On February 2, 2017, FERC rejected the Midcontinent Independent System Operator, Inc’s. (“MISO”) proposed Competitive Retail Solution (“CRS Proposal”), which would have bifurcated the MISO capacity market into two distinct market clearing processes – the existing Planning Resource Auction (“PRA”) and a newly proposed, three-year forward capacity auction (“FCA”) for jurisdictions that had implemented retail choice initiatives. FERC found that the proposed bifurcated construct could potentially have adverse impacts on price formation in both the PRA and the FCA.

In the order rejecting the CRS Proposal, FERC explained that bifurcated clearing processes held at different points in time are typically less efficient than the single, market-wide auctions, which are currently used in all FERC-jurisdictional wholesale capacity markets. Specifically, FERC posited that “an auction-based market-wide clearing mechanism for capacity simultaneously co-optimizes zonal capacity requirements subject to the zonal transmission capability constraints and economic supply offers at the time of the auction.”  By contrast, according to FERC, the fact that the PRA and the proposed FCA would occur at different times could yield clearing prices in those two auctions that diverge based on supply participant behavior, even when such divergence is not supported by underlying supply and demand fundamentals. Further, FERC noted that the proposed FCA would apply only to the less than ten percent of total MISO load that falls within zones with retail choice, which, according to FERC, meant that relatively small changes in supply participation from zones without retail choice could result in significant price volatility in year-to-year FCA clearing prices.

Additionally, FERC rejected MISO’s CRS Proposal because it found that MISO had not adequately explained or provided clear tariff language to demonstrate that the CRS Proposal would reasonably allocate transmission capability across capacity zones and across sub-regions in the MISO footprint between the FCA and the PRA. Specifically, FERC noted that the proposed, bifurcated clearing mechanism requires MISO to choose how much transmission capability to allocate between the PRA and the FCA, which could lead to improper or inefficient allocations. According to FERC, an insufficient allocation of transmission capability to the FCA “could result in price separation in the [FCA] that does not truly reflect the physical limitations of the system or the locational need for capacity.”

FERC’s Order rejecting the CRS Proposal is available here.