They call the United States the “Saudi Arabia of Wind.” That’s due in large part to the huge potential of the Great Plains. But there’s a hole in the metaphor. Wind power development in some parts of the prairie is falling short of expectations.
Consider rankings from the American Wind Energy Association (AWEA), listing the top states in terms of: 1) total wind energy potential; 2) projects already online; and 3) projects under construction (third quarter 2008) (see Figure 1).
These rankings show that wind project development lags in South Dakota and Nebraska. In part, that’s because those states remain largely shut out of power markets run by the Midwest Independent Transmission System Operator (MISO), a regional transmission organization (RTO) certified by the Federal Energy Regulatory Commission (FERC). These two states lie on the wrong side of the irregular, overlapping, and intertwined geographic seam between MISO and the Mid-Continent Area Power Pool (MAPP). That means that many wind projects and other generation resources located in South Dakota or Nebraska must pay an extra, pancaked transmission “out” charge to sell their output into MISO Midwest markets.
Not so for Iowa and Minnesota, which are largely integrated within MISO, and so enjoy access to MISO’s day-ahead and real-time bidding auctions, including locational marginal pricing (LMP) and financial transmission rights (FTRs) available to hedge against grid congestion.
Donald Furman, senior vice president for development, transmission, and renewables at Iberdrola Renewables, put his finger on the problem when testifying at a conference held at FERC last November. Furman was talking about wind projects slated to hook up with MidAmerican Energy, a utility located within MAPP, and lacking membership in MISO or access to MISO markets:
“We have two wind farms currently either under construction or in advanced stages of development … in MidAmerican’s service territory. As we look … at where we’re going to sell that output, having access to MISO is extraordinarily important.”
Furman then noted how a new tariff proposed by MISO might go a long way to fix the problem:
“When you’re outside of an organized market, it’s purely bilateral. You’re really tied to the local utility and maybe one wheel over. What this does [the MISO proposal] is give us access to the entire Midwest.”
The fix to which Furman was referring has come to be known as the MISO “Western Markets Proposal,” or MISO tariff “Module F.” Filed at FERC nearly a year ago, MISO’s new three-part tariff idea would permit utilities within MAPP to choose “Market Coordination Service” and participate in MISO’s day-ahead, real-time, and operating reserves markets without joining the MISO RTO as full-fledged signatories. The concept is all the more remarkable, since many MAPP utilities are cooperatives, municipal districts, or federal or state-run public power agencies that are restricted in their ability to convey resource rights or participate in combined public-private ventures. (See FERC Dkt. ER08-637, filed March 4, 2008).
In other words, the Western Markets Proposal would allow MAPP utilities to taste the fruits of MISO markets without a) transferring operational control of their transmission systems to the RTO, or b) participating in the MISO regional process for transmission-system planning and expansion—two conditions that appear to be listed as minimum characteristics and functions for RTOs under FERC Order 2000, which governs RTO structure according to the principle of maintaining functional independence between grid operators and market participants.
Critics were quick to attack MISO’s new idea, calling it a sort of “RTO-Lite” regime that would provide for “Day Two” markets with a “Day Zero” grid. Some warned, quite simply, that it would “Take the ‘T’ out of ‘RTO.’”
But the biggest objection stemmed from the fact that current MISO members might well decide to defect and withdraw from the RTO to take advantage of the new tariff’s apparently generous offer. That’s because, in addition to the exemptions already listed, the new proposed tariff would immunize these new non-member market players from having to pay cost allocations under the controversial RECB program (Regional Expansion Criteria and Benefits), whereby MISO requires all RTO members to share in the funding of new, large-scale, high-voltage transmission expansion projects that offer region-wide economic benefits, regardless of where the project is located—a cost-sharing regime that FERC itself has approved as reasonable.
Representing an ad hoc coalition of transmission-dependent utilities in the Midwest, attorney Cynthia Bogorad of Spiegel & McDiarmid in Washington, D.C., wrote that allowing MAPP utilities to partake of markets while escaping the regional planning obligation or any funding share for regional grid expansions would be like an option to pay a quarter share of annual operating expenses for an ocean-front beach house in exchange for a summer-only membership (Midwest TDUs’ Responses to Seven Policy Questions, pp. 36-37, FERC Dkt. No. ER08-637, filed Aug. 22, 2008).
MISO officials concede that RECB cost allocations have become the single greatest source of dissention within the RTO. In fact, the problem has become so acute that a group of Midwestern governors recently announced the formation of a five-state regional coalition to tackle the issue (See Upper Midwest Transmission Development Initiative, at www.misostates.org).
Also, RECB cost allocations for regional grid projects can prove “lumpy,” not only over time, but from utility to utility within the region, depending upon which utilities are building transmission projects today, and in which states, versus which companies might be building tomorrow.
For example, according to the comments from Bogorad and the Midwest TDUs, the MISO 2007 Transmission Expansion Plan illustrates this ebb and flow in grid funding, by reporting cumulative positive and negative RECB cost allocations among MISO members through 2011. Bogorad asserts that the MISO plan projects ITC Midwest will pay out $10 over that period for every dollar received in RECB funding contributions for regional grid projects, while Duke Energy Midwest would receive $10 in cost contributions for every dollar paid out.
Nevertheless, MISO has sought to calm fears of an RTO unraveling due to disagreements over regional funding obligations. It suggests that any member seeking to withdraw from RTO participation must pay an exit fee that includes shares of previously allocated RECB and RTO startup costs, which presumably would cause any would-be defector to think twice.
Overall, MISO urged not getting hung up over concerns about FERC Order 2000, or the fact that the proposal in truth will not fully eliminate inter-regional transmission rate “pancakes” where they exist today. MISO argued that its idea could overcome the present stalemate, which has seen many Western utilities, and especially public power entities, unable or unwilling to participate in RTOs. Even so, FERC decided last fall to withhold approval for MISO’s proposed Market Coordination Service (see, Dkt. ER08-637, Oct. 10, 2008, 125 FERC ¶61,029).
Instead, FERC asked the industry for comment on whether the new tariff proposal might violate FERC Order 2000 or undercut RTO membership. By the time of FERC’s November 12 technical conference, Commissioner Jon Wellinghoff showed that the commission still had its doubts. Weighing in at the conference, Wellinghoff abruptly broke in on MISO CEO Graham Edwards, as the latter was dutifully running down a list of benefits the MISO members would enjoy by signing up new MAPP market customers (MC), and broadening MISO’s virtual footprint:
“Excuse me for interrupting,” said Wellinghoff.
“Those were benefits that would also be shared by the other entities. What benefits would the existing members have that the Schedule F members [the MAPP MCs] do not have? Any? I don’t think so.”
In fact, Wellinghoff even suggested that widespread MISO defections might solve the problem of RTO members arguing over the regional allocation of costs for large-scale grid expansions:
“If I understand it correctly, if current MISO members opt out of MISO and go under Schedule F, market service, there’s no more RECB anyway to worry about.”
Clair Moeller, MISO’s vice president for transmission asset management, had explained in the MISO tariff proposal why the Western Markets Proposal could offer benefits to MAPP utilities and MISO members alike.
As Moeller explained in an affidavit, the current regime was governed by an expiring seams operating agreement and successor “bridge” agreements between MISO and MAPP that employed a hodge-podge of transmission loading relief (TLR) and redispatch of generating plants to manage energy flows between the two regions. But while the MISO market manages grid congestion over five-minute intervals, through LMP and computer algorithms for security-constrained dispatch, the old-fashioned MAPP TLR model allows for grid-flow adjustment only after 30 to 60 minutes, with no process or capability to seek energy flow in a defensive direction (counterflows or decremental dispatch), making economic grid optimization impossible across the MAPP/MISO seam. Thus, unfunded congestion costs increase and are uplifted to the entire MISO membership, while money is left on the table on the MAPP side in the form of underutilized generation resources.
John Norris, chairman of the Iowa Utilities Board and a key MISO watchdog group, the Organization of Midwest ISO States, terms MISO’s analysis and benefit claims as “somewhat speculative and difficult to quantify.”
In fact, MISO’s initial calculation of benefits in its March filing had assumed that most of the entities in MAPP would sign on as MCs. But that assumption soon proved too optimistic.
By late spring, three key MAPP members—Nebraska Public Power District, Omaha Public Power District, and the Lincoln Electric System—announced the signing of a memorandum of understanding with intent to join the Southwest Power Pool. And by November, at the time of the afore-mentioned technical conference, it appeared that MidAmerican Energy was the only remaining MAPP utility that still entertained serious intentions to sign on as a market customer.
One major question mark concerned the manner in which MISO would offer transmission service to MAPP members opting to sign on as MCs. Students of today’s regional power markets know already that the RTOs that operate bid-based, security-constrained, LMP pricing regimes are classified by the FERC as transmission “providers,” and thus take over the transmission tariff function from their transmission-owning members (TOs), but in fact do not really sell transmission service on a transactional basis to market participants.
Rather, the RTO monetizes the grid congestion and rations grid capacity through the collection of energy price surcharges, expressed in the form of locational marginal prices for generation. In fact, FERC has stressed on many occasions that transactional pricing for transmission interferes with the competitive pricing in regional power markets.
That’s why FERC two decades ago denied authority to interstate natural gas pipelines to bundle the sale of the natural gas commodity with tariffed gas pipeline transportation service, and likewise now wants the RTO transmission-provider function to remain independent of market participation.
Recall, however, that MISO’s Western Markets Proposal would allow any MAPP utilities choosing to become non-member market customers in MISO to retain functional control over company-specific grid assets, and also to retain their company-specific transmission tariffs. How then would the RTO enforce its LMP market regime?
Space constraints bar any attempt at a full explanation. But suffice it to say that while MISO’s Western Markets Proposal includes a new concept known as Market Integration Transmission Service (MITS), and while MISO claims that this new grid charge will remain nontransactional, as FERC prefers (it will be based instead on patterns in cross-border power flows between MISO and the individual MAPP MCs), opponents have alleged otherwise. They argue both that the rate never will be transactional in practice (because market customer utilities supposedly can always manipulate their flow patterns), and also that the MITS rate ought to be transactional, if it is not so already, since otherwise the new MAPP market customers would be able to lean on the system to their advantage by scheduling MISO market transactions that entail markedly different power flow patterns than MISO anticipated when it priced the MITS rate.
MISO claims that a planned 88 percent discount included in the MITS rate (as against the current MISO/MAPP “out” charge) will make market transactions attractive to MAPP utilities. But opponents note that because this MITS offering will not qualify as firm transmission service, that MAPP MCs will need to purchase firm point-to-point (PTP) service separately—both to secure full capacity credit for generation resources under RTO requirements or state-enforced rules for resource adequacy and renewable portfolio standards, and also to ensure availability of FTRs to hedge against potentially ruinous LMP congestion charges. So the choice either is firm PTP service, or else qualify the resource as fully deliverable across the system and reserve network transmission service. Either way, whether a PTP or network reservation, the additional grid-service charge to ensure FTRs and meet resource adequacy rules will eat into the 88 percent rate discount promised by MISO.
The uproar over the MISO’s Western Markets Proposal reveals a fundamental disconnect between the rules that FERC adopted a decade ago to govern RTO formation and structure, including FERC Order 2000, and the reality that today confronts RTOs and their members.
In comments that MISO filed to address FERC concerns that its Western Markets Proposal might lead RTO members to defect, MISO said the “central mission” of its RTO structure is “the voluntary agreement of the Transmission Owners to commit their transmission facilities to the Midwest ISO’ functional control” (Comments of MISO, p. 3, FERC Dkt. ER08-637, filed Aug. 12, 2008).
But that statement reflects the climate seen in the 1990s, when FERC was touting RTOs as the way to overcome rampant discrimination in the provision of interstate transmission service. It leads RTO policymakers to think in terms of transactional efficiency and minimizing the administrative costs that RTOs incur for tariff design and management of grid operations.
Today, by contrast, the prime directive facing the nation’s RTOs is not to squelch discrimination in grid service, but to get more long-haul transmission built, to integrate vast new supplies of renewable energy, to meet renewable portfolio standards and stave off climate change. The notion of market “independence,” so central to FERC Order 2000, now seems to have taken a back seat to the need for capital formation. This new mission—a massive grid bailout—may well demand a new type of structure at RTOs.
Consider the story shown by the data in Figure 2 (A New Equation for RTO Members.) That figure, taken from comments filed last April by Indianapolis Power & Light, shows how IPL’s annual bill for RTO administrative costs (MISO Schedule 17) has been overtaken by IPL’s huge cost allocation for funding regional grid projects. IPL revisited that topic in a second set of comments, filed in August:
“If the Midwest ISO needed to cut a deal to entice another company on its Western border to join, perhaps exemption from RECB cost-sharing was the key.
“While this speculation may or may not be true, the reality for many existing MISO members is that forecasted transmission expansion costs now dwarf administrative expenses in coming years” (Comments of IPL, p. 4, FERC Dkt. ER08-637, filed Aug. 12, 2008).
It’s worth noting that MISO vice president and CFO Michael Holstein testified in the Western Markets case that a transmission-owning MISO member choosing to defect from MISO to take non-member market service, as offered under the Western Markets Proposal, would need to pay about $1.92 million a year to obtain the same tariff administration, transmission planning, and related services previously obtained from MISO as an RTO member (Prepared Supplemental direct Testimony of Michael P. Holstein, FERC Dkt. ER08-637, filed Aug. 12, 2008).
Yet attorney Bogorad claims that data from MidAmerican Energy’s 2007 FERC Form 1 shows that the utility paid less than $808,000 for the same sorts of services, provided by TransServ, the affiliate formed as an Independent Coordinator of Transmission to run Mid-America’s grid system in roughly the same manner as would an RTO (Comments of Midwest TDUs on Compliance Filings, pp. 17-20 FERC Dkt. ER08-637, filed Sep. 5, 2008).
As IPL puts it, “the Commission’s aim should not be to figure out how to coerce existing members to remain a part of an RTO, but rather how do we make the RTO value proposition a positive for existing members.”