FERC Filings
MOTION OF EPSA FOR LEAVE TO INTERVENE AND PROTEST OUT OF TIME IN OPPOSITION TO IMPLEMENT OF BID CAPS
II. Protest
On June 30, 2000, the NYISO made its filing, seeking immediate authority
to implement $1,300 bid caps on certain bids in the NYISO-administered markets. The filing is made pursuant to the NYISO Board's authority to make independent, unilateral filings under "exigent circumstances." Despite its self-professed "philosophical aversion" to price controls, the NYISO Board has latched onto bid caps as an "appropriate interim solution to a significant market problem." The NYISO asserts that its extraordinary action is justified by the "near total" absence of demand-side price response mechanisms, the support of the NYISO Management Committee and the New York Public Service Commission (NYPSC) and the existence of caps in other ISOs. For the reasons explained below, the bid caps are an inappropriate regulatory action that compromises the development of healthy, competitive markets.
In its filing, the NYISO states that its market system is "the most sophisticated competitive electric market design" in North America. Indeed, it remains "confident that these markets are fundamentally sound." In administering this state of the art market design, the Commission has equipped the NYISO with both Market Power Mitigation (MPM) and Temporary Extraordinary Procedure (TEP) authority. Furthermore, NYISO's answer to the New York State Electric & Gas Corp.'s (NYSEG) Complaint in Docket EL00-70-000 seeking to suspend market-based pricing, stated that NYSEG's action "does not provide evidence of market power or insurmountable market flaws sufficient to warrant interference with market forces, or the suppression of the price information they produce."
Notwithstanding all this, the NYISO now claims that limited demand-side price responsiveness creates the "potential" for severe price spikes this summer. Rather than provide actual evidence or factual support for its request, it summarily concludes that it needs authority to intervene in the markets to impose bid caps as an additional "safeguard" or "backstop." This rationale stands the fundamental economic principles underlying market development on their head. In promoting efficient, competitive wholesale markets, the goal of the Commission, as well as ISOs, should be to give market participants, both suppliers and load serving entities (LSE), the freedom and opportunity to make independent economic decisions. A central component of this market activity is risk management.
The NYISO's fundamental premise -- that the demand side of the market presently has no opportunity or means to respond to price signals -- is misleading. It understates the range of options available to LSEs - the entities responsible for managing risk in the wholesale market. The NYISO ignores possible hedging arrangements, bilateral agreements with suppliers or load reduction as means to prepare for, and mitigate, high energy prices.
Price caps send the wrong signals to LSEs, delaying the development of workably competitive markets. Without an incentive to manage demand or hedge risk, LSEs create a "vertical price curve," in which the value of the "last megawatt" is infinite. In this scenario, price caps become the only logical solution. The approach, however, is self-perpetuating and fails to lead to a more lasting solution. Price caps eliminate incentives for LSEs to hedge risk, either physically or financially. In fact, LSEs are given a free regulatory hedge to the competitive disadvantage of competitive market participants who invest in hedging "tools" and learn to manage risk appropriately. With perpetual "training wheels," LSEs never learn to manage the risks inherent in a competitive market. Again, problems are postponed, but not solved.
Even more troubling is the NYISO's myopic and disjointed approach to developing solutions to market "problems." The NYISO's request for authority to impose bid caps is entirely premised on its perception that the demand side is unable to mitigate price spikes. This short-term view ignores the demand side hedging and risk management options that do provide means for demand to prepare for price increases. Of far greater consequence, however, is the threat to reliability created by the NYISO's preoccupation with the demand side of the market.
By focusing on theoretical speculation about when -- or whether -- demand is "artificially" high, the NYISO would drag the Commission down the wrong policy path, and further delay market solutions to the real problem: reliability. EPSA acknowledges the importance of the vibrant interplay of supply and demand and supports efforts to enhance the ability of load to respond to price increases. As the Commission has recognized, increasing demand has created an urgent need for investment in additional generation; resource adequacy concerns lie at the heart of sound reliability policy. Additionally, increasing supplies that could result from unfettered price signals would not only enhance reliability, but would also produce downward pressure on prices, and provide one measure of a well-functioning market.
Unfortunately, the NYISO's filing tramples the economic forces so critical to reliability. While they may provide short-term psychic -- and political -- comfort, market interventions such as bid caps have profoundly more serious consequences. At just the time when we need to attract capital for new generation and to expand and improve the electric system infrastructure, the NYISO's proposed action would create uncertainty that will discourage and delay this much needed investment. The NYISO's narrow speculation regarding demand side responsiveness amounts to a high stakes gamble that consumers will be harmed more by short-lived, infrequent price spikes than long-term delays in generation investment needed for reliability. Rather than speculative short-term outcomes, the wiser approach to both price spikes and reliability concerns is to unleash free market forces and the investment capital they will provide.
The NYISO also takes comfort in the fact that the PJM Interconnection, L.L.C. (PJM) and the California ISO have implemented bid caps. The NYISO "does not believe" that PJM's $1,000 energy bid cap has adversely affected reliability or market operations. This reasoning is an inadequate basis for granting the NYISO bid cap authority; the circumstances and rules governing PJM and NYISO are quite distinct. For example, PJM allows generation to be freed up through "delisting;" the NYISO's scheme is much more restrictive.
The NYISO's reliance on the California ISO's price caps is clearly misplaced and, in light of the highly controversial, strife-ridden process, a rather dubious source of "comfort." While the NYISO states that it is "by no means clear" that the California ISO price caps have caused problems, the California ISO staff, in fact, opposed the recent effort to lower the cap from $500/MWh to $250/MWh, along with generators and marketers who believe that such actions deter investment and cause power to flow out of California. In the context of the price cap debate in California, it has been observed that increased dependency on out-of-state market activity (a possible outcome of caps) could result in higher payments than savings obtained from price caps.
The NYISO's reference to caps in other regions highlights how problematic, and capricious, regulatory interventions are. Viewing the NYISO's request for bid caps in the larger, national context raises serious questions about the integrity of market "strategies" based upon regulatory intervention. With caps in the California markets-for now- at $500, and in the PJM market at $1,000, it is difficult to discern a legitimate rationale that would presumably result in a more consistent exercise of regulatory authority. Clearly, establishing differing price and bid caps in the various ISOs sends artificial signals regarding where energy should be sold. Having generators chasing after the highest bid cap of the month, week or day makes little economic sense. It is time to move beyond this short-sighted approach to market development.