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News Analysis

New England puts a price on electric reliability, but some say the charge looks more like a tax.
Fortnightly Magazine - August 2001

Duke Energy highlights differences over ratcheted discounts and penalties: "PJM has no similar program of discounts for 'good behavior.' Rather, PJM retains 'bad behavior' penalties, which increase the ICAP deficiency charge when a participant misses its capacity obligation by greater than 5 percent."

Various generators affiliated with PPL Energy add that in PJM, generators enjoy a safe harbor right to obtain ICAP compensation pegged at an "alternate valuation point," if bilateral prices fall too low.

"Thus," says PPL, "ICAP suppliers theoretically would receive compensation ... To the contrary, ISO-NE purports to guarantee nothing, explicitly stating that ICAP suppliers may receive a payment of zero regardless of the sale revenue they could garner from selling ICAP elsewhere."

Mirant and PG&E add that if regional convergence is the desired goal, then New England should focus on New York - not PJM:

"At this time," say the two generators, "it is almost impossible to sell ICAP from the NY ISO into PJM because NY ISO does not provide (and PJM requires) external ICAP resources to have firm physical transmission service into PJM. ... Adopting a watered down version of PJM' s capacity deficiency rate will not create any real convergence between PJM and NEPOOL, nor should NEPOOL/PJM convergence be the first goal.

"If ISO-NE is truly concerned with promoting convergence with external markets, its short-term solution should be to look to the external installed capacity market that is now, and for the foreseeable future will be, the most physically and economically linked with NEPOOL - the NY ISO ... where the deficiency charge É will increase to no less than $10.40/kW-month ... during the next two years [except in New York City - where the charge is currently $12.50]."

Pricing Issues

Testifying for Sithe Energies, the well-known consultant William Hieronymus, vice president of Charles River Associates, suggests that ISO-NE should set the ICAP deficiency charge at least as high as $6.70/kW-month. That would assume a deficiency charge that fully recovered the value of installed capacity, with no penalty component added on. (NEPOOL' s historical charge of $8.75 is widely seen as implying a capacity charge of between $5 and $6, plus a penalty component for the balance.)

Hieronymus notes that PJM' s $5.48 baseline charge reflected a 1998 estimate of $348/kW for the value of installed peaking capacity (equivalent to $64.56/kW-year, or $177/MW-day). He then calculated the current installed cost of New England peaker capacity at $475/kW, which he says implied a capacity value of $82.11/kW-year, including $7.50/kW for fixed O&M and administrative and general expenses. (He cited other data showing that mid-priced peakers in PJM were selling in April at costs that implied total turnkey installed costs of about $525/kW.)

By contrast, the Rhode Island Attorney General Sheldon Whitehouse argues that spot energy markets alone may prove high enough to compensate generators for reliability (capacity) value. Whitehouse proceeds by comparing the ISO' s proposed $4.87 default charge (derived from dated PJM data), with PJM' s analysis of its own energy markets, as conducted in a report issued last year.

"On page 6 of the