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Electricity Markets

FERC rejects RTO’s resource adequacy requirement plan, provides guidance

The Federal Energy Regulatory Commission rejected revisions that the Southwest Power Pool proposed earlier this year to its open access transmission tariff, and asked the regional transmission organization to revise its proposal.

Under the proposal, filed in March, SPP outlined revisions to the tariff that it wanted in order to implement a resource adequacy requirement, or RAR, for load-responsible entities, or LREs, in the SPP footprint. (An LRE is a new term developed by SPP for this proposal and is defined as asset owners serving load within the SPP integrated marketplace.) The grid operator’s stakeholders had settled on 12 percent as a reasonable planning reserve margin.
In an Aug. 29 order, the commission found SPP’s tariff filing “inadequate in several respects.” [Docket Nos. ER17-1098-000 and ER17-1098-001]

“While we appreciate the extensive effort of SPP and its stakeholders to develop this proposal, we find that SPP’s filing is inadequate in several respects and that key elements must be addressed to help ensure successful implementation of SPP’s RAR proposal,” FERC said in its Aug. 29 order.

“We reject SPP’s proposed tariff revisions without prejudice to SPP submitting a revised resource adequacy requirement proposal in the future,” the commission said.

When it filed the proposed revisions with FERC on March 3, 2017, SPP said that putting the RAR in place would improve reliability. The RAR would apply to the summer season, from June 1 through Sept. 30 of each year.

FERC’s critique

In the Aug. 29 order, the commission found that SPP’s proposal: (1) “fails to include a requirement that all power purchase agreements are backed by verifiable capacity to meet SPP’s RAR and fails to include provisions to allow SPP to review the agreements to verify that they are backed by capacity,” (2) SPP’s proposed treatment of firm power purchases and sales in the determination of net peak demand “is unduly discriminatory,” and (3) SPP “as not supported as just and reasonable its proposal to post publicly a list of all LREs that have not met their RAR.”

“Until these inadequacies are remedied, we cannot find that SPP’s RAR proposal has been shown to be just and reasonable and not unduly discriminatory or preferential,” FERC said. “Accordingly, we reject SPP’s proposed tariff revisions and provide further guidance.”

“Our intention here is to provide SPP with the guidance it needs to fully develop its proposal so that it may submit a revised RAR framework in the future,” the commission explained.

The first two findings concern the proposed treatment of power purchase agreements. Under the SPP proposal, each LRE’s RAR would be equal to its net peak demand plus the SPP planning reserve margin multiplied by the net peak demand, resulting in the firm capacity in megawatts that each LRE must hold. The determination of net peak demand adds the megawatts (MW) subject to a firm power sales contract, and subtracts the MW purchased under a contract.

First, the commission said the SPP proposal not only “lacks a requirement that power purchase agreements be backed by verifiable capacity in order to serve as capacity resources” but also “lacks a process that would allow SPP to verify whether contracts meet such a requirement.”

Second, because load served under a firm power transaction would be counted in the seller’s load and removed from the purchaser’s load for purposes of RAR compliance, if the seller is located outside of SPP, no entity would have the obligation to demonstrate that there is sufficient firm capacity and planning reserves to meet that load. FERC noted that the Transmission Dependent Utilities, comprised of the Kansas Power Pool and the Missouri Joint Municipal Electric Utility Commission, one of the groups that intervened in this proceeding, argued that the differential treatment of sellers located outside of SPP increases the risk that the grid operator would not have sufficient capacity, including planning reserves, to meet its needs. The TDU intervenors said that SPP should revise the definition of firm power to require that the seller be an LRE in SPP.

FERC found that SPP’s proposal "fails to ensure that LREs that rely on power purchase agreements are providing sufficient capacity to meet their net peak demand plus planning reserve margin on the same basis as LREs that self-supply their own capacity, and therefore could result in unjust, unreasonable and unduly discriminatory determinations of deficiencies and assessments of deficiency payments.” The commission found that LREs that purchase from an external seller should be responsible for meeting SPP’s RAR for the load served by the purchase.

Moreover, FERC ordered that in any new proposal it files, SPP should address the TDUs' concerns that it is unclear how SPP proposes to treat agreements negotiated and executed prior to the effective date of the RAR proposal that may exhibit some, but not all, of the elements of SPP’s proposed definition of firm power.

Concerns over market power ‘could arise’

In addition to the findings regarding power purchase agreements, the commission addressed  the TDU Intervenors’ concern that capacity sellers will have an unfair information advantage over buyers because SPP will only provide deliverability study results to individual generator owners, rather than all LREs. At the same time, SPP would publicly identify LREs that are short capacity, which could give capacity sellers an advantage. FERC stated that they “are concerned that such information asymmetry may disadvantage LREs that are deficient, particularly if there is a limited quantity of available capacity.” But the commission also refrained from requiring “SPP to disclose the results of the deliverability study, as requested by protestors, as a means of resolving the issue because those results contain proprietary information of the generator owners and should remain confidential.”

The commission pointed out that, currently, SPP’s market for bilateral capacity “is relatively net long compared to SPP’s proposed 12 percent planning reserve margin,” and said there are likely many sellers of capacity that are available to meet LREs’ net peak demand and planning reserve margin.

“Over time, however, SPP’s market for bilateral capacity may begin to tighten as it approaches a level of balance closer to its 12 percent planning reserve margin,” the commission said. “As the amount of uncommitted capacity and the number of potential sellers shrink over this period, concerns over the potential exercise of market power could arise.”

“We encourage SPP and its stakeholders to consider the potential for the exercise of market power in the market for bilateral capacity as the overall reserve margin potentially shrinks in the future.”

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