UNITED STATES OF AMERICA
BEFORE THE

FEDERAL ENERGY REGULATORY COMMISSION

Offer Caps in Markets Operated by)

Regional Transmission Organizations and)Docket No. RM16-5-000

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 January 21, 2016 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 continues to support the
Commission’s goal of using the best cost information available for the purposes of calculating Locational Marginal Prices (“LMPs”).

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 *James H. Sweeney, Attorney

10 Krey Boulevard

Rensselaer, NY 12144
Tel: (518) 356-7659
Fax: (518) 356-8825
jsweeney@nyiso.com

*Person designated for receipt of service.

1 NOPR at P 73.

II.COMMENTS

A.The NYISO Supports Capping Incremental Energy Offers at the Higher of

$1,000/MWh or a Resource’s Cost-Based Incremental Energy Offer

The NYISO generally supports the Commission’s proposal to revise its regulations to
require that each regional transmission organization (“RTO”) and independent system operator
(“ISO”) cap each resource’s incremental energy offer2 to the higher of $1,000/MWh or that
resource’s verified cost-based incremental energy offer. The Commission’s proposal would
allow verified cost-based incremental energy offers above $1,000/MWh to be included in the
calculation of LMPs. The NYISO believes this approach is prudent to address future price

volatility and market seams concerns. Subsections 1 and 2, below, describe the incremental cost
review process that the NYISO uses to develop and revise Generator reference levels.3 The
NYISO’s review is a multistep process that initially relies on the Market Party’s submission of
anticipated costs, subject to review prior to calculating LMP, followed by after-the-fact review of
supporting documentation and penalties for unwarranted or inaccurate costs. The NYISO
believes this process achieves the goals of the Commission as outlined in the NOPR.
The NYISO, similar to the ISO/RTO Council (“IRC”),4 respectfully requests that the Commission clarify the requirement to verify costs before an offer can be used to calculate LMP.

1. The NYISO’s Existing Incremental Cost Review Process

The NOPR proposes that the “costs underlying a resource’s cost-based incremental

energy offer above $1,000/MWh must be verified before that offer can be used for purposes of

2 In New York, the existing $1,000 offer cap applies to Incremental Energy and Minimum Generation Bids.
See Services Tariff Section 21.5.1. The NYISO expects that a revised offer cap, based on the higher of
$1,000/MWh or that resource’s verified cost-based incremental energy offer subject to a hard cap, would also apply
to Incremental Energy and Minimum Generation Bids, which the NYISO reviews against reference levels.

3 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”).

4 The NYISO is a signatory to and supports the comments the IRC submitted in this proceeding.

calculating Locational Marginal Prices.”5 The NYISO’s existing incremental cost review process used to develop and revise Generator reference levels could be used to satisfy this verification requirement.

The NYISO’s general approach to imposing market power mitigation is to first compare
a Market Party’s offers for a Generator to a set of “reference levels” for that Generator. Dollar-
denominated reference levels, such as start-up, minimum generation and incremental energy
reference levels, are generally intended to reflect a Generator’s marginal cost of providing a
service.6 Several of the rules addressing the development of reference levels expressly require
the NYISO to adjust reference levels to reflect changes in the price of the fuel that a Generator
must consume.7 Even where the NYISO is not expressly required by its Services Tariff to fuel
index a particular type of reference level, it incorporates fuel costs where appropriate to more
accurately reflect Generators’ marginal costs. Fuel prices can change for a variety of reasons,
including price volatility due to demand, a Generator’s capability to burn more than one fuel
type, different fuel blends, or fuel from multiple sources with distinct prices. Therefore, the
NYISO permits Market Parties to submit updated fuel type and fuel price information with Day-
Ahead Market offers and Real-Time Market offers to accurately reflect the fuel type the
Generator will burn and the associated costs incurred if it is committed.8 This information
allows the NYISO to fuel-index Generator reference levels to accurately reflect changes in fuel

5 NOPR at P 56.

6 See, e.g., Services Tariff Sections 23.3.1.4.1.1(iii), 23.3.1.4.1.2(iv), 23.3.1.4.1.3, 23.4.2.1.

7 See, e.g., Services Tariff Sections 23.3.1.4.1.1, 23.3.1.4.1.2, 23.3.1.4.4.1.

8 Services Tariff Section 23.3.1.4.6.8 (“For purposes of this Section 23.3.1.4.6, “timely” notice or

submission to the Real-Time Market shall mean the submission of fuel type and/or fuel price information using the
methods specified in Section 23.3.1.4.6.4 of these Mitigation Measures prior to market close for the relevant Real-
Time Market hour. For purposes of this Section 23.3.1.4.6, “timely” notice or submission to the Day-Ahead Market
shall mean the submission of fuel type and/or fuel price information using the methods specified in Section

23.3.1.4.6.4 of these Mitigation Measures at least 15 minutes prior to the close of the Day-Ahead Market (i.e., by
4:45 a.m.)).”; See also Services Tariff Sections 4.2.1.1 and 23.3.1.4.6.4; see generally Services Tariff Section

23.3.1.4.6.

prices. Each Market Party remains responsible for maintaining accurate cost information with the NYISO, including timely reflecting cost decreases.9 Market Parties are expected to submit updated cost data for all material changes to reference levels.10

The NYISO utilizes automated screening processes and manual review to evaluate the

fuel type and fuel price information that Market Parties submit with their Energy offers. Market
Parties are able to update the fuel price used to fuel-index their Generator’s reference level at the
time Energy offers are submitted. Fuel price updates are screened automatically by NYISO
software and will be allowed if the update is within the pre-defined screening threshold.11 The
NYISO publicly posts the thresholds used to screen changes in fuel type or fuel price in
advance.12 At times when fuel prices are extremely volatile (for example, when natural gas
prices are spiking or when gas is not available in the winter months due to heating demand), the
NYISO posts correspondingly broader screening thresholds to permit Market Parties to react to
price changes in the fuel markets. At times when fuel prices are relatively stable, the NYISO
posts more stringent thresholds. Supporting documentation must be available for the NYISO’s
review after the fact when a Market Party updates its fuel type or fuel price information within
the pre-defined thresholds. The screening thresholds also identify which fuel type and fuel price
change requests need to be manually reviewed by NYISO staff before they are permitted to take
effect and potentially be used to calculate LMP or generator guarantee payments.
In the event a Market Party needs to request a fuel type or fuel price change that exceeds the pre-defined thresholds, the Market Party may submit updated fuel type and/or fuel price

9 Services Tariff Section 23.3.1.4.6.2.

10 See Services Tariff Section 23.3.1.4.1.3.

11 Services Tariff Section 23.3.1.4.3.3 permits the NYISO to implement a fuel type screening process that requires the NYISO to approve a Generator’s change to a new fuel type.

12 See Fuel Entry Thresholds at

http://www.nyiso.com/public/markets_operations/services/market_monitoring/index.jsp.

information through the NYISO’s Reference Level Software (“RLS”). Upon being noticed of a
RLS submittal, the NYISO will initiate manual review in consultation with its external Market
Monitoring Unit (“MMU”). NYISO staff and the MMU are alerted simultaneously when a new
RLS submittal is received. The NYISO has a defined process to review extremely time-sensitive
or “urgent” RLS submittals, such as requests related to fuel price or fuel availability that are
close in time to the end of the Energy offer submission window.13 For “urgent” submittals, the
NYISO will promptly contact the MMU to review the request and, following the discussion with
the MMU, promptly contact the Market Party (conducting a conference call, if necessary). The
discussions will identify the nature of the submittal and the basis for an immediate update. The
NYISO will also communicate any concerns with the submittal and identify additional
documentation required for approval. Any additional details discussed verbally will be
documented in an e-mail from the NYISO and confirmed by the Market Party. If necessary, the
Market Party will have the opportunity to provide additional information by adding an
attachment to its original RLS submittal.

When a Market Party requests a temporary change in fuel type or fuel price because the
commodity fuel cost exceeds the fuel cost used to develop a Generator’s Reference Level, the
NYISO may request evidence of the increased fuel cost. Supporting documentation must be
provided by the Market Party enough in advance of the close of the bidding window to allow the
NYISO to review and process the submittal.14 Based on the data documented in the RLS and/or
e-mail exchange, the NYISO and its MMU will approve or deny the urgent request within 16
hours of submission. The NYISO will provide the basis for any denial in its comments in the

13 See NYISO Reference Level Manual Section 2.2,

http://www.nyiso.com/public/webdocs/markets_operations/documents/Manuals_and_Guides/Manuals/Operations/rl
_mnl.pdf.

14 See Services Tariff Section 23.3.1.4.6.8.

RLS (viewable by the Market Party). The NYISO will notify the Market Party immediately

upon approval of the submission. Changes in reference levels will be implemented

prospectively. Changes in fuel type and/or fuel price that are approved by the NYISO before the close of the bid window can be reflected in Energy offers that are eligible to set the LMP.
When the NYISO is not able to review and approve changes in fuel type and/or fuel price that are submitted prior to the close of the bid window, the fuel costs will be eligible for cost recovery as long as they accurately reflect the cost of the fuel that a Generator consumes.
However, fuel costs that are not submitted sufficiently in advance to permit NYISO review are
not used to calculate the LMP.

2. The NYISO’s Penalty Structure for Market Parties that Submit

Inaccurate Fuel Type or Fuel Price Information

Fuel type and fuel price information that is used to determine a Generator’s reference
levels can directly impact market clearing prices or a particular Generator’s guarantee payment
compensation. Once fuel costs are incorporated into a Generator’s reference levels, applying
mitigation will not prevent a Generator that submits inaccurate fuel price or fuel type information
from receiving a financial benefit. For this reason, the NYISO applies a penalty when (1) a
Market Party submits inaccurate fuel type and/or fuel price information for one or more
Generators, and (2) the inaccurate information is used by the NYISO to develop reference levels
for the Generators, and (3) the resulting inaccurately developed reference levels permit the
Market Party to Bid the Generator(s) in a manner that increases the guarantee payments to one or
more of the Market Party’s Generators, or the market clearing prices at the Market Party’s
Generator locations, or the Market Party’s Day-Ahead Transmission Congestion Contract
(“TCC”) revenues, above the payment that the Market Party would have received had it
submitted accurate fuel type/price information. In order for a penalty to apply, the guarantee

payment or market clearing price must increase by more than the NYISO’s conduct and impact
thresholds for at least one of the Market Party’s Generators.15 The penalty is calculated based on
the difference between the compensation the Market Party received as a result of the inaccurate
fuel type and/or fuel price information it submitted and the compensation the Market Party
would have received if it had submitted accurate information. The Market Monitoring Unit also
has the opportunity to review and comment on the NYISO’s proposed penalty before it is
applied.

B. The NYISO Supports a Hard Cap on Cost-Based Incremental Energy Offers,

Inter-Regional Interchange Transactions, and Virtual Transactions

A hard cap should also be included in the final rule for cost-based incremental energy
offers, inter-regional interchange transactions and virtual transactions.16 The NYISO’s market
design schedules internal supply resources, inter-regional interchange transactions, financial
hedging transactions (or virtual transactions), and price responsive demand simultaneously using
offer costs. This market design allows all customers to compete to the maximum extent possible
in the NYISO energy markets. A hard cap remains appropriate for inter-regional interchange
offers and virtual transaction offers because such offers are generally based on price expectations
as opposed to verifiable costs. Often times, inter-regional interchange offers depend on an
entity’s expectation of price differences between two regional markets and virtual transaction
offers depend on an entity’s expectation of price differences between the Day-Ahead Market and
the Real-Time Market. A consistent hard cap for all offers will allow all entities to continue
competing to the maximum extent practicable.

15 See generally Services Tariff Section 23.4.3.3.3.

16 In New York, the existing $1,000 offer cap applies to Day-Ahead and real-time Decremental Bids, Price Cap Load Bids, Sink Price Cap Bids and real-time CTS Interface Bids. See Services Tariff Section 21.5.1. The NYISO expects that a revised hard cap would apply to the same categories of Bids in addition to the Incremental Energy and Minimum Generation Bids discussed above.

The NYISO urges the Commission to hold a technical conference to lead an evaluation
and discussion of an appropriate hard cap. Maintaining a hard cap will continue to serve several important functions; including protecting the marketplace against the inadvertent submission of offers above the cap, creating bounds for offers with costs that are difficult to verify, and
preventing potential attempts to exercise market power that are not otherwise addressed by
existing mitigation rules. Given the high correlation between wholesale LMPs and natural gas
prices, adjustments to the hard cap should be carefully evaluated to ensure that consumers will
realize economic benefits in both the electric and gas markets while maintaining a safe and
reliable electric system. An appropriate hard cap should allow resources to reflect actual fuel
costs during peak fuel demand conditions.

The NYISO does not have access to the fuel price data necessary to determine an

appropriate hard cap. The NYISO can only evaluate whether the offer cap prevents Generators
from submitting offers that reflect marginal costs by comparing the offer cap to the marginal cost
data and energy market offers that Generators submit to the NYISO. In order to properly
evaluate a hard cap, the elasticity of the fuel markets, including natural gas, and the relative fuel
prices at various demand levels must be analyzed. The NYISO does not have access to the full
fuel price supply curve across the various natural gas pipelines and Local Distribution
Companies, which would be necessary to conduct such an evaluation. The Commission, the
ISOs and RTOs, the states and the fuel suppliers (e.g., natural gas pipelines, Local Distribution
Companies, etc.) should work together to analyze the fuel prices that electric Generators face as
a component of the short-run marginal costs of producing electric power. The offer cap should
not prevent Generators from offering their short-run marginal costs and should not prevent LMP
from reflecting the marginal cost of production.

The NYISO has not seen evidence of natural gas prices or other fuel prices that prevented
Generators from submitting offers reflecting their marginal costs due to the current $1,000 per
MWh offer cap that applies to Incremental Energy and Minimum Generation Bids in New York.
During the winter of 2013-2014, natural gas prices rose to unprecedented high levels in New
York and elsewhere.17 Despite previously unseen gas prices, no supply resource in New York
submitted invoices to the NYISO showing it incurred costs in excess of $1,000 per MWh or
sought recovery of actual costs in excess of the $1,000 per MWh offer cap.18 The NYISO also
did not identify any natural gas or other fuel prices that resulted in incremental costs that
exceeded the offer cap during the sustained cold weather conditions of winter 2014-2015.
Although the NYISO has not seen, or does not have access to, evidence warranting
changes to the offer cap in New York, the NYISO has consistently supported the coordinated
inter-regional implementation of comparable offer caps in order to limit potential seams issues
between neighboring regions.19 The NYISO also understands and appreciates the need to revisit
the topic of offer caps based on concerns raised by other market areas. Offer caps must be
addressed at an inter-regional level in order for all interested parties to evaluate the potential for

17 In response to the high natural gas prices and its concern that such prices could potentially reach levels
that would prevent certain supply resources from recouping their actual costs under the current $1,000 per MWh
offer cap, the NYISO requested a temporary waiver to allow it to consider Incremental Energy and Minimum
Generation Bids in excess of $1,000 per MWh and compensate Generators that were able to demonstrate that they
actually incurred variable costs in excess of $1,000 per MWh. The NYISO requested that such temporary waiver
apply from January 22, 2014 through February 28, 2014. Docket No. ER14-1138-000, New York Independent
System Operator, Inc., Petition for Temporary Tariff Waivers, Request for Shortened Comment Period, and Request
for Expedited Commission Action by January 31, 2014 (January 22, 2014). In granting the NYISO’s temporary
waiver request, the Commission directed the NYISO to submit an informational filing by March 28, 2014 to, among
other matters, provide the total amount of energy that qualified to receive compensation for costs in excess of $1,000
per MWh during period in which the temporary waiver was in effect. New York Independent System Operator, Inc.,
146 FERC ¶ 61,061 at P 24 (2014).

18 Docket No. ER14-1138-000, New York Independent System Operator, Inc., Bid Restriction Waiver Informational Filing (March 28, 2014).

19 See Docket No. AD14-14, Price Formation in Energy and Ancillary Services Markets Operated by

Regional Transmission Organizations and Independent System Operators, Post-Technical Workshop Comments of the New York Independent System Operator, Inc. at 3-5 (March 6, 2015).

seams issues and other impacts that could arise from having different offer caps apply in markets that access an overlapping fuel supply and set of electric generating resources. Consistent offer caps among the regions are critical to equalize the fuel buying power of electric Generators in the various market areas.

Electric markets in the Mid-Atlantic and Northeast compete for a common supply of natural gas. Generators located in regions that are subject to lower offer caps could be denied access to fuel due to restricted buying power compared to Generators in areas with higher offer caps. Enacting materially different offer caps in these regions could result in operator actions to avoid electric system reliability impacts during periods of cold weather and high natural gas prices. Inter-regional or national coordination to appropriately modify offer caps is essential to ensure that Generators in all electric markets enjoy equivalent access to fuel.

III.CONCLUSION

WHEREFORE, for the foregoing reasons, the NYISO respectfully requests that the
Commission: (1) hold a technical conference to determine an appropriate hard cap; and

(2) consider these comments, including the description of the NYISO’s cost review process, and provide the requested clarification when developing a final rule in this proceeding.
Dated: April 4, 2016

Respectfully submitted,

/s/ James H. Sweeney
James H. Sweeney
Attorney

New York Independent System Operator, Inc.

10 Krey Blvd.

Rensselaer, New York 12144 (518) 356-7659

jsweeney@nyiso.com

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 4th day of April 2016.

/s/ Joy A. Zimberlin

Joy A. Zimberlin

New York Independent System Operator, Inc.

10 Krey Blvd.

Rensselaer, NY 12144 (518) 356-6207