By Amanda Durish Cook

Citing an analysis by The Brattle Group, MISO has decided to stick with its original forward design in its capacity auction overhaul, rejecting the hybrid prompt auction proposal it had negotiated with the Independent Market Monitor.

Jeff Bladen, executive director of MISO market services, said the forward proposal was the “best fit” to address price formation and encourage entry by new resources.

“This is the best chance of seeing real improvement,” Bladen said during a special conference call of the Resource Adequacy Subcommittee Thursday .

Monitor David Patton continued his criticism of the forward proposal, which he has called “fundamentally unsound.” (See MISO, Monitor Release Negotiated Auction Redesign.)

According to Brattle’s analysis, a forward model would reduce price volatility by 35 to 37% compared to the current Planning Resource Auction. The hybrid prompt proposal, Brattle analysts said, would reduce volatility by 25 to 28%. Brattle said a forward proposal paired with a broader and more gently sloping demand curve could reduce price volatility by 44 to 48%.

Bladen said MISO is still “fine-tuning” the curve shape and could incorporate Brattle’s recommendation.

Brattle analysts said that while the forward model attracts an additional 1,800 MW of merchant supply when compared to the status quo and “substantially” improves reliability, it still falls “somewhat” short of redesign objectives.

A wider demand curve could bring 2,200 MW in merchant supply, meeting the one-day-in-10-years loss-of-load expectation. Brattle said the prompt hybrid proposal supports an additional 1,200 MW of merchant supply and that, although reliability improves under the model, it is “still substantially short of reliability objectives.”

Not Surprised

Patton criticized Brattle’s analysis, saying it measured volatility and reliability but ignored efficient pricing that allows generators to recover costs. Patton insisted that some volatility was natural.

“Volatility is a secondary metric at best,” he said.

Patton said he wasn’t surprised by MISO’s decision to move ahead with its own proposal.

“Fundamentally, I never felt like we reached a compromise because MISO never agreed to do the prompt proposal. They always had a strong preference for a forward proposal. I think it’s a mistake,” he said.

Despite that, Patton said he did not feel that working with MISO on the prompt proposal was a “charade.”

Bladen said the forward proposal minimized Tariff changes and is the best choice when considering reliability and FERC precedent. Patton countered that the legal hurdles to implementing a prompt proposal “weren’t nearly as daunting as MISO makes it seem.” He also said instituting the two-stage prompt auction would not undermine the current PRA, although it may lower prices.

Several stakeholders questioned Brattle’s Monte Carlo analysis, a probability simulation using repeated sampling. Brattle analysts noted that “findings may change with future refinements, particularly to assumptions in how utilities participate in forward auctions.”

“That’s a pretty big caveat,” Dynegy’s Mark Volpe said.

Brattle analyst Kathleen Spees said the forward analysis carries substantial uncertainty “simply because there’s not as much evidence on how utilities will behave. In the prompt proposal, we have much more empirical evidence.”

Bladen said the Monte Carlo analysis took “thousands” of scenarios into account.

Volpe asked if Brattle supported MISO’s decision to move ahead with the forward proposal.

“Look, nothing is going to be perfect or perfectly predictable in this environment,” Brattle analyst Sam Newell said. “That said, the elements of this proposal are clearly better that the status quo and better than other alternatives, including the prompt proposal.”

Newell said the forward proposal “achieves an economic efficiency that the alternative does not” and is the best proposal to provide reliability at least cost. Newell also said the forward proposal is “unambiguously” better than the current construct.

In response to stakeholder questions, Newell and Spees said their study did not consider scenarios assuming supply from MISO South, reduced demand or a case focusing on renewable growth.

“If this is a billion-dollar business, why so many simplifications?” asked Indianapolis Power and Light’s Ted Leffler.

Newell responded that the lack of historical evidence prevented a more definitive study.

“MISO has looked exhaustively at the prompt hybrid proposal. We simply didn’t believe we could move forward with the hybrid prompt proposal,” Bladen said.

FERC Filing Next Month

MISO expects to file its proposal with FERC sometime next month. Bladen said MISO would “act without undue delay,” as directed by its board.

Draft Tariff language and revised Business Practices Manuals are expected to be posted by July 20; stakeholder discussions regarding the language is planned at the Aug. 3-4 RASC meeting. MISO will make another presentation regarding Tariff language on Aug. 8 before the Markets Committee of the Board of Directors.

Volpe said that MISO excluded stakeholders by not presenting the Advisory Committee with both proposals for review before announcing a decision.

Bladen said it wasn’t MISO’s intention to subvert the stakeholder process and pointed to the year and a half of discussion on auction redesign. He agreed the Advisory Committee could hold a special meeting on the auction design proposals or even recommend a delay in filing.

“We don’t want to stand in the way of the Advisory Committee coming together to debate,” Bladen said.

Marcus Hawkins, an engineer with the Public Service Commission of Wisconsin, responded that for the first seven months of the discussion, stakeholders had only an issues statement from MISO.

IMM Critical of Analysis

In his own presentation, Patton said prices in the forward proposal are “heavily dependent on decisions that regulated and external entities make to offer” and would result in annual price fluctuations exceeding $500 million, resulting in poor price signals to competitive suppliers.

“There is no way to predict where this market will clear year-to-year,” Patton said. He said MISO’s forward proposal fails to ensure auction clearing prices are consistent with the marginal value of reliability.

Patton said MISO’s forward proposal is not comparable to forward markets in other RTOs. “This is the first time that I’ve seen a model where the demand does not reflect the requirement,” he said.

Patton also said Brattle did not properly model the prompt proposal, including a much steeper demand curve than recommended. He said Brattle’s Monte Carlo analysis carried too much uncertainty because of assumptions regarding the demand curve and participant behavior. “I don’t envy The Brattle Group,” Patton said.

Stakeholders Split

Before Thursday’s meeting, stakeholders provided feedback on the two proposals.

Two members of the Michigan Legislature wrote a letter in support of a forward auction. “The three-year forward proposal provides long-term pricing signals that we feel are critical to attract new generation capacity to Michigan,” Sen. Mike Shirkey (R-Jackson) and Rep. Gary Glenn (R-Larkin Township) wrote.

Northern Indiana Public Service Co. and Alliant Energy asked that MISO and the Monitor take more time to explain and vet their proposals with stakeholders. Likewise, Duke Energy, Big Rivers Electric, Hoosier Energy and Southern Illinois Power Cooperative said they required more information before backing a proposal.

Illinois Industrial Energy Consumers and DTE Energy said neither proposal was acceptable.

Wolverine Power Cooperative called for a footprint-wide three-year forward auction instead of a proposal that blends a regulated prompt auction and a retail-choice forward auction.

American Electric Power also said it preferred at least a three-year advance auction for the entire footprint.

“This provides a price signal to the resource owner in time to budget and plan for maintenance, upgrades, fuel supplies, development of new resources, etc. It also would allow loads, both retail switching and wholesale, sufficient time to develop, evaluate and budget for supply offerings, with known auction result prices,” AEP said.

The Organization of MISO States said it needed more information before it selected a proposal to support, but it also added that it had “mixed opinions as to whether each proposal will promote generation investment.”

Dynegy also said it supported the prompt proposal. “At this point, it is abundantly clear that the hybrid prompt proposal may result in a clearer price signal for supporting restructured competitive retail markets,” Dynegy wrote.

Consumers Energy said the forward proposal is the better option but wanted revisions to Safe Harbor provisions for not entering generation into the auction and wanted the cost of new entry raised “to better incent new generation in shortage situations.”

Main Line Generation asked for the addition of a minimum price offer rule in both proposals.