A number of factors, some local and some national, are contributing to the difficulties New York State's power sector faces, according to a report published Tuesday by Standard & Poor's Ratings Services.

"Anyway you look at it, New York's power sector is going through tough times," comments Standard & Poor's credit analyst Trevor J. D'olier-Lees. "The capacity payments issue may be clarified once the Federal Energy Regulatory Commission announces its decision, perhaps within days or weeks, but then the New York Energy Highway Task Force will be coming out with their Action Plan sometime this fall. Credit quality may be affected as a result of all this."

The report explains that "capacity payments" are designed to help ensure a reliable and adequate electricity supply. Nonutility merchant power producers and project-financed power plants primarily depend on two sources of cash flow--one from the electricity they sell, and the second from capacity payments. These capacity payments are made by electricity utilities that serve customers to power generators to keep plants in operating mode.

Capacity payments provide a strong incentive to generators to make their electricity available when demand increases, and also encourages the participation of demand response, which lets commercial users and others to commit reducing electricity use if required to do so by a grid operator. Capacity markets also help signal needed investment in the construction of new generation and or transmission--in well-functioning markets as new-build is needed, capacity prices should rise to signal scarcity.

"The uncertainty in New York State's capacity power market has continued for many years, and it expects a ruling from the FERC within days or weeks. Market participants hope it will bring some much-needed clarity to the market," said D'Olier-Lees.

But even a definitive ruling will not clear up the uncertainty, as the Action Plan for the new "Energy Highway Plan" announced in April by Governor Andrew Cuomo will be issued sometime this fall, which will add another layer of complexity to an already complex situation. The New York Energy Highway Task Force appointed by the Governor has received some 85 responses to its Request for Information, and the deadline for commenting on those responses has been extended to Aug. 31.

A bright light for merchant power is the aspiration that market mechanisms such as capacity markets would be transparent and have predictable price signals. If market rules are opaque and or being vigorously challenged as evidenced by the complaints filed in New York, then there is cause for concern at a fundamental level. Merchant generators are already operating under environmental, financial, and regulatory ambiguity. With states eager to stimulate their economies amid ongoing high unemployment and severe budget constraints, there may very well be a splintering between policies at the state level and those at the federal level. If the fog of doubt in the capacity markets turns into pea soup, then there merchant generators' credit quality could suffer.

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