The ISO (K Robb) circulated the ISO's position on the Def Penalties this
PM. It is attached.

As it stands, what the ISO wants now (or previously wanted) is an issue to
be decided by the BIC. What is now proposed - empowering the ISO to change
the deficiency rates if an adjacent ISO modifies (presumably upward) their
caps - has one large problem: if such an action were taken in the midst of
a Capability Period it would cause all sorts of issues with participant
positions.

Having said that I offer the following:

The FERC staff report strongly indicated that caps would have to exist (if
at all) on a regional basis and at similar levels.

In order to de-list and be free to sell out, a generator must make that
decision for the following month by the 10th of the current month. That is
trading a sure ICAP revenue stream for the increased opportunity to sell
energy at higher prices - even if some disaster befell one of out
neighbors, the amount that can move is limited by the transmission
capability.

What is the likelihood that any of the 3 NE ISOs will be uncapped next
Summer?

The transmission system limits how much energy can flow regardless of price
considerations. NY-NE about 1500Mw and NY-PJM about 2000 Mw (pending return
of the PARs).

BME, if faced with a reserve shortage (or inability to meet load), will
curtail exports to solve that problem.

Jim

(See attached file: Section 5.14 Proposed Tariff language.doc)




rstalter@nyiso.com


11/29/2000 05:49 PM

Please respond to market_relations@nyiso.com


To:   TIE_List_Server@nyiso.com
cc:    (bcc: James E. Scheiderich/NUS)
Subject:  DPS statement re: movement to a one month Obligation Procurement
       Period




rstalter@nyiso.com writes to the NYISO_TECH_EXCHANGE Discussion List:



The following message has been forwarded to the Tech Exchange at the
request of
Steven Keller of the NY PSC:


Statement of the Department of Public Service Staff to the BIC
Regarding Shortening the ICAP Obligation Procurement Period from Six
Months to One Month


The ICAP Working Group has proposed Phase II tariff language that
implements the BIC/MC decisions to implement a monthly ICAP obligation
procurement period (OPP) instead of the current six-month OPP.  It is our
understanding that this proposal is largely supported by incumbent load
serving entities who are currently required to purchase their ICAP six
month's in advance even though they expect to lose load to new entrants
during that period.  The LSE's are concerned that they may lose money
trying to sell unneeded ICAP back into the market.  Staff of the New York
State Department of Public Service (Staff) understands those concerns.

A report by the Brattle Group suggests that the existence of price caps in
New York could lead to capacity migration from New York under a one-month
OPP scenario.  Brattle suggests that under such a system certain
"optimistic" suppliers might choose not to offer to sell their ICAP to NY
if they think they could do better by selling energy into external markets
where they could earn high revenues in high demand month.   If that
happens, even to a limited extent, we believe it will likely result in
increased purchase costs for ICAP purchased both on a bilateral basis and
through the ISO auctions, and could also push up energy prices.

In a subsequent study by KEMA it is suggested that in order to avoid
capacity migration ICAP deficiency charges should be increased as much as
six-fold.  The obvious result would be that all LSE's would be exposed to
significantly higher deficiency charges under a
one-month OPP.  Staff does not view this as an acceptable alternative to
retaining a six-month OPP even with its potential that LSEs may incur a
loss as a result of purchasing ICAP for load they expect to lose.

As of November 29, 2000, the ISO has been unable to estimate the level of
deficiency penalties that would be required to avoid capacity migration
under a one-month OPP.  As a result, the New York State Department of
Public Service has been unable to verify whether the current levels need
to be increased, decreased or left as they are.  Because of concerns about
capacity migration, and because there is very little convincing argument
about the costs/benefits that would result from moving to a one-month ICAP
OPP that cannot at least partially be obtained from the six month OPP with
monthly deficiency auctions, Staff is opposed to such a change at this
time.   Until the ISO and market participants work out how to ensure that
energy and ICAP markets will remain workably competitive even during peak
periods, we believe it is prudent to move cautiously with regard to
shortening the OPP.







 - Section 5.14 Proposed Tariff language.doc