Message-ID: <25702330.1075857925599.JavaMail.evans@thyme> Date: Wed, 9 May 2001 07:04:00 -0700 (PDT) From: owner-nyiso_tech_exchange@lists.thebiz.net To: nyiso_tech_exchange@global2000.net Subject: FW: NYISO - MC - Document from Stephen Fernands to MC Members Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: owner-nyiso_tech_exchange@lists.thebiz.net X-To: "Tech Team EMail List," X-cc: X-bcc: X-Folder: \Larry_Campbell_Jun2001\Notes Folders\Notes inbox X-Origin: Campbell-L X-FileName: lcampbel.nsf Steve Fernand's comments on the recent ICAP deficiency auction results are based upon a fundamental misunderstanding of the ICAP market. This misunderstanding is summarized in his statement that "Unlike the electric commodity, there have been no significant changes in the underlying costs for suppliers of ICAP." Since last summer there have been very significant changes in the factors that affect the ICAP markets in New York. The basic principle of the ICAP market is that it provides the generator (or external ICAP provider) a mechanism to recover costs that are not adequately recovered from the energy market. In return for this revenue the generator accepts an obligation to bid into the NYISO day-ahead energy market every day that the generator is not out of service due to either maintenance or forced outage. The basic theory on developing a bid into the ICAP market for an internal generator is that the generator should estimate the total revenue it requires from the ICAP market to continue operating. This calculation is based upon its total cost of remaining in business less its expected profits from the energy market (expected revenues less expected fuel costs). For external suppliers the ICAP bid is based upon the opportunity cost of being obligated to the New York energy market rather than being either obligated to another market or having no obligations to any market. Clearly, in each case, the bid into the capacity market is dependent upon the expectations of the New York energy market. There have been several adopted and proposed changes in the New York energy markets that make them both less desirable than last year and less desirable than the energy markets surrounding New York. These include: The Circuit Breaker/AMP - The Circuit Breaker/AMP creates both a concern that the day-ahead market prices will be depressed from the levels that should exist. The implementation of the circuit breaker raises concerns that the market prices in New York energy price will be depressed. The potential ways in which the DAM prices could be depressed include failure to incorporate changing unit operating parameters, fuel costs, or emissions costs. Additionally, while opportunity costs are a part of an acceptable bid, there is no methodology to keep the circuit breaker from effectively removing the opportunity costs for a circuit broken bid. Finally, the design of the circuit breaker may result in numerous individual bids by different market participants being circuit broken when they are not exercises of market power. Every time a bid is improperly circuit broken it affects all sellers because all sellers end up being paid less in the DAM then they should have received. In addition to these questions about whether the AMP will improperly depress prices, there is still uncertainty to how a generator that has been improperly mitigated is supposed to be able to be compensated. This was part of the original circuit breaker design but as of this point the NYISO has failed to provide any description of how this process will work. There is also uncertainty about the reference prices and the process that generators will follow in getting changes or exceptions to the reference prices accepted. The uncertainty raises the cost of being obligated to the New York market. Price Capped Load Bidding - The price capped load bidding mechanism that is being implemented this summer provides a sophisticated tool to a small subset of market participants to determine whether they want to purchase at the DAM market prices. This provides the possibility that day-ahead market prices will systematically be depressed relative to the real time market if this mechanism is abused. Virtual load bidding has been blocked for the summer. If virtual load bidding were implemented it would provide a potential check on this market manipulating behavior. The only check allowed in our market design is the inclusion of opportunity costs in the generator day-ahead market bids. As addressed above, the application of the Circuit Breaker/AMP is likely to impede the generators including opportunity costs in their bids thereby eliminating the only check on using the price capped load bids to manipulate the market. Penalty and Public Disclosure Proposal - This proposal will penalize market participants that are mitigated for exceeding the NYISO Market Mitigation Measures. There have been issues raised related to this proposal regarding due process and fundamental fairness. The penalties only apply to generators and other suppliers. The penalty is not based upon a determination that the market participant has exercised market power. Finally, the ADR process can determine whether mitigation was properly applied by the NYISO but cannot determine whether the penalty that was applied was appropriate. Each of the above measures has resulted in a potential reduction in energy market revenues and added significant uncertainty to the New York market. The above price control measures are not in place in the surrounding markets. Each of these makes the New York market less desirable than its neighbors and raises the price of being obligated to the New York market. Interestingly, the Penalty and Public Disclosure Proposal was approved by the NYISO Management Committee between the ICAP Monthly auction and the ICAP Deficiency auction. The above are not the only price control proposals that have been made for the NYISO energy market. Most notably, there have been proposals for $150 price caps in the energy market and retroactive price authority. Fortunately, both of these ill-considered proposals were ultimately withdrawn. However, the mere fact that they were proposed inflicts uncertainty on the energy market and therefore increases the expected prices in the ICAP market. Two final points need to be clarified regarding Mr. Fernand's argument that the results of the auction indicate a problem. First, he lists the change in ICAP market clearing prices between last year and this year as indicating there is a problem in the ICAP markets. When generators bid into last summer's auction they had not yet experienced summer operation under the NYISO markets. There also had not been the broad range of price control measures proposed and adopted for this summer. Compared to last summer, ICAP bids for this summer would have incorporated better understanding of the expected profits in the energy market as well the expected impacts of the price control measures. Second, he also uses the results of this summer's strip/monthly auction and the deficiency auction as an indication of there being problems in the ICAP market. Because the entire ICAP requirement is not cleared in a single auction, the prices that are bid into the earlier auctions are essentially an ICAP providers estimate of its opportunity cost of selling in the earlier auction rather than selling in a later auction. This requires the ICAP providers to guess the likely bids of the marginal ICAP providers. The results of this years auctions merely indicate that those who sold in the early auctions apparently did not do a very good job of guessing the lost revenue associated with selling in the earlier auctions. Mr. Fernand's provides a set of proposed measures for addressing the ICAP issue. If any of them are worthy of be considered then they should be aired through the committee process. Nonetheless, one of the proposals should be killed at the outset. Because being an ICAP provider to New York includes an obligation to bid into the energy market, no ICAP owners should ever be "automatically bid into the Deficiency Auction" or any other auction. Mr. Fernand's suggests that that the automatic bidding requirement be relieved if a Long ICAP Owner exclude itself. The act of choosing not to bid into the ICAP auction is in itself an indication that the ICAP provider has chosen to exclude itself. Mark Younger Vice President Slater Consulting 69 Werking Road East Greenbush, NY 12061 518-286-1937 ph 518-286-1941 fax -----Original Message----- From: kkranz@nyiso.com [mailto:kkranz@nyiso.com] Sent: Tuesday, May 08, 2001 2:49 PM To: marketrelations@nyiso.com Subject: NYISO - MC - Document from Stephen Fernands to MC Members Dear Management Committee Members. The attached document is being forwarded to you at the request of Stephen Fernands of New Energy Inc. Regards, Kristen Kranz 518-356-6186 (See attached file: Stephen Fernands to MC re ICAP.PDF) - Stephen Fernands to MC re ICAP.PDF