NYISO Plan Draws Generators Ire;Utilities, Pols Praise

NEW  YORK (Dow Jones)--A computer program developed by the New York Independent  System Operator to prevent manipulation of the state's wholesale power market won praise from utilities and scorn from generators but is unlikely to change the way electricity is traded in the state, market participants agreed.

The Federal Energy Regulatory Commission late Thursday approved the  NYISO's automated mitigation procedure, or AMP, after removing it from two meeting agendas this month. The program automatically lowers bids in the day-ahead power market that seem out-of-line with past prices.

"Fundamentally, at the conceptual level, the AMP is a very good idea," said Jaya Bajpai, a power analyst at ESAI, an independent research firm that analyzes power markets. "It's a guard against anticompetitive behavior."

But generators said there has been no evidence of abuse in New York and  charge the AMP with discouraging the construction of new power plants in the  state.

"It is New York specific," Mark Stultz, spokesman for the Electric Power Supply Association, a trade group representing generators and power marketers,  said of the NYISO's program. "But the market tends to be regional. It puts the supplier in New York at a competitive disadvantage."

The AMP kicks in when prices in the day-ahead market hit $150 per  megawatt-hour. The computer program reviews bids that are $100 or 300% higher  than the mean or median, whichever is lower, of a generator's bids accepted over the past 90 days. It automatically reduces the bid to the historical level if it determines that a generator is withholding capacity to drive up prices.  Generators can consult with the NYISO in advance when outstanding circumstances cause them to submit unusually high bids.

The program focuses on the market clearing price, which is the price of  power set by the last generator the NYISO calls into service under its system of dispatching the least expensive units first.

Fifty percent of day-ahead deals in New York are conducted through the market run by the NYISO and the other half are done through bilateral contracts.  The AMP is unlikely to alter this balance, market participants agreed.

"I think it's possible but I would be surprised if there's a major move  into the bilateral market," said ESAI's Bajpai. The limits set by the AMP are fairly high and it's unlikely anyone in the bilateral market would be willing to accept a bid that exceeds others, he added.

This relatively high threshold could lead to increased retail rates by giving generators the leeway to submit bids that are well-above the actual cost of producing the power and are therefore "unjust and unreasonable," said Gerald Norlander, executive director of the Public Utility Law Project, which represents low income and rural customers.

But utilities and politicians applauded the program for offering protection against price spikes this summer.

"We believe this is an approach that will keep the markets viable and  reduce the volatility of electricity prices," said Pat McMurray, spokeswoman for  the Electric Energy Institute, an association of investor-owned utilities.

Earlier this week Senators Hillary Rodham Clinton (D-N.Y.) and Charles Schumer (D-N.Y.) sent a letter to FERC, urging it to approve the AMP and citing  concern about rate hikes more than 40% above average in New York last summer.

"New York City remains susceptible to the exercise of market power,  particularly at times of peak demand and/or during extreme weather conditions,  such as thunderstorms or extended heat waves," the senators wrote.

The AMP is different from a bid cap and reduces price spikes caused by generators that withhold power but doesn't eliminate high prices that result from a true shortage of power, NYISO's president said in a statement.

"The AMP is to bid caps what the surgeon's scalpel is to a machete," NYISO president William Museler said. "The AMP is able to carefully slice out  uncompetitive conduct without damaging the overall free market, as bid caps can  often do."

Using data from 2000 to test the program, the grid operator determined that the AMP would have mitigated less than one quarter of one percent of bids  throughout the year.

The grid operator said Friday it hoped to have the AMP in place within 24 hours. The program, which the NYISO believes to be the first of its kind, will run through Oct. 31, 2001.

The NYISO will file another plan with FERC which would fine generators and utilities that repeatedly manipulate the market.

``It's another program that they want to put in place that's a  disincentive to do business," said Gavin Donohue, executive director of the Independent Power Producers of New York, which represents generators and power marketers.

In their letter this week, Senators Clinton and Schumer also urged FERC  to approve a separate mitigation plan Consolidated Edison Inc. (ED) filed that  would adjust bids from more expensive units that are called into service out of  order due to transmission constraints. The utility submitted a revised plan on June 18 after FERC rejected an earlier version in mid-May.