DC 20503 [Attention: Desk Officer for the Federal Energy Regulatory Commission]. 

For security reasons, comments to OMB should be submitted by e-mail to: 
Docket No. RM11-7-000 and AD10-11-000 - 30 - 

oira_submission@omb.eop.gov. Comments submitted to OMB should include Docket 

Number RM11-7 and OMB Control Number 1902-0096. 

IV. Environmental Analysis

46. The Commission is required to prepare an Environmental Assessment or an 

Environmental Impact Statement for any action that may have a significant adverse effect 

on the human environment.57 The Commission has categorically excluded certain 

actions from this requirement as not having a significant effect on the human 

environment.58 The proposed regulations are categorically excluded as they address ra

filings submitted under section 206 of the FPA and the establishment of just and 

reasonable rates, terms and conditions of jurisdictional service under this section of the 

FPA.

te 

59 Accordingly, no environmental assessment is necessary and none has been 

prepared for this NOPR. 

V. Regulatory Flexibility Act 

47. The Regulatory Flexibility Act of 1980 (RFA)60 generally requires a descriptio

and analysis of final rules that will have significant economic impact on a substantial 

number of small entities. The RFA mandates consideration of regulatory alternatives 

accomplish the stated objectives of a proposed rule and that minimize any signifi

n 

that 

cant 

 57 Regulations Implementing the National Environmental Policy Act, Order No. 

486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs. Preambles 1986-1990 ¶ 30,783 

(1987). 

58 18 CFR 380.4. 

59 See 18 CFR 380.4(a)(15). 

60 5 U.S.C. 601-612. 
Docket No. RM11-7-000 and AD10-11-000 - 31 - 

economic impact on a substantial number of small entities. The Small Business 

Administration’s (SBA) Office of Size Standards develops the numerical definition of a

small business.

att hours.62 Five ISOs 

with over 54,000 megawatts of capacity and 

s, 

r 500 generators, and manages a nearly 11,000-mile network of highrs, and large industrial 

 over 57,000 miles of transmission lines and serves 

 

61 The SBA has established a size standard for electric utilities, stating 

that a firm is small if, including its affiliates, it is primarily engaged in the transmission,

generation and/or distribution of electric energy for sale and its total electric output for 

the preceding twelve months did not exceed four million megaw

and RTOs, not small entities, are impacted directly by this rule. 

48. CAISO is a non-profit organization 

over 25,000 circuit miles of power lines. 

49. NYISO is a non-profit organization that oversees wholesale electricity market

dispatches ove

voltage lines. 

50. PJM is comprised of more than 600 members including power generators, 

transmission owners, electricity distributors, power markete

customers, serving 13 states and the District of Columbia. 

51. Midwest ISO is a non-profit organization with over 145,000 megawatts of 

installed generation. Midwest ISO has

13 states and one Canadian province. 

61 13 CFR 121.101. 

62 13 CFR 121.201, Sector 22, Utilities & n.1. 
Docket No. RM11-7-000 and AD10-11-000 - 32 - 

52. ISO-NE is a regional transmission organization serving six states in New England. 

The system is comprised of more than 8,000 miles of high-voltage transmission line

over 350 generators. 

s and 

53. The Commission certifies this rule will not have a significant economic impact on 

a substantial number of small entities, and therefore no initial regulatory flexibility 

analysis is required. 

VI. Comment Procedures

54. The Commission invites interested persons to submit comments on the matters and 

issues proposed in this notice to be adopted, including any related matters or alterna

proposals that commenters may wish to discuss. 

tive 

 Comments are due 60 days from 

-

andard word processing formats. Documents created electronically using word 

nd not 

88 

publication in the FEDERAL REGISTER. Comments must refer to Docket No. RM11

7-000, and must include the commenter's name, the organization they represent, if 

applicable, and their address in their comments. 

55. The Commission encourages comments to be filed electronically via the eFiling 

link on the Commission's web site at http://www.ferc.gov. The Commission accepts

most st

processing software should be filed in native applications or print-to-PDF format a

in a scanned format. Commenters filing electronically do not need to make a paper 

filing. 

56. Commenters that are not able to file comments electronically must send an 

original to: Federal Energy Regulatory Commission, Secretary of the Commission, 8

First Street, NE, Washington, DC 20426. 
Docket No. RM11-7-000 and AD10-11-000 - 33 - 

57. All comments will be placed in the Commission's public files and may be viewed, 

ents 

printed, or downloaded remotely as described in the Document Availability section 

below. Commenters on this proposal are not required to serve copies of their comm

on other commenters. 

VII. Document Availability

58. In addition to publishing the full text of this document in the Federal Register, the

Commission provides all interested persons an opportunity to view and/or print the 

ormal 

 2A, 

age on the Internet, this information is available 

 for eLibrary and the Commission’s website during 

ormal business hours from FERC Online Support at (202) 502-6652 (toll free at 1-866-

08-3676) or email at ferconlinesupport@ferc.gov, or the Public Reference Room at 

02) 502-8371, TTY (202)502-8659. E-mail the Public Reference Room at 

ublic.referenceroom@ferc.gov. 

contents of this document via the Internet through the Commission's Home Page 

(http://www.ferc.gov) and in the Commission's Public Reference Room during n

business hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room

Washington, DC 20426. 

59. From the Commission's Home P

on eLibrary. The full text of this document is available on eLibrary in PDF and 

Microsoft Word format for viewing, printing, and/or downloading. To access this 

document in eLibrary, type the docket number excluding the last three digits of this 

document in the docket number field. 

60. User assistance is available

n

2

(2

p
Docket No. RM11-7-000 and AD10-11-000 - 34 - 

List of subjects in 18 CFR Part 35 

lectric power rates, Electric utilities, Reporting and recordkeeping requirements. 

By direction of the Commission. Commissioner Spitzer dissenting in part with a 

 separate statement attached. 

Kimberly D. Bose, 

Secretary. 

 

 

E

( S E A L ) 
Docket No. RM11-7-000 and AD10-11-000 - 35 - 

In consideration of the foregoing, the Commission proposes to amend Part 35 Chapter I, 

Title 18 of the Code of Federal Regulations as follows: 

PART 35 – FILING OF RATE SCHEDULES AND TARIFFS 

 1. The authority citation for Part 35 continues to read as follows: 

Authority: 16 U.S.C. § 791a-825r, 2601-2645; 31 U.S.C. § 9701; 42 U.S.C. § 

7101-7352. 

2. Amend § 35.2 as follows: 

Add a new paragraph (g). 

§ 35.2 Definitions. 

* * * * * 

(g) Frequency regulation. The term frequency regulation as used in this part will 

mean the capability to inject or withdraw real power by resources capable of responding 

to a balancing area’s frequency deviations or interchange power imbalance, measured by 

the Area Control Error. 

3. Amend § 35.28 as follows: 

Add a new paragraph (g)(3) . 

 § 35.28 Non-discriminatory open access transmission tariff. 

* * * * * 

 (g) * * * 

(3) Frequency regulation compensation in ancillary services markets. Each 

Commission-approved independent system operator or regional transmission 
Docket No. RM11-7-000 and AD10-11-000 - 36 - 

organization that has a tariff that provides for the compensation of frequency regulation 

must provide such compensation based on the actual service provided, including a 

capacity payment that includes the marginal unit’s opportunity costs and a payment for 

performance that reflects a frequency regulating resource’s contribution to correcting the 

relevant balancing area’s Area Control Error (when the resource is accurately following 

the dispatch signal) when providing regulation service. 
Docket No. RM11-7-000 and AD10-11-000 - 37 - 

Appendix A 

Source: Beacon, Technical Conference Speaker Materials, at 7 (May 26, 2010). 

Source: Beacon, technical Conference Speaker Materials, at 7 (May 26, 2010). 
UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Frequency Regulation Compensation in the Docket Nos. RM11-7-000 

Organized Wholesale Power Markets AD10-11-000 

(Issued February 17, 2011) 

SPITZER, Commissioner, dissenting in part: 

 In the Notice of Proposed Rulemaking, the majority is concerned that current 

mechanisms for compensating frequency regulation service in regional transmission 

organization (RTO) and independent system operator (ISO) regions may not adequately 

compensate for the true value of the frequency regulation service provided. I share the 

majority’s concern. Resources that have faster-ramping capability have the potential to 

respond quicker and more accurately to certain transmission system needs. 

 However, the majority concludes, based on the existing record, that the 

Commission should require a standard formula through which all RTO/ISO regions must 

compensate frequency regulation service. I believe the record is not adequate to propose 

a specific proposal at this time. Accordingly, I believe the Commission should have 

taken a preliminary step (such as the issuance of a Notice of Inquiry or Advanced Notice 

of Proposed Rulemaking) before moving forward with the specific proposal in a Notice 

of Proposed Rulemaking. 

I disagree with the majority that the record is sufficiently robust to make a specific 

proposal at this time to change our regulations. Although the record provides some data 

regarding potential reliability and efficiency benefits of faster-ramping resources 

providing frequency regulation service, I am concerned this evidence may be 

incomplete.1

 In the existing record, several commenters raise concerns about the lack of 

hard data; these commenters argue that more study is needed to demonstrate incremental 

value.2

 Even RTO/ISOs examining these issues express reservations that the evidence 

may be inadequate to support the conclusions asserted in the NOPR.3

 1 Compare Notice of Proposed Rulemaking at P 16-18, P 24 with Transcript of 

May 26, 2010 Technical Conference (Transcript) at 24:2-16 (Pike); Transcript at 18:13-

25 and 29-1-21 (Potishnak). 

2

 Electric Power Supply Association (EPSA) June 16, 2010 Comments at 2; Xcel 

Energy Services Inc. (XES) June 16, 2010 Comments at 3, 5-7; Transcript at 59:15-24 

(Lowell); Transcript at 124:4-9 (Pike). 

3

 Notice of Proposed Rulemaking at P 25; ISO New England Inc. (ISO-NE) June 
Docket Nos. RM11-7-000 and AD10-11-000 - 2 -

The May 26, 2010 Staff Technical Conference and subsequent outreach provided 

some feedback on these issues. However, I am concerned that the limited participation 

from entities other than the RTOs/ISOs and non-traditional technologies undermines the 

record on which to base a change to our regulations. There are “traditional” resources, 

such as pumped-storage hydro and certain combustion turbine resources that provide this 

type of “faster-ramping” service,4

 but we have received only limited feedback from these 

types of resources so far. In addition, there may be proponents of new technologies that 

we have not heard from whose role with regard to frequency regulation may warrant a 

different change to our regulations than proposed in the Notice of Proposed Rulemaking. 

Initiation of a Notice of Inquiry or Advanced Notice of Proposed Rulemaking may better 

allow evidence regarding those technologies. 

Appropriately, the Notice of Proposed Rulemaking asks questions to develop a 

more complete record. However, the nature of the questions posed is an indication that 

we should do more prior to issuing a specific proposal. While the Notice of Proposed 

Rulemaking asks some generic questions in this regard, the majority fails to address the 

concerns already in the record about co-optimization,5

 sustainability6 and potential 

limitations of faster-ramping resources.7

Moreover, I believe there is no basis to propose a single, one-size-fits-all approach 

for frequency regulation compensation. In fact, several commenters caution specifically 

 

16, 2010 Comments at 5-6; California Independent System Operator Corporation 

(CAISO) June 16, 2010 Comments at 2-3. 

4

 ISO-NE June 16, 2010 Comments at 4-6; Transcript at 14:18-22 (Masiello); 

Transcript at 49:3-14 (Pike). 

5

 Notice of Proposed Rulemaking at P 38; EPSA June 16, 2010 Comments at 9-10; 

Southern Company Services, Inc. (Southern) June 16, 2010 Comments at 6-8; Southern 

California Edison Company (SCE) June 16, 2010 Comments at 3. 

6

 Notice of Proposed Rulemaking at P 33; ISO-NE June 16, 2010 Comments at 5; 

EPSA June 16, 2010 Comments at 6-8; XES June 16, 2010 Comments at 5; Transcript at 

15:13-15 (Potishnak); Transcript at 18:18-25 and 19:1-5 (Ramey); Transcript at 23:18-25 

and 24:1 (Pike); Transcript at 75:15-25 and 76:4 (Pike); Transcript at 86:18-20 

(Potishnak). 

7

 Notice of Proposed Rulemaking at P 33, n.51; ISO-NE June 16, 2010 Comments 

at 5; EPSA June 16, 2010 Comments at 8-9; Transcript at 17:20-25 (Ramey); Transcript 

at 73:4-16 (Ramey). 
Docket Nos. RM11-7-000 and AD10-11-000 - 3 -

 

against such an approach.8

 In addition, I have concerns that the majority decision could 

detract from, or otherwise delay, efforts ongoing at the RTO/ISO stakeholder level.9

It is essential that this Commission address frequency regulation compensation to 

ensure appropriate compensation for service provided. Moreover, new technologies 

could offer substantial benefits. While I recognize the majority’s desire to move quickly, 

I believe it is more important to “measure twice, cut once.” Accordingly, I believe the 

Commission should have taken a preliminary step (such as the issuance of a Notice of 

Inquiry or Advanced Notice of Proposed Rulemaking) before moving forward with the 

specific proposal in a Notice of Proposed Rulemaking. For these reasons, I respectfully 

dissent in part from this Order. 

_____________________ 

Marc Spitzer 

Commissioner 

8

 ISO-NE June 16, 2010 Comments at 7-8; SCE June 16, 2010 Comments at 2,5; 

Southern June 16, 2010 Comments at 3. 

9

 Notice of Proposed Rulemaking at P 13; SCE June 16, 2010 Comments at 3-4; 

CAISO June 16, 2010 Comments at 1-2.