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Commission Watch

LICAP and Its Lessons:
Fortnightly Magazine - January 2005

wisdom across the utility industry states that SW Connecticut (SWCT) is a classic load pocket that faces a crisis in electric supply. Transmission constraints make it difficult to import power into the area, meaning that local resources come under strain in order to meet demand.

But if that is true, then why is it that the ISO's plan would treat SWCT as having a capacity surplus?

According to Thomas Austin, a staffer at the Maine Public Utilities Commission, the LICAP plan assigns a capacity ratio of 1.083 to SWCT. "In other words," says Austin, "SWCT has 8.3 percent more capacity than it needs to maintain reliability, and about 3 percent more capacity than the ISO's target capacity level."

Other expert witnesses remark on similar aspects of the same phenomenon.

Steve Corneli and Robert Stein, representing the NRG companies, explain that when the ISO examines individual resources to determine how much capacity they can contribute to OC (peak demand plus the 12-percent reserve), the ISO counts all resources as system resources or "pool-planned units" (PPUs), capable of delivering power anywhere on the regional grid. And it then allocates these system resources to the individual LICAP zones according to load, when measuring the installed capacity recourse level of each zone, using the GE MARS software program.

However, when the ISO reviews a request by a resource owner for authority to retire or mothball a unit, it apparently applies a different standard, known as SCED (security-constrained economic dispatch). The SCED model is more conservative in estimating real resources, as it discounts some capacity, based upon grid constraints, simultaneous transfer limits, and various local constraints related to reactive power, grid support, and so on.

Corneli would prefer to move the entire curve to the right. He would prefer higher values for C-target and C-max. (Recall that C-max is the x-intercept, or the highest level of capacity, as a function of OC, for which the ISO would allow a LICAP auction payment-.)

Generally speaking, utilities, LSEs, and consumer groups would prefer to move the demand curve to the left, producing lower prices at various capacity levels, and producing a smaller value for C-max. They question the generous incentive payment of 2 times EBCC (double the estimated marginal cost of constructing a new benchmark plant), as the ISO has proposed on its demand curve, when capacity levels fall below OC. Instead, some suggest that the premium should never exceed 1.2 x EBCC. (Speaking for the ISO, consultant Steven Stoft predicts that suppliers might end up earning the double-weighted premium payment about 15 percent of the time.)

In short, the ISO designed the curve so as to produce a long-term equilibrium that would maintain the historical average level of capacity (C-target, or 1.054 x OC), as observed over the past 21 years. On the y-axis, the corresponding equilibrium is where price equals 1.0 times EBCC.

But on the ISO's demand curve, a price of 1.0 x EBCC occurs at a lower capacity level - 1.037 times OC - a point the ISO identifies as the "kink" in the curve,