FERC Filings

MOTION TO INTERVENE, AND COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION-DOCKET NO. ER01-180-000 AND ER01-181-000

III. Arguments

Price caps send the wrong signals to participants, do not abolish market volatility, and in fact delay the development of robust competitive markets. Asking the Commission to perpetuate the use of price caps in New York is troubling. EPSA is particularly concerned that the NYISO has proposed to extend bid caps indefinitely, despite the finding of its independent consultant that the NYISO-administered market is functioning properly and has not been subject to the unlawful exercise of market power. The NYISO action amounts to creating a presumption that bid caps and possibly other anti-competitive measures will apply unless proven to be unnecessary. This shifting of the “burden of proof” represents a fundamental divergence from the guiding principle that free market competition should apply except in extraordinary circumstances, and the Commission should not endorse such a shift.

The Commission should not allow price caps to become the status quo. Price caps should be a last resort, not a standard feature of ISO-run markets. In an environment where the market rules have been established, the market monitor is doing its assigned function (i.e., assessing the competitiveness of the market) and variance
in supply and demand are correctly illustrating the needs of the market. Price caps should not be called on to “fix” short-lived concerns about market price. Sensitive to this conviction, Commissioner Massey recently expressed his awareness “that any sort of cap or intervention risks a watering down of the price signals we need for bringing about new supply and for hedging.”(4) Therefore, perpetuating the use of price caps will undermine the effectiveness of price responsive demand reduction techniques that the NYISO is planning to implement for the summer of 2001. Used properly, price caps should only be used rarely, as a short-term fix to address proven allegations of market power abuse and, even then only as a last resort.

It is important to note that the increased electricity prices in the state of New York are not attributable to NYISO’s market design or operations. In a report recently released by NYISO’s independent market advisor, David Patton, an almost doubling of prices is attributable to: (1) substantial increases in natural gas and oil prices; and (2) the outage of ConEd’s Indian Point 2 facility, a 1000 MW nuclear plant in eastern New York.(5) The analysis of these two factors illustrated that prices in 2000 would have been 48 percent lower in eastern New York absent the rise of fuel prices and the outage of Indian Point 2. Moreover, the report stated that “the New York electric markets employ the most theoretically efficient market design.” (6)

EPSA is attaching to this filing a recently completed paper titled “An Initial Analysis of Recent Wholesale Prices, Price Caps and Their Effect on Competitive Bulk Power Markets.” In this paper, EPSA, with the assistance of Boston Pacific Company, Inc., examines the impact of price caps on rising wholesale power bills in other regions of the country and concludes that, such measures have had little impact on reducing those prices that have risen as the result of legitimate market dynamics.(7)

If price caps do not afford the consumer benefits sought, the next question is whether they have a negative impact on the market. EPSA’s paper shows that they do, in three major areas: market entry, the development of risk mitigation tools and demand side response. These are not trivial considerations; each is critical to the successful development of competitive markets.

A recent commentary in The Electricity Daily argued that a “fundamental intellectual error” has been made repeatedly regarding volatility in electricity markets and asserts that “higher prices for electricity in some circumstances do not constitute market failure.” (8) It must be understood that price volatility itself is desirable in competitive markets and provides economic signals for the efficient allocation of resources. Indeed, the markets in New York operated without price caps last winter when the market was even more immature. EPSA reiterates the fact that the markets, while not fully competitive, are indeed working in New York – they are showing imbalances between supply and demand. (4) Remarks by William L. Massey, Commissioner of the Federal Regulatory Energy Commission. “Ensuring RTO Formation an Well Functioning Markets.” Board of Directors Meeting, Edison Electric Institute. Chicago, Illinois. September, 7, 2000.

 (5) David B. Patton, Ph.D., New York ISO Market Advisor. Preliminary Market Assessment of the New York Electric Markets. Presented to NYISO Board and Management Committee. October 17, 2000. (NY Market Advisor Report)

(6)While endorsing much of Mr. Patton’s report, EPSA remains concerned that New York’s markets are not working as well as possible. The lack of financial trading, needed to ensure liquidity, as well as ongoing software problems, continue to limit the benefits a more competitive market could produce.

(7)The paper does not provide an analysis of the NYISO markets because two years of data were not available at the time of release. However, it does present an illustration of price caps’ inability to alleviate market volatility or significantly lower customer costs.