Wisconsinites don't fear 'Day 2.' But let's get the grid rights right.
While working for the Wisconsin Public Service Commission (PSC), I have grown accustomed to the friendly advice frequently offered by regulatory colleagues and utility executives in higher-cost areas to the East. The latest of their suggestions on how to best develop efficient, transparent, robust bulk power markets in the Midwest comes from Scott Miller of the PJM Interconnection LLC (see "Reliability and Markets: Two Sides of the Same Coin," , January 2004), who says critics of the big-bang approach to market development from the Midwest Independent Transmission System Operator Inc. (MISO) are guilty of forcing a "false choice" between reliability and markets.
But the skepticism over MISO's proposal to implement its Day 2 market design-a real-time, day-ahead energy and financial transmission market (a proposal that MISO later agreed to postpone)-across its scattered footprint had very little to do with the false choice suggested by Mr. Miller, and everything to do with potential diminution of the economic value of existing transmission service and future wholesale market activity, especially in load pockets like Wisconsin. These fundamental economic concerns were outlined by stakeholders across the MISO footprint over the glaring omissions in MISO's hastily filed energy markets tariff based on locational marginal pricing (LMP).1
It would be ironic indeed to characterize as "opponents of restructuring" the MISO stakeholders like the Wisconsin PSC, which actively supported MISO's decision to withdraw its energy markets tariff last October. Since MISO's inception, Wisconsin regulators have consistently supported our utilities' membership in MISO and MISO's decision to develop competitive bulk power markets in the Upper Midwest.2 As a net importer of electricity, Wisconsin stands to benefit greatly from a reliable, open-access transmission system that provides greater access to regional energy markets for our load-serving entities (LSEs). Wisconsin, therefore, has been and will continue to be, a strong proponent of markets and market reforms that will provide near- and long-term benefits to Wisconsin consumers that are commensurate with additional costs.
A False Choice
The belief that the MISO tariff advocates a false choice between reliability and markets is based on a fundamentally flawed assumption that MISO would have been able to file a tariff and successfully implement new LMP-based markets by April 2004. This critique strives to avoid any discussion of the demonstrable gaps in the incomplete tariff that formed the basis for the MISO board of directors' decision to support withdrawal last fall. The board's decision reflects a good measure of Midwest common sense and the realization that MISO's piecemeal approach to market implementation could not garner broad stakeholder support.
I have never considered reliability and wholesale market development to be mutually exclusive. We can all agree that reliability and commercial efficiency are not only compatible, but mutually reinforcing, and that reliability and markets are two sides of the same coin. The trouble is that the commercial efficiencies that reinforce reliability can be obtained only through a well-developed market tariff and implementation plan.
Hastily planned and executed market implementation can threaten reliability. The Wisconsin PSC and a number of interested LSEs filed comments critical of MISO's July 25, 2003, tariff filing because it reflected MISO's rush to meet market implementation deadlines instead of a market implementation approach that would enhance reliability.3 To the extent MISO's proposed tariff, as filed July 25, 2003, presented a choice between reliability and markets, the choice was not false.
I still believe it is appropriate to consider the economic losses from events like the Aug. 14, 2003, blackout as potential offsets to gains from new markets, especially given the hurried, piecemeal market implementation approach that MISO was taking. In contrast, Mr. Miller carries his implicit assumption about MISO's market readiness so far as to suggest that LMP in the MISO footprint could have prevented the Aug. 14 blackout.4
Gaps in the Tariff
The most critical missing element in MISO's withdrawn tariff concerns the allocation of financial transmission rights (FTRs). It is difficult to understate either the priority or magnitude that Wisconsin stakeholders have placed on developing an FTR allocation process at MISO that fully hedges Wisconsin LSEs for a significant portion of their intermediate and baseload resources in a day-ahead energy market.
As the Federal Energy Regulatory Commission (FERC) and most PJM market participants would agree, the allocation of FTRs is of paramount importance, especially in areas with persistent load pockets like Wisconsin and the Upper Peninsula of Michigan.5
The Wisconsin-Upper Michigan System (WUMS) frequently is described as the most constrained portion of the MISO footprint and one of the most congested transmission systems in the United States.6
Mr. Miller describes the LMP-based market concept as "simple and elegant" because it "in effect 'pays' the utilities and traders to monitor the condition of the grid with every transaction."
Many prominent academics might opine that equity and efficiency require that MISO's FTR allocation leaves Wisconsin short on its FTRs as the financial hedges against congestion costs. As a matter of public policy, however, implementing LMP-based congestion management in load pockets like Wisconsin is neither simple nor elegant. MISO stakeholders have reviewed a variety of FTR allocations that have not provided LSEs with a sufficient level of confidence that their customers will not be paying more for their existing uses of the transmission system under MISO's Day 2 market design. Unless FTRs provide a full financial hedge, the risk of higher congestion costs is real. In the absence of any meaningful protection, Wisconsin faces the prospect of bearing substantially higher transmission costs than exist today during the initial phase of the MISO's Day 2 market.
FERC has made bold "hold harmless" promises to the states on the issue of FTRs. In its ,7 FERC provides the following assurances:
If an RTO or ISO uses location pricing, it must ensure that each existing firm customer (including transmission owners with a service obligation for native load) has the opportunity to obtain FTRs equivalent to that customer's existing firm rights. We will ensure not only that existing customers retain their existing rights but also that they have the ability to obtain rights for future load growth.8
The white paper's promise on the subject of FTRs was, in my view, an effort to ensure those on the fence that our federal brethren would not force low-cost states like Wisconsin to pay more for their existing transmission under any standard market design (SMD) proposal that relied on LMP as the primary congestion management tool. The demise of FERC's SMD rulemaking9 has not diminished the interest of those who want to keep FERC's and MISO's feet to the fire when it comes to ensuring that LSEs receive FTRs equivalent to the firm transmission rights they enjoy today. Implementing LMP in load pockets like Wisconsin without that assurance likely would be economically harmful to our LSEs and their customers.
How will MISO implement significant aspects of its market plans while maintaining fidelity to the principles described in FERC's white paper and its Feb. 24, 2003, order, with respect to the appropriate allocation of FTRs?10 Resolution of this issue will drive future stakeholder support for MISO's efforts, as well as any effort to expand MISO membership in its western footprint.
Apart from the concerns over FTRs, Wisconsin regulators and utilities also recognize our congested transmission system cannot be wished away. Wisconsin utilities are working together to alleviate transmission constraints through new construction and improved local transmission operations. Wisconsin's stand-alone transmission company, American Transmission Co. LLC (ATC),11 plans to roughly quadruple its rate-base transmission assets over the next decade. The Wisconsin PSC recently approved a new 345-kV line that could, once it is placed in service in 2008, nearly double Wisconsin's import capability.12 These planned transmission upgrades will not, however, provide any meaningful benefit before the currently scheduled Dec. 1, 2004, start-up date of MISO's Day 2 markets.
Wisconsin utilities also are examining other ways to improve the efficiency of congestion management prior to the introduction of an LMP model. ATC not only has improved local congestion management, but it makes congestion costs explicit to its members. Making congestion costs explicit sends cost signals to Wisconsin utilities and improves their grid operations to minimize these costs. Wisconsin's LSEs and ATC are constructing billions of dollars of new generation close to load, as well as planning billions of dollars of new transmission infrastructure that will reduce congestion in and around Wisconsin and expand the accessibility of MISO's regional markets.13 Wisconsin is making the correct infrastructure investment decisions prior to the introduction of LMP-driven price signals.
Other Missing Parts in the Tariff & Seams
Since withdrawing the tariff, MISO has acknowledged a great deal more work is needed to be done before it could start up a real-time or day-ahead energy market. In addition to the missing provisions related to FTR allocations, the proposed tariff left out several other crucial elements needed to gain stakeholder support.14 MISO identified "a list of gaps in the tariff and unresolved, market design issues that required policy direction from stakeholders.15 For example, MISO identified 24 market design issues that will require more stakeholder work, including broad issues like "offer cap and scarcity pricing," "resource adequacy commitment (RAC) process," and "day-ahead market timeline." Additionally, stakeholder groups are working on delineating control area roles and responsibilities.16
Wisconsinites know Swiss cheese when we see it. Significant seams exist between MISO and non-MISO members throughout the MISO footprint, and I remain concerned not only about the existing seams to our south resulting from Commonwealth Edison's decision to join PJM, but also the potential for a large number of unresolved seams issues between jurisdictional and non-jurisdictional utilities in the Mid-Continent Area Power Pool (MAPP) region. In the absence of any federal regulatory action to compel non-MISO MAPP utilities to join MISO, these seams issues could exist regardless of the timing of market implementation in the western portions of the MISO region.
MISO's business plan is very ambitious in the scope of what it plans to accomplish over a relatively brief period of time. A number of MAPP utilities have expressed both reliability and financial concerns about joining MISO under the present circumstances. Some have suggested that MISO consider alternative market implementation plans. Some non-MISO members of MAPP have very granular and reliable state estimators that took several years to develop. While MISO has made excellent progress in developing grid monitoring tools, including a state estimator model, it was not until January 2004 that MISO deemed its state estimator to be "production grade" and used it for real-time operations.17
MISO needs to provide greater assurance to stakeholders in Wisconsin [which is split between the MAPP and the Mid-America Interconnected Network (MAIN) reliability councils] as well as to other MAPP utilities that they will not be worse off under MISO's Day 2 market design. This is significant for Wisconsin because the MAPP system is Wisconsin's only direct interconnection to the rest of MISO.
How MISO addresses these difficult tariff and seams issues will determine the ongoing level of stakeholder acceptance of MISO's market initiative in many parts of the Midwest. The cost of rushing into poorly designed LMP-based energy markets may far exceed any purported cost increases attributable to any future delayed start-up date for certain portions of the MISO region. One need not have attended law school to understand the significant risk of litigation for pursuing a Day 2 market that is not acceptable to a large number of MAPP members.
I hope industry observers will recognize that many of us in the Midwest believe in robust wholesale markets and in regional transmission organizations. Every region, however, should be allowed to fashion market implementation plans that will most effectively achieve those objectives. It was the practical, and not the theoretical considerations that compelled a large majority of MISO stakeholders to support MISO's tariff withdrawal last October. And it will be practical solutions that ensure MISO's success.
- FERC .
- Through state legislation passed in 1999, Wisconsin was one of the few states in the country that required its transmission owners to join the MISO. Wisconsin also unbundled transmission service and later enacted laws authorizing the divestiture of transmission facilities.
- See Comments of the Public Service Commission of Wisconsin, FERC , filed Aug. 27, 2003.
- Mr. Miller's lack of stated appreciation for MISO's lack of market-readiness before Aug. 14, 2003 runs even deeper. His analysis ignores the lingering "Day 1" problems that MISO faced last October. Many of these issues were rolled into MISO's new Reliability Charter, which MISO claims is largely responsible for the roughly $40 million cost of market delay.
- In fact, FERC is investigating the degree of transmission congestion on the Delmarva Peninsula and the associated LMP implications. FERC .
- See U.S. Department of Energy, National Transmission Grid Study: Issue Papers, May 2002.
- FERC, White Paper on Wholesale Power Markets Platform, available at http://www.ferc.gov/industries/electric./indus-act/smd/white_paper.pdf
- See white paper, Appendix A, pp. 7-8. Also, in its white paper FERC stated that in its final SMD rule, FTRs "would be allocated according to existing contracts and existing service arrangements in order to hold customers harmless." See p. 10.
- FERC .
- See Order on Petition for Declaratory Order, FERC , issued Feb. 24, 2003. In its order to MISO, with respect to MISO's initial FTR allocation, FERC places a higher priority on holding "existing transmission customers whole with respect to congestion-related charges under MISO Day-2 operation to the extent possible given the objective of simultaneous feasibility" than on MISO's other objectives for its FTR allocation.
- ATC was created under state law to address our state's historic underinvestment in transmission. ATC plans to construct almost $3 billion in new transmission projects in Wisconsin over the next decade.
- Wisconsin PSC .
- The PSCW recently authorized the construction of approximately 2,500 MW of coal-fired baseload and natural gas-fired intermediate generation facilities at existing plant locations near load. PSCW .
- MISO's "Market Subcommittee Energy Markets Tariff Issues Update" to the MISO Advisory Committee, Jan. 14, 2004.
- The identified "gaps" include market mitigation measures; initial FTR allocation and nomination methodology; system support resources agreement and compensation; marginal losses crediting mechanism; and creditworthiness provisions.
- At the Jan. 14, 2004, MISO Advisory Committee meeting, stakeholders reported that they will not work on control area consolidation issues until after they resolve issues related to roles and responsibilities. The Aug. 14, 2003, blackout has amplified concerns in Wisconsin and elsewhere in the MAPP region over the feasibility of centralized control of the entire MISO footprint. Some MAPP members and other Wisconsin utilities are concerned that MISO's central control does not properly recognize the differences in the multiple control areas in its footprint. To the best of my knowledge, other RTOs that operate with single control areas did not face such challenges during market implementation.
- This leads to another question that Mr. Miller did not address when expressing his concern for MISO's tariff withdrawal: Would MISO's grid monitoring tools have been sufficiently developed and tested in time for a March 2004 LMP-based market start-up? Even Mr. Miller concedes that for LMP-based markets to enhance reliability, the price must reflect "the actual physical state of the grid." He describes that condition as the "kicker." An LMP-based market start-up only weeks after the necessary grid monitoring tools are operationally proficient could have been quite a "kicker" as well as a "screamer"!
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