FERC OKs lowering NY power reserve margin

NEW YORK, March 7 (Reuters) - The Federal Energy Regulatory Commission approved a request from the New York State Reliability Council to cut the reserve margin in New York from 18 percent to 16.5 percent effective March 1, federal officials said Wednesday.

This ruling requires load serving entities such as utilities and energy-service companies to buy less capacity, which should ultimately save consumers money.

In a competitive market, generators make money only if their plants operate, so they have an incentive to keep the generation available for service.

Before deregulation, if a plant did not operate, the utilities would buy or generate the power elsewhere and simply pass on those higher costs to customers.

The new rules, which FERC approved in a decision on March 5, will take effect before the New York Independent System Operator's March 29 summer capacity auction.

The ruling does not affect the requirement that 80 percent of the capacity in New York City be physically located in the city or that 99 percent of the capacity on Long Island be located on the Island.

Both regions, which import a lot of power from outside of their respective regions, are load pockets, meaning there is not enough transmission capacity connecting the city and the island to the rest of the state to meet all of their needs.

IN-CITY CAPACITY

The FERC also late Tuesday turned down a request by the NYISO to reduce the market cap on the price of in-city capacity from $105 to $82 per kilowatt year.

Load serving entities, like utilities and energy-service companies, buy capacity equal to their forecast demand plus reserves from generating companies.

Capacity payments help generators cover the cost of keeping their units available for reliability reasons even if those units do not operate.

The cap is only for the old generation in the city, including plants formerly owned by Consolidated Edison Inc. (ED.N) like KeySpan Corp.'s KSE.N Ravenswood, Astoria Generating Co LP's Astoria and NRG Energy Inc.'s (NRG.N) Arthur Kill, among others.

The cap, which is in place to prevent the abuse of market power by generators in the transmission-constrained city, does not affect the new generation recently built in the city.

The problem with the $105 cap, according to power market participants, is that it has become the price for capacity. The market participants considered the proposed $82 cap to be a fair price.

FERC said it would conduct an investigation into the capacity market in the city but power traders noted it was unlikely the FERC would make a decision until after the NYISO March 29 capacity auction.