UNITED STATES OF AMERICA
BEFORE THE

FEDERAL ENERGY REGULATORY COMMISSION

New York Independent System Operator, Inc.)Docket Nos. EL07-39-002

)ER08-695-000

)ER08-695-001

TARIFF COMPLIANCE FILING AND REQUEST FOR WAIVER OF
THE NEW YORK INDEPENDENT SYSTEM OPERATOR, INC.

The Commission’s September 30, 2008 order in the above-captioned proceeding1

directed the New York Independent System Operator, Inc. (“NYISO”) to make certain changes
in the tariff language filed in compliance with the Commission's order largely approving the
NYISO's proposals for market power mitigation measures for the Installed Capacity market in
New York City.2 The NYISO's compliance filings were made on March 20, 2008 and May 6,
2008. The NYISO submits in this filing the tariff revisions requested by the Commission.3

In connection with this filing, for the reasons discussed further below the NYISO

requests a waiver of the previously requested effective date of November 1, 2008 for the

implementation of the “Affiliated Entity” provisions included in the May 6 compliance filing, with these provisions to become effective on January 1, 2009.

Simultaneously with this filing, the NYISO is also submitting a limited request for

rehearing relating to one aspect of the definition of “Control” approved by the Commission in

1 N.Y. Indep. Sys. Operator, Inc., Order on Rehearing and Further Order on Compliance Tariff Sheets, 124 FERC ¶ 61,301 (2008) (“September 30 Order”).

2 N.Y. Indep. Sys. Operator, Inc., 122 FERC ¶ 61,211 (2008) (“March 7 Order”).

3 Unless otherwise specified, capitalized terms have the meanings specified in the
NYISO’s Market Administration and Control Area Services Tariff (“Services Tariff”).

Robert E. Fernandez, General Counsel
Elaine D. Robinson, Director of Regulatory Affairs New York Independent System Operator, Inc.

10 Krey Boulevard

Rensselaer, NY 12144
Tel: (518) 356-7677
Fax: (518) 356-8825
rfernandez@nyiso.com
erobinson@nyiso.com

* Designated to receive service.

II. Documents Included in this Filing

1.This compliance filing;

*William F. Young, Esq.

J. Christopher Upton, Esq. Hunton & Williams LLP 1900 K Street, NW

Suite 1200

Washington, DC 20006-1109 Tel: (202) 955-1500

Fax: (202) 778-2201
wyoung@hunton.com
cupton@hunton.com

Services Tariff.

III. Background

The September 30 Order granted in part and denied in part rehearing of the March 7

Order conditionally approving the NYISO's proposals to strengthen market power mitigation in
the New York City (“in-City”) Installed Capacity (“ICAP”) Market. The Commission also
accepted, subject to conditions and effective November 1, 2008, the NYISO's March 20 and May

6 compliance filings of tariff language to implement the mitigation measures. Ordering

paragraph (D) directed the NYISO to file tariff sheets containing revised market rules reflecting

the determinations in the September 30 Order within 30 days of the issuance of the Order. This filing submits the tariff sheets directed by ordering paragraph (D). The revisions all appear in Attachment H of the Services Tariff.

IV. Description of Tariff Changes

Net Buyer. The September 30 Order concurred with the NYISO's contention that the
mitigation measures for uneconomic entry should not be limited to net buyers of ICAP.
Accordingly, the September 30 Order directed that the language included in the May 6
compliance filing to implement a “net buyer” limitation on the application of bid floors be
deleted.4 To implement this revision, the attached tariff language deletes the definition of
“Attributable ICAP” in § 2.1 of Attachment H since that definition was only used to implement
the “Net Buyer” definition, and the definition of “Net Buyer” has also been deleted. In addition,
the substantive provisions implementing the Net Buyer limitation that appeared in § 4.5(g)(vi) of
Attachment H have been deleted.

Control. The September 30 Order rejected the NYISO's contention that in order to rebut
a presumption of control over ICAP, a supplier must show that is “without any right to revenues
or other financial benefits from such Unforced Capacity that would enable the seller to benefit
from an increase in the Market-Clearing Price in the New York City Locality.”5 The NYISO
continues to believe that not including this requirement will potentially create a significant
loophole that would allow a supplier to avoid the Pivotal Supplier test while retaining an interest
in capacity that would provide incentives for withholding. The NYISO is accordingly submitting
a limited request for rehearing on this aspect of the September 30 Order. In compliance with the

4 September 30 Order at P 29.

5 September 30 Order at P 101.

September 30 Order, but without prejudice to its rehearing request, the attached tariff language revises the definition of “Control” in Attachment H to delete the reference to a retention of a right to revenue or other financial benefits from Unforced Capacity. A conforming change is also made to § 4.5(e) of Attachment H.

Going-Forward Costs. The September 30 Order granted a supplier’s request for

rehearing to the extent of directing that “all non-discretionary capital expenditures such as those
necessary to comply with federal or state regulations for environmental, safety, or reliability
reasons be included as going-forward costs,” but noted that to be included as such a cost “must
not only be necessary to comply with federal or state regulations, but also must be necessary to
make the unit available in the ICAP market.”6 The NYISO believes that the inclusion of these
costs is consistent with the definition of “Going-Forward Costs” previously submitted.
Accordingly, the attached tariff revisions adds language to the definition of “Going-Forward
Costs” to make clear that those costs include, but are not limited to, the capital expenditures
specified in the September 30 Order.

Special Case Resources. The September 30 Order rejected the NYISO’s proposal to

exempt Special Case Resources (“SCRs”) from the mitigation measures for uneconomic entry,
stating that “we will require SCRs to comply with [the] NYISO’s in-City mitigation rules as
approved herein.”7 In complying with this directive, the NYISO submits that certain distinctions
between SCRs and traditional generator sources of Installed Capacity must be recognized. First,
SCR ICAP comes from numerous small sources, which in many instances may be aggregated at
a single ICAP injection and tracking point, or PTID. Second, as noted in the September 30

6 September 30 Order at P 50.

7 September 30 Order at P 41.

Order, SCRs “are usually industrial or commercial companies that, in exchange for an advanced payment, agree to curtail power usage, usually by shutting down, when requested to do so by the NYISO.”8 Thus, in a finding not overturned by the September 30 Order, the Commission has “concluded that there is no basis to establish an offer floor for demand response resources based on the cost of new generation entry because there is not necessarily any connection between net CONE by generation and net CONE by demand response resources.”9 The implications of these practical realities for this compliance filing are discussed further below.

The first revisions to implement the inclusion of SCRs in the mitigation measures for
uneconomic entry appear in the definition of “Offer Floor” In § 2.1 of Attachment H. These
revisions recognize that the Net CONE test for determining Offer Floors for generators would,
for the reasons articulated above by the Commission, be essentially a non sequitur if applied to
SCRs. Instead, Offer Floor rules specific to SCRs are set forth in the revisions to § 4.5 (g)(v) of
Attachment H.

In § 4.5(g)(v), the exemption for SCRs has been deleted and replaced with appropriate
Offer Floor provisions. Consistent with the uneconomic entry mitigation measures for
generators, the Offer Floor provisions are applicable to SCRs that are new entrants into the
capacity market. In addition, the revisions recognize that since capacity is not the primary
business of a SCR, a given SCR may leave and later reenter the capacity market. After some
period of time, such reentry would in effect be a form of new entry. The revisions propose that a
SCR offer be treated as coming from a new entrant if the SCR has never participated in the
capacity market, or has not participated for a year or more. Offers from a SCR that was subject

8 September 30 Order at P 39, n.27.

9 September 30 Order at P 39 (citing March 7 Order at P 120).

to mitigation would be subject to mitigation for a 12 month period commencing with the month in which offers subject to an Offer Floor were first made. This is a reasonable period for the application of Offer Floors, given the facility with which Special Case Resources can enter and leave a capacity market, and corresponds to the 12 month period for determining whether a Special Case Resource should be considered a new entrant.

The Offer Floor for a SCR would be based on the amount of the per month minimum
payment that is payable to the SCR by its Responsible Interface Party (“RIP”), as the best
available proxy for the SCRs' costs of providing capacity. As unrelated parties presumably
dealing at arm’s length, a RIP and its SCRs should negotiate payments to the SCR that reflect at
least the minimum amount at which the SCR would expect to recover its costs of providing
capacity, and there is no legitimate economic reason why a RIP should be willing to offer
capacity for less than what is it paying a SCR to provide the capacity. At the same time, given
the variety of primary businesses in which SCRs may be engaged, there is no equivalent to the
proxy generating unit that is used as the basis for the Net CONE determination for generators,
and thus no ready basis for determining a broadly applicable bid floor threshold for all SCRs.
Using the RIP payments would result in Offer Floors tailored to each SCR.

To be comprehensive, any such Offer Floor would have to be inclusive of any subsidies
or other benefits, for example from the host LSE, meant to encourage SCRs to provide capacity.
In addition, the Offer Floor is set at the minimum monthly amount payable to the SCR, in order
to accommodate arrangements in which the SCR is paid a percentage of the monthly market-
clearing price. While the NYISO understands that SCR payments based on a percentage of the
market-clearing price are relatively common, the NYISO believes that few if any would obligate
a SCR to provide capacity in a given month without a minimum payment protection, and the

minimum payment at which the SCR is willing to provide capacity would provide the

appropriate proxy for a cost-based Offer Floor. If, however, a SCR were willing to undertake a
capacity obligation on a percentage basis without minimum payment protection, then presumably its costs of providing capacity are very low and its Offer Floor would and should be permitted to sink to that level.

The offers submitted for SCRs by RIPs may aggregate a number of SCRs behind a single
PTID. In order to avoid having an Offer Floor attributable to one SCR being nullified by offers
from other SCRs with which it is aggregated, tlus allowing an uneconomic offer to escape
mitigation, the revisions in § 4.5(g)(v) specify that offers by a RIP at a given PTID may not be
lower than the highest Offer Floor applicable to a SCR providing ICAP at that PTID.

As noted above, there may be hundreds of SCRs participating in the in-City capacity
market at any given time. At present, the NYISO has neither the software nor the other
resources necessary to evaluate and apply Offer Floors across the inventory of SCRs prior to
each monthly ICAP Spot Auction. Accordingly, the revisions in § 4.5(g)(v) would enforce the
Offer Floor requirement through an ex poste audit and penalty procedure, similar to that
applicable to physical withholding, with thresholds and penalty amounts paralleling those used
elsewhere in the ICAP mitigation measures. With the benefit of experience and the availability
of sufficient resources, it may be possible to develop an ex ante procedure for the application of
Offer Floors to SCRs, but an ex ante procedure is just not feasible today. In order to prevent
gaming of the Offer Floor requirement by setting up subsidiaries or affiliates to avoid the
mitigation thresholds, the ex poste examination can include a Responsible Interface Party and its
Affiliated Entities, a defined term used for similar purposes in the application of the in-City
ICAP mitigation measures. The price impact test is set at the lower of the thresholds used

elsewhere in the in-City ICAP mitigation measures, in recognition of the reality that Responsible Interface Parties should be able to determine the applicable Offer Floors at the time of their bids with relative certainty.

Capacity Retirements. The clarifying language required by P 134 of the September 30
Order relating to the verification of a planned Installed Capacity Supplier retirement has been
added to § 4.5(c). As a result of a stakeholder comment, a reference to mothballing a unit has
been added to the language previously proposed by the NYISO as a clarifying revision to avoid
any negative inference that the concept of avoided Going-Forward Costs applies only to unit
retirements.

Exports. The September 30 Order directed the NYISO to make several changes in its proposed measures for mitigating capacity exports that constitute physical withholding of the exported capacity from New York City. In P 161, the Commission directed that the impact test threshold for determining the effect on in-City capacity prices that would trigger a penalty be revised upward to the greater of $2/kW-month and 15%. This change is included in the revised language of §4.5(d)(ii) of Attachment H.

In P 162, the Commission determined that it was not reasonable to determine whether an
export was a legitimate response to higher prices in an external market by comparing the price
for an annual product with the price of the New York monthly product. Instead, the Commission
stated that: “One way to make the comparison reasonable would be to compare (i) the net
revenue that could have been received from the New York City market over the comparable
period for which the supplier's capacity was committed in the export market with (ii) the net

revenue that was actually received in the export market during that period.”10 Tariff revisions in compliance with this directive are set forth in § 4.5(d)(i).

In making these revisions, the NYISO reiterates its position, noted with apparent approval in the September 30 Order, that

mitigation turns on a supplier’s conduct in the shortest term, organized external
market that is closest in time to an in-City auction in which exported capacity
was not offered, and correspondingly, a supplier would not be subject to
mitigation because of a decision to sell capacity into a three-year forward
external market.11

As the September 30 Order notes,

if capacity is available in a short term external market at a price below the inCity spot auction price, there is no economic justification for a Pivotal Supplier not to take advantage of the lower-priced capacity to satisfy its external
obligations, unless the Pivotal Supplier were seeking to use its market power to raise capacity prices in New York City.12

These considerations necessarily inform the tariff revisions implementing the net revenue
comparison directed by the Commission. The tariff revisions specify that an export can be
deemed to constitute physical withholding if (a) the Responsible Market Party could have bought
out of its export obligation through participation in an external reconfiguration auction, and (b)
the net revenues that could have been earned in New York over the period covered by the
commitment period for reconfiguration auction purchases would have been greater, subject to an
appropriate bandwidth, then the revenues the exporter did earn over the period covered by the
reconfiguration auction.

10 September 30 Order at P 162.

11 September 30 Order at P 154.

12 Id.

Similar considerations also govern the implementation of an ex ante approval process for
exports as directed by P 164 of the September 30 Order. An ex ante approval process is
specified in new subparagraph §4.5(d)(iii). As with the new revenue comparison, the focus is on
the participation of a Responsible Market Party in an external reconfiguration auction. The ex
ante process will allow the Responsible Market Party to request the NYISO, in consultation with
its independent Market Advisor, to provide a projection of in-City ICAP Spot Auction prices
over the commitment period covered by the external reconfiguration auction. The Responsible
Market Party would be exempt from a withholding penalty if it made offers in the external
reconfiguration auction that would reasonably be expected to produce net revenues from exports
that would exceed the net revenues that would have been realized from in-City sales of the same
capacity at the spot auction prices projected by the NYISO over the period corresponding to
commitment period specified in the external reconfiguration auction. In effect, the Responsible
Market Party would be able to require the NYISO to specify an offer floor for the external
reconfiguration auction that, when viewed on a net revenue basis, would provide a safe harbor
for participating in the external market. The price projections would be binding on the NYISO
in that if the export decision was an economically rational response at the time to higher external
revenues when compared to the NYISO's price projections, the NYISO would be precluded from
imposing a physical withholding penalty.

Finally, the September 30 Order directed the NYISO “to revise the penalty for physical
withholding related to uneconomic exports so that it is 1.5 times the smaller of (i) the difference
between the clearing prices in the New York City ICAP Spot Auction with and without the
export and (ii) the difference between the New York City ICAP Spot Market Auction clearing

price and the external region clearing price.”13 Revisions to make this change are incorporated
in §4.5(d)(ii). In accordance with the factors discussed above, the price comparisons are made
on the basis of the commitment period corresponding to the relevant external reconfiguration
auction.

V. Request for Waiver

In the May 6 compliance filing, the NYISO explained that the March 20 compliance

filing had adopted the existing definition of “Affiliate” in the Services Tariff in connection with determining the portfolio of capacity sources that could be attributed to a Pivotal Supplier. That definition proved to be overly broad, because it included Affiliates that do not do business in the New York markets. Accordingly, the NYISO proposed

a definition of “Affiliated Entity” that is tailored to the requirements of

mitigation of the portfolios of Pivotal Suppliers of capacity. Under the new
definition, suppliers would be required to inform the NYISO of all upstream
parent entities, but reporting of subsidiaries or affiliates would be limited to
persons or entities authorized to participate in a New York capacity market, or that have a relevant interest in an In-City Installed Capacity Supplier. The new definition also clarifies the reporting of bidding agents, and of agreements under which the seller retains Control.

The “Affiliated Entity” definition was generally supported by the Market Participants,
and was accepted by the September 30 Order. In the time available after the issuance of the
September 30 Order, however, it is not possible to complete the data compilation and software
mapping necessary to implement the new definition any earlier than in time for the ICAP Spot
Auction for February, which auctions will be held toward the end of January. Accordingly, the
NYISO requests a waiver of the November 1 effective date for the Affiliated Entity provisions,
with this portion of the compliance filing to become effective on January 1, 2009, which will

13 September 30 Order at P 163.

make them effective for the ICAP Spot Auction to be held in January for the month of February. In the meantime, the broader definition in the March 20 compliance filing will remain in effect. This waiver will not affect the substantive application of the supplier mitigation measures, but only the administrative burden of implementing them.

VI. Conclusion

WHEREFORE, the NYISO requests that the attached tariff revisions be accepted by the Commission in compliance with the requirements of the September 30 Order.

Respectfully submitted,

NEW YORK INDEPENDENT
SYSTEM OPERATOR, INC.

By__________________________
Counsel

William F. Young, Esq.

J. Christopher Upton, Esq. Hunton & Williams LLP 1900 K St., NW

Washington, DC 20006-1109 202-955-1684

wyoung@hunton.com

Dated: October 30, 2008

CERTIFICATE OF SERVICE

=The NYISO will serve this filing on all parties on the official service list compiled by
the Secretary in this proceeding. The NYISO will also electronically send a link to this filing
to the official representative of each of its customers, to each participant on its stakeholder
committees, to the New York Public Service Commission, and to the electric utility regulatory
agencies of New Jersey and Pennsylvania. In addition, the complete filing will be posted on
the NYISO’s website at www.nyiso.com. The NYISO will also make a paper copy available to
any interested party that requests one. To the extent necessary, the NYISO requests waiver of the requirements of Section 35.2(d) of the Commission’s Regulations (18 C.F.R. § 35.2(d)
(2007)) to permit it to provide service in this manner.

Dated at Washington, DC, this 30th day of October, 2008

Hunton & Williams LLP

1900 K Street, NW

Washington, DC 20426 (202) 955-1500

55430.000063 EMF_US 26418459v1