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September 19, 2014

Retirement and Maintaining Reliability: The Midwest ISO’s System Support Resource Agreement

Introduction

On October 5, 2012, the Midwest Independent Transmission System Operator, Inc. (“MISO”) and the City of Escanaba, Michigan (“Escanaba”) filed with the Federal Energy Regulatory Commission (“FERC” or “Commission”) MISO’s first-ever System Support Resources (“SSR”) Agreement. The SSR Agreement is MISO’s mechanism to deal with the reliability concerns surrounding the decision to retire a generating unit. FERC’s decision is pending and it will have important implications for other retirement decisions and load-serving entities (“LSEs”) within MISO’s region (as well as for the retirement decisions and LSEs in the regions of other Independent System Operators (“ISOs”) and Regional Transmission Organizations (“RTOs”)).

Background

The retirement of generating resources can occur due to several factors, e.g., the age of a generating unit, relatively high capital and operating costs, or market conditions. With coal-fired generation, environmental restrictions and compliance costs often are key drivers in the decision to retire a generating unit. FERC has no authority over the decision to retire a generating resource. However, if the decision to retire a generating unit raises reliability concerns, FERC has the authority under the Federal Power Act (“FPA”) to ensure reliability is maintained before, during, and after retirement of a generating unit. Since the owners of generating units participating in ISO/RTO markets must comply with the FERC-approved tariffs of the ISOs/RTOs, these tariffs typically have mechanisms to postpone retirement while any reliability concerns (i.e., potential violations of mandatory reliability standards) are addressed.

FERC’s Legal Authority Over Generation Facilities

That the Commission has no direct authority over the decision to retire a generating resource is evident from the provisions of the FPA. FERC has jurisdiction over the transmission and sale of electric energy at wholesale in interstate commerce, but under FPA § 201(b) it has no jurisdiction “over facilities used for the generation of electric energy” (except as specifically set forth in Parts II and III of the FPA). 16 U.S.C. § 824(b).

In addition, under FPA §§ 202 and 207, the Commission has the authority to establish the physical interconnection of facilities and to ensure adequate service (respectively). However, both sections also provide that FERC “shall have no authority to compel the enlargement of generating facilities for such purposes.” See 16 U.S.C. § 824a(b) and 16 U.S.C. § 824f (respectively). FERC also has noted several times that it does not have the authority to authorize the construction or siting of electric generation under the FPA. See, e.g., Montana Megawatts I, LLC, 107 FERC ¶ 61,140 (2004).

Mandatory Reliability Standards

FERC has jurisdiction over the establishment of, and compliance with, reliability standards under FPA § 215. 16 U.S.C. § 824o. Under FPA § 215, “[a]ll users, owners and operators of the bulk-power system shall comply with reliability standards that take effect under this section.” Similar to other sections of the FPA, Section 215 is careful to circumscribe the Commission’s authority regarding generating facilities: “[t]his section does not authorize … the Commission to order the construction of additional generation … or to set and enforce compliance with standards for adequacy or safety of electric facilities or services.” 16 U.S.C. § 824o(i)(2).

The MISO’s SSR Agreement

The SSR Agreement is MISO’s mechanism for handling the reliability concerns associated with the retirement of a generating unit. If a generating unit decides to retire, MISO will determine if there are reliability concerns associated with the decision to retire, and if so, whether an SSR Agreement is necessary. The SSR Agreement is negotiated between the owner of the generating unit and MISO.

In general, the SSR Agreement determines (i) generating unit operations during the period past the original retirement date, (ii) the payments made to the generating unit for such operations, and (iii) how such costs are recovered from MISO participants. MISO SSR Agreements allow for the recovery of certain going-forward costs, offset by expected payments for resource adequacy and net revenues from energy market transactions. Typically, the costs associated with an SSR unit are allocated on a pro rata basis to the affected LSEs that require (or benefit from) the operation of the SSR Unit for reliability purposes.

MISO’s Updated SSR Tariff Provisions

On July 25, 2012 (Docket No. ER12-2302-000), MISO filed proposed changes to the SSR provisions of its Tariff noting that it was likely the SSR provisions will be used in the near future due to (a) changing economic and regulatory conditions, (b) Environmental Protection Agency (“EPA”) regulations, and (c) renewable portfolio standards. The existing SSR provisions in MISO’s tariff had not been used in the eight years since their acceptance by FERC.

On September 21, 2012, FERC conditionally accepted the SSR changes but directed that MISO address several issues in two compliance filings (within 90 and 180 days from the date of the Order). See Midwest Independent Transmission System Operator, Inc., 140 FERC ¶ 61,237 (2012) (“September 21 Order”).

MISO’s compliance obligations are several and include, among other things, the need to:

  1. explain its proposal to apply the SSR process to resources not directly interconnected to the MISO system, September 21 Order at P 17;
  2. explain its timelines and process for studying whether all or a portion of a resource’s capacity is necessary to maintain system reliability and for studying whether there are feasible alternatives to an SSR Agreement, PP 34-36;
  3. propose tariff revisions that will treat notices of retirement and study results as confidential information in the event that an SSR Study finds that a resource would not qualify as an SSR, P 37;
  4. explain how MISO will conduct multiple and/or overlapping studies, P 38;
  5. propose additional procedures regarding transfers of interconnection service, PP 46-52; and
  6. treat non-binding study requests regarding potential SSR status and the non-binding study results as confidential information, P 89.

FERC addressed several other issues including the following. MISO proposed that it would not enter into an SSR Agreement when the continued operation of a portion or all of a generating unit would be contrary to applicable law, regulations, or court or agency orders (such as a settlement with an environmental agency or a consent decree approved by a court). FERC accepted the proposed revision. See September 21 Order at P 99.

FERC elaborated on when MISO should enter into SSR Agreements. In its justification for the original SSR provisions in 2004, MISO stated that it would designate SSRs if no other alternatives could be found that were more economic in mitigating reliability issues. Id. FERC clarified that designating SSRs merely because they are the most economic option to address the reliability issue would be contrary to FERC’s finding that an SSR designation is a limited, last-resort measure. Id. FERC stated that it expects MISO to designate resources as SSRs only when there are no other SSR alternatives. Id.

Regarding the term of an SSR Agreement, FERC noted that such agreements must not exceed a one-year term except in exigent circumstances. P 106. In all cases (regardless of the length of the term), FERC will require MISO to justify the nexus between the duration of the SSR Agreement, the underlying reliability need for the SSR, and the timeline for implementing the permanent solution to meet the reliability need. Id.

Regarding recovery of operating costs, MISO had proposed to limit recovery to include only the non-capital costs of environmental waivers, allowances, and/or exemptions necessary to enable an SSR to operate. FERC rejected this proposal and ordered MISO to allow SSRs to “fully recover the capital costs associated with their continued operation, including reasonable and prudent costs to comply with environmental regulations or local operating permit requirements.” P 138. FERC also required that MISO include a refund provision, with interest, in the circumstance where an SSR later returns to service. Id.

Finally, regarding cost allocation, MISO proposed to continue allocating the costs to the LSEs that benefit from the operation of the SSR Unit, but also proposed that the allocation (i) would be specified in the SSR Agreement and (ii) would no longer be tied explicitly to local balancing authority area (“BAA”) boundaries. FERC accepted MISO’s proposal. P 154. FERC also required MISO to (a) explain the general principles it will apply in identifying the LSEs that will pay SSR costs, and (b) disclose — at the time it discloses the results of an SSR study finding that the resource qualifies as an SSR — how the SSR costs would be allocated in the event that MISO enters into an SSR Agreement. Id.

The SSR Agreement between MISO and The City of Escanaba

After FERC issued the September 21 Order (and with the compliance obligations still outstanding), MISO submitted its first-ever SSR Agreement with the Commission on October 5, 2012 in Docket Nos.ER13-38-000 and ER13-37-000 (“October 5 Filing”).  At the end of 2011, Escanaba requested that its generating units 1 and 2 be permitted to shut down for a 36 month period beginning on June 15, 2012. October 5 Filing, Transmittal Letter at 2. MISO completed its analysis of Escanaba’s request and concluded that the proposed mothballing of the Escanaba units 1 & 2 prior to the completion of transmission upgrades in the area would result in violations of applicable reliability standards (specifically, violations of NERC TPL Standards TPL002-0b and TPL 003-0a). See October 5 Filing, Exhibit C at 3. MISO designated Escanaba units 1 & 2 as SSR Units until such time as alternatives could be implemented to mitigate the reliability issues.

The proposed MISO-Escanaba SSR Agreement is for an initial term of twelve months. The agreement would establish an annual revenue requirement of $3.7 million ($309,190 per month) and a variable generation payment of $71.57 per MWh when the units are dispatched.See October 5 Filing, Furmanske Testimony at 7-10. The proposed variable generation payment has a make-whole and return provision (or true-up) if the MISO’s market-clearing prices either are lower or higher than $71.57 per MWh, respectively. Id. MISO proposes that the costs of the MISO-Escanaba SSR Agreement will be allocated to all LSEs within the footprint of the American Transmission Company (“ATC”) on a pro rata basis.

The MISO-Escanaba filing is pending before the Commission. The following entities submitted comments and/or protests: Public Service Commission of Wisconsin (“PSCW”); Wisconsin Electric Power Company (“WEPCO”); Wisconsin Public Service Corporation and Upper Peninsula Power Company (“WPS/UPPCO”); Wisconsin Power and Light Company and Madison Gas and Electric Company; and the Wisconsin Industrial Energy Group, Inc., the Wisconsin Paper Council, and the Minnesota Large Industrial Group (collectively, the “MISO Industrial Group”). Most of the criticisms center on whether: (i) cost allocation to the ATC footprint was just and reasonable; (ii) the requisite details and support for the rates and rate design were provided; (iii) the proposal should be subject to the outcome of the MISO’s compliance obligations in the September 21 Order (Docket No. ER12-2302-000); and (iv) the proposed retroactive effective date of June 15, 2012 is reasonable.

Conclusion

FERC’s decision on the MISO-Escanaba SSR Agreement will have important implications for other retirement decisions and LSEs within MISO’s region as well as in the regions of other ISOs/RTOs. The issues discussed above will continue to be important because, as noted by FERC in Order No. 1000-A: “existing and potential environmental regulation and state renewable portfolio standards are driving significant changes in the generation mix, resulting in early retirements of coal-fired generation, an increasing reliance on natural gas, and large-scale integration of renewable generation.” Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000-A at P 50, 139 FERC ¶ 61,132 (2012).

Moreover, the issues obviously are not limited to the MISO. For a case involving the same issues in the PJM Interconnection LLC, see the filing by Exelon Generation Company, LLC and the Commission’s orders in Docket No. ER10-1418-000. Exelon Generation Company, LLC , 132 FERC ¶ 61,219, Order Approving Settlement, 135 FERC ¶ 61,190 (2011).

For a case involving the same issues driven by the integration of renewable generation, see the filing by the California Independent System Operator Corporation (“CAISO”) at the Commission in Docket No. ER12-897-000 (involving Calpine’s Sutter Energy Center). The filing was withdrawn later, when the California Public Utilities Commission (“CPUC”) ordered the three investor-owned utilities (“IOUs”) in California to enter into contracts with Calpine regarding the Sutter Energy Center. See CPUC Resolution E-4471, March 22, 2012 (the resolution “orders Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric utilities to negotiate to enter into a contract with Calpine’s Sutter Energy Center and adopts a non-bypassable charge to pay for the cost of the contract”).

© 2014 Schiff Hardin LLP

TRENDING LEGAL ANALYSIS


About this Author

Partner

Roger E. Smith concentrates his practice in energy regulation, litigation and transactions. He represents investor-owned utilities, electric distribution companies and regional transmission organizations regarding: -Transmission rate and rate design matters -The design of competitive wholesale energy markets and ancillary service markets -Energy transactions and contractual disputes -Interconnection agreements -Power purchase agreements -Reliability agreements -Competitive solicitations for power supply, transmission tariff and service issues -Parallel path / loop flow issues -Electric...

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