"Stephen Fernands" <srfernands@cesolution.com> writes to the 
NYISO_TECH_EXCHANGE Discussion List:

Mark,
Thank you for your thoughtful response.  I think you raise some valid
points, but I do not think they change the end conclusion.

Fundamental Value of ICAP
The principle of the ICAP market, as in any market, should be to reflect the
value of the underlying product that is being sold to the market.  The
question is whether the product being sold, in this case ICAP, has truly
appreciated more then 400% since the previous ICAP auctions.  Maybe - but I
doubt it.

AMP and Expected Revenue
The premise that changing the existing market mitigation rules to catch rule
breaking on a real time basis instead of a one day lag basis, although
plausible, seems fairly weak.  It presumes that generation owners were
planning on violating the pre-existing screens and counting on the revenue
from those "golden eggs."  Likewise, the link between "expected energy
revenue" and ICAP prices is tenuous at best.  Generators are not limited to
receiving revenue from the spot market and may well choose to sell energy in
the bilateral market.  In either case the goal of the generation owner is to
maximize revenue through all markets.  The ICAP market, if functioning
properly, should reflect the value of the first call on the energy from the
generator by the NYISO and the ability of the NYISO to curtail external
transactions from that generator.  For example two generation owners owned
two plants with the same characteristics. One generation owner did a
relatively "good" job selling a forward energy contract for the 6 month
procurement period while the other owner did a relatively "poor" job selling
a similar contract.  In the ICAP auctions they both should have the same
strategy - maximize the revenue that each of them can receive out of the
ICAP auction.  Any other strategy by either of the plants will lead to
overall lower profits.

Price Cap Load Bidding (I won't comment on if Virtual Bidding were in place
because it isn't going to be)
Price Cap Load Bidding has been available in the past, only know it is
expanded slightly to Zonal Price Cap Load Bidding.  This is not a
significant change to the existing rules and would seem unlikely to account
for either a significant change in the expected energy revenue or the
underlying value of the ICAP product.

"...significant uncertainty to the New York market..."
I would agree that all of the rule changes including the Penalty and Public
Disclosure Proposal  made it difficult for generation owners to properly
evaluate the effects of selling ICAP into a 6 month market.  For this
reason, as well as the other possible reasons listed on my letter, I believe
that mitigating measures should be evaluated.  I am not passing judgment at
this stage, but feel that all parties should know that the prices that were
posted are in the process of being reviewed and that subsequent changes may
be required to some or all of the months.

Next Steps
If the MMU determines that there was economic and/ or physical withholding,
whether due to regulatory uncertainty in surrounding control areas or
internal uncertainty about the exact effects of the AMP, I believe that it
is most appropriate for the MMU to take immediate action and refer it to the
committees for longer term resolution.

Stephen Fernands
Consultant
AES NewEnergy
215.875.9440

----- Original Message -----
From: "Mark Younger" <mdy@slater-consulting.com>
To: "Tech Team EMail List," <nyiso_tech_exchange@global2000.net>
Sent: Wednesday, May 09, 2001 2:04 PM
Subject: FW: NYISO - MC - Document from Stephen Fernands to MC Members


> 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)
>