FERC Filings
Motion of EPSA for Leave to Intervene and Comment re: Devon Power LLC
Comments
As has been demonstrated in several organized markets and stated by ISO-NE, it is of vital importance that market prices support and encourage both new entry and the continued operation of existing units needed to provide reliable service. Particularly as long as energy prices are mitigated in any fashion, separate capacity markets and compensation mechanisms are essential. ISO-NE states, “[P]rice signals from energy markets are not sufficient to support new entry and may not even support continued operation of existing units needed to reliably meet system or local load requirements.”
Generally speaking, EPSA is not in favor of administratively set pricing mechanisms. However, due to constructive cooperation among stakeholders to develop workable solutions, EPSA and its members are supportive of the major elements of this proposal for this market, at this stage in the evolution of the New England market. Thus, EPSA supports the conceptual methodology of the New England proposal, especially in light of the rationale behind the implementation of a locational ICAP demand curve. In the current New England ICAP market, the demand curve functions as a vertical “cliff” which results in large price swings with a tendency to clear at zero, even when small changes in capacity occur. The resulting boom and bust, or binary, pricing of ICAP resources and lack of any locational requirement do not adequately compensate reliability units, provide certainty to the marketplace or incent investment decisions for new entry in areas that require it. The locational ICAP and downward-sloping demand curve proposals appropriately address the problems in the current ICAP system and add locational capacity values by establishing four sub-regions in the New England market. Further, as ordered by the Commission, with the implementation of a locational ICAP mechanism, the use of the PUSH mechanism will be discontinued. As stated in the filing,
The locational element will value capacity appropriately by area and ensure that incentives for new entrants induce investment where needed. Consistent with the April 25, 2003, Order, the Proposal will properly price both import-constrained and export-constrained sub-regions. The downward-sloping demand curve will eliminate bi-polar pricing, add predictability to capacity prices, and provide better incentives….
However, as part of the proposal, ISO-NE includes a five year phase-in mechanism that includes transitional elements intended to dampen any adverse impact of the locational ICAP proposal on constrained sub-regions. Elements of the transitional phase-in mechanism include a cap on prices derived from the demand curve in constrained sub-regions and transition payments for units in constrained sub-regions.
The ISO-NE filing includes other material changes as well. Price floors have been eliminated for units in Maine ($0.50/kW-month) and Rest-of-Pool ($1.00/kW-month) without eliminating the concomitant obligations that ICAP resources face in the New England market. These price floors were an integral part of the package developed in the stakeholder process and were initially proposed by ISO-NE during that process in recognition of continued obligations of ICAP resources. ISO-NE’s proposal also includes the implementation of a new deliverability requirement and initiates a Regional Dialogue, a process designed to provide a forum for stakeholders, including state regulators, to develop a broadly supported resource adequacy mechanism for New England and to evaluate operation of the locational ICAP mechanism. ISO-NE proposes a full evaluation after one year of operation, to be reported to the Commission 18 months after locational ICAP implementation.
These “transitional elements” are significant aspects of and changes to the proposal. The level of the cap in the first year, elimination of the floors and the price level of the transition payments have all been changed from that which was discussed and agreed to in the stakeholder process. As EPSA has stated in numerous proceedings, the Commission must acknowledge and encourage regional stakeholder processes to achieve acceptable market design elements. Through the stakeholder process, parties compromise extensively from what would otherwise be advocated on a unilateral basis in order to achieve a proposal supported by a broad spectrum of market participants. Absent such a compromise in this case, an efficient and balanced market design has not been achieved. A balanced approach would not include caps or floors, thereby obviating the need for transition payments, for instance.
Thus, the Commission should require that ISO-NE, at a minimum, modify its proposal based on the Compromise Proposal approved by the NEPOOL Markets Committee and broadly supported by the NEPOOL Participants Committee. While the March 1 Filing “retains most of the elements approved by the NEPOOL Markets committee,” the additions and changes made by ISO-NE have not been vetted or accepted by market participants and, in fact, are inconsistent with the letter and spirit of the Compromise Proposal in important ways. At this stage of the development of the New England marketplace, it is unacceptable for ISO-NE to disregard reasonable compromises that reflected the delicate balance achieved by stakeholders.