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MISO Files Resource Adequacy "Foundation" Which Includes Proposal for Mandatory Auction

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December 9, 2010

The Midwest ISO has filed with FERC the general "foundation" which MISO expects will govern further revisions to its resource adequacy mechanism, which may potentially include a five-year forward obligation for load serving entities to purchase capacity, and a mandatory capacity auction.

While the MISO filed with FERC elements of its expected Resource Adequacy Requirements (RAR) Enhancements, MISO stressed that its draft proposal, "was intended to stimulate further stakeholder discussions and not to preclude the Midwest ISO's active consideration of alternate stakeholder suggestions."

Nevertheless, the proposal MISO filed with FERC, and which has been presented to stakeholders for consideration, does contain formal positions regarding issues including mandatory capacity auctions, and local capacity requirements.

Under the MISO foundational proposal, MISO would establish locational capacity zones, known as Locational Resource Zones (LRZ), to assure that all Planning Resources are able to appropriately be considered in meeting locational capacity requirements for a geographic area. While still being discussed, MISO expects the following characteristics will be considered in defining LRZ boundaries: (1) the geographical boundaries of Local Balancing Authorities (LBAs); (2) state boundaries; (3) the relative strength of transmission interconnections between LBAs; (4) the results of Loss of Load Expectation (LOLE) studies; (5) the location of existing and proposed Planning Resources; and (6) the relative size of LRZs.

MISO is planning to develop LRZ requirements to encourage parties to develop or retain the right number of Planning Resources in the right locations within the Midwest ISO Region to meet reliability standards. Local Clearing Requirements (LCR) will represent the minimum amount of Planning Resources that are physically located within an import-constrained LRZ which must be designated by LSEs serving load in such LRZ. Capacity Export Limits for each LRZ will represent the maximum amount of Planning Resources located within a LRZ that can be exported by Market Participants from an export-constrained LRZ.

MISO is "exploring" the implementation of a refined auction process to replace the existing voluntary capacity auction (VCA) by developing and implementing a new Planning Resource Auction (PRA). The parameters of such participation in a PRA are still being developed internally by the Midwest ISO and, "more work needs to be done to answer all of the questions that naturally arise regarding how a PRA would differ from the existing VCA process."

Despite this caveat, MISO currently, "believes that all Planning Resources and Load will need to participate in a PRA to ensure zonal import and export limits are not violated and to ensure that the resulting auction has adequate liquidity to reduce the potential exercise of market power."

Though MISO is working with stakeholders to incorporate "self-supply", "self-schedule", and/or "opt-out" features into a PRA, and allow continued reliance on the bilateral capacity market, MISO conceded that participation in such a PRA could be described as "mandatory," since the load must be accounted for in one fashion or another.

MISO has "discussed" an approach with stakeholders for forward capacity obligations which would involve establishing an LCR for each LRZ for a forward annual period (instead of a monthly period) of between three and five years. This approach would require LSEs to annually provide load forecasts for each of the forward years, based upon 50/50 peak data. Under this approach, LSE capacity obligations would be based upon LSE-provided forecasts and the applicable Planning Reserve Margin.

Though not discussed in the FERC filing, a MISO presentation to be shared with stakeholders at today's Supply Adequacy Working Group meeting describes Years 1-3 of the capacity construct as requiring full compliance, or a 100% demonstration of resource adequacy. Years 4-5 would involve only qualification of resources and consideration of voluntary options to support and facilitate bilateral transactions.

The Midwest ISO, "recognizes that states located in the Midwest ISO Region will continue to have the ability to review Planning Reserve Margin ('PRM') determinations made by the Midwest ISO and to establish state PRMs, as currently provided in Section 68.1 of the Tariff."

Accordingly, the Midwest ISO believes that regulated LSEs should retain their load forecasting responsibilities, as currently provided in Section 69.1.1 of the Tariff. Moreover, the Midwest ISO intends that the RAR Enhancements will appropriately incorporate state Integrated Resource Plans (IRP) into any proposed market mechanisms.

MISO said that the existing LSE load forecasting provisions could be modified to require LSEs or Electric Distribution Companies (EDCs) to provide coincident peak demand forecasts based upon the Midwest ISO's historical peak load information. As a result, accounting for load diversity would be moved from the PRM calculation to load forecasts by LSEs, in order take such diversity into account on a more granular basis.

"The RAR Enhancement protocols could be made more responsive to current state retail [choice] approaches by: (i) improving load tracking and capacity settlement procedures; (ii) providing transparency into future period capacity prices; and/or (3) revising EDC obligations to forecast the Load of LSEs in retail choice states," MISO noted. "Each of these potential changes will be discussed with the states and relevant stakeholders to assure that the RAR Enhancements will appropriately promote a variety of state regulatory objectives," MISO added.

MISO reported that, "[s]ome stakeholders also have expressed concerns that the Midwest ISO is devoting excessive resources to meet the needs of the few Midwest ISO states with retail choice programs."

The Midwest ISO currently plans to file the final proposed RAR Enhancements with FERC in June of 2011. Upon Commission approval of the RAR Enhancements, the Midwest ISO would seek to implement transition elements of the RAR Enhancements for the 2012-2013 Planning Year. Full implementation of the RAR Enhancements is expected during the 2013-2014 Planning Year.

MISO Resource Adequacy Filing (Docket ER08-394-024)

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