FERC last week conditionally approved a proposal by the New York Independent System Operator (NYISO) to implement an installed capacity (ICAP) demand curve in the grid operator’s ICAP market. The Commission said the proposal will provide better price signals to investors for the construction of new generation and encourage the formation of long-term, bilateral transactions, among other things.

The NYISO filed its demand curve proposal at FERC in March after its board of directors gave the grid operator the green light to pursue Commission approval of the plan.

Currently, each load serving entity (LSE) in the NYISO must procure resources equal to 118% of its peak load and each LSE is assessed a fixed deficiency charge of three times the annualized cost of a new peaking unit per MW for each MW that is deficient.

Under the NYISO plan, the ICAP requirement would no longer be fixed at 118% of peak load. Rather, it would vary depending on the market price for ICAP determined using a demand curve for ICAP in a monthly auction. Also, the current fixed deficiency charge would effectively be replaced with a variable charge equal to the ICAP price that results from the monthly auction and would decrease as the quantity of ICAP offered into the market increases.

In conditionally accepting the demand curve proposal, FERC said that it agreed with the NYISO that the plan will encourage greater investment in generation capacity and thus improve reliability by reducing the volatility of ICAP revenues. The Commission also found that the demand curve will provide net benefits, especially compared with the existing vertical demand curve.

FERC noted that the ICAP demand curve was initially proposed by the New York Public Service Commission (PSC) in May 2002 and reflects a year of negotiations and discussions among the PSC, participants and the NYISO. FERC considers the PSC’s role in developing the ICAP proposal to be an important factor in its ruling.

The PSC and the NYISO have determined that the demand curve proposal will adequately and reliably serve customers’ needs over the short and long terms, FERC noted.

The Commission also said that it is persuaded by the NYISO that it is reasonable to establish a price for ICAP that declines as the chosen ICAP requirement level increases. “We agree with NYISO that resources above the traditional 118% of peak load would provide additional reliability value to the market. We also agree with NYISO that successive incremental resource additions above 118% provide declining incremental reliability value, and that it is reasonable for the price of ICAP to reflect this relationship.”

At the same time, FERC noted that the ICAP demand curve is a “novel proposal.” Determining the specific parameters of the plan requires some measure of judgment since there has been no experience with this new mechanism, the Commission said.

“It will be important to evaluate and monitor the appropriateness of these parameters after some experience is gained,” the federal agency said. FERC therefore directed the NYISO to file a detailed evaluation of the demand curve and its implementation by Dec. 1, 2003 and annually for two years thereafter.

Meanwhile, FERC said that it agreed with arguments made by Consolidated Edison Co. of New York and Strategic Energy that a proposed supplemental supply fee may create the potential for capacity withholding when the system doesn’t clear to meet the 118% minimum.

FERC therefore rejected this element of the demand curve proposal. The Commission said that removing the supplemental supply fee will reduce the incentive for generators to withhold capacity from the ICAP auction and therefore will encourage a greater amount of capacity to be bid into the spot market auction.

The Commission noted that the NYISO has indicated that a refinement addressing the incentive for withholding is under consideration by the grid operator’s board of directors. “We will entertain any new proposal that addresses our concerns about withholding.”

In addition, FERC directed the NYISO’s market monitoring unit to monitor ICAP markets and the behavior of ICAP suppliers, particularly owners of large amounts of capacity, and to file a report detailing any withholding behavior by Dec. 1, 2003 and each year thereafter.

Elsewhere in the order, the Commission noted that potential conflicts with ongoing multi-independent system operator (ISO) capacity adequacy efforts were raised by numerous commenters.

Energy East, for example, argued that the demand curve proposal represents a huge departure from the broader regional approach being developed in a multi-ISO resource adequacy markets working group, particularly the development of a centralized capacity market.

FERC said that while the NYISO demand curve proposal will benefit New York, it also wants to see a multi-regional approach implemented. Since the resource adequacy markets working group intends to file a proposal by next year, FERC directed the NYISO to file a compliance report by Feb. 28, 2004 detailing the status of the working group process.

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