PULP Demands Full Public Investigation by FERC of NYISO Gaming

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

A recent NYISO filing at FERC brought out of the shadows a strong indication that market participants have been gaming the NYISO wholesale electricity markets by deliberately scheduling circuitous transactions around Lake Erie. This has the effect of creating economic congestion, raising spot market clearing prices, and increasing costs related to uscheduled flows of electricity.

Estimates of the cost of the practice range from $125 million to $290 million. See PULP Network, Enron-Like Gaming of NYISO Market Rules: Did it Cost New York Consumers At Least $125 Million?, Platts: NYISO Electricity Market Gaming Cost $290 Million, and New York ISO Moves to Cut off Loop Routing as Cost of Strategy Mounts for Whole Market

NYISO implemented changes in its tariffs to limit the use of certain transmission paths on one day's notice, and filed an "exigent circumstances" petition asking FERC to approve only the tariff changes it filed under Section 205 of the Federal Power Act. In a subsequent letter, NYISO reported that it had implemented the change in its rules to restrict certain transaction routes, and that average power flows had changed direction around Lake Erie in the first week of the new rules, from 457 MWh clockwise to 67 MWh counterclockwise.

NYISO acknowledges in its filings that it may be unable to detect continued circuitous transactions in its day ahead electricity market until September, when it will have new software. It says that if it discovers additional gaming its "market monitor" will send a letter warning against further gaming. In the event of a second infraction of the new rule prohibiting the gambit, NYISO will notify the FERC Office of Enforcement.

Thus, all NYISO market participants get at least one more free bite at trying a New York Death Star gambit at the expense of consumers. There is no provision in the NYISO rules for disgorgement of gaming profits. One might add that with FERC led by ardent deregulators and architects of a scheme of unfiled, unreviewable, and unrefundable market rates, what better time to loot and pillage New York than in the waning days of their reign.

On August 1, PULP moved to intervene in the case and asked FERC to commence a proceeding under Section 206 of the Federal Power Act, to examine publicly any gaming activities, to examine more closely and modify NYISO tariffs, to set a refund effective date to assure that refunds will be available in the event of continued gaming, and for other relief, including public identification of the sellers or other parties and their circuitous transactions that elevated rates and NYISO costs. PULP pointed out that "[t]he remedy sought by NYISO is grossly inadequate to address the situation....

• NYISO does not identify the extent of unreasonable rates and charges flowing from the gaming activities of its Market Participants.
• NYISO seeks no disgorgement of profits from unreasonable rates and no refunds.
• NYISO asks for no revocation of market-based rates of Market Participants whose gaming activities elevated congestion costs, clearing prices, residual NYISO charges, and uplift charges.
• NYISO acknowledges that its requested rule change may not completely halt the circuitous gaming transactions it has attempted to prohibit, and only reduce gaming.
• NYISO asks for no Commission investigation under Section 206.
• NYISO does not ask for a refund effective date that would allow for refunds related to gaming that occurs prospectively.
• NYISO’s Section 205 filing does not propose to add new NYISO tariff provisions that would prohibit its Market Participants from gaming, other than a few listed transaction routes.
• NYISO does not propose new NYISO tariffs that would require resetting of clearing prices influenced by gaming.

Seven utilities and neighboring states filed information suggesting that the market gaming had been going on longer than revealed by NYISO in its filing, and pointed to a $240 million increase in NYISO uplift charges since early 2007.

there is likely to be more going on than has been identified in the NYISO’s filing here. Although it blames a few unnamed market participants playing within the then-existing rules for driving up the initial cost of hydro power and energy five fold simply to move it across New York, it would be a serious mistake for the Commission to take the NYISO’s explanation at face value .... A different explanation may be that market participants were manipulating the market prior to January, 2008, and—having gotten away with doing so—were inspired to launch this latest, more aggressive gambit.

The Neighboring States' filing suggests that NYISO knew for months about the problem and apparently tolerated the gaming. Only after being confronted at a meeting on July 15, 2008 with evidence of gaming, reproduced in the filing of the Neighboring States, did NYISO go forward with the exigent circumstances filing on July 21.

A filing by AES also indicates that FERC was aware of the situation months ago. FERC did nothing to correct it or to protect customers by commencing an investigation with a refund effective date prior to the $125 million added uplift charges that were extracted from consumers' pockets this spring.

The New York Association of Public Power Utilities filing indicates that NYISO uplift charges alone rose $240 million in the first six months of 2008:

the Total Uplift was $129.4 million in May 2008 and $97.3 million in June 2008, according to the NYISO President’s Report, July 23, 2008. For the period January through June 2008, Total Uplift in New York has more than doubled and is approximately $240 million above Total Uplift for the same six-month period in 2007. Consumers in the other affected organized markets have also been harmed.

The filing of the New York Public Service Commission basically supports the NYISO. In all likelihood the PSC has known about the situation for months but has done nothing to protect consumers. Although NYISO tariffs are under FERC jurisdiction, the NYISO is still a New York electric corporation and the PSC has some jurisdiction over the NYISO to see that it operates in the public interest. See NYISO Governance. In its filing as a party in the FERC proceeding the PSC seeks no refunds, no disgorgement of profits, and demands no broader investigation of gaming at the NYISO.

The Consumer Protection Board requests refunds in its filing. FERC precedents indicate that this is highly unlikely. FERC will claim that the rates elevated by gaming cannot be changed under the "filed rate" doctrine -- even though the actual rates and charges are not filed publicly and are not reviewable before they take effect as contemplated by the Federal Power Act. The Supreme Court recently remarked that FERC's unfiled market rate scheme is rather "mystical." See Supreme Court Leaves Fundamental Questions About FERC Market Rate Scheme Unanswered.

The American Public Power Association (APPA) filed comments asking a number of pointed questions, including:

• Who are the market participants engaging in these scheduling practices?
• Are these participants load-serving entities with physical market transactions, or are they purely financial players?
• How many dollars in uplift charges and increased locational-based marginal prices have their activities caused other NYISO transmission customers to pay?
• Are these scheduling practices the sole reason for the substantially increased transmission charges APPA members are paying the New York ISO, or are there other practices that are contributing as well?

APPA told FERC, "Something is clearly wrong here. This commission, if it is to ensure that consumers only pay just and reasonable rates as the Federal Power Act requires, must get to the bottom of it."

DC Energy, LLC in its filing provides independent evidence of the circuitous transactions designed to exploit differences in market rules of adjacent control areas, and points out the adverse impact on reliability:

Since the circuitous transactions commenced (January 2008), there have been 72 NERC TLR [transmission load relief] procedures enacted at level 2 or above to relieve flows on Ontario/NYISO flowgates. By contrast, only one was issued in all of 2007. The Circuitous Path Transactions’ pernicious effect on the market includes additional and avoidable challenges to the reliable operation of the system.

Because it is possible that the NYISO action may not completely curb the identified gaming techniques, or that it has only identified one of several gambits, it is important for consumers that FERC, in response to the NYISO Section 205 filing to change its rules, on its own motion commence an investigation proceeding under Section 206 of the Federal power Act and establish a "refund effective date" forthwith, as PULP and some other intervenors have requested, to at least shore up the possibility of refunds of ongoing and future overcharges due to continued gaming which occurs after the NYISO filing.