Thursday, August 16, 2007

NYISO "Scarcity Pricing" Events

Click on chart to enlarge

Upward Trend in NYISO Scarcity Pricing Events

Under NYISO tariffs approved by FERC, scarcity pricing may occur at times when there is no actual scarcity. The number of NYISO scarcity pricing events grew rapidly from 2004 through 2006, according to Some Issues on Scarcity Pricing, a recent presentation by California PUC and FERC staff.

For example, slide 28 (above) shows that the number of NYISO scarcity events more than tripled over the three year period. In the Long Island zone the number rose more than five-fold, from about 60 in 2004 to about 340 incidents in 2006. NYISO appears to have far more of these scarcity pricing occurrences than any of the other RTO/ISO organizations that perform similar functions in other areas of the country.

A conclusion of the presentation suggests that "[m]arket manipulation under [Scarcity Pricing] and Performance metrics for generation investment should be addressed."

To implement the restructuring "vision order" of the New York Public Service Commission (PSC), coordination of the state's bulk power grid was shifted from the New York Power Pool to a new utility, the New York Independent System Operator (NYISO). See Outline of Orders and Issues in New York Electric Industry Restructuring. See also, NYISO Costs Skyrocket, Benefits Questioned. In addition to physical coordination functions, such as balancing electricity supply with load, adjusting transmission line transfers, and dispatching power plants to run at specified levels of output and times, the NYISO also operates day ahead and real time spot markets in which electricity is bought and sold at whatever price the market will bear, subject to certain limitations.

NYISO market participants include power plant owners (e.g., KeySpan Ravenswood), distribution utilities that now buy most of the power needed to serve their customers after having sold most of their power plants (e.g, Consolidated Edison of New York), and numerous "virtual" electricity traders who neither produce nor use the electricity they buy and sell (such as Morgan Stanley Capital Group). According to the 2006 NYISO Annual Report, unaudited wholesale electricity market trading volume was $8.6 billion in 2006.

Since the inception of the NYISO, concerns have been raised about the exercise of market power by sellers who may physically or economically withhold power in its markets as a strategy to drive market prices higher. See Justice Department Investigating NY Energy Markets, and Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006? regarding possible economic withholding of capacity. The possibility of physical withholding surfaced early, as discussed in a PSC Staff report issued in the first year of the NYISO's operations:
Physical withholding of generation can be accomplished in several different ways. Some examples are: a generator may report a false outage to the ISO; a generator may not bid all of the MWs that the generator is able to provide; or a generator may submit a maintenance schedule that is intentionally lengthened. All three examples result in the next highest cost generator being chosen over the lower cost generation being withheld. Staff’s data analysis regarding physical withholding keys on actual operational data. * * * *

A review of data for the period January 2000 through September 2000 indicates an increase in reserve pickups from historical levels. Frequent calls for reserve pickups can impact prices, reliability, and equipment maintenance. We plan to thoroughly review possible causes of reserve pick-ups (e.g. regulation units that are underperforming or insufficient levels of regulation, generators unable to maintain basepoints, insufficient number of units on dispatch, excessive generator outages, or external transactions with neighboring ISOs) to determine the primary causes and assess the impacts on price and reliability.
See Interim Pricing Report On New York State’s Independent System Operator, December 2000, requesting public comment. Numerous parties submitted comments on the "Interim Report."

A Final Report on the investigation of the NYISO that might have identified reasons for the "increase in reserve pickups" that began with the advent of the NYISO, but a final report was never issued by the PSC.

"Scarcity Pricing" Allowed Under NYISO Rules

Ample electricity is available to meet New York's peak usage, but there are times when the NYISO grid operator must call for generating plants to provide service on short notice, for example, when a power plant abruptly trips off line. While additional plants are coming on line to meet a temporary deficiency in reserves, NYISO rules permit the payment of very high "scarcity" prices. These prices are paid to all sellers in the real time markets, under the notion that this sends "price signals" to encourage new power plants to be built. During these scarcity pricing events, NYISO real time market prices paid to a seller may rise to more than ten or twenty times the cost of electricity production.

News stories sometimes mention that electricity prices spiked during outages or on hot days, but the precipitating factor of the soaring prices may not be high demand, but a loss of supply due to a power plant or transmission line tripping off line. Or, it may be due to other events in the operation of the power plants and grid, such as a reduction of output by one plant that requires others to provide operating reserves:
NYISO tariffs and FERC rules prohibit its participants, including local retail utilities like Con Edison, from disclosing information regarding power plants that trip off line. See Power Outage Mystery. Information about the identity of sellers and the prices they demand is deemed confidential, as is certain information related to contracts for transmission system congestion rights.

PSC Scrutiny of NYISO and Merchant Power Plant Operations is Also Needed
The tripping of merchant power plants at times when prices are allowed by FERC to spike to extreme levels should be fully investigated by the New York PSC. Power plant shutdowns played a role in the California energy crisis, creating shortages that led to spot market price spikes. See Regulation's Rationale: Learning from the California Energy Crisis. Also, the official US-Canada Task Force report on the 2003 blackout found, at page 96, that New York generator protection devices were set to trip the machines off line unnecessarily in response to minor disturbance levels. The Times said, "[a]ccording to the report, some were set to trip much sooner than protecting the generator required."

Additional scrutiny is particularly important because FERC's market rate system and the NYISO market rules may allow some sellers or traders of electricity to reap very large financial rewards at times of temporary scarcity created by unscheduled outages or transmission constraints. Although FERC has jurisdiction over the level of rates paid to sellers during scarcity events, FERC effectively abandoned meaningful regulation of market rates, and does not otherwise supervise the generators.

It cannot be assumed that generators will voluntarily run their plants to keep prices low. Indeed, in another context, involving the early retirement of merchant power plants (which could maintain shortages and high prices even as new power plants are built), the association of New York's merchant power plant owners asserted that the New York PSC lacks "authority to constrain a wholesale supplier's decision to exit the wholesale market or to require a wholesale supplier to provide any service."

The PSC has ample power to investigate NYISO scarcity pricing events and unscheduled power plant outages.
The New York PSC adopted a policy of "lightened regulation" over new electric companies that purchased power plants from the old utilities, but the PSC still retains supervisory authority to assure that all electric companies in New York - including the merchant power generation companies and the NYISO - perform their public service duties.

As stated by the New York State Court of Appeals in Matter of Astoria Gas Turbine Power, LLC v. Tax Commission of City of New York, :
the PSC maintains "light regulation" over AGTP covering "matters such as enforcement, investigation, safety, reliability and system improvement . . . . This light regulation also gives the PSC authority to limit AGTP's power in the market and any actions in contravention of the public interest.
Similarly, the PSC stated, with respect to its jurisdiction over the NYISO:
the NYISO is nonetheless an 'electric corporation' that operates and manages 'electric plant,' as set forth in Sections 2(12) and 2(13) of the Public Service Law (PSL). It is therefore under the Public Service Commission's general jurisdiction pursuant to Section 5(b) and Article 4 of the PSL * * *
Section 65 [of the Public Service Law] assigns the Public Service Commission the responsibility to ensure that electric corporations such as the NYISO furnish safe and adequate service at just and reasonable rates. Moreover, the manner in which bids are made, generators are committed, and the performance of generators in meeting those commitments, can and often do have profound impacts on the reliability of electric service in New York State and, ultimately, on retail rates.
Thus, the PSC, under its own precedents and those of the state's highest court, possesses ample power to investigate the cause of the scarcity pricing events and whether the NYISO and its participants who may have the ability to trigger such events are functioning in the public interest.

Time for Action
Despite its clear powers, however, the PSC has not required the NYISO or the electric companies that generate power to explain the reasons for so many "scarcity pricing events" during times when there is no actual shortage. Nor has the PSC required the utilities to file public reports of all unscheduled power plant and transmission outages, the reasons, and the cost to consumers of the high price spikes that accompany them.

The reliable operation of all electric companies in the state and the economic provision of safe service are very major matters affecting core public interests and core duties of the New York PSC. This requires reassertion of vigilant PSC supervision of the NYISO and the new utilities producing and marketing power in this state. This duty cannot simply be "divested" by the PSC and left to "the market" and the new utilities.

1 comment:

Mark Lively said...

When electricity prices spiked in the Midwest in 1998, I felt that the prices should be more measured. The reported prices were so smooth that they obviously reflected the rough estimates of what the market would bear instead of the true intersection of well defined supply and demand curves.

Why were reported prices $5,000/MWH and not $6,294/MWH? Why were the reported prices for a well defined hour when the shortage might have lasted only 23 minutes?

Accordingly I wrote “Electricity Is Too Chunky: The Midwest power prices were neither too high nor too low. They were too imprecise,” Public Utilities Fortnightly, 1998 September 1.

I can provide an electronic copy to anyone sending me an e-mail to