On February 28, 2020, FERC rejected Midcontinent Independent System Operator, Inc.’s (“MISO”) Tariff proposal to subject generation resources that are not designated as capacity resources (“Non-Capacity Resources”) to MISO’s physical withholding rules in MISO’s day-ahead market. FERC determined that MISO’s proposed revisions lacked sufficient clarity and would effectively subject Non-Capacity Resources to a must-offer rule obligation without a corresponding capacity payment.

Concerned that its Tariff may be out of alignment with FERC’s market-based rate policies, MISO explained in its filing that it proposed to delete from its Tariff the exemption from physical withholding penalty charges for Non-Capacity Resources. MISO argued in its filing that its intention was simply to ensure effective market power mitigation, thus enhancing competition in the day-ahead market, rather than creating a must-offer requirement. But to prevent Non-Capacity Resources from otherwise being subject to physical withholding penalties if the resource is not expected to operate economically, MISO also proposed to add new Tariff language stating that market participants shall not be deemed to have physically withheld a resource “if the Market Participant reasonably expected the costs of making the Resource available to be higher than the Resource’s net revenues from being withheld.”

FERC rejected MISO’s proposal, explaining that the revisions lacked sufficient clarity to identify which Non-Capacity Resources may be legitimately withheld from day-ahead markets for economic reasons compared to those withheld in an attempt to exercise market power. According to FERC, this vagueness would leave a resource at risk of incurring withholding penalties in circumstances that should not warrant them. Due to the overall lack of clarity and uncertainty, FERC found that MISO’s proposal could effectively create a must-offer obligation as resources would likely offer into the day-ahead market to avoid the risk of incurring penalties.

In a concurring opinion, Commissioner Glick supported FERC’s determination and agreed that the proposal was overly broad and put certain Non-Capacity Resources at risk of being penalized, even in the absence of market power. However, Commissioner Glick wrote separately to encourage MISO and its stakeholders to continue exploring proposals to address the potential for Non-Capacity Resources to exercise market power through physical withholding.

A copy of the order is available here.