Regulatory Updates by Region

FERC Approves NYISO’s Proposal to Establish a New Capacity Zone

In an Order (Docket No. ER13-1380-000) issued on August 13, 2013, the Federal Energy Regulatory Commission (FERC) approved the New York Independent System Operator's(NYISO's) proposed revisions (filed April 30, 2013) to its Market Administration and Control Area Services Tariff and its Open Access Transmission Tariff (OATT) to establish and recognize a new capacity zone that would encompass NYISO Load Zones G, H, I, and J (the G-J Locality in downstate NY).

What is NYISO?

Independent system operators (ISOs) and regional transmission organizations (RTOs), such as the New York Independent System Operator (NYISO), are organizations in their respective regions that manage the reliability of the bulk electricity grid (i.e. manage flow of electricity from power plants over transmission lines) and administer and monitor open and competitive wholesale energy markets.

This new zone, which will be implemented on May 1, 2014, is expected be called the Lower Hudson Valley Capacity Zone (LHV). According to the Order, NYISO conducted a study that examined and considered the transmission system, capacity market, and economic consequences of its proposal to create this new zone and concluded that establishing and implementing the new LHV capacity zone for Load Zones G-J is appropriate.

Currently NYISO is split into three capacity zones, one of which includes consumers in Load Zone J (New York City), one that includes consumers in Load Zone K (Long Island), and the other, which serves "rest of state" (or ROS) and includes consumers in Load Zones A-I.

What is the expected outcome of establishing this new LHV capacity zone?

NYISO expects that by establishing this new LHV capacity zone, it will generate more efficient price signals to incent new capacity in this critical region (which is currently operating under tight transmission constraints), enhance reliability, mitigate potential transmission security issues, and serve the long-term interest of all consumers in New York State. As a result of the current constraints in this geographic region (i.e. the lower Hudson Valley) however, pricing for capacity in Zones G-J is expected to increase compared to capacity prices prior to the implementation of this new LHV capacity zone. Specifically, consumers in Load Zones G, H, and I will see more of an impact because they were previously paying capacity rates settled at the ROS capacity zone price but will, under the new LHV capacity zoning structure, be subject to the rates associated with the new LHV capacity zone—where constraints are tighter on transmission and demand is much higher.

Click here for a chart that illustrates the historical differences in capacity prices between the ROS Zone and Zone J capacity. As you can see, consumers in Zone J were historically paying much higher capacity prices than ROS.

Capacity and its impact on your electricity supply price

Capacity is one of the cost components that comprises your overall supply price and it is based on both a rate, as well as your business' coincident peak usage during the prior year. In NYISO, there are two "seasons" for capacity requirements: winter (November–April) and summer (May–October).

To set the capacity price (rate) for each of these seasons at the different capacity zones in NYISO, there are three separate auctions administered by the ISO that take place to determine the overall seasonal rate—a strip auction, monthly auction, and spot auctions. Load serving entities like Direct Energy Business can also purchase capacity directly from suppliers (i.e. power plants). A combination of the results of these auctions for your specific capacity zone, as well as the price of any bilateral purchases (directly from power plants), are used to set your capacity rate. To find out more about capacity and how the costs associated with it are managed and determined in NYISO, click here.

Because capacity rates are determined by the market and the natural forces of supply and demand (as well as a business' individual peak consumption data), the capacity cost component is a part of/impacts your energy price in relatively the same way—no matter who is providing your electric supply (us, another supplier or the local utility). This means that if demand and capacity rates are high, your bottom line is impacted via your electric supply bill.

What does this new capacity zone mean to businesses in downstate New York?

If you are located in downstate New York in one of the load zones G, H and I, you can expect to see an increase in your electricity price as of May 1, 2014 next year as a result of an increase in capacity rates related to the new LHV capacity zone. For businesses located in Zone J (which comprises NYC), capacity rates have always been higher than ROS, so the establishment of this new zone may not have as much impact on these businesses as it would on those located in Zones G, H and I (see chart on the right for detailed load zone breakdown).

Capacity rates impact ALL consumers

It’s important to understand that capacity and the rates associated with it impact all consumers in markets where capacity is a requirement—no matter who is supplying the power (utility company, energy service company, etc). And, because capacity is bought and sold through market mechanisms, the price can fluctuate based on many factors. In the case of the new LHV capacity zone, transmission constraints are high which may drive prices for capacity higher. The hope is that over time, pricing in the new LHV capacity zone will dictate the need for more generation and/or transmission in this region, and once in place, the demand will better be met in the LHV zone, which will likely bring prices down.

If you have any questions on this announcement, please contact your Direct Energy Business representative.

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