[Editor’s Note: This column does not represent the opinion of the Coalition of Midwest Power Producers or any of its members.]
By Karen P. and Mark J. Volpe
Last September, we documented the gradual departure of more than 25 GW of independent power producer-owned and -operated generation out of MISO.1 Today we will review and disclose the fundamental cause as to why merchant generation has been forced to exit MISO. As background, more than 22 years ago, the functional unbundling of transmission and generation assets as required under FERC’s landmark Order 888 was intended to promote wholesale competition among generators and preclude vertically integrated utilities from restricting access to the transmission system in order to favor their own generation resources.2 The first and most important fundamental characteristic FERC defined was independence, and those RTOs approved as consistent with Order 2000 were required to be independent in their decision-making process, with FERC explicitly stating, “the regional transmission organization must have a decision-making process that is independent of control by any market participant or class of participants.”3 My late wife, Karen, had always questioned the entire concept of “ISO independence,” dating back to the end of my time at FirstEnergy in 1997, when she steadfastly maintained that an ISO’s independence was never a realistic hypothesis because the ISO’s decision-making process would never be the product of truly independent thinking. Karen loved to ponder and debate the question of independence with family, where she concluded there was no such thing as independence. When dealing with the human element, she insisted that once we are born, it is universally true that because the human condition it is not possible to be independent. Each and every living being evolves and grows and gradually becomes a product of their environment based on their life’s experiences.
To address this reality, the ISO’s senior management must be populated with industry experts with a deep-seeded awareness and responsibility that it is incumbent upon the RTO/ISO to remain fair and balanced in its decision-making process and not appeal solely to the interests of those business models representing the majority. Unlike the rest of the country, RTOs are not a democracy subject to majority rule; instead, they are supposed to be independent and also represent the interests of those in the minority. The MISO transmission owners are collectively a class of participants, which, except for the standalone transcos, are composed of vertically integrated utilities that also own and operate a significant amount of affiliated generation assets. As such, MISO is purportedly independent and precluded from making market design decisions that would favor the TOs, which have voluntarily transferred functional control of their assets over to the RTO. This lack of independence is not unprecedented, given MISO senior management’s favoritism of certain TOs, including Ameren, Northern Indiana Public Service Co. and FirstEnergy in the context of a preferential and more lucrative distribution of revenue sufficiency guarantee payments, which was the subject of a nonpublic investigation performed in 2007 by the FERC Office of Enforcement (IN07-32).4
In 2011, things really “hit the fan,” as MISO received FERC acceptance of its current Planning Resource Auction design, relying on a fundamentally flawed vertical demand curve under a residual capacity construct.5 This design certainly favored the incumbent TOs because by operating under a vertical demand curve, even the slightest surplus results in near zero auction clearing prices that cannot sustain merchant generation over the long term and has resulted in the continued inevitable demise of merchant generation. More recently, in a protest concerning MISO’s refiling of its entire PRA construct, which has resulted in unreasonably low auction clearing prices ranging from $1.50 to $10/MW-day in recent years, the RTO’s own Independent Market Monitor, David Patton, stated:
“The commission relies on well-designed competitive markets to produce prices and market outcomes that are just and reasonable. No objective analysis of the MISO capacity market could demonstrate that the outcomes under the current Module E are just and reasonable by any appropriate standard. In fact, the flawed design of the market precludes it from producing just and reasonable prices. … Further, MISO made no attempt to provide evidence that its capacity market has produced reasonable outcomes or that it is an economically sound market design.”6
Patton has demonstrated that with a properly shaped demand curve, the auction clearing prices would be in the range of $65 to $150/MW-day. The vertically integrated entities comprise 95% of the MISO market and are subject to traditional cost-of-service regulation administered by state regulatory commissions, where, based on publicly available FERC Form 1 data, the affiliated generators received on average $300/MW-day for capacity cost recovery as collected within the utilities’ bundled retail rates. In filing this flawed approach, and arbitrarily favoring the generation assets affiliated with the MISO TOs back in 2011,7 the underlying silent intent on MISO’s behalf was aimed at ensuring the remaining TOs stayed put in the RTO and has forced a large majority of the merchant generators to exit, leaving the TOs owning generation with the dominant market share.
While Order 888 promoted open access to the grid, MISO’s TOs still retain significant influence and leverage over MISO’s market design decisions, given the ever present veiled threat to pull their assets out. This has resulted in an inherent bias on MISO’s behalf to support a capacity construct that favors “The Owners” and their affiliated generators. It’s no coincidence that FERC accepted MISO’s flawed capacity construct right after FirstEnergy and Duke Energy Ohio had decided to leave MISO for PJM’s better designed forward capacity market. The continued departure of otherwise economic merchant owned generation will eventually leave consumers in a “market” dominated solely by the incumbent vertically integrated utilities owning the major market share of MISO’s total generating capacity. The Organization of MISO States needs to do what is best for their ratepayers because consumers will be harmed and eventually see a rise in prices given the absence of competitive supply alternatives.
Promoting competition among wholesale generators was one of the cornerstones of Orders 888 and 2000 and has been severely compromised because of a lack of independence in MISO. This is not the result of unintended consequences. Wholesale competition in MISO is in danger of extinction given the rapid departure of competitive merchant generation. The facts demonstrate MISO purposely and consciously designed its resource adequacy construct to unduly discriminate against the economic interests of merchant generators in violation of the independence requirement, by arbitrarily benefiting the financial interests of those generation assets affiliated with MISO’s vertically integrated TOs. This untenable situation is not working as originally envisioned by our federal regulators in D.C., where Orders 888 and 2000 were designed to promote wholesale competition among generators — not kill it!
Mark J. Volpe is the president & CEO of the Coalition of Midwest Power Producers (COMPP), a nonprofit trade association focused on the continued evolution of fully robust wholesale energy and capacity markets in MISO. He is the former Senior Director of Regulatory Affairs for Dynegy Inc.This column does not represent the opinion of COMPP or any of its members.]
1RTO Insider, “The Slow Death of Merchant Generation in MISO,” Sept. 17, 2018.
2FERC Order No. 888, Docket No. RM95-8-000, et al., 75 FERC ¶61,080, April 24, 1996.
3FERC Order No. 2000, Docket RM99-2000, 89 FERC ¶ 61, 285, Dec. 20, 1999.
4FOIA FY 2011 Log Report – Federal Energy Regulatory Commission.
5Midwest Independent Transmission System Operator, Inc. Filing to Enhance RAR By Incorporating Locational Capacity Market Mechanisms (“Resource Adequacy Filing”), Docket No. ER11-4081-000 filed July 20, 2011, and order accepting MISO Resource Adequacy Proposal, 139 FERC ¶61,199, June 11, 2012.
6See Motion to Intervene Out of Time and Protest by MISO’s Independent Market Monitor, FERC Docket No ER18-462, page 4, Feb. 7, 2018.
