Audit finds NYISO's Private "Market Monitor" System Lacks Sufficient Independence

The functioning of wholesale electricity markets has taken on huge importance in the 15 states, including New York, that encouraged their utilities to sell their power plants so that most power must be purchased in the functionally deregulated and seriously flawed markets such as those of the NYISO. A recent audit report filed with FERC finds that the NYISO "Market Monitor" system provides insufficient independence. The "Market Monitor" is hired by the NYISO to review whether its spot markets which set the price of wholesale electricity in New York are competitive and not flawed, gamed or manipulated.

The audit faults several features of the private NYISO utility's market monitoring function, including that

• the "independent market monitor" consultant reports to the CEO of the NYISO instead of to its Board of Directors
  
• NYISO failed to consistently notify FERC and market participants on a timely basis when NYISO discovered problems in its markets
  
• the NYISO "market monitor" may be subordinate to other executives involved in market design. Typically the NYISO response to gaming or manipulation has been not to seek price corrections but to change market rules going forward, with the result that no refunds are provided and market rules become so complicated few can understand them
  

Still pursuing its Enron-style deregulation agenda, FERC, instead of requiring all sellers to comply with Federal Power Act requirements to publicly file rates, allows wholesale electric rates to be set and changed privately. There is no public disclosure of prices demanded in the day-ahead and real time markets until months later, and even then, the identity of sellers is masked. As a result the public cannot know, for example, which seller set the market price or which sellers may be engaging in strategic tactics to raise prices, such as "hockey-stick" bidding.

FERC just assumes market prices are "just and reasonable" without public filing or review, and has approved RTO/ISO tariffs that privatize the determination whether markets are competitive. This allows the ISO, a private utility, to itself judge, through its private "market monitor" consultant, whether its markets are working. Seven years ago, the National Association of State Utility Consumer Advocates, NASUCA, adopted a resolution urging more independence of "Market Monitoring Units" ("MMUs") in situations where states had restructured:

The MMU should be an integrated part of the RTO and should be ultimately accountable to the RTO board;The head of the MMU should only be dismissed for cause and with the approval of the independent board of the RTO and the Commission....

After an incident involving independence of the market monitor in the PJM region, FERC, in its Order 719, issued in October 2008, required changes intended to strengthen the independence and role of market monitors along the lines proposed five years earlier by NASUCA. These included making market monitors accountable to and removable by the RTO/ISO Board of Directors, instead of the management of the entity.

After a series of incidents involving delayed action on gaming and failures of the NYISO markets, the new audit report faults the NYISO "Market Monitoring Unit" for a lack of structural and operational independence now required by Order 719.

As stated in the FERC Order accepting the audit report, which covered a period ending January 2009

Several provisions of the NYISO Market Monitoring Plan require the MMU to be responsive to NYISO’s Chief Executive Officer (CEO). Specifically, the Market Monitoring Plan requires the MMU to act at the direction of the CEO. It also subjects the MMU to the management oversight of the CEO in retaining consultants and other experts and in developing and implementing methods, procedures, staffing and other resources for meeting the objectives of its Market Monitoring Plan. The Report notes that while the Market Monitoring Plan calls for the MMU to be responsible to the CEO, the audit revealed that the head of the MMU was reporting to the Vice President of Market Structures. This raises a potential conflict because the Vice President of Market Structures also has responsibility for market design. The Report found that this is inconsistent with the Market Monitoring Plan and Order No. 719, which requires MMUs to report to the Board of Directors, rather than management, to give them the separation needed to foster independence.

For more on the NYISO see New York State Assembly Committees to Hold Hearings on NYISO Wholesale Electricity Pricing; Data Discredits NYISO and PSC Defense of Spot Market Rate Demands; 12% of Bids Exceed $900.