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When Markets Fail

New England grapples with excess capacity and rock-bottom prices.

Fortnightly Magazine - May 2010

Corrosive.” “ Seriously flawed .” On the “ brink of market failure .”That’s what critics say about New England’s forward capacity market (FCM), whereby ISO New England conducts auctions to solicit offers from project developers to make electric capacity available three years into the future to meet anticipated regional demand.

The reason? Too many offers—way more than New England needs to meet its ICR, or installed capacity requirement. All that excess capacity has forced prices down to the market floor—to $2.95 per kilowatt-month in the third forward capacity auction (FCA-3), held last October for delivery in June 2012—with surplus capacity left over, apparently willing to offer at even lower prices, if auction rules had so permitted.

And no one today expects the surplus or the low prices will disappear any time soon.

Dr. Miles Bidwell, a consultant and critic of New England’s auction market who represents Boston Generating LLC in the FERC proceeding now pending on FCM reform, argues that excess supply “will hang over the FCAs for at least the next seven years and will continue to keep the FCA price at much less than the competitive market outcome.”

NRG and PSEG, also filing comments on the FCM reforms, suggest it might take 10 years to work off the surplus, as nearly 37,000 MW cleared FCA-3 at the floor price, representing a surplus over 5,000 MW, whereas the year-to-year increase in regional needs “is typically on the order of ±500MW or less, less than 10 percent of the current surplus.”

Even consultant James F. Wilson (Wilson Energy Economics, an affiliate of LECG) representing Connecticut’s state utility commission and testifying before FERC in support of FCM, concedes that “trends of slower load growth, and diverse capacity additions … and regulatory incentives … leads me to expect that excess capacity and the resulting low FCM prices should continue.”

Importantly, these twin regulatory problems—extreme excess capacity coupled with severely depressed auction prices—still appear largely in play, even following FERC’s recent decision of April 23, handed down just as this issue went to press.

In that decision FERC reviewed the ISO’s comprehensive package of FCM market reforms, proposed in late February. FERC accepted certain noncontroversial changes as proposed, but set a paper hearing to resolve the more difficult questions. ( See, Docket ER10-787, April 23, 2010, 131 FERC ¶61,065 .)

Among other things, FERC’s April 23 decision resolved the question of the price floor.

In February, the ISO had offered to help prop up prices by extend the life of the price floor past the first three auctions, as planned originally when FERC OK’d FCM in June 2006, in order to cover FCA 4 through 6, for the capacity delivery years from June 2013 through May 2016.

Now we learn from the April 23 order that FERC will cancel the price floor as an unnecessary intrusion on markets, but will suspend the move temporarily, thus allowing the floor to remain in