S&P Global, November 20, 2019

Maya Weber

San Antonio — If all generation were dispatched economically in Midcontinent Independent System Operator, average wholesale power prices would rise 3%, but production costs would drop 11%, lowering consumer costs, according to a preliminary analysis by the Union of Concerned Scientists presented Tuesday.

The group, along with the Sierra Club and consumer advocates, has raised concerns about coal plants owned by vertically integrated utilities that “self-commit,” or run out of merit at times when their production costs exceed the wholesale market price. The practice is enabled, they argue, because those coal units recover fuel and operational costs from ratepayers.

UCS presented its preliminary study results at a panel discussion Tuesday on how regulators might respond.

Joe Daniel, senior energy analyst for UCS, said the practice affects the entire market because other lower-cost resources are not being called. While the approach may have made sense during a time when market prices did not drop below coal-fired plants’ production costs, Daniel argued most coal plants now face weeks, if not months, in a row where prices do not justify operating.

While some utilities have altered their practices, there is “a large swath of the fleet in the wholesale markets that is simply operating at an economic loss,” he said.

His analysis of MISO, based on modeling of 2018 data, suggested that the profitability of the MISO system would improve by 64% under the economic dispatch, he said. His estimate of the gross benefit to individual MISO utilities ranged from $120 million for CLECO and over $90 million for DTE Electric to much smaller amounts for other companies such as NRG Energy Services. The estimates did not include the substituted electricity purchases that would be needed.

Regulators’ View

While Federal Energy Regulatory Commission member Richard Glick said FERC may have legal authority, “this is primarily at this point a matter for the states,” he told the group. Several states have initiated investigations and the questions are state prudence-related issues, he noted. Still, he said FERC will have to examine the study results, as the practice could have significant impacts on price signals and transparency in wholesale markets it regulates.

“It just strikes me that in a significant part of some of these markets, particularly MISO and [Southwest Power Pool], we’re not really having a truly functional market because of this.”

The Indiana Utility Regulatory Commission is examining the issue through quarterly fuel adjustment clause, said Sarah Freeman, a member of that commission. Because of confidentiality provisions, others might not see why plants are choosing to self-commit, she said. “Maybe they’ve got big coal contracts that they have to use up” with potential penalties. There may also be a role at the RTO level to take a deep dive into the regional resource mix, she said.

A collaborative approach that aligns interests may be a better pathway than an adversarial docket, particularly as public interest groups may lack resources to participate in multiple adversarial dockets.

Annie Levenson-Falk, executive director of the Citizens Utility Board of Minnesota, said the less state regulators segregate the issues, the easier it would be for public advocates to see the full picture.

Daniel suggested that when presented with evidence that a utility has turned on a coal plant eight weeks before it was economic, state regulators might want to consider a disallowance of costs.

State Information Proceedings

Matthew Schuerger, a member of the Minnesota Public Utilities Commission, noted his agency has started an informational proceeding on the issue. “We do think there are some legitimate reasons for self-commitment and self-scheduling, and there’s opportunities to do better and to save customers money,” he said.

Ted Thomas of the Arkansas Public Service Commission offered examples of “legitimate reasons” to self-commit, though he described those as exceptions that prove the rule. Those included instances of a take-or-pay coal contract where a cost comparison shows merits of running; occasions when units must run for reliability; and when units on the border of two regions are dispatched into one of those areas.

In Arkansas, he said he had begun with informal suggestions to utilities. He advised advocates to “raise it everywhere, so it never gets to hearing.”

“This is easy to prove just by talking about it. If you’re in the utility business and you’re smart, you’re going to say, ‘Oops, we’ve got to quit doing that’,” he said.