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WASHINGTON - The Connecticut Delegation recently wrote to the President and CEO of New England's power grid operator (ISO New England) asking him to address a number of flaws in ISO-NE's proposal for a capacity pricing scheme that will cost New England ratepayers an estimate additional $13.5 billion. Chief amongst the delegations concerns, a market analysis which says that under the proposal, electricity generators could receive the maximum possible payments without adding any new generation capability.
The delegation's letter was copied to the Chairman of the Federal Energy Regulatory Commission, which will rule on the proposal.
The full text of the letter follows:
Mr. Gordon van Welie, President and CEO
ISO New England Inc.
One Sullivan Road
Holyoke, Massachusetts 01040-4000
Dear Mr. van Welie:
We are writing in the hope of receiving more specific answers to our concerns than ISO New England has thus far been willing to provide. We bring to your attention the enclosed report from Standard & Poor's which echoes a number of the issues that have been raised by New England's Congressional delegation, Governors, Attorneys General, Public Utility Commissions and consumer advocates.
In your July 25, 2005 letter to the New England Governors, you dismiss the concern that there is no guarantee that capacity will be built, by explaining that is "true of all competitive markets." While LICAP is, to quote the S&P analysis, designed "to mimic the operation of competitive markets" it is not, in fact a true competitive market as ISO-NE proposes to establish the minimum capacity prices "through administrative fiat, with an eye towards reliability and with little regard to the costs involved."
It is insufficient to imply that the competition envisioned for the system is the pure creation of a free market. The design of LICAP involved countless choices made by ISO-NE, and therefore we would appreciate an explanation of how, exactly, ISO-NE's design for LICAP will address the following deficiencies, as noted in the S&P analysis:
1. Because the LICAP proposal would allocate the capacity payments to all generators, "existing generators will receive increased capacity payments for providing no incremental value or service. To make matters worse, it is not clear why generators would ever want to build enough capacity in any region to receive anything less than the maximum potential capacity revenues."
2. "ISO-NE's methodology will attempt to balance capacity revenues with energy revenues, avoiding duplicate payments. However, this aspect of the LICAP market design may act as a disincentive for merchant generators to build new capacity, in part negating the ISO-NE's efforts."
3. ISO-NE's market design for LICAP sets a minimum reserve margin "that reflects margins used in the days before the industry restructuring, as opposed to the industry standard" which will force "market participants to pay for capacity in excess of their needs ... without providing necessary tangible benefits."
4. "LICAP does not address various barriers to entry that prevent the development of new capacity in areas that need it the most." We believe this is an especially acute problem in Southwestern Connecticut where barriers include high population density, high property cost, and poor air quality. "As a result, it is possible that new capacity will continue to be built away from load, in places where development is relatively easy."
Mr. van Welie, these structural weaknesses of the LICAP proposal must be addressed. It is time for ISO-NE to acknowledge that this market design -- in which generators will receive maximum potential capacity revenues without having to build capacity -- is fatally flawed and should be withdrawn and reworked.
Cc: Hon. Joseph Kelliher, Chairman, FERC
For a copy of the letter and article, please visit:
http://www.house.gov/shays/news/2005/august/vanwelie.pdf
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