Thursday, June 05, 2008

Wholesale Electricity Capacity Market Results Attacked by PA, MD, DE and NJ Utility Commissions and Utility Consumer Advocates

Eschewing the traditional filed rate regulation system set up in 1935 by the Federal Power Act, FERC has allowed wholesale sellers of electricity to charge "market-based rates" for energy, capacity, and ancillary services. These rates are set privately either by unfiled contracts or in FERC-approved private markets run by RTO and ISO utilities such as the New York Independent System Operator. The NYISO since November 1999 has run day-ahead and "real time" spot markets for energy, in addition to taking over coordination of physical dispatch and operation of the bulk power grid from the New York Power Pool, and runs capacity markets too.

This experiment was begun when deregulation was the rage in the late 1990's. Electricity "restructuring" was adopted by fifteen states, including New York, and the District of Columbia. A major piece of the model was for the traditional utilities to sell their power plants, which were under state regulation, to new owners who would compete in a wholesale market, under FERC regulation, and for the traditional utilities to form holding companies patterned after Enron, with less regulated ventures such as retail ESCOs, wholesale trading companies, merchant power ventures in other jurisdictions, and telecom companies. Since the demise of Enron in 2001, no state has followed this path, and some, like Virginia and New Mexico, turned back to full state regulation rather than rely on the essentially deregulated federal wholesale markets.

The RTO and ISO Capacity Markets
States and utilities gave up their traditional planning processes, and went for a market substitute -- capacity markets -- the idea of which is to signal the market value of new power plants (or demand side substitutes), by requiring utilities that directly serve customers to pay existing owners of generating plants an amount they demand in an auction for basically just being there, in addition to the price of energy and ancillary services that they received in the spot markets.

Existing owners of low cost generation already reap very large rewards because the cartel-like RTO and ISO markets pay all sellers the same amount, which is the market clearing price, without regard to the cost of producing the energy. On top of that, they receive the capacity payments from load-serving entities that are required to buy capacity in NYISO auctions to meet their expected needs. The notion was that if supply is short and capacity prices go up, someone will decide, based on the price signal of how good it is to be in the power generation business, to meet the need with a new solution, e.g., a new power plant.

NYISO Capacity Markets: Billions Paid, Little Built
The track record of the NYISO capacity markets is that they have added significantly to the cost of electricity without achieving much in the way of meeting future needs. See Cornell Professor Gives Low Marks to NYISO Electricity Markets. According to Professor Timothy Mount,
the [NYISO] 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. At this point, it is likely that New York City or state agencies will need to be more proactive before it is too late and reliability is sacrificed
A 2007 New York City Bar Committee Report on Electricity Regulation in New York acknowledges the failure of the NYISO capacity markets to induce adequate supplies of power at a time when new power plants are generally considered to be necessary for reliability and reasonable prices, particularly in downstate areas:
the only truly merchant plant built in New York City since 1999 has been KeySpan-Ravenswood’s 250 megawatt (“MW”) project. Orion Power also invested approximately $25 million in restarting a retired unit at the Astoria Generating Station. Otherwise, all major new plants have been either built by the New York Power Authority (“NYPA”) or under long-term contract to the Consolidated Edison Company of New York, Inc. (“Con Edison”) or the Long Island Power Authority. Outside New York City, however, plants have been constructed on a merchant basis.
See City Bar Committee Issues Report on Electricity Regulation in New York. To that, one might add, the owner of the largest merchant power plant constructed outside of New York City went bankrupt, and other merchant power plants have been shut down by owners who deny having any obligation to serve. Over the past decade, the Power Authority of the State of New York became the de facto builder or financier of last resort due to the failed reliance on NYISO capacity markets and the private merchant power sector.

Pennsylvania, New Jersey, Delaware and Maryland Commissions: Fed Up and Can't Take it any More
Fed up with the results of the PJM capacity markets in their area, and impending new capacity payments, state utility regulatory commissions of Pennsylvania, New Jersey, Delaware and Maryland filed a complaint against PJM last week with FERC seeking to prevent huge future capacity payments totalling $12 Billion under market rules previously approved by FERC. See
Electricity Said to Be Too Costly; Consumer Advocates Say Plant Expansion Hasn't Happened.

Joining in the complaint were the Division of Rate Counsel in the New Jersey Office of the Public Advocate, as well as state utility consumer advocates from Maryland, the District of Columbia, Ohio, and Pennsylvania; the Public Power Association of New Jersey; the PJM Industrial Customer Coalition; the Southern Maryland Electric Cooperative Inc, (SMECO); Blue Ridge Power Agency; Allegheny Electric Cooperative; American Forest and Paper Association; Portland Cement Association; Duquesne Light Company; and the United Stated Department of Defense and other affected Executive Agencies.
The 211 page compaint alleges that implementation of flawed auction results is leading to unjust and unreasonable rates in violation of Federal Power Act requirements "because it has produced excessive capacity prices, has failed to prevent suppliers from exercising market power, and has not produced benefits commensurate with its costs," and asks FERC to reset the prices.

FERC has generally refused, short of court order, to review and reset unreasonable rates privately set by sellers to whom it has granted the "privilege" of charging "market-based rates," even when those rates have been affected by price manipulation. See Consumer Groups File Supreme Court Amicus Briefs in Electricity Market Rate Case.

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