Friday, August 01, 2008

Platts: NYISO Electricity Market Gaming Cost $290 Million

Captain Renault: I'm shocked, shocked to find that gambling is going on in here! -- Casablanca, 1942.

Earlier we noted that NYISO filed a request to change its tariffs to foreclose certain spurious transactions that had the effect of raising wholesale electricity rates artificially. According to NYISO, this was accomplished by scheduling circuitous transactions from New York to Pennsylvania counterclockwise around Lake Erie -- through Canada, MISO, and finally into PJM -- instead of a more direct transaction, in order to create economic congestion and game the rules of the loosely regulated "organized markets" approved by FERC to establish rates privately, in place of the filed rate regulation system.

Platts has now reported that the cost of this gaming may be $290 million.

The New York Independent System Operator said a small subset of its market participants has been increasing congestion around Lake Erie by creating circuitous power schedules in order to benefit from the differences in locational marginal prices in neighboring areas. As a result, the rest of the NYISO members and customers were adversely affected and will end up paying an estimated $290 million in additional charges.

The market behavior may seem reminiscent of Enron trading practices in California with colorful names such as “Death Star” and “Fat Boy,” which were denounced by the Federal Energy Regulatory Commission. That controversy ended with Enron traders pleading guilty to federal wire fraud charges.

See New York ISO Moves to Cut off Loop Routing as Cost of Strategy Mounts for Whole Market.

The lower figure of $125 million we cited earlier (See PULP Network, Enron-Like Gaming of NYISO Market Rules: Did it Cost New York Consumers At Least $125 Million?) may relate only to increased NYISO uplift and residual charges imposed to balance daily transactions involving unscheduled flows of electricity, as of early June 2008. Perhaps the higher $290 million estimate from Platts includes the added NYISO uplift charges plus impact of the manipulation upon spot market clearing prices and the impact of additional gaming that occurred after the first estimate. Under NYISO rules, all sellers generally benefit when prices are inflated because all are paid the same spot market clearing prices. By artificially creating economic congestion, however, more expensive power plants may be called to run, while less costly power cannot be dispatched, so sales of some producers may have been curtailed by the gaming.

NYISO did not identify the amount the gaming has cost, did not seek refunds, acknowledged that the rule changes it is adopting may not halt the gaming, and indicated that it lacks the ability to detect the gaming in its major spot market, the "day-ahead" market. NYISO indicated that if it discovers continued use of the particular circuitous transactions it will refer the matter to FERC for enforcement. There is no talk of a refund for consumers.

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