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FERC Blasts NYISO, Approves ConEd-NU, AEP-CSW Mergers

FERC Blasts NYISO, Approves ConEd-NU, AEP-CSW Mergers

Although its requests were partially met last week by the Federal Energy Regulatory Commission, the New York Independent System Operator got an earful from FERC Commissioners, including an ultimatum to get its systems in proper working order or have its authority taken away.

FERC agreed to allow the ISO to put in place price caps on non-spinning (stand-by) power reserves --- effective March 28 through Nov. 1. Non-spinning reserves are power plants waiting on stand-by to meet peak demand. FERC set a temporary price cap at $2.52/MWh for the 10-minute non-spinning reserves market. The Commission also will allow non-spinning reserve providers to recover their opportunity costs if they are selected to provide reserves and cannot sell power into the wholesale market.

The regulatory action follows huge price spikes in the ancillary services market during the first quarter. Prices for 10 minute non-spinning reserves soared to as high as $302/MWh in mid-February from only $1.06/MWh two months earlier. The ISO reported that the rates paid by transmission customers for these reserves rose by $65 million in just six weeks from the end of January to mid-March.

The Commission rejected the ISO's request for a cap on spinning reserves, which saw similar price spikes, and disallowed the ISO's request to re-bill for spinning reserves from March 1 through March 28. In addition, the Commission lambasted the ISO for being partly responsible for the market power problems that triggered huge price spikes for power reserves in New York.

"When we approved market-based pricing for this ancillary service," said Commissioner William Massey, "the study presented at the time showed [market] concentration numbers that were clearly on the margin of my comfort level, but the Commission was persuaded that things would be better than indicated. That did not turn out to be the case. Instead market concentration is even higher now with an HHI [Herschman-Herfindahl Index] of over 4,000. Capacity is not being bid into the market, and prices are predictably going through the roof..

"There are other facts in this case that are clearly troubling," Massey added. "Some of this market concentration is due to certain practices of the ISO. Among them are procuring reserves only east of the central-east constraint even when that constraint is not binding, not including in its software a very large pumped storage plant located east of the constraint that is capable of providing reserves, and not allowing customers to self-supply reserves. While I understand and am sympathetic to the challenges of devising good electricity markets, I'm troubled that the ISO has not done all that it could to rectify current market problems. Getting these markets right so that consumers can enjoy a reliable supply of electricity at reasonable prices is imperative."

If the ISO can't get it right by Nov. 1, FERC will commence a Section 206 (Federal Power Act) investigation, said Massey. "I know that market design and implementation is tough sledding, but the stakes are high now, and it's time for due diligence and deliberate speed, a real sense of urgency in making it work."

Commissioner Curt Hebert, who presented a concurring opinion, had a more hard-nosed reaction to the ISO's problems. "...The ISO failed in its responsibilities," he said. "I think we should reconsider our approval of the organization as the operator of the grid in New York. I prefer we institute a Section 206 proceeding against the ISO directly rather than wait in front of a court, therefore I will concur." Hebert suggested FERC give the ISO "the cold turkey treatment."

"I would reject bid caps altogether and let prices fluctuate; this would act as an inducement to the ISO to reform its practices. Each of the errors the ISO made, it could repair in the short-term... With bid caps in place, it has no incentive to spend the money or change its practices."

Hebert said FERC should "start from the beginning" and withdraw its approval of the ISO, which "would allow everyone to deal with the reality of the failure of the parties in New York. With the deadlines of Order 2000 looming, this will give impetus to the industry to construct from the ashes of the current system a real competitive market in the framework of a regional transmission organization. Today's order, although not as specific as I would write it, begins that journey."

ConEd-NU and AEP-CSW Mergers Approved

In other action impacting the power industry last week, FERC approved two major mergers, the $6 billion combination of American Electric Power and Central and South West Corp., and Consolidated Edison's $7.5 billion purchase of Northeast Utilities.

The market power remedies filed by American Electric Power and Central and South West Corp. were sufficient to meet the conditions FERC imposed in March. The merged utility was required to transfer operational control of its transmission facilities to a FERC-approved regional transmission organization (RTO) by Dec. 15, 2001. In the meantime, AEP and CSW were required to implement certain mitigation measures, including arranging for an independent party to calculate/post available transmission capacity and monitor the operation of the transmission system to determine whether the merged utility is discriminating against customers or exercising market power.

The companies have devised a plan to monitor their activities and have taken other steps to ensure competition among power suppliers is maintained. They also agreed to increase the amount of power they would sell from the 470 MW Frontera generating plant in Texas to 290 MW from 250 MW. The $7 billion company will be the nation's largest electric utility based on generating capacity with 38,000 MW.

FERC also approved the formation of the nation's largest power distributor by allowing Consolidated Edison to purchase New England's biggest electric utility, Northeast Utilities. FERC said it found no competitive, regulatory or rate-based conflicts to prevent approval of the deal. ConEd announced the $7.5 billion purchase in October 1999. It will create a huge utility with more than five million electric and 1.4 million gas customers in New York and New England. The combined company will have annual revenues of $11 billion and a total enterprise value of $19 billion.

Rocco Canonica

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