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MISO Capacity Obligation Tariff Filing Laves Price Paid for Switched Load Unanswered

July 13, 2011
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The Midwest ISO's formal tariff filing at FERC to implement revisions to its Module E resource adequacy construct, including the creation of an annual commitment period and central auction with opt-out provisions, still leaves many questions unanswered regarding the interaction of various elections that incumbent electric distribution companies could make for serving capacity, and the effect of such elections on retail suppliers.

As expected (6/23), MISO has proposed imposing a one-year capacity obligation (with local requirements) on load serving entities, with LSEs required to show compliance with the requirements approximately two months before the start of the delivery year.

An annual auction will be held for LSEs to procure capacity resources, though LSEs may elect to minimize or eliminate exposure to the auction clearing price for capacity through either opting-out of the auction via a Fixed Resource Adequacy Plan, or self-scheduling generation into the auction.

While MISO's filing does address some procedures for load switching in retail choice states, a reading of the most on-point tariff provisions appear to be silent regarding specific charges for capacity that will be implicated due to load switching, especially if the incumbent LSE is not relying on the capacity auction to meet its capacity obligations (granted, the filing is 380 pages long, but a review of the entire explanatory statement, affidavits, and tariff sections 69A.1.2, 69A.1.3, and 69A.7.8, which would be the most relevant to load switching and opt-out plans, revealed no explicit provisions for the pricing of "switched" capacity obligations, nor did MISO highlight this question in its discussion).

Of course, if the incumbent LSE, or its procurement agent (e.g. the Illinois Power Agency in Illinois) decides to rely solely on the auction for capacity purchases, the issue of the charges applicable to LSEs gaining and losing load is largely moot, as there will be only a single price available, and the only question when the "new" LSE begins assuming the obligation for any migrated load's capacity obligation (the timing and measurement of which MISO does discuss in detail).

However, things become complicated if the incumbent LSE decides to opt-out of the auction completely, or self-schedule capacity into the auction for a portion or the entirety of its capacity obligations, and then that LSE then loses load to competitive suppliers.

Notably, this issue (with one exception) does not appear in the eastern RTOs with forward capacity markets largely due to the complete divestiture of generation by incumbent LSEs in those regions, and the design of the PJM Fixed Resource Requirement which does not allow partial opt-outs for LSEs. In the one case where an incumbent LSE in a retail choice state has opted out of PJM's Reliability Pricing Model (e.g. AEP Ohio), capacity charges for any capacity procured by AEP Ohio on behalf of a customer who has now switched to a competitive provider were initially (and to date still are, though subject to litigation) priced at the PJM clearing price, so that competitive retail suppliers are not exposed to any higher prices for capacity due to AEP Ohio's Fixed Resource Requirement election (there is still a misalignment in retail capacity charges in default service versus the PJM clearing price, but this issue is secondary to the issue of what capacity rate AEP Ohio charges retail suppliers; and AEP Ohio is now seeking to substantially raise these rates above the PJM clearing price).

In MISO, it is not clear how the various opt-out and self-schedule plans will interact with load switching and the wholesale price of capacity paid by competitive retail suppliers. While retail rate issues outside of MISO's jurisdiction are obviously implicated as well, the wholesale price of capacity for such situations could arguably be addressed at the RTO level (as it was done at PJM, unless overruled by a state regulator).

The load switching/opt-out issue is even more acute in MISO because the opt-out and self-schedule rights granted to LSEs are broad enough that an LSE may seek to avoid the impact of the auction clearing price for a portion of its load, and not its entire load (making self-scheduling more likely). This complicates the issue further since the cost of capacity of the incumbent LSE could theoretically be "blended" between self-supply and auction-procured capacity, leading to the question of, if load switches to a competitive provider, at what rate will such retail provider be charged for this new obligation.

The MISO tariff does provide some specifics regarding assignment of coincident peak demand and load switching.

For those areas where an LSE's coincident peak demand forecast is included in the coincident peak demand forecast submission of an electric distribution company, the EDC will determine and report each LSE's portion of such demand to MISO.

Under the "default" method in the tariff, an LSE's share of the coincident peak demand forecast will not be known until each operating day. Under this default method, the "daily capacity charges" related to obligations arising from meeting the Planning Reserve Margin Requirement during the planning year shall be apportioned on a daily energy pro rata basis to load served within the EDC's area. Daily energy values will be based on the energy settlement data (billable meter volume).

For LSEs using this default method, no additional arrangements regarding retail load switching are necessary, the tariff states. As load changes suppliers, this approach will automatically incorporate any changes.

The term "daily capacity charges" is not specified, however, so while the obligation of suppliers acquiring new load is clear, the cost of such capacity is not apparently prescribed in the same section of the tariff. Matters is following up with MISO on this issue, but MISO could not provide an answer to Matters prior to publication time regarding questions relating to the cost of capacity paid by retail suppliers for migrated customers whose capacity obligation was previously served under an opt-out plan.

When wholesale load switching occurs, the remaining capacity charges of such wholesale load will be transferred from the original LSE to the new LSE serving such load during the planning year. The coincident peak demand forecast for affected LSEs will be decreased or increased, as appropriate, by the amount of the coincident peak demand forecast for the transferred wholesale load. Similarly, the Planning Reserve Margin Requirements for the affected LSEs shall be decreased or increased, as appropriate, by equal pro rata amounts over the days of the planning year, depending on the date of the wholesale load customer switch.

An EDC may elect to use an alternative method for the coincident peak demand forecast, which must describe in detail the procedures and data used to determine, on a daily basis, the assignment of the EDC's forecast coincident peak demand to those LSEs providing service within the EDC's area. Such alternative plans are subject to MISO approval, and must remain in effect for at least one year.

For LSEs using an alternative method, the alternative method must be sufficiently documented to inform the MISO of how responsibility for resource adequacy commitments will be re-allocated due to retail load switching.

"Procedures for billing, settlement, and credit requirements will be as specified in the appropriate BPMs [business practice manuals]," the tariff states.

MISO's filing was made in dockets ER08-394 & ER11-4081 and is available here. The filing also discusses in more detail various aspects of the new resource adequacy mechanism, including development of the Local Resource Zones and Local Reliability Requirements, the creation of a minimum offer price in the auction and exemptions from the price, the role of state regulators in setting the Planning Reserve Margin, and the "vertical" reliability target used in the auction representing the 0.1 Loss of Load Expectation.

MISO proposed that the first annual capacity compliance period begin June 1, 2013, with the auction held in late March/early April 2013.

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