By Chris O’Malley and Rich Heidorn Jr.

MILWAUKEE — MISO Independent Market Monitor David Patton on Wednesday called for tighter rules on wayward generators, more precise real-time pricing and a fix for Financial Transmission Rights funding shortfalls. He also engaged in a spirited debate with board members over his longstanding complaints about the RTO’s voluntary capacity market.

Patton outlined the proposals, contained in the Monitor’s 2014 State of the Market Report, during a presentation at the Markets Committee of the Board of Directors at MISO’s Annual Meeting in Milwaukee.

Board members’ repeated interjections ate up the clock and forced Patton to defer further discussion about some recommendations to a future Markets Committee meeting.

Five-Minute Pricing

One of Patton’s “high-priority” recommendations is to implement five-minute settlements for generators in the real-time market, something he raised three years ago.

“This is one area where we’re not leading, and it has real consequences,” Patton said after rattling off a list of positive metrics for MISO during 2014.

MISO dispatches the real-time market in five-minute intervals but settles based on hourly average prices. Patton said the inconsistency reduces the incentive for generators to follow dispatch signals and results in increased uplift.

“The response to our dispatch signal by a lot of our suppliers is pretty ragged and it affects us from a reliability standpoint and it affects us from an economic standpoint.”

Patton noted that SPP and NYISO both use five-minute settlements. MISO won’t be able to do so until it installs a new settlement system.

Todd Ramey, vice president of system operations and market services, said the system is expected to be installed next year, but it would be 2017 before members’ systems would be ready to accommodate the shorter pricing intervals. “The question mark is ultimately whether the membership says ‘please proceed with five-minute settlements.’”

He said the $28.6 million in increased generator revenue that the Monitor estimates would result from the change is “way less” than 1% of their overall revenues.

“From the market participant perspective, they’re trying to weigh … the changes they would need to make to accommodate five-minute settlements versus the additional revenue,” Ramey said.

Patton replied that a better comparison is the impact after accounting for fuel costs. “If you compare it against net revenue, it’s actually way more significant,” he said.

FTR Funding

Patton also offered a new recommendation for the longstanding problem of underfunding FTRs.

Shortfalls, but none of the surpluses, are allocated to FTR holders. MISO funded 96% of FTRs in 2014.

“We’ve created a financial instrument and created an unnecessary uncertainty about what that instrument is actually worth,” Patton said. “It lowers the prices of our FTRs, so we collect less revenue when we sell the FTRs, which hurts our transmission customers.”

Patton said shortfalls caused by transmission outages or derating should be allocated to those responsible for the diminished transmission capacity, as is done in NYISO. The current approach has provided incentives for some “relatively unseemly outages,” including some during the polar vortex last year that generated hundreds of millions of dollars in congestion, Patton said.

“You would wonder why [outages] were being scheduled at that time of the year in the northern part of our system.”

30-Minute Local Reserve Product

The Monitor also recommends that MISO introduce a 30-minute local reserve product, saying the RTO incurs high uplift costs in some areas to satisfy voltage and local reliability requirements beyond first contingencies.

The reliability requirements would be best addressed by quick-start gas turbines, which are in very short supply in MISO South, Patton said. As a result, slower-responding units are paid to be online even though they’re not economic.

Patton said the new product would provide incentive to invest in quick-start units. “When [the cost is] embedded in uplift, you’re not providing an investment signal,” he said.

Tighten Thresholds

Another recommendation, first made by the Monitor in 2012, is to tighten thresholds for uninstructed deviations by generators. Patton said MISO is “substantially more lenient” than other RTOs in setting the bandwidth for measuring compliance, using a tolerance band of 8% and four consecutive intervals.

Patton said generators not following dispatch are nonetheless receiving a “significant amount” of ancillary services and price volatility make-whole payments.

In addition, he said, the RTO is losing as much as 400 MW due to derates during peak conditions, “a meaningful portion of the headroom that we have to operate the system. This has some reliability implications and it has economic implications.

“We think it’s very important and there’s almost nothing that’s been accomplished in terms of moving this forward,” he said. He said referrals to the Federal Energy Regulatory Commission’s Office of Enforcement have improved performance somewhat.

Interface Pricing

Patton repeated his call for removing external congestion from interface prices, saying the current rules are resulting in inefficient imports and exports. Patton has previously called for a FERC technical conference to resolve MISO’s differences with its neighboring RTOs. (See Patton Asks FERC to Set Deadline on PJM-MISO Interface Pricing Dispute.)

“We’re seeing virtually no progress toward any consensus solution” with PJM, he said. “SPP is a little closer to understanding the issue than PJM.”

“We think it’s extremely important that MISO move forward unilaterally,” he added later.

Capacity Market

Patton drew pushback from some board members when he displayed a slide showing that generators’ net revenue in MISO is far below the estimated annual cost of a new combustion turbine or combined-cycle plant.

“We’re not very close to motivating anybody to build anything in MISO,” he said. “For RTOs with functioning capacity markets, they would be meeting or exceeding the cost of new entry.”

Patton said that could be fixed by making several changes to the Planning Resource Auction for capacity, including adding seasonal capacity requirements and replacing the vertical demand curve with a sloped curve similar to that used in PJM.

Committee Chairman Michael Curran was unconvinced by Patton’s analysis. “As I’m struck by this chart, I’m thinking we still manage to get things built.

“One’s led to believe if you’re vertically integrated you have a monopolistic power, therefore you’re going to  be able to exploit the poor state regulators and get really high prices … but in our market, MISO came through as the lowest cost market,” he said, citing an analysis from the ISO/RTO Council.

Patton responded that MISO has a “tremendous cost advantage” because of low-cost fuel.

“All of our [independent power producers] want to get out of MISO and … that causes our vertically integrated utilities to have to build resources that are more expensive than maintaining the existing resources that we have. And it also puts all that investment risk on the backs of regulated ratepayers instead of investors.

“MISO has been enjoying a capacity surplus for a long time,” he added. “When states have to build new generation … that’s when you’re going to see the costs appear.”

Board Chairman Judy Walsh also waded into the debate, saying Patton needed to provide more data regarding other regions’ costs. “This chart doesn’t do it,” she said.

Director Paul Feldman said the board had authorized Patton to share his proposed changes with state officials, who have been opposed to anything resembling PJM’s mandatory capacity market. “So you didn’t do a good [sales] job,” he said, prompting laughter.

Director Paul Bonavia was a bit more conciliatory. He said if Patton could convince the stakeholders that MISO could have a more robust capacity market without increasing overall costs, “that would change the dialog a lot.”

At the end of the meeting Curran thanked Patton for his independent analysis but couldn’t resist a little jab.

“You’re going to have a sloped demand curve on your tombstone.”

“Cause somebody’s going to kill me?” Patton responded, laughing nervously.

“No,” Curran said. “This is the Midwest. These are nice people.”