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Commission Watch

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

of 132 percent-a 32 percent reserve margin). Similarly, prices will rise gently as capacity margins tighten. The ISO designed the curve so that the clearing price at the target level of capacity (118 percent of load) would just equal the estimated actual installed capacity cost of a new gas turbine, after backing out any net profits from sales of energy or ancillary services (see Figure 1).

But look at what happened. With its demand-curve idea, the ISO has abandoned a model based on an engineering standard of operational reliability (18 percent reserve margin). In its place the ISO has adopted an economic model that seems crafted solely to save generators from ruin. That puts the ISO in the business of making political decisions, says attorney Phillip Marston, representing the Retail Suppliers Alliance, one of dozens of companies and groups that have attacked the plan. Here is a rough breakdown of why they say FERC should reject the ISO plan:

  1. Unlawful. Violates rate-making principles. Is neither cost-based nor incentive-based.
  2. Unethical. ISO concedes certain voting irregularities that occurred in the approval process at the management committee.
  3. Unnecessary. No evidentiary proof that the current ICAP market is not already working. Low capacity prices under current regime stem quite logically from New York's current (but diminishing) capacity "cushion" of five percent above 18 percent margin required for reliability by engineering standards.
  4. Expensive. Will force retail rates up without any assurance that merchants will use the cash to invest in new generating capacity.
  5. Unmanageable. Creates risk that cannot be hedged, and tends to force utilities out of forward markets and into shorter-term spot cash market-exactly opposite of intentions-since utilities cannot discover ahead of time how much capacity they will be required to buy.
  6. Inefficient. If more capacity is needed, why not just issue an RFP to solicit new plants for specific geographic areas, as New England has done for southwest Connecticut, and as Con Ed has proposed recently for NYC.
  7. Bureaucratic. Imposes a top-down, administrative pricing regime in place of a functioning bid-based market. Creates subsidy for merchant generators. Creates political role for ISOs in managing gen capacity not just for reliability, but also to manipulate energy prices to achieve socio-economic goals.
  8. Inconsistent. Encouraging generators to build reserve margin greater than 18 percent runs counter to FERC proposal in SMD for 11 percent margin.
  9. Windfall. Designed to make sure merchant generators can recover fixed costs, and thus runs counter to last year's First Circuit ruling (Sithe New England Holdings v. FERC, 308 F.2d 71) that says ISOs cannot use ICAP markets to help merchant generators recover costs already sunk.
  10. Wrongheaded. Policymakers instead should look to energy markets to provide revenues for generators.

A One-Armed Market

The most troubling critique comes from Consolidated Edison, and from testimony that it offered from its expert witness, William Hieronymus, of Charles River Associates.

As ConEd and its witness point out, the ISO's demand curve is not a demand curve at all. It does not represent a summation of bids submitted by the utilities that buy capacity. Instead, it represents an administrative