FERC Imposes "Uncertain and Variable" Capacity Obligation on Retail Suppliers at Certain Midwest ISO Utilities

FERC accepted, with modifications, revisions to the Midwest ISO's Module E resource adequacy construct, and while FERC improved in some territories MISO's original proposal with respect to the assignment of capacity obligations to retail suppliers in retail choice environments, FERC's approved methodology in certain areas still requires retail suppliers to meet "uncertain and variable" capacity obligations.

As first noted by Matters, MISO's original proposal would have apportioned daily capacity charges on a pro rata daily energy basis to load within an electric distribution company's service territory, based on energy settlement data. Retail suppliers objected to this daily pro rata energy methodology because, among other reasons, an LSE's share of the coincident peak demand forecast (and thus capacity obligation) would not be known until each operating day

Although MISO's proposed tariff allowed for an alternative allocation of capacity charges, it required the agreement of all loads within a territory -- consensus retail suppliers said would not occur if the default methodology advantaged electric distribution utilities over competitive suppliers (which RESA said it did).

FERC agreed that MISO's proposed default methodology for coincident peak demand allocation and capacity charges is not reasonable because it relies on energy data, not capacity. "Further, this method creates uncertainty for LSEs, who will not know their share of the coincident peak demand until the operating day," FERC said.

FERC therefore directed MISO to use the peak load contribution methodology (similar to PJM) as its default methodology for assigning capacity obligations, as requested by retail suppliers

However, FERC recognized that some electric distribution companies have said that they lack the data necessary to use the peak load contribution methodology, notably Detroit Edison and Consumers Energy.

Accordingly, FERC did not require these entities to use the peak load contribution methodology for capacity cost assignment.

Rather, FERC directed that MISO use a daily peak load methodology for these entities, as proposed by Detroit Edison and Consumers. Under this mechanism, the electric distribution companies will provide MISO with the daily peak load data for each retail choice provider.

FERC did state that, "[o]nce MISO has acquired sufficient historical data to develop peak load contribution for each LSE, MISO will begin to utilize the peak load contribution methodology," though FERC did not opine on how much time is required for "sufficient" historical data.

Several retail suppliers had said that the daily peak load methodology suffers from most of the same flaws as the originally proposed daily pro rata energy usage methodology.

"Most fundamentally, a daily peak energy calculation still fails to properly assign Coincident Peak Demand responsibility ... Most of the problems that we identified that would be caused by using a daily pro rata energy usage calculation would apply with equal force to the use of a daily peak usage calculation [including] ... an uncertain and variable capacity obligation for retail choice providers, potential after-the-fact revision to the load allocation, inefficient pricing and, ultimately, significantly reduced retail choice participation," said a group of suppliers which included Constellation NewEnergy, Exelon, FirstEnergy Solutions, Ameren Energy Marketing, and NextEra Energy Resources, among others.

FERC did grant a requested revision sought by the Retail Energy Supply Association with respect to grandmother agreements. Grandmother agreements exempt LSEs holding the agreements from new zonal charges based on their historical use of remote resources. FERC will allow the use of grandmother agreements through the end of the 2014/2015 planning year.

RESA specifically requested that the Commission require MISO to revise its tariff to provide grandmother agreement treatment to LSEs that have, through a combination of agreements between the same two zones (as opposed to a single contract as proposed by MISO), aggregated rights to capacity that are sufficient to satisfy the LSEs' planning reserve margins for the entire planning year.

"We agree with RESA that a combination of contracts that together provide for the delivery of capacity throughout the planning year meets the same purpose as a single contract that remains effective for the planning year. MISO has not explained why LSEs that use two or more agreements, which when considered in the aggregate would otherwise qualify as Grandmother Agreements, have not 'entered into those arrangements under a different paradigm,' such that they should not 'be protected during the transition to a location specific construct.' Consequently, we direct MISO to revise section 69A.7.7(a) to allow LSEs' combination of capacity agreements that require the delivery of capacity throughout the planning year to qualify for treatment as Grandmother Agreements, provided the agreements otherwise satisfy the criteria in the Tariff," FERC directed.

FERC adopted the major tenets of MISO's revised resource adequacy proposal. These include the creation of a centralized auction for a one-year capacity obligation, held two months prior to the start of the delivery year. LSEs will be permitted to meet their obligations through a Fixed Resource Adequacy Plan (FRAP) as an alternative to the auction (opt-out), and may also self-schedule capacity into the auction.

Unlike in other RTO capacity mechanisms, LSEs can fulfill a portion of their capacity obligations through the opt-out mechanism and fulfill the remainder through the auction. Similarly, FERC will not prohibit LSEs from opting out some years and participating in the auction in others.

The Commission also directed MISO to remove Minimum Offer Price Rule mitigation provisions from the tariff, finding them to be unsupported.

FERC adopted MISO's proposed introduction of zonal capacity requirements. FERC approved the use of a fixed reliability target instead of a downward sloping demand curve.