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Commission Watch

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

determination of what the ISO says that utilities ought to bid if they were acting in the best interest of the consumers, as defined by the ISO.

In fact, as Hieronymus points out, the utilities as purchasers cannot even participate in this new demand-curve ICAP market. Merchant generators, submitting supply bids, are the only active participants in the market. That, in turn, forces utilities to undertake an obligation to buy capacity at a floating price to be determined in the future by generator behavior. It also forces utilities to buy all the capacity that generators want to sell at that price. In other words, utilities cannot know in advance how much capacity the ISO will require them to buy.

And, as Heironymus, ConEd, and attorney Marston put it, this situation creates an unhedgeable risk; without knowing the quantity term, there is no way to take a long or short position to counterbalance the risk of a future price increase or drop. Thus, they predict that the New York demand curve plan will cause utilities to abandon bilateral forward markets in favor of New York's cash-market spot ICAP auction-exactly opposite to the effect that the ISO and the PSC predict.

"This proposal is not designed to bail out merchant generation, as some may claim," writes Dawn K. Jablonski, general counsel for the New York Public Service Commission, defending the plan.

Back at Strategic Energy, Francis Pullaro sees New York's demand curve scheme as nothing more than a tax, like the taxes and user fees imposed by states to build highways, airports, and a convention center.

But unlike those taxes, Pullaro adds, "the ICAP tax has no requirement that the recipients use the revenue to build generation."

"If this problem of peaking units being uneconomic actually exists," Pullaro adds, then "lift the price caps … to reflect the true value of energy."

And yet again, generators might not be much better off even if reglators abandon ICAP, remove the price caps, and rely on energy prices alone to recover fixed costs for merchant plants.

According to Keyspan, research calculations have shown that with an energy-only market design, we would have to endure price spikes of up to $30,000/MWh to assure enough capacity to preserve reliability.

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