Retail Suppliers Seek to Pass The Buck on New York Make-Whole Costs

Retail suppliers protested the New York ISO's sought waiver to provide make-whole payments in excess of $1,000/MWh to generators, not because the payments are unwarranted, but because the retail suppliers said that the costs should instead be reflected in market-clearing prices.

Specifically, in separately filed comments, the Retail Energy Supply Association and National Energy Marketers Association each protested the NYISO's requested make-whole payments, and as an alternative asked that any costs paid in excess of the $1,000/MWh cap should instead be paid through the LMP used to set the market-clearing price. Retail suppliers said that inclusion of the costs through the LMP would allow suppliers to hedge such costs, while the use of make-whole payments and uplift would make the costs unhedgeable, and present challenges for retail suppliers seeking to recover the costs from customers (absent invoking regulatory change in law clauses).

We understand retail suppliers have been put in an untenable position by the NYISO's request. Uplift payments certainly should be minimized because of their unexpected and unhedgeable nature.

However, the retail suppliers' solution is not without additional cost. If the decision was simply how to allocate the same amount of money through LMP or make-whole payments, then the retail suppliers' request would be reasonable. But that is not the issue here. Allowing generators with costs in excess of $1,000/MWh to set LMP greatly inflates the total costs at issue, since now all generators will be paid the inflated price, rather than just a single generator through a make-whole payment. Other than creating a windfall for lower-cost generators, it's not clear what these excessive LMP payments would do (since new entry, we're told, is not driven by "transient" and "unpredictable" LMPs, and we're told that the capacity market is what drives investment decisions and signals).

Now, given that FERC already approved PJM's request for make-whole payments above $1,000/MWh through uplift (with approval of LMP recovery still pending), retail suppliers may feel it's inevitable that FERC will grant some form of relief to generators who have costs in excess $1,000/MWh (even though natural gas is a free market and if generators didn't want to pay $120/mmbtu for gas, they could have avoided this). If such relief is inevitable, retail suppliers may be seeking to ensure that they at least get half a loaf in supporting cost recovery through LMP to reduce uplift.

Still, if retail suppliers are representing customer interests, as they claim to do when advocating for greater choice and competition in the industry, then they should be opposing any payment to generators in excess of $1,000/MWh, or at least to generators with a capacity supply obligation, rather than just covering their own position in seeking that the costs flow through LMP and not uplift.

Generators who agreed to be subject to making a day-ahead offer in exchange for a capacity payment did so knowing what the offer cap was, and should have acted to ensure their costs would not exceed such cap. If they did not, retail suppliers and/or customers cannot be compelled to bail out the generators' imprudent management just because such management will lead to "unrecovered costs." A free market says such unrecovered costs should be borne by investors.

It's like a retail supplier agreeing to a one-year fixed contract with a customer for 10¢/kWh. If the retail supplier suddenly faces increased costs of 12¢/kWh during the contract term -- perhaps because 1-in-10 year weather spikes usage even beyond usage for which the retail supplier prudently hedged and it needs to buy expensive balancing power -- the retail supplier isn't able to recover those higher costs from the customer, and the supplier either eats it, or, in the worst case scenarios, defaults. No rational person, or even economist, would suggest that the supplier should have the right to extract additional money from the customer just because its costs increased in an unanticipated manner. But that's exactly what is occurring with "competitive" generators who agreed to take on a capacity supply obligation.

We understand market rules are mutable, and generators are certainly well within their right to propose changes to the offer cap or other rules, but what is inappropriate is doing it through an "emergency" measure just because they are facing unrecovered costs which are solely due to their own actions, or inactions, in managing their risks.