Central Resource Adequacy Markets For PJM, NY-ISO AND NE-ISO

Sun Feb 01 15:24:38 EST 2004
By Dr. Chantale LaCasse and Eugene Meehan with former NERA Associate Director Dr. Philip Kalmus and Dr. Bernard Neenan of Neenan and Associates

NERA was retained by ISO New England, the New York ISO and the PJM ISO to conduct a comprehensive analysis of the centralized resource adequacy market model (CRAM) that was developed and proposed by the interregional Resource Adequacy Model Group (RAM Group). The proposal would establish centralized capacity markets that would operate in a coordinated way in the three ISOs.

The analysis, written by NERA Senior Vice President Gene Meehan and Vice President Dr. Chantale LaCasse with former NERA Associate Director Dr. Phillip Kalmus and support on demand resources and retail access from Dr. Bernard Neenan of Neenan and Associates, examines several key features of the CRAM. These features were:

1. The planning horizon or how far in advance of the supply commitment the auction should be held.
2. The commitment period or what the length of the supply commitment or contract should be.
3. The percent procured which encompasses whether the ISOs should procure all capacity for a commitment period at one time or procure various percentages at different times, perhaps even with different planning horizons.
4. The auction format with a particular request to examine a descending clock auction, Reverse English auction, and clearing, versus pay as bid formats.

With respect to the major issues, NERA reached several conclusions. First, the planning horizon must be sufficiently long to enable the CRAM to be a deciding factor in the decision to construct. Second, sequential auctions are not reliable for determining price and one hundred percent of the capacity required should be procured or under contract to be procured at all times. Third, the commitment period could be from one to three years, but three years is preferable as it increases revenue certainty and is more likely to lessen the uncertainty facing bidders and remove uncertainty premia. Fourth, an open auction format id desirable and the Descending Clock Auction (DCA) (a multi-round uniform price auction) is the best-suited format. Finally, competition must be trusted to discipline price. An administrative price should only be used when there is not adequate competition.

NERA was asked to examine all these questions relative to the RAM Group objectives and also to consider gaming and market issues; and monitoring and mitigation to ensure that the CRAM with NERA's recommendations would not be subject to market power. The report addresses several other issues as well.