California power problems worry New York

With summer approaching, supplies short, and California experiencing blackouts, a dispute is shaping up between the New York grid operator and state regulators over a proposed 'soft' cap on wholesale electricity prices. The staff of the New York Public Service Commission is recommending the New York Independent System Operator seek Federal Energy Regulatory Commission approval to institute a $150/Mw-hr 'soft' price cap similar to one the federal agency ordered for the California market.


With summer approaching, supplies short, and California experiencing blackouts, a dispute is shaping up between the New York grid operator and state regulators over a proposed "soft" cap on wholesale electricity prices.

The staff of the New York Public Service Commission(PSC) is recommending the New York Independent System Operator seek Federal Energy Regulatory Commission approval to institute a $150/Mw-hr soft price cap similar to one the federal agency ordered for the California market.

Proponents say the cap is necessary to avoid the problems that have brought the California electric system to its knees. Generators in the New York market are already subject to a $1,000/Mw-hr hard cap.

Under a soft cap, generators can bid higher than $150/Mw-hr, but the price is subject to review after the fact. Suppliers would have to defend the cost basis for the bid. Plus, bids higher than $150/Mw-hr would not set the market-clearing price, under the staff proposal.

The PSC staff report proposes bids over $150/Mw-hr be submitted to the ISO and the commission for their analyses with a recommendation to FERC. The staff said the soft cap would work in conjunction with the $1,000 hard cap and a proposed circuit breaker plan to ensure "consumers pay reasonable prices." It also recommended FERC consider a region wide cap.

The ISO favors a circuit breaker mechanism, says Ken Klapp, ISO spokesman, but not a soft price cap. The circuit breaker would be activated when it appears markets are constrained or there is an insufficient amount of excess capacity available or an insufficient number of bidders in the market.

In its review of the ISO, the staff said it is concerned some market participants may seek a weak circuit breaker to replace the $1,000/Mw-hr price cap. Instead, the staff recommended the ISO institute a circuit breaker no later than May 1, in conjunction with both the $1,000/Mw-hr and $150/Mw-hr caps.

These measures are necessary because during the summer there is potential for repeated and sustained price spikes, according to the staff analysis. Much like California, very little generation has been built in New York for the past 10 years, while electricity demand is rising much faster than forecasts of just a few years ago.

Even in a well-established functioning market, such an environment would be expected to yield price spikes during peak demand, the staff report concludes, and the New York ISO needs ample power to protect consumers.

Klapp says the ISO expects to produce details of its circuit breaker proposal "shortly" in order to make software changes in time for this summer. But in a letter to the PSC, William J. Museler, ISO chief executive, said the board cannot endorse a soft cap, which is a "major departure from the economic fundamentals underlying the New York ISO markets."

An analysis by two prominent economists found the soft cap in California has served as a floor instead, because sellers no longer have a strong incentive to offer electricity at prices close to their marginal costs. Museler said the soft cap could also discourage investment in new generating capacity in New York among private investors seeking a return on invested capital.

Finally, Museler said, imposition of such a cap would create "severe" administrative problems for the ISO similar to the ones created by wellhead regulations that nearly resulted in "destruction of the natural gas industry."

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