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
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
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