Lack of coordination between RTOs provides multi-million dollar gaming opportunity to some market participants – at the expense of others

Michael Giberson

On July 21, the New York Independent System Operator (NYISO) filed what was in effect an emergency rule change – proposed to go into effect the morning of the next day unless FERC stopped it (and FERC didn’t stop it) – in order to bring to a halt certain gaming activities pursued by some market participants.

In the filing, the NYISO described how a market participant could schedule power flows between New York and neighboring PJM in two ways – a direct path and an indirect path. The indirect path – using external transactions looping around Lake Erie (scheduling through Ontario and the Midwest ISO, and entering PJM from the west) – is essentially a false schedule. Power generally flows in the interconnected AC system over the path of least resistance, so transactions scheduled using the indirect “Lake Erie looping” path end up mostly flowing over the direct links between New York and PJM.

When the difference between the New York price received for power imported from PJM and the New York price charged for power exported to Ontario is greater than the cost of scheduling external transactions around the Lake Erie loop, a market participant can make money by scheduling the indirect path.

Because the actual flow will tend to be directly from western New York across the NYISO-managed transmission system to the PJM border, but isn’t scheduled on that path, the flows create west-to-east congestion costs that are paid by all transmission users (and not solely by the transmission users who caused the congestion). The market participant in effect uses the NYISO-managed grid without paying full price for it. In addition, the practice would tend to depress prices in western New York and increase prices in eastern New York and create ‘phantom congestion’ over the external paths around the Lake Erie loop. The result would be potentially significant economic losses in all affected regional power grids because of the inefficient use of the interconnections between regions and less efficient unit commitment and dispatch.

NYISO said that the scheduling practice seemed to emerge in early 2008 and tended to increase over time. The Public Utility Law Project blog (PULP Network) has noted estimates of the costs created by the Lake Erie looping strategy ranging as high as $290 million. (The PULP Network has also posted a more detailed description of the filing and a discussion of various comments filed in the proceeding by it and other stakeholders. See also this story by Platts.) The NYISO filing proposed to stop the practice going forward, but didn’t propose to penalize the market participants for using the indirect paths prior to the rule change. Many stakeholders urged the Commission to use its anti-energy market manipulation authority to penalize market participants who employed the inefficient-but-profitable Lake Erie looping strategy.

By the way, the emergency filing of rule changes appears to have had the desired effect. The NYISO reported to FERC on July 31 that in the seven days immediately after the filing power flows around Lake Erie returned to levels typical of 2007.

Ironically, one of the factors contributing to the economic viability of the Lake Erie looping strategy was the reduction or elimination of charges on transactions between PJM and MISO, a policy long advocated by transmission users and supported by FERC as a way of reducing “seams.” The lower the costs for external transactions between regions around Lake Erie, the more likely it would have been economical to engage in the Lake Erie looping schedule. However, the implication is not to re-raise the costs of external transactions but to more fully coordinate power scheduling in neighboring regions. Improving coordination between RTOs will improve system efficiency and on net lower prices to consumers.

FERC has long said elimination of seams between power markets is one of its priorities; it is past time to actually make it a priority.

(NOTE: While until recently I worked for the firm that provides market monitoring services to the NYISO, I did not work on the related analyses or participate in the development of related reports. My commentary here is based solely on the NYISO filing and other public documents linked to above. -MG)

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2 thoughts on “Lack of coordination between RTOs provides multi-million dollar gaming opportunity to some market participants – at the expense of others

  1. One picky nit, Mike: As I’m sure you know, power doesn’t flow on *the path* of least resistance, even though that’s the way it’s most often stated. It flows on all possible paths, allocated inversely by resistance. Perhaps a better way to say it, in parallel with the usual sound bite, is that most power flows on the *paths* of least resistance.

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