NYISO Governance

NYISO: Not Your Ordinary "Nonprofit"
Today's Daily News points out that the head of the Port Authority of New York and New Jersey, who is paid over $286,000 per year for that post, is also a paid member of the Board of Directors of the New York Independent System Operator (NYISO). According to the article, NYISO directors receive compensation in the neighborhood of $100,000 per year for perhaps 12 hours of work per week. See Port Authority Boss Also Earns 100G as Part of Nonprofit's Board.

A 2006 article noted directors were paid as much as $130,000 while declaring they worked for only 12 hours a month, according to the group's tax returns.

The issue of NYISO governance deserves further scrutiny. It is not just a "nonprofit" organization as suggested by the headline.

The NYISO is also a utility, an electric company authorized by the New York Public Service Commission (PSC). It spends about $150 million a year, collected through electric rates. Although structured as a nonprofit organization, it performs no charitable deeds, but its actions do affect the public interest. See

• NYISO Costs Skyrocket: Benefits Questioned
  
• Mayor Upset over Latest Round of Exorbitant Electric Charges
• NY City Wholesale Electricity Prices May Rise 89% Due to Market Design and Higher Natural Gas Prices
• NYISO "Scarcity Pricing" Events
• Cornell Professor Gives Low Marks to NYISO Electricity Markets
• NYISO Opposes Possible Refund of Overcharges Due to Sellers' Market Power
• NYISO Report on Capacity Market Faulted at FERC
• Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?
  

The NYISO took over the grid management function of the New York Power Pool in November 1999, and, to implement the PSC's "vision" of a deregulated power generation sector, now operates day-ahead and "real time" spot markets where energy is bought and sold at market based rates allowed by the Federal Energy Regulatory Commission (FERC). Since the demise of Enron in 2001, no state has followed New York's example.

Under lax FERC regulation, rates set in NYISO markets are essentially deregulated, subject to high upper limits on rates that serve to stem only the most gross attempts at overcharges. New York utilities that sold their power plants now must buy back power in the wholesale markets at prices affected by what sellers can obtain in the NYISO markets. The NYISO markets also encourage "virtual" trading of electricity by traders who neither make nor use the electricity they buy and sell in billions of dollars of virtually unregulated transactions each year.

The NYISO Board and Committee Structure
The NYISO is governed by a Board of Directors, which selects its own replacements when directors leave the board. According to the NYISO bylaws

The ISO Board shall be self-perpetuating. Vacancies on the ISO Board shall be filled by the Directors then in office and new Directors shall be required to meet the same basic qualifications as the nine (9) initial Directors. The ISO Board shall always be comprised of at least three (3) Directors with prior relevant experience in the electric industry. The Management Committee shall assist the ISO Board in the filling of ISO Board vacancies. The Management Committee shall conduct a search for new Directors and provide the ISO Board with a list of at least three (3) qualified candidates for each vacancy. The ISO Board may seek candidates from other sources, including an executive search firm. The ISO Board shall provide the Management Committee with an opportunity to review the qualifications of candidates not forwarded to the ISO Board by the Management Committee and to comment on their qualifications prior to the selection of a new Director.

Most of the current directors are market rate devotees, former executives or consultants with utility and finance backgrounds.

The NYISO has a complex stakeholder committee structure consisting of a "Management Committee", a "Business Issues Committee", and an "Operating Committee." Based on the votes of committee members, the committees recommend policies for consideration by the board, but the Board is not bound by committee recommendations.

Voting Power in NYISO Committees: A Tilt Toward Sellers?
The NYISO "stakeholder" committee voting structure weights the NYISO "stakeholder" sectors as follows:

Generation Owners 21.5%
Other Suppliers 21.5
Transmission Owners 20.0
End Use Consumers
Large Consumers Subsector 9.0
Large Cons. Gov. Agency Subsector 2.0
Small Consumers Subsector 4.5
Gov. State-wide Cons. Advocate Subsector 2.7
Gov. Sm. Cons. & Retail Aggr. Subsector 1.8
Public Power
State Power Authorities Subsector 8.0
Munis & Co-ops Subsector 7.0
Environmental Subsector 2.0

Thus, the NYISO committee voting structure is heavily weighted so as to favor sellers and "other suppliers" (including energy traders), and to limit consideration of interests of ordinary consumers. A 58% majority is needed to take action in a committee, making it possible for sellers - who control 43% of the voting weight - to block action.

The "Transmission Owners" are the retail distribution utilities. They can pass through any wholesale charges under PSC and FERC rules and cannot be relied upon to protect consumer interests. Also, they may have energy trading affiliates who benefit from rules that favor sellers.

The 4.5% voting power of the small end use customer category in the NYISO committee structure is further diluted by the definition of "small" customer. NYISO defines a small customer as one who uses up to 499 Megawatts per year, thus including very significant businesses and large institutions.

How "Small" is the "Small" Customer Role?
The roster of NYISO committee members indicates that the following entities comprise the "small end use customer" sector:

American Sugar Refining, Inc
Association for Energy Affordability, Inc
Beth Israel Health Care System
Fordham University
Memorial Sloan Kettering Cancer Center
Mount Sinai Medical Center
New York Presbyterian Hospital
New York University

As can be seen, the "small" customer sector vote of 4.5% is actually dominated by rather large business and institutional customers.

In sum, despite a claim that "we never forget who our ultimate customers are — the family, the business, the soldier, and the farmer," made in the 2007 NYISO Annual Report, in reality the utility industry, energy traders, and large customer "stakeholders" far outweigh any credible voice of ordinary consumers in determining policy at the NYISO.

The California ISO
In contrast to the New York ISO, which was formed voluntarily by the former Power Pool members to conform with the "vision" of the Public Service Commission, the California Legislature created its state ISO as a public benefit corporation. In reaction to blackouts and electricity market manipulation, the California Legislature attempted to make its ISO more accountable to the public interest by requiring the CAISO Board of Governors to be appointed directly by the Governor.

FERC issued a Governance Order disapproving the Governor's selection of CAISO board members, and ordered CAISO essentially to reinstate a stakeholder process to select new "independent" Board members. FERC wanted a Board Selection Committee, composed of CAISO stakeholders, to select new Board members from a slate of candidates compiled by a private executive search firm, analogous to the stakeholder process used by the NYISO to select its Board replacements.

The Court of Appeals rebuked FERC in a scathing opinion, vacating and remanding the FERC Governance Order, finding that FERC had no authority under the Federal Power Act to require CAISO to replace its Board with a new board whose members are chosen through procedures dictated by FERC.

Subsequently, in compliance with the court decision, FERC issued a new order approving the selection process for the CAISO Board of Governors.

Under the approved process, the CAISO retains a search firm to find at least four qualified candidates for each open position. The search is for candidates who have"(1) electric industry expertise; (2) market expertise;(3) general corporate, legal, and/or financial expertise; and (4) public interest expertise. In addition, candidates must have a reputation for excellence in their areas of expertise." Further, candidates selected by the search firm cannot be employed by, cannot consult for, or hold any direct or indirect financial interest in any person or entity engaged in the generation, transmission, marketing, trading, or distribution of electricity within the United States. Rejecting a request to ease the nationwide conflict of interest standard, FERC stated

In Order No. 888, the Commission stated that “[a]n ISO and its employees should have no financial interest in the economic performance of any power market participant.” Consistent with Order No. 888, we believe that a potential Board member should be independent of any market participant that has economic or commercial interests that could be significantly affected by CAISO’s actions.

The candidates are reviewed by a CAISO nominating committee comprised of its "stakeholder" groups, and then CAISO sends the candidate list, along with the rankings, to the Governor for consideration as possible Board members.

However, in accordance with state law, the Governor can ignore the CAISO slate of candidates and appoint a Board member of his or her own choosing. CAISO board members are confirmed by the California state senate, and cannot be removed by the Governor, though they can be removed by a 2/3 vote of the Board members, with approval of a state energy oversight authority.

Time for a Change?
The NYISO structure privatizes and make less transparent much of the policy affecting electricity prices paid by New York State consumers, previously set by the state PSC or the FERC, and has marginalized the force of the consumer/voter. It is in this context that one must view FERC's recent decisions refusing to examine strategic bidding and withholding of power in RTO/ISO markets, and its suggestion that consumers should raise concerns in the stakeholder processes at the RTO/ISOs. See No Evil: FERC Refuses to Examine Gaming of RTO/ISO Electricity Spot Markets.

When the next grid or market debacle occurs at the NYISO, it may be time for the New York Legislature to review whether the PSC has been exercising adequate oversight to ensure that it is functioning in the public interest, that it files new rules to reform its markets, and to consider making the institution and its Board of Directors more directly accountable to the people of New York State and the public interest.