NYISO Report on Capacity Market Faulted at FERC

Background
The NYISO operates capacity markets which pay owners of existing power plants amounts in excess of what they receive for the sale of the electricity they produce in order to give a price signal to them or other market participants to meet rising needs for generating capacity available with new power plants or other resources. This private market approach was endorsed by the PSC as a substitute for integrated resource planning undertaken by other states.

When new power plants were not built, despite rising demand, a “demand curve” capacity market modification was adopted by the NYISO on the theory that it would pay more to owners before needs become urgent and thus stimulate the market to make new resources available. The modified NYISO capacity markets have resulted in large amounts being collected from customers, but still have not worked to stimulate new resources, even as the capacity reserve margin in New York is shrinking. (The capacity reserve margin represents the amount of spare energy in excess of estimated peak demand. When the New York PSC restructured, the reserve margin was 18%. Under the 18% standard, the state would soon violate this reliability standard. In 2007, the PSC reduced the amount to 16.5%).

Economic Withholding of Capacity
Due to the failure of the market approach to induce new capacity additions, new plants were added by the publicly operated New York Power Authority and under contract with Con Edison. It was assumed that the cost of capacity in 2006 would change with this addition of new resources, but it did not. Sellers in capacity markets may be able to raise the price paid to all through strategic withholding, which is done by offering a portion of the capacity at a price so high it is effectively withheld. It became apparent to some market participants that capacity had been withheld from the NYISO capacity market in 2006 to maintain high prices. See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?

Although the economic withholding issue was brought to FERC’s attention, FERC did not investigate the apparently unreasonable NYISO capacity market rates, which had been implemented without being publicly filed in advance. Instead, FERC rejected a proposal for tighter price caps, which would have the effect of reducing the maximum price, and commenced a new case to look at NYISO capacity markets. On May 18, 2007, in response to the allegations that one or more owners of generation had been withholding capacity from the NYISO market to maintain high prices, FERC issued an Order directing the NYISO to submit additional information and analysis with respect to the ICAP Demand curves.

NYISO Report Finds No Problem
In response to the order, on July 17, 2007 the NYISO filed its “Report on Implementation of the New York Installed Capacity Demand Curves,” finding no market withholding or other dysfunction:

“the performance of the market does not raise concerns about withholding in the overall NYCA or Long Island markets. The observed bidding behavior in New York City is consistent with expectations under the Commission-approved mitigation measures.”

New York City Says NYISO Capacity Charges are Double a Competitive Price
In reaction to the NYISO report, the City of New York stated in August 8, 2007 comments:

While physical withholding by DGOs is barred, the harmful effect of economic withholding on consumer welfare is essentially identical. Therefore, in the face of bidding behavior that reflects economic withholding to artificially raise in-City capacity prices, it is not sufficient to offer an innocuous description of capacity bidders’ behavior in the context of a Report on Demand Curve implementation. **** [The bidding pattern] has constituted an attempt to forestall the beneficial market effects that would ordinarily flow from the addition of 1000 MW of new, highly efficient generation in the City. **** The benefits that were expected to be associated with the NYISO capacity market Demand Curves created at the direction of the Commission in 2003 have proven in the view of many parties to be largely illusory. * * * * In essence, as the NYISO’s Independent Market Monitor himself has stated, in-City UCAP prices have been effectively doubled by the use of economic withholding by capacity bidder(s).

Multiple Intervenors Says NYISO is Taking Credit for Events Unrelated to its Capacity Markets
Mulitple Intervenors, in its comments, points out that the NYISO report claiming the capacity market is succeeding has counted power plants that were built by the state or under bilateral contracts due to the failure of the market approach, projects which were proposed before the new market changes, and wind energy projects that were more likely stimulated by tax and policy initiatives completely unrelated to the NYISO markets. Further, Multiple Intervenors notes that

Recently, the [PSC] recognized that “new capacity might not be built in the absence of long term agreements between a new entrant and one or more load serving entities.” In doing so, the New York Commission ordered an examination of the use of long term contracts to facilitate the entry of new resources. Thus, the New York Commission already has expressed concern that generation projects may not be developed in the absence of long-term bilateral contracts. **** Importantly, the July, 2007 Report does not demonstrate the role that the Demand Curve may have played in the proposed projects, nor does it conclude that the proposed projects would go forward in the absence of long-term contracts.

Con Edison Notes Harm to Consumers
Con Edison, in its comments, states

The NYISO’s independent economic advisor, Dr. David B. Patton, stated in the NYISO’s December 22, 2006 filing in Docket No. ER07-360, “I conclude that the ICAP Spot Market Auctions during the 2006 Summer Capability Period have been characterized by economic withholding of Capacity to exercise market power to the maximum extent allowed by the existing offer cap for the DGOs.” **** As a result, consumers paid double the price of capacity, $12.71/kW-month, instead of a competitive price of “less than $6 per KW-month.” High capacity prices in New York adversely affect electric consumers, a point that bears emphasis in the Commission’s review of New York’s electric markets.

Con Edison’s concerns for consumers, however, apparently did not go so far as to protest the overcharges at FERC and seek refunds of the unreasonable market rates, even though there are court precedents requiring FERC to review market rates and allow refunds when it is discovered that the market relied upon to set the rates was not competitive. Con Edison is allowed by the PSC simply to pass through its electricity costs, including purchases of capacity, through its “Market Supply Charge.” and so it had little incentive to protest the rates already paid. In contrast, Massachusetts regulators apparently have devised rate plans which give the incentive to the utility to keep the cost of electricity purchases down for the benefit of retail consumers. See NSTAR Electric & Gas Corp. v. FERC. Also, a Con Edison holding company affiliate, Con Edison Development, owns power plants in the PJM and NE ISO areas. It stands to benefit when high capacity market prices set in RTO markets similar to those of the NYISO are paid to all providers.

Upstate Utilities Say NYISO Fails to Address Capacity Withholding Outside the New York City Area
The comments of the upstate utility transmission owners also said the NYISO report is deficient, and did not satisfy the requirement of FERC’s May 18, 2007 order. The transmission owners further pointed out that the NYISO is not addressing the apparent economic withholding of capacity outside the York City area.

The NYTOs initially brought this issue to the attention of the NYISO during a presentation given at the July 6, 2006 meeting of the NYISO’s ICAP Working Group made on behalf of the New York Transmission Owners. As the NYTOs pointed out in the comments filed in February of this year, that presentation “illustrated [that] approximately 900 MW of capacity may have been physically or economically withheld from the Rest of State region … during the summer 2006 months to date, resulting in higher prices for ICAP supplied by resources in the Rest of State region… [but] to our knowledge the NYISO has never performed an evaluation of this occurrence to determine whether market power was involved.”

The apparent indifference of the NYISO to market power concerns contributes to the lack confidence that rates privately established by this utility are reasonable. See Justice Department Investigating New York Energy Markets.

Independence of Market Monitor Functions
Recently, the PJM market monitor alleged that his warnings about the exercise of market power were being suppressed. See PJM Electric Grid’s Watchdog Muzzled The head of the PJM RTO subsequently resigned and PJM is trying to settle a FERC case dealing with the market monitor’s allegations. See PJM Seeks to Settle Claims of Meddling With Monitor Unit.

The NYISO has staff who work in a market monitoring unit and an outside consulting “advisor” who periodically issues reports largely favorable in nature. Under the NYISO plan for monitoring its markets, both the NYISO staff and the consultant “Market Advisor shall be accountable to the Chief Executive Officer, and shall serve at the pleasure of the Board.” The NYISO plan forbids the monitor from releasing “Protected Information,” which may include, for example, evidence of capacity withholding or bidding patterns of a utility without permission of the sellers.

FERC Proposes “Reforms”
The RTOs and ISOs that now privately set wholesale rates without meaningful public scrutiny and FERC review continue to be dominated by producers, utilities and traders, with consumer interests and states marginalized. The rising costs of administering the RTO/ISO markets (see NYISO Costs Skyrocket, Benefits Questioned) and the growing lack of public confidence in them apparently led FERC to propose more “reforms” of the ISO and RTO utilities . In a proceeding begun in June, 2007, FERC is seeking public comment on “strengthening market monitoring” and “the responsiveness of RTOs and ISOs to customers and other stakeholders,” and is proposing “reforms” in RTO/ISO governance and management.

Implicit in FERC’s order is the suggestion that customers are just one of a bunch of “stakeholders,” rather than the primary constituency whose protection is the paramount concern of the Federal Power Act.

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