Data Discredits NYISO and PSC Defense of Spot Market Rate Demands; 12% of Bids Exceed $900

Background
The Federal Power Act, 12 U.S.C. section 824d stipulates

All rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.

The Federal Energy regulatory Commission (FERC), the agency charged with enforcing the Federal Power Act and protecting customers, is, like the New York PSC, in the midst of a major deregulation effort which abandons traditional regulatory safeguards.

In its so-called "market-based rate" system, FERC allows wholesale electricity sellers to change their rate demands secretly, without publicly filing the rates and charges (or contracts) in advance. FERC allows sellers at the NYISO spot markets to demand up to $1,000 MWH -- even when the actual cost of operating power plants is only a small fraction of that. This stands in marked contrast to the traditional filed rate regulation system under the Federal Power Act in which (i) reasonableness of the price is tested by relationship of the price to some measure of the cost, and (ii) all rates and rate changes are publicly filed in advance with an opportunity for public scrutiny and revision by FERC prior to their taking effect.

Under FERC's practices, no review or refund is possible when unreasonable market rates are charged. In a decision last year, the Supreme Court pointedly refused to endorse the legality of FERC's "market-based rate" regime. See Supreme Court Leaves Fundamental Questions About FERC Market Rate Scheme Unanswered.

Legislative Hearings on NYISO Market Design
Two New York State Assembly Committees held hearings on the impact of NYISO markets on New York State's high electric rates earlier this month. See Assembly Committees Hold Hearing to Discuss NYISO Practices and High Electric Prices.

A topic of the hearings was a report of Robert McCullough, principal of McCullough Research, a Portland Oregon consultant who uncovered electricity market manipulation by Enron.

McCullough concluded that the sale by New York utilities of their power plants to new owners who can sell the output at the NYISO at federally allowed "market-based rates", and the resultant new role of the NYISO influencing wholesale rates has resulted in higher prices to consumers. See The NYISO's Market-Clearing Price Auction Is Too Expensive for New York- New Yorkers Lost $2.2 Billion Because of NYISO Practices.

McCullough criticized the lack of transparency in NYISO markets. NYISO secrecy rules, approved by FERC, prohibit release of the identity of the sellers whose bids clear the hourly market auctions and set the price for all sellers. Data on prices sellers demand at the NYISO is kept secret for six months, and then is released in "masked" form without identifying the sellers. As a result, the identity of sellers who may have gamed the market rules is never disclosed, as in the case of last year's episode of market gaming which may have cost consumers hundreds of millions or more. See FERC, NYISO and PSC Watched While NYISO Gamers Looted Consumers.

In his testimony, Robert McCullough discussed an anonymous seller who regularly offers the output of its power plant in ascending "hockey-stick" bids which reached $1,000/MWH. He urged further inquiry regarding the identity of the seller making such high rate demands and any reasons given to justify them.

The NYISO Defense
The NYISO, the New York PSC, and other spot market supporters responded last week with efforts to rebut the McCullough Research report and to explain away the anonymous $1,000 bidding. See NYISO submitted a paper from Susan Tierney of the Analysis Group. Tierney's prior papers defending NYISO markets has been criticized here. One thrust of the defense was to claim that the $1,000 bid was unusual, and perhaps related to unique characteristics of some generating plant, though it did not identify the plant.

Two PSC staffers submitted a response supporting the NYISO. The current Chairman of the PSC is a former NYISO official. See The PSC urged creation of the NYISO in its 1996 "vision order" that propelled the utilities in New York to divest their power plants and form holding companies. Although FERC has jurisdiction over the wholesale electric rates, the PSC still retains limited but possibly significant jurisdiction over the NYISO. For example, the PSC has jurisdiction to assure the NYISO operates in the public interest, and also has jurisdiction over other New York power companies participating in the NYISO market to prevent their exercise of market power.

The Response to the NYISO - Much More Evidence of Anomalous, "Possibly Criminal" Bidding
Yesterday, McCullough Research issued a response. See New Yorkers Lost $2.2 Billion Because of NYISO Practices: The Debate Continues. The response includes "A Short Review of Anomalous Bidding at the New York ISO from September 2007 through August 2008." A press release states

McCullough Research has now countered the objections of the NYISO and the Public Service Commission with "New Yorkers Lost $2.2 Billion Because of NYISO Practices: The Debate Continues" released on March 30. This surrebuttal also analyzes data on bidding in New York. "From September 2007 through August 2008, NYISO received 585,043 bids at $900/MWh or more. This appears to be a very large number of anomalous bids – 12% of the 4,859,186 bids entered into the NYISO markets during this period," says McCullough. "Markets that lack transparency are susceptible to many different forms of abuse. In California, market failure posed an extreme danger to the economy of the state. New York appears to be facing many of the same factors."

The March 30 Report defends the conclusion that New Yorkers are paying more for electricity due the the NYISO markets, debunks hypothetical justifications proffered by the PSC and Tierney for the $1,000 MWH bids by an anonymous bidder, and discusses its startling new finding of a broad pattern of anomalous bids:

Hockey stick bids are not simply the province of a single bidder in New York State. Bids higher than any plausible level of marginal cost are made continuously by a number of different bidders. Our database of NYISO bids, for example, has non-economic bids (over $900/MWh) made by 95 different bidders. On average, each bidder submitted non-economic bids for seven different generating units. Why would bidders make such irrational, non-economic bids? Given the opaque nature of New York’s markets, it is difficult to determine the rationale, but three reasons have been observed in other areas with administered markets:

Project Stanley: In Alberta, Enron and Powerex had a collusive agreement to divide the market. Powerex allowed Enron to purchase power from it at a lower rate in exchange for Enron setting the high price in the market. Proceeds were then divided on a share-and share-alike basis.

Market Allocation: In PJM, EMMT made maximum bids in order to avoid providing capacity in the day ahead market.

Load Shift: Enron frequently made anomalous bids in Northern California and Southern California in order to manipulate the California ISO’s computer algorithm to assume heavy traffic on a transmission line. Enron then received the congestion payments.

We believe that non-economic bidding is a problem with broad ramifications – perhaps even criminal ramifications – that should not be casually dismissed as the irrational behavior of an imaginary hospital or hydro generator.