Tuesday, July 22, 2008

Enron-Like Gaming of NYISO Market Rules: Did it Cost New York Consumers At Least $125 Million?

In a cryptic NYISO filing at FERC on July 21, 2008, the NYISO asked FERC to approve a prospective market rule change to prohibit what appears to be gaming of market rules by NYISO market participants. Apparently uneconomic wholesale energy transactions are scheduled over circuitous routes involving other areas adjacent to the NYISO New York Control Area, counter to the normal flow of transactions around Lake Erie, raising prices.

The NYISO filing says
The Board concluded that exigent circumstances exist in this instance because a relatively small number of Market Participants are scheduling transactions over circuitous Scheduling Paths around Lake Erie to take advantage of a "seam" between the methods that are used by the organized markets in the Eastern lnterconnection to price External Transactions.

* * * * The NYISO believes that this filing letter presents an adequate factual record for the Commission to determine that a "seam" between the methods used to price and settle External Transactions in the organized markets around Lake Erie is resulting in unjust and unreasonable rates and charges.

* * * * The NYISO proposes to preclude the scheduling of External Transactions via the eight circuitous Scheduling Paths identified above for two primary reasons. First, until such time as the Control Areas around Lake Erie are able to more closely conform actual power flows to scheduled power flows, the path by which Energy that is scheduled to flow over one of the eight identified Scheduling Paths actually moves from source to sink will hear little relation to the Scheduling Path. Divergence between scheduled and actual inter-Control Area flows has increased the level of unscheduled power flows moving through the interconnected NYISO, MISO, PJM and IESO Control Areas and is exacerbating west-to-east congestion in the NYCA. Second, there is a "seam" between the method that the NYISO and IESO use to price External Transactions, and the method that PJM and the MISO use to price External Transactions that is providing inefficient scheduling incentives that are resulting in increasing levels of inefficient transactions.

* * * * Since January of this year a significant volume of External Transactions have been scheduled over two of the eight Scheduling Paths described above by a small subset of Market Participants that appear to be responding to an inefficient incentive resulting from differences between the External Transaction pricing and settlement roles of the ISOs and RTOs that surround Lake Erie.

* * * * The attached Tariff revisions propose to prohibit the scheduling of External Transactions over eight specified Scheduling Paths around Lake Erie to mitigate burdens on the interconnected Control Areas and costs to the NYCA that are not being accurately charged to the responsible Market Participants. These burdens and costs occur because actual power flows do not align with scheduled power flows when Market Participants schedule significant volumes of transmission service over circuitous Scheduling Paths around Lake Eric. Electricity does not follow a contractual Scheduling Path unless there are adequate controls in place to ensure that actual and scheduled flows are reasonably closely aligned. In the absence of such controls, electricity flows over the path of least resistance in accordance with Ohm's Law.

* * * * When generation is increased in the NYCA to .serve PJM Load as a result of the scheduling of an External Transaction over a circuitous Scheduling Path from New York to PJM, unless power flows are controlled, most (approximately 80%) of the power will flow directly over the common border interconnections between the NYISO and PJM, rather than traveling circuitously around Lake Erie to enter PJM at its midwestem border with the MISO. Although New York generation will serve the PJM load, most of the Energy will not flow over the circuitous Scheduling Path. The resulting difference between .scheduled and actual flows is referred to in this filing as "unscheduled flow." A well known example of unscheduled flow is the flow of unscheduled energy through the interconnected transmission system around Lake
Erie, often referred to as "Lake Erie circulation."

* * * * The NYISO incurs additional congestion related costs when actual power flows include unscheduled power flows that exacerbate internal NYCA west-to-east transmission constraints.

* * * * Studies prepared by the NYISO's Operations Department indicate that on May 26 2008, a day when Market Participants were scheduling more transactions over circuitous Scheduling Path No. I than the Available Transfer Capability on the NYISO - IESO interface, more than half of the real-time congestion costs that the NYISO was experiencing were caused by Lake Erie circulation. A study prepared by the NYISO's Independent Market Advisor explains that the cost of redispatch to address Lake Erie circulation causes costs to the market that may either be reflected in market clearing prices, or charged to the market as uplift.
How Much are Consumers Paying for the Latest NYISO Market Failures -- $125 Million in NYISO Charges Plus Higher Market Prices Paid to Sellers?
The NYISO filing does not reveal the amount of overcharges passed through to consumers through higher market clearing prices - paid to all sellers in the market - and through NYISO "uplift" or "residual" charges. See Power Grid Closes Costly Loophole: Rule Bars Power Traders from Creating Certain Interstate Transactions That Strain Lines, up Price, quoting a NYISO spokesman saying that "NYISO . . . , plans to calculate the effect ... on electric prices this year, but does not yet have an estimate."

While it may be difficult to analyzed the effect of the trading gambit on market clearing prices for energy, paid to sellers, it may be possible now to identify the effect on the NYISO fees collected by the NYISO for "uplift" and "residual" charges. These are daily NYISO costs of unscheduled energy flows or other costs not reconciled in the market due to its flaws, which are simply allocated to the utility buyers in the NYISO wholesale markets who then simply pass on the cost to retail users of electricity. According to the NYISO submission, the trading gambit caused unscheduled flows of electricity the cost of which was recovered through uplift charges.

The NYISO assessed extraordinary "uplift" or "residual" costs that were $25 million and $125 million higher in May and June of 2008, respectively, according to Slide 7 of a June 10 Suez Energy Resources, NA "webinar" presentation.

Passing the NYISO Charges Through to Consumers through Retail Utilities
In June, there were news reports of small municipal utilities objecting to extraordinarily high NYISO uplift or residual costs. According to the June 18 Plattsburgh Press
The city was recently sent a bill from the Independent Systems Operators for about $150,000 for the month of May to help pay for transmission problems on Lake Erie.
* * * * The city, and other municipal power companies in the region, received significant charges from the Independent Systems Operators in March for what was termed "unaccounted power." Plattsburgh was forced to pay about $282,000 more than usual, and Rouses Point, Tupper Lake and Lake Placid also received large bills.

* * * * The latest Independent Systems Operators bill comes under the heading of "loopflow and uplift" charges. "Obviously, they don't take us seriously, so maybe we ought to do something more than a strongly worded letter to get their attention," Kasprzak said. He said the city and other municipal-power towns and villages should seriously consider refusing to pay the charges.

The Independent System Operator has warned that if the bills are not paid, power will be cut off.

* * * * Lake Placid, which also has municipal power, got hit with a bill for about $161,000 for Independent Systems Operators charges in May. Mayor Jamie Rogers said those charges account for about 63 percent of the village's monthly bill for power.
See Mayor Upset over Latest Round of Exorbitant Electric Charges. If these small municipal utilities had to pass on large bills to their customers, what about the large utilities?

Con Edison raised its residential electric rates by 6.3 cents/kwh on July 11. That was a huge unexpected increase, far above the already very high target rate for July that was just set May 1. See Excelsior! Excelsior! Con Edison Rates Peak Again: Bills Up 30% Since May. The explanations of the NYISO and Con Ed pointed to international oil and gas markets and did not mention market design flaws of the NYISO. See It was the [NYISO] Market.

Con Edison has wholesale and retail energy trading subsidiaries, Con Edison Energy and Con Edison Solutions, that may have profited from a runup of prices, even if they were not in the "small subset" of NYISO market participants who scheduled the Lake Erie loop transactions, while the distribution utility passed the costs through to retail consumers.

The NYISO letter indicates that the rates charged for electricity were unjust and unreasonable (and hence illegal) due to the circular transactions. But the NYISO has not proposed any refunds. Under FERC's scheme, unfiled market rates are given the same force as rates filed publicly subject to review for reasonableness, are changed only prospectively. So the NYISO is at best only closing the barn door after the damage is done. There are serious questions whether FERC's unfiled market rate regime satisfies the public filing requirements of the Federal Power Act. See Supreme Court Leaves Fundamental Questions About FERC Market Rate Scheme Unanswered.

Sounds Familiar
The behavior of "a small subset" of unidentified NYISO Market Participants, described above by the NYISO, is reminiscent of Enron's "Death Star" market gaming schemes in California and the West in 2000 and 2001.

"Death Star"involved creating essentially fictitious transactions that could not be physically implemented in order to artificially "congest" the transmission system and raise prices. A FERC ALJ found in a decision issued in June 2007 after years of litigation and hearings that Enron had engaged in such transactions:
Death Stars are congestion related schemes that involve circular scheduling. The Commission has found that Circular Scheduling is a prohibited Gaming strategy. Gaming Order, 103 FERC ¶ 61,345 at P 43. Death Star Transactions were perpetrated by Enron scheduling power to flow at the same time in opposite directions, but no power would actually flow. The purpose of scheduling such counter flows was to create the illusion that Enron was relieving congestion so that Enron could receive congestion management payments from the ISO. However, congestion is not actually relieved if power does not flow. Death Star transactions were created by John Forney to take advantage of congestion payment revenues and originally called the “Forney Loop” and later renamed “Death Star.” **** There were several different types of Death Star transactions such as “Small Death Star” transactions, “Black Widow,” “Big Tuna,” and “the LOOP” which all had the fundamental purpose of creating simultaneous offsetting schedules where no energy would actually enter or be taken off the system.
The NYISO has gag rules that prevent open disclosure of the activities of the "small subset" of Market Participants who the NYISO says scheduled the uneconomic Lake Erie loop transactions, and keeps their identities, and the rates and charges they demanded and received, secret.

State Investigation Necessary

According to the NYISO, the market gaming may affect reliability, putting the public in danger. In asking FERC for permission to begin limiting the circuitous transactions on July 22, the NYISO said that the status quo
would leave the NYCA and neighboring Control Areas without any deterrent against the scheduling of External Transactions over Scheduling Paths that are not closely tied to the expected physical flow of Energy and that may adversely affect both market prices and the reliability of the interconnected transmission grid during the height of the summer peak. Under the circumstances, and in light of the potential for relatively tight supplies in New York during peak summer load periods, it is entirely appropriate for the Commission to take expedited action in this proceeding.
There needs to be a serious investigation of the NYISO market flaw, behavior of market participants, and performance of the NYISO.

Do not expect to see meaningful oversight anytime soon from FERC. See See No Evil: FERC Refuses to Examine Gaming of RTO/ISO Electricity Spot Markets .

If the past is any guide, FERC will throw a cloak of secrecy over who was making the bogus transactions, how much market prices were inflated, how much consumers had to pay, and how much was made by those who engaged in the transactions. After several years there will be a settlement in which sellers admit no wrongdoing, blame former "rogue" traders who violated their company rules against market manipulation, pay fines that amount to chump change in relation to what was overcharged, and the evidence will be sealed.

Indeed, after years of litigation and an ALJ decision finding that Enron owed $1.3 Billion due to market manipulation, FERC recently vacated the administrative decision as moot preventing it from being relied upon in related litigation. A protest of FERC's action is now underway.

The NYISO is an electric company organized under New York law and is required to operate in the public interest. The New York PSC and the legislature can and should exercise more oversight of the performance of the NYISO. The State should consider alternative structures that provide greater accountability to the public interest and the interests of consumers, beginning with appointment of NYISO Board Members by the Governor, as California did after manipulation of the CAISO markets.

The State should also revisit the policies of the PSC that have resulted in too little bilateral contracting and too much reliance upon purchases in the flawed NYISO day-ahead and real time "convenience store" spot markets to meet needs of consumers that are predictable far in advance.

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