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Commission Watch

Price controls turn upside-down in New England.
Fortnightly Magazine - July 15 2003

300 percent of the prior reference level or exceeds it by $100. It would then mitigate the derived SMD price if the bid produces an upward move of $100 or a price doubling, whichever is lower, or a downward move of $25 or 200 percent, whichever is lower, above or below the LMP in any other market serving NEPOOL (New England Power Pool).

2. PUSH. To compensate high-cost gas turbines, and to carry out FERC's directive in its landmark Devon Power decision (103 FERC 61,082, Apr. 25, 2003), where FERC rejected the idea of signing piecemeal RMR ("reliability-must-run") contracts with individual suppliers, ISO-NE now in effect will guarantee fixed cost recovery by proposing a safe harbor bid level exempt from price mitigation for any peaking plant with a capacity factor of 10 percent or lower that operates in a designated congestion area (DCA). The bid level ("peaking unit safe harbor," or PUSH), will reflect the prior year's fixed and variable costs, averaged over actual hours of operation-not just hours of congestion, as under a previous but now terminated cost recovery scheme known as the CT Proxy. FERC says that all PUSH bids must be allowed to set the hourly LMP, so that the rising price tide will lift all generator boats and furnish incentives for new plant construction. But so far the ISO refuses, saying that its software can allow LMP price-setting for only about 75 percent of PUSH plants, and it describes this as-yet unsanctioned compromise as "rough justice" for turbines.

3. SCARCITY. Lastly, to encourage new plant construction in the absence of a resource adequacy model (expected next year) that reflects locational capacity needs, ISO-NE proposes to set the LMP price in the real-time market at $1,000 during scarcity conditions if the ISO cannot otherwise restore operating reserves to required levels under NEPOOL Operating Procedure 8, or if the ISO is able to maintain the required level of reserves only by purchasing power from outside the system in external transactions ineligible to set LMP prices, while it redispatches and constrains successful supply bidders from inside the system by instructing them to supply only reserves, rather than product energy. This idea has come partly from ISO market advisor David B. Patton, who argues that the reserve obligation marks an unequivocal obligation for the ISO, and thus an ISO decision to look out-of-merit for reserve supplies should be seen as the true marginal price driver. Thus, Patton claims that the energy bid cap of $1,000 (the highest merit price) identifies the applicable opportunity cost for shortage hours. But note that the ISO predicts that its scarcity pricing proposal would likely kick for as few as two to four hours during an entire year.

In a key development for New England, FERC has now granted conditional approval of a similar scarcity pricing proposal for the New York ISO, saying it will "benefit customers" by sending "better economic signals." However, the New York scheme differs in that it adds a locational parameter. New York will boost the energy price to the $1,000 cap depending