FERC sets sanction higher than Northeast ISO requests

Dec. 14, 2000—The Federal Energy Regulatory Commission rejected an ISO New England's request to cap rates for its so-called installed capability (ICAP) market at 17 cents/kW-month, calling it a �token� amount, and reinstated an $8.75/kW-month charge.

The charge is intended to encourage new generation and is levied against New England utilities or other load entities that don�t contract for enough electricity to serve customers and maintain a reasonable generation margin, or the so-called ICAP. The charge or fine is paid to generators.

FERC sees the charge as a way to provide monetary incentives to manage congestion by stimulating new generation supply. The agency said the $8.75/kW-month is an approximation of the cost to install a peaking unit and represents a reasonable basis for encouraging construction of new generation.

�The ICP deficiency charge needs to be high enough to influence behavior and serve a reliability function," according to the FERC order. "The charge should be related to the actual harm created by ICAP deficiencies.�

In a June 28 order, FERC permitted ISO New England to eliminate the ICAP auction market Aug. 1 because the commission found it wasn't useful and could produce inflated prices unrelated to actual harm created by ICAP deficiencies.

Instead, the federal agency ordered the ISO to revert to levying administratively administered sanctions against companies that failed to comply with ICAP requirements. The ISO proposed the 17 cents/kW-month charge based on the average clearing price in the ICAP auction market in 1999. But FERC agreed with those who argued for the higher rate, which was in effect before the ISO was created.

�We are evaluating FERC�s order,� says Ellen Foley, spokeswoman for the ISO New England.

The ISO could implement the new charge or challenge the order in federal court, an action still not decided.

Separately, FERC agreed to extend a $1,000/MWh cap on the wholesale (operating reserve) electricity market until March 31, 2001. The temporary bid cap was put in place July 26 at the request of the ISO and was set to expire Dec. 31.

The ISO said the extension was necessary due to continuing flaws in its markets and the potential for price spikes during periods of high demand in the winter as well as summer. Generators argued the cap will discourage investment in new generation exacerbating supply problems in the region, but FERC said the cap "allows a significant margin for profit above the marginal costs of the most expensive unit existing or planned in New England."

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