MESS: FERC May Allow Default Service Providers to Charge Competing Retail Suppliers for Unaccounted Capacity in MISO

Implementation of a revised capacity market in the Midwest ISO continues to get more complex for competitive retail suppliers as FERC ordered the Midwest ISO to propose a mechanism to allow Providers of Last Resort, which are allocated any capacity obligations not accounted for in individual LSE load forecasts, to recover the "administrative" costs of such additional capacity obligations.

While FERC did not specify a method of such cost recovery, presumably, such mechanism could potentially include the assignment of the POLR's costs to other LSEs in the service territory; namely, retail suppliers competing with a host distribution company which has the POLR obligation.

FERC's order, issued yesterday in Docket ER12-2706, addressed a revision to MISO's recently adopted revised capacity market framework to address MISO's new concerns that the previously adopted framework could, in situations of load switching among retail providers, result in some retail suppliers over-paying (see prior story for discussion of this problem)

MISO's proposed solution to the problem was, in short, that where no LSE claims an obligation to serve certain Load in an electric distribution company's territory (and the electric distribution company and LSEs are unable to agree on the appropriate provider), MISO shall assign responsibility for such Load to the Provider of Last Resort.

While retail suppliers recognized the problem, they protested MISO's proposed solution as an "unworkable" band-aid attempting to cure inherently flawed protocols and designs for capacity allocation and load forecasting responsibility.

However, FERC broadly denied the protests of retail suppliers, finding them to be impermissible collateral attacks on the previously adopted design of the MISO capacity market, and FERC's prior order dismissing retail suppliers' concerns.

With respect to MISO's discrete proposal to allocate unassigned forecast demand and capacity requirements to the POLR, FERC accepted the proposal.

In doing so, FERC noted that the tariff, "does not specify how the provider of last resort can recover the administrative cost of procuring the planning reserve margin requirement for remaining demand."

"We find that such compensation would ensure that the provider of last resort would be revenue neutral. Accordingly, we direct MISO to propose such language in its compliance filing," FERC ordered.

The nature of the "administrative" costs cited by FERC are unclear. Even assuming these are truly "administrative" costs, and that FERC is not suggesting that the cost of the actual incremental capacity can be recovered by the POLR through the tariff (perhaps through a pro rata charge on other LSEs), the requirement that the POLR be kept "revenue neutral" for unassigned capacity raises concern, particularly in that FERC did not clarify that these costs are only "incremental" administrative costs resulting from the unassigned capacity cost allocation.

As originally stated by MISO, the unassigned capacity could be the result of load scheduled to return to the POLR by the time the forward capacity obligation requirement begins, but which is served by a competing supplier at the time of the forward load forecasts. In other words, the unassigned capacity reflects a future capacity obligation of the POLR which the POLR is not aware of.

In this case, allocating administrative costs of the POLR's procurement of this capacity -- for which it is solely responsible -- to any party aside from the POLR (or the POLR's customers on a bypassable basis) reflects subsidization of the POLR.

Stated another way, consider a POLR which will serve 100 MW of load in a capacity year, but of which only 90 MW is included in its own forecast, and 10 MW is assigned to the POLR through the unassigned capacity process. Even though the POLR serves 100 MW of capacity, under this scenario the POLR will incur administrative costs to procure 90 MW of capacity (for its "self-forecasted" obligations), but the administrative costs of the final 10 MW will be allocated according to to-be-filed tariff, which may assign such costs to LSEs other than the POLR, or non-commodity customers of the POLR.

In contrast, a retail supplier serving 100 MW of load must recover the entire administrative costs of procuring such capacity from its retail customers. The POLR rates, if having to only procure 90 MW of administrative costs through POLR rates, would be artificially lower.

With respect to retail supplies' concern regarding situations in which the sum of the individual LSEs' forecasts is more than the electric distribution company's forecast, MISO said that its tariff holds the electric distribution company responsible for load forecasts in retail choice areas. "Therefore, the electric distribution company's forecast will be the basis for the peak load contribution of each LSE," FERC noted, declining to address this issue further.

FERC did note that in light of MISO's proposal to make POLRs responsible for obtaining capacity based on their demand forecasts, the costs of which are assessed to LSEs, and concerns from retail suppliers, "we are concerned that the Tariff does not specify a process for LSEs to challenge demand forecasts provided by the electric distribution company, which inform MISO's cost allocation to LSEs."

Accordingly, FERC ordered MISO to propose tariff revisions specifying procedures for LSEs to challenge demand forecasts submitted to MISO by electric distribution companies.

While MISO has provided a number of improvements to its description of the peak load contribution and daily peak load methodologies, FERC found that, "the planning reserve margin requirement formula based on peak load contributions provided in 69A.1.2.1(b) fails to define each element of the formula as well as the adjustment factor."

As a result, FERC directed MISO to define each element of its proposed formula, including the adjustment factor and all mathematical symbols used in the formula in the compliance filing.

FERC was also concerned that neither the adopted Module E-1 capacity market provisions nor MISO's proposed tariff revisions specify when and if LSEs in retail choice areas must report their plan for meeting their capacity obligation to MISO. Such a plan would specify whether the LSE intends to satisfy its capacity obligation through submittal of a Fixed Resource Adequacy Plan, participation in the market, payment of the deficiency charge, or allocation of the cost based on one of the default methodologies. Accordingly, FERC directed MISO, in its compliance filing, to amend to the tariff to specify the reporting of resource plans to MISO for LSEs in retail choice areas.