Letter to the Editor

To the Editor:

In your recent article about New York's "demand curve" ("New York Throws a Curve," May 15), opponents dismiss the role of installed capacity in restructured electric markets. Instead, they suggest a complete reliance on revenues from the energy market to recover all fixed costs. Yet, as your article notes, an energy-only approach might require price spikes of up to $30,000/MWh to cover the fixed costs of "peaking" units that seldom run but are needed for reliability.

Experience has shown the danger of relying on huge price spikes during shortage conditions to finance the fixed costs of power plants. The "golden carrots" from shortage conditions are random and unpredictable. Customers cannot budget for them; investors cannot rely on them for financing. Worse, such a system is prone to market power abuse: Suppliers may be tempted to withhold just enough energy to create artificial scarcity to get the gold.

Moreover, when shortages lead to involuntary curtailments (e.g. blackouts), the impact on customers can be severe. New York suffered costly blackouts in 1965 and 1977, and responded by instituting requirements for installed capacity sufficient to minimize the likelihood of shortage conditions. The higher levels of reliability naturally lead to fewer hours of shortage prices and decrease the energy payments available to peaking units.