Independent Power Producers of New York, Inc. (IPPNY)

Transcription

1 Independent Power Producers of New York, Inc. (IPPNY) 194 Washington Ave, Suite 315 Albany, NY phone: fax: Gavin J. Donohue, President & Chief Executive Officer October 2, 2013 Mr. Robert Hiney Chairman of the NYISO Board of Directors c/o Mr. Stephen G. Whitley President and CEO New York Independent System Operator, Inc. 10 Krey Boulevard Rensselaer, NY Re: Comments of Independent Power Producers of New York, Inc. on Proposed NYISO Installed Capacity Demand Curves and Request for Oral Argument Dear Chairman Hiney: In accordance with Sections and of the New York Independent System Operator, Inc. s ( NYISO ) Market Administration and Control Area Services Tariff and Section of the NYISO s Installed Capacity Manual, enclosed please find comments of Independent Power Producers of New York, Inc. ( IPPNY ) to the NYISO Board of Directors on the NYISO Staff s Proposed NYISO Installed Capacity Demand Curves for Capability Years , and issued on September 6, 2013 and revised on September 13, Additionally, IPPNY respectfully requests the opportunity to engage in oral arguments before the NYISO Board of Directors Reliability and Markets Committee on the issues addressed in the enclosed submission and those of other market participants. Very truly yours, /s Christopher J. LaRoe Managing Director, Market Policy & Regulatory Affairs Independent Power Producers of New York, Inc.

2 COMMENTS OF INDEPENDENT POWER PRODUCERS OF NEW YORK, INC. ON PROPOSED NYISO STAFF INSTALLED CAPACITY DEMAND CURVES Independent Power Producers of New York, Inc. ( IPPNY ) 1 hereby tenders its comments to the NYISO Board of Directors ( Board ) on the NYISO Staff s Proposed NYISO Installed Capacity ( ICAP ) Demand Curves for Capability Years , and issued on September 6, 2013 as revised on September 13, 2013 ( Staff Proposal ). 2 With the exception of two changes that NYISO Staff correctly made, 3 the Staff Proposal adopted the recommendations included in the August 2, 2013, Independent Study to Establish Parameters of the ICAP Demand Curve for the New York Independent System Operator prepared by NERA Economic Consulting ( NERA ) with assistance from Sargent & Lundy ( S&L ) (collectively, the Consultants ) (the NERA Report ). Initially, IPPNY would note that NYISO Staff correctly applied its tariffs and determined that the LMS100 must be selected as the proxy unit for the New York City ( NYC ) and new Lower Hudson Valley ( LHV ) Demand Curves and that the current slope for the NYC Demand Curve must be maintained. As the NYISO repeatedly has shown in both its operational and planning studies, a substantial portion of the total New York load is located in Southeastern New York which is a heavily constrained area of the system. These two determinations were critical to at least partially provide an accurate price signal in these areas. As discussed below, however, NYISO Staff s proposed reference values to set the demand curves for all four capacity regions in New York the New York Control Area ( NYCA ), Long Island ( LI ), LHV and NYC overall, will not produce adequate expected revenues to provide a reasonable opportunity to recover the costs of a new peaking unit in each region, and thus, will not attract the proper level of investment to build new capacity and to retain needed existing capacity in these regions as required by the demand curve structure. Because suppliers will be undercompensated, the Demand Curves will not promote long-term reliability, and thus will not satisfy one of their core purposes in any region in New York State. 4 It is incumbent upon the NYISO to put a market design in place that provides for investment to support new entry based on competitive free market principles, not State-sanctioned intervention. Specifically, the proposed reference values do not accurately reflect the net cost of new entry ( Net CONE ) of the proxy peaking plants in the following material respects: The stand alone Siemens SGT6-5000(F) simple cycle unit ( Siemens Unit ) is not a viable proxy unit for the NYCA. Both the Staff Proposal and the NERA Report fail to recognize the significant risk that: 1) the unit cannot be permitted under Article 10 of the New York State Public Service Law and 2) more stringent environmental regulations will be adopted in the near future but environmental control equipment cannot reliably be retrofitted on this facility from an operational standpoint, and therefore, the unit will become inoperable well before the presumed 20-year amortization period; 1 IPPNY is a not-for-profit trade association representing nearly 100 companies involved in the development and operation of electric generation facilities and the marketing and sale of electric power in New York. IPPNY is acting through its members on the NYISO Management Committee ( MC ). IPPNY submits its comments pursuant to Section of the NYISO Installed Capacity Manual and Section of the NYISO s Market Administration and Control Area Services Tariff ( Services Tariff ). Pursuant to Section , IPPNY respectfully requests the opportunity for oral argument on this matter. 2 See New York Independent System Operator, Inc., Proposed NYISO Installed Capacity Demand Curves For Capability Years 2014/2015, 2015/2016 and 2016/ Final (dated September 6, 2013, revised September 13, 2013). 3 The first of the changes, the determination to maintain the current zero crossing points, is discussed below. The second change, a change in temperature and relative humidity assumptions to determine net ICAP in some locations, is not separately discussed herein but is correct and is also supported by IPPNY. See Staff Proposal at 5. 4 See New York Independent System Operator, Inc., 118 FERC 61,182 (2007) at P 17.

3 The NERA Report and the Staff Proposal fail to adequately account for the substantial and growing regulatory risk borne by merchant developers proceeding with projects in New York State; The proposed amortization periods are too long and the weighted average cost of capital ( WACC ) is too low to support the development of the proxy peaking unit in all four capacity regions; Both the Staff Proposal and the NERA Report fail to reflect the real world experience concerning financing costs for new facilities, and, at a minimum, fail to adequately account for a major component of the financing costs for new facilities across all four capacity regions; The Net CONE calculated for the NYC proxy unit presumes that it will earn revenues annually in the 10 minute non-synchronous reserves ( TMNSR ) market but the proxy unit cannot operate in this fashion without violating emissions requirements; and Both the Staff Proposal and the NERA Report erroneously conclude that the Payment In Lieu Of Taxes ( PILOT) agreement tax level ascribed to the proxy unit for the Demand Curves for NYC and LHV will continue for the entire life of the asset. It is critical that the Board reject Staff s recommendations on these matters while adopting Staff s other recommendations to ensure that the Demand Curves will accurately reflect the cost of new entry. As noted above, IPPNY strongly supports the Staff s recommendations that: The NYC Demand Curve not be steepened by tightening the zero-crossing point; The LMS100 is required to be the proxy unit for the LHV and NYC capacity zones in accordance with the NYISO s tariffs; and Dual-fuel capability should be assumed as a core equipment component for both the LHV and NYC proxy unit. I. THE BOARD SHOULD REJECT THE STAND ALONE SIEMENS UNIT AND INSTEAD REINSTATE THE CONSULTANTS INITIAL RECOMMENDATION TO USE THE LMS100 WITH SCR AS THE PROXY UNIT FOR THE NYCA DEMAND CURVE. The Consultants and Staff recommended an uncontrolled, stand alone Siemens Unit as the proxy peaking unit for the NYCA Demand Curve. The Board should reject this proposed unit and instead select the unit that the Consultants repeatedly recommended until very late in the reset process the LMS100 with SCR. 5 As demonstrated infra, the Siemens Unit is an unsuitable technology for 5 NERA made its first presentation to stakeholders on the review's underlying assumptions on December 3, One criterion used to screen technologies was that they meet certain environmental requirements. The NERA Draft Study, dated April 18, 2013, recommended the LMS100 with SCR environmental controls as the peaking unit for all capacity zones because it represented the "unit with technology that results in the lowest fixed costs and highest variable costs among all other units [of] technology that are economically viable," as required by the NYISO tariff. See Independent Study to Establish Parameters of the ICAP Demand Curve for the New York Independent System Operator, Interim Draft Final Report (Second Draft), NERA Economic Consulting, (hereinafter "Draft Report"). The Draft Report concluded that the frame units used in past resets to set the Demand Curve for the ROS proxy unit would no longer be a viable option "as Selective Catalytic Reduction would now be required" to mitigate NOx emissions and SCR "is not a proven technology with frame machines." The Consultants continued to recommend the LMS100 with SCR at the April 30, May 22 and June 2

4 the NYCA proxy unit because there is a high risk that it cannot be permitted under the new Article 10 process or financed either at all or, at a minimum, without a major risk adder that has not been included in the unit s Net CONE. Moreover, even if it is permitted, it is not economically viable because more stringent environmental laws that may soon be adopted will require the addition of expensive pollution control equipment well before the end of the presumed 20 year amortization period, but this equipment cannot be retrofitted to this facility. As discussed in more detail below in Section VII, past attempts to apply control technology to these types of frame units have failed. 6 And, as further discussed below, the Marsh Landing facility which is a Siemens Unit with SCR that importantly was built and is operating pursuant to a 10-year Power Purchase Agreement ( PPA ) with an investor-owned utility in California has just three months of operations to date. The Consultants and NYISO Staff correctly found that this new configuration faces significant potential operating difficulties and lacks sufficient operating data to confirm that it has resolved these difficulties and proven its viability. 7 Because the ability to retrofit the facility is unproven, the stand alone Siemens Unit cannot be selected as the ROS proxy unit. And in any event, as is true of the required additional financing costs referenced above that such a facility would bear to address these increased operational risks, the costs for such expensive pollution control equipment were not included in the Net CONE for the NYCA proxy unit. Turning first to the permitting issues, the NERA Report and the Staff Proposal concluded that the stand alone Siemens Unit could obtain necessary air quality permits. 8 Both the NERA Report and the Staff Proposal, however, failed to address that seeking to site the Siemens Unit as a stand alone facility would create significant uncertainty as to the likelihood of receiving an Article 10 certificate from the New York State Board on Electric Generation Siting and the Environment ( Siting Board ). Indeed, there is only a passing reference to Article 10 in the NERA Report 9 despite the fact that when the Consultants reported for the first time at the July 9, 2013 ICAP Working Group meeting that they were endorsing the stand alone Siemens Unit, the Consultants readily acknowledged that there were major permitting risks and uncertainties with proceeding with this application. Nowhere is there any analysis provided concerning this unit s ability to be certified under Article 10 as a stand alone facility. Both the NERA Report and the Staff Proposal fail to account for the fact that New York State is a widely recognized leader in aggressively regulating air emissions. Over the past decade, the State has taken significant steps to reduce emissions from electric generating facilities, including the establishment of the Regional Greenhouse Gas Initiative, implementation of one of the first State-only mercury, NOx, and SO2 programs, and adoption of strict limits on CO2 in the State DEC and Article 10 regulations that effectively bar the development of new conventional coal-fired generation. As New York continues to consider air quality related issues due to emissions of CO2, NOx, SO2, and mercury, the siting process for new generation is likely to be very hostile to proposed generating plants that are not controlled and are less efficient. Indeed, the Consultants recognized that the New Source Review ( NSR ) worksheet establishes that there may be instances where, in the permit authority s judgment, the consideration of alternative production processes is warranted and appropriate for consideration in the BACT 18, 2013 ICAP Working Group meetings. The Consultants did not change their opinion until July and ultimately recommended the stand alone Siemens Unit in the NERA Report. 6 See, e.g., NERA Report at Id. at 9; see also Staff Proposal at (citing the May 1, 2013 commercial operations date and consequent limited operating experience with the Marsh Landing facility). 8 See NERA Report at pp 24-35; Staff Proposal at p See NERA Report at p 37 ( Public Service Law Article 10 requires any proposed electric generating facilities with a nameplate generating capacity of 25 MW or more to obtain a Certificate of Environmental Compatibility and Public Need. Part 487 provides regulations to implement the environmental justice provisions of Public Service Law Article 10. ). 3

5 analyses. 10 Thus, while, as the NERA Report highlighted, a coal project would not be required to consider natural gas technology alternatives, it is certainly conceivable even probable that parties in an Article 10 proceeding will urge that a project proponent may only go forward to construct the more efficient LMS100 with SCR option, not the uncontrolled Siemens Unit option, to achieve BACT. Moreover, while the NYCA proxy unit that set the NYCA Demand Curve in the 2010 reset process was a pair of stand alone Frame units, the new Article 10 statute did not exist during the last demand curve reset process. As a result, at that time, the unit would have needed to proceed through the State Environmental Quality Review Act ( SEQRA ) process to obtain its necessary permits. The new Article 10 statute will play a major role and its impacts were not adequately considered by either the Consultants or NYISO Staff. Specifically, Article 10 enacted in 2011 imposes additional, more stringent environmental requirements on an applicant that do not exist under SEQRA and significantly increase the likelihood that the stand alone Siemens Unit would not be certificated. Indeed, no stand alone Frame units have been proposed in New York State and none have received approvals through SEQRA or certainly Article 10. In addition, Article 10 requires an extensive outreach program through the implementation of a Public Involvement Program ( PIP ) 11 which includes, as a core component, the availability of generous funding for intervenors to finance advocacy by the intervenor s experts and attorneys in the pre-application process and the application process itself. 12 SEQRA does not have PIP obligations. Using these tools in an Article 10 proceeding to oppose the permitting of a stand alone Siemens Unit, an intervenor would undoubtedly argue that compliance with statutory air quality requirements does not satisfy the statutory finding the Siting Board must make that the proposed facility minimizes or avoids adverse environmental effects to the maximum extent practicable. 13 This finding is stated separately in the law from the finding that the Siting Board is required to make concerning compliance with applicable laws. 14 An intervenor, therefore, would likely argue that simply satisfying air permitting requirements fails to minimize nitrogen oxide impacts to the maximum extent practicable, pointing to the widespread use of control technology on LMS100 units, the higher efficiency that the LMS100 unit provides and the concomitant lower emission rates from that unit. An intervenor would likely support its argument by also citing PSL 170.2(f), which requires the Siting Board to conduct the environmental review required by Article 10 before it issues a certificate, notwithstanding that the New York State Department of Environmental Conservation ( DEC ) may have already provided the Siting Board air quality permits for the facility. Indeed, Article 10 states that the permits will be voided if the Siting Board denies certification. An intervenor will likely argue that the Siting Board s hands are not tied by the DEC s issuance of the air quality permits and the Siting Board is free to deny certification for failure to minimize impacts to the maximum extent practicable because the applicant did not propose to construct an LMS100 with SCR instead. Further, for the first time, environmental justice ( EJ ) concerns are a core consideration in the Article 10 process. 15 Pursuant to the EJ regulations that have been promulgated by DEC, the Siting Board must determine whether there are significant and adverse disproportionate environmental impacts on an EJ community from the emissions of the proposed facility. 16 If significant and adverse disproportionate impacts are identified, to obtain certification the applicant is required to demonstrate to the Siting Board that it has adopted measures to avoid, offset[,] or minimize impact, to the 10 See NERA Report at 40 (citation omitted). 11 N.Y. PUB. SERV. L Id. at 163.4(a), Id. at 168.3(c). 14 Id. at 168.3(e). 15 Id. at 164.1(f), 168.2, (d). 16 Id. at 168.2, (d). 4

6 maximum extent practicable, for the duration of the certificate, using verifiable measures. 17 Given its more efficient operation and its concomitant lower emissions, an LMS100 with SCR will be an obvious choice for intervenors to advocate, for the agency staffs to support, and for the Board to require to minimize NOx impacts. The extent of the impact minimization can be quantified because the reduction in emissions will be known. Imposing the requirement to construct an LMS100 with an SCR as a condition of certification would satisfy the duration test. Lastly, not only does Article 10 provide intervenors additional legal bases, tools and opportunities to advocate their positions during the administrative process, but the Siting Board will also have its feet held to the fire on judicial review of a certificate. In addition to the customary bases that would allow a court to void a certificate issued by the Siting Board, Article 10 has added a new one. A Siting Board s decision to issue a certificate can be voided if the New York Supreme Court, Appellate Division, finds that the Siting Board failed to provide a process that afforded meaningful involvement for the citizens affected by the facility. 18 Thus, the Siting Board will be under significant pressure to satisfy concerns raised by intervenors before granting a certificate, including the environmental concerns highlighted above. Importantly, this permitting uncertainty a factor that, as documented above, the Consultants readily acknowledged during working group meetings was not considered when the Consultants calculated regulatory risk for the NYCA proxy unit. 19 Turning next to operational viability, even if a stand alone Siemens Unit could initially secure a permit under the Article 10 process, it still cannot be chosen as the NYCA proxy unit because it is very likely that it will not be able to continue to meet environmental requirements over its assigned 20-year amortization period. A developer will very likely be required to add control technology to the facility to comply with ever more stringent environmental regulations over the life of the project. For example, the Environmental Protection Agency ( EPA ) is currently considering changes to its Ozone NAAQS regulations which would create more stringent ozone control standards from a current level of 75 ppb to between 60 and 70 ppb. When EPA lowers the NAAQS and finalizes nonattainment area designations, the DEC is expected to adopt tighter Reasonably Available Control Technology ( RACT ) requirements and, importantly, impose them on existing sources of ozone precursors, NOx and VOCs. It is highly likely that New York s RACT requirements for existing combustion sources will require expensive upgrades on uncontrolled combustion turbines within the next ten years. However, as noted supra, past attempts to add control technology to frame units have failed which would mean that the unit would be rendered inoperable. Moreover, at a minimum, even if technical viability were possible which cannot be proven at this time the significant costs associated with such technology have not been included in the ROS proxy unit s CONE. Given that the risks of permitting the stand alone Siemens Unit under Article 10 are so high and the fact that the uncontrolled Siemens Unit would likely need to be retrofitted but its ability to add control equipment is unproven, it is an unsuitable technology for the ROS proxy unit. Indeed, it appears that this recommendation was made in a regulatory vacuum with the Staff and Consultants fixating solely on selecting the absolute lowest cost technology while ignoring the obvious pitfalls to obtaining the most important State approval for it, and thus, the tariff requirement that such facility also must be economically viable. Accordingly, the NYISO Board should reject the proposed stand 17 Id. at (d). 18 N.Y. PUB. SERV. L (f). 19 Nor was the permitting risk adequately accounted for when identifying the associated permitting costs. In fact, as the Consultants confirmed at the August 13, 2013, ICAP Working Group meeting, they have continued to ascribe permitting costs to the NYCA proxy unit set at 1% of total project costs. Thus, given that the Siemens Unit is less expensive than the LMS100, the Consultants have actually allocated fewer permitting dollars to the more risky permitting process associated with a stand alone Siemens Unit proposal. 5

7 alone Siemens Unit and reinstate the Consultants initial recommendation to utilize the LMS100 with SCR as the ROS proxy unit for the NYCA Demand Curve. II. THE BOARD SHOULD INCLUDE A REGULATORY RISK FACTOR IN THE DEMAND CURVE MODEL. The NERA Report and the Staff Proposal fail to adequately account for the regulatory risks merchant developers face when proceeding with projects in New York State. That risk, already substantial, continues to grow. In their Draft Report, the Consultants correctly proposed to include a regulatory risk variable in their model to reflect the risks faced by developers that market rule changes and/or governmental intrusions in this single State market will cause excess capacity to remain well above the minimum Installed Reserve margin plus the size of the proxy unit and, concomitantly, capacity prices on average to clear well below Net CONE. 20 Because intervention will prevent the market from reaching equilibrium, clearing prices, on average, will be too low to support the entry of new facilities or the retention of needed existing facilities unless a further adjustment is made to the Demand Curve model. The Consultants stated that the proposed risk variable in the Draft Report reflected that by necessity, the capacity market is affected by regulatory actions and that the impact of these actions may be non-symmetrical. 21 As an example of the types of regulatory risks borne by developers, the Consultants noted that the buyer side mitigation rules in place in New York City and to be applied to the new capacity zone in the LHV operate such that, an entrant will not be mitigated below 75% of Net CONE even if it has a higher cost and that this could result in capacity prices that never rise above 75% of Net Cone. 22 Thus, the model utilized in the Draft Report incorporated a separate 10% regulatory risk factor. 23 Despite the concerns raised in their Draft Report that it is likely that a regulatory risk will always exist, 24 the Consultants ultimately removed the regulatory risk adjustment from the Demand Curve model. In the NERA Report, the Consultants instead pointed to demand curve operations for 10 years and noted that efforts are constantly underway to improve the process and to refine elements that would bias the process. 25 While still emphasizing that, as an administratively set price, the Demand Curve is susceptible to risks that can be categorized as regulatory risks, the Consultants nonetheless concluded simply, [f]or purposes of this reset...it would be reasonable to develop the Demand Curve without a regulatory risk adjustment in light of the NYISO s efforts to improve 20 See Draft Report at pp Id. 22 Draft Report at p 87. While the Consultants described the current buyer side rule as having a default value of 75% of Net CONE, the NYISO has proposed tariff changes (pending at the FERC) and has applied a 75% of Mitigation Net CONE value when making the Mitigation Exemption Test determination and subsequently assigning an offer floor to projects that failed the Mitigation Exemption Test. The Mitigation Net CONE value is even lower than 75% of Net CONE, and thus, more substantially artificially suppresses the market clearing prices. 23 See id. The Consultants noted that the 75% offer floor level was under review in the stakeholder process. As of this time, this proposed tariff revision is being considered in conjunction with a series of significant expansions to the buyer-side mitigation and other market rules. It is not yet known what the final components of this package will include or when the necessary Committee discussion and action will take place. Even if this change was made, it is unclear whether proposed companion changes (e.g., the competitive entry exemption) will cut the other way, eliminating the benefits of this correction. Moreover, separate and apart from the interaction of these NYISO rules, actions being taken outside of the NYISO s markets discussed infra also produce substantial regulatory risk which must be taken into account in the Demand Curve model. 24 Draft Report at p NERA Report at p 93. 6

8 mitigation measures in the capacity market. 26 Even then, the Consultants further noted, [w]e do, however, recommend that the NYISO monitor and examine this issue anew in future resets. 27 Contrary to the Consultants conclusion, however, recent activities demonstrate that incorporating a regulatory risk factor into the Demand Curve model is required more than ever before. Initially, it must be noted that no reliance can reasonably be placed on proposed revisions to the buyer side mitigation rules. It is entirely unclear at this point what components will be included in a package proposal, whether such proposal can garner the requisite Management Committee ( MC ) approval, and, if so, what form the package would take to be approved. Assuming, arguendo, that the MC adopts an amendment to increase the offer floor and that FERC accepts it, it is unknown whether the amended mitigation rules will, in fact, prohibit uneconomic entry and the artificial suppression of prices. Clearly, the current rules have not adequately stemmed State intervention in the NYISO s competitive markets. 28 Since the last demand curve reset proceeding, two State-backed, major uneconomic projects have come on line in the New York City market with the minimum offer floor rules in place. Specifically, the 550 MW Astoria Energy II gas-fired generating facility and the Hudson Transmission Partners HVDC transmission line, which can import up to 660 MW of power from New Jersey directly into New York City, were both supported by long-term, above-market contracts with the New York Power Authority ( NYPA ). For these two demonstrably uneconomic projects, the 75% Mitigation Net CONE rule has been applied. 29 While the units properly cannot sell capacity at this time, the energy from these uneconomic projects still can be sold into the market. Indeed, even assuming the buyer side rules are amended and 100% of the capacity associated with these kinds of projects in the future does not clear the market until the 100% of Net CONE requirement can be met, the energy produced and delivered by such projects also most certainly will artificially suppress energy prices. 30 There are no mitigation measures in the NYISO tariff to protect the energy market from uneconomic entry. IPPNY is not aware that the NYISO is even considering any such measures. Thus, at a minimum, a developer will face shortfalls in energy revenues. If the buyer-side rules continue to be ineffective in this regard, the developer will also face shortfalls in capacity revenues. The demand curve reference prices must account for these regulatory risks. This is particularly the case given the recent activities in the State referenced above that further demonstrate the need to incorporate a regulatory risk factor. Specifically, there are a number of efforts underway that threaten to bring on-line significant, subsidized, uneconomic new entry throughout New York. Governor Cuomo has adopted a New York Energy Highway Initiative, which contemplates approximately $5.7 billion in public and private investments and as much as 3,200 [MW] of 26 Id. 27 Id. 28 Importantly, in its 2008 decision addressing the proposed curves developed in the 2007 Demand Curve Reset Process, the FERC determined that it should not prejudge the outcome of the then ongoing New York City capacity market structure proceeding in FERC Docket EL07-39, and thus it denie[d] the request of New York Suppliers to incorporate the additional risk factor back into the ICAP Demand Curves until such time that the uneconomic entry mitigation issues are fully resolved. See New York Independent System Operator, Inc., 122 FERC 61,064 (2008) at P 60. Given that these rules are now in place but have not prevented uneconomic entry as demonstrated herein, additional risk factors must be incorporated into the model to ensure that the Demand Curves provide a level of compensation that will attract and retain needed infrastructure, thus promoting long term reliability. 29 In both instances, the respective unit s Net CONE exceeded the 75% Mitigation Net CONE level. The offer floor is set at the lower of 75% of Mitigation Net CONE or 100% of Unit Net CONE. Thus when the offer floor bids of these units clear, they will be permitted to sell capacity while their units remain uneconomic. 30 As reflected by the much lower energy and ancillary services offsets for New York City due, in part, to the entry of the Astoria Energy II facility, the impacts on the energy market can be very significant. 7

9 additional electric generation and transmission capacity and renewable power generation. 31 This initiative also advocates, inter alia, the construction of new generation at the sites of existing generation facilities that would be financed with above-market long-term contracts. 32 Acting in response to the New York Energy Highway Initiative, the New York Public Service Commission has initiated a proceeding and directed Con Edison to develop and file a contingency plan to address identified system needs if the Indian Point Energy Center ( IPEC ), a large nuclear generating facility located approximately 30 miles north of New York City whose owner is actively pursuing a 20-year license renewal, is ultimately retired. 33 In connection with this plan, NYPA issued a request for quotations ( RFQ ), offering contracts using regulated dollars for incremental generation capacity (i.e., not included in the 2012 Reliability Needs Assessment, as updated in the Compliance Filing) to be on line by June 1, 2016, 34 despite the fact that IPEC may still be operating on that date. The draft power purchase agreement issued as part of the RFQ expressly requires that the generators offer their capacity as price takers in the capacity spot market auctions unless the project is subject to an offer floor pursuant to the buyer side mitigation rules. 35 Importantly, the buyer side mitigation rules apply to New York City and the Lower Hudson Valley only. Efforts are currently underway in a NYPSC proceeding in connection with the Energy Highway Initiative involving the repowering of above-market facilities in Upstate New York that would have the same impact. 36 Recently, the NYPSC approved Reliability Support Service Agreements with those facilities, requiring de minimis capacity bids to be submitted into the NYCA spot market auctions for facilities that are indisputably uneconomic. 37 It appears that these contracts will be in place for several years. 38 The Consultants wholly ignored the potential for significant artificial price suppression that will occur as a result of these State initiatives when they retracted their initial recommendation to apply a regulatory risk factor. The Board should therefore adopt a regulatory risk factor. As discussed in Point III below, this risk factor should be incorporated into the Demand Curve model by reducing the amortization periods for the peaking plants in all four capacity regions by five years and increasing the WACC to adequately reflect the regulatory risk associated with having a reasonable opportunity to earn adequate revenues to support the addition of new generation and the retention of needed existing units to promote long-term reliability in New York. 31 See New York Energy Highway Blueprint at p 13, available at 32 See id. at pp See Case No. 12-E-0503, Proceeding on Motion of the Commission to Review Generator Retirement Contingency Plan. 34 See NYPA, Request for Proposals, No. Q LW, Contingency Procurement of Generation and Transmission, sec. 4.1 (April 3, 2013) (hereinafter "NYPA RFQ"). To date, the actions directed by the PSC in this proceeding have been planning related; no development or construction work has been authorized. 35 See NYPA RFQ, Exhibit 2 to Master Agreement, at p 2. Standard & Poors Rating Services issued a report in August 2012 detailing the uncertainty facing New York s capacity markets. It stated that the Energy Highway plan could add significant subsidized capacity in New York, but with the risk of an unintended consequence of lowering capacity prices and putting pressure on the credit quality of existing merchant power generators. New York's Capacity Power Markets Face Even More Uncertainty, And Generators' Credit Quality May Fall, Standard & Poor s Rating Services (August 21, 2012). 36 See Case No. 12-E-0577, Proceeding on Motion of the Commission to Examine Repowering Alternatives to Utility Transmission Reinforcements. 37 While IPPNY has filed a complaint on these issues before the FERC, the FERC has not yet acted on it. In the meantime, it appears that the de minimis bidding has continued in the NYCA spot market auction. 38 At the September 19, 2013, PSC session, DPS Staff reported that one of these contracts is expected to remain in place through 2017, the entire term for the Curves that are approved in this current reset process. 8

10 III. THE BOARD SHOULD ADOPT SHORTER AMORTIZATION PERIODS AND A HIGHER WACC FOR THE PROXY PEAKING PLANTS. The substantial regulatory risks documented above support the need to adopt shorter amortization periods and higher WACC for the proxy units used to set the NYC, LHV, and NYCA Demand Curves. In addition, as demonstrated infra, proposed changes to other Demand Curve components and other determinations made by the Consultants further support reducing the Consultants proposed amortization periods and increasing the WACC for the NYC, LHV, and the NYCA proxy peaking plants. For example, since the last Demand Curve Reset Process concluded in 2010, there have been several factors directly associated with the Demand Curves that have made recovering expected new entrant revenues riskier. In particular, there has been a decrease in expected Net Energy and Ancillary Service Revenues and a movement to a smaller proxy unit Upstate. These factors increase the risk associated with entry into New York. Moreover, while the Consultants noted that the Demand Curve model has been structured to factor in certain risks faced by generators including the tendency toward excess capacity, 39 it is important to recognize that the Demand Curve model operates by assuming that future market excess levels will vacillate with a normal distribution that has a very small standard deviation around the size of the proxy unit. For example, the ROS modeling that is used to set the NYCA Demand Curve assumes that the market will average only one-half percent (0.5%) excess capacity beyond the minimum Installed Reserve Margin over the life of the proxy unit and that, in no instance, will excess capacity exceed 1.4%. To operate as designed and meet one of its primary purposes, the Demand Curve must incentivize new entry when the market is close to its minimum capacity requirement and would be short without such new entry. However, irrespective of the Demand Curve model s idealized representation of the future, new entrants will take into account the fact that future excess levels could very well go beyond the small levels assumed by the model due to factors such as forecast error, fluctuations in Installed Reserve Margin and Locational Capacity Requirements, conservativeness of NYISO planning, and the State s focus on acting in advance to prevent capacity shortages. 40 These facilities will only be financed if this risk is adequately addressed so that facility revenues are sufficiently robust to allow a reasonable opportunity to recover a return on and of the equity needed to build the facilities. As Mr. Younger demonstrates in his attached affidavit, the excess capacity levels built into the Demand Curve model, standing alone, do not adequately account for these risks. Even with the Consultants assumed amortization periods, if the market exceeds the model s assumed excess levels by a relatively limited amount of capacity as applied to the NYC and LHV Demand Curves, the time required to recover the proxy plant investment will rise to unrealistic levels. For the NYC demand curve, the average excess capacity included in the model in accordance with the tariff is 190 MW which represents a 1.8% excess level. Recovering financing costs would take 121 years if the actual average excess level was 370 MW, which is a 3.5% excess level. Yet this amount of excess capacity is less than twice the assumed equilibrium excess level of 190 MW. To provide context, the current level of excess in New York City as reflected in the September Spot Market Auction results is MW. At 260 MW which is a 2.5% average excess level and well below the current excess levels it would take 35 years to recover financing costs. Given that a 2.5% average excess level is well below what might be expected from forecast errors alone, it is unlikely that the proxy unit could be financed based upon the proposed Demand Curves. 39 See NERA Report at As explained below, the excess capacity component that is set at the level of the proxy unit in accordance with the NYISO s tariff was not designed to encompass the full slate of these other risk factors. 9

11 During ICAP Working Group meetings, some market participants countered that the NYISO tariff already addresses the risks associated with excess capacity which is measured as the size of the proxy unit. However, these assertions were incorrect. When these issues were raised in 2007 as part of the second reset process, two separate risk factors were proposed first, for excess capacity to generally reflect the fact that New York would not let the Curves fall below the IRM point; and second, to address other factors such as the Energy Highway Initiative related efforts, load forecasting, and related matters. FERC accepted the first factor and, as noted supra, took a wait and see approach on the second factor. 41 As demonstrated throughout IPPNY s comments, applying this second risk factor is warranted. Therefore, as Mr. Younger recommends, the amortization periods for the NYC and LHV demand curves should be reduced to 20 years respectively to ensure that projects could be financed and would not be killed by the significant potential that a small excess would eviscerate the potential of ever recovering the investment costs. If the NYISO s current default bid floor for uneconomic entry is not increased to 100% of Net CONE, the amortization period at the average excess level for the NYC and LHV Demand Curves should be further reduced to 15 years to account for the lower revenues that operation of the current buyer-side offer floor mechanism produces. Separate and apart from the factors that cause actual average excess levels to affect the recovery period, the NYCA Curve separately faces additional risks that warrant reducing the amortization period given the currently proposed choice of technology. As discussed in Point I, the Consultants have proposed the stand alone Siemens Unit as the proxy peaking unit but have failed to recognize the substantial permitting, financing and operational risks that a developer of this technology will face. The NERA Report itself acknowledged that the modeling projects the expected annual operating hours of the Siemens Unit to remain only slightly below its estimated maximum annual operating hour restriction. With such a small cushion in the number of operating hours associated with uncontrolled operations, a developer of this technology faces substantial risk that it will not recover its costs based on the Consultants proposed reference value. This risk would be reduced if the Board changed the proposed amortization periods for the NYCA Curve to 15 years. Finally, with respect to all four Demand Curves, NERA correctly updated its recommended cost of equity from 12% to 12.5% in the NERA Report to incorporate shifts in capital market conditions during July However, the Consultants underlying calculated cost of equity for the proxy peaking plants is itself too low because it relies on financial data that is not representative of merchant peaking plants operating without long-term contracts. 43 To determine the cost of equity for the proxy units, NERA began with the key presumption that the facility must be financed on balance sheet as part of a larger corporate entity and calculated the recommended cost of equity using an adjusted capital asset pricing model ( CAPM ). NERA then loaded the model by relying on comparables that have substantial contracted positions, retail businesses, non-proxy type units (nuclear and geothermal), and other revenue streams that are in no way exposed to the same level of merchant risk as the proxy unit. The assumptions underlying the corresponding cost of debt analysis further exacerbated this shortcoming by including comparables that have substantial regulated transmission 41 See 2007 DCRP Order at PP 31-34, 60. At the time, the NYISO tariff required that available capacity be equal or slightly exceed the minimum IRC to address the first factor. That provision was later modified to specifically reference the size of the proxy unit. 42 See NERA Report at As the Transmission Owners themselves recently recognized when supporting their joint Transco AC transmission project proposal, equity returns must be higher to address higher project risks associated with major capital investments to build and site new facilities, such as cost over-runs, project delay and project scope increases arising from siting approvals. See Case 12-T-0502, Proceeding on Motion of the Commission To Examine Alternating Current Transmission Upgrades, Comments of the New York Transmission Owners on Behalf of the New York Transco with Respect to the Cost Allocation Straw Proposal (dated August 26, 2013) at

12 and distribution businesses in their portfolios. Using these comparables depresses the proxy unit CONE by assuming that the lower risk profile balance sheets of these entities will be used to subsidize far riskier merchant generation investments with no meaningful compensation to offset such additional risk. As such, while the 0.5% adjustment was an important and warranted change to accurately reflect documented shifts in capital market conditions, a significant increment must be added to account for the non-diversifiable New York risks. IV. THE BOARD SHOULD CORRECT THE CONSULTANTS' DEBT FINANCING COST ASSUMPTIONS TO INCLUDE ORIGINAL ISSUE DISCOUNT COSTS IN THE CALCULATION. With respect to the cost of debt assumptions, the Final Report appears to include some level of bank, legal, and consulting type fees associated with the financing of the proxy peaking units in the four zones. However, despite the fact that this omission was highlighted during the ICAP Working Group meetings, in IPPNY s comments to the Consultants, and in IPPNY s comments to NYISO Staff, both the NERA Report and the Staff Proposal failed to include a major category of financing costs: original issue discount ( OID ) costs. OID costs comprise a substantial portion of total debt costs and are a standard component of any financing. Specifically, the Consultants approach utilizes Yield to Maturities ( YTM ) for a comparable group of debt. However, as IPPNY previously has documented, YTM, by definition, leaves out OID. Moreover, the NERA Report assumed total financing costs of just $5.8M. This level inexplicably is substantially below Astoria Energy II s total financing fees of $37.9M, Bayonne Energy Center s total fees of ~$20M and Astoria Generating Company s total fees of $29M ($425M refinancing; including bank fees and $17MM of OID). The cost of debt that is reflected in the Demand Curve model should be consistent with real world experience and thus should be calculated using financing costs that approximate the properly adjusted average of recently completed financings in New York, some of which have the OID costs embedded in the cost of debt. 44 Indeed, given their largely contracted nature and affiliated relationships, the total financing fees recently incurred for New York facilities should be considered the low end of the reasonable range. At the very least, some explicit OID costs must be included. V. THE BOARD SHOULD CORRECT THE ERROR IN THE CONSULTANTS TREATMENT OF PILOT AGREEMENTS FOR THE LHV AND LI PROXY UNITS. The NERA Report states that new entrants outside NYC have generally been able to receive Payment in Lieu of Taxes ( PILOT ) agreements and proposed a 0.75% property tax rate to account for such PILOT agreements. PILOT agreements typically last for 15 or 20 years at which point the facility goes on the general tax rolls. Unfortunately, the S&L levelized carrying charge model assumes that the PILOT agreement tax level will continue for the entire life of the asset. This results in understating the levelized fixed charges for anything beyond the normal 15 to 20 year PILOT agreement. The Board should correct this error. 44 IPPNY acknowledges that to make an apples to apples comparison, the total fee paid must be adjusted to reflect the difference in the size of the underlying total debt. However, even taking into consideration this adjustment, the financing costs determined by the Consultants are too low. 11

13 VI. THE BOARD SHOULD ADOPT NYISO STAFF S RECOMMENDATION TO MAINTAIN THE CURRENT ZERO CROSSING POINT FOR THE NYC DEMAND CURVE. The Staff Proposal properly rejected the NERA Report s flawed recommendation to significantly steepen the NYC Demand Curve from its current zero crossing point of 118% to 116.5%. After thoroughly reviewing the various preliminary analyses concerning the zero crossing points for the NYCA, Zone J, Zone K, and the LHV Demand Curves, NYISO Staff properly determined that adopting any methodology to adjust the zero crossing point at this time could result in fluctuations to the recommended zero crossing point at each Demand Curve reset, introducing undue volatility and uncertainty in the market. 45 As IPPNY documented throughout this proceeding, Staff correctly recognized that recommendations based on the various analyses were highly sensitive to methodology, input assumptions, and transmission system topology. 46 Moreover, as IPPNY and its members further established during the ICAP Working Group meetings and documented in comments in this proceeding, NERA s recommendation was based on another consulting firm s examination of only one conceptual factor, the incremental value of reliability, which was determined by that other consulting firm using only one year s data. However, no changes can be made to the zero crossing points absent a full review that balances all relevant factors and evaluates whether related changes to other market rules is required. Staff properly concluded that there was insufficient information to demonstrate that a revised methodology would send a more accurate market price signal or otherwise better align the ICAP Demand Curves with the system reliability. 47 Thus NYISO Staff recommended, inter alia, that the current slope for the NYC Demand Curve be maintained. IPPNY supports the Staff s recommendation to continue the NYC Demand Curve zero crossing point to prevent, inter alia, needlessly increasing the market s volatility and uncertainty, as discussed in detail below. 48 The NERA Report recommended adopting a much steeper slope for the NYC Demand Curve by shifting its zero-crossing point (x-intercept) from the current 118 percent of the NYC Locational Capacity Requirement (LCR) to percent of the NYC LCR. 49 As the NERA Report itself recognized, because this would cause the NYC Demand Curve slope to be much steeper, prices would fall off more quickly when excess supply increased. 50 In other words, volatility would increase. The NERA Report readily acknowledged that the sole basis for this proposed change was the conceptual discussion of a Demand Curve shape based on the incremental value of reliability, included in FTI s report, Evaluation of the New York Capacity Market. 51 As NERA acknowledged during the ICAP 45 Staff Proposal at p Id. 47 Id. 48 In its Staff Proposal, Staff reported that the MMU had independently reviewed the FTI analyses and had proposed an alternative methodology to define the zero crossing point. That methodology was introduced for the first time at the last ICAP Working Group meeting before the Staff Proposal was issued. Even as of that late date, Market Participants were informed that the MMU had asked the NYISO to complete additional studies to test the viability of the methodology. Market Participants on both the load and supply sides objected to the MMU methodology, in part, because it could not be adequately reviewed given that it was introduced so late in the process and there was incomplete information about it. NYISO Staff correctly concurred. See Staff Proposal at p See NERA Report at pp Id. at p Id. at p 14. Recognizing that there are tradeoffs between the revenue stability objective of the Demand Curve construct and adherence to a Demand Curve reflecting incremental reliability value that militated against making major adjustments, however, NERA recommended a zero crossing point between the current NYC Demand Curve value and the recommendation provided by FTI. Id. at p

14 Working Group meetings, its zero crossing point recommendation relied entirely on FTI s analyses; NERA did not conduct its own independent analysis nor did it otherwise seek to verify FTI s work. As IPPNY has documented throughout this proceeding, NERA s recommendation to steepen the NYC Curve slope was flawed in several material respects: The proposed steeper NYC Curve will, by design, decrease revenue stability and lead to a higher cost of capital. No corollary adjustment to the financing costs was made to address this increased risk. As an initial matter, FTI concluded that the current zero crossing points were generally consistent with the reliability value of incremental capacity. Moreover, FTI itself acknowledged that its choice of slope was based on an analysis that was indicative and should first be supported by further analysis and evaluation. In any event, FTI s chosen slope did not appropriately consider practical implications for the New York City zone, such as the impact on incentives for retirement or entry of new capacity of a different size with different summer/winter ratings. Recommendations concerning changes to the zero crossing point cannot be considered in isolation. Rather, they must be considered within the context of other NYISO ICAP market rules, in particular the assumed excess underlying the demand curve and the structure of the NYC buyer-side mitigation rules, which would require corresponding revisions. The FTI analysis is based on a conceptual construct that considers only the incremental value of reliability. However, incremental reliability value was only one of the considerations when the Demand Curve construct was developed. The NYISO Demand Curves were also established to promote several additional practical considerations and objectives. All of these factors must be balanced when assessing whether any change to the current slope for the NYC Curve is required. The analysis presented by FTI dismisses these other considerations based on a theoretical economic welfare analysis that is not directly applicable in the context of the NYISO markets, especially the smaller NYC and LI markets. The incremental reliability analysis discussed by FTI is based on one snapshot but system conditions underlying current and future LCR calculations (e.g., the impact of the recent Danskammer retirement) may differ. In fact, the Consultants themselves acknowledged that the results of the FTI analysis would be sensitive to the underlying assumptions that were used. 52 Steepening the Curve by moving the zero crossing point will result in a significantly increased and, importantly, disproportionate probability of zero or non-zero pricing. In a well-functioning market that returns competitive long-run pricing, this increased probability of low prices would be accompanied by an increased probability of high prices when the market becomes tighter. Because State-sponsored procurement in New York (e.g., those illustrated supra) and ultimately reliability backstop measures will prevent such high pricing from ever occurring, this necessary balance will not be achieved. NERA has noted that the model produces a higher reference point given the shift in the zero-crossing point, which NERA asserts makes a change in slope neutral in terms of pricing. But this assumption only holds in the case that the assumed surplus underlying the reference point calculation is correct, which history and practical experience demonstrates is not a supportable assumption. 52 See NERA Report at p

15 To revise the zero crossing point for any of the ICAP Demand Curves that are embodied in the NYISO s tariffs, the Federal Power Act requires that the revision must be demonstrated to be just and reasonable. Robust analyses of all relevant factors (including, but not limited to, those identified herein) and review of whether changes are correspondingly required to other related market rules (including, e.g., the capacity market power mitigation rules which are intertwined with the Demand Curve rules) must be undertaken to assess whether such changes are warranted. After fully reviewing the indicative work completed by FTI, NERA s review of FTI s analyses and the MMU s newly proposed methodology, NYISO Staff correctly concluded in the Staff Proposal that additional analyses were required to define the benefit of adopting any new approach and to determine whether such benefit would eliminate or offset the additional uncertainties and potential price volatility that would be introduced into this process. 53 To ensure an adequate review, NYISO Staff committed to gather information and conduct additional analyses in the next reset process. 54 As IPPNY has documented throughout this proceeding, proposed changes to the NYC Demand Curve zero crossing point raise numerous issues that must be fully considered. Thus, IPPNY concurs with NYISO Staff s recommendation that the slope for the NYC Demand Curve should be maintained in this reset process with a comprehensive analysis of all these inter-related issues to be addressed in the coming two and a half years as part of the next reset process. 55 VII. THE BOARD SHOULD ADOPT THE CONSULTANTS AND STAFF S RECOMMENDATION TO USE THE LMS100 AS THE PROXY UNIT FOR LHV AND NYC. As required by the NYISO tariffs, the Consultants conducted an assessment and screening analysis of several technologies to determine the unit for each zone in this reset process with technology that results in the lowest fixed costs and the highest variable costs among all other units technology that are economically viable. 56 The Consultants determined that the four technologies that they screened would exceed the established CO2 emissions threshold and would therefore be classified as a major source subject to NSR permitting. Based on their extensive review, the Consultants correctly concluded that the LMS100 should serve as the proxy peaking plant for the NYC and LHV zones. Because these regions generally have more severe air quality issues, the regulatory requirements pertaining to emissions in these regions are stricter. Moreover, the utilities throughout the LHV and NYC have dual fuel requirements in place that apply to interconnecting generators. A plant like the Siemens SGT6-5000F(5) that, as the Consultants documented, is already shackled with operational limitations, simply could not remain under the applicable emissions limit if burning oil. Thus the Consultants correctly found that the LMS100 unit met the tariff requirement for the lowest fixed cost, highest variable cost, economically viable technology for the LHV and NYC zones. 57 During the course of the reset process, the Consultants reviewed the issue of technology choice in detail with Market Participants. In initially assessing the technology choice, the Consultants specifically evaluated the use of SCR with the SGT6-5000F(5) and found that it was not a viable option based on technical challenges, 58 the Consultants experience with clients developing power 53 See Staff Proposal at Id. at Id. 56 NERA Report at p For the reasons set forth supra, the LMS100 facility also should have been designated as the ROS proxy unit to establish the NYCA Demand Curve. 58 E.g., the design and operational challenges inherent in introducing diluent air to achieve uniformly lower gas turbine exhaust temperatures necessary for SCR to function. 14

16 projects, and unsuccessful attempts to deploy the technology where catastrophic failure occurred. 59 Thereafter, some Market Participants pointed to the recent Marsh Landing facility and requested that the Consultants review their findings. In response to these requests, the Consultants reevaluated this issue and confirmed that there was far too little experience with the most recent attempt to deploy the technology to change their recommendation. 60 Specifically, during the July 9, 2013 ICAP Working Group meeting, the Consultants highlighted the fact that the Marsh Landing units were in test mode in Q1 2013, and thus, only start-up data was available. Moreover, with the facility only operational since May, insufficient information was available at this time. The Consultants emphasized that, to gain industry acceptance, at least a full year of data is required to understand the forced outages and other factors. Moreover, while not identified by the proponents that advocated the March Landing example, the Marsh Landing facility is supported by a ten-year PPA pursuant to which all of its energy, capacity, and other products are purchased by a California investor-owned utility. Thus, the Marsh Landing example is entirely inapposite to this process where merchant generators must bear the risk of constructing new facilities and obtaining sufficient revenues from the markets. Most recently, during the last few ICAP Working Group meetings addressing the Demand Curve Reset Process that took place over the summer and in their comments to NYISO Staff, some Market Participants pointed to the fact that the PJM Demand Curve was based on a Frame + SCR proxy unit and asserted that the NYISO should take the same approach for the LHV and NYC Demand Curve proxy units. No party, however, provided any analysis or other information from the PJM stakeholder process to support this technology choice. Addressing these claims in the Staff Proposal, NYISO Staff first noted that it had directed the Consultants to develop cost and performance data for this alternative to ensure a thorough examination of the technology choice. 61 NYISO Staff focused on the fact that [t]he Consultants clearly do not recommend this plant configuration as a viable proxy unit. 62 Pointing to the fact that because PJM had expended little or no effort... to assess the technical feasibility of the technology, or to show that the technology had been previously applied in a significant number of applications, and was therefore a proven, reliable technology, 63 NYISO Staff properly rejected the relevance of PJM having selected a Frame + SCR proxy unit. Based upon its extensive review of the Frame + SCR option proposed by a subset of Market Participants, the Consultants correctly determined that an SCR could be deployed successfully only with aeroderivative gas turbines and with frame units in combined cycle operation. 64 IPPNY concurs with the Consultants and Staff s recommendation to use the LMS100 as the proxy unit for the LHV and NYC Demand Curves and, as demonstrated supra, it also should be the technology utilized for the NYCA Demand Curve. As required by the NYISO Tariff, the LMS100 is the economically viable technology with the lowest capital and highest operating costs as compared with the other viable units and it is a proven and reliable technology. VII. THE BOARD SHOULD APPROVE THE CONSULTANTS AND STAFF S DETERMINATION THAT THE LHV AND NYC PROXY UNIT MUST HAVE DUAL FUEL CAPABILITY. 59 E.g., unsuccessful deployments of frame gas turbines with SCR in Kentucky and Puerto Rico. 60 The Marsh Landing Generating Plant in California began commercial operation only on May 1, See Staff Proposal at Id. 63 Id. at p Staff Proposal at p

17 The Consultants and NYISO Staff properly concluded that the proxy peaking unit for the NYC and LHV Demand Curves must have dual fuel capability. Both the Con Edison and National Grid tariffs require dual-fuel capability to qualify for transportation service. 65 To provide service to both core customers and electric generators in New York City and Long Island, these two utilities jointly operate the New York Facilities System ("NYFS"). A new generator entering the market must have dual-fuel capability if it wishes to interconnect to NYFS. In addition, as the NYISO Staff noted, the current NYC Local Reliability Rules require fuel switching to occur in a time frame that can be met by the LMS100 facility. 66 For this reason, dual fuel capability has previously been included as a design component for the NYC proxy unit and should continue to be included in this reset process. For the first time in this reset process, the Consultants were charged with defining the Demand Curve for the long-anticipated LHV capacity zone. As is true of utilities in New York City as documented above, the gas transportation tariffs of the local distribution companies in the LHV require dual-fuel capability for generating facilities. Moreover, while some Market Participants focused on the fact that interstate pipelines do not currently have this requirement, limiting the proxy units to this interconnection option will stymie development in the very area of the State where efforts have been focused to provide the correct market signals to incentivize investment in new and needed existing facilities. 67 Moreover, a new generator without a high capacity factor is not likely to pay the exorbitant rate an interstate pipeline would charge for firm pipeline capacity. The Consultants were therefore reasonable to assume that new generators in the LHV zone will install dual-fuel capability rather than pay extraordinary rates to secure firm interstate pipeline capacity. 68 Additionally, as New York s overall resource mix shifts in response to falling gas prices, reliance on natural gas as the predominant fuel for generators continues to grow. Generators are typically interruptible customers of pipeline capacity suppliers. However, gas suppliers determine their total capacity based on demand from firm customers during peak periods. In the event of a capacity shortage, generators are therefore increasingly likely to have their service interrupted. Consequently, to be viable, the proxy unit must include dual-fuel capability as a core equipment component. Lastly, as the NYISO previously has reported, the LHV is in a highly constrained part of the State. Due in part to the long delay in implementing the LHV zone, it has become an area that is highly susceptible to transmission security violations. In addition, as the FERC has recognized, there are growing concerns with the adequacy of electric system and gas system coordination and the electric system s flexibility to address gas shortages by, e.g., having units that are able to switch fuel sources. The Demand Curve is the administrative tool used to support the construction of facilities to support the long term reliability of the system. The market signal must be robust enough to support the installation of dual fuel capability to ensure reliable system operation over the long term in this area of the State. The Consultants and NYISO Staff were therefore correct to incorporate dual-fuel capability as a core equipment component for both the NYC and LHV proxy unit. 65 Con Edison's SC No. 9 requires dual-fuel capability for its Power Generation Transportation Service in NYC; National Grid's SC No. 14 only provides gas transportation service for electric generation to dual-fuel generators with at least 50 MWs of capacity. 66 See Staff Proposal at It is particularly troubling that the same utilities that themselves require generators to have dual fuel capability in their own tariffs when it is on the generators dime (presumably, inter alia, to enhance reliability) have now when the utilities must pay for it willingly jettisoned reliability in the name of short-term savings. 68 IPPNY would note that new generators in proximity to the NYC market have or have proposed to both interconnect directly with the interstate pipeline and install dual-fuel capability. See, e.g., CPV Valley and Bayonne Energy Center. 16

18 VIII. THE BOARD SHOULD ELIMINATE THE ESTIMATED TMNSR REVENUES PROJECTED FOR THE NYC PROXY UNIT. In the NERA Report, the Consultants have estimated that the NYC proxy unit will earn just under $6 per kw annually in TMNSR revenues. 69 In reaching this conclusion, the Consultants acknowledged that, while the LMS100 can start in 10 minutes, its SCR will not achieve full emissions compliance until 20 minutes after each start. Without citing to any authority, the Consultants nonetheless surmised that the units would routinely be able to secure allowances to operate outside of compliance requirements and exceed emissions limits. Their assumption appears to be based entirely on their view that the LMS100 would have lower emissions than older units so it would be granted this special treatment. However, as IPPNY established in its comments to NYISO Staff, the Consultants underlying supposition is wrong. It is highly unlikely that the LMS100 would be permitted to continuously exceed its emissions limits to such a substantial degree that it will be able to earn these estimated TMNSR revenues year after year. Moreover, the DEC evaluates permit applications on a project by project basis. Thus, the comparison presumed by the Consultants pursuant to which the LMS100 would be considered against older units will never take place. In fact, even if DEC review were not conducted on a project-specific basis, the older units identified by the Consultants will actually be operating within their permit limits and will not be required to request an allowance themselves. Again, no comparison will ever take place. NYISO Staff did not address this issue in the Staff Proposal. Thus, at this juncture, the Consultants recommendation to include TMNSR revenues in the NYC proxy unit Net CONE stands. However, the Consultants have provided no evidence to support the ability of the NYC proxy unit to be able to secure these revenues. The Board should eliminate these revenues and correspondingly increase the Net CONE for the NYC proxy unit by $6. 70 CONCLUSION The NYISO Board of Directors should adopt the Staff Proposal with limited modifications in accordance with the foregoing discussion. Dated: October 2, 2013 Respectfully submitted, /s Christopher J. LaRoe Managing Director, Market Policy & Regulatory Affairs Independent Power Producers of New York, Inc. 194 Washington Ave, Suite 315 Albany, NY See NERA Report at As reflected in the NERA Report, the Consultants determined that the Siemens Unit could not reach full output in ten minutes, and thus no TMNSR revenues were assumed for the ROS proxy unit. See NERA Report at 93. The same approach must be applied for the NYC proxy unit. 17

19 AFFIDAVIT OF MARK D. YOUNGER Mark D. Younger, having been duly sworn, deposes and states as follows: 1. My name is Mark D. Younger. I am employed as President of Hudson Energy Economics, LLC. My business address is 480 Pondview Road, Petersburgh, New York My entire professional career has been devoted to matters relating to electric generation and the development of competitive electricity markets. For the past thirteen years, I have actively participated in working groups to refine the New York Independent System Operator, Inc. s ( NYISO ) market structure and develop methods to improve its market design, including all aspects of its energy, ancillary services and capacity markets. Over this time period, I also have testified in numerous Federal Energy Regulatory Commission ( FERC ) proceedings relating to all aspects of the overall NYISO market design, including the design of its capacity markets. In connection therewith, I have filed numerous affidavits: addressing the need for a demand curve in the NYISO s capacity market and then addressing issues in the subsequent demand curve reset process filings and reviewing its annual reports to ensure that the NYISO s Demand Curves would produce just and reasonable rates. My resume is available on request. 3. I write this affidavit in support of the comments by the Independent Power Producers of New York ( IPPNY ) to the Board of Directors regarding the NYISO Staff s recommended parameters for the demand curves. IPPNY has asked me to analyze how having higher amounts of excess capacity on the system beyond the average excess capacity levels included in the demand curve model increases the capital recovery periods required for the proxy units for the New York City ( NYC ) and Lower Hudson Valley ( LHV ) capacity zones and therefore the likelihood that the proposed Demand Curves would be able to incent investment needed to assure reliability. Based on my analysis, the assumed capital recovery period at the average excess level should be 20 years for the proxy units in NYC and LHV, and 15 years if the NYISO s current default bid floor for uneconomic entry remains at 75% of the demand curve Mitigation Net CONE value at the time that the NYISO s filing is submitted to the FERC for review and approval. The NYC and LHV Demand Curves Should Be Based On A 20-Year Capital Recovery Period At the Equilibrium Excess Level 4. NERA s demand curve model solves for the proxy unit recovering its costs over an amortization period assuming that over the recovery period the average excess capacity in the market will equal the equilibrium point. The equilibrium point, as defined in the tariff, is equal to the minimum Installed Capacity requirement and the peaking plant s capacity. 5. For the demand curves to serve their fundamental purpose of inducing new entry when needed to meet the minimum capacity requirements, the assumed amortization period at the equilibrium excess point must yield revenues that will induce new entry. I analyzed the NYISO Staff s proposed demand curves to determine whether they meet this basic requirement. 6. For a new generator to enter the market, it must expect to receive sufficient revenues from Net Energy and Ancillary Service Revenues ( Net E&AS ) and the capacity markets to recover all its fixed costs, to pay off its debt and obtain a return on and of its investment. In deciding whether to enter the market, a developer will consider not just the expected level of revenues assumed by the Demand Curve model but also will assess the risks that it will not recover its investment costs. 7. To address this question of risk, I evaluated the amount of time it would take to recover these costs of at differing levels of excess capacity.

20 Years to Recover Investment Page 2 of 3 8. To do this analysis, I extended the Sargent and Lundy ( S&L ) levelized carrying charge model so that it could calculate levelized carrying charges for periods beyond the 35 years that was included in the demand curve model. The extended model for NYC is attached as exhibit MDY- 1. I then calculated the Net E&AS and capacity revenues that a proxy unit would receive when excess capacity exceeds the average excess levels modeled in the demand curve study by varying amounts. The extended Demand Curve model for NYC is attached is exhibit MDY The results are striking. The figure below presents the results for the New York City demand curve. There is a 9.95% levelized fixed charge associated with an average summer excess capacity level averaging 370 MW (3.5% excess), less than twice the assumed equilibrium excess level of 190 MW (1.8% excess). This translates to a capital recovery period of 121 years. The capital recovery period grows so quickly with small increases in excess above the average excess levels because there are so many fixed costs associated with running the unit, beyond the financing costs, that the levelized fixed charge rates do not decline very quickly. Essentially, with this small additional excess, the developer would never recover its equity investment. A developer would be unwilling to make an investment when even a small increase from the equilibrium excess level essentially results in the developer never recovering its investment by virtue of how the demand curve structure alone operated. Capital Recovery Period % 2.3% 2.8% 3.3% Percent Excess Capacity 10. These results are conservative because the S&L levelized carrying charge model assumes that a developer can spread its debt recovery over the full capital recovery period. However, a developer would be unlikely to be able to issue debt for more than 20, or at most, 25 years. Because the developer would not be able to stretch out its debt payments just because the actual excess in the market exceeded the demand curve s baseline assumption (e.g., for the 121 year recovery period that matches a 3.5% excess as established above), the S&L levelized carrying charge model understates the capital recovery factor for any recovery period beyond 25 years, and therefore, even more substantially understates the period of time it would take a developer to recover its investment costs. 11. When the model was originally proposed in this demand curve reset, it included a regulatory risk component to cover the potential that uneconomic entry would occur. Under the NYISO s existing rules, such uneconomic entry would be allowed to suppress the clearing price to 75% of the demand curve Mitigation Net CONE value. The Consultants stated that this risk factor was 1 In calculating the winter capacity revenues I utilized the average winter excess value from the model and accounted for the proxy unit s greater winter DMNC rating. The demand curve model simplifies this step by assuming that the winter clearing price will be a set percent of the summer clearing price. The result is that the model compresses the winter excess as you move down the demand curve compared to the winter excesses that have occurred in the past and that are consistent with the ratings of the units.

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