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Commission Watch

ISO's new ICAP scheme seen as subsidy for the gen sector.
Fortnightly Magazine - May 15 2003

Long Island; $127.89/kW-yr. ($151.14 in year two) for New York City.

Yet, it is the guaranteed nature of these prices-guaranteed by the linear demand curve-that has drawn protests. For example, rural cooperatives claim to have evidence that generators already are withdrawing capacity (1,300 MW) from PJM markets for sale into the New York ISO at a higher price.

Why the New Scheme?

According to testimony presented by ISO market advisor David Patton and PSC witness Thomas Paynter (economist and regulatory analyst), the old ICAP scheme tended to produce a vicious cycle of gyrating boom/bust prices. It forced utilities to acquire capacity equal to 118 percent of load (with certain other locational purchase obligations to secure downstate load in New York City or Long Island), or else pay a severe penalty for falling a fraction short of that benchmark. But it provided no special rule for exceeding the mandatory margin. Thus, ICAP prices climbed at auction as long as utilities needed to buy it to reach the cutoff point at 118 percent, up to a de facto cap equal to the deficiency penalty the ISO would assess against utilities for falling short. (Under current rules, the penalty would hit $255/kW-yr. for upstate capacity, and a whopping $477/kW-yr. for a capacity shortfall within the New York City load pocket.)

To make matters worse, prices then collapsed the moment utilities had bought enough ICAP so that margins passed the 118 percent level. Generators found they could hardly earn a cent on the next increment of capacity that exceeded the benchmark. Gas turbine peaking plants faced a double whammy. First, with energy prices collapsing, the ISO dispatched the turbines in fewer hours (merchants built the turbines in expectation of periodic price spikes of $250 or higher per megawatt-hour, to recover costs.) Second, those plants had counted on ICAP revenues, but they found that prices there had collapsed also.

For example, the 1,700 MW Oswego plant in upstate New York was designed for baseloads but ran only 3 percent of the time in 2001. "It is doubtful that this plant is making money at today's ICAP prices," writes PSC staffer Mark Reeder, in a recent study.

But, according to experts like Patton and Paynter, an extra dollop of plant capacity beyond the required margin-let's say an extra one percent, up to a 19 percent reserve margin-could conceivably reduce energy price spikes enough to produce up to $100 million annually in consumer savings. Surely, they argue, capacity that exceeds the minimum required engineering standard to assure reliability has substantial economic value, and ought not go for $1 per kW.

To fix the problem, the ISO proposed to create an artificial sloping demand curve to represent the prices a hypothetical utility might be willing to pay for ICAP if there were no preset "cliff-like" benchmark at 118 percent, but utilities instead paid a true-value price. In other words, the ISO set an artificial linear demand curve, sloping in such a way that capacity prices would fall gently as generators submit bids to supply more (up to a saturation level