On February 29, 2008, the Federal Energy Regulatory Commission ("FERC") issued an order accepting the New York State Reliability Council's ("NYSRC") proposal to reduce the Installed Capacity ("ICAP") Requirement for the New York Control Area ("NYCA"). The ICAP Requirement is based on the Installed Reserve Margin ("IRM"), which the NYSRC proposed to reduce from 16.5% to 15.0%. The NYSRC provided four reasons for the reduction in the IRM: (1) the continued improvement of NYCA generating unit availability; (2) updated NYCA transmission topology; (3) improved emergency assistance benefits from interconnection to neighboring control areas, primarily due to transmission reinforcements within these areas; and (4) a reduction of transmission cable outage rates. FERC accepted the reduction in the IRM for filing effective March 1, 2008.
The reduction in IRM will impact ICAP auctions in New York. The NYISO uses ICAP demand curves to establish capacity prices. The demand curves approved by FERC for 2008 through April 30, 2011 are established by plotting curves based on two points: (a) the capacity price set at the estimated locational cost of new entry ("CONE") when the amount of capacity supply equals the ICAP Requirement; and (b) the price set at zero when the amount of capacity supply equals 112% of the ICAP Requirement. The linear curves cap out at a maximum ceiling rate, which also varies by locale. The impact of the IRM reduction is to shift the ICAP Demand Curves currently in place in the New York ICAP markets to the left. This leftward shift in the Demand Curves will reduce prices for capacity on the Demand Curves. The following graph illustrates this impact for the NYCA for the 12-month period ending April 30, 2009.
The above graph is for illustrative purposes only, but shows that, all other things being equal, the shift in the curves to the left can be expected to reduce capacity prices. Of course, many factors will influence prices, including plant retirements, load growth, new supplies, alternative market opportunities, and bidding. Separate curves could also be plotted for the 12-month periods ending April 30, 2009, 2010 and 2011 for each of three locations: NYCA, New York City and Long Island (the CONE and zero crossing points are different for each location and/or year).
FERC approved the reduced IRM over the objections of the Independent Power Producers of New York ("IPPNY") and others. IPPNY claimed that the NYSRC failed to take into account two New York State environmental initiatives that could potentially impact system reliability. IPPNY also argued that reducing the IRM would incorrectly signal to investors that new generation investment is not needed in New York. FERC disagreed with IPPNY's claims, explaining that the NYSRC followed its Reliability Rules in calculating the IRM and that the NYSRC's study methodology was consistent with the reliability requirements methodology used in prior years. Although the order is subject to possible review on rehearing or appeal, in the absence of a stay (which is very rarely granted), the order will remain in effect subject to such review.
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