NYISO Death Star Gaming: LIPA, Con Ed, and Other Utilities Ask FERC to Investigate, Pursue Refunds

LIPA President and CEO Kevin S. Law has filed a letter to FERC Chairman Joseph T. Kelliher supporting the request of Senator Schumer and others for a FERC investigation of the Enron-like congestion gaming of unnamed NYISO market participants that increased rates for wholesale electricity and NYISO charges ultimately collected from retail consumers. Law said “I fully intend to pursue financial recovery (and/or other claims LIPA may have) on behalf of our 1.1 million customers and look forward to receiving FERC’s cooperation in those efforts.”

PULP previously demanded FERC undertake a full public investigation in its comments filed on August 1. Motion for leave to intervene of Public Utility Law Project of New York, Inc. and Request for FPA section 206 Investigation and Order setting refund effective date regarding New York Independent Transmission System Operator, Inc. under ER08-1281.

Estimates contained in other filings put the cost of added NYISO charges in the range of $240 – $290 million in 2008 alone. Some commenters suggest the higher NYISO charges due to gaming began before 2008.

These direct charges, which the NYISO calls “uplift,”are crammed down by the NYISO and retail utilities to consumers. They do not include the impact of higher spot market clearing prices achieved by the gamers which, due to the NYISO market design, are paid to all sellers in the market, who profit too when gamers succeed in driving prices up. Thus the cost to consumers of the gaming may far exceed the NYISO “uplift” assessments.

A group of New York retail distribution utilities, which includes Con Edison and other major investor owned companies, the “Transmission Owners,” also filed a letter asking FERC Chairman Kelliher to initiate an investigation. Reading between the lines a bit, the letter suggests the NYISO was less than quick to discovery the gaming:

The costs of these circuitous scheduling transactions have been borne by all NYISO consumers. Various Market Participants, including those representing New York consumers, observed and repeatedly questioned the NYISO regarding the cause for significant increases in certain costs, known as “uplift.” Ultimately, the NYISO’s investigation of these increased costs led to the discovery of the circuitous scheduling.

The NYISO’s filing should protect consumers from adverse effects of the circuitous path scheduling on a going-forward basis. However, it does nothing to address the ability of the NYISO to curtail transactions that create unscheduled flows such as Lake Erie Circulation, which is still going on. The transactions which are the subject of the Exigent Circumstance Filing may have violated the Commission’s prohibition against market manipulation and the Federal Power Act (“FPA”) when they occurred.

The New York Transmission Owners and many other market participants have requested that the NYISO provide additional information to ensure a complete understanding of the nature of the market activity that took place and the economic impact on New York consumers, to develop tools, and if needed, new tariff language, to monitor and mitigate future unscheduled flows. In addition, it is appropriate for the Commission to review this market behavior, to determine if the transactions were appropriate under applicable provisions of the Federal Power Act and implementing regulations and to take steps consistent with the Commission findings, including remedying economic harm. It is important to maintain public confidence in competitive electricity markets.

How can there be any confidence in the flawed markets which allow sellers to manipulate prices and soak consumers at will, without refund, and without meaningful sanction?

Because of the cloak of secrecy thrown over rates by FERC and the NYISO, we might never have known of the problem but for the objections of the small local municipal utilities who began to protest the outrageous and unexplained NYISO “uplift” charges. Where were the Transmission Owners? Were they just passing the charges through to their retail customers? Did their energy trading affiliates with market-based rates benefit from the higher market prices caused by gaming.

For years, FERC has consistently raised obstacles to refunds in cases of market manipulation in its so-called “organized markets” like the NYISO. Indeed, June, FERC vacated the precedent established in the Enron case that Death Star congestion gaming in California was illegal. Only last year, FERC refused a request of consumer advocates to hold proceedings to hear how its “organized markets” can be gamed. FERC said that would be unduly burdensome. See No Evil: FERC Refuses to Examine Gaming of RTO/ISO Electricity Spot Markets.

It is no wonder that a growing national Campaign for Fair Electric Rates is now demanding that Congress act to oversee and reform FERC’s market rate regime.

The Transmission Owners indicate in their filing that undesirable Lake Erie circulation “is still going on,” raising costs and possibly impairing reliability.

The NYISO in its filing only sought to change its rules to ban a certain set of circuitous transaction routes prospectively, sought no FERC investigation, and did not seek refunds. One might analogize a situation where a bank embezzlement has occurred, the establishment knows it was an inside job, knows who did it, does not ask for the money back, and simply changes the passwords and vault combinations that were used to accomplish the theft.

In its July 22 filing NYISO acknowledged that even after banning the use of several transaction routes, the software for its major market, the day ahead spot market, cannot detect continued gaming. NYISO filed its rule changes on one days notice and had not alerted market participants because it was concerned that if normal 60 day advance notice were given as ordinarily required by the Federal Power Act, Section 205, more market participants would take advantage of the market flaw while the change is being considered.

NYISO also has indicated that if it catches a market participant continuing to use the banned routes, it will have its market monitor (no Sherlock Holmes) send a warning letter. If the participant is caught twice, NYISO will send a note to the FERC enforcement department. The rule changes proposed by NYISO do not ban other gaming beyond the prohibited scheduling paths, do not provide for disgorgement of profits wrongfully obtained, and allow for continued secrecy regarding the identity of the gamers who have driven prices up for consumers.

PULP has called for public identification of the gamers and their transactions in a public proceeding at FERC in which a “refund effective date” is set to at least assure refundability of charges due to future gaming.

Under the Federal Power Act Section 205 all rates and contracts are required to be publicly filed. Under FERC rules and orders and NYISO tariffs, however, sellers are allowed to make secret contracts, the cost of which is passed on to consumers. Whether this is legal is an issue left open in a recent Supreme Court decision, which held that contracts will be deemed reasonable in most situations, without addressing whether FERC had power to lift the public rate and contract filing requirements absent an act of Congress amending the Federal Power Act. See Supreme Court Leaves Fundamental Questions About FERC Market Rate Scheme Unanswered.

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