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FERC Finds Use of PJM Opportunity Costs To Set MISO Capacity Market Mitigation Levels Unreasonable, Orders Changes

January 4, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

FERC found that using a capacity supplier's opportunity costs of selling capacity in PJM is not a just and reasonable basis for setting the mitigation of capacity supply offers in the Midcontinent ISO capacity market, and ordered that such provisions be stricken from the MISO tariff

The ability to base capacity supply offers on opportunity costs of selling capacity in PJM has been cited as a significant driver of capacity price spikes in MISO Zone 4, and allowed suppliers to bid well above the MISO Cost of New Entry.

"[W]e find that the evidence in the record does not support the continued use of a PJM-based opportunity cost for all or even a substantial portion of MISO resources," FERC said.

Instead, FERC set the Initial Reference Level, which is used in part along with CONE to determine whether a capacity bid is subject to mitigation, for MISO capacity at $0/MW-day. Suppliers will be able to petition for use of a facility-specific reference level and technology-specific reference levels are to be developed but suppliers will no longer be able to use PJM prices to set their reference level absent a specific showing that PJM capacity prices are realistically available to them.

Currently, the MISO Market Monitor calculates the Initial Reference Level by subtracting transmission costs from the PJM Daily Capacity Deficiency Rate. "We find that, going forward, this calculation does not represent an appropriate default opportunity cost for all MISO capacity resources," FERC said

"Recent changes to PJM’s capacity construct make basing MISO’s Initial Reference Level on the opportunity to sell capacity to PJM problematic going forward because MISO capacity resources must satisfy additional requirements to sell capacity into PJM. In addition, based on the record before us, we find that the amount of MISO capacity that can be sold into PJM is significantly limited due to the availability of transmission service. Therefore, we find that under these circumstances, it is not appropriate to continue to base the Initial Reference Level, applicable to all MISO resources, on the opportunity cost of selling capacity to PJM," FERC said

"We note that circumstances in the PJM capacity market are changing in a way that makes use of the PJM-based opportunity cost for MISO resources less indicative of a legitimate opportunity. The Commission has approved changes to PJM’s capacity construct that make basing MISO’s Initial Reference Level on the opportunity to sell capacity to PJM problematic going forward because MISO capacity resources must satisfy additional requirements to sell capacity into PJM. We find that these changes will further limit the opportunity for capacity sales into PJM and make PJM capacity prices non-comparable to MISO capacity prices, and thus make that opportunity a less appropriate basis for MISO’s market power mitigation provisions," FERC said

FERC noted that once PJM fully transitions to the Capacity Performance construct for the 2020/21 Planning Year, PJM and MISO will be procuring different capacity products, thereby making the opportunity to sell capacity to PJM a less appropriate basis for the MISO Initial Reference Level because PJM capacity revenues will reflect both a capacity payment and an expectation of penalties and performance payments, which could vary widely by resource

Additionally, as a result of PJM’s full transition to Capacity Performance, all external capacity resources selling into the PJM capacity market must be pseudo-tied into PJM beginning with the 2020/21 Planning Year

FERC noted that regarding the actual opportunity for MISO capacity to sell into PJM, based on an analysis of the monthly firm point-to-point transmission service requests from Zone 4 to PJM, only 200 MW of the 3,650 MW of monthly firm point-to-point transmission service requests were granted in the 2014/15 Planning Year.

Moreover, regarding MISO capacity's opportunity to sell as replacement capacity in PJM, FERC noted that the average size of replacement capacity sales per day from MISO resources was approximately 64.3 MW and 12.3 MW, in the 2014/15 and 2015/16 Planning Years, respectively. "Therefore, it is apparent that in recent years, MISO capacity resources made limited sales into the PJM replacement capacity market after PJM’s third Incremental Auction, which is held approximately one month prior to the MISO Auction for the same Planning Year," FERC said

Moreover, FERC noted that the evidence from after PJM’s third Incremental Auction for the 2015/16 Planning Year indicates that 38.5 MW of PJM replacement capacity has been procured from MISO in just three sales, with only one of those sales lasting the entire year. "This evidence about the volume of MISO replacement capacity sales into PJM after the final PJM Incremental Auction indicates that the opportunity to make such sales is limited due to both the limited demand for replacement capacity in PJM and the limited ability to attain transmission service from MISO to PJM," FERC said

FERC also ruled that the MISO tariff provisions relied upon to calculate Capacity Import Limits understate the impact that counter-flows from capacity exports have on a Zone’s Capacity Import Limit, and therefore are unjust and unreasonable. "We agree with assertions that MISO’s current approach for calculating Capacity Import Limits fails to accurately reflect the counter-flows created by capacity exports committed to neighboring regions, such as PJM," FERC said

FERC adopted a recommendation from the MISO Market Monitor which adds back the amount of capacity exports included in Base Power Transfer, thereby eliminating the negative impact that those capacity exports have on the calculation of the Capacity Import Limits.

EL15-82

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