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Illinois Regulators Assail MISO Centralized Capacity Auction Plan, Raise Concerns on Retail Market Impact
September 9, 2011
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In a pleading likely to fall on deaf ears at FERC (ER11-4081), the Illinois Commerce Commission expressed, "significant doubts that a centralized capacity market, as proposed by [the Midwest ISO], is necessary for the Midwest."
The ICC also called the proposed tariff provisions related to retail load switching and the attendant capacity obligation unclear, with "fundamental flaws."
As noted by Matters, MISO's July filing gave few concrete details regarding load switching (especially with regard to the pricing of migrated capacity obligations, see 7/13 story). MISO has since explained the migration rules in greater detail to Matters (see 8/2), but such procedures do not appear to be embodied in the filed tariff, and may be left to the business practice manuals.
"MISO fails to provide any meaningful evidence that such centralized capacity market approach to resource adequacy is either necessary or superior to building on the existing MISO resource adequacy construct and voluntary capacity auction program. MISO's July 20 Filing fails to substantiate the claims that the proposed resource adequacy proposal will actually improve reliability, better address the resource adequacy needs of MISO's stakeholders or achieve system reliability in operating and planning horizons at the lowest cost," the ICC said of MISO's plan.
"Properly functioning markets feature willing buyers and willing sellers and the interaction of supply and demand to produce competitive outcomes. However, MISO's proposed capacity construct does not have these features. In particular, the demand for capacity is not revealed through consumers' preferences. Rather, demand for capacity in MISO's proposal is represented by an administratively determined, reliability driven, reserve margin calculation. This is in direct contrast to MISO's Energy and Ancillary Services market, which exhibits more of the characteristics of a well functioning market," the ICC said.
Regarding retail load switching, the ICC noted that Sections 69A.1 through 69A.1.3.b of the filed tariff deal with coincident peak demand forecasting and the re-allocation of responsibility for resource adequacy commitments when retail load switching occurs.
"Unfortunately, because these two topics are jumbled up and spread throughout Sections 69A.1 through 69A.1.3.b, and are addressed under sub-heading titles that have little or nothing to do with the contents of each sub-section, the intent of MISO's proposals for these two topics is not clear. Accordingly, monitoring MISO's implementation performance for these matters will not be reasonably possible unless the Commission requires these sections to be clarified and rewritten," the ICC said.
The ICC called the determination of load serving responsibility and reassignment of load serving responsibility in retail access states, "a state-jurisdictional function."
While the MISO tariff does contemplate alternatives to the "default" treatment for load switching, the tariff only provides that the "host" LSE (i.e. distribution company) shall "work with" the applicable retail regulator in devising any alternative capacity re-allocation designs. The ICC said that, "the MISO process must allow for the state to assert its responsibility to establish these rules and must allow for the LSEs to comply with them."
"At a minimum, MISO's tariff should require that, if the applicable state regulatory authority has established a process or rules for determining LSE obligations and re-assigning LSE obligations due to retail load switching, then the LSE must follow those rules and procedures. MISO's tariff would improperly turn these state-jurisdictional matters over to the Commission by incorporating them into a Commission-jurisdictional tariff," the ICC said.
While MISO has claimed that its proposed tariff language will, "facilitate state retail choice programs that exist in the MISO Region by establishing improved provisions to address peak load forecasting and wholesale and/or retail load switching," the ICC said that the current monthly capacity obligation, "satisfactorily facilitates Illinois' retail choice program and that MISO's proposed resource adequacy program could be counter-productive in this regard."
It should be noted that Illinois will be the only jurisdiction in MISO with any substance of a retail market starting in 2012, thus lending weight to its view that the current resource adequacy approach adequately facilitates retail choice (with Duke Energy Ohio completing the move to PJM, and Michigan only having limited retail choice capped at a meager 10% of volume).
Illinois is also the only state in MISO where the local distribution company no longer has a traditional obligation to serve (e.g. relying on owned generation), further raising questions on the need for the revamped resource adequacy program if every other LSE in MISO outside of Ameren is required by its applicable regulator to meet customers' capacity needs through integrated resource planning or similar processes (Indeed, even in Michigan, where there is some restructuring, a proposed Michigan order would essentially conclude that utilities are still obligated to serve customers returning to the utility from competitive supply, implying utilities must plan for this load, and thus that migrated customers should pay a nonbypassable surcharge for this right to return, see 8/15 story).
In any event, the ICC noted that, to the extent that capacity obligations do not instantly follow load switching under MISO's current program, the disjoint lasts for, at most, 30 days, until a new capacity obligation is established.
However, as MISO has now proposed a 12-month capacity obligation, "to the extent there is friction in matching capacity obligations to changing load responsibilities that is not addressed, the disjoint will last for as much as a year until new capacity obligations can be established."
Additionally, the ICC opposed the "grandmothering" of certain LSE hedges under which LSEs are made whole for the difference between their local capacity price, and the price in another zone where the resource backing the hedge is located. Such hedges are typically held by various public power entities.
"These hedges favor some LSEs over others in constrained [zones] and will skew competition for customers within a [zone], particularly in retail competition states," the ICC said.
The ICC also noted that despite the proposal for a 12-month capacity obligation on LSEs, the extension in the forward procurement of capacity will only be for an additional 30 days (from a 30-day compliance showing to a 60-day showing). Given the length of time to build new resources, the ICC said that the MISO's 30-day extension of the forward commitment obligation, "will do nothing to fundamentally change the nature of the competition to supply capacity in a MISO market because it is not sufficient to enable new entrants to build capacity to compete against incumbents."
"Therefore, whether the forward period is approximately thirty days or approximately sixty days, the competitors in the auction will be limited to incumbents with resources already in place," the ICC said.
This is concerning, the ICC said, because, as found by PJM's market monitor,
"[t]he market design for capacity leads, almost unavoidably, to structural market power in the capacity market."
Quoting the PJM market monitor, the ICC noted that, "[t]he capacity market is unlikely ever to approach a competitive market structure in the absence of a substantial and unlikely structural change that results in much greater diversity of ownership."
Furthermore, the ICC said that MISO has not proposed a meaningful market power monitoring and market power mitigation program.
"Rather than expending time and resources on the development and implementation of a centralized capacity market for the Midwest, the ICC believes it would be much more productive, and would better facilitate resource adequacy and the reliability resulting from resource adequacy, for MISO to make the minimal changes needed to the existing capacity construct to incorporate locational mechanisms. The focus should be on improving energy and ancillary services market design as the mechanism for facilitating resource adequacy," the ICC concluded.
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