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Commission Watch

LICAP and Its Lessons:
Fortnightly Magazine - January 2005

Commission Watch

LICAP and Its Lessons:

Doubts intensify over New England's radical new market for electric capacity.

What began nearly two years ago as a simple request by power producers to boost their chances for recovering fixed costs for several power plants in Connecticut has mushroomed into the single most complicated case now pending before the Federal Energy Regulatory Energy Commission (FERC).

Starting with must-run agreements for plants essential for reliability in local load pockets, and then offering a safe-harbor rate (PUSH) for peaking units with low capacity factors, the New England ISO (the ISO) now finds itself on the extreme cutting edge of FERC's already-edgy Standard Market Design (SMD). In sheer complexity, the New England proposal exceeds just about anything tried before. (.)

The goal is to solve the most confounding problem of electric utility regulation: how to encourage developers to build enough electric generating plants to ensure reliability-but without the systemic overbuilding of the regulatory compact, or the irrational exuberance of the recent merchant power boom and bust.

The case thus far has attracted a dean's list of star expert witnesses from all sides of the electric utility industry, including such luminaries as Steven Fetter, Steven Stoft, Roy Shankar, Steven Corneli, and Peter Fox-Penner, speaking for power producers, consumers, investors, and the ISO (not in that order).

But as the experts are beginning to discover, it ain't gonna be easy to manage this new model. And why impose it when New England enjoys a huge surplus reserve margin above the level of capacity deemed adequate under longstanding reliability rules?

In fact, New England would go beyond the basic market designs employed elsewhere for installed (ICAP) or "unforced" (UCAP) electric capacity. And it would improve on the second-generation downward-sloping demand curve model adopted with success last Spring in New York. (UCAP prevails in PJM and New York. It's the same thing as ICAP, except that plant capacity ratings are marked down - usually about 10 percent - to reflect an expected rate of unforced outages.)

Effective January 2006, New England would impose a fully locational ICAP market, known as "LICAP." It would set minimum capacity thresholds for electric generation in five different sub-zones encompassing the entire ISO market. The five separate zonal price markets would serve much like the nodal locational marginal prices (LMPs) in the day-ahead energy market.

By contrast, New York also has attempted to set locational UCAP requirements, but so far, only for New York City and Long Island. But as in New York, New England also would rely on a downward-sloping demand curve set by administrative fiat, to ensure that capacity prices rise and fall in a gradual manner, from scarcity to surplus, without "falling off a cliff," as occurs so often when the demand curve stays vertical. ()

Yet the ISO's LICAP design strikes out on its own with radical new definitions of plant availability and after-the-fact revenue offsets to make sure plant owners selling through the monthly LICAP auctions cannot double-recover costs by selling energy simultaneously through the day-ahead spot market.

And more than

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