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New York ESCOs Asked to Pay Generators in Excess of $1,000/MWh As NYISO Seeks FERC OK to Lift Bid Cap; Despite Capacity Market, NYISO Says Bid Cap Waiver Needed to Ensure "Reliable Operations"

January 23, 2014

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Copyright 2010-13
Reporting by Paul Ring •

The New York ISO has sought FERC approval for a temporary waiver to allow it to accept offers in excess of the $1,000/MWh price cap.

NYISO specifically asked for authority to consider Incremental Energy and Minimum Generation offers that exceed $1,000/MWh, and to compensate generators that are able to demonstrate that they actually incurred variable costs in excess of $1,000/MWh to provide Incremental Energy or Minimum Generation.

Despite its mandated reserve margin and centralized capacity market -- for which load pays considerably -- NYISO said that, "[t]he requested waivers are ... necessary to ensure the reliable operation of the New York State Power System and that Generators are made whole for their costs of producing Energy."

"[E]xtreme winter weather and unprecedented natural gas market conditions have driven certain gas-fired Generators' fuel costs to previously unseen levels," NYISO said.

"Granting the NYISO's requested waiver is appropriate because it will provide assurance to NYCA generation owners that they will have a reasonable opportunity to recover the costs they incur to provide Incremental Energy and/or Minimum Generation. Failure to implement measures to permit generation owners to recover the costs they incur to supply Incremental Energy and/or Minimum Generation could reduce participation in the markets that the NYISO administers. Such a result could be detrimental to reliability," NYISO said.

If the waiver is granted, "the NYISO will reimburse affected generation resources for their demonstrated, actual costs of producing Incremental Energy and/or Minimum Generation that exceed the $1,000/MWh Bid Restriction, via a Bid Production Cost Guarantee."

"The NYISO is not currently able to permit, and is not seeking authority to permit Incremental Energy offers in excess of $1,000/MWh to set prices in its Day-Ahead or Real-Time Markets," NYISO said.

NYISO claims that, "the requested waivers will not have undesirable consequences, such as harming the legitimate interests of third parties," which we think will be hard to sell to the customers forced to guarantee capacity payments to generators under the guise that these generators will then be available to produce energy -- and not only when it's "economic" for generators to do so.

"Increasing payments to Generators so that they are made whole for the actual costs they incur to provide Minimum Generation and Incremental Energy that the NYISO schedules will increase the costs ultimately paid by Loads. However, such increased costs should not be viewed as 'harming' Loads because they are necessary to ensure continued, reliable electric service during extreme weather conditions, as explained above," NYISO said.

However, customers are absolutely harmed by the increased compensation granted to generators. It changes a fundamental benefit of the bargain forced on customers, who are compelled to forward procure capacity to ensure "reliability."

In exchange for this mandated forward procurement and payment, customers have been promised this capacity will be available to ensure reliability when needed. All of the capacity suppliers in New York are aware of the long-standing $1,000/MWh bid cap. Capacity suppliers who bid for the right to supply NYISO with capacity, and who cleared the market, took on the obligation of serving this future need knowing full well what existing market rules were.

While the natural gas price dynamics (discussed further below) cited by NYISO as justifying the bid cap waiver may be atypical, they are hardly surprising. Severe weather can often lead to shocks in market prices, which may push the variable cost of generating power above $1,000/MWh. Capacity suppliers who knowingly agreed to assume a capacity supply obligation have no basis to seek increased compensation because their variable costs have increased -- that's a risk they assume in agreeing to serve the capacity obligation, for which they are rewarded generously with mandatory payments from load.

Moreover, although the NYISO waiver request would only allow payment in excess of the cap for verifiable costs, NYISO offers no support for why it believes generators are actually exposed to excessive costs due to the gas price spikes noted further below. Presumably generators, particularly those with a capacity supply obligation, in being aware of the $1,000/MWh bid cap, will have hedged prudently to limit their variable costs, and avoid the risk of having variable costs in excess of the bid cap.

In fact, to grant the NYISO's requested waivers would create a moral hazard freeing generation owners from undertaking any prudent management of their business. No longer would generators have to engage in practical management to limit their variable costs; so long as the power is needed to maintain "reliable operations" of the grid, generators know NYISO has no alternative but to pay them their costs in excess of the bid cap. So why pay a premium most of the year for a firm supply and collared price of natural gas, when it will be more profitable to ride the spot natural gas market, enjoy low prices when they are available, and then simply rely on NYISO waivers to recover excessive costs when natural gas prices spike?

The only resources for which a waiver of the $1,000 cap should even be contemplated would be any resources without a capacity supply obligation but which nevertheless remain in the market and are needed for reliability, either because a supplier with a capacity supply obligation failed to deliver, or because load exceeded the reserve margin for which capacity was procured. Of course, this would only reinforce the futility of relying on mandated capacity procurements and payments to ensure reliability.

Otherwise, customers are being deprived of being compelled to pay, in advance, for capacity in exchange for the guarantee such capacity suppliers will make energy available, under current market rules, when needed.

And of course, it's always a one-way street. When generators aren't recovering enough costs, emergency action or waivers are needed to ensure adequate compensation and reliability.

But when regulatory changes in market design and rules lead to windfall payments to generators, we're told that such "market-driven" price signals are "efficient," and necessary to incent investment, and that regulators must not mute these signals.

The most recent example is the new NYISO capacity zone (G-J), whose capacity prices have been estimated to increase retail rates by 25%. Although NYISO now supports a phase-in of the new local capacity zone (NYISO only offered such support after FERC approved the zone, despite load interests warning of the price spike during consideration at FERC), generators have sought to prevent a phase-in, arguing that the new local capacity zone is needed to send "efficient" price signals. Never mind that the New York PSC is already undertaking various actions, including transmission projects, to relieve constraints leading to the G-J locality, making the high prices nothing but transient windfalls to existing capacity owners; not signals for new investment.

If a waiver of FERC's order adopting a new capacity zone to allow a phase-in of the transient and penal capacity prices is not appropriate, then neither is a waiver of the long-standing and well-understood bid cap just because the market for an input needed for producing power (natural gas) has behaved in an erratic manner.

Competition is about generation owners and developers assuming risk. While we understand the $1,000/MWh cap is an artificial interference in the market, so is requiring load to forward procure capacity; and the two serve as a regulatory trade-off. In exchange for guaranteed payments, capacity suppliers assume the risk of being available to produce energy under current market rules, including the bid cap. If market shocks will lead to capacity suppliers under-recovering variable costs; it's the fault of the capacity supplier for not prudently managing its risks, not the market design, and the appropriate course of action is to let shareholders absorb these unrecovered costs.

Regarding natural gas prices, NYISO said as follows:

"The natural gas prices that the NYCA is experiencing during the cold snap could cause some NYCA Generators' costs to exceed the $1,000/MWh Bid Restriction. The January 22, 2014 day-ahead index price for natural gas at the Transco Z6 NY6 hub was more than $120/MMBtu. $120/MMBtu is more than double the second highest price posted for that hub in 2013 and 2014. The January 22, 2014 day-ahead index price is 20 times higher than the $6/MMBtu average price at the Transco Z6 NY hub in December 2013. During January and February 2013, the average Transco Z6 NY natural gas prices were $9.98/MMBtu and $10.39/MMBtu respectively. The January 2013 average price was affected by a three day period when temperatures ranged from slightly above 5 degrees to less than 20 degrees Fahrenheit. During the cold weather in 2013 the Transco Z6 NY natural gas price ranged from approximately $16/MMBtu to less than $40/MMBtu. The January 22, 2014 day-ahead index price of $120/MMBtu is more than triple the highest price seen at the Transco Z6 NY hub in January of 2013."

The NYISO is requesting that the temporary bid cap waivers be in effect from January 22, 2014 through February 28, 2014

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