MISO: Avoiding the Mess Facing Other Wholesale Competitive Electric Markets

The Midcontinent Independent System Operator's (MISO's) geographic footprint extends down the middle of the U.S. Because of the structure of its market, MISO has artfully avoided some nasty policy and economic issues that characterize its neighbors in the Mid-Atlantic and Northeast. However, MISO still faces many of the same market forces that are transforming the electric generation and distribution business across the country.

The scope of the Midcontinent Independent System Operator (MISO) is vast. One of the original regional transmission and wholesale market operators growing out of the Federal Energy Regulatory Commission's (FERC's) restructuring of much of the U.S. electricity business in the late 1980s and early 1990s, MISO stretches from Manitoba in central Canada to the Gulf of Mexico in Southern Louisiana (Figure 1).

1. Vast reach. The scope of the Midcontinent Independent System Operator (MISO) stretches from Manitoba, Canada, to the Gulf of Mexico. Courtesy: MISO

"What we have done," MISO CEO John Bear told POWER, "is taken a bunch of small, regional utilities and given them a super-regional utility that requires less investment." The result, he said, is that "we have made electric deliverability more reliable and increased quality for about 2 million people and provided about $3 billion in annual benefits to our members."

MISO, Bear noted, also has been able to provide broad responses to major public policy issues. Wind power is an example. In 2005, MISO had about 300 MW of wind capacity. Today, the system supports 17 GW of wind, or about 8% of the system's generating portfolio. Coal has dropped from 65% of generating capacity to about 35% in MISO's footprint, and gas generation has risen from 10% to 43%. Nuclear makes up a steady 8%.

MISO's website notes that it "manages one of the world's largest energy markets, covering 965,000 square miles and delivering 689 terawatt-hours of energy in 2016 to millions of homes." The regional transmission organization (RTO) says in 2016 it yielded "$2.6 billion to $3.3 billion in regional benefits, driven by enhanced reliability, more efficient use of the region's existing transmission and generation assets, and a reduced need for the addition of new assets."

The MISO territory includes 191 GW of generating capacity in 6,567 generating units, peak load of 131 GW, 65,800 miles of transmission, 36 local balancing authorities, and according to the ISO, 291,538 supervisory control and data acquisition data points. The numbers are so large they are hard to grasp. The system-with headquarters in Carmel, Ind., north of Indianapolis, and regional offices in Eagan, Minn.; Little Rock, Ark.; and Metairie, La.- runs a sprawling network of generation and transmission with precision (Figure 2).

2. Central command. The MISO system is headquartered in Carmel, Ind., shown here, and has regional offices in Minnesota, Arkansas, and Louisiana. Courtesy: MISO

According to Bear, the trend away from coal and toward wind and natural gas is likely to continue in the near term. Northern Indiana Public Service Co. (NIPSCO) recently announced plans to shut down two large coal-fired units at its Bailly station by mid-2018, and NIPSCO plans additional coal shutdowns at its Schahfer Generating Station.

Low-cost gas and wind generation is clobbering coal in the Midwest as elsewhere in the U.S. Regardless of new federal government policy pronouncements aimed at rescuing coal, low-emissions sources are likely to prevail in MISO's view. Nuclear is also likely to decrease as a victim of the advance of gas and wind.

In Bear's analysis, solar won't play a big role in the next few years. The region is not bathed in sunshine. Because MISO's electric prices are low, solar remains uncompetitive. That's in contrast to sunny California, where energy prices are so high that solar can grab market share.

Capacity Markets

Other large competitive wholesale markets have lately been consumed by controversy-particularly in the Mid-Atlantic and Northeast where state actions to subsidize uncompetitive nuclear capacity in the wholesale markets threaten the viability of the RTO/ISO concept (see sidebar). MISO has largely been able to dodge those policy and economic bullets.

Because of its structure, MISO has eschewed the hard-capacity markets that characterize RTOs such as PJM Interconnection and ISO-New England (ISO-NE). "We don't have a capacity market," Bear said. In the MISO system, most of the states' utilities continue to be vertically integrated monopolies, with the responsibility for providing adequate generation to meet retail distribution load. That's unlike the prevailing model to the east, where generation and distribution are separate entities and the ISOs determine resource adequacy.

"States have jurisdiction over resource adequacy" in most of MISO, Bear said. So MISO doesn't have to conduct forward capacity auctions to buy reserve generation at competitive wholesale prices from generating entities. That appears to be working. MISO has been able to reduce its generation reserve margin and still remain confident that it can meet future loads.

MISO conducts what it calls a "fixed resource adequacy plan," (FRAP), a short-term alternative to the long-term capacity auctions in PJM and ISO-NE. A 2015 analysis by the consulting firm ICF International said, "The [MISO] capacity auction is prompt rather than forward-looking like the ISO-New England (ISO-NE) and PJM markets, meaning that capacity for the June-May annual planning period is procured in April of that same year."

While MISO brags that it does not have a capacity market, its independent market monitor, David Patton of Potomac Economics, is critical of the ISO's approach to capacity. Last year, Patton told stakeholders, as reported by Platts, that while MISO's energy market is working well, its approach to capacity has not provided "efficient economic signals to facilitate investment, retirement and capacity import/export decisions."

MISO last fall moved to adjust an aspect of its hands-off approach to long-term capacity, dealing with Michigan and southern Illinois decisions to restructure into separate generating and transmission regimes. MISO came up with a plan for a bifurcated approach to capacity, which it called the "competitive retail solution." It would have continued the existing short-term auction for most of its business, while adding a new three-year forward auction for the restructured systems in Michigan and Illinois. In early February, FERC rejected the MISO plan for two different market-clearing processes, arguing that it could introduce unnecessary price volatility.

In one of the last decisions before losing its quorum, FERC said it would like MISO to implement a more conventional capacity auction mechanism, arguing that "an auction-based marketwide clearing mechanism for capacity simultaneously co-optimizes zonal capacity requirements subject to zonal transmission capability constraints and economic supply offers at the time of the auction." Translated from FERC-speak, the commission effectively said a systemwide competitive auction better matches supply, demand, and delivery than relying on state utility systems' judgment of resource adequacy.

Responding to the FERC rejection, MISO said it is going back to its stakeholders to try to come up with a solution. Power Markets Today reported that MISO said its initial review of FERC's order "will be complicated by the lack of detail contained in the order concerning the reasons our proposal was rejected-or guidance that would allow MISO to better determine alternative paths to ensure reliability in competitive retail areas."

Pseudo-Ties

Another troubling issue facing MISO is how some utilities in its territory are treated when they win bids into PJM's capacity market. The issue is called "pseudo-ties," (which reminds some of old-fashioned clip-on neckware). This has to do with who controls dispatch of the generating units when the capacity is needed and how that impacts transmission system reliability.

Bear noted to POWER that PJM has performance rules accompanying its capacity requirements. The rules allow PJM to become the balancing authority (BA) for the remote units, wherever located. The ISO-NE and the New York Independent System Operator (NYISO) have similar rules.

According to MISO, under the rules "a generating unit that is physically located in the MISO BA could be controlled by the PJM Interconnection BA," allowing PJM to dispatch the units at will, as if they were part of the PJM system, hence "pseudo-tied" to PJM. However, many of those units are so far away from PJM that the eastern system is unable to model the impact of the dispatch on MISO's system reliability. As a result, MISO claims PJM could "unknowingly and unintentionally overload MISO transmission lines when dispatching a pseudo-tied unit physically located in MISO."

Patton-whose firm Potomac Economics is also the independent market monitor for the Electric Reliability Council of Texas, ISO-NE, NYISO, and the Regional Greenhouse Gas Initiative in the Northeast-in April asked FERC to order PJM to end its pseudo-ties policy. Patton argued that the policy, which FERC blessed in 2014, has "imposed substantial economic and reliability costs on [MISO] that will only grow as pseudo-ties proliferate."

MISO's Origins

In April 1996, after years of discussion at state and federal levels over the closed nature of the nation's high-voltage transmission system-controlled by the vertically integrated monopoly electric utility systems-the FERC issued Order No. 888 (named for FERC's new headquarters building at 888 First Street NE in Washington, D.C.). The thrust of the order, and follow-up Order No. 889, required owners of interstate electric transmission to become common-carriers of electricity rather than monopolies.

FERC's move to open access to transmission was driven by a landmark 1989 study by the former Congressional Office of Technology Assessment (OTA) titled "Electricity Wheeling and Dealing, Technological Considerations for Increasing Competition." (Ed. note: Kennedy Maize was an OTA contractor for that study.) It concluded, "Concerns that the bulk power system (generation and transmission) is inherently incompatible with competition do not appear to be well-founded. The system can be made to work under any of the institutional/regulatory arrangements considered in this study. Problems and issues will arise with widespread competition, but they will be much less technical than political and institutional."

When FERC, under the leadership of Chairman Betsy Moler, adopted open-access transmission, three existing power pools-New York, New England, and PJM-were already positioned to adapt to the new regime. In the Midwest, the MISO website notes, "Several transmission owners recognized the benefits of FERC's vision to form an independently operated regional transmission system, voluntarily coming together in 1998 to establish MISO." At that time, the name was the Midwest Independent System Operator.

FERC accepted the MISO open access transmission tariff in 1998 and approved MISO as the first regional transmission organization in 2001.

Based on its successful operation of an independent transmission system, MISO began planning to operate a competitive energy market, as was occurring across the country. In 2005, MISO began acquiring and centrally dispatching electric power through much of middle America. At about the same time, MISO began running a market for financial transmission rights, a tradable commodity. In 2009, MISO launched an ancillary services market, becoming the region's overall balancing authority governing energy dispatch across its growing footprint.

In 2013, after two years of planning, MISO integrated the transmission systems of Entergy (Arkansas, Mississippi, Louisiana, Texas, Gulf States, and New Orleans), Louisiana's Cleco Corp., Lafayette (La.) Utilities System, Louisiana Energy and Power Authority, Louisiana Generating, South Mississippi Electric Power Association (now known as Cooperative Energy), and East Texas Electric Cooperative.

"MISO's new members across the South will begin to receive the broad array of benefits that our markets provide, including the cost savings realized from improved reliability and efficient commitment and dispatch," said Bear in a press release at the time.

Two years later, RTO Insider newsletter reported, "Entergy and MISO's Independent Market Monitor told the Entergy Regional State Committee in Little Rock on Aug. 11 [2015] that the December 2013 integration has produced substantial benefits and that the transition was well-managed." Entergy said it had achieved $236 million in annual savings since the integration with MISO.

MISO's Future

MISO's first order of new business may be old business: dealing with the FERC order rejecting its bifurcated capacity plan. One of FERC's criticisms of the MISO scheme was, as Power Markets Today noted, that "MISO would have to allocate that transmission capability across two different auctions, which could lead to price separation that does not reflect what is actually happening on the system."

Patton has suggested that the ISO could run a dual market to make sure resources in competitive areas are paid enough. He has advocated a plan similar to what ISO-NE has proposed, a two-part capacity auction with conventional bidders in one and subsidized bidders in the other. Winners in the second auction would then have to compete against the winners in the first auction, including meeting the requirement of a "minimum offer price rule," which sets a floor on capacity bids.

Discussing FERC's rejection of the capacity plan, Bear said he's confident Michigan and Illinois will be able to work out ways that they can continue with MISO's traditional approach to capacity. As others have noted, one of the reasons MISO considered altering its approach to capacity in Illinois was because Exelon's Clinton nuclear plant was facing a shutdown. The Illinois legislature authorized the subsidies that will keep the plant running.

In the longer run, MISO faces many of the same market forces that are transforming the electric generation and distribution business across the country. "We continue to see pressure from a public policy standpoint and from environmental issues," Bear said. "We foresee a decarbonized generating fleet, with lots more wind and solar, more agile natural gas, and some continued coal and nuclear."

Bear said federal policy would be important for MISO (Figure 3). The Obama administration's Clean Power Plan, which the Trump administration is now trying to reverse, was "pretty significant" for MISO, as was the Mercury and Air Toxics regulation, which "forced a lot of older coal plants to close."

3. Where to from here? MISO CEO John Bear foresees a decarbonized energy fleet, featuring expansive wind generation and more natural gas. Much of the future, however, will be determined by federal policy. Courtesy: MISO

When it comes to wind power, Bear noted that with federal tax credits supporting it, wind is "incredibly inexpensive." Should the tax credits expire (they were enacted in 1992 as a "short-term" subsidy, which has continued for the past 25 years), the wind proposition could change. Late last year, Patton told MISO, according to RTO Insider, "Some wind generators appear to be deliberately over-forecasting their output to inflate their revenues."

MISO is less bullish on solar, as its footprint often is cloudy. But in January, MISO integrated a 100-MW community solar project from Minnesota (selling power to Xcel Energy) into its wholesale market, a first, according to Utility Dive. "MISO remains committed to supporting our members in meeting their policy goals through reliable and efficient markets," said MISO vice president Todd Ramey. "This project furthers the integration of renewable resources into our markets."

MISO is gingerly examining utility-scale energy storage. The 1,872-MW Ludington pumped storage project in Michigan, operated by Consumers Energy, is in MISO's territory. Battery storage is on the corporate radar. "We are having a lot of discussions about all the different things storage can do," Bear said. Storage "is a big game-changer."

But much of the future depends on natural gas. While wholesale markets love low gas prices, they make life difficult for renewables such as wind and solar, and for storage. Coal, nuclear, and gas come with storage built-in.

"The other big question" for the future, said Bear, is load. MISO's peak demand has been sinking, while the overall amount of electricity use is going up. Conservation programs, he said, have been "not that successful." As with all economic markets, it's not just a matter of supply, or "resource adequacy," but also demand and the interaction with supply that defines prices.

For MISO and competitive wholesale markets, it's Economics 101-supply and demand determines prices. For monopoly markets, that's irrelevant. Which paradigm prevails? We'll see. a-

The Future of Competitive Wholesale Electric Markets The federally-created-and-governed regional, competitive wholesale markets are under attack by state regulators and utilities with special needs, such as keeping uneconomic nuclear plants in the wholesale markets or boosting renewable generation. So far, only the Midcontinent Independent System Operator among the multistate regional transmission organizations appears to be immune from the controversy. That could change. Illinois and New York have adopted plans to put a thumb on the scales of the wholesale markets' pricing to keep favored nukes in the capacity queue. Connecticut and Ohio appear ready to follow suit, and New Jersey may also get in line. Proponents of the nuclear plant bailouts argue that competitive wholesale markets don't recognize the value of nuclear power's zero-carbon emissions. To address the alleged discrepancy, both Illinois and New York created zero-emissions credits (ZECs), which subsidize nuclear power by recognizing the value of its carbon-free generation. In New York, the value of ZECs from rescued nuclear plants does not equate to a value for the emissions from the politically challenged Indian Point nuclear facility, much nearer Manhattan, which Gov. Andrew Cuomo persuaded Entergy to close. The move by states to influence the wholesale markets' auctions has caused heartburn at the Federal Energy Regulatory Commission (FERC), overseer of wholesale electricity. At a panel discussion hosted by the Federalist Society in April, as reported by SNL, several panelists questioned whether the FERC-regulated markets could survive. Larry Gasteiger, federal regulatory policy maven at New Jersey's major utility Public Service Enterprise Group, said, "Time for action in the wholesale markets is simply running out when it comes to nuclear generation. I'm real concerned about the lack of urgency. This issue has been discussed for years. I don't think we have years more to go." In early May, the quorum-less FERC held a two-day technical conference on the future of wholesale markets in the face of state moves to favor nuclear generating technologies, often for political reasons such as jobs, tax base, and the like. At that meeting, acting FERC chair Cheryl LaFleur said, "It's no secret I'm a strong supporter of wholesale competitive markets. " Centralized capacity markets are designed to signal new entry and exit into the markets, rather than through the integrated resource planning used in the vertically integrated markets." During the May FERC conference and the earlier Federalist Society meeting, LaFleur laid out three avenues to solve the tension between the states and the feds: negotiation, litigation, or capitulation-federal deference to the states to make their own resource adequacy decisions. That third option looks like MISO.

-Kennedy Maizeis a long-time energy journalist and frequent contributor to POWER.

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