Michigan Adopts Hybrid Proxy Plant Strategy

Based on testimony presented by its staff, the Michigan Public Service Commission has provided an electric utility with guidance on calculating its avoided costs for purposes of setting the rates to be paid qualifying small power production facilities (QFs) for capacity purchased by the utility pursuant to the Public Utility Regulatory Policies Act of 1978 (PURPA). As previously directed by the commission, the utility, Consumers Energy Company, had filed with the commission its assessment of its avoided costs. Its analyses were performed in reliance on two different methodologies: the hybrid proxy plant method and the transfer price method. 

Upon examining the various party claims, the commission concluded that, consistent with its staff's position, the hybrid proxy plant (HPP) approach should be employed if Consumers Energy will require capacity during a specified 10-year planning period. The commission said that its staff's HPP method combined a natural gas combustion turbine (NGCT) proxy unit for the capacity component of avoided 

The commission agreed with its staff that should Consumers Energy's forecasts show that no capacity will be needed during the 10-year planning period, the utility should alert the commission to that fact and then refine its existing standard offer capacity rate for new QFs to reflect the planning reserve auction price used by the Midcontinent Independent System Operator. However, for existing QFs with contracts that expire during the subject time frame, commission staff had recommended that such projects have their contracts renewed at the full standard rate, whether or not the company's forecasts indicate a need for capacity. 

Commission staff had posited that because the capacity supplied by existing QFs is already taken into account in the company's planning process, it would be appropriate to continue the contracts at the full avoided-cost rate. Commission staff likewise had suggested that if any capacity shortfall was projected over the 10-year planning horizon, QFs should be compensated for both capacity and energy. 

In accepting the HPP method, the commission deemed it the most appropriate model for calculating avoided costs under PURPA. It pointed out that the purpose of PURPA, as well as avoided-cost calculations, is not to set prices that reflect the lowest incremental costs of capacity and energy, but to assure nondiscriminatory treatment of QFs. It elaborated that QF pricing premised on a utility's avoided costs accomplishes just that by setting rates that are just and reasonable, in the public interest, and mirror what the utility would have paid if it purchased or built the resource itself. 

The commission observed that its staff had attested that in the event Consumers Energy requires additional capacity only, theoretically the company would build an NGCT unit. The commission concurred with its staff's reasoning that that type of unit could be built quickly and at a relatively low cost. Moreover, an NGCT plant can be cycled on and off when additional capacity is required. 

On the other hand, the commission said, its staff had reported that if the company requires additional energy, as opposed to capacity, a natural gas combined cycle (NGCC) unit would be preferable. The commission echoed its staff in asserting that in that case, NGCC technology would be the most appropriate generating unit, due to the low cost of the energy produced therefrom. 

In endorsing its staff's proposals over those tendered by Consumers Energy, the commission explained that the utility's calculations of its avoided capacity and energy costs had inappropriately relied on shortterm market prices. In addition, the commission disputed the company's contention that only capacity required in the next five years should be considered for full avoided-cost treatment, because it uses a far longer planning horizon in making decisions about whether to purchase or build new conventional generation. 

The commission stated that from its perspective, there is significant ratepayer value in deferring large capacity additions and contracting with QFs for incremental capacity instead. Nevertheless, the commission stressed that a utility's obligation to purchase capacity from a QF does not continue if no additional capacity needs are forecasted. Re Consumers Energy Co., Case No. U-18090, May 31, 2017 (Mich.P.S.C.).