Fortnightly Magazine - June 15 2000


ISO Meltdown?

Some wanted to shut down New York's power markets. Then cooler heads prevailed.

I love it when ordinary electric customers take it straight to the regulators. Like what happened during that late spring East Coast heat wave, when some in the electric industry asked federal officials in Washington, D.C. in effect to shut down the New York ISO-suspending nascent "competitive" markets for trading energy, reserves, and ancillary services.

All it takes is some honesty and a moment or two to master the vocabulary.

Listen to Barbara Garr, assistant treasurer for Hammond & Irving of Auburn, N.Y., manufacturers of seamless rolled rings and open die forgings. "Rings are our specialty," it says right there on the H&I letterhead.

In her letter to the Federal Energy Regulatory Commission dated May 4, Garr writes, "We are in a very competitive market and cannot accept any hint of price increases....We are concerned that current operation of the New York ISO endangers the competitive marketplace and, absent a safety net, prices will continue to be irrationally volatile."

Or Thomas A. Lewis, corporate engineer for International Wire Group, of Camden, N.Y. "IWG operates six manufacturing plants in upstate New York for the fabrication of copper wire, with a combined demand of approximately 20 megawatts....During the summer of 1999...the actual costs of manufacturing wire during periods of upward real-time electricity pricing volatility actually exceeded the value of the product produced."

And then there was Thomas W. Grifa, of Goulds Pumps Inc., Seneca Falls, N.Y., a part of ITT Industries. "Very few marketers were willing to participate in the New York market and all had significant cost adders tied to market pricing. The initial kilowatt-hour pricing showed some savings but penalties from our non-linear load profile in some scenarios added up to $300,000 in additional cost, and the majority was in the summer months. It was even suggested to jump back and forth between supplier of last resort and marketers to secure savings, but that loophole has now been closed."

IT ALL STARTED ON APRIL 24, when New York State Electric & Gas Corp. filed a formal complaint asking the FERC on an emergency basis to suspend market-based bidding and pricing in markets for energy and ancillary services in the New York Independent System Operator, from June 1 through October 2000. Also, NYSEG asked the FERC to convene an emergency technical conference on a fast track to address short-term modifications to ISO software and a fix for various market flaws cited in the complaint.

"The warning signs are clear," said lawyer Stuart A. Caplan, from the firm of Huber Lawrence & Abell, representing NYSEG.

"The confluence of severe problems-extra-tariff pricing rules, software problems, and communications failures-have strained the NY ISO market to the point that a short-term safety net is the only prudent course to avert a potential disaster this summer."

But cooler heads prevailed two weeks later, when NYSEG withdrew its call for a technical conference and for cost-based bidding. Instead, it offered an alternative plan worked out with six other ISO members: Central Hudson Gas & Electric, Consolidated Edison, Niagara Mohawk, Orange & Rockland, the Long Island Power Authority, and Rochester Gas & Electric.

Under the new consensus proposals, the ISO by June 5 would begin to conduct "price screens" to verify that prices were rational. Market prices above screen levels would not be permitted unless the ISO first determined that the prices "were the result of properly functioning, competitive markets." The ISO would convene its management committee to address market anomalies and produce a progress report by June 15, and again every two weeks thereafter "until all existing problems have been addressed."

Nevertheless, NYSEG chose not to retract any of its allegations of "market flaws" identified in the earlier complaint:

  • Imports. Energy imports from outside New York are "unworkable."
  • Volatility. Energy prices fluctuate substantially over short periods in an "inexplicable fashion."
  • Irrational Relationships. A "significant lack" of convergence in day-ahead and real-time energy prices.
  • Tariff Violations. Inefficient allocation of fixed-block generation resources, resulting in customer payment obligations not permitted by tariff.
  • Overlooked Resources. Failure by the ISO to recognize resources in the market.
  • Poor Communications. Lack of timely communication on curtailments and restoration of transactions.
  • Market Power. Uncompetitive prices for ancillary services.
  • Unreliable Settlements. Revisions of settlement information after long delays, "distorting" market signals.

Explaining why imports were unworkable, NYSEG said "severe cuts" to transactions between control areas had led PJM to consider discontinuing day-ahead transactions with New York. Further, it said that NY ISO software incorrectly predicts prices, curtailing purchases of less-expensive supplies and then forcing the buyers to purchase energy at much higher prices.

SOME OUTSIDE THE ISO DIDN'T SEE THINGS AS SO BAD. Writing on May 15, after NYSEG had toned down its initial complaint, General Counsel David M. Perlman of Constellation Power Source insisted the ISO could work it out.

"In no instance are the fundamental as to require a complete, albeit temporary retreat from competitive energy markets," wrote Perlman.

PSE&G vice president (law) Richard P. Bonnifield agreed: "[T]he proper forum for resolving these market issues is within the structures and procedures of the NY ISO."

At PECO Energy, lawyer Marjorie Philips acknowledged that NYSEG had "correctly identified a number of flaws." but she argued that many of them related to "seams" between control areas and emphasized that all of the ISOs in the Northeast were aware of the issues and committed to work to resolve them through their Memorandum of Understanding.

Philips added that NYSEG had not provided "any numbers that quantify the extent by which external supplier participation has dwindled."

Yet supplier participation was very much on the minds of those representing consumers in New York City, where the NYSEG complaint found allies.

New York City corporation counsel, Michael D. Hess, noted that for full-service electric customers in the downstate load pocket, Con Edison on May 1 had shifted from an embedded-cost generation charge to a market supply charge based on ISO prices. As Hess explained, that meant that "New York City electricity customers will be exposed to these prices before the Con Edison competitive retail electricity market has been opened to all customers." Hess added that only 30 percent of Con Ed customers so far had been allowed to choose a competitive power supplier.

THE NEW YORK ISO WEIGHED IN ON MAY 17, if only to comment on generation reserves for the coming peak season. While making no mention of NYSEG's complaint, the ISO reported that "the power supply should be adequate to meet the traditional high summer demand."

At the same time, ISO president William Museler offered words both calming and alarming:

"We exercise great care to produce accurate forecasts, but there are variables such as weather, unplanned outages and availability of power from neighboring systems that are beyond our control. The unusually hot weather of May 7, 8 and 9 provided clear evidence that nature defies prediction."

Said Museler, "We encourage New York residents and business to conserve power whenever they can."

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