(Photo by Michael Kappel via Creative Commons)
(Photo by Michael Kappel via Creative Commons)
(Photo by Michael Kappel via Creative Commons)

©2015 E&E Publishing, LLC
Republished with permission

By Jeffrey Tomich

Illinois officials searching for answers about the spike in generation capacity prices in the southern half of the state went straight to the source during a legislative hearing Monday.

Melissa Seymour, the Midcontinent Independent System Operator’s central region executive, appeared before an Illinois Senate committee Monday afternoon. The topic of the hearing was supposed to be overview of regional transmission and wholesale power markets. But questions quickly zeroed in on MISO’s recent auction.

Seymour told committee members that the tenfold increase in capacity prices from last year was driven by the fact that more capacity was procured through the auction instead of private negotiations.

Capacity auction results were “not a result of a lack of supply here in Illinois,” she said, noting there was more than 11,000 megawatts of generation bid in to supply 10,000 MW of demand. “It was a function of how load-serving entities will be meeting their obligations.”

The auction results surprised Wall Street analysts and have generated considerable controversy since MISO released results a week ago. Not only did the year-over-year increase from $16.75 per MW-day to $150 catch observers off-guard, so did the disparity between rural southern Illinois and the rest of MISO’s 15-state footprint, where prices didn’t exceed $3.50.

The results riled consumer advocates, who were already skeptical of the benefits of the auction, and added a layer of intrigue to an already multifaceted debate over the state’s energy policy (EnergyWire, April 17).

On Friday, Illinois Attorney General Lisa Madigan issued a letter to MISO asking executives to answer a string of questions about the auction process.

Susan Satter, a senior assistant attorney general under Madigan, testified at Monday’s hearing. She said southern Illinois consumers who purchase energy from the incumbent utility, Ameren Illinois, will see bills rise by an average of $150 a year because of the sharp increase in capacity prices that take effect June 1.

“Historically, capacity prices were small. They were barely noticeable,” Satter told committee members. “But with these changes, they are growing.”

In northern Illinois, residential customers who purchase energy from Commonwealth Edison saw capacity charges — which are baked into the variable kilowatt-hour charge — increase from $3 to $14 a month as a result of last year’s auction in PJM. Beginning June 1, customers who purchase energy from Ameren Illinois will see capacity charges rise to about $14 a month from $1.50. (Customers in areas served by alternative energy providers must also pay for capacity, but the prices are the result of privately negotiated contracts.)

Satter said some of Ameren’s industrial consumers could pay more than $1 million a month in additional capacity charges.

“That’s what we’ve heard from the industrial customers,” she said. “It’s going to have a significant impact on their energy costs.”

Meanwhile, Satter said Illinois generator Dynegy Inc. could see a $284 million boost in revenue, and Exelon Corp., owner of the 1,100-MW Clinton nuclear plant, will reap an additional $53 million as a result of the higher capacity prices, according to an estimate by UBS Securities.

Dynegy and Exelon have previously declined to specify the financial impact of last week’s capacity auction.

‘A lot more demand’

Seymour, who was quizzed by state Sen. Don Harmon (D) about MISO capacity auction rules, explained that all generators over 50 MW are required to participate. But load-serving entities such as utilities, industrial energy customers and energy marketers have options for securing capacity.

For instance, municipal utilities and electric cooperatives that own power plants can “self-schedule” generation and opt out of the auction.

Energy marketers or industrial customers can negotiate energy and capacity contracts with generators. Capacity committed to serve load under a bilateral contract can be included in the auction, but assigned a price of zero.

In previous years, more of the load in southern Illinois, known as Zone 4, contracted for capacity through those bilateral contracts. But more megawatts of demand participated in the most recent auction, which covers the 12-month period beginning June 1.

So “you went further up the supply curve this year,” Seymour said. “It’s a supply-demand market, and there was a lot more demand in this market than there has been historically.”

And while some of the demand within any given zone can be supplied with generation from another zone, via imports, the bulk of demand must be met with resources physically located within the region.

The explanation didn’t fully satisfy Harmon, who continues to question why the southern half of the state was such “an incredible outlier” in the MISO auction.

Nor did the answers satisfy all of the questions for the attorney general’s office.

“We have serious concerns about this outcome, and so we are taking a closer look at this given the substantial increase in revenues that it will mean for Dynegy and Exelon and, alternatively, the adverse impact it will have on Southern Illinois ratepayers’ monthly bills,” spokeswoman Natalie Bauer Luce said in an email response after the hearing.

A MISO spokesman said the grid operator would continue the dialogue with Illinois officials.

“As with all stakeholders, MISO looks forward to continuing the discussion with policymakers in Illinois to address any questions and concerns around the results of the planning resource auction,” spokesman Andy Schonert said.