Category Error in Northeast Markets

New York City, according to Sir Peter Hall’s epic 1998 survey, Cities in Civilization, is the “apotheosis of the modern.” Hall cites New York City’s unique geography as compelling technological fixes, and thus New York engineers invented the air brake (Westinghouse), the telephone (Bell), the electric light (Edison), the fountain pen (Waterman), the adding machine (Burroughs) and the linotype (Mergenthaler). Over time, cities age and sometimes ossify, as seen in Detroit. Cities have to reinvent themselves, and that reinvention includes their basic infrastructure: they have to renew roads, bridges, power lines, and water systems.

Superstorm Sandy’s high winds and severe flooding revealed the fragility of, not only New York City’s electricity infrastructure, but also that of the surrounding Metro Area, which is unique in that its transmission grid is defined by three completely different planning processes that determine what transmission must be built to keep the lights on: the Connecticut suburbs are administered by the Independent System Operator of New England (ISO-NE), upstate New Jersey by the PJM RTO, and New York City and Long Island by the New York Independent System Operator (NYISO).

Each regional transmission organization spends the vast majority of its time managing the complex system of connections between electricity generation, transmission, distribution, and consumption within their service areas, not between service areas. Thus, in spite of FERC prodding for better inter-area coordination, neither PJM nor ISO-NE nor NYISO have “sponsored” transmission projects between the regions.

To the extent there are inter-regional projects, it has been at the initiative of New York. New York’s electric authorities (the New York Power Authority and the Long Island Power Authority) have pioneered interconnections between the different electrical grids that serve the New York metro area: LIPA commissioned the 300MW Cross Sound cable in 2001 that connects Connecticut to Long Island, and the 660MW Neptune cable that connects New Jersey to Long Island. NYPA commissioned the 660MW Hudson cable from New Jersey to mid-town Manhattan.

These projects – designed as sophisticated, controllable, inter-area HVDC systems - could have opened the door for transmission to shatter the destructive load pockets of the metro area, and to integrate New York City and Long Island fully into the neighboring PJM and New England markets. But such a tectonic shift cannot occur without a challenge from those who had invested in the expectation that load pockets are forever. In the case of transmission to end load pockets, the challenge came in the development of the details of the NYISO “capacity regulations.”

Compounded Errors

As usually happens in these types of regulatory constructs, the devil is in the details. The essence of the detailed regulation prepared by the NYISO was “Mitigation Exemption Test” (MET). If a project was exempt, it could participate in the capacity market without restrictions. If it was not exempt (if it was deemed “uneconomic”), it would be prohibited from participating the capacity market for a defined period of years. Such a prohibition would cost the project tens of millions of dollars per year in revenue.

Whatever one’s opinion of this construct for generation qua generation, the NYISO first applied this construct to a transmission line in 2012, with potentially severe consequences for the metro area. In 2012, the NYISO ruled that the Hudson Transmission Project (a 660MW HVDC project selected by NYPA in a competitive RFP, and constructed in 2011-2013) was “uneconomic” and therefore would be subject to the MET. Is it appropriate – even in principle – to apply the MET to new transmission lines? Is there a basis in logic, FERC precedent, or economic theory for treating transmission like generation?

NYISO’s application of the MET to transmission was puzzling. Simply stated, a transmission line is not a generator. Such an error is not all that common in the regulatory arena, and its appearance here was perhaps more an act of omission than commission. Clearly, it is erroneous to equate agents of production (a generator) with agents of transportation (transmission).

When evaluating what kind of regulatory error this is, it may be best to rely on simple logic. It was recognized long ago that authorities can commit what are now called category errors: “a category mistake arises when things or facts of one kind are presented as if they belonged to another.” (From Simon Blackburn in the Oxford Dictionary of Philosophy.)

Thus, it seems plain that the NYISO committed a category error when it looked upon Hudson Transmission and assumed it was part of the category “generators,” rather than in the category “controllable transmission infrastructure.” To compound the error, the NYISO treated the Hudson Transmission Project as a “generator lead line” from one specific generator to a specific point on the NYISO system. But the Hudson Transmission Project is not a generator lead. It is a high-tech, controllable, system-to-system connection between the entire PJM system and the NYISO system. Like the road to the mall, it is in the category of infrastructure.

Moreover, a generator is a market participant, a producer and supplier of electric energy and capacity, while a transmission line like HTP is not. Transmission can provide enormous system-wide reliability benefits of a different nature than those provided by generators. In particular, under New York rules, if a transmission project cannot clear the ICAP auction, the inherent attributes of the transmission line enable the NYISO to use the line to reduce the Installed Reserve Margin (“IRM”) for NYISO and the Minimum Locational Capacity Requirement (“MLCR”) for New York City and Long Island.

The NYISO further compounded its category error by committing a “composition fallacy,” which occurs when the conclusion of an argument depends on an erroneous characteristic from parts of something to the whole or vice versa. By assuming that Hudson Transmission is, in effect, part of a generator, it attributes to Hudson Transmission only the attributes of a generator. But Hudson Transmission on its face is far more than a generator. It is a controllable transmission line that conveys the products of multiple generators, indeed the essential strength and stability of the entire PJM system, across the Hudson River, to New York City.

Seeking Relief

The MET regulation has huge implications for the New York metro area. If the MET continues to be applied to transmission in New York City, it will prevent projects from being built or it will render existing projects uneconomic by eliminating significant revenue streams.

How do we prevent the damage this category error will wreak? And then how does the New York Metro Area finally get the transmission it deserves? It starts with FERC. In addition to granting the relief requested in the HTP Complaint, the Commission should direct the NYISO to revise its Attachment H to eliminate the provisions applying the MET to new controllable transmission lines. With that, New York, Connecticut and New Jersey can get on with the continued development of critical intra-metro-regional transmission projects.

ABOUT THE AUTHORS Krapels is founder and CEO of Anbaric Holding, LLC, a company that development energy projects, including transmission projects. This article is based on a longer paper Krapels prepared for the Regional Plan Association in June 2013. The author was a principal in the companies that developed the Neptune and Hudson projects. Hollaway is a partner with the law firm Gibson Dunn & Crutcher and is regulatory counsel to Anbaric and other transmission companies.