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Capacity Roulette

Out of market means out of luck—even for self-supply.

Fortnightly Magazine - July 2011

if the bid falls below an offer-floor benchmark.

As Strauss and Schwarz note, that raises the specter of having to pay twice—once to build, and then again to buy through the FCM to cover the resource that is left stranded:

“That was never the deal,” they argued.

“And the commission has no jurisdiction to impose such an obligation upon LSEs.”

A New Paradigm

Concerns over OOM projects were rampant long before New Jersey enacted legislation to target the PJM market. As FERC noted in its New England order, every FCM auction since the market’s birth has cleared at the price floor, with more capacity ready to step in and bid at that level. Such low prices, said the commission, arose from bids from out-of-market suppliers that received revenue from sources outside ISO-NE markets, such as through bilateral purchased power contracts, rate base cost recovery, or favorable tax status or financing linked to those revenue streams. These sources of revenue, largely enabled by state policies on ratemaking, resource planning, and portfolio management, tend to make OOM resources indifferent to the market clearing price, and thus willing to offer capacity for virtually any price as a price-taker, especially in New England. In fact, as this column noted last year, the Connecticut state commission as far back as 2007 had attempted to carry out a scheme similar to the New Jersey plan to design RFPs to solicit capacity resources to offer below-cost bids into the New England FCM to drive down prices and avoid “federally mandated congestion charges,” coupled with a contract for differences that would settle against New England markets, to make the suppliers whole. (See, “ When Markets Fail ,” Fortnightly, May 2010.)

As in PJM, FERC’s New England order imposed offer-price controls on all self-supplied capacity. In FERC’s view the innocent self-supply of capacity outside the FCM auction carried with it the same price-distorting effects as zero-price bidding by OOMs, “regardless of intent.” FERC also denied arguments that cost benchmarking for self-suppliers worked a taking of property under the Fifth Amendment:

“In the era of Hope and Bluefield … it was necessary to require that the utility was able to recover its costs …

“Today, however, the commission regulates under another paradigm.”

Yet earlier this year FERC flip-flopped on the question of a different state-sponsored incentive to bring down capacity prices: that is, whether the New York ISO should recognize the value of certain tax abatements offered to power plant developers to induce installation of peaking units in New York City in the course of calculating the “net CONE” parameter (cost of new entry) for the administrative demand curve used to set in-city prices for installed capacity (ICAP).

At first, FERC had rejected the NY ISO’s decision to recalculate CONE and bend the market to honor the tax abatements as economic, noting that it was in New York city’s interest to grant tax abatements to locally installed peaking units “because doing so would result in lower capacity prices.” (See, Dkt. ER11-2224, Jan. 28, 2011, 134 FERC ¶61,058.)

But that drove the mayor