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Michigan PSC Adopts Locational Capacity Requirement, And Finds It Has Authority To Allocate Locational Requirement To LSEs

Seeks Solutions To Address Allocation to LSEs, Shopping Issues

June 16, 2017

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Copyright 2010-17
Reporting by Paul Ring •

The Michigan PSC has adopted a locational requirement as part of the mandatory capacity obligations required under statute, but said that the allocation to LSEs and related issues will be addressed after further proceedings

The PSC said that statute mandates that the PSC adopt a locational requirement in setting capacity mandates

"The premise underlying Section 6w is to safeguard Michigan’s long-term resource adequacy and ensure that all providers contribute to reliability in the state. In order to do that, the law requires the Commission to set forward capacity obligations for electric providers in the state. While the law recognizes the association between the MISO capacity construct and the new capacity obligations to be set by the Commission to ensure resource adequacy over the long term, this does not mean that the Commission’s framework is bound by the minimum requirements of MISO. To the contrary, the Legislature recognized that there is no existing obligation on providers to show that over the long haul there is adequate electricity supply to meet customer demand. The Commission is required to establish capacity obligations for the period four years in the future, that electric providers will be required to meet. MISO has no requirements four years out – not even mandatory reporting of the LSE’s capacity resources over that timeframe. Moreover, Section 6w(8)(c) requires the Commission, 'in order to determine the capacity obligations' to 'request that the appropriate independent system operator provide technical assistance in determining the local clearing requirement and the planning reserve margin requirement.' The definitions of LCR [local clearing requirement] and PRMR [planning reserve margin requirement] in Section 6w(12) explicitly acknowledge the role of the Commission in setting the LCR and PRMR under subsection (8)," the PSC said

"Further, the law clearly provides that 'capacity obligations' includes a local clearing requirement. As defined in Section 6w(12)(d), 'local clearing requirement' means 'the amount of capacity resources required to be in the local resource zone in which the electric provider’s demand is served to ensure reliability in that zone as determined by the appropriate independent system operator for the local resource zone in which the electric provider’s demand is served and by the commission under subsection (8).' As noted above, in requesting assistance from MISO in determining capacity obligations, the Commission is tasked with requesting technical assistance in determining this local clearing requirement," the PSC said

"Section 6w(8) also requires individual electric providers to demonstrate to the Commission that they can meet capacity obligations. The Commission is directed to require each electric provider to demonstrate that it 'owns or has contractual rights to sufficient capacity to meet its capacity obligations as set by the appropriate independent system operator, or commission, as applicable' four years into the future. These capacity obligations necessarily include a local clearing requirement," the PSC said

"It is clear that the statute requires the Commission to create capacity obligations, that these capacity obligations include a locational requirement, and that the Commission, in setting locational capacity obligations, is allowed to require a demonstration by individual electric providers that the resources that they use to meet their capacity obligations meet a local clearing requirement. The Commission acknowledges the inter-relatedness of the MISO and Section 6w capacity demonstration processes, but also points out that these are distinct activities. These activities should be harmonized to the extent practicable, but the fundamental responsibility of the Commission is to meet Michigan’s statutory obligations," the PSC said

"Thus, the Commission finds that a locational requirement is required under Section 6w and that a locational requirement applicable to individual LSEs is allowed as part of the capacity obligations set forth by the Commission pursuant to Section 6w in order to ensure all providers contribute to long-term resource adequacy in the state. The Commission disagrees with commenters who claim there will be no impacts on affordability or reliability if the MISO LCR is not met. There is also an equity consideration if only some LSEs are contributing to the locational requirement. At the same time, the Commission is not convinced that allocating a proportional share of the LCR among individual LSEs is the most equitable or reasonable allocation at this time. Electric utilities with all or nearly all local generation that have served retail customers as the incumbent provider would have a distinct and disproportionate advantage moving into a system where the LCR as a whole is allocated on a proportional basis four years into the future. The LCR was first put into effect in 2012, long after the vast majority of generation in Zone 7 was placed into service," the PSC said

The Commission is requesting technical assistance from MISO in determining capacity obligations as part of this process.

"Further, the Commission directs the Staff to work with MISO and other parties to explore an equitable manner for allocating the LCR among LSEs," the PSC said

The PSC said that several guiding factors should inform the proper allocation approach:

• There is almost inevitably a need for new capacity supplies in the state to meet the LCR in the near and the long term, and to maintain local resource adequacy.

• There can be a long lead time for entities to be able to construct and/or contract for such capacity; bringing on new generation and other resources is a long-term commitment.

• It is reasonable to allow for imports from outside the Zone to expand the pool of capacity resources and potentially lower costs so long as transmission is available and the overall LCR and PRMR can be met over time to protect reliability in the state.

• Uncertainty in load forecasts, generator performance, transmission limits, and other factors can affect the local reliability requirement and LCR calculations by MISO over time; these factors present the risk of potentially over- or under-procuring local capacity supplies, depending on the design and allocation of the capacity obligations.

• Customers and providers should be able to make informed decisions about their options as the state transitions to new requirements.

• Customers of all LSEs should contribute to the state’s capacity needs based on objective criteria and should be given a level playing field to the extent possible.

"In light of these considerations, the Commission directs the Staff and stakeholders to explore and attempt to define an allocation methodology for the locational element in the remaining technical conferences. One approach is to phase-in requirements over time, recognizing entities are coming into the system in dramatically different positions, and the time it will take to reasonably achieve compliance through the construction or contracting of new zonal capacity resources. Another approach is to: (1) identify the incremental capacity needed in the Zone in order to meet the PRMR and LCR over a longer term planning horizon to account for expected retirements and planning and construction lead time, and (2) allocate a proportional share of that incremental zonal capacity need among all LSEs in order for all entities to contribute directly by owning or contracting for an equivalent amount of local capacity. This methodology could be combined with a base-level allocation tied to a reasonable fraction of the proportional share of the overall LCR," the PSC said

"The Commission also requests that stakeholders and the Staff explore, through the lens of the Section 6w framework, issues related to potential changes in load forecasts, customer switching, and supply arrangements. Consumers and others have suggested that the PRMR portion of the capacity obligations under Section 6w be set at 95% of the MISO PRMR for each of the subsequent four years, to allow contracting through the MISO annual auction or other means through the planning years. This is a hedging strategy that could mitigate risk of overprocurement while still ensuring that a large proportion of capacity is secured well in advance of the planning year. Another option is to require a lower percentage of the PRMR be met farther out in time, but to require providers to true up the residual capacity for the interim years on a rolling basis as part of the Commission’s annual capacity demonstration process," the PSC said

The PSC also adopted the schedule set forth in MCL 460.6w(8)(a) and (b) for LSEs to show their compliance with capacity obligations

Under MCL 460.6w(8)(a) and (b), capacity demonstrations are required from electric utilities by December 1 of each year. Alternative electric suppliers (AESs) must show capacity demonstrations by the seventh business day of February of each year

The Commission also said that a uniform methodology for capacity demonstration should be applied to all types of providers and all service territories, including retail suppliers and utilities. "As several commenters pointed out, Section 6w mandates the need for all providers to prove, on an annual basis, that they have sufficient and reliable capacity resources for serving Michigan retail customers. Incumbent utilities are treated, by the statute, as backups to the AESs with respect to provider of last resort obligations in the absence of an adequate AES demonstration, and Section 6w makes no distinction between the types of capacity demonstrations that should be required from these different types of providers; nor does it make a distinction for any other type of provider or service territory," the PSC said

Case No. U-18197

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