MISO Staff Proposes Forward Auction Plan for Retail Electric Choice

On July 20, 2016 MISO (Midcontinent Independent System Operator, Inc.) proposed draft rules for changes to its planning reserves auction for retail competitive states. Once finalized, the proposal will be filed with the Federal Energy Regulatory Commission (FERC) for approval following several stakeholder meetings. The informal stakeholder meetings began last week where MISO unveiled its proposal and allowed interested parties to ask questions and suggest alternative proposals. MISO staff has suggested they could file tariff language as early as the end of August or early September with FERC and, if approved, the proposed forward capacity auction proposal could begin with the 2018-2019 planning year (the Midcontinent ISO said at a recent board meeting that it now proposes to implement the auctions in the 2018-19 delivery year, rather than 2017-18 as was first indicated). Last week MISO convened its first stakeholder meeting to explain its initial proposal and to hear input and feedback. Follow-up stakeholder meetings are anticipated.
As background, while most of MISO is made up of vertically integrated full regulated states, only downstate Illinois (and Michigan to a lesser extent, which has a 10% shopping cap) allow for retail electric shopping. Michigan’s “10% shopping cap” is defined as no more than 10% of the utility’s average weather-adjusted retail sales for the preceding calendar year may purchase energy supply from a retail energy supplier (RES) provider at any time. The MISO plan is based on the assumption that the best way to address declining reserve margins in MISO’s competitive retail areas of Illinois and Michigan is to establish a separate capacity market auction for those areas that covers a period three (3) years into the future. In the remaining fully regulated MISO service territories the state Commissions would continue to regulate generation with the traditional cost-of-service model, where MISO’s capacity market would continue as before.
MISO’s proposal, named the “Competitive Retail Solution,” would require all competitive retail demand to take part in a “forward resource auction” (FRA) process. Under the proposal, State regulators could get out of mandatory participation by setting up a “prevailing state compensation mechanism” for utilities under their jurisdiction. Under the proposal it is assumed that enough capacity would be sought in the auction to meet the expected demand of competitive retail load serving entities (LSEs) that they had not already procured by other means. Any entity — merchant or regulated utility — that could deliver capacity to those competitive retail LSEs would be allowed to offer capacity in excess of existing commitments or requirements.
The FRAs would occur in February and capacity would be procured three (3) years ahead of time. MISO is working on some interim auctions for the years before 2020 but those are still in progress, so a firm description was not in the draft document.
On the supply side of the FRA – generation, external resources, DR (Demand Response), intermittent generation, use-limited resources and energy efficiency – would be eligible to take part. MISO would qualify planning resources for the applicable year of the auction and they have to fit MISO’s requirements for resource adequacy (referred to as capacity).
Any market participants that own resources in zones with competitive retail demand that take part in the new forward auction would have to submit into either the auctions or sell bilaterally as part of a fixed resource-adequacy plan. External resources that clear in a forward auction for a zone would have to submit bids in the next auction and have to keep taking part unless they give MISO six (6) -month notice that they want to stop.
One major aspect of the plan that is still being worked out is the demand curve, which is what forward capacity market prices are based on. The Brattle Group was retained by MISO to develop several sloped demand curves to be used in the proposed Forward Resource Auction, and MISO intends to post its pick among those curves prior to August 12th. Under the proposal MISO would determine the variable reliability targets and how much competitive retail demand contributes. The auctions would target procurement of capacity to meet a one-in-10-year reliability standard. Those variable reliability targets would be updated at least every four (4) years and any changes would have to be reviewed by stakeholders and ultimately approved by FERC.