Although its emergency requests were partially met yesterday bythe Federal Energy Regulatory Commission, the New York IndependentSystem Operator got an earful from FERC Commissioners, including anultimatum to get its systems in proper working order or have itsauthority taken away.

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

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

The Commission rejected the ISO’s request for a cap on spinningreserves, which saw similar price spikes, and disallowed the ISO’srequest to re-bill for spinning reserves from March 1 through March28. In addition, the Commission lambasted the ISO for being partlyresponsible for the market power problems that triggered huge pricespikes for power reserves in New York.

“When we approved market-based pricing for this ancillaryservice,” said Commissioner William Massey, “the study presented atthe time showed [market] concentration numbers that were clearly onthe margin of my comfort level, but the Commission was persuadedthat things would be better than indicated. That did not turn outto be the case. Instead market concentration is even higher nowwith an HHI [Herschman-Herfindahl Index] of over 4,000. Capacity isnot being bid into the market, and prices are predictably goingthrough the roof..

“There are other facts in this case that are clearly troubling,”Massey added. “Some of this market concentration is due to certainpractices of the ISO. Among them are procuring reserves only eastof the central-east constraint even when that constraint is notbinding, not including in its software a very large pumped storageplant located east of the constraint that is capable of providingreserves, and not allowing customers to self-supply reserves. WhileI understand and am sympathetic to the challenges of devising goodelectricity markets, I’m troubled that the ISO has not done allthat it could to rectify current market problems. Getting thesemarkets right so that consumers can enjoy a reliable supply ofelectricity at reasonable prices is imperative.”

If the ISO can’t get it right by Nov. 1, FERC will commence aSection 206 (Federal Power Act) investigation, said Massey. “I knowthat market design and implementation is tough sledding, but thestakes are high now, and it’s time for due diligence and deliberatespeed, 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 ISOfailed in its responsibilities,” he said. “I think we shouldreconsider our approval of the organization as the operator of thegrid in New York. I prefer we institute a Section 206 proceedingagainst the ISO directly rather than wait in front of a court,therefore I will concur.” Hebert suggested FERC give the ISO “thecold 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 theshort-term… With bid caps in place, it has no incentive to spendthe money or change its practices.”

Hebert said FERC should “start from the beginning” and withdrawits approval of the ISO, which “would allow everyone to deal withthe reality of the failure of the parties in New York. With thedeadlines of Order 2000 looming, this will give impetus to theindustry to construct from the ashes of the current system a realcompetitive market in the framework of a regional transmissionorganization. Today’s order, although not as specific as I wouldwrite it, begins that journey.”

In other action impacting the power industry yesterday, FERCapproved the market power remedies filed by American Electric Powerand Central and South West Corp., which allows the two companies tocomplete their $6 billion merger. The merger was approved by FERC inMarch on condition that the merged utility transfer operationalcontrol of its transmission facilities to a FERC-approved regionaltransmission organization (RTO) by Dec. 15, 2001 (see Daily GPI, March 16). In the meantime, AEP and CSWwere required to implement certain mitigation measures, includingarranging for an independent party to calculate/post availabletransmission capacity and monitor the operation of the transmissionsystem to determine whether the merged utility is discriminatingagainst customers or exercising market power.

The companies have devised a plan to monitor their activitiesand have taken other steps to ensure competition among powersuppliers is maintained. They also agreed to increase the amount ofpower they would sell from the 470 MW Frontera generating plant inTexas to 290 MW from 250 MW. The $7 billion company will be thenation’s largest electric utility based on generating capacity with38,000 MW.

FERC also approved the formation of the nation’s largest powerdistributor by allowing Consolidated Edison to purchase New England’sbiggest electric utility, Northeast Utilities. FERC said it found nocompetitive, regulatory or rate-based conflicts to prevent approval ofthe deal. ConEd announced the $7.5 billion purchase in October 1999(see Daily GPI, Oct. 14, 1999). It willcreate a huge utility with more than five million electric and 1.4million gas customers in New York and New England. The combinedcompany will have annual revenues of $11 billion and a totalenterprise value of $19 billion.

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