FERC Filings
PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON THE MIDWEST ISO MARKET MITIGATION MEASURES
COMMENTS
EPSA applauds the MISO and its continued progress in the development of an independent RTO. As the first Commission-approved RTO, the MISO is continuing its commitment to achieving competitive wholesale markets and resolving possible seams issues with neighboring markets. These developments are important strides forward for competitive wholesale markets. EPSA also shares the MISO’s concern that market power issues and possible abuses be addressed from the outset of market implementation. Abuse of market power is a barrier to reaching fully competitive wholesale electric markets, which is the goal of FERC’s SMD and the MISO’s RTO development. That said, however, the proposed Mitigation Measures are inconsistent with the ISO-NE Order and the general direction of the SMD NOPR, fundamentally flawed and premature.
A. THE MISO MITIGATION MEASURES ARE INCONSISTENT WITH THE ISO-NE ORDER AND THE COMMISSION’S SMD PROPOSAL
As justification for the proposal, the MISO cites its consistency with the FERC’s SMD and references other regional AMPs.
The Mitigation Measures are based on core concepts and procedures previously approved by the Commission for use by – and successfully used by – the New York Independent System Operator, Inc. (“NYISO”) and ISO New England Inc. (“ISO-NE”). The Commission has also directed the California Independent System Operator (“CAISO”) to adopt mitigation procedures similar to the Mitigation Measures….[and they] are fully consistent with market mitigation principles set forth in the Commission’s recent [SMD NOPR].
The characterization that the Mitigation Measures are consistent with the Commission’s SMD proposal is incorrect for several reasons.
1. The NOPR and ISO-NE would provide for a safety net bid cap as the initial measure of mitigation and the only measure in unconstrained areas
The FERC SMD proposes that a safety-net bid cap exist in all markets as the proxy for demand response. FERC has suggested, both in the NOPR and in the ISO-NE Order, that such a safety net should be sufficient mitigation for unconstrained areas. In its transmittal letter, however, MISO says that they have “not yet determined whether a safety net bid cap is necessary in the Midwest ISO’s territory or how high any such safety net should be.” There is no sound rationale presented by the MISO that supports granting the authority to implement an AMP-like mechanism when they have yet to complete any evaluation or make any determination as to whether a less intrusive mitigation measure such as a safety-net bid cap will suffice, or indeed, is even necessary. In unconstrained areas, the market forces of supply and demand will ensure a competitive outcome. If transitional market power problems do exist, they must be addressed by very short-lived mitigation options. The MISO filing has leaped over such short-lived options, such as a $1,000 safety-net bid cap (with a resource adequacy requirement, as discussed below), and seeks to impose a complicated mitigation proposal for both constrained and unconstrained areas within its region.
2. The NOPR would provide a resource adequacy program to offset the energy price suppressing effects of bid mitigation
Of grave concern to EPSA is that the MISO Mitigation Measures lack a resource adequacy requirement, which is an important aspect of the Commission’s SMD proposal that must go hand in hand with any level of mitigation measures. MISO has not yet addressed resource adequacy market design for its territory, and, thus, any generic mitigation as proposed herein is premature. MISO is “putting the cart before the horse” in asking for approval of Mitigation Measures before it has finalized the design of its market. EPSA does not believe, as MISO states, that safety-net bid caps and resource adequacy programs are simply “elements of the overall market design rather than authority to mitigate specific abuses of market power.” Rather than “accommodate,” “conflict with” or “be impaired by” these elements, as characterized in the MISO filing, any additional mitigation measures must coexist with these elements. As EPSA explained in detail in comments on the FERC’s SMD NOPR, a resource adequacy program is needed to help ensure adequate generation capacity and demand response. A resource adequacy requirement also helps obviate the problems associated with any regime that mitigates short-term markets. If structured properly, a resource adequacy program will balance the needs of both the short- and long-term markets by promoting the development of infrastructure needed for reliable transmission system operation, even in a market that utilizes mitigation measures that can suppress competitive market price signals. A resource adequacy program is an integral and necessary component of any market mitigation strategy; the interplay between mitigation and resource adequacy is critical.
3. SMD would authorize an AMP like mechanism only after a specific need for such measures has been demonstrated
An AMP-type mechanism, as proposed in the Mitigation Measures, is similar to the “fourth measure” of mitigation in the SMD, to be considered after the safety-net bid cap, must run obligations and resource adequacy mechanisms have been implemented. SMD characterizes this fourth mitigation measure as a voluntary mechanism based on specific, demonstrable market problems.
While it is clear that the first three measures must be part of the Standard Market Design market power mitigation plan, there may be market conditions in which a fourth measure is needed. The fourth mitigation measure would deal with situations when noncompetitive conditions may exist, by examining and possibly limiting bids from individual suppliers into the day-ahead and real-time spot markets if those bids are high due to withholding rather than scarcity. Exercise of this mitigation could be triggered by predetermined conditions or triggers (such as a sustained period of prices significantly above competitive levels), or by significant infrastructure problems in the market (e.g., sustained tight reserve conditions, as might be due to drought). This mechanism is like the Automatic Mitigation Procedure (AMP) used by the New York ISO, and adopted recently for the California ISO. This mechanism would not be required for every region but may be adopted if the market monitor's analysis determines this measure is needed.
The MISO proposal does not address either existing or demonstrably “likely” structural market problems in the Midwest, nor does it contain any analysis or data defining structural market problems that warrant the additional mitigation as proposed. In the Commission’s SMD NOPR, the implementation of an AMP-type mechanism is predicated upon the identification of persistent load pockets.
The implementation of the [AMP] will rely on the results of an initial competitive market analysis by the Independent Transmission Provider's market monitor in each region. This will identify at the outset the persistent load pockets or other conditions that create local market power. This analysis will be filed with the Commission as part of the implementation process for Standard Market Design and subject to comment from all interested parties. After Commission review, it will form the basis for the mitigation measures that are applied by the Independent Transmission Provider. It then will be updated annually to review the continuing effectiveness of the market power mitigation.
While the MISO IMM does discuss an annual review of constrained areas and related mitigation, these measures are not preceded by a showing of conditions creating local market power.
As the Commission has already stated in the order denying the First Level Mitigation proposed for unconstrained areas by the ISO-NE for the New England market, an automated mitigation measure should not be proposed as a way to ensure competitive bidding behavior. To impose an AMP-type mechanism in areas without constraints, or sufficient market analysis showing structural problems that would lead to abuse of market power, has not been acceptable to the Commission previously, and should not be acceptable here. In the ISO-NE order, issued December 20, 2002, the Commission states,
The Commission will approve only mitigation measures that address well-defined structural problems in the market. As markets mature, we expect that the underlying structural problems causing market power will be resolved, and at that point behavioral mitigation rules can be removed.
The Midwest market, in fact, has served as an example of appropriate, competitive and timely responses to temporary adverse market conditions. After the sudden price spikes experienced during the summers of 1998 and 1999, the Midwest marketplace responded with a flurry of supply production that has eased energy constraints in the region. This successful self-correcting process is not likely to recur if the MISO’s Mitigation Measures are adopted. A request for the authority to implement an AMP-like mechanism in the Midwest is simply unwarranted.
While the MISO argument that the authority to implement the AMP will serve as a worthwhile deterrent may seem compelling on first blush, it is exactly this type of preventative over-mitigation that endangers the competitive energy markets and the development of additional infrastructure and demand response. While the Midwest currently has a sufficient supply reserve margin, this could and will certainly change at some point in the future. In New York, where an AMP is in place, there is a documented need for significant additional investment, yet very little new construction is underway because of extensive mitigation and a poorly functioning ICAP market. In fact, the New York ISO is currently examining intense administrative fixes to its model in constrained areas in order to replicate the price signals for the market that scarcity pricing would provide. This should serve as a model of the unintended results of over-mitigation and the need for good market design. Both New York and California are highly mitigated markets. The one common denominator in both markets is extensive mitigation and a lack of new investment. Dr. Patton’s conclusory statements in support of the MISO proposal, and that the MISO proposal will not dampen the scarcity pricing necessary for new investment, should not give the Commission solace that such unintended consequences might not occur. Dr. Patton simply states, without a shred of supporting evidence,
[T]he Mitigation Measures are designed to not interfere with price increases that are associated with true scarcity conditions, mitigating only withholding conduct that results in artificial price increases. Since the Mitigation Measures will not hinder efficient scarcity pricing, there is no trade-off between the Mitigation Measures and resource adequacy requirements.
He then concludes, “[T]he conduct-impact tests are the key components of the Mitigation Measures that act to preserve legitimate scarcity pricing.”
In the end, however, the fundamental problem with Dr. Patton’s testimony is not the conclusory statements contained therein but what the MISO and Dr. Patton are trying to accomplish with its proposal. Fundamentally, the MISO’s mitigation proposal is an attempt to determine for the market the “right price” for new investment, and the “wrong price” for buyers to pay. If the history of energy markets is any guide, such as the problems that occurred in the gas industry with the Natural Gas Policy Act in the 1980s and area ratemaking in the 70s, neither regulators nor respected economists, such as Dr. Patton, are able to set, through administrative fiat, the right price for the continued development of competitive markets. Only the market can do that.
The harm that can come from such over-mitigation was described more fully in an article on the development of RTOs by Department of Justice economist Gregory J. Werden. In his article, he questioned the effectiveness of mitigation to counter perceived market power. Werden explained, “[I]t remains to be seen whether a regulatory response to market power is appropriate. However sparingly, regulation is being used without a determination that there is a substantial market power problem….”
Mitigation should only be imposed when there is a reasonable expectation that market power could be abused. There is no reasonable expectation or demonstration of the exercise of market power in unconstrained areas, or so called Broad Constrained Areas, in the Midwest. Rather, the implementation of such mitigation measures, when unwarranted, can only serve to warp the market and reduce or eliminate scarcity prices.
B. THE MITIGATION MEASURES AS PROPOSED BY MISO AND THE IMM ARE FUNDAMENTALLY FLAWED
As has already been noted above, the MISO’s filing fails to demonstrate that there are any areas of sustained congestion in the MISO territory that require these measures. This is reason enough to reject the filing at this time. However, MISO characterizes the implementation of AMP in other areas as having been successful. That characterization is not entirely accurate as the market outcomes in areas that use AMP-like mechanisms, such as in New York, have revealed flaws with AMP-like mechanisms that the Commission should, in any event, direct MISO to fully evaluate and correct before it requests the authority to implement these measures. Specifically, these Mitigation Measures would impose a bid cap when the as-submitted bids by market participants exceed a specific threshold established by the IMM. MISO contends that these bid caps will not prevent scarcity pricing during shortage conditions because prices will rise to “true” marginal costs. MISO’s reasoning is significantly flawed.
1. Unit Specific Marginal Bid Caps Prevent Scarcity Pricing
MISO proposes that each unit would have a reference price tied to its marginal cost. That reference price would serve as the bid cap, when as-submitted bids exceed the established threshold levels. These types of bid caps ensure that bidders do not bid above the reference prices, because to do so will result in mitigation. In other words, bidders will automatically be penalized (i.e, mitigated) for bids that exceed marginal cost, even when shortage conditions would dictate that such bidding behavior is appropriate. As such these measures do not represent mitigation; rather they represent managed competition and price controls, entirely inconsistent with the ultimate goal of competitive markets. As explained by economist Larry Ruff,
This type of mitigation will effectively limit bids to levels that will not violate conduct thresholds, because bidders will not want to risk being mitigated all the way back to their reference bids, and hence will often result in prices that are far below market-clearing levels.
Furthermore, these types of price controls provide a regulatory-based hedge to buyers, shield them from scarcity prices and eliminate incentives to enter into forward contracts. The MISO and the IMM need to work with market participants to develop mitigation measures that correct these harmful outcomes before recommending implementation of mitigation measures for the MISO territory. If and when it is ever determined that an AMP-like mechanism is necessary, specific measures to avoid these outcomes must be included.
2. The Threshold Levels in the Mitigation Measures Are Too Narrow
The thresholds that MISO proposes to identify the exercise of market power and to establish bid caps are too limiting, particularly for peaking units that must recover their fixed costs over a very few hours during the year when scarcity prices clear the market. Dr. Patton argues that, if a peaking unit raises its bids in an attempt to recover a scarcity premium during a true shortage period, it may trigger the conduct threshold, but should not trigger the market threshold because other suppliers will also be placing high bids. However, Dr. Patton’s speculation is not comforting. During scarcity periods, peaking units will be leading the price, not chasing it, and they will, therefore, clearly impact the market clearing price. And, because the premium that peaking units must demand during scarcity periods is large, there is a great likelihood that peaking units will have a market price impact that exceeds the threshold and be price mitigated.
C. THE MISO FILING IS SIMPLY PREMATURE AT THIS POINT
The MISO filing at this time is premature based on four facts:
• First, MISO says that it needs to establish its mitigation measures in order to continue its stakeholder efforts to finalize market design and market rules. This is just plain backwards. Mitigation Measures should support market design, not dictate it. Once the market design and associated market rules are finalized, the MISO should evaluate the appropriate mitigation measures to ensure success of that market design, with a goal of minimizing the intrusiveness of the mitigation measures. The fact that implementation of market measures will necessitate potentially costly expenditures as well further supports the notion that market design elements and market rules must be finalized before the Mitigation Measures are put in place to ensure that the proper software and other systems are put in place as well.
• Second, the MISO and its IMM have failed to put forward any criteria against which the abuse of market power will be judged. Such criteria must be fully vetted and established before mitigation measures are implemented.
• Third, there is simply no evidence to suggest that the MISO territory needs to have these draconian mitigation measures authorized at this time. The MISO territory is known to be well supplied at this point; to impose ill-conceived and overly broad mitigation measures at its outset will compromise the market price signals that will ensure continued sufficient capacity reserves.
• Fourth, there is a conspicuous lack of consensus among stakeholders that the mitigation proposal is necessary, timely or appropriate. The transmittal letter to the filing specifies that, ““[A]lthough the Mitigation Measures have been the subject of extensive stakeholder processes, they do not enjoy overwhelming support from all segments of the Midwest ISO’s participant community…[and there is] significant opposition to the timing of its filing” Numerous stakeholders disagree with the MISO’s assertion that the mitigation measures must precede the development of a market-based pricing regime. Due to this lack of consensus, the MISO asks FERC “to provide guidance on these contested issues in advance of the planned December 2003 implementation of the Market Rules….” Again, the cart here is before the horse. The MISO should file a mitigation plan concurrent with final market rules which include a resource adequacy program.