©2016 E&E Publishing, LLC
Republished with permission

By Jeffrey Tomich

Federal energy regulators ordered the grid operator for a large swath of the central United States to alter rules that govern its annual capacity auction in response to complaints over soaring prices in southern Illinois.

The Federal Energy Regulatory Commission issued the order Dec. 31 declaring elements of the rules governing the spring auction “unjust and unreasonable.” FERC specifically ordered the Midcontinent Independent System Operator to change two key formulas in its tariff that governs bidding by power plant owners.

The order applies to future auctions and is expected to result in lower prices than would have been produced under existing auction rules. Meanwhile, FERC is continuing its investigation into claims that last year’s auction clearing prices in southern Illinois were manipulated.

FERC declared any future refunds issued in response to complaints retroactive to May 28, the day the first ones were filed.

The Dec. 31 order is the latest action in a complex and controversial issue involving the price of capacity in southern Illinois. Capacity payments ensure that power plants are available at times of peak demand. Prices are embedded in consumer electric rates.

The flare-up in Illinois began in April when prices in MISO’s grid in the southern half of the state surged ninefold to $150 per megawatt-day while clearing prices across the rest of MISO were $3.75 (EnergyWire, April 17, 2015). The increase means the average residential customer in Ameren Illinois’ service area will pay an extra $131 a year.

The increases sparked a political backlash and complaints to FERC by Illinois Attorney General Lisa Madigan, Public Citizen and others. FERC in October ordered its Office of Enforcement to conduct a formal investigation (EnergyWire, Oct. 5, 2015).

Madigan applauded FERC’s decision to require changes in MISO’s auction rules. She also urged regulators to deliver relief from last year’s price jump.

“FERC has acknowledged downstate electric customers deserve relief from an inflated and absurd pricing process,” Madigan said in a statement. But the commission “still needs to order refunds to consumers for the outrageously high prices.”

Tyson Slocum, director of Public Citizen’s Energy Program, said it’s logical to think that if FERC decided elements of current auction rules to be unjust that it should find the same of the most recent results. If so, consumer refunds could total in tens of millions of dollars, he said.

“It seems reasonable to conclude,” Slocum said. “But that’s not a given.”

MISO, which is studying new rules for the capacity market in southern Illinois — the only area within the grid operator’s 15-state footprint with a competitive retail electricity market — said it’s continuing to review last week’s order (EnergyWire, Dec. 11, 2015). The grid operator must file the rule changes with FERC within 30 and 90 days, respectively.

“As we review the order, we will work with stakeholders to better understand the changes directed by the commission and how they would be implemented for the upcoming auction,” MISO spokesman Andy Schonert said in an emailed statement.

Time to recalculate

FERC’s order requires MISO to recalculate a “reference” price published ahead of the auction. The price, which was based on the price of capacity in neighboring PJM Interconnection LLC, acts as a benchmark for power plant owners, informing them how much they can bid without inviting scrutiny by MISO’s market monitor.

The commission, which rejected parts of the complaint, also ordered MISO to adjust how it calculates the amount of power that can be imported into specific “zones,” such as southern Illinois (Zone 4). Allowing for more power to be imported increases the available supply and helps reduce prices.

Houston-based Dynegy Inc., the largest generator in southern Illinois, which was accused by Madigan of using its heft to extract higher capacity prices, maintains that it didn’t withhold any generation in the April auction and violated no rules.

However, the company warns that power plants will continue to retire in the region unless MISO’s capacity market design “reflects the competitive nature of the market, which has delivered lower costs to consumers than many neighboring states.”

“We look forward to working to MISO to make the changes as ordered by FERC that benefits all parties,” company spokesman Micah Hirschfield said in a statement.

David Kolata, executive director of the Chicago-based Citizens Utility Board, is among those engaged with state officials, utilities, generators and the grid operator to craft new market rules. He called the FERC order a positive step.

“A lot of work needs to be done, but the recent FERC ruling aims for reforms that will better protect consumers from unjust increases in their power bills,” Kolata said.