In a ruling likely to have an immediate impact on companies owning or considering buying high-cost electric generation plants that are infrequently dispatched, the Federal Energy Regulatory Commission on May 20 ordered that such generators must bid their actual costs of operation without any consideration of recovery of their fixed costs. The order involved a case brought to FERC by the New York Independent System Operator (NYISO Order).

The question addressed by FERC was the proper bid price when certain generation is dispatched out of merit for reliability reasons. Such generators typically have higher costs, which is one of the primary reasons they are infrequently dispatched. However, in the NYISO Order case, high-cost generators included a fixed-cost component in their bid price when they were dispatched out of merit for reliability purposes. NYISO alleged that including a fixed-cost component resulted in those generators' bid prices being above their actual costs to operate, i.e., fuel and other variable costs. As a result, NYISO requested that FERC order the generators to reduce their bid prices to their actual cost of operation.

In its May 20 order, FERC agreed with NYISO, despite the vigorous objections of the generators. The generators' objections were based on their claims that the units in question had high fixed costs yet rarely operated, and even when they did operate, they were not infra-marginal, i.e., their actual costs of operation were not less than the market clearing price. As such, the generators argued that absent allowing bidding above actual costs, the recovery of sufficient revenues was "extremely unlikely."

In the NYISO Order, FERC said that market rules should "promote marginal costs bidding," and went on to find that marginal costs are the actual costs of operation without any consideration of the frequency at which the units are dispatched. FERC also stated that including costs in excess of actual operating costs, even including fixed costs, when the generators are required to run for reliability is evidence of the exercise of market power. FERC stated "[t]heir [the generators'] desire for full cost recovery does not justify the exercise of market power."

The implications of the NYISO Order are far-reaching and will have a direct impact on the profitability of an entire class of electric generation plants in the United States. While the order only addressed power plants in New York, it establishes a very significant precedent, and FERC's rationale behind this decision will likely be applied to other power markets. Any company that currently owns or is considering investing in high-cost units that are rarely dispatched will now need to consider alternative options to recover their costs, other than bidding above the actual cost of operation. Among those options, as FERC has suggested, is seeking to obtain reliable must-run agreements for such facilities.