Federal regulators this month rejected a plan by the multi-state electric grid operator to redesign the capacity auction process for parts of Michigan and Illinois, a move that would have affected electric choice customers and providers.
While Alternative Electric Suppliers and electric choice customers are disappointed in the Federal Energy Regulatory Commission’s Feb. 2 ruling, they are optimistic that new state laws passed in December will shield them from increasing costs.
The Midcontinent Independent System Operator, or MISO, had sought a three-year “forward capacity auction,” which would have allowed retail energy suppliers to know three years in advance what energy costs would be for their customers. MISO argued it would have supported resource adequacy in competitive areas of its territory.
However, FERC said in a relatively brief ruling that the plan has “not been shown to be just and reasonable, and not unduly discriminatory or preferential.”
“We fully supported the notion of establishing a three-year forward auction, and felt that was a workable solution for retail states,” said Ron Carrier, director of government and regulatory affairs with Direct Energy, which is a registered alternative electric supplier in Michigan.
Carrier said the company is “fully capable” of continuing under the existing auction structure in MISO’s territory.
MISO’s proposed changes focused on emerging concerns from the past two years about maintaining adequate electricity supplies as utilities close coal plants, and how electric choice customers should be charged for that. The debate was particularly heated in Michigan, where 10 percent of customers are free to shop on the open market for electricity. These are mostly large commercial and industrial energy users.
Michigan’s energy reforms passed in December featured built-in provisions for if FERC either approved or rejected MISO’s proposal. The Michigan Public Service Commission now has started the process of setting the “state reliability mechanism” for alternative suppliers.
Grand Rapids-based Steelcase Inc., which was active in last year’s energy discussions and is a participant in the electric choice market, said the state’s new laws provide an important backstop in light of the FERC ruling.
“FERC’s ruling shows why it was critical that additional flexibility was built into the new energy law during its final revisions, and underscores the importance of the contested case that the MPSC will be conducting to ensure the fair implementation of the electric choice provisions,” John DeAngelis, the company’s energy and special projects manager, said in an email.
‘KIND OF A SURPRISE’
Carrier with Direct Energy said choice customers are protected by safeguards in the current policy that mandate the reliability charge to be based only on capacity.
“Now we have to work through the state Public Service Commission contested rate proceedings to see what happens,” he said.
The primary concern moving forward, Carrier added, is that these new prices will be set administratively “whereas the capacity auction would be a market-based price.”
MISO spokesperson Jay Hermacinski said the grid operator is determining its next steps.
“Initial review suggests that process will be complicated by the lack of detail contained in the order concerning the reasons our proposal was rejected; or guidance that would allow MISO to better determine alternative paths to ensure reliability in competitive retail areas,” he said.
Joshua Lunger of the Grand Rapids Area Chamber of Commerce called the FERC decision “kind of a surprise,” and noted the group would be focusing on the hearings before the MPSC.
A driving factor behind FERC’s decision is that a three-year capacity auction for its competitive retail states would have created a “bifurcated market,” effectively dividing MISO’s market into regulated and competitive states. This would have created a mismatch between MISO states that are regulated versus those that are deregulated, according to FERC.
Given the uncertainty with a bifurcated structure, “such unpredictable and variable supply participation could result in significant and unnecessary price volatility,” FERC said.
Less than 10 percent of the load in MISO’s territory, which includes parts of 15 states in the Midwest and the south, is in competitive areas.
“The two didn’t play well together, and FERC conceded the market would be distorted because of those factors,” Carrier said. “We can’t really argue with that.”
By comparison, the grid operator PJM’s territory in the region is mostly deregulated states.
“For people that build new capacity or want to, they’ll argue that the market isn’t providing enough revenue for them or an incentive to build more,” said Ken Rose, a senior fellow at Michigan State University’s Institute for Public Utilities.
The challenge for MISO going forward, Rose added, is “trying to come up with something that makes sense” for a grid operator with states with varied regulated markets.
“The people in regulated states prefer resource adequacy decisions made by the state level,” he said. “But that doesn’t help a state like Illinois. … They are arguing they need a construct that makes more sense in a competitive environment. There’s a lot of uncertainty with how they will proceed.”
Rod Williamson, executive director of the Birmingham, Mich.-based Association of Businesses Advocating Tariff Equity (ABATE), said most people expected FERC to approve MISO’s proposal. ABATE represents large industrial and commercial customers on the state’s electric choice program.
“For those who support electric choice, there was a belief that the (three-year) auction market mechanism was the best way to price generation and have access to that capacity for suppliers to serve their customers,” Williamson said.
Now that the capacity charge is in the hands of state regulators, he added, retail choice suppliers “will have to demonstrate for basically four years going forward that they either own or have the capacity under contract to meet the requirements of their customers. If they can’t make that demonstration, then they’re required to purchase that capacity from utilities.”
Williamson believes FERC’s decision effectively limits alternative suppliers’ ability to secure capacity.
“Now they’ll have to go to owners of generation that have capacity available and negotiate a deal with them for the sale of the capacity, or they’ll have to build their own capacity, or they’ll be stuck paying this charge,” he said. “It’s definitely going to increase costs that the capacity retail choice suppliers have to procure versus a market mechanism where all of that capacity has to be offered.
“From that standpoint, it’s very disappointing for Michigan where we’re not going to have access to that auction to determine market prices. Ultimately, what impact that’s going to have is still to be seen.”
MORE CHANGE AHEAD?
The FERC vote also came days before commissioner Norman Bay resigned, causing more uncertainty going forward, including whom President Donald Trump may appoint for vacant posts. Bay’s resignation means the commission, with only two members, currently does not have a voting quorum.
Williamson said he doesn’t anticipate MISO will refile a new request anytime soon.
“Maybe (MISO) will wait and see and test the viewpoint of new FERC commissioners and repackage something,” he said.
Still, ABATE and Direct Energy are optimistic the contested rate cases before the MPSC will sort out prices going forward.
“I’m confident that with the strong protections included in the legislation from December, that working with the commission staff through a contested proceeding will come out with prices that will maintain customer choice in Michigan but still meet capacity needs at the same time,” Carrier said.