Item E-9: Commissioner Allison Clements Concurrence Regarding Midcontinent Independent System Operator, Inc.

Commissioner Allison Clements Statement
March 18, 2021
Docket No. ER21-679-000
Order:  E-9

I support today’s order accepting revisions to MISO’s process for selecting spinning reserves because MISO has met its burden under section 205 of the Federal Power Act.  I believe, however, that protestors in this proceeding raise two valid concerns that bear watching once this proposal is implemented. 

The first relates to reserve price formation.[1]  Under MISO’s existing rules, reserves are selected based on a resource’s submitted reserve offer—i.e., the price at which the resource has agreed to sell reserve, sometimes thought of as a “reservation” cost—plus an implied opportunity cost equal to the energy profits the resource must forego if it is instead selected to provide reserves.[2]  These two components are thus costs directly associated with providing reserves. 

As MISO explains in its filing, there is a dynamic in its market whereby resources selected for reserves that are later deployed for energy—i.e., asked by MISO to instead convert those reserves to energy—may not be fully compensated for that energy.[3]  There can be multiple reasons for that energy revenue shortfall, but among them is the fact that not all resource types are eligible to set the energy price, so they may be deployed for energy even when the energy price does not cover their costs.  Another reason is that MISO deploys resources on a pro rata, rather than least-cost, basis during a contingency event, so it is a near certainty that some of the resources deployed will be out of merit relative to the energy price and will not have their energy costs fully covered.

Regardless of the cause of the shortfall, it can and does occur, as MISO explains.  Currently that shortfall is recovered by the resource through make-whole payments.  But because MISO’s proposal does away with those make-whole payments, MISO must offer an alternative means for recovery:  Resources will be permitted—and arguably compelled—to include in their reserve offer a portion of the costs they may incur if they are instead asked to provide energy after a contingency event.  That is, they will be asked to approximate their potential energy revenue shortfall based on a future, unknown energy price and add that to their reserve offer.  We can therefore expect that the reserve price will, at times, reflect not simply the marginal resources’ cost of providing reserves during the given interval, but also its approximated revenue shortfall if it is instead deployed for energy.  By allowing these energy costs within reserve offers, MISO is moving away, even if only in a small way, from reserve prices reflective solely of reserve costs.  All this is to say, it appears MISO’s proposal may be novel among RTO/ISO reserve markets, so while that is not inherently problematic, we are wise to evaluate over time its effect on reserve price formation. 

The second concern relates to reserve market participation, and in fact derives from the first concern.  Protestors argue that MISO’s proposal will disadvantage resources capable of providing reserves cost-effectively if they also have high costs of providing energy and are ineligible to set the energy price under MISO’s energy market rules.[4]  While selection of energy and reserves is co-optimized, any unit of capacity can only provide one service at a time, so hampering a resource’s competitiveness in providing one service because of its cost in providing another service may not foster efficient outcomes.  As we strive for competition and efficiencies in the provision of market products to ensure reliable electric service, the effect of MISO’s proposal on reserve market participation also bears watching.

So, while I am not persuaded at this time that these concerns rise to the level of rendering MISO’s proposal unjust and unreasonable or unduly discriminatory or preferential, I intend to observe closely the effects on market pricing and participation once this proposal is implemented.  I also know that MISO, along with other RTOs and ISOs, is currently engaged in a major effort to upgrade its market software in the coming years.  This is a welcome development that promises to enhance efficiency and performance and foster greater participation by new technologies in wholesale markets.  I encourage MISO and its stakeholders to consider whether reserve selection, pricing, and deployment is an area of potential improvement once that upgrade is in place.

For these reasons, I respectfully concur.