By Rich Heidorn Jr. and Suzanne Herel

WASHINGTON — MISO officials asked FERC staff last week to trust in its stakeholder process and not force capacity market changes that could increase exports, while the RTO’s Market Monitor and other critics called for the commission to force reforms.

FERC staff’s daylong technical conference on MISO’s capacity market — called in response to complaints by Illinois officials, industrial energy users and a consumer group — was dominated by technical discussions on zonal boundaries, capacity import limits and reference levels. But MISO’s stakeholder process also came under scrutiny.

MISO Market Monitor David Patton suggested only a FERC order would prompt the RTO to switch from a vertical to a sloped demand curve.

“For any change that involves large economic value, the stakeholder process can bog down,” Patton said. “And that’s definitely the case with the sloped demand curve.”

Patton suggested a FERC mandate — such as its 2014 order requiring a sloped curve in ISO-NE — might be necessary to prompt change.

“That reorients the stakeholders’ discussion. Folks who were obstructionist become part of the process of discussing how to implement something that would be effective and produce reasonable outcomes,” he said. “So while there is a stakeholder process [on capacity issues], the most important issues are not part of those discussions.”

‘Robust Stakeholder Process’

Patton’s comments came after MISO officials Renuka Chatterjee, executive director of interconnection planning and resource adequacy, and Jeff Bladen, executive director of market design, asked the commission to exercise caution.

Bladen said the commission shouldn’t take any actions that increase the number of MISO-based generators selling capacity into PJM.

Chatterjee said the RTO already plans to make two changes before its 2016 Planning Resource Auction. She asked the commission to allow MISO’s “robust stakeholder process” to develop long-term solutions.

That brought a retort from Tyson Slocum, director of Public Citizen’s Energy Program, who said the RTO’s stakeholder process “is heavily dominated by a few interests and … not reflective of broader stakeholders.”

The commission announced the technical conference Oct. 1 in response to complaints by Public Citizen, Illinois Attorney General Lisa Madigan, Southwestern Electric Cooperative and Illinois industrial energy consumers over MISO’s 2015 PRA in April. The auction saw a nine-fold price increase in Zone 4, which comprises much of Illinois.

FERC said the conference would help it “determine what further action, if any, may be appropriate” to address the complaints (EL15-70, et al).

At the same time, FERC announced a non-public investigation into “whether market manipulation or other potential violations of commission orders, rules and regulations occurred before or during the auction” (IN15-10). (See FERC Launches Probe into MISO Capacity Auction.)

Public Citizen called for an investigation in May into whether Dynegy improperly withheld capacity in Zone 4, an allegation the company has denied. Public Citizen also alleged that MISO brushed aside recommendations by its staff that Zones 4 and 5 be merged due to their concerns about Dynegy’s growing share of capacity in Zone 4 after the company acquired four generators there from Ameren.

Madigan’s complaint said that Dynegy’s increased generation portfolio in Zone 4 made it a “pivotal supplier” in the zone. Madigan also complained that in approving the Dynegy acquisition, FERC declined to look at its effect on competition and prices in Zone 4 and instead only considered a competitive analysis of MISO as a whole.

Lost Opportunity Costs

The April auction saw prices in Zone 4 clear at $150/MW-day, compared with just $16.75 a year earlier.

Dynegy said the results were consistent with its opportunity costs, which Patton had calculated at $155.79/MW-day, reflecting its ability to sell capacity into PJM. The company noted that a PJM Incremental Auction cleared at $163/MW-day less than a month before MISO’s auction. (See Dynegy: No Evidence of Misconduct in Auction.)

MISO relies on the estimated opportunity cost of exporting capacity to a neighboring region in setting the initial “reference level” — a benchmark it uses for identifying economic withholding.

In a complaint June 30, the Illinois Industrial Energy Consumers argued that PJM’s capacity costs should be not be used in setting the reference level because PJM can only accommodate a limited amount of uncommitted MISO capacity (EL15-82).

Representing the industrials, attorney Robert Weishaar told the hearing that the method MISO uses to calculate lost opportunity costs should be changed, saying the RTO’s current practice doesn’t comply with FERC’s requirement, “which is they must be legitimate and verifiable.”

Weishaar said the reference level should be set to zero pending MISO’s development of a new standard that is compliant.

“The other option is for the commission to get very prescriptive about how the LOC provisions of the Tariff should be applied to take into account such things as whether there is excess capacity within the zone; what is the available transfer capacity; what are realistic options for selling into neighboring regions,” he said.

In response to questions from staff, Patton opposed the use of a zero reference level. Patton and consultant Roy Shanker, speaking on behalf of the Electric Power Supply Association, also opposed using estimated going-forward costs by resource type in setting the reference level.

“It’s a suspension of reality,” Shanker said. “You should definitely not do it.”

Weishaar said MISO also should reflect counterflows in the calculation of local clearing requirements.

He said the two changes should be made in time for the 2016 PRA. “What we’ve learned today is that there is a high-level imprecision in the existing Tariff provisions and that some change needs to be made on both of those issues. Our view is both of those issues need to be addressed in the next six to eight months.”

Sloped Demand Curve

Henry D. Jones, executive vice president and chief commercial officer for Dynegy, joined Patton in calling for MISO to adopt a sloped demand curve.

“The vertical demand curve construct suggests that any megawatts over the planning reserve margin receive zero capacity dollars,” he said. “… Any capacity that’s not going to clear is going to be an [independent power producer] in Zone 4 and that’s not a sustainable model in terms of a capital investment in existing assets or attracting investment for new build.”

Patton said MISO’s current method separates “the representation of demand from reliability,” making it impossible to “get a market outcome that is going to produce just and reasonable prices.”

Under current rules, the last megawatt needed to meet the requirements is “worth a ton. You go one megawatt further, that megawatt is worth nothing. But if you do any sort of loss-of-load expectation — any conventional reliability analysis — it would tell you those two megawatts are delivering almost the same reliability value,” Patton said.

Patton has been unable to get any traction within MISO for changing the construct. (See MISO Monitor Debates Capacity Rules with Board.)

Jones acknowledged that such a change would face opposition from MISO’s traditionally regulated states. “I think it’s a fight worth having,” he said.

Jones also said that while MISO’s traditionally regulated states can ensure construction of new generation, Illinois — a retail choice state that does not use integrated resource planning — could find itself deserted.

“The concern we have is that over a very short period of time assets will retire or become less reliable in Southern Illinois and they will be replaced in surrounding states in [the] regulated rate base. And the southern part of Illinois will wake up with less capacity and an aging coal and nuclear fleet that’s being replaced in other states, where jobs and tax base are being shifted.”

Jones also argued that MISO should implement a minimum offer price rule (MOPR) and change its auction schedule. “It’s truly nonsensical to imagine that people can plan with an auction that occurs eight weeks before the planning year,” he said. “We need more lead time if we’re going to be thoughtful about this and provide incentive for capital expenditure and/or new build. There needs to be a longer runway for that.”

‘Swiss Cheese’ Effect

In addition to reiterating his call for a change in the demand curve, Patton said MISO also needs to “rationalize how capacity is delivered in real time.” He said MISO is being hampered by PJM’s requirement that capacity resources serving it from outside its footprint be pseudo-tied.

The PJM requirement is “creating effectively a Swiss cheese effect, where they’re taking dispatch control over units that are critical to control constraints that they don’t see in their model — and that demonstrably harms reliability,” he said.

Patton said PJM’s requirement should be replaced with operating procedures in which MISO guarantees delivery of the energy PJM has purchased “so that they [PJM] have what they need without having to effectively reconfigure the RTOs in ways that are really hard to undo from an efficiency standpoint.”

The change would help PJM’s reliability as well, Patton said.

“If MISO’s delivering energy on a firm basis, they’ll dispatch around constraints, whereas [under current procedures] a particular resource — if it hits a constraint — may have to be curtailed.”

Patton wasn’t optimistic that the two RTOs would reach agreement any time soon, however. “It’s going to take time, if my experience is a guide. To get PJM and MISO to agree on something takes a long time.”

MISO: Changes Planned

MISO’s Chatterjee said the RTO expects to make changes in time for the 2016 PRA regarding how it treats generation retirements and suspensions and how it allocates zonal deliverability benefits.

She said MISO staff will be attending a Nov. 19 conference with the Illinois Commerce Commission to hear more about the state’s concerns.

“’What problem are we trying to solve?’ is an important question to ask ourselves,” she said.

Bladen said FERC should not eliminate MISO’s opportunity cost provisions, which he said would mean that generators could “capture the opportunity cost in PJM — or the equivalent value of the opportunity in PJM — only by exporting to PJM.”

FERC will take post-hearing comments until Nov. 4. It has set no timeline for possible actions resulting from the inquiry.

In the meantime, MISO’s executive team is withholding comments on the issue, Clair Moeller told stakeholders at its Oct. 20 Informational Forum.

“What you’ll see [MISO] do is take a breath. We think it’s prudent for us to wait to see how FERC’s action on the section 206 complaints play out,” said Moeller, MISO executive vice president of transmission and technology.

Criticism of FERC Response

Public Citizen’s Slocum said he was frustrated that the conference, which was run by staff from FERC’s offices of General Counsel, Energy Market Regulation and Energy Policy and Innovation, failed to resolve some factual issues. (Commissioner Cheryl LaFleur attended part of the afternoon session.)

“The technical conference structure does not appear to be resolving these disputes effectively,” Slocum said. “This morning on the first panel, I [heard] a number of folks from MISO and Dr. Patton say, ‘I didn’t have that table in front of me,’ ‘I don’t have that data,’ ‘I didn’t bring those numbers,’ ‘I don’t have the specific numbers,’ ‘I don’t have the numbers,’ in response to repeated questions from FERC staff on subjects that were given to us ahead of time.”

“What this shows is that this is not an adequate structure to resolve these disputed claims,” he said. “The only adequate structure is an evidentiary hearing, which multiple parties called for.”

Amanda Durish Cook contributed to this article.