FERC Filings

MOTION OF EPSA FOR LEAVE TO INTERVENE AND PROTEST, NEW ENGLAND POWER POOL

II. PROTEST

NEPOOL’s effort to develop and establish market rules reaches back to December 17, 1998 and the Commission’s order approving NEPOOL’s market-based rate proposal.2 The Commission originally reviewed Market Rules 6, 8 and 9 in the December 17th Order, and subsequently approved them on April 6, 1999.3 After the commencement of market-based rates in the six NEPOOL markets on May 1, 1999, the ISO New England, Inc. (“NEISO”) invoked Market Rule 15 to unilaterally impose price caps to ensure that Operating Reserve clearing prices would not exceed the Energy Clearing Price (“ECP”). In August, through the NEPOOL-NEISO consultative process, the NEISO sought formal Market Rule changes to convert what began as an emergency action into the permanent status quo. On September 10, 1999, the NEPOOL Participant’s Committee approved revised Market Rules that would limit Operating Reserve clearing prices to the ECP calculated within the same Trading Interval. Finally, the NEISO’s revised software that will automatically adjust Operating Reserve clearing prices was scheduled to become operational on September 28, 1999.

In addition to the increased authority to intervene in market activity NEPOOL and the NEISO seek here, in multiple filings with the Commission in early August, they sought approval of several other “corrective” actions. On September 30, 1999, the Commission approved the extension of, and revisions to, Market Rule 15, and related price capping in NEPOOL’s Operable Capability Market4 through September 30th. In its decisions, the Commission appeared to endorse the use of price caps as an interim solution to so-called market design flaws until the NEISO completes its comprehensive market redesign by year-end.

However, the Commission’s extension of the NEISO’s authority under Market Rule 15 through September 30th was for the express purpose of contending with the pressures of the summer peak period. In dissenting opinions in both decisions, Commissioner’s Bailey and Hebert expressed serious reservations about substituting unilateral NEISO intervention for the market forces of supply and demand. Even the majority, in the NEISO dockets and elsewhere5 , have stated that “the best response to a design flaw is, as even the ISO would concede, to correct the flaw rather than to impose a price cap.”6

While the Commission has tolerated price caps as an emergency measure to facilitate development of nascent markets, and as an interim remedy for certain software or other technological glitches, it is no longer appropriate here to subject sellers to administratively imposed, artificially low prices. The only support for the NEPOOL Participants’ Committee claimed market “design flaw” is the vague suggestion that competitiveness and efficiency could be compromised because Operating Reserve prices “bear little relationship to the nature of the product being sold.”

The benefits of a competitive market require more compelling evidence that unilateral regulatory decisions are necessary. Indeed, although it requests an extension of its price cap authority as a “medium-term solution”, it would appear that the market presently is working as designed. Curiously, NEPOOL states that it wants to “facilitate a greater correspondence” between the value of various products and their associated clearing prices. However, this is the very role that market participants play. Increasing the NEISO’s authority to intervene in markets stunts the growth of truly competitive markets. NEPOOL has failed to demonstrate a breakdown of the economic forces of supply and demand that would justify expanding the NEISO’s authority to impose price caps. The issuance of price cap authority presumes that there is not a workably competitive market, notwithstanding the NEISO’s implementation of these various market reforms.

If and when the NEISO concludes, based upon its examination of further information, including the comprehensive market redesign expected in December, that there is, in fact, evidence of significantly flawed markets or opportunity for the abuse of market power that cannot otherwise be mitigated, then it and the Commission can revisit the role, if any, of price caps. EPSA believes, however, that, in most instances, the NEISO can effectively take other, less intrusive measures to remedy alleged market shortfalls. EPSA agrees with Commissioner Bailey that “temporary price caps, once placed into effect, and despite the best of intentions, have a tendency to become more permanent fixtures.”7 That appears to be the case with respect to the NEISO. The NEISO should concentrate on developing market-oriented solutions to any remaining market flaws, rather than continually seeking to extend its authority to cap competitively-determined prices.

NEPOOL suggests that its regulatory pricing methodology will result in more rational “correspondence” between the value of Operating Reserves and their associated clearing prices. Rather than improving the pricing scheme, however, NEPOOL’s proposal will likely cause pricing anomalies. Price patterns in recent weeks raise serious doubts about using marginal cost for regulatory determinations of “value”. For example, on September 26, 1999, power in NEPOOL traded as low as $1 per MWh. Price capping would have resulted in the Operating Reserve products trading for as little as $1 per WMh. Moreover, during periods of excess generation this situation could result in negative prices for operating reserves as participants bid to stay on line. Clearly, such price outcomes bear no rational relation to marginal cost.

For competitive markets to flourish, supply and demand must interact freely to determine the price, thereby allowing market participants to make intelligent resource allocation decisions. Accurate price signals are needed to encourage suppliers to make capacity and energy available to provide ancillary services and replacement reserves or, if necessary, to finance and develop new generation projects. Allowing the NEISO to manipulate the market price by enforcing price caps will distort market price signals and chill development of new generation because of uncertain market prices. Price-controlled markets are inherently viewed as both riskier and less profitable to new suppliers of power. Price caps and trading limits increase risk, because there is no guarantee that, once set, the caps or limits would not be tightened in the future. Moreover, price caps and trading limits would deny suppliers of electricity the opportunity to cover their fixed costs during those important, but transitory, periods when market prices substantially exceed long-run average costs. Nor is this increased risk offset by symmetric assurances of price floors. In short, the best defense against price spikes is to encourage greater numbers of suppliers to enter the market, not to restrict the payments to existing suppliers.

The NEISO appears too willing to resort to price caps based upon its own perceptions of the “proper” value of products. Absent clear evidence of the abuse of market power or collusion driving market prices substantially higher than otherwise expected – which appears not to exist -- the more prudent approach would be to allow these interim prices to act as a signal for the market to develop intermediate (e.g., generation redispatch and demand-side responses) and longer-term (e.g., additional investment in generation and/or transmission) solutions during hours of scarce supply. EPSA believes that the NEISO should exhaust other remedial measures, if needed, before resorting to any form of price cap.
2. New England Power Pool, 85 FERC 61,379 (1998).
3. New England Power Pool, 87 FERC 61,045 (1999).
4. ISO New England, Inc., 88 FERC 61,315 (1999); New England Power Pool, 88 FERC 61,316 (1999).
5. A request by the California ISO to extend for one year the it’s authority to disqualify Energy and Ancilliary Service bids that exceed levels the ISO unilaterally specifies is currently under review by the Commission. In its May 26, 1999 Order originally approving California ISO price caps for ancillary services and imbalance energy, the Commission stressed that capping prices was not the preferred approach to operating competitive markets. 87 FERC 61,208 (1999)
6. ISO New England, Inc., 88 FERC 61,315 mimeo at 4 (1999)
7. ISO New England, 88 FERC 61,315, mimeo at 2 (1999).