UNITED STATES OF AMERICA
BEFORE THE

FEDERAL ENERGY REGULATORY COMMISSION

New York Independent System Operator, Inc.)Docket No. ER08-1281-010

REQUEST FOR REHEARING, AND REQUEST TO DEFER CONSIDERATION, OF
THE NEW YORK INDEPENDENT SYSTEM OPERATOR, INC.

In accordance with Rule 713 of the Commission’s Rules of Practice and Procedure,1 the
New York Independent System Operator, Inc. (“NYISO”) hereby submits this Request for
Rehearing, and Request to Defer Consideration, of the Commission’s March 15, 2012 order in
this proceeding (“March 15 Order”).2 The March 15 Order addressed the NYISO’s December
22, 2011 compliance filing3 to implement a new interface pricing policy for certain interregional
transactions in, and around, the Lake Erie region. It holds (i) that the NYISO should submit
compliance tariff changes “specifying a revised pricing methodology for all interface
transactions, based on NERC tag information and actual energy flows, i.e., consistent with
PJM’s4 methodology”;5 and states (ii) that prices should be calculated “based on the actual
energy flows at all times.”6

The NYISO does not seek rehearing of the Commission’s instruction that it submit

Tariff7 revisions that incorporate and reflect changes to its interface pricing rules. However, the

1 18 C.F.R. §§ 385.713 (2011).

2 New York Independent System Operator, Inc., 138 FERC ¶ 61,195 (2012) (“March 15 Order”).

3 Compliance Notice, Docket No. ER08-1281-010 (filed December 22, 2011) (“Compliance Notice”).

4 “PJM” means PJM Interconnection, LLC.

5 March 15 Order at P 25.

6 Id. at P 21.

7 Terms with initial capitalization that are not otherwise defined herein shall have the meaning set forth in the NYISO’s Market Administration and Control Area Services Tariff (“Services Tariff”), and if not defined therein, in the NYISO’s Open Access Transmission Tariff (“OATT”).

NYISO is concerned that other aspects of the March 15 Order could be read as imposing unjust, unreasonable and unduly burdensome compliance obligations on it. For this reason, (1) the NYISO requested the scheduling of a technical conference before it had to submit this Request for Rehearing, and (2) requests below that the Commission rule on the NYISO’s compliance filing in this Docket before it acts on this Request for Rehearing.

The NYISO requests rehearing of the provisions of the March 15 Order that determine
that the NYISO has not made the changes to its market rules that were required the
Commission’s December 30, 2010 order (“December 2010 Order”).8 The December 2010 Order
required changes to the NYISO’s interface pricing rules. The instructions in the March 15 Order
that the NYISO is challenging are inconsistent with the compliance directives set forth in the
December 30 Order, impermissibly vague, may be impossible or prohibitively expensive to
implement, and are beyond the scope of the Commission’s authority to require.
The March 15 Order does not explain how or why the changes that the NYISO made to its market design to comply with the December 30 Order to implement interface pricing
revisions fell short of the NYISO’s compliance obligation. For example, the March 15 Order
does not explain why the NYISO’s path validation method (which uses NERC e-Tag information
to validate transactions) is insufficient to achieve consistency between scheduled power flows
and expected power flows for pricing purposes. The NYISO recognizes that its implementation
is not identical to PJM’s source-and-sink pricing, but it accomplishes a similar result and
improves the consistency between the NYISO and PJM interface prices. As explained below,
there are fundamental differences between the PJM and NYISO market designs that make the
NYISO’s implementation appropriate for the NYISO’s markets.

8 New York Independent System Operator, Inc., 133 FERC ¶61,276 (2010) (“December 2010

Order”).

The Commission’s directive that prices should be calculated “based on the actual energy
flows at all times,” read literally, is not consistent with the method PJM actually uses to
determine interface prices and settle External Transactions (Imports, Exports and Wheels-
Through). Implementation of this interpretation of the March 15 Order would produce prices
that are inconsistent with dispatch, and would be extremely impractical to accommodate, even
partially. Requiring the NYISO to implement interface pricing rules “based on the actual energy
flows at all times” (hereafter, the “Actual Energy Flow Requirement”) would make NYISO’s
rules less consistent with PJM’s. As the attached affidavit of Dr. David B. Patton establishes,
PJM relies on expected energy flows and does not, in fact, use actual energy flows to set
interface prices or to determine settlements for External Transactions. The March 15 Order’s
assumption that PJM uses actual energy flows to set prices, and that an Actual Energy Flow
Requirement would harmonize the NYISO’s rules with PJM’s, is not correct.9
If the March 15 Order is intended to require that the NYISO adopt PJM’s actual interface pricing rules, it would force the NYISO to make wholesale changes to its existing tariffs, and market design, that would require years of effort and would be prohibitively expensive to
implement. Such a directive is essentially a requirement that the NYISO abandon its
Commission-approved market design and adopt PJM’s market design.
Since its inception in 1999 the NYISO has employed an economic evaluation based
transmission reservation model that the Commission has repeatedly held is “consistent with or
superior to” the physical reservation rules adopted in Order No. 890 and its predecessors.10 PJM

9 Attached Affidavit of Dr. David B. Patton at PP 10-12 (“Patton Affidavit”).

10 See, e.g., New York Independent System Operator, Inc., 123 FERC ¶ 61,134 at P 13 (2008)
(conditionally approving NYISO’s Order No. 890 compliance filing and acknowledging the substantial
differences between the NYISO’s tariffs and the pro forma OATT related to the NYISO’s use of a
financial reservation model); New York Independent System Operator, Inc., 123 FERC ¶ 61,134 at P 13
(2008) (finding “that NYISO’s proposed deviations from the pro forma OATT… [are] consistent with or

uses a physical reservation system that differs from the NYISO’s economic evaluation based
model. PJM’s process of calculating interface prices (which reflect the cost of transmission
congestion) is distinct from the physical reservation process PJM uses to allocate ramp and
Available Transfer Capability (“ATC”). PJM does not require its interface pricing and interface scheduling to be entirely consistent. Because the NYISO’s economic evaluation process sets the interface price and determines which External Transactions to schedule in a single step,
scheduling and pricing must be consistent in New York. As a result, the NYISO could not adopt PJM’s rules without making several fundamental changes to its markets. The required changes would not be confined to a discrete subset of systems governing External Transactions; they
would broadly impact the NYISO’s software and market rules.

Changes on this scale would be enormously expensive to develop and test, and would
take years to implement. The necessary changes would go far beyond the tariff modifications
that the NYISO proposed, or has ever contemplated, to address Lake Erie loop flow. The
changes would extend far beyond what is necessary to effectively address interface pricing issues
between New York and PJM, and would do more harm than good because they would require
the NYISO to cease using economic priority to schedule External Transaction bids and offers.
There is no factual record in this proceeding to justify imposing such changes and the
Commission has failed to “articulate a satisfactory explanation for its action.”11 This is

superior to the pro forma OATT….”), New York Independent System Operator, Inc., 125 FERC ¶ 61, 274 at P 13 (2008) (same). See also, New York Independent System Operator, Inc., 133 FERC ¶ 61,246 (2010) (granting waiver of NAESB requirements because they are incompatible with the NYISO’s market
design); New York Independent System Operator, Inc., 133 FERC ¶ 61,246 at P 25 (2010) (same); New York Independent System Operator, Inc., 127 FERC ¶ 61,005 at P 7 (2009) (same); New York
Independent System Operator, Inc., 125 FERC ¶ 61,275 at P 15 (2008) (same); New York Independent
System Operator, Inc., 121 FERC ¶ 61,036 at P 9 (2007) (same); New York Independent System Operator, Inc., 117 FERC ¶ 61,197 at PP 15-17 (2006) (same).

11 Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

especially true given the Commission’s established policy of allowing different regions to adopt market designs that best suit their individual circumstances. Moreover, to the extent that the Commission intended to require such changes it lacks authority under the Federal Power Act (“FPA”) to do so because of the absence of an adequate record and the fact that such changes are outside the scope of this compliance proceeding.

To the extent that the March 15 Order was meant to subject the NYISO to an Actual Energy Flow Requirement, or to require the NYISO to adopt, wholesale, PJM’s market rules with respect to interface pricing, it must be overturned on rehearing. Such directives would be unlawful, arbitrary and capricious, inconsistent with reasoned decision-making, contrary to Commission precedent, and neither adequately explained nor justified.
In addition, the requirement that the new pricing method apply to “all interface
transactions” involving the NYISO is unnecessary, would produce inaccurate prices at many NYISO interfaces, and would disrupt existing and proposed interface scheduling and pricing mechanisms between the NYISO and neighboring systems.

The directives in the March 15 Order are an unreasonable and unexplained departure

from earlier orders that gave every indication that the changes that the Commission expected the
NYISO to make “could be implemented … at minimal cost,”12 and that consistency between the
NYISO’s and PJM’s interface pricing rules could be made without fundamental, time consuming
and expensive changes to the NYISO’s market design. The Actual Energy Flow Requirement
and instruction to apply the new pricing method to “all interface transactions” are beyond the
scope of this proceeding and there is absolutely no factual record or legal basis for requiring
these modifications.

12 December 30, 2010 Order at P 31.

Finally, the NYISO respectfully requests that the Commission defer action on this request until after the Commission considers and rules on the NYISO’s compliance filing in this
Docket.13 The NYISO will withdraw this rehearing request if the Commission accepts the tariff revisions that the NYISO submits to comply with the March 15 Order without imposing
significant additional/new compliance obligations on the NYISO. The NYISO believes that the tariff revisions it proposes will address the Commission’s concerns because they will achieve greater consistency between the NYISO and PJM interface pricing rules, without imposing an unjust, unreasonable and unsupportable compliance burden on the NYISO.

I.COMMUNICATIONS

Communications regarding this pleading should be addressed to:

Robert E. Fernandez, General Counsel
Raymond Stalter, Director of Regulatory Affairs *Alex M. Schnell

New York Independent System Operator, Inc.

10 Krey Boulevard

Rensselaer, NY 12144
Tel: (518) 356-6000
Fax: (518) 356-7678
rfernandez@nyiso.com
rstalter@nyiso.com

aschnell@nyiso.com

*Ted J Murphy14

Hunton & Williams LLP
2200 Pennsylvania Ave, N.W. Washington, D.C. 20037
Tel: (202) 955-1588

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

*Vanessa A. Colón
Hunton & Williams LLP Bank of America Center Suite 4200

700 Louisiana St
Houston, TX 77002

Tel: (713) 229-5724

13 Request to Convene On-The-Record Technical Conference, Request for Extension of Time to Submit Compliance Filing, and Request for Shortened Notice and Comment Period and Expedited Commission Action of the New York Independent System Operator, Inc., Docket No. ER08-1281-010 (filed March 30, 2012) (“Technical Conference Request”).

14 Waiver of the Commission’s regulations (18 C.F.R. § 385.203(b)(3) (2011)) is requested to the extent necessary to permit service on outside counsel for the NYISO in both Washington, DC and
Houston, TX.

Fax: (202) 229-5782
vcolon@hunton.com

*Persons designated to receive service

II.LIST OF DOCUMENTS SUBMITTED

The NYISO submits the following documents:

1. This Rehearing Request; and

2. The Affidavit of Dr. David B. Patton.

III. STATEMENT OF ISSUES AND SPECIFICATION OF ERRORS

In accordance with Rule 713(c), 18 C.F.R. § 385.713(c), the NYISO submits the

following statement of issues, specification of errors, and representative supporting precedents:

1) The March 15 Order is arbitrary and capricious and does not reflect reasoned decision

making because it is impermissibly vague regarding the extent of the modifications
that it is directing the NYISO to make. See, e.g., Trinity Broadcasting of Florida, Inc.

v. FCC, 211 F.3d 618, 628 (D.C. Cir. 2000); McElroy Electronics Corporation v. FCC, 990 F.2d 1351, 1358 (D.C. Cir. 1993).

2) To the extent that the March 15 Order is directing the NYISO to adopt new interface

pricing rules incorporating an Actual Energy Flow Requirement, or to adopt PJM’s
market design, that directive is arbitrary and capricious and does not reflect reasoned
decision making because: (i) it is founded on basic and demonstrable factual errors;
(ii) it requires the NYISO to fundamentally alter its existing Commission-approved
market design, and would therefore necessitate unprecedented, unnecessary, and
undesirable changes, while unreasonably and inexplicably rejecting a previously
accepted NYISO proposal that would fully resolve the interface pricing issues being
addressed in this proceeding; and (iii) it fails to articulate a satisfactory explanation
for its action. See Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1982);
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983);
City of Charlottesville, Va. v. FERC, 661 F. 2d 945, 947 (D.C. Cir. 1981); see also
Attached Affidavit of Dr. David B. Patton.

3) The March 15 Order is arbitrary and capricious, does not reflect reasoned decision

making, and does not adequately explain the Commission’s reasoning, to the extent it
is intended as a reversal of the directives in the earlier orders in this proceeding that
accepted the NYISO’s Interface Pricing Proposal and stated that could be achieved
with only limited adjustments to the NYISO’s existing Commission-approved market
design and within a relatively short time frame. See, e.g., New York Independent
System Operator, Inc., 136 FERC ¶61,011 (2011); New York Independent System

Operator, Inc., 133 FERC ¶61,276 (2010); New York Independent System Operator, Inc., 132 FERC ¶ 61,031 at P 40 (2010).

4) The March 15 Order is arbitrary and capricious and does not reflect reasoned decision

making to the extent that it suggests that the NYISO should have sought clarification
or rehearing of Prior Orders that were clear and that could not have reasonably read at
the time as requiring the NYISO to do something other than move to implement its
Interface Pricing Proposal. See, e.g., Sam Rayburn Dam Elec. Coop. v. Fed. Power
Comm'n, 515 F.2d 998, 1007 (D.C.Cir.1975); see also East Texas Elec. Co-op, Inc. v.
FERC, 218 F. 3d 750, 754-755 (D.C. Cir. 2000); LPSC v. FERC, 482 F.3d 510, 517-

18 (D.C. Cir. 2007); Edison Mission Energy, Inc. v. FERC, 394 F.3d 964,968 (D.C.
Cir. 2005); Dominion Resources, Inc. v. FERC, 286 F.3d 586, 589-90 (D.C. Cir.
2002); Pacific Gas and Elec. Co. v. FERC, 533 F.3d 820 (D.C. Cir. 2008);
Competitive Telecommunications Ass’n v. FCC, 309 F.3d 8, 11-12 (D.C. Cir. 2002).

5) The Commission’s directives requiring modifications to elements of the NYISO’s

existing Commission-approved market design that were not the subject of the

NYISO’s section 205 FPA filing in this proceeding are unlawful, because the

Commission failed to find those existing tariff provisions (or the market design they implement) to be unjust and unreasonable pursuant to the Commission’s authority under section 206 of the Federal Power Act. See, e.g., Atlantic City Elec. Co. v.
FERC, 295 F.3d 1, 9-10 (D.C. Cir. 2002); Papago Tribal Utility Authority v. FERC, 723 F.2d 950 (D.C. Cir. 1983); City of Winnfield, La. v FERC, 744 F.2d 871, 875 (D.C. Cir. 1984); Public Serv. Com’n of State of NY v. FERC, 866 F.2d 487 (D.C. Cir. 1989); Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 183 (D.C. Cir. 1986); ANR Pipeline Co. v. FERC, 771 F.2d 507, 514 (D.C. Cir. 1985).

6) To the extent that the March 15 Order departs without justification or explanation

from the Commission’s well established policy of allowing different regions to adopt
market designs that best serve their regional needs, it is arbitrary and capricious and
does not reflect reasoned decision making. See, e.g., Wholesale Competition in
Regions with Organized Electric Markets, Order No. 719, FERC Statutes and
Regulations ¶31,281 at P 9 (2008), order on reh'g, Order No. 719-A, FERC Statutes
and Regulations ¶31,292 (2009), order on reh'g, Order No. 719-B, 129 FERC
¶61,252 (2009); Transmission Planning and Cost Allocation by Transmission Owning
and Operating Public Utilities, Order No. 1000, 76 Fed. Reg. 49,842 at P 745 (Aug.
11, 2011), FERC Stats. & Regs. ¶31,323 (2011); See also Remedying Undue
Discrimination through Open Access Transmission Service and Standard Electricity
Market Design, 112 FERC ¶ 61,073 (2005).

IV.BACKGROUND

The March 15 Order found that the NYISO’s Compliance Notice, which stated that the
software changes necessary to implement the NYISO’s Interface Pricing Proposal to address

Lake Erie loop flow issues were completed, did not comply with the Commission’s the

December 2010 Order, the July 1, 2011 order (“July 2011 Order”) and July 15, 2010 (“July 2010 Order”) (collectively, the “Prior Order”)),15 The Prior Orders addressed the NYISO’s filings regarding the implementation of an interface pricing proposal that is consistent with the proposal that was developed through a collaborative process with its market participants, neighboring
Independent System Operators (“ISOs”) and Regional Transmission Organizations (“RTOs”) and their market participants, and other interested parties (the “Interface Pricing Proposal”). The Interface Pricing Proposal was the culmination of extensive work to implement solutions to the Lake Erie loop flow problems identified in the NYISO’s July 21, 2008 “exigent circumstances” tariff filing that initiated this proceeding (“July 2008 Filing”).16

The December 2010 Order established additional compliance obligations and reporting
requirements for the NYISO and its neighboring ISOs/RTOs. The Commission directed the
NYISO, PJM, and the Midwest Independent Transmission System Operator, Inc. (“MISO”) to
make implementation of the Interface Pricing Proposal17 a priority, while also directing the
NYISO to postpone work on other proposals. In the July 2011 Order, in response to a request for
rehearing submitted by the NYISO on January 31, 2011 (“January 2011 Request”),18 the
Commission granted the NYISO, additional time, until the end of 2011, to complete the software

15 New York Independent System Operator, Inc., 133 FERC ¶61,276 (2010) (“December 2010
Order”);New York Independent System Operator, Inc., 136 FERC ¶61,011 (2011) (“July 2011 Order”);
New York Independent System Operator, Inc., 132 FERC ¶ 61,031 at P 40 (2010) (“July 2010 Order”).

16 Exigent Circumstances Filing Requesting Authority to Amend its Tariffs to Preclude the

Scheduling of Certain External Transactions, Requesting Prospective Limited Tariff Waivers, Seeking Expedited Commission Action, Requesting Shortened Notice and Comment Periods, and Contingent Request for Consideration Under Section 206 of the Federal Power Act, Docket No. ER08-1281-000 (July 21, 2008) (“July 2008 Filing”).

17 The Commission also directed the NYISO to accelerate work on its “Congestion Management/Market-to-Market Coordination” proposal.

18 Request for Rehearing, Docket Nos. ER08-1281-007 (filed January 31, 2011) (“January 2011 Request”).

necessary to implement the Interface Pricing Proposal by January 2012. The Compliance Notice
reported that the NYISO had developed software to implement its Interface Pricing Proposal.
The March 15 Order stated that the Compliance Notice “failed to comply” with the Prior Orders, and directed a further compliance filing within 30 days.19 On March 30, 2012 the
NYISO filed a request for technical conference and extension of time to make the compliance
filing, in an attempt to obtain additional guidance from the Commission’s staff regarding the
extent of the modifications required. The Commission granted the NYISO’s request for
extension on April 10, 2012, extending the deadline for submission of the compliance filing to
May 10, 2012.20 The Commission has not yet acted on the NYISO’s request for a technical
conference.

V.REQUEST FOR REHEARING

A.The Commission’s March 15 Order Is Arbitrary and Capricious and Does

Not Reflect Reasoned Decision Making Because it Is Impermissibly Vague

The March 15 Order is arbitrary and capricious and does not reflect reasoned decision

making because it is impermissibly vague. It does not clearly articulate the extent of the

modifications the NYISO must make, states that the NYISO must emulate interface pricing rules
that PJM supposedly uses, but does not actually use, and is ambiguous as to whether the
methodology developed by the NYISO in its Interface Pricing Proposal has been rejected.
Commission orders must state “with ascertainable certainty, the standards with which the agency expects parties to conform.”21 However, the March 15 Order’s directives are unclear and

19 March 15 Order at P 1.

20 New York Independent System Operator, Inc., Notice of Extension, Docket No. ER08-1281-
010 (issued April 10, 2012). The NYISO request that the Commission convene a technical conference is
still pending.

21 Trinity Broadcasting of Florida, Inc. v. FCC, 211 F.3d 618, 628 (D.C. Cir. 2000); see also

McElroy Electronics Corporation v. FCC, 990 F.2d 1351, 1358 (D.C. Cir. 1993) (regulated entities must

conflicting, leaving the NYISO with no guidance regarding what exactly the Commission has required.

Paragraph 21 of the March 15 Order appears to reject the NYISO’s Interface Pricing

Proposal, stating that the NYISO’s must submit a further compliance filing that “includes an

interface pricing methodology consistent with PJM’s methodology, i.e. an interface pricing

methodology that uses NERC tag information to determine actual source and sink for a

transaction and calculates prices based on the actual flows at all times.” Similarly, Paragraph 25
directs the NYISO to “submit detailed tariff provisions specifying a revised pricing methodology
for all interface transactions, based on NERC tag information and actual energy flows, i.e.,
consistent with PJM’s methodology.” As is discussed below in Section V.B, however, these
requirements are contradictory and impossible to satisfy literally because PJM uses expected, not
actual energy flows to determine interface prices. The NYISO is therefore forced to guess
whether the March Order requires it to: (i) adopt interface pricing rules that incorporated an
Actual Energy Flow Requirement, notwithstanding the fact that PJM does not calculate prices
“based on the actual flows at all times,” so compliance would make the PJM and NYISO rules
less consistent and produce prices that are inconsistent with schedules; or (ii) replace the
NYISO’s economic evaluation of External Transactions and transmission scheduling path
validation processes with PJM’s physical ATC/ramp reservation process and source-sink pricing,
notwithstanding the fact that PJM’s rules, are not compatible with the NYISO’s existing market
design and could not be implemented by the NYISO “at minimal cost…,”22 or (iii) take some
other action that is not expressly described by the March 15 Order.

have “knowledge of requirements established by the Commission, and elementary fairness requires clarity of standards sufficient to apprise an [entity] of what is expected”).

22 December 30, 2010 Order at P 31.

Alternatively, it might be appropriate to read Paragraph 23 of the March 15 Order as allowing the NYISO to modify its existing Interface Pricing Proposal to implement only the “Non-Conforming Mode.” Such a change would appear to address the Commission’s concern that “certain elements of the method outlined by the NYISO’s Compliance Notice (namely, the Conforming Mode, which relies on NYISO’s status quo pricing and scheduling policy), are
inconsistent with the PJM methodology.” This would be a reasonable outcome, but it is not clearly directed by the language of Paragraphs 21 and 25 of the March 15 Order.
An order with this degree of ambiguity is impermissibly vague, imposes unreasonable (and unknowable) compliance burdens, and is inconsistent with “elementary fairness.” The March 15 Order must, therefore, be overturned on rehearing.

B. To the Extent that the March 15 Order Is Directing the NYISO to Adopt

New Interface Pricing Rules Incorporating an Actual Energy Flow

Requirement, or to Adopt PJM’s Interface Pricing Method, that Directive is
Arbitrary and Capricious and does Not Reflect reasoned Decision Making
Because it Is Founded on Fundamental Factual Mistakes and Rejects a
Reasonable Proposal Without Articulating a Reasonable Factual Basis for
Doing So

If the March 15 Order requires the NYISO to overhaul its interface pricing rules to
incorporate an Actual Energy Flow Requirement at all interfaces, and rejects, the Interface
Pricing Proposal, it must be reversed on rehearing. The alternative contemplated by the
Commission is not a realistic solution to the issues being addressed in this proceeding.

If the March 15 Order requires the NYISO to change its market design and adopt “PJM’s interface pricing,” then the March 15 Order’s directives extend far beyond the changes needed to address Lake Erie loop flow. Implementing such a requirement would require the NYISO to abandon its Commission-approved economic evaluation of transmission service based market design and adopt PJM’s physical transmission reservation based market design.

1.A Directive to Adopt an Actual Energy Flow Requirement to Achieve

Greater Pricing Consistency with PJM Would Be Based on a

Demonstrably Inaccurate Understanding of PJM’s Pricing Rules

The Commission appears to place great weight on the following statement made by the
PJM external market monitoring unit, Monitoring Analytics, LLC (“Monitoring Analytics”):

The Market Monitor requests that FERC direct the NYISO to implement an

interface pricing method that matches the methods successfully implemented by
PJM and MISO. These methods provide a dynamic, real-time approach to
defining and modifying the interface definitions, which reflect the actual flows
on the PJM or MISO systems resulting from generation sources at their actual
locations serving loads at their actual locations, as appropriate whether the
PARs are operational or not and whether scheduled flows equal actual flows
[or not].23

Based, apparently, on that assertion, the March 15 Order finds that “NYISO is required to submit a further compliance filing that includes an interface pricing methodology consistent with PJM’s methodology, i.e., an interface pricing methodology that uses NERC tag information to
determine actual source and sink for a transaction and calculates prices based on the actual
energy flows at all times.”24

However, as explained in the attached Patton Affidavit contrary to the Commission’s

findings in the March 15 Order PJM’s real-time pricing method does not use “actual” energy

flows for interface pricing. As Dr. Patton states “[w]hen Monitoring Analytics speaks of “actual
flows” it is referring to the expected power flows associated with a schedule, not actual power
flows determined after-the-fact based on the specific locations where power was actually injected

23 Protest of the Independent Market Monitor for PJM at 5, Docket Nos. ER08-1281-005, 006, 007, and 010 (filed January 12, 2012).

24 March 15 Order at P 21 (emphasis added); see also March 15 Order at PP 23, 25 (stating that “PJM’s methodology, as noted above, utilizes NERC tag information to determine the actual source and sink for a transaction and calculates prices based on the actual energy flows” and directing
implementation of a “revised pricing methodology for all interface transactions, based on NERC tag information and actual energy flows, i.e., consistent with PJM’s methodology”).

and withdrawn.”25 PJM’s existing market design, much like the NYISO’s market design, uses expected power flows in its determination of prices.

The Patton Affidavit explains that “it is virtually impossible for any RTO to know

precisely where power will be injected and withdrawn for a control area to control area

transaction. For example, when power is scheduled from PJM to New York, certain generators
in PJM will produce more (i.e., the marginal generators) and certain generators in New York will
produce less. The locations of these marginal generators and the current topology of the
networks in the two areas determine how the power will actually flow. However, the locations
of the marginal generators are not known at the time external transactions are scheduled and
priced…. Therefore, in order to incorporate expected power flows into its interface pricing, PJM
necessarily makes assumptions about where the power will be injected and withdrawn.”26 So,
while PJM’s ex post pricing uses the actual output of PJM internal generators for the
determination of LMPs at their locations, in order for PJM’s prices to be consistent with its
dispatch, that PJM’s ex post pricing must also use constraints developed when PJM determined
its commitment and dispatch.27 Thus, PJM and NYISO both use expected power flows to
determine interface prices in their Real-Time Markets,28 and both PJM and the NYISO run their
Day-Ahead Markets using models and estimates, not actual energy flows, to develop schedules
and prices.

Further, Dr. Patton explains that Monitoring Analytics’ statement regarding that PJM’s
methods reflect actual flows from “generation sources at their actual locations serving loads at

25 Patton Affidavit at P 10.

26 Id. at PP 11-12.

27 See Patton Affidavit at P 12.

28 Id. at PP 11-12.

their actual locations” appears to have also been misunderstood in the March 15 Order.29 In

PJM’s real-time market, the source control area and sink control area of a transaction are used to
determine an expected set of power flows and congestion impacts when PJM sets External
Transaction schedules as part of its scheduling/dispatch process. PJM does not map each
External Transaction’s scheduled MWs to specific PJM tie lines, and does not utilize actual
energy flows. PJM rather “uses representative generator locations in other Control Areas to
estimate the expected power flows that will result from external transactions to or from those
Control Areas.”30 PJM also “sets the interface price for many different Control Areas to a
common price or common set of prices.”31 For example, PJM determines the expected power
flows that it uses to price transactions scheduled directly with the NYISO by assigning the
scheduled interchange, on a weighted basis, to two New York generator locations (Roseton and
Dunkirk) that it uses as proxies for the New York Control Area. PJM’s weighting of the
allocation between these two proxy generator locations is based on expected power flows.
Hence, PJM’s prices are not based on “actual energy flows at all times,” but rather on expected
power flows, just like the NYISO’s.

The Commission is required to base its decisions on accurate data.32 The March 15 Order should be overturned on rehearing to the extent that it actually meant to require that the NYISO implement an Actual Energy Flow Requirement.

29 Id. at P 14.

30 Id.

31 Id.

32 See Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1982) (An agency must show a “rational connection between the facts found and the choices made”); Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (An agency “must examine the relevant data and
articulate a satisfactory explanation for its action”); City of Charlottesville, Va. v. FERC, 661 F. 2d 945, 947 (D.C. Cir. 1981) (stating that the Commission must have “factual support” for its orders); see also Attached Affidavit of Dr. David B. Patton.

2.The NYISO Should Not Be Forced to Adopt PJM’s Interface Pricing

Rules Because Doing So Would Require Unprecedented,

Unwarranted, and Undesirable Changes to the NYISO’s Existing Commission-Approved Market Design

The NYISO’s Interface Pricing Proposal presents a reasonable solution to the interface
pricing issues that the orders in his proceeding seek to remedy. It makes the NYISO’s interface
pricing significantly more consistent with PJM’s and MISO’s by (1) accurately reflecting the
Ontario/Michigan PARs present inability to conform actual power flows to scheduled power
flows, and (2) appropriately relying on the NYISO’s path validation process to ensure that
transactions around Lake Erie are scheduled over a direct path and not circuitously.
The NYISO’s Interface Pricing Proposal can be implemented within the framework of the NYISO’s existing, Commission-approved market design. By contrast, compelling the
NYISO to implement PJM’s interface pricing method would require the NYISO to adopt
significant elements of PJM’s market design, which would necessitate years of work, cost tens of
millions of dollars, and have undesirable consequences that would vastly outweigh the
comparatively small expected benefits. Fundamental differences between PJM and NYISO
market designs make it exceedingly difficult, and unreasonable, for the NYISO to comply with
such a directive. Therefore, it is arbitrary and capricious, and incompatible with reasoned
decision making, for the March 15 Order to require the NYISO to make such tariff
modifications.

a. The NYISO’s and PJM’s Market Designs Utilize Different

Methods for Scheduling External Transactions

PJM’s market utilizes express, physical transmission service and ramp reservations at its
external proxy buses to schedule imports, exports and wheels-through (collectively “External
Transactions”). When there are more transmission service requests than ATC or ramp limits are
able to accommodate, PJM allocates transmission and ramp capacity at its external proxy buses

based on: (1) service priority (firm transmission service request trump non-firm transmission
service requests); (2) transaction duration (longer duration requests may trump shorter duration
requests); (3) whether transactions are pre-confirmed; and (4) the timing of transmission
reservation requests. PJM does not auction ATC or ramp capability based on economic offers.
All entities that schedule transmissions service in the PJM markets are price takers for whatever
minimum duration PJM requires their transactions to be available for scheduling.
The NYISO does not use express reservations of transmission capacity. Instead
transmission service is scheduled in tandem with the scheduling of energy transactions as part of
the NYISO’s centralized, bid-based, economic dispatch algorithms. Since the NYISO first
commenced operation in 1999, it has economically evaluated and selected External Transactions
based on the financial offers Market Participants submit in the New York markets, consistent
with its Commission-accepted tariffs. When ATC and ramp are scarce, the NYISO allocates
these scarce resources to the entities willing to pay the most to secure them.
Economic evaluation of External Transactions has been a fundamental precept of the NYISO’s markets since their inception. Because of this, the software used to perform this
function is a core component of the NYISO-administered markets. The NYISO’s economic
evaluation of External Transaction is incorporated into its Commission-accepted tariffs, and into
every major component of the NYISO scheduling, pricing and dispatch software. Changing the
method of scheduling External Transactions in New York from an economic evaluation process
to physical reservation of ATC and ramp that PJM uses would require years of effort and tens of
millions of dollars to accomplish. It would also eliminate a market feature that provides
substantial benefits to customers in New York.

The NYISO’s economic evaluation of External Transactions has repeatedly been found by the Commission to be appropriate for the New York region and just and reasonable. If and to the extent that the March 15 Order directed the NYISO to change its markets to eliminate its
economic evaluation of external transactions and use physical transmission reservations, the
Commission erred because it did not articulate a reasoned basis for such a directive.33 Further, such a compliance directive would be beyond the scope of the issues raised and the tariff
modifications proposed34 in this proceeding. Therefore, the March 15 Order is arbitrary and
capricious and must be reversed on rehearing.

b.The NYISO uses Path Validation and PJM uses NERC E-Tag

Source and Sink

PJM uses the source control area and sink control area on the NERC e-tag to determine how to settle each External Transaction. External Transactions that are all scheduled at the same proxy bus, at the same time, may not all receive the same settlement price if they have differing sources and sinks. The NYISO’s understanding is that PJM’s market is designed to tolerate a degree of divergence between the path over which a transaction is scheduled, and the path over which a transaction is assumed to flow for pricing purposes. The source-sink pricing that PJM applies in its settlement process is intended to ensure that PJM’s market participants will make efficient use of the transfer capability and ramp reservations they obtain.

The NYISO markets do not rely on express physical reservations of ATC and ramp, but
rather utilize implicit transmission reservations. In order for the NYISO to be able to perform an

33 See, e.g., Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)
(An agency “must examine the relevant data and articulate a satisfactory explanation for its action”).

34 See, e.g, City of Winnfield, La. v FERC, 744 F.2d 871, 875 (D.C. Cir. 1984) (finding that under Section 205(e) the Commission cannot “institute any change in a rate-making component … that does not represent at least partial approval of the change for which the enterprise had petitioned in its filing”)
(internal citations omitted)).

economic evaluation that compares competing offers and to develop ex ante prices, the NYISO must identify which set of External Transactions are eligible to compete to use the available ATC and ramp resources at each of its interfaces before the eligible transactions can be
economically evaluated and scheduled. The NYISO must determine which External
Transactions are eligible to be scheduled at an interface before it performs its economic
evaluation of the associated offers/bids to ensure it is evaluating External Transactions with similar network impacts on a comparable basis.

The NYISO determines ex ante LBMPs at its Proxy Generator Buses consistent with the
NERC e-tag evaluation performed by its offer/bid validation software. This, coupled with the
NYISO’s implementation of the circuitous path scheduling prohibition (which is also
implemented in the NYISO’s offer/bid validation software), provides strong safeguards to ensure
the reliable operation of the interconnected transmission system. For example, the NYISO’s
circuitous path scheduling prohibition helps ensure that the power flow expectations that PJM
uses to develop its interface prices (e.g., the Roseton/Dunkirk proxy bus weighting that PJM uses
to price transactions that are scheduled directly with the NYISO) remain accurate and
appropriate.

In Dr. Patton’s Talking Points for Technical Conference on NYISO Proxy Bus Pricing
(submitted in this Docket on Dr. Patton’s behalf by the NYISO on April 10, 2012), Dr. Patton
explained why it is appropriate for the NYISO to continue to use its bid validation software:

[E]ven though the pricing may be based on the scheduled source/sink, the

scheduled path cannot reasonably be ignored for two reasons. First, the RTOs

must still manage external interface and ramp capability, which is affected by the
path over which the transaction is scheduled. Second, Phase Angle Regulators
(“PARS”) can cause the expected power flows associated with two transactions
with identical sources and sinks, but different paths, to be very different. Hence,
the NYISO’s path validation is reasonable and does not conflict with source/sink
proxy bus pricing. Removing it would not provide any economic benefit.

The NYISO’s path validation process is designed to ensure that transactions are

scheduled directly, similar to the economic incentives provided by PJM’s source-sink pricing. Because the NYISO economically evaluates transactions to determine which transactions to schedule, the NYISO cannot wait until settlement occurs to ensure consistency between
schedules and prices. The NYISO’s path validation process is well adapted to the NYISO’s market design and the Commission should accept its continued use as a reasonable method of conforming interface schedules and prices.

3. The Commission Failed to Articulate a Reasoned Basis for its

Directive that the NYISO Alter its Existing Market Design in a

Manner that Would Affect Interfaces and Transactions Not at Issue in
this Proceeding and Jeopardize a Broadly Supported Proposal to
Address External Transaction Issues Between the NYISO and ISO-
NE

The March 15 Order fails to articulate a reasoned juncture between the facts considered
and the decision made,35 especially as it relates to the Order’s directive requiring the NYISO to
change the method it uses to price External Transactions at “all interfaces.”36 The Commission
does not articulate a basis for its directive that requires the NYISO to alter its existing market
design in a manner that would affect: (1) proposals submitted in other proceedings to address
issues with External Transactions between the NYISO and ISO-NE; and (2) External

Transactions that are scheduled over tightly controlled interfaces that are not significantly affected by the loop flow issues addressed in this proceeding.

35 See Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1982) (An agency must show a “rational connection between the facts found and the choices made”); Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (An agency “must examine the relevant data and
articulate a satisfactory explanation for its action”); City of Charlottesville, Va. v. FERC, 661 F. 2d 945, 947 (D.C. Cir. 1981) (stating that the Commission must have “factual support” for its orders); see also Attached Affidavit of Dr. David B. Patton.

36 March 15 Order at P 25.

The March 15 Order’s directive would adversely impact other proceedings where the

NYISO proposed tariff modifications to address issues with External Transactions between itself
and a neighboring ISO. The Coordinated Transaction Scheduling tariff provisions recently filed
by the NYISO and ISO-New England37 address price disparities between the regions by
improving “the efficiency of Energy trading across the external Interfaces for which it is
implemented.” Those tariff modifications are premised on the NYISO’s and ISO-New
England’s mutual understanding and agreement regarding how External Transactions at the New
York/New England border will be scheduled and priced. They enjoy broad support from
stakeholders in both regions. The March 15 Order, however, could require fundamental market
design changes that would alter the basis for the CTS provisions for no benefit and without
reasoned explanation. The March 15 Order does not explain why a pricing and scheduling
construct that has been mutually agreed to by the NYISO and ISO New England is not an
appropriate method of developing prices at the New York/New England border.
Additionally, the Commission has failed to articulate a reasoned basis for requiring the modification of the pricing method for transactions for which unscheduled flows are not an issue. For example, the changes directed in the March 15 Order would require the modification of the pricing method used for controlled facilities, such as the NYISO’s DC interconnection with
Hydro Quebec, and the NYISO’s Scheduled Lines (i.e., Cross-Sound Cable, Neptune, Linden
VFT, Dennison, Northport-Norwalk). The NYISO’s Non-Conforming Scheduling Mode treats
these injection/withdrawal points like generators or loads. It would not be appropriate for the
Commission to require the NYISO to modify the pricing method used at these locations to reflect

37 See Proposed Tariff Amendments to Add External Coordinated Transaction Scheduling Market
Rules and Request for Waiver at 1, Docket No. ER12-701-000 (filed December 28, 2011) (proposed
NYISO tariff revisions) and Market Rule 1 Revisions Relating to Coordinated Transaction Scheduling,
Docket No. ER12-1155-000 (filed February 24, 2012) (proposed ISO New England tariff revisions).

additional unscheduled power flows, because they are controlled facilities that are only minimally affected by unscheduled loop flows.

The NYISO’s Interface Pricing Proposal, particularly the Non-Conforming Scheduling
Mode, will achieve all of the objectives of the Commission’s Prior Orders and is a just and
reasonable proposal. It allows the NYISO to address the issues raised by Lake Erie loop flow in
a manner consistent with its existing market design, without having adverse effect on tariff
proposals filed in other proceedings or on facilities that are not, or are only minimally, affected
by Lake Erie loop flow.

C. To the Extent that the Commission’s March 15 Order Rejected the NYISO’s

Interface Pricing Proposal and Directed the NYISO to Revise its Interface Pricing Rules to Adopt PJM’s Method it Is Arbitrary and Capricious and
Does Not Reflect Reasoned Decision Making Because it Does Not Adequately Explain the Reasoning Behind the Commission’s Departure from its Prior Orders in this Proceeding

1.The NYISO’s Prior Filings in this Proceeding Clearly Explained the

Interface Pricing Proposal

All of the NYISO’s previous filings in this proceeding included clear descriptions of how
the Interface Pricing Proposal would be implemented. Most significantly, they explained that the
Interface Pricing Proposal would be implemented within the framework of the NYISO’s existing
Commission-approved market design. The January 2010 Filing explained that “the Midwest
ISO, PJM Interconnection and the NYISO have agreed to implement comparable interface
pricing methods at their common borders.”38 The proposals were designed “in such a manner
that they can be incorporated into the various ISOs and RTOs respective market designs

38 Report on Broader Regional Markets; Long-Term Solutions to Lake Erie Loop Flow at 11,
Docket No. ER08-1281-004 (filed January 12, 2010) (“January 2010 Filing”) (emphasis added).

without the need for fundamental changes to the rules that underlie the various interconnected markets.”39

Further, the NYISO explained, in its January 2011 Request, that its Interface Pricing Proposal would “ensure that the jurisdictional ISOs and RTOs around Lake Erie use similar methods to price interregional transactions, so that differences in pricing methods do not create ‘seams’ that can be exploited.”40 The January 2011 Request clearly explained that the Interface Pricing method that the NYISO was proposing would include “Conforming” and “Non-
Conforming” Scheduling modes. Specifically, the NYISO stated:

If the Ontario/Michigan PARs are effective in conforming actual power flows to scheduled power flows at the Ontario/Michigan border, then the NYISO believes it will be necessary to have two distinct sets of pricing rules. One set of pricing rules that will apply when the Ontario/Michigan PARs are effective in
conforming actual power flows to scheduled power. flows, and a different set of pricing rules that will apply when the Ontario/Michigan PARs are not effective in conforming actual power flows to scheduled power flows.41

The NYISO’s Interface Pricing Proposal complies with the Prior Orders. It will make the
NYISO’s interface pricing similar to PJM’s and will produce comparable prices. The NYISO’s
Interface Pricing Proposal, particularly the “Non-Conforming” Scheduling mode,42 achieves the
objective of the Prior Orders, and the goal that the parties’ worked toward in this proceeding, i.e.,
to implement similar interface pricing methods, that would work within existing market designs.

39 January 2010 Filing at Attachment A - Broader Regional Markets, Long-Term Solutions to Lake Erie Loop Flow White Paper at 4 (emphasis added).

40 January 2011 Request at 3 (emphasis added).

41 Id.

42 The “Non-Conforming” mode: (1) recognizes and accounts for (for purposes of both pricing
and scheduling) the expected loop flow impacts of transactions scheduled at its IESO (Bruce) and PJM
(Keystone) Proxy Generator Buses; (2) recognizes the loop flow impacts of internal New York Control
Area (“NYCA”) generation dispatch to serve NYCA load; and (3) achieves these results by modeling the
Ontario/Michigan interface as an uncontrolled/free-flowing A/C transmission path, like PJM and MISO
currently do. See Motion for Leave to Respond and Response of the New York Independent System

Operator, Inc. at 8, Docket Nos. ER08-1281-005, 006, 007, 010 (filed January 27, 2012).

The Commission had many opportunities to direct changes to the Interface Pricing method that the NYISO proposed. Instead, the Commission accepted the NYISO’s proposal, without giving any indication that it was flawed, even commending the parties for their efforts.43

2. The Prior Orders Accepted the NYISO’s Interface Pricing Proposal

The March 15 Order errs to the extent that Paragraphs 21 and 25 would require the

NYISO to adopt “an interface pricing methodology consistent with PJM’s methodology … for
all interface transactions,” as that directive contravenes the Prior Orders. Contrary to the March

15 Order’s reading of the Prior Orders, they required that the NYISO implement its Interface Pricing Proposal.

The July 2010 Order at Paragraph 14 expressed the Commission’s understanding that the
NYISO proposed to develop and implement “interface pricing revisions to address existing
seams between markets that tend to exacerbate loop flows” and that “efficient and compatible
interface proxy bus prices will improve the interconnected markets’ ability to efficiently transfer
power within the four ISO/RTO regions.” The July 2010 Order commended the NYISO and
other entities with which it “collaborated in developing the recommendations and proposals
outlined in the NYISO Report” agreeing “that these planned regional initiatives, taken as a
whole, appear to represent a constructive, workable framework for minimizing the occurrence of
Lake Erie region loop flow” listing each proposal, including the Interface Pricing Proposal.44
In its December 2010 Order the Commission stated that the changes contemplated in the Interface Pricing Proposal “may reduce the incentives for scheduling these transactions”
acknowledging that “interface pricing reform and congestion management/market-to-market
coordination can address and resolve many of the price incentives that create loop flow related

43July 2010 Order at P 40.

44 Id. at P 40.

concerns” and directed implementation of the Interface Pricing Proposal and related revisions “concurrently for the Commission-jurisdictional RTO/ISOs.”45

The January 2011 Request, explained that the NYISO intended to achieve compliance
with the December 2010 Order through implementation of Interface Pricing using the two
pricing rules (i.e., the “Conforming” and “Non-Conforming” methods) approach that was later
described in the December 2012 Filing. The July 2011 Order did not state that it was rejecting
the proposal, comment on the NYISO’s Interface Pricing Proposal, or direct any modifications.
Instead, the July 2011 Order adopted the NYISO’s explanation of its Interface Pricing Proposal,
stating:

Interface Pricing: the NYISO Report recommended the development and

implementation of Interface Pricing revisions to address existing seams between
markets that tend to exacerbate loop flows, an initiative that would require that the
ISOs and RTOs around Lake Erie use similar methods to price interregional
transactions, with one set of pricing rules applicable when the Ontario/Michigan
PARs are effective in conforming power flows to scheduled power flows, and a
different set of pricing rules applicable when the Ontario/Michigan PARs are not
effective in conforming actual power flows to scheduled power flows…”46

The July 2011 Order also characterized the December 2010 Order’s compliance directive
with respect to Interface Pricing as follows: “The Commission directed the NYISO to prioritize
Interface Pricing and Market-to-Market initiatives to address and resolve the price incentives that
exacerbate Lake Erie loop flow.”47 Further, the July 2011 Order provided the NYISO with
additional time to implement the Interface Pricing Proposal, based on the NYISO’s request. The
NYISO’s January 2011 Request explained that “the PJM and New York markets operate on

45 December 2010 Order at PP 27, 30-31.

46 July 2010 Order at P 3 (emphasis added).

47 Id. at P 6.

fundamentally different market platforms” thus “the assumption that PJM software can readily be adapted for use by the NYISO is not credible.”48

Further, the Commission’s directives with respect to the other proposal at issue in the

July 2011 Order (i.e., the Market-to-Market Coordination initiative), clearly show that the Prior
Orders did not limit the NYISO’s discretion or direct compliance modifications to the Interface
Pricing Proposal. Paragraph 16 of the July 2011 Order provided the NYISO with extensive
guidance on how it should modify the Market-to-Market Coordination initiative, clearly stating
particular directives and how compliance with those directives could be achieved.49 Had
Commission intended to require modifications to the NYISO’s Interface Pricing Proposal in its
July 2011 Order, the Commission would have included directives to that effect in the order. The
July 2011 Order adopted the NYISO’s explanation of its Interface Pricing Proposal without
comment and without directing changes. The only compliance directive on the Interface Pricing
Proposal in the July 2011 Order was the Commission’s acceptance of the time frame proposed
by the NYISO.

Except for isolated references to assertions by the PJM MMU regarding a method that
“has been used by PJM and the Midwest ISO for years”50 and that “the Commission [should]
require immediate correction to interface pricing at the NYISO’s interfaces … to reflect the

48 Id. at P 11.

49 Id. at P 16 (stating that “we want to be clear that in the December 30, 2010 Order, we did not intend to direct the NYISO to develop and use its own market flow tool, nor did we intend to direct the NYISO to abandon the NERC parallel flow visualization tool. In the December 30, 2010 Order, the
Commission concluded that the NYISO should not delay implementation of the Market-to-Market
Coordination initiative to wait for the NERC parallel flow visualization tool to be completed. While in this order we direct the NYISO to achieve Market-to-Market coordination with PJM in accordance with the schedule the NYISO has proposed, it may, but is not required to, develop and use an alternate tool of its own design in the interim to achieve that coordination. Nonetheless, we also expect the NYISO to
continue to work within the NERC process to expeditiously pursue finalization of the NERC parallel flow visualization tool, and to use that tool once it is developed.”).

50 December 2010 Order at P 31.

actual flow of energy”51 there was nothing in the Prior Orders that even mentioned an obligation to adopt PJM’s interface pricing method. Rather, consistent with the Interface Pricing Proposal, the Prior Orders directed, the modification of the NYISO’s interface pricing rules to be more consistent with PJM’s method, but in a manner that would fit within the NYISO’s existing
Commission-approved market design.

The March 15 Order’s alteration of the meaning of those Prior Orders based on assertions
that the NYISO never presented its Interface Pricing Proposal and the Prior Orders did not factor
the NYISO’s explanations into their analysis52 are clearly erroneous. The NYISO described and
explained its Interface Pricing Proposal and the Commission considered it, as evidenced by the
Commission’s summary of the Interface Pricing Proposal in the July 2011 Order.53 The March

15 Order dramatically alters the requirements of the Prior Orders, in a manner that the NYISO
could not have anticipated, is arbitrary and capricious and does not reflect reasoned decision
making.

The March 15 Order’s reinterpretation of the Prior Orders is especially unreasonable

because compelling the NYISO to adopt PJM’s interface pricing method would essentially

require that the NYISO replace accepted New York market rules with components of PJM’s

market design. Imposing this requirement would force the NYISO to make extensive changes to
its existing tariffs and rules. As explained in Section V.B.2 above, the necessary changes would
be prohibitively expensive, would require years of effort to complete, and would necessarily
displace other projects that the NYISO is working on to improve its markets. There was nothing
in the Prior Orders suggesting that the Commission intended to impose such a requirement. The

51 July 2010 Order at P 29.

52 March 15 Order at P 20.

53 July 2011 Order at P 3.

March 15 Order’s attempt to retroactively revise the Prior Orders is unsupported and untenable, and must be reversed on rehearing.

3. The Deadlines for the NYISO to Make Modifications that Were

Established by Prior Orders Clearly Indicate that the NYISO Was

Expected to Implement an Interface Pricing Proposal that Fit Within the Framework of its Existing Market Design

The Prior Orders directed the NYISO to develop a proposal that would achieve the

Commission’s objectives, in a time frame that indicated that such changes must, necessarily, fit
within the framework of the NYISO’s existing Commission-approved market design. The
December 2010 Order provided the NYISO with six months to make the modifications needed to
implement modified interface pricing rules.54 In response to the NYISO’s request that additional
time be provided, the Commission gave the NYISO an additional six months for implementation
of Interface Pricing.

If the Prior Orders had intended that the NYISO adopt significant elements of PJM’s

market design, which, as is discussed in Section V.B.2, would require fundamental market

design changes, the Commission’s compliance deadlines would have been unachievable. These changes would go far beyond the limited scope of interface pricing improvements that were the subject of these proceedings and which the Commission characterized as being changes that could be “implemented immediately and a minimal cost.”55

The compliance periods determined in the Prior Orders are reasonable when evaluated
against the compliance directives that the Commission actually established: i.e., implementation
of the NYISO’s Interface Pricing Proposal. The NYISO could not have anticipated that the Prior
Orders would be reinterpreted in the March 15 Order to require the NYISO to complete a

54 New York Independent System Operator, Inc., 133 FERC ¶ 61,276 at PP 30-31 (2010).

55 December 2010 Order at P 27.

fundamental re-design of major components of its market within the relatively limited time

frames specified in the Prior Orders. Further, the interpretation espoused in the March 15 Order
contravenes the Prior Orders’ clear directives allowing the NYISO discretion to implement and
formulate its Interface Pricing Proposal.56 The March 15 Order must be reversed on rehearing.

D. The March 15 Order Is Arbitrary and Capricious and Does Not Reflect

Reasoned Decision Making to the Extent that it Suggests that the NYISO

Should have Sought Clarification or Rehearing of Prior Orders that Were

Clear and that Could Not Have Reasonably Been Read at the Time to Impose Impossible Requirements on the NYISO

The March 15 Order erred to the extent that it found that the NYISO should have sought rehearing, or clarification of the directives in the Prior Orders in this proceeding addressing the NYISO’s Interface Pricing Proposal. As explained in Section V.B.2, the Prior Orders accepted the NYISO Interface Pricing Proposal, subject to minor conditions. Specifically, Paragraph 27 of the December 2010 Order stated that:

PJM and Midwest ISO use NERC tag information regarding the source and sink
of a transaction to determine the price the transaction receives or pays. In
contrast, the NYISO and IESO base the price on the path over which the external
transaction is scheduled into their respective control areas. The NYISO
acknowledges that this difference creates incentives for market participants to
schedule circuitous transactions which can exacerbate loop flow. The NYISO’s
comments indicate that a change to their pricing methodology may reduce the
incentives for scheduling these transactions, and has agreed to evaluate what
changes are necessary.

Based on the Prior Orders, the NYISO understood the Commission’s directives as requiring it to
implement changes that would improve price convergence between it, PJM and MISO. The
Compliance Notice, therefore, explained the method the NYISO developed to improve price
convergence. A significant component of the NYISO’s solution is “a Scheduling Mode that

56 See December 2010 Order at PP 30-31; July 2010 Order at P 15.

anticipates and accounts for the expected deviation between actual and scheduled power flows.57
This “Non-Conforming” Mode computes all generator, load and proxy generator bus shift
factors, and delivery factors to reflect expected deviation of scheduled flows from corresponding
contract paths.58 Consistent with the Commission’s directive, the “Non-Conforming” Mode
improves price convergence, yielding “pricing results that are similar to the results produced by
the external interface pricing methods that … PJM and the MISO currently employ.”59
However, the March 15 Order suggests that the compliance directive in the December 2010 Order somehow required the NYISO to adopt “an interface pricing methodology consistent with PJM’s methodology”60 that would necessitate fundamental changes to the NYISO’s existing market design. To the extent that the March 15 Order imposes an Actual Energy Flow
Requirement, or a requirement that the NYISO adopt PJM’s actual interface pricing rules
without accounting for differences between the PJM and NYISO’s market design, it attempts to
substantially modify the holdings of the Prior Orders.

The March 15 Order also errs to the extent that it implies that the NYISO should have

sought clarification or rehearing of the Prior Orders at the time that they were issued. The

Commission is not allowed to reinterpret its Prior Orders in a manner that radically changes their
directives without providing an opportunity for further review. The United States Court of
Appeals for the District of Columbia Circuit has held that the Federal Power Commission’s
(“FPC”) denial of a rehearing request as untimely was improper where the FPC had issued an
order interpreting a prior order in an unexpected manner. The court held that allowing such a

57 Compliance Notice at 3.

58 Id.

59 Id.

60 March 15 Order at P 21.

denial to stand “would permit an administrative agency to enter an ambiguous or obscure order, willfully or otherwise, wait out the required time, then enter an ‘explanatory’ order that would extinguish the review rights of parties prejudicially affected.”61

The Prior Orders accepted the NYISO’s Interface Pricing Proposal. The Commission

cannot retroactively reject the compliance proposals that the NYISO described to the

Commission on at least two occasions, and the subsequently direct the adoption of a method that would require fundamental market design changes,62 without affording the NYISO an
opportunity to seek rehearing. Additionally, the same court has stated that review is appropriate where “an order is not final because it leaves an issue contingent on subsequent compliance
proceedings.”63 Footnote 23 of the March 15 Order is therefore invalid to the extent that it is intended to limit the NYISO’s rights to seek rehearing.

E. The Commission’s Directives Requiring Modifications to Elements of the

NYISO’s Existing Commission-Approved Market Design that Were Not the Subject of the NYISO’s Section 205 FPA filing in this Proceeding Are
Unlawful, Because the Commission failed to Find the Existing Tariff

61 Sam Rayburn Dam Elec. Coop. v. Fed. Power Comm'n, 515 F.2d 998, 1007 (D.C.Cir.1975);
see also East Texas Elec. Co-op, Inc. v. FERC, 218 F. 3d 750, 754-755 (D.C. Cir. 2000) (stating that
“[w]e have consistently rejected agency efforts to bind parties ‘by what the agency intended, but failed to
communicate. …’ , stating that “an agency order must provide reasonable notice of its import” (internal
citations omitted).

62 Dominion Resources, Inc. v. FERC, 286 F.3d 586, 589-90 (D.C. Cir. 2002) (finding that the
order is a modification and thus reviewable where a reasonable party in that position could not have
perceived that there was “a very substantial risk” that the prior order would be interpreted in the manner
that the subsequent order interpreted it”); see also LPSC v. FERC, 482 F.3d 510, 517-18 (D.C. Cir. 2007)
(finding that petitioner could seek rehearing of an order which interpreted prior orders in such a way that
it was not obvious to the petitioner, until issuance of that order, that review would be necessary). See also
Edison Mission Energy, Inc. v. FERC, 394 F.3d 964, 968 (D.C. Cir. 2005) (finding that an entity was not
barred from challenging Commission orders representing modification of prior orders in a proceeding that
the entity did not challenge, where the new orders obviously increased the likely harm to such entity); see
also, Competitive Telecommunications Ass’n v. FCC, 309 F.3d 8, 11-12 (D.C. Cir. 2002) (finding that
where an subsequent order on clarification “radically changed” the directives in prior orders an entity
could challenge the subsequent order which interpreted a rule in a way that could not have been originally
anticipated).

63 Pacific Gas and Elec. Co. v. FERC, 533 F.3d 820, n.1 (D.C. Cir. 2008).

Provisions (or the Market Design they Implement) to Be Unjust and Unreasonable Pursuant to Section 206 of the FPA

The Commission cannot lawfully require the NYISO to implement an Actual Energy

Flow Requirement or PJM’s market design because that would require the NYISO to

involuntarily change numerous other previously accepted tariff provisions without a finding that
they are unjust and unreasonable pursuant to FPA section 206. This proceeding was initiated as
a section 205 filing on behalf of the NYISO to address loop flow issues in the Lake Erie region, a
fact that is acknowledged in the first two paragraphs of the March 15 Order. Nothing in the
NYISO’s proposals to address the issues raised in this proceeding, including the tariff provisions
accepted by the Commission which implemented scheduling path prohibitions,64 acquiesced to
the implementation of the fundamental market design changes described above.
In Atlantic City Elec. Co. v. FERC, the United States Court of Appeals for the District of Columbia Circuit has found that where the Commission wishes to require involuntary changes to accepted tariff provisions, that the public utility is not seeking to change on its own initiative under section 205 of the FPA, it must find those existing and accepted provisions unjust and
unreasonable pursuant to section 206. 65 Section 205 of the FPA only empowers the Commission

64 See New York Independent System Operator, Inc., 124 FERC ¶ 61,174 (2008) (accepting tariff provisions to implement scheduling path prohibitions on a temporary basis) and New York Independent System Operator, Inc., 125 FERC ¶ 61,184 (2008) (accepting tariff provisions to implement scheduling path prohibitions on a permanent basis).

65 See, e.g., Atlantic City Elec. Co. v. FERC, 295 F.3d 1, 9-10 (D.C. Cir. 2002) (stating that “in
order to make any change in an existing rate or practice, FERC must first prove that the existing rates or
practices are ‘unjust, unreasonable, unduly discriminatory or preferential’. Then FERC must show that its
proposed changes are just and reasonable. …The courts have repeatedly held that FERC has no power to
force public utilities to file particular rates unless it first finds the existing filed rates unlawful. … [T]he
very thing that the statute was designed to protect … [is] the ability of the utility owner to ‘set the rates it
will charge prospective customers, and change them at will,’ subject to review by the Commission.”

(internal citations omitted)); City of Winnfield, La. v FERC, 744 F.2d 871, 876 (D.C. Cir. 1984) (finding
that under Section 205(e) the Commission cannot “institute any change in a rate-making component …
that does not represent at least partial approval of the change for which the enterprise had petitioned in its
filing. If the Commission seeks to make such changes, it has no alternative save compliance with the

to review voluntarily proposed changes to the rates, charges, classification or services filed by

public utilities. If the Commission wants to order changes to previously approved rates that were not proposed to be modified in the section 205 filing, the Commission must find those approved rates to be unjust and unreasonable under section 206 of the FPA.66

As explained in above in Section V.C.1, the NYISO’s prior filings clearly set forth the
modifications that the NYISO was proposing to make to address the issues raised by its July
2008 Filing, namely its Interface Pricing Proposal. That proposal was formulated because it
could be implemented: (i) in the time frames contemplated by the Prior Orders; (ii) within the
framework of the NYISO’s existing Commission-approved market design; and (iii) in a manner
that effectively addressed Lake Erie loop flow issues. The NYISO did not contemplate, and
could not have contemplated based on the Prior Orders, that the March 15 Order would require

strictures of … [section] 206(a)” and noting that this “principle applies to an attempt by the agency to
impose under § 205 a sort of rate which the utility (as opposed to one of its customers) does not desire.
For in that circumstance the agency is effectively using § 205, which is intended for the benefit of the
utility — i.e., as a means of enabling it to increase its rates within what was been called the ‘zone of
reasonableness,’ — for the quite different purpose of depriving the utility of the statutory protection
contained § 206, that its existing rates be found to be entirely outside the zone of reasonableness before

the agency can dictate their level or form.” (internal citations omitted)); see also, Public Serv. Com’n of
State of NY v. FERC, 866 F.2d 487, 488 (D.C. Cir. 1989) (explaining that under § 4 of the NGA the
“company has the burden of showing that the proposed rates are just and reasonable, while under § 5 the
Commission must show that the rates it would alter are not just and reasonable, and that the ones it seeks
to impose are. The unifying principle is that the proponent of the change bears the burden”); Sea Robin
Pipeline Co. v. FERC, 795 F.2d 182, 183 (D.C. Cir. 1986) (finding that where FERC sought to change a
set of rates not directly affected by the filing the court held that FERC must show the existing rate to be
unjust and unreasonable, stating that “The Commission is not free to blend, or pick and choose at will
between its section 4 and 5 authority; FERC must use the appropriate authorization in the appropriate way
in order to remain within the bounds Congress has set for the agency.”); ANR Pipeline Pipeline Co. v.
FERC, 771 F.2d 507, 514 (D.C. Cir. 1985) (finding that where FERC was seeking to change an existing
rate that the company did not seek to alter it had to “find the existing provision is unjust and
unreasonable”).

66 See, e.g., Papago Tribal Utility Authority v. FERC, 723 F.2d 950, 952-953 (D.C. Cir. 1983)

(explaining that “the Federal Power Act provides two routes for changing electricity rates: The seller may initiate rate changes under § 205 of the Act, by filing a new schedule, which is subject to Commission review for justness and reasonableness … and the Commission itself may initiate rate changes (usually, of course, upon application of one of the parties to the contract) under § 206, but only upon finding that the existing rates are unjust, unreasonable, unduly discriminatory or preferential.”).

changes to elements of the NYISO’s market design that the NYISO never proposed, intended or expected to modify in order to address the issues raised in the July 2008 Filing. The NYISO’s understanding was consistent with the Commission’s statement that the compliance obligation it was imposing “could be implemented by other RTOs/ISOs at minimal cost.”67

The Commission does not have the authority under Section 205 to require the adoption of
an Actual Energy Flow Requirement or significant elements of PJM’s market design. The
NYISO’s compliance filing submittals did not waive the NYISO’s statutory rights or empower
the Commission to impose involuntary changes to elements of the NYISO’s tariffs and
Commission-approved market design that are outside the scope of the July 2008 Filing.
Further, the Commission has not met its burden under FPA section 206. If and to the extent the March 15 Order purports to require fundamental changes to the NYISO’s market
design, it must be reversed because it is directing changes to existing tariff provisions based only
on unsupported, inaccurate statements by Monitoring Analytics that PJM’s system uses an
interface pricing method that provides:

a dynamic, real-time approach to defining and modifying the interface definitions, which reflect the actual flows on the PJM … [system] resulting from generation sources at their actual locations serving loads at their actual locations, as
appropriate whether the PARs are operational or not and whether scheduled flows equal actual flows [or not].68

As explained in Section V.B.2 above, and confirmed by the Patton Affidavit, Monitoring

Analytics’ reference to “actual flows” is intended to refer to “ an approximation of the expected
power flows associated with a schedule, not the actual power flows determined after-the-fact

67 December 2010 Order at P 31.

68 Protest of the Independent Market Monitor for PJM at 5, Docket Nos. ER08-1281-005, 006, 007, and 010 (filed January 12, 2012).

based on the specific locations where power was actually injected and withdrawn”69 Thus, the
Commission directive that the NYISO adopt an Actual Energy Flow Requirement is incorrect, as PJM’s system does not utilize such a method and adoption of such a method for all interfaces
would reduce the consistency between the NYISO and PJM interface pricing methods. There is no reasonable basis for the Commission to determine that the fact that the NYISO’s tariffs do not incorporate an Actual Energy Flow Requirement makes the NYISO’s tariffs “unjust and
unreasonable” under section 206.

A Commission directive that the NYISO make involuntary changes to its filed Tariffs in
order to adopt significant elements of PJM’s market design would similarly require the
Commission to first determine that the NYISO’s existing Commission-accepted, tariff provisions
are unjust and unreasonable. The Commission has not made such a determination. The March

15 Order must therefore be reversed on rehearing.

F. The March 15 Order is an Unexplained Departure from the Commission’s

Well-Established Policy of Allowing Different Regions to Adopt Market Designs that Best Serve their Regional Needs

A directive that the NYISO adopt an Actual Energy Flow Requirement or significant
elements of PJM’s market design would require it to alter its Commission-approved market
design, which has been carefully structured to address New York’s unique regional
circumstances, to conform it to PJM’s market design (or to an inaccurate portrayal of PJM’s
market design). This directive is an unexplained departure from the Commission’s policy
allowing the development, and adoption, of regionally appropriate market designs. The
Commission has issued numerous orders rejecting the imposition of “one-size-fits-all” market

69 Patton Affidavit at P 10.

solutions. It has consistently recognized that market designs can, and should, be tailored to accommodate the needs of individual regions.

The Commission most recently affirmed these principles in its Orders No. 719 and 1000.
In Order No. 719, the Commission articulated its policy that it “recognize[s] and respect[s]” that
“[s]ignificant differences exist between regions” and allowed for the development of changes
that met the Commission’s goals while preserving the diversity of the solutions.70 Similarly,
Order No. 1000 directed changes to regional transmission planning, but emphasized the
development of solutions that were appropriate on a regional basis.71 Because the March 15
Order’s directive seeks to, without regard to regional variation, impose interface pricing rules on
the NYISO that are not consistent with elements of the NYISO’s Commission-accepted market
design, it contravenes the Commission’s long-standing policy and must be reversed on rehearing.

VI. REQUEST TO DEFER CONSIDERATION OF REHEARING REQUEST

The NYISO is prepared and able to comply with Paragraph 23 of the March 15 Order by
making tariff modifications to implement its Interface Pricing Proposal. Specifically, the NYISO
will propose compliance modifications to address the directive that it alter “certain elements of
the methodology” it has outlined, “namely, the Conforming Mode, which relies on NYISO’s
status quo pricing and scheduling policy” to the extent they are “inconsistent with the PJM

70 Wholesale Competition in Regions with Organized Electric Markets, Order No. 719, FERC Statutes and Regulations ¶31,281 at P 9 (2008), order on reh'g, Order No. 719-A, FERC Statutes and Regulations ¶31,292 (2009), order on reh'g, Order No. 719-B, 129 FERC ¶61,252 (2009).

71 Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000, 76 Fed. Reg. 49,842 at P 745 (Aug. 11, 2011), FERC Stats. & Regs. ¶31,323 (2011) (explaining that it intended for its cost allocation principles to “afford public utility transmission providers in individual transmission planning regions the flexibility needed to accommodate unique
regional characteristics.”). See also Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design, 112 FERC ¶ 61,073 (2005) (terminating the Standard Market Design proceeding indicating that it had been “overtaken by events” including the fact that
“interested parties, through region-specific proceedings, [had taken steps] to shape the development of independent entities to reflect the needs of each particular region.”).

methodology.”72 The NYISO has also requested that a technical conference be scheduled to

permit it to seek guidance from Commission Staff regarding possible additional tariff revisions that might satisfy the Commission’s expectations. However, as discussed above, Paragraphs 21 and 25 of the March 15 Order could be read to direct the NYISO to adopt an Actual Energy Flow Requirement or elements of PJM’s market design that would require the NYISO to abandon its economic evaluation of External Transactions.

The NYISO respectfully requests that the Commission defer action on this rehearing

request until after it considers and rules on the NYISO’s upcoming compliance filing. The

NYISO will withdraw this rehearing request if the Commission accepts the NYISO’s compliance filing without imposing significant additional or new compliance obligations.

VII. CONCLUSION

WHEREFORE, for the foregoing reasons, the New York Independent System Operator, Inc. respectfully requests that the Commission grant rehearing, or in the alternative clarification, of the March 15 Order as specified above.

Respectfully Submitted,

/s/Ted J. Murphy

Ted J. Murphy
Counsel to the

New York Independent System Operator, Inc.

April 16, 2012

72 March 15 Order at P 23.

CERTIFICATE OF SERVICE

I hereby certify that I have this day caused the foregoing document to be served on the official service list compiled by the Secretary in this proceeding.
Dated at Washington, DC, this 16th day of April, 2012.

/s/Ted J. Murphy

Ted J. Murphy

Hunton & Williams LLP

2200 Pennsylvania Ave, N.W. Washington, DC 20037
(202) 955-1500