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FERC rejects MISO forward capacity auction proposal

Houston — The Midcontinent Independent System Operator cannot implement its proposed three-year-forward capacity auction for its competitive retail areas as a result of its rejection Thursday by the Federal Energy Regulatory Commission.

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On November 1, MISO filed a 1,682-page tariff proposal (Docket No. ER17-284) that provides four "options to demonstrate resource adequacy," according to a MISO fact sheet about what the organization calls its "Competitive Retail Solution" for areas that have competitive retail power markets, including Illinois and Michigan. The options are:

--Forward resource auction, in which a load-serving entity buys capacity through a three-year forward auction with a sloped demand curve.

--Forward fixed resource adequacy plan, which an LSE submits so as to be excluded from the FRA.



--Prevailing state compensation mechanism, which a state may establish so as to exclude its demand from the FRA, in which case resource adequacy is demonstrated through MISO's existing prompt-year planning resource auction.

--Long-term resource adequacy planning process, in which a jurisdictional authority may opt to keep competitive retail demand out of the FRA.

MISO currently operates a one-year planning reserve auction designed to meet the incremental capacity needs of the vertically integrated utilities that serve the vast majority of the MISO footprint, but MISO also has competitive retail areas in Illinois and Michigan, which may have less than their internal reserve requirements as early as this summer, according to a 2016 survey conducted jointly by MISO and the Organization of MISO States, a group of regulatory agencies for the MISO footprint.

MISO's forward resource auction resembles the PJM Interconnection's three-year-forward capacity auction model. MISO's planning reserve auction for 2015-16 resulted in capacity prices in the MISO Zone 4 portion of Illinois being much closer to those in the Northern Illinois Hub. MISO's Zone 4 price was $150/MW-day. PJM's Base Residual Auction for 2015-16, conducted in 2012, resulted in a market-clearing price of $136/MW-day for the Northern Illinois Hub. Other capacity prices in MISO's North and Central regions had a clearing price of $3.29/MW-day.

On Thursday, FERC rejected the CRS proposal, finding that it "has not been shown to be just and reasonable and not unduly discriminatory or preferential" (Docket No. ER17-284).

Applying the proposed forward resource auction only to load in the competitive retail areas, primarily Illinois and Michigan, would result in a "bifurcated approach" which "could have uncertain, and potentially adverse, impacts on price formation in both the forward auction and the prompt auction."

Such a bifurcated approach "will likely result in clearing prices and capacity resource selections that lack the desirable properties associated with a single marketwide clearing price," the FERC order said.

"Due to the bifurcated structure, which requires owners of these supply resources to decide whether to offer into the forward auction more than three years prior to the prompt auction for the same planning year, it is not clear the extent to which these supply resources will offer into the forward auction or how this uncertainty will impact clearing prices in the forward and the prompt auction," the FERC order said. "Such unpredictable and variable supply participation could result in significant and unnecessary price volatility in both the forward and the prompt auction."

Small changes in supply participation in the FRA by resources in the noncompetitive areas "could result in substantial unnecessary year-to-year differences in forward auction clearing prices, even with a downward sloping demand curve that should reduce price volatility," the order said.

Conducting the FRA and PRA at different times could cause prices to diverge "even when such divergence is not supported by underlying supply and demand fundamentals," the order said.

Also, retaining a vertical demand curve in the PRA while applying a sloped demand curve in the FRA "would allow for variable amounts of capacity to clear in the forward auction, which could amplify volatility in the prompt auction," the order said.

Another problem with MISO's CRS proposal is that "MISO has not adequately explained or provided clear tariff language to demonstrate that the CRS proposal would reasonably allocate transmission capability across capacity zones and across sub-regions in the MISO footprint between the forward auction and the prompt auction," FERC said.

"In past prompt auctions, transmission capability constraints between zones and sub-regions have caused substantial price separation," the order said, but "the proposed bifurcated clearing mechanism requires MISO to choose how much transmission capability to allocate between the prompt auction and the forward auction, which could lead to improper or inefficient allocations."

--Mark Watson, Markham.watson@spglobal.com

--Edited by Jason Lindquist, jason.lindquist@spglobal.com