UNITED STATES OF AMERICA
BEFORE THE

FEDERAL ENERGY REGULATORY COMMISSION

Settlement Intervals and Shortage Pricing in)

Markets Operated by Regional Transmission)Docket No. RM15-24-000

Organizations and Independent System)

Operators)

COMMENTS OF THE NEW YORK INDEPENDENT SYSTEM OPERATOR, INC.

In accordance with the Notice of Proposed Rulemaking issued by the Federal Energy

Regulatory Commission (“Commission”) on September 17, 2015 in the above-referenced

proceeding (the “NOPR”), the New York Independent System Operator, Inc. (“NYISO”) hereby submits its comments in response to the NOPR.1 The NYISO generally supports the proposals set forth in the NOPR, as well as the broader price formation policy objectives that the
Commission intends to pursue in the future.

Better aligning settlement and scheduling intervals and improving shortage pricing
triggers will enhance price formation and, ultimately, benefit consumers in all organized
markets. Price formation improvements should be especially beneficial in regions, like New
York, that have centralized capacity markets because they will reduce the amount of “missing
money” that must be addressed through capacity payments.2 Proper price formation will also

1 NOPR at P 66.

2 The NYISO has previously emphasized the interrelated nature of energy, ancillary services, and capacity markets. For example, it has stated that “it is important to evaluate the performance of the
capacity, energy, and ancillary services markets together because they are closely integrated and
complementary. The markets as a whole should send economic signals that maintain reliability while providing competitive resources an opportunity ‘to recover both their variable and fixed costs over time.’ This is what sound market design, and applicable legal precedent, require and this avoids any potential ‘missing money problem.’” Docket No. AD14-18-000, Joint Technical Conference on New York Markets & Infrastructure, Written Statement of Emilie Nelson (November 3, 2014).

help to promote renewable generation, and other resources, that may principally depend on energy market revenues.

Although aligning settlement and pricing intervals is a sound market design principle,
there are limited instances, some of which are discussed below, in which exceptions should be
allowed.

I. COMMUNICATIONS AND CORRESPONDENCE

All communications and correspondence concerning these Comments should be served as
follows:

Robert E. Fernandez, General Counsel

Raymond Stalter, Director, Regulatory Affairs *Garrett E. Bissell, Senior Attorney

10 Krey Boulevard

Rensselaer, NY 12144
Tel: (518) 356-6107
Fax: (518) 356-8825
gbissell@nyiso.com

*Person designated for receipt of service.

II.COMMENTS

A.Settlement Intervals

The NOPR proposes to “require that each RTO/ISO settle energy transactions in its real-
time markets at the same time interval it dispatches energy and settle operating reserves
transactions in its real-time markets at the same time interval it prices operating reserves.”3 The
NYISO generally supports this proposal. As the NOPR observes, the NYISO currently uses “a
settlement interval that matches the dispatch interval.”4 The NYISO has used sub-hourly
settlements in its real-time markets for Energy, Regulation Service, and Operating Reserves

3 NOPR at P 34.

4 NOPR at P 15, fn. 19.

since its inception.5 The NYISO’s real-time settlement and dispatch intervals are normally five minutes long, although they can be shorter or longer at times when the NYISO’s real-time
dispatch software has entered “corrective action mode.”

The NYISO’s use of tightly coupled settlement and dispatch intervals has provided

critically important economic incentives for resources to follow NYISO dispatch instructions. It has also provided opportunities for supply resources to receive full compensation for their
performance. The NYISO’s rules thus accurately and transparently reflect the value of providing specific services needed to address actual system conditions.

There are certain cases, however, in which the NYISO currently performs settlements on
an hourly basis and should not be required to bring those settlements into alignment with its
normal dispatch intervals.6 For example, station power settlements in the NYISO are conducted
hourly.7 Similarly, Limited Energy Storage Resources (“LESRs”) - energy storage devices that
do not participate in the energy market and that only provide Regulation Service in the NYISO-
administered markets - receive hourly settlements for net injections and withdrawals related to
the NYISO’s management of the charging capability of the storage asset.8 The special

5 Capitalized terms not otherwise defined herein shall have the meaning specified in Section 1 of the NYISO Open Access Transmission Tariff (“OATT”) and Section 2 of the NYISO Market
Administration and Control Area Services Tariff (“Services Tariff”).

6 The NYISO is presenting these examples for illustrative purposes. If the NOPR’s proposals are adopted, the NYISO would demonstrate that its existing rules, including its limited use of hourly
settlements, are appropriate. The NYISO is not seeking a Commission determination that its existing rules comply with the NOPR’s proposals at this time. See NOPR at P 57.

7 See Section 4.7 of the Services Tariff; Docket EL01-50-002, KeySpan-Ravenswood, Inc. v. New York Independent System Operator, Inc., Compliance Filing and Request for Expedited Action
(September 20, 2002); and KeySpan-Ravenswood, Inc. v. New York Independent System Operator, Inc., 101 FERC ¶ 61,230 (2002).

8 See Section 15.3.6.1 of Rate Schedule 3 of the Services Tariff; Docket No. ER09-836-000, New York Independent System Operator, Inc., Proposed Tariff Revisions to Integrate Energy Storage Devices into the NYISO-Administered Regulation Service Market (March 11, 2009); and New York Independent System Operator, Inc., 127 FERC ¶ 61,135 (2009).

settlement rules for Station Power and LESRs are both exceptions to the normal rule that subhourly settlements are appropriate. These special settlement rules were previously approved by the Commission despite the NYISO’s general practice of using sub-hourly settlements in the
Real-Time Market.9

The Commission has previously held that determining the value of station power on an
hourly basis is an appropriate and reasonable methodology.10 In doing so, the Commission
determined that “a generator may net against its gross output as measured over a specific time
period, typically one hour … even though there may be occasions during that one hour when the
gross output is less than station power requirements.”11 The Commission has noted that the use
of a one-hour period for determining station power appropriately recognizes that “generation
output varies constantly.”12 The NYISO’s use of hourly settlements for Station Power;
therefore, aligns the settlement thereof with the interval over which the quantity of Station Power
is determined.

For LESRs, the net hourly settlement is unrelated to participation in the real-time Energy
market. In fact, these resources participate only in the NYISO-administered Regulation Service
market. The hourly settlement procedures relate to accounting for the energy management
activities undertaken by the NYISO on the resource’s behalf. In connection with the resource’s
participation in the NYISO-administered Regulation Service market, the NYISO provides energy
management service in order to maximize the resource’s capability to provide Regulation

9 KeySpan-Ravenswood, Inc. v. New York Independent System Operator, Inc., 101 FERC ¶
61,230 (2002); and New York Independent System Operator, Inc., 127 FERC ¶ 61,135 (2009).

10 See, e.g., KeySpan-Ravenswood, Inc. v. New York Independent System Operator, Inc., 107

FERC ¶ 61,142 at P 39 (2004); and PJM Interconnection, L.L.C., 94 FERC ¶ 61,251 at 61,891-92 (2001).

11 PJM Interconnection, L.L.C., 94 FERC ¶ 61,251 at 61,891-92 (2001).

12 Id.

Service. The hourly settlement for LESRs accounts for the net injections and withdrawals that occur as a result of such energy management. Because this settlement is unrelated to
participation in the real-time Energy market, the proposed requirement to utilize sub-hourly settlements does not appear to be applicable.

In neither case above do the settlement rules create a disincentive to follow NYISO

dispatch instructions or fail to provide appropriate incentives for resource response in real-time. It may be that similar cases exist in other ISOs/RTOs. Any final rule adopted in this proceeding should be sufficiently flexible to accommodate such exceptions.

The NOPR expressly states that it is not proposing to extend the Commission’s proposed
reforms to intertie transactions. The Commission, however, seeks comment on “whether
settlement reforms are appropriate for intertie transactions that are scheduled on intervals
different from the intervals on which RTOs/ISOs dispatch internal real-time energy.”13
The NYISO supports the principle that settlement timeframes for intertie and internal transactions should be aligned. Providing consistent price signals for internal generation and interchange promotes competition and allows for the most economic supply option to be
identified. Both internal and external transactions should have equal incentives to respond to the
same price signals reflecting real-time system conditions. Greater consistency of settlement
intervals across neighboring regions would also help to improve the efficiency of interregional
transactions.

13 NOPR at P 39.

B.Shortage Pricing Triggers

The NOPR proposes “to require that RTOs/ISOs trigger shortage pricing for any dispatch interval during which a shortage of energy or operating reserves occurs.”14 The NYISO agrees that prices should reflect real-time conditions, including reserves shortages.

As noted above, the NYISO prices Operating Reserves on a five-minute basis. This

practice is necessary to support the NYISO’s use of a least-cost economic dispatch market model
that simultaneously co-optimizes Energy, Regulation Service and Operating Reserves nominally
every five minutes in real-time. Co-optimization ensures that the system commits and dispatches
adequate resources to meet the flexibility requirements of the system. It also allows prices to
reflect shortage conditions that are brief in duration. Even though such shortages may not last
long they are critically important indicators of actual system conditions and needs.
The NYISO currently implements shortage pricing in both its Day-Ahead and Real-Time Markets utilizing various demand curves for Operating Reserves (i.e., Operating Reserve
Demand Curves), Regulation Service (i.e., Regulation Service Demand Curve) and transmission
security (i.e., Transmission Shortage Cost). These demand curves represent the escalating value
of each product as the level of any shortage thereof increases. The NYISO has utilized demand
curves for shortage pricing since 2005.15

Consistent with the NOPR’s proposal, the NYISO uses the demand curves to price all
reserves shortages, regardless of their duration. The NYISO’s use of demand curves allows for
prices to increase as shortages worsen. Escalating prices allow the commitment and dispatch
software to determine the most economic solution to resolve different levels of shortage.

14 NOPR at P 51.

15 See Docket No. ER04-230-000, New York Independent System Operator, Inc., Tariff Revisions Reflecting Implementation of Enhanced Real-Time Scheduling Software (November 26, 2003); and New York State Independent System Operator, Inc., 106 FERC ¶ 61,111 (2004).

Escalating prices also incentivize greater resource flexibility by rewarding resources that are capable of responding to real-time system conditions.

The NYISO supports the Commission’s proposal that shortage pricing should be

triggered for any dispatch interval when there is a shortage of reserves. Operating Reserve

Demand Curves are a proven shortage pricing tool that has worked well in New York.

Finally, the NYISO notes that it does not interpret the NOPR to be addressing the use of
offline resources in real-time pricing or to be implying that practices, such as the NYISO’s
“Hybrid Pricing” rules,16 are inconsistent with the proposal to require that all reserve shortages
be priced.

III.CONCLUSION

In conclusion, the NYISO respectfully requests that the Commission consider these comments when developing a final rule in this proceeding.

Dated: November 30, 2015

Respectfully submitted,

/s/ Garrett E. Bissell
Garrett E. Bissell
Senior Attorney

New York Independent System Operator, Inc.

10 Krey Blvd.

Rensselaer, New York 12144 (518) 356-6107

gbissell@nyiso.com

16 The Hybrid Pricing rules were adopted in 2001. See New York Independent System Operator, Inc., 95 FERC ¶ 61,121 (2001). They apply to Real-Time Market pricing and relax the minimum
operating limits of certain fast-start, block-loaded resources in order to permit them to be eligible to set price based on the incremental need that required their commitment.

CERTIFICATE OF SERVICE

I hereby certify that I have this day served the foregoing document upon each person

designated on the official service list compiled by the Secretary in this proceeding in accordance with the requirements of Rule 2010 of the Rules of Practice and Procedure, 18 C.F.R. §385.2010.
Dated at Rensselaer, NY this 30th day of November 2015.

/s/ Joy A. Zimberlin

Joy A. Zimberlin

New York Independent System Operator, Inc.

10 Krey Blvd.

Rensselaer, NY 12144 (518) 356-6207