By Rich Heidorn Jr.

MILWAUKEE — Dynegy CEO Robert Flexon last week defended his company’s bidding strategy in MISO’s April capacity auction and said the controversy over the results signals the need for a regulatory change in Illinois.

On May 28, Public Citizen Inc. and the Illinois Attorney General asked the Federal Energy Regulatory Commission to investigate whether Dynegy illegally manipulated MISO’s Planning Resource Auction, resulting in a nine-fold price increase in Zone 4. Public Citizen also alleged that MISO rejected 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 in the zone from Ameren. (See Public Citizen: Investigate Dynegy Role in MISO Auction.)

Zone 4, comprising much of Illinois, cleared at $150/MW-day, compared with just $16.75 a year earlier. Clearing prices in the rest of MISO were less than $3.50/MW-day.

In an interview before his appearance in a panel discussion at the MISO Annual Meeting last week, Flexon said that the company had properly offered all of its generating units into the auction based on their operating costs. “Nothing was withheld,” he said.

Flexon said the auction results pointed to the disconnect between Illinois, which has retail choice, and the other14 states in MISO, which operate under cost-of-service rate regulation. Southern and Central Illinois are in MISO, while the Chicago area is part of PJM, where most states have retail choice.

“If you do the math, we’re getting about $50/MW-day where all of the [utilities in the] regulated states are getting about $300 to $350 per MW-day via rates,” he said — the $50 an average including units that did not clear.

“You have a market where it’s designed where all of the other 14 states will take all of their capacity and [price] them at zero … and then people compare our [prices] to theirs and they’re actually getting 10 times what we’re getting. But we’re getting all the [criticism] because we only have two ways of compensation.”

Flexon said the company bid its units in at “basically a marginal cost.”

“We look at each unit and we look at the economics and the cash flow and we bid it in at the cost. We balance the energy market with the capacity market. So some units are cheaper to run than others. So we had some units that cleared and some units that don’t. … It does us no good to offer it in at $3/MW-day like the [regulated utilities do].”

Move to PJM?

Flexon reiterated his desire to move his generation into PJM. He said the company is trying to convince Illinois officials to support a change in their regulatory construct.

“The message I’ve really got to take to Illinois is that Central and Southern Illinois — being a part of MISO in the deregulated state — there’s no future for [merchant] generation in Central and Southern Illinois if you don’t change the construct. We’re going to continue to get every megawatt we can into a market that’s designed with like competitors.

“I think Illinois needs to look at that and say this construct doesn’t work. And that’s why [Exelon’s] Clinton [nuclear] plant can’t survive.

“Whether you do that within the parameters of MISO; whether we make Zone 4 designed a little different; whether you reregulate or whether you try … to push the whole state into PJM — I don’t know what the answer [is] there. Those are possible solutions.”

MISO Response

In a question-and-answer session with MISO’s Board of Directors afterward, Chairman Judy Walsh thanked Flexon for his candor. “I don’t think this is a problem that we didn’t know about,” she said.

Brett Kruse of Calpine said the aberrant prices weren’t in Zone 4 but in MISO’s other regions, where prices were much lower. “It is not the correct price signal. I think most economists would probably agree with that. So given all the challenges MISO’s had over the years … maybe it’s time for MISO and the board to say, ‘Maybe there’s another way to do it,’” he said.

MISO CEO John Bear said the RTO has been talking with Illinois officials about developing “a separate mechanism for that state — which I think is a way for us to address that problem without having to do anything different across our vertically integrated states, who are quite happy with the resource requirements that we have now.”

“I think that’s something that we ought to try to get some traction on … pretty quickly,” Bear added.