FERC Filings
MOTION OF EPSA FOR LEAVE TO INTERVENE AND PROTEST, NYSEG V. NYISO
II. Protest
On April 24, 2000, arguing that a “confluence of severe implementation problems” continue to plague the NYISO markets, NYSEG asks the Commission to suspend market-based rates in New York’s energy markets and substitute an administratively determined energy rate for the summer. While maintaining that the “fundamental market design is sound,” NYSEG suggests this Draconian approach as the interim solution to software problems and communications failures. The Commission set May 5th and then 15th as the deadlines for timely motions for leave to intervene and protest.
On May 10th, certain Members of the Transmission Owners Committee of the Energy Association of New York State (“Member Systems”) moved to intervene in the proceeding, suggesting an alternative “safety net” for the New York markets. The Member Systems suggest that FERC extend the NYISO’s TEPs, which are otherwise set to expire May 16, 2000, and require the NYISO to establish, under its TEP authority, price screens against which market prices would be reviewed and judged. NYSEG then withdrew its request for the elimination of market based rates and joined in the Member Systems. The Commission has now set May 25, 2000 as the deadline for timely interventions in this proceeding.
EPSA was initially concerned that NYSEG’s proposal to eliminate market-based rates for the summer was completely out of proportion to the problems facing the NYISO and would be counterproductive. If adopted, we feared that the proposal would delay the development of an efficient competitive market in New York by siphoning resources away from the effort to find meaningful and effective solutions to the current problems. Further, we were concerned that NYSEG’s request was designed to make less Draconian, but equally inappropriate, market interventions appear palatable. Our fears appear to have been well grounded, as evidenced by this new proposal for price screens that are equally unworkable, administratively complex and will needlessly delay development of a competitive market in New York.
EPSA urges the Commission to reject NYSEG’s complaint and the remedies sought by NYSEG and the Member Systems and direct the parties to continue their diligent efforts to develop workable solutions to the problems facing the NYISO. In addition to the arguments raised herein, EPSA joins in arguments set forth in the Motion for Leave to Intervene and Protest filed by the Independent Power Producers of New York (“IPPNY”).
The imposition of price screens suggested by the Member Systems may appear, at first blush, to be a more reasonable and less drastic step than the elimination of market-based rates. However, the imposition of administratively determined price screens is likely to create additional problems and raise a host of new complications in the New York market. First, it is unclear from the Member Systems’ filing how these price screens will be developed. Will the ISO staff develop numbers on its own? Will they be developed based on previous cost-based rates, which many of the current New York suppliers never had? Will the Management Committee vote on these prices? While the Member Systems specifically reject imposition of a price cap, won’t a price screen serve the same purpose? What basis will market participants have for litigating the ISO’s determination that sales above a price screen were legitimate? How much confidential information will have to be released to litigate these issues?
The Commission should be very leery of radical rule changes so early in the process of developing workable markets. Competitive power suppliers and new market participants take risks in competitive markets in reliance on rules and contracts and do not have captive customers upon whom to foist costs associated with rule changes. In absence of concrete identification of insurmountable problems, the Commission should be very reticent about changing rules.
The imposition of price screens will significantly disrupt market operations. Not only are the published screens likely to be very difficult to develop, they are likely to operate exactly as a price cap would, with expensive and time consuming administrative litigation necessary to defend any price over the screening limit. In addition, the approach is likely to lead to numerous after-the-fact price changes, which are very disruptive to a well-functioning market. Although it may be too obvious to bear mention, the proposal made by NYSEG and the Member Systems runs directly counter to FERC’s oft-stated policy of fostering competitive wholesale power markets. Problems abound with nascent competitive electric markets across the United States. The solution is to develop workably competitive markets, not develop increasingly complex, administratively difficult mechanisms designed to replicate regulated, not competitive, markets.
The shortcomings associated with this approach are numerous and significant. As a starting point, the development of appropriate administratively determined price screens are problematic. Does the ISO staff have the resources and expertise to get this right? Given the numerous problems with the NYISO’s performance to date, highlighted by the NYSEG and Member Systems’ filings, it does not appear the NYISO staff is able to undertake significant new responsibilities. Will the Management Committee be asked to vote on the screens? How can this avoid becoming a political process? Will cost-based information be the starting point? How does the ISO know what prices a competitive market will produce in the absence of competition? How will screens and after-the-fact litigation distinguish between acceptable market operations and unacceptable exercise of market power? Will the NYISO “know it when they see it” or is there some objective standard to determine what price a properly functioning market would have produced? How will existing bilateral transactions be impacted? Will prices in existing contracts be revised to meet these new limitations? What about the effect of price screens on new bilateral agreements? The time and resources needed to work through this process are significant. In addition, as a practical matter, most generators with an opportunity to export power from New York are likely to do so.
Exacerbating the shortages created by the approach, it is unclear how the NYSEG proposal will affect marketers selling power into New York from outside resources. Will all sales into New York be subject to some administratively determined price screen? If so, why would any marketer choose that market over adjoining markets where supply and demand are sending different price signals? Accordingly, the effect of implementing NYSEG’s proposals will be to seriously undermine reliability in New York. At a time when the Commission is seeking to identify short-term measures to alleviate reliability stresses during peak periods, the price screen proposal represents a counter-productive approach.
While the impact on the developing wholesale marketplace is clearly negative, the wholesale market does not operate in a vacuum. Supply shortages, after-the-fact wholesale price changes, and the associated uncertainty will severely and adversely impact the development of nascent competitive retail electricity markets in the New York region as well.
In addition, the resources needed to implement this approach will be significant. Those same resources are needed to fix the problems identified by NYSEG and others in the New York markets. While NYSEG has endorsed this approach over its initial proposal as a way to get faster results without diverting resources from fixing the underlying problems, it is difficult to believe that implementing a complex administratively determined price screen, and subjecting every sale above that screen to appeals and review, will streamline the process of doing business in New York. Rather than litigating administratively determined rates, all parties would be better served by keeping their resources focused on solving the problems at hand.
On that topic, it is hard to believe that some of the problems highlighted by the NYSEG complaint remain intractable. For example, it has been two months since PJM sent its March 6th letter complaining about scheduling problems with the NYISO. This issue was highlighted at the March 15th and 16th RTO Workshop in Philadelphia and again at the March 30th ISO MOU Business Practices Working Group in Wilmington. In every instance, market participants were assured that this issue was solvable and at the top of the list. EPSA endorses the suggestion by the Member Systems and NYSEG that the Commission direct the NYISO staff to “develop a consensus plan on an expedited basis to resolve the current problems.” However, this may not be able to be accomplished in a vacuum. The Commission should also require appropriate staff at the adjoining ISOs to meet until these problems are solved. NYSEG and the Member Systems should concentrate on working through the appropriate NYISO Committees to develop market-oriented solutions to any remaining market flaws, rather than encouraging FERC and the NYISO to use heavy-handed price interventions.
EPSA is also concerned that every time a problem has developed in a start-up market, where the buyers are unhappy with prices, a temporary fix has been suggested. These have taken the form of price caps, in California and PJM, or the extension of “extraordinary powers,” in New York and New England. The net effect of these “remedies” is to delay the maturation of the markets in question and to lessen the incentive for the ISO and the market participants to get to the root of the problem and fix it. These actions, while designed to address short-term problems, have long-term effects on the marketplace, undermining the confidence of suppliers, damaging liquidity, limiting investment, and, ultimately threatening reliability.
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. Certainly, accurate price signals, not software glitches, are needed to encourage suppliers to make capacity and energy available to the markets and to finance and develop new generation projects. The imposition of administratively determined price screens will dampen market price signals and chill development of generation because of uncertain market prices. Price-controlled markets are inherently viewed as both riskier and less profitable to power suppliers, particularly peaking units. Peaking units are designed to operate only during the limited hours in which demand is at its highest and extra generation is needed to serve all load. A peaking plant may earn its entire return when operating just a few weeks a year when prices are highest. Administratively-determined rates could well 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. In short, the best defense against price spikes is to encourage greater numbers of suppliers to enter the market, not to restrict existing suppliers to artificially-determined rates.
In addition, NYSEG’s broad, unfocused allegations of gaming and market power are misplaced. NYSEG makes no effort to more precisely target its allegations of market power so that all market participants are not tarred with that brush. If specific market participants are in fact abusing their market power in ways that are detrimental to the functioning of the market, those practices must be curbed. However, NYSEG presents no evidence that the abuse of market power or collusion has affected market prices; clearly, unsupported suggestions of improper conduct are insufficient grounds for the extreme relief NYSEG seeks.
The more prudent approach would be to stay on course and focus on fixing the problems identified with the NYISO operations and developing intermediate (e.g., generation redispatch and demand-side responses) and longer-term (e.g., additional investment in generation and/or transmission) solutions to the “problem” of price volatility.
The parties should continue to work diligently to solve the problems facing the NYISO rather than resorting to radical and administratively difficult measures that will undoubtedly result in a whole new host of implementation problems.