The Federal Energy Regulatory Commission (FERC) recently issued four orders addressing the methodology for allocating costs attributable to the Revenue Sufficiency Guarantee (RSG) as set for the in the tariff of the Midwest Independent Transmission System Operator, Inc. (Midwest ISO). The RSG ensures that generators earn sufficient real-time energy revenues to recover start-up and no-load costs. With these recent orders, FERC has established rules for allocating cost responsibility to virtual transactions in four different time periods.

Initial Period. The Midwest ISO's tariff originally provided that virtual transactions should be assessed RSG costs, but this provision was not given effect. FERC previously determined that it would not require allocating RSG costs to virtual transactions for the period from the start of the Midwest ISO energy market in April 2005 until April 24, 2006. This determination has not changed.

Locked-In Period. FERC has now confirmed that for the period from April 25, 2006 (the date of FERC's order interpreting the Midwest ISO's tariff to require that it allocate RSG costs to virtual transactions), until August 10, 2007, a market participant's virtual transactions should be allocated some cost responsibility for RSG charges, but only if the market participant physically withdrew energy. FERC also explained the way in which cost responsibility should be resettled (i.e., refunds issued/new charges assessed).

Current Period. FERC has now determined that from August 10, 2007 (the refund date established in response to a series of complaints), until a future date (when the new indicative tariff provision discussed below becomes effective), virtual transactions should be allocated RSG costs even if no corresponding physical withdrawal of energy occurred and, therefore, the cost responsibility reallocated accordingly.

Future Period. FERC determined that, on a prospective basis, the "indicative" cost allocation developed by the RSG Task Force would be appropriate with a few conditions. In short, the indicative proposal refines the currently effective RSG cost allocation mechanism by allocating costs based on market participants' activities that cause unit commitment and can cause the incurrence of RSG costs, including generation injections at constrained flowgates, deviations in imports, exports, load, generation and virtual supply offers.

Scheduled Events. The Midwest ISO Staff will discuss these orders at the Market Subcommittee meeting on Tuesday, December 2, 2008, and at the RSG Task Force meeting on Wednesday, December 10, 2008. Because virtual transactions have not been allocated RSG costs, the Midwest ISO is now undertaking settlement and billing adjustments that will allocate RSG costs to virtual transactions beginning April 25, 2006.