FERC Extends New York, New England $1,000/MWh Bid Caps

The Federal Energy Regulatory Commission last week signed off on requests by ISO New England and the New York Independent System Operator (NYISO) to extend the $1,000 per megawatt hour (MWh) bid caps in their energy markets, but only through the end of October. Meanwhile, a FERC official said that in his view, once the caps expire later this year, that may very well spell the end of such caps in both New York and New England.

The Commission in July of last year issued an order establishing a temporary bid cap of $1,000 per MWh for ISO New England's energy and automatic generation control markets during capacity deficiency periods in which a New England Power Pool (NEPOOL) operating procedure is in effect. FERC also accepted a bid cap extension applicable to ISO New England's operating reserve markets. In December, the Commission extended ISO New England's temporary bid caps from October 31, 2000, through March 31, 2001.

More recently, ISO New England in March of this year asked FERC to approve its request to extend the $1,000 per MWh bid caps for its energy, automatic generation control and operating reserves markets through 2001 and proposed adding new language clarifying the instances in which the bid caps would become operative. In its application, ISO New England argues that FERC's approval of the extension is warranted, noting that during periods of capacity shortage, consumers in New England may still be subject to opportunistic bidding and the potential exercise of market power.

FERC, in an order issued last Tuesday, approved ISO New England's request to extend its $1,000 per MWh bid caps through October 31, 2001. The Commission also allowed the proposed extension to become effective April 1, 2001. In its order, FERC states that ISO New England's use of bid caps reflects the continuing market design problems within NEPOOL and related problems. "At the same time, however, we also note the improved competitive outlook for the New England region and its implications," the order adds.

In addition, the Commission notes that in its July 2000 order, it approved an interim bid cap applicable to these markets as a transitional mechanism to be in effect only until ISO New England and NEPOOL stakeholders adopted appropriate remedies to the market flaws that gave rise to these bid caps. "It was not our expectation that these bid caps would become a permanent fixture of the New England markets, especially given the disincentive these bid caps could pose over time to the construction of new generation to serve the NEPOOL market," the order continues.

FERC cites several reasons in its order as to why it agreed to extend ISO New England's bid caps. Among other things, the Commission notes that NEPOOL and ISO New England are making progress in improving the demand responsiveness of NEPOOL's markets. According to the order, FERC last summer approved a temporary load response program that ISO New England wanted to test in the market, but the ISO could not and did not make any projections of what reductions in demand might be possible at that time. Since then, ISO New England has developed new demand-side response programs for use this year, the order continues. Given last summer's experience and testing for the winter, ISO New England now estimates that these programs could reduce peak demand for energy by 300 to 600 MW. In addition, ISO New England has also developed new market monitoring and mitigation provisions and associated screens, FERC added.

For its part, the NYISO in March asked FERC to extend its $1,000 per MWh energy bid cap that would have otherwise expired on April 30, 2001. The NYISO proposed to extend the bid cap through October 31, 2002. In support of its application, the NYISO, among other things, said that it is concerned that its electric supply continues to be tight, while adequate new generation is not yet available and demand continues to grow. The order notes that in its recently released Locational Installed Capacity Requirements study (ICAP study), the NYISO concluded that the New York City area is almost 400 MW short of installed locational generating capacity required to satisfy reliability standards for the summer 2001 capability period. Also, the NYISO stated that delays in New York State's process for licensing and siting new generating capacity are preventing supply from increasing in order to match the continued demand growth.

FERC, in an order issued last Tuesday, agreed to extend the NYISO's bid cap authority, but only until October 31, 2001 and agreed to make the proposed extension of the bid cap effective on May 1, 2001. The Commission said that it found the NYISO's proposal to extend the bid cap for a period of 18 months to be unsupported based on the progress the ISO has made to increase supply and to correct market design flaws. FERC noted that the NYISO's ICAP study indicates that if expected supplies come on line by June 1, 2001, the ISO will be able to meet ICAP requirements for this summer. Specifically, the New York Power Authority is expected to install about 400 MW of new gas-fired turbines in New York City by June 1, 2001, the order added.

In a separate but related order issued on the same day, FERC also ruled on a request by the NYISO to extend temporary extraordinary procedures (TEP) authority given to the ISO on several previous occasions. The Commission points out in its order that under the TEP, the NYISO is authorized to take an extraordinary corrective action in order to correct a market design flaw or to address a transitional abnormality. The NYISO was first given TEP authority on September 15, 1999 for a period of 90 days from the commencement of NYISO's operations. The Commission has granted three extensions of the ISO's TEP authority. In the NYISO's latest request to extend its TEP authority, the ISO seeks to stretch the authority through the summer 2002 capability period. The NYISO estimated that it will take at least 18 months until it becomes clear whether new rules and improvements that it intends to implement have adverse consequences and whether the supply situation in New York has improved. Although the Commission agreed last week to a limited extension of the NYISO's TEP authority, it stretched that authority only until October 31, 2001, making the extension effective as of May 1, 2001.

FERC Chairman Curt Hebert voiced his opposition to the price cap and TEP decisions in a dissent attached to all three orders. "I continue to oppose the bid caps in New York and New England and the 'temporary extraordinary procedures' (TEP) in New York," wrote Hebert in the dissent. "My preference would be to allow these market mitigation measures to now lapse," Hebert continued. "My conviction is particularly strong in light of improvements during the last year ... in the supply situation and the introduction of demand response programs in those regions," he added. "My hope is that the Commission, when it revisits these issues this Fall, will conclude that the TEP and bid caps no longer serve any purpose other than to stifle the type of supply and demand initiatives necessary to ensure a truly competitive market for electricity in New York and New England," Hebert wrote.

But even with the Commission's recent moves to extend bid caps in New York and New England, that doesn't necessarily mean that those caps won't disappear in the near future, according to Larry Greenfield, FERC's senior counsel in the Commission's Markets, Tariffs and Rates section. Greenfield commented on the New England and New York orders last week at NGI's GasMart/Power 2001 conference in Tampa, FL. Once the bid caps in New York and New England expire at the end of October, "well, of course, nobody can guarantee what's going to happen, but my own personal view is that this may be the end of price caps" in both regions, said Greenfield. "Now, as I say, who knows what'll happen between now and then, but I think that may be the end of price caps in New York and New England," he added.

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