Study Finds High Profits for New York's Electric Power Generators

In March, a McCullough Research report, New York Independent System Operators Market Clearing Price Auction is Too Expensive for New York estimated that New Yorkers pay $2.2 Billion per year more for electricity due to the high prices obtained by sellers in the flawed York Independent System Operator (NYISO) wholesale power spot markets. The report cites the example of a seller who offers power consistently at the highest amount allowed by NYISO, $1,000/MWH, as an indicator that prices are not based on marginal running cost - as predicted by spot market enthusiasts - but on other factors, perhaps to game the market.

A high bid can effectively withold power from the day-ahead and hourly spot markets. When sellers demand an extremely high price for part of the output they may be "hockey-stick" bidding as a stratgem to drive prices higher than if they had made a cost-based bid.

In response to hearings held by the New York Assembly, the NYISO and its defenders (the New York PSC, the NYISO market monitor consultant, and the merchant power industry) refused to identify the seller who regularly demanded $1,000/MWH. They pointed out that NYISO rules filed with FERC require the identity of sellers and the price they demand to be completely confidential for six months and then for the identities of sellers to be "masked" when the prices they demand are eventually released. They also argued that a $1,000/MWH price demand is rarely paid and might even be justified in some hypothetical circumstances, and that the NYISO's private consultant "market monitor" had vetted the system for manipulation.

McCullough Research responded with further analysis of NYISO data showing that high bids are not an isolated anomaly, but are in fact quite common.

The problems posed by NYISO's lack of transparency amply demonstrate that the [PSC Staff] are unable to provide convincing explanations for the hockey stick bid in New York that is continuously posted by bidder 55446280. Even worse from a policy perspective, it appears that the Public Service Commission has not yet been briefed on the full extent of the problem.

* * * * Hockey stick bids are not simply the province of a single bidder in New York State. Bids higher than any plausible level of marginal cost are made continuously by a number of different bidders. Our database of NYISO bids, for example, has non-economic bids (over $900/MWh) made by 95 different bidders. On average, each bidder submitted non-economic bids for seven different generating units.

* * * * In the twelve months from September 2007 through August 2008, the New York ISO received 585,043 bids at $900/MWh or more. This appears to be a very large number of anomalous bids – 12% of the 4,859,186 bids entered into the NYISO markets during this period.

* * * * If (as appears reasonable to assume from the limited data available) the complex and secretive bidding process at NYISO is creating an environment where anomalous bidding is a frequent occurrence, this should be part of the public debate concerning NYISO's reform.

New Yorkers Lost $2.2 Billion Because of NYISO Practices: The Debate Continues, and A Short Review of Anomalous Bidding at the New York ISO from September2007 through August 2008. See McCullough hits back at NYISO report, Larry Rulison, Times Union Blog, March 31, 2009.

In reaction, on May 29, 2009 the director of New York's trade association representing the merchant power industry authored an op-ed article extolling the benefits of a "free market." See Free market means cheaper power, Times Union, May 29, 2009.

The "market-based rate" system of the NYISO spot markets allows sellers to charge what the market will bear (within the $1,000/MWH cap), and to avoid running at any hour when their costs will not be covered by the market price. FERC allows the market to set the price when it believes the sellers lack market power and it assumes the market prices are reasonable without reviewing the prices demanded and without public disclosure of who demands what and who won the hourly auction bids.

In contrast, the traditional test of whether wholesale electric rates are "just and reasonable" as required by the Federal Power Act has been based on transparent disclosure of all rates demanded and evaluation of some measure of cost, with rates fixed so that sellers have a fair opportunity to recover their prudent operating costs plus a reasonable regulated return on their investment. Thus, an examination of the earnings of the power producers is another way to test whether the market prices in New York are reasonable.

On June 5, 2009 McCullough Research issued a memorandum with an analysis of the estimated earnings of New York power producers in 2008.

A combination of high fuel costs and non-economic bidding practices at the New York In-dependent System Operator (NYISO) made 2008 a very profitable year for generators in New York. The profits of the largest plants in New York were very high. On the most conservative basis, assuming no debt in the capital structure, the profits range from 19% to 99%. Alternatively, assuming a 50/50 capital structure, the profits range from 31% to 186%. The before-tax weighted average of 100% equity is 50%, and the same measure for 50% equity is 93%.

PRE-TAX RETURN ON EQUITY

50/50 Capital Structure / 100% Equity
AES Cayuga 186% / 99%
AES Somerset LLC 112% / 61%
Astoria Generating Station 122% / 67%
Athens Generating Plant 44% / 27%
Bethlehem Energy Center 40% / 23%
C R Huntley Generating Station 155% / 81%
Danskammer Generating Station 85% / 46%
Dunkirk Generating Station 154% /81%
Indian Point 2 51% / 28%
Indian Point 3 114% / 60%
Nine Mile Point Nuclear Station 102% / 54%
R. E. Ginna Nuclear Power Plant 72% / 39%
Ravenswood 31% / 19%
Weighted Average: 93% / 50%

McCullough Research Memorandum, June 5, 2009.

See Electricity Price Gougers, N.Y. Post June 6, 2009; Deregulated Electric Market Allows New York's Electric Generation Plants to Reap over 100% Profits, Yonkers Tribune, June 5, 2009.