[BETA] Fortnightly

ISO's new ICAP scheme seen as subsidy for the gen sector.

For evidence that electric restructuring has lost its way, look no further than ICAP-the dubious idea that to guarantee reliability and low prices, regulators should create a market not just for trading the finished commodity, but also for buying and selling ownership rights in the future ability to produce.

How else to describe the idea of forcing utilities (also known as load-serving entities, or LSEs) to buy "capacity"-the present right to the future output of a generating plant-even if they already have purchased enough energy (the product) to sell to customers?

Listen to Francis Pullaro, manager of regulatory affairs for New York State for Strategic Energy, a firm that provides consulting services related to fuel and energy management: "Capacity has no value in today's market. Thus no demand exists for it."

And yet ICAP (installed capacity) has played a prominent role in the design of emerging power markets in New York, New England, and PJM, which typically set a certain level of capacity that utilities must have on hand. Thus, as Pullaro argues, the regulators have had to create "an artificial demand" for ICAP by requiring LSEs to purchase it. "The only value to a purchaser comes from the avoidance of a penalty for not purchasing it," he says.

Back in Washington, D.C., Federal Energy Regulatory Commission Chairman Pat Wood III thought he had put the matter to rest last year when he killed ICAP from the FERC-proposed standard market design (SMD). He opted instead for a concept more akin to a traditional reserve margin, known in SMD parlance as RAM, or regional adequacy model. And indeed the three regional operators have convened a working group (RAMWG) to devise a coordinated and seamless capacity solution for the Northeast, based on FERC's vision. (But Mirant says that while PJM and New England have raised their reserve margins above 30 percent, New York is "fast approaching" deficiency conditions, and cannot wait as long as it would take for the RAMWG to complete its work.)

Now comes the New York Independent System Operator, endorsed by the state public service commission (PSC) and merchant power producers, with its new and improved ICAP scheme, known as the "demand curve."

(See FERC Docket No. ER03-647, tariff filed March 21, 2003.) The New York plan presumably would eliminate the extreme volatility that has plagued capacity prices in the region. Prices of late had fallen as low as $0.10/kilowatt-month ($1.20/kW-yr), for upstate areas outside New York City and Long Island. Yet if utilities come up short, they can be made to pay hundreds of times more as a make-up penalty. To smooth out those peaks and valleys, the New York ISO has proposed a gently self-moderating "curve" of prices.

The New York Plan

The plan would set target ICAP prices at $56.24/kW-yr. for upstate capacity (climbing to $67.49 in year two). Prices would run considerably higher for New York City and Long Island, but still below the level of the current deficiency penalties: $104.37/kW-yr.

($123.94 in year two) for