Hundreds of millions of dollars are being paid through the capacity market to the owners of installed generating capacity to supplement their earnings in the wholesale market. The main accomplishment of these extra payments is to increase the market value of existing generating capacity. There is no obligation placed on generators to build new capacity when and where it is needed.See Investment Performance in Deregulated Markets for Electricity: A Case Study of New York State
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the LICAP market has been an expensive and an ineffective way to maintain generation adequacy. In 2005 and 2006, customers paid over $1 billion/year in the LICAP market in NYC and merchant investors were still reluctant to commit to specific in-service dates for new generating units that have already received licenses for construction. This amount of money is enough to finance over 12,000 MW of new peaking capacity at a capital cost of $80/kW/Year (from Table A1 in the Appendix), and this amount of additional capacity would more than double the installed generating capacity in NYC.
The NYISO sometimes claims that its capacity markets have led to construction of new power plants. Actually, it is the dismal failure of NYISO capacity markets to function as intended that led the state, through the Power Authority, LIPA, and Con Edison to step in to get plants built. See City Bar Committee Issues Report on Electricity Regulation in New York, PULP Network Feb. 9, 2007. The response of the marketeers has been that the capacity payments to existing power plant owners need to be even higher to induce private sector investment, and that a revised capacity market design is needed. See Looking for the “Voom”: A Rebuttal to Dr. Hogan’s “Acting in Time: Regulating Wholesale Electricity Markets,” by Robert McCullough, analogizing the marketeers’ perennial new market solutions to the “Cat in the Hat.”
Making matters even worse, the 2006 NYISO capacity market allegedly was manipulated by seller(s) withholding of capacity to drive prices up to the limit of a price ceiling. The addition of new power plants had no effect on the price that was charged. See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?, PULP Network, March 21, 2007. This appears to have been recognized by Con Edison, which bought much of the capacity and apparently passed the cost through to customers without meaningful oversight, via its "Market Supply Charge."
Con Edison, the PSC, the NYISO and others made no request to FERC for a refund of excessive charges imposed in 2006. (In the Ninth Circuit, the court of appeals has required FERC to consider retroactive revision of unfiled market rates when markets were manipulated and conditions were not competitive. See U.S. Supreme Court to Decide Electricity Market Rate Refund Case, PULP Network, September 25, 2007).
Instead of seeking correction of the unreasonable, excessive rates, the New York utilities reached an agreement with the NYISO to change the capacity market rules and price cap going forward, in an effort to limit the extent of future price gouging in 2007. In a March 6, 2007 order, however, FERC rejected that proposed deal to revise future NYISO capacity market auction rules, and directed parties to enter into settlement talks. FERC also established a "refund effective date" going forward, making refunds a possibility -- at least with respect to the exercise of market power in future capacity market auctions.
When the confidential talks failed to produce a new agreement, the merchant power producers proposed that a "paper hearing" be held, and they were supported in their request by the NYISO.
Other parties -- New York Transmission Owners; Consolidated Edison Solutions, Inc.; Multiple Intervenors, the New York State Consumer Protection Board, Consumer Power Advocates; New York State Public Service Commission; and the New York Association of Public Power -- argued that
a trial-type evidentiary hearing is required to investigate, e.g., allegations of economic withholding,[ ] and the need for and effectiveness of market mitigation measures and the cost support for such measures.[ ] A trial-type evidentiary hearing is also favored by these parties because “the issues . . . are extremely complex and controversial and involve significant disagreements over several material facts, such as . . . economic withholding . . . the ability of competition to produce just and reasonable prices, and what price level is necessary to meet New York’s standard for the adequacy of electric facilities.In a July 6, 2007 Order Establishing Paper Hearing and Referring Certain Matters for Investigation, FERC rejected the request for a full evidentiary hearing with cross examination that might have more fully aired the issues concerning sellers' behavior in the NYISO markets, and accepted the proposal of the Independent Power Producers and the NYISO for a "paper hearing."
In typical FERC fashion, noting that a Justice Department investigation of the alleged 2006 market manipulation was now underway, (see Justice Department Investigating NY Energy Markets, PULP Network, June 13, 2007), FERC belatedly referred the issue of possible market manipulation in 2006 to its enforcement division.
(FERC's "enforcement" of anti manipulation laws seems mainly concentrated on violations of bankrupt entities like Enron and Ameranth, self-reported violations, or where other agencies have stepped in to investigate public allegations of market manipulation allowed by FERC's lax enforcement of the federal utility consumer protection laws).
On October 4, 2007, the NYISO made a compliance filing arguing, as did the beneficiaries of California market manipulation in the Ninth Circuit cases, that refunds for the benefit of consumers would upset the expectations of sellers and the reputation of the NYISO markets:
Although there may be a need to change market rules, that need should be balanced with the need for market certainty. Bids and offers in the voluntary ICAP auctions were made with a certain set of expectations, which cannot be altered after the fact. Ordering refunds and changing market outcomes after the fact may have a deleterious influence on perceptions of market credibility and regulatory uncertainty.Thus, the NYISO opposes a meaningful consumer remedy -- refund of excessive charges -- on the ground that it might harm the public perception of its markets. The Federal Power Act, however, was intended by Congress to protect consumers, not those who benefit from market manipulation.
Wholesale electricity sellers with "market-based rates" and the NYISO have departed from the statutory scheme. They should not be heard to complain about "market certainty" and "contract sanctity" and the "filed rate doctrine" when their rate schedules were never properly filed. The Federal Power Act requires all rates to be just and reasonable, and subject to review by FERC before they are charged. Unfiled rates, such as those demanded and charged in the ICAP auctions, when challenged, should be subject to subsequent plenary review by FERC and the judiciary for reasonableness. Sellers who do not file their rates in advance, and who choose to participate in flawed NYISO markets, do so at their peril.
The failure of the NYISO, the PSC, FERC, and the courts to police wholesale market rates for electricity and capacity may be one reason why electricity rates in the states that restructured their electricity industry to rely more on federal wholesale markets are now higher. See Competitively Priced Electricity Costs More, Studies Show, NY Times, Nov. 6, 2007. See also, New York Restructuring: It Was About Price, PULP Network, October 4, 2007