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Reliability Wars

Power System Planning: Who gets paid (and how much) for backing up the system?

Fortnightly Magazine - June 2005

temporal and locational factors. To translate, the PUC might find it a simple matter to set an overall planning reserve margin for each utility. But what mechanisms would ensure deliverability—that reserves would be available at the hours required and at all constrained locations? ( See, CPUC Docket No. R.04-04-003, filed April 1, 2004. See also comments of ISO, posted at

Nevertheless, by shifting oversight on reliability from the grid operator to the PUC, the California plan would achieve the one thing that FERC and NERC (the North American Electric Reliability Council) have been seeking for so many years but without success—a reliability standard backed up by force of law.

New York: A Rate Case?

In regions that have adopted ICAP plans, the degree of complexity of analysis of generating costs can take your breath away. In the New York case, the full detail is outlined in a study presented in August of last year by the Boston consulting firm of Levitan & Associates. Consider, for example, only a very small part of the analysis.

The Levitan Study (the ISO’s main case) would assume construction in Long Island or New York City of two, simple-cycle LM6000 Sprint aeroderivative gas turbine units, with a 96-MW capacity rating and heat rate of 9,739 Btu/kWh (at an ambient temperature of 59 degrees F). But for the rest of the state, either the 2xLM6000 or a pair of industrial frame 7FA turbines would be chosen. That’s because, due to economies of scale, the 2xLM6000 plant would be 17 percent more expensive than the 2x7FA plant if operated in the rest-of-state zone. However, the LM6000 unit would be better suited to simple-cycle operation, as it can achieve full load operation in 10 minutes (allowing for higher emissions prior to operation of the selective catalytic reduction system). By contrast, the 7FA turbine would take longer to achieve full load and would be more commonly used in combined-cycle operation. In either case, financing would incorporate assumptions of a 3 percent inflation rate, plus 5 percent interest for construction debt, 7.5 percent over 20 years for the permanent debt term (the plant’s useful life), a debt/equity ratio of 50/50, and an after-tax equity rate of return of 12.5 percent.

This level of detail gives power-plant developers lots of targets to shoot at in taking aim at the final ICAP demand curve and set of prices. And so, in the New York case, the ISO had complained that the developers, by their detailed protests over specific cost and operating characteristics of particular plant models, were “trying to turn this proceeding into a gas turbine rate case.”

The ISO said the plant developers were attempting to steer the ISO ICAP process “in accordance with rate-making principles” to produce rates that would satisfy a traditional “just and reasonable” test. But the ISO bristled at this notion. “ICAP payments,” it argued, “are not statutory entitlements akin to classic just and reasonable rates.”

To defend its position, the ISO had cited the case of Sithe New England Holdings, LLC v. FERC, 308 F.3d