FERC Filings

MOTION OF EPSA FOR LEAVE TO INTERVENE AND PROTEST, NYISO

II. PROTEST

NYISO' s proposed action exceeds the role the Commission originally intended for ISO's as independent administrators and operators of the transmission system. The presumption that the activity in the reserves markets requires a regulatory determination of "workable" competition is misplaced. Rather than market monitoring, NYISO's proposed action amounts to regulatory manipulation based upon mere allegations of market power. Instead of "correcting" the market structure, if approved, NYISO's actions would distort fundamental economic forces of supply and demand and threaten market liquidity.

The Commission, in New England ISO dockets and elsewhere2, has 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."3 In dissenting and concurring opinions in decisions the Commission issued last Fall4, former Commissioner Bailey and Commissioner Hebert expressed serious reservations about substituting unilateral ISO intervention for the market forces of supply and demand.

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 not appropriate here to subject sellers to administratively imposed, artificially low prices. The only support for the NYISO's claimed market "design flaw" is its assertion that competitiveness and efficiency could be compromised because "spinning reserves are superior quality reserves by comparison to non-spinning reserves [and] thus spinning reserves should not be valued at anything less than the value of NSR".

The benefits of a competitive market require more compelling evidence that unilateral administrative interventions are necessary. Indeed, although the NYISO proposes to exercise regulatory control through cost-based limits for bids into reserve markets only until it is satisfied that pricing patterns reflect a "workably competitive" market, it would appear that the market presently is working as designed. Curiously, NYISO proposes that the Commission establish a settlement process as "the best method for resolving the issues and disputes arising from the pricing patterns" it has deemed "noncompetitive." However, establishing prices through the interplay of supply and demand is the very role that participants in the markets are supposed to play. Establishing a dispute resolution process to negotiate "appropriate" amounts for retroactive billing and collection is an odd way to promote competitive markets.

Increasing the NYISO's authority to intervene in markets stunts the growth of truly competitive markets. NYISO has failed to demonstrate a breakdown of the economic forces of supply and demand that would justify the suspension of market-based pricing. The issuance of price cap authority presumes that there is not a workably competitive market. Rather than intervene in the markets, however, the NY ISO should implement market reforms to immediately remedy whatever structural deficiencies may exist.

If and when the NYISO concludes, based upon its examination of further information, 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 NYISO can effectively take other, less intrusive measures to remedy alleged market shortfalls. Certainly, the NYISO could make an effort to more precisely target its allegations of market power so that all market participants are not tarred with that brush.

EPSA agrees with former Commissioner Bailey that "temporary price caps, once placed into effect, and despite the best of intentions, have a tendency to become more permanent fixtures." That has clearly been the case in New England and California, where price caps have been extended repeatedly, and appears to be the case with respect to the NYISO. The NYISO should concentrate on developing market-oriented solutions to any remaining market flaws, rather than engaging in heavy handed intervention by capping competitively-determined prices.

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 NYISO 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 NYISO's resort to price caps based upon its own perceptions of the "proper" value of competitively traded products is an unwarranted-and unwise-expansion of its authority to operate and administer the system. 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 NYISO should exhaust other remedial measures, if needed, before resorting to any form of price cap.
2. 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)

3. ISO New England, Inc. 88 FERC 61,315 mimeo at 4 (1999)

4. ISO New England, Inc. 88 FERC 61, 315 (September 30, 1999); ISO New England, Inc. 88 FERC 61,316 (September 30, 1999); Cal ISO 89 FERC 61,169 (1999); NYISO 88 FERC 61,228 (1999); ISO New England, Inc./New England Power Pool 89 FERC 61,209 (November 23, 1999).