Battle cries of price gouging, price suppression and threatened reliability res-ounded across the six-state region of New England`s restructured wholesale electricity marketplace as the Independent System Operator New England (ISO-NE) and generators took stock after their initial 10-month run.
On May 1, 1999, ISO-NE, in addition to operating the power grid and transmission reservation system, also began to administer the region`s wholesale electricity marketplace. A bid-based system replaced the traditional cost-based dispatch of generation. Generators, represented by the Competitive Power Coalition (CPC), recently fired off some criticisms about ISO-NE`s admin- istration, and three generators filed a complaint with the Federal Energy Regulatory Commission (FERC) alleging ISO-NE has improperly suppressed prices.
Will peakers make a hasty retreat?
CPC`s eight members include: PG&E Generating, Sithe Energies Inc., Energy Management Inc. (EMI), American Ref-Fuel, Massachusetts Institute of Technology, Calpine Corp., Northeast Energy Associates and Southern Energy New England LLC.
In a recent CPC teleconference, EMI`s Dennis Duffy said, “We believe the ISO is misapplying the market rules so as to suppress the market prices.” Pointing to more than 600 price revisions by ISO-NE, most of which were downward, CPC asserts ISO-NE is stifling the market and jeopardizing development of peaking capacity required to meet demand in the region.
Duffy said, “At EMI, we had a fully permitted peaker project ready to go to financing at the end of last summer; however, when we went to Wall Street and spoke with the financial community, the general reaction was `we do not have sufficient confidence that this ISO will let peak period clearing prices stand so that we could advance the financing on a peaking unit in this pool.`”
Northern States Power`s NRG Energy appeared to be fed up with its struggle to make money under ISO-NE`s administration, giving notice that it wants to remove its Somerset, Mass., peak-running turbines (229 MW). Reportedly losing as much as $15 million by running below operating costs, NRG wants to move the power plant outside the ISO-NE region.
There are some market players, however, bringing new generation into the region. ISO-NE`s Jim Sinclair, director of public affairs, said there are currently more than 27,000 MW of proposed new generation on the books of which more than 5,500 MW are under construction.
CPC contends the 27,000 MW figure is misleading as an indicator of the market`s robustness. Neil Costello, CPC`s general counsel, said “Those applications were made three to five years ago in anticipation of a restructured competitive marketplace. There are only going to be 6,500 to 7,000 MW that are built.”
Sinclair said many of the issues raised by CPC are really NEPOOL issues. “For example, how do you deal with a unit that has critical reliability importance to the grid, but can`t earn a living in the competitive markets? You think of small peaking units by way of example. NEPOOL needs to resolve that issue quickly and fairly to ensure that some type of mechanism exists to be able to properly compensate that unit.”
Who defines “fair” pricing?
Jim Gordon, EMI`s president, said ISO decided to pick (via price adjustments) the winners and the losers in last summer`s marketplace. He said, “Certain sophisticated traders believed that the price of electricity was going to be very low so they went in short; they had the opportunity to enter into bilateral contracts for over the summer and longer periods of time, but they chose, based on their view of the marketplace, to go in, in essence naked, into the market.”
Pointing to the hottest summer in over 100 years in New England and the region`s capacity need, Gordon asserted there were no market flaws. “The price of electricity went up and these sophisticated traders that took a position in the marketplace got hammered.”
Gordon added ISO-NE previously said it did not want to see a transfer of wealth into the marketplace due to spurious prices. He said, “This is not a transfer of wealth into the marketplace, these are traders taking positions, and one person by virtue of that, wins for the day and another person loses. The ISO decided to play God and to pick the winners and losers in this marketplace. The ISO decided that they didn`t want the transfer to occur so they rewrote history.”
Not so, according to Sinclair. “It`s not our role to be in the price administration business. We want price certainty just like everyone else, but we can`t allow a market flaw to dictate an outcome. A bad price or inaccurate price at the end of the day means someone has gotten money they don`t deserve to get and someone else has had to pay in the wholesale market money they didn`t deserve to pay. We`re not in the business of determining winners and losers, but we are in the business of insuring that if the market flaws exacerbate or show themselves in terms of erroneous price or a system error occurs, or a software error occurs that produces an erroneous price, we obviously have to fix that.”
Sinclair said much of the price adjustment occurred in the first three to five months of the market. He estimated that in the first two months in the New York market, there were about 300 to 400 instances of price administration. He added New York had a more refined and robust market structure coming out of the starting gate compared to New England. For example, New York already had a multi-system settlement system (see sidebar) and a transmission congestion mechanism in place for pricing, which New England does not yet have.
Flawed markets need fixing
A group representing 20 market participants, including power marketers, end use customers, municipal utilities and transmission owners, in a memorandum sent to the New England Power Pool (NEPOOL), ISO-NE, and to the New England Conference of Public Utility Commissioners, said the energy market was working reasonably well. They pointed to the 80 percent of the top 20 marketers nationwide that are active in NEPOOL as evidence of confidence in the market as a basis for trading and hedging.
Standard blocks of 25 MW, 50 MW and 100 MW are frequently traded in forward markets out two years. Longer-term trades also occur, according to the market participants.
They suggest improvement is necessary in the following areas:
– The reserve and capacity markets are flawed.
– A transmission congestion and multi-settlement system needs to be implemented in NEPOOL.
– A comprehensive transmission planning process needs to be implemented as an integral part of a functioning competitive bulk-power market.
Harvey Reed, managing director of Constellation Power Source Inc., a subsidiary of Baltimore Gas & Electric and one of the electricity trading firms sending the memorandum, commented on the status of the markets. “The energy market is a market where it`s reasonably liquid and it`s liquid going forward into market where people trade, and there`s a fair amount of hedging going on in that market. We like to see price certainty in that market and not have prices change so that you can do the hedging around the price itself. On the other hand, we recognize that the reserves and the capacity markets have fundamental problems that need to be fixed. We think those markets need to be worked on and need to be worked on expeditiously.”
ISO SETTLEMENT SYSTEMS
A multi-settlement system results in added flexibility in market clearing prices, helping to diminish the need for an ISO`s price administration. The following examples illustrate the difference in the systems as described by ISO-NE`s Jim Sinclair.
Single settlement system: ISO-NE operates with such a system. On a day-ahead basis, a generator offers excess generation to the ISO at a stated price. For example, 40 MW is offered at $40 per MW. However, there is no binding financial commitment to that price by either the generator or the buyer. The spot clearing price applied to the 40 MW is determined after the fact the next day. The fact that the generator is dispatched by the ISO indicates the market clearing price is expected to reach at least $40. All generation run in a particular hour will receive that hour`s market clearing price, which is related to the highest priced MW physically dispatched. There is no binding commitment to anything that occurred the previous day.
Multi-settlement system: New York ISO operates with this system. The advantage to this settlement is that some market clearing price certainty is achieved at the time of day-ahead bidding. For example, a buyer proposes taking 100 MW at $40 per MW and a generator agrees to sell at that price. In contrast to the single settlement system, this agreement becomes a binding financial commitment. The buyer is on the hook for 100 MW at $40 per MW. If the buyer`s demand in real-time is 105 MW, the additional 5 MW will be purchased at real-time spot market prices.