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FERC rejects SPP plan to put costs in mitigated bids

Role, importance of market monitors highlighted

Rockville, MD (September 28, 2015) – FERC recently rejected proposed rules from the Southwest Power Pool (SPP) that would let generators include maintenance costs in their mitigated bids. The rules were opposed by SPP's Market Monitoring Unit and PJM Independent Market Monitor Joseph Bowring.

SPP wanted the changes to ensure units were recovering legitimate costs through its markets and to clear up a public dispute between generators and the MMU. The rules would remove references to "short-run marginal cost" as the basis of mitigated offers and replace it with language describing the components of variable costs that could be included, the RTO had argued.

FERC found SPP did not prove its proposal would lead to mitigated offers that would reasonably reflect offers in a competitive market. It also failed to show its proposal was consistent with earlier commission directives on mitigated bids when FERC approved the RTO's Integrated Marketplace in 2012, it added.

The commission previously said suppliers are expected to produce energy at the point where prices exceed their short-run marginal costs – and mitigation based on those marginal costs is reasonable for generators that are usually dispatched "in-merit" to provide energy. While mitigation is not an exact science, it should be based on what power plants would have offered absent any market power, FERC said, quoting earlier orders.

SPP's proposal would not reflect what happens in a competitive market, it added. The rules, as proposed, could lead to inefficient dispatch outcomes with higher production costs and distorted LMPs that do not reflect competitive conditions.

The RTO did not even define "variable costs" in its tariff, leaving the commission with some examples including certain fuel activities and maintenance costs.

Since SPP did not offer enough evidence to fully support its proposal, the commission did not make a finding on its contention that the industry lacks a consensus on what to include in mitigated bids. While the RTO's monitoring office and Bowring both disagreed with its rulemaking, SPP noted Potomac Economics' David Patton, who monitors several markets, disagreed with them.

The commission also rejected the RTO's request to set up a new way of calculating unit-specific variable operation and maintenance costs. SPP failed to provide enough support to show its proposal to base them on variable costs rather than short-run marginal costs was just and reasonable, FERC said.

FERC rejected arguments by some generation owners that the RTO's rules gave its monitoring unit too much discretion in reviewing exactly what costs belong in mitigated offers.

The unit is required to review mitigated offers submitted for unit-specific mitigation by generators. That review may include the exercise of some discretion, which FERC found is appropriate.

One area where SPP and its monitor agreed was on setting up a "frequently mitigated unit adder," which has been used to ensure that such generators recover the costs in other ISO/RTOs. FERC again found the RTO failed to support those rules because it did not justify the dollar/MWH levels of the adders in its filing.

Without any support for the adder's actual value, it is not possible to review SPP's proposal, the commission said.

SPP argued its proposal should be accepted because stakeholders came up with it in a commission-approved process – asking FERC to give appropriate deference to them. The monitoring unit and Bowring argued FERC should not do that since the actual rules clashed with the efficient functioning of a market and doing so would undermine competitive markets.

Bowring noted the case brought up questions about whether SPP should be granting more independence to its monitor.

Given that FERC found the RTO failed to provide enough support for its proposal's justness and reasonableness – the commission declined to side with stakeholders.

FERC also decline to direct an examination of whether SPP's monitoring unit needs more independence because it found that issue to be outside the scope of the RTO's proposal.

"We note, however, that the SPP market monitor's participation in this case demonstrates the importance of having an independent market monitor that assists SPP, market participants and the commission in evaluating market rule proposals," the order said. "This role is crucial to ensure that markets are competitive."

This story was originally published in Utility Markets Today (http://ow.ly/SLXzd) September 23, 2015 and has been slightly edited for this format. To read more articles like this one, sign up for a Free Trial to Utility Markets Today.

UTILITY MARKETS TODAY is published 245 times per year on business days by Modern Markets Intelligence Inc. UMT's mission is to deliver exclusive news chronicling ongoing efforts to build competitive wholesale and retail energy markets with in-depth analysis on why some fail and others succeed.

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