(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
When Markets Fail
New England grapples with excess capacity and rock-bottom prices.
intention of driving down prices in the FCM.”
The most important of the new FCM market proposals—one that will pose questions to be decided in the upcoming paper hearing—involves changes to the ISO’s alternative price rule.
APR allows the ISO to boost the price artificially above the clearing level when certain “trigger” conditions are satisfied, to offset the assumed price-distorting effects of OOM offers. The APR was on the books for the first three FCAs, but was never triggered—a sore point with the generating sector, especially since NEPOOL stakeholders approved the ISO’s new FCM reform package entirely without generator support. No generator voted in favor of the reform package. The gen sector cites that fact in arguing that New England’s ISO governance structure is “skewed,” and remains convinced that the proposed FCM reforms won’t go nearly far enough.
Consider comments filed with FERC by the New England Power Generators Association (NEPGA), reacting to the FCM reforms:
“Here we have load contracting for capacity,” writes NEGPA, “when there already is surplus existing supply, and then offering that capacity in well below its actual cost (even at zero), for the express purpose of reducing the price paid for all other capacity suppliers.”
The ISO’s internal market monitor had issued warnings over on the OOM problem in a report last summer:
“Because the annual new capacity requirement is small relative to the size of existing generating capacity, buyers may have the ability and incentive to exploit the market’s price sensitivity by building or contracting for a large amount of new capacity bilaterally and then offering such capacity into the FCA at an uncompetitively low price. ( See, Internal Market Monitoring Unit Review of the Forward Capacity Market Auction, FERC Docket ER09-1282, filed June 5, 2009 .)
The New England generators entreat FERC to view OOM offers as the flip side of capacity withholding and seller market power, deserving of just as much attention from regulators:
“If … prices were being distorted upward by suppliers exercising market power and possibly manipulating the market, those concerns would never face the protracted delay we face in seeking badly needed modifications to the APR.
“We would never see the issue punted … to an open-ended and lengthy stakeholder process destined to fail.”
Back in 2006, when FERC OK’d the FCM settlement, regional stakeholders had picked out a figure of $7.50/kW-month as a starting benchmark for CONE, with the descending clock FCM auction opening at 2 x CONE, or $15. But they also designed FCM to be technology neutral. If auction prices diverged under pressure of new capacity entering the market and employing a cheaper or more efficient technology, the ISO would reset CONE for the next auction to reflect the lower cost of the new technology.
Yet FCM’s architects weren’t altogether prescient. What they failed to foresee was a massive wave of new offers from projects with a capital cost revenue stream coming from outside organized capacity market—projects sponsored by utilities, load-serving entities, local governments, and state regulators anchored by long-term bilateral purchased power contracts, often with