posted on Tuesday, March 14, 2006 10:33 AM by Tracy Davis

Forward Capacity Market Proposed in Lieu of LICAP for New England

New England generators, the ISO-New England (ISO-NE), and four out of six New England states submitted an agreement to FERC on March 6 to resolve the running debate on New England capacity markets.  The agreement would establish a forward capacity market in ISO-NE, replacing the controversial LICAP proposal that has been stuck at FERC for months.  Under the agreement, the ISO-NE would be responsible for performing forecasts of needed capacity three years in advance and for conducting an annual auction to purchase sufficient power to meet those needs.  The plan provides that generators would be paid for any capacity purchased from them, but generators would not receive payment if the capacity is unavailable when ultimately called upon.  The ISO-NE has indicated it could conduct its first auction in December 2007.  The proposal also contains a locational component that allows prices to differ between import- and export-constrained zones within New England.  Supporters of the proposal estimate that forward capacity markets will cost up to 50% less than LICAP, but acknowledge it would probably increase residential costs in the short-term during the transition period, which will last from 2006 until the summer of 2010.

The proposed mechanism for the transition period appears to be the agreement's main sticking point.  The transition proposal will compensate generators for new and existing capacity between December 2006 and May 2010, with payments increasing over time.  While the parties supporting the settlement agreement argue the transition period is necessary to allow the ISO-NE time to develop the auction process and update its software, regulators in Maine and Massachusetts, two states opposing the agreement, charge that the compensation provided to generators during the transition is excessive.  The forward capacity markets plan also faces several familiar opponents in several transmission-owning utilities and load-serving entities throughout the region that were also opposed to the LICAP proposal.  Despite this opposition, the ISO-NE reports that 78% of members of the New England Power Pool supported the deal.