Cutting the price cap on bids to $150/Mw-hr from $1,000/Mw-hr could deter the "very power generation" needed to moderate prices and insure reliability, the New York Independent System Operator said in response to a recommendation by the Public Service Commission of New York (PSC) staff.
State regulators called for the much lower price cap on bids by generators into the wholesale electricity market in a Dec.14 report. The PSC initiated the examination after New York experienced prices spikes this past summer.
Rising fuel prices, a shortage of generating capacity, and the inability of consumers to respond to power prices are the most important factors affecting electricity prices today, the New York ISO said.
The New ISO also expressed "serious concerns" over drawing conclusions about the New York markets and imposing remedies based upon the recent events in California. New York ISO Pres. William Museler warned against drawing generalized conclusions and imposing "quick fixes" that may inadvertently eliminate economic signals necessary for the New York market to flourish.
"While we have had some startup problems," Museler said in a statement, "New York has not seen the kind of operational issues, market behavior, or financial outcomes experienced in California," he said. Moreover, he said, the $150 bid cap proposal represents a departure from how the New York, ISO-New England, and PJM markets are currently operated.
Not California
Museler said the ISO together with market participants are developing a market mechanism that will protect against price spikes when competition does not exist as well as demand-side, price-sensitive price mechanisms.
In its assessment, the PSC staff warned the New York wholesale market is dangerously vulnerable to market power abuse during a normal or hotter than normal summer." The market in New York has similar conditions to California�tight supply, no new generation, and strong demand for electricity also characterize the New York market, it said.
The staff report says the commission is concerned market participants could take advantage of these problems and send prices to levels unjustified by scarce resources. The report found significant problems with the NYISO�s day-ahead, hour-ahead, and real-time operations. In particular, the bidding system of using a market-clearing price to pay all generators tends to keep wholesale prices higher than using a �pay what is bid� approach.
Regulators recognize that market-clearing prices are more efficient and give the proper price signals; consequently, the staff is not recommending complete elimination of that type of pricing.
The staff recommends the New York ISO seek FERC permission to cap market clearing prices at $150/Mw-hr. Generator bids can exceed the cap, if the higher bid can be justified on a cost basis first with the NYISO and the commission, which will then make its own recommendations to FERC. But under no circumstances can bids exceed the existing $1,000/Mw-hr cap. But bids higher than $150/Mw-hr will not set the clearing price.
The report also sets out stronger �mitigation� measures for generators that exercise market power. It recommends profits from market power be returned to consumers, a penalty against repeat offenders, and publication of the names of repeat offenders. These measures will be implemented when bids increase the lesser of 100% or by $50/Mw-hr.
The New York electricity market is particularly susceptible to market power abuse because of transmission constraints, the inability of suppliers or consumers to increase output or reduce demand in response to price changes, and an inadequate generation supply, according to the report.
State regulators also want the Federal Energy Regulatory Commission (FERC) to "retroactively correct" wholesale prices and award refunds to consumers, if it determines gains by generators were the result of market power abuse. The NY ISO should seek authority from FERC to retroactively correct prices within a �reasonable� period of time when consumers are harmed by the markets.
The staff reasons refunds are justified because consumers should not be harmed while the markets remain uncompetitive, especially during the the time needed to allow the New York ISO to make these changes to rules and regulations.
