Senator Calls for Ferc Probe of Traders Using Lake Erie Loop Strategy

Michael Giberson

Senator Charles Schumer of New York has asked the U.S. Federal Energy Regulatory Commission to investigate the traders scheduling circuitous routes around Lake Erie for transactions that in effect flowed primarily within the New York ISO power system.

As discussed here last week, in late July the NYISO sought emergency rule changes to allow it to prohibit use of the Lake Erie looping strategy. Unofficial estimates suggest the practice may have resulted in as much as $290 million in additional costs imposed on users of the NYISO system.

‘This practice of scheduling power on circuitous routes around Lake Erie was not merely deceptive, but also costly to New York and in defiance of the basic laws of physics,’ Schumer wrote to Federal Energy Regulatory Commission Chairman Joseph Kelliher. ‘The economic motive for this practice appears to be evading fees associated with sending power over congested, direct lines between New York and New Jersey for which there is a more costly transaction fee.’

I think an investigation by FERC is appropriate. While the practice may have been in full compliance with the rules, if the purpose of the scheduling practice was to profit from manipulating the market, then it may run afoul of laws concerning energy market manipulation. (The trader may have simply been trying to find the cheapest means to schedule a particular transaction, without necessarily intending to profit through manipulating the market. An investigation would be able to distinguish between the two possibilities by examining other contemporaneous market transactions by the parties involved.)

As I suggested in the earlier post, the strategy could work in part because of a lack of coordination between RTOs: the RTOs currently don’t have any way to ‘net out’ the true source and destination of a trade scheduled across multiple RTO boundaries, so they can’t necessarily work out the real expected effects on power flows for such schedules. Therefore when such trades are scheduled, the effect can be unexpected congestion that gets billed to all users of the system rather than just the users causing it.

The best fix for the problem is improving coordination among regional power markets. The main benefits of better coordination would flow to consumers, while power suppliers would be a little worse off due to the moderating effect on power prices in the coordinating regions. While RTOs nominally favor better coordination, RTOs typically are reluctant to take on projects which find their stakeholders sharply divided and in practice other priorities are pursued. In addition, in some cases the benefits may flow primarily to consumers in neighboring regions, and the RTOs sees little internal constituency pushing for such benefits.

In this case, the cause of economic efficiency needs a champion with a perspective broader than the borders of a single RTO. FERC has long said elimination of seams between power markets is one of its priorities; it is past time for FERC to make it a priority.

2 thoughts on “Senator Calls for Ferc Probe of Traders Using Lake Erie Loop Strategy

  1. I’m glad you’ve clarified this, as news reports can be very confusing.

    As you’ve described it, this sounds like little more than a modern-day example of the “Contract-Path Fiction,” well-understood even in the days of traditional interface-oriented bilateral markets. As we know, within a well-functioning locational market with closed interfaces, locational pricing eliminates these arbitrage opportunities. In this case the problem is a convergence of seams with a big lake in the middle. But certainly there must still be contract-path issues occurring in the bilateral markets, where the only solutions are presumably still TLRs (Transmission Loading Relief). So it will be interesting to see if rulings in the present case might have some impact on contract-path practices in the bilateral markets. It really is the same thing.

  2. Yes it really is just an exploit of the contract-path fiction — I’m guessing this is what Sen. Schumer’s remark about practices ‘in defiance of the basic laws of physics’ is about. As you point out, markets using locational pricing have eliminated these kinds of problems arising from the difference between the schedule and the actual flows.

    However, external transactions between RTOs continue to rely on convenient, but inexact, fictions that can give rise to these kinds of problems.

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