10 Krey Boulevard Rensselaer, NY 12144
November 2, 2012
Submitted Electronically
Kimberly D. Bose
Secretary
Federal Energy Regulatory Commission 888 First Street N.E.
Washington, D.C. 20426
Re: New York Independent System Operator, Inc.’s Proposed Amendments to
its Market Power Mitigation Measures revising Mitigation Measures for
10-Minute Non-Synchronized Reserves and New York City Day-Ahead
Market Spinning Reserves; Docket No. ER13-___-___.
Dear Ms. Bose:
The New York Independent System Operator, Inc. (“NYISO”) submits this filing
pursuant to Section 205 of the Federal Power Act1 to propose amendments to its Market
Administration and Control Area Services Tariff (“Services Tariff”) that provide for the
incremental removal of the $2.52 reference level cap2 on 10-Minute Non-Synchronized
reserves and the Bid limit of $0/MWh3 on New York City (“NYC”) Day-Ahead Market
(“DAM”) Spinning Reserves.4 The incremental process for eliminating both these limits will
increase each limit over one to two years prior to removing the limits altogether. In this
filing, the NYISO proposes to implement the first step in the process - raising both limits to
$5.00/MWh.
Dr. LeeVanSchaick explains in his affidavit, attached hereto, that the current limits on
the reserves markets restrict the opportunity for generators to reflect their costs for reserves
offered in the Energy Market and to respond efficiently to market incentives.5 Increasing, and
eventually removing, these limits should increase market efficiency by allowing generators to
respond to market incentives in their ancillary services offers. In addition, removing these
1 16 U.S.C. § 824d.
2 Services Tariff § 23.3.1.4.5.
3 Services Tariff § 23.5.3.3.
4 Capitalized terms that are not otherwise defined herein shall have the meaning specified in the Services Tariff.
5 Affidavit of Dr. Pallas LeeVanSchaick at P 7-8.
Kimberly D. Bose, Secretary November 2, 2012
Page 2
limits should improve convergence of Day-Ahead and Real-Time Operating Reserve prices in
peak load hours. The gradual increasing of the limits prior to complete removal will protect
NYISO customers from unforeseen market impacts and provide the NYISO’s Market
Monitoring Unit time to evaluate the markets as Day-Ahead Operating Reserve offer prices
increase.
I.LIST OF DOCUMENTS SUBMITTED
The NYISO submits the following documents:
1.This filing letter;
2.An affidavit of Pallas LeeVanSchaick, PhD., of Potomac Economics, the
NYISO’s Market Monitoring Unit (“Attachment I”);
3.A clean version of the proposed revisions to the NYISO’s Services Tariff
(“Attachment II”); and
4.A backline version of the proposed revisions to the NYISO’s Services Tariff
(“Attachment III”).
II.COPIES OF CORRESPONDENCE
Correspondence concerning this filing should be served on:
Robert E. Fernandez, General Counsel
Raymond Stalter, Director, Regulatory Affairs *Mollie Lampi, Assistant General Counsel *James H. Sweeney, Attorney
New York Independent System Operator, Inc.
10 Krey Boulevard
Rensselaer, NY 12144
Tel: (518) 356-7659
Fax: (518) 356-7678
mlampi@nyiso.com
jsweeney@nyiso.com
* Person designated for receipt of service
III. BACKGROUND AND JUSTIFICATION
The NYISO’s Market Monitoring Unit (“MMU”) recommended that the NYISO
modify two mitigation provisions that may limit competitive reserve offers in the Day-Ahead
Market. According to the MMU, the two existing mitigation provisions lead to Day-Ahead
Kimberly D. Bose, Secretary November 2, 2012
Page 3
clearing prices being set below competitive levels in certain hours.6 If suppliers were able to reflect competitive conditions in their offers, Day-Ahead prices would increase and result in more consistency between Day-Ahead and Real-Time clearing prices. Such consistency
would then lead to more efficient commitment and scheduling of resources in the Day-Ahead Market.7 Dr. LeeVanSchaick’s affidavit explains that the current mitigation measures are not sufficiently flexible to allow reserve suppliers to raise their offer prices when it would be
justifiable in a competitive market.8
The first mitigation provision caps a generator’s reference level for 10-Minute Non-
Synchronized reserves at $2.52/MWh.9 The reference level cap originated as the remedy for
a defined market flaw in the non-synchronous reserves market that occurred between January
and March 2000.10 In early 2000, the NYISO observed bidding patterns into the 10-Minute
Non-Synchronized reserve markets east of its central east transmission constraint indicating
the exercise of market power. In response, the Commission granted the NYISO’s request for
a $2.52 bid restriction on 10-Minute Non-Synchronized reserves.11 In an order issued on
November 8, 2000, the Commission extended the bid cap until such time as the NYISO is
able to show that “the competitive state of the non-spinning reserve market has reached a
level of improvement that would warrant a lifting of, or increase in, the existing $2.52 cap.”12
By 2003, competitive conditions had significantly improved and the bid cap was transformed
into the $2.52 reference level cap.13 Additional significant improvements have been made to
the 10-Minute Non-Synchronized reserve market since that time. Most importantly, 10-
Minute Non-Synchronized reserve capability has increased substantially in the New York
Control Area (“NYCA”).14 “Many new combined cycle and peaking generators have been
built in Eastern New York, adding approximately 1.8 GW of additional Spinning Reserve and
10-Minute Non-Synchronized Reserve capability.”15 The NYISO’s Services Tariff also now
includes physical withholding measures that should prevent Generators from failing to offer
this product. These measures include bright line conduct16 and impact thresholds17, that seek
6 Affidavit of Dr. Pallas LeeVanSchaick at P 11.
7 Affidavit of Dr. Pallas LeeVanSchaick at P 12.
8 Affidavit of Dr. Pallas LeeVanSchaick at P 11.
9 See Docket No. ER03-836-000.
10 See Docket No. ER00-3591.
11 New York Independent System Operator, Inc., Order on Tariff Filing and Complaints, 91 FERC ¶ 61,128
(2000).
12 New York Independent System Operator, Inc., Order Extending Bid Cap, Acting on Tariff Sheets, and Establishing Technical Conference, 93 FERC ¶ 61,142 at p. 61,437 (2000).
13 New York Independent System Operator, Inc., Order Conditionally Accepting Proposed Tariff Revisions, 104 FERC ¶ 61,002 (2003).
14 See also Affidavit of Dr. Pallas LeeVanSchaick at P 7.
15 Affidavit of Dr. Pallas LeeVanSchaick at P 13 and 20.
16 Services Tariff § 23.3.1.1.
17 Services Tariff §23.3.2.
Kimberly D. Bose, Secretary November 2, 2012
Page 4
to identify electric facilities not offering to sell or schedule their output or provide services to
the NYISO market. As a result, the NYISO and its MMU believe the remedy designed in
2003 is no longer necessary and the 10-Minute Non-Synchronized Reserve market will
perform competitively without a reference level cap.18 In addition, 10-Minute Non-
Synchronized reserve suppliers will benefit from the ability to adjust Day-Ahead offers in
response to market signals. Once the reference level cap (of $2.52/MWh) is raised, the
NYISO will calculate individual reference levels for generators that offer this product in
accordance with the NYISO’s existing Market Mitigation Measures, Attachment H of the
Services Tariff (“Market Mitigation Measures”).19 The NYISO’s Market Mitigation
Measures methods for calculating reference levels include: (1) by the lower of the mean or the
median of a Generator’s accepted Bids; 20 (2) in consultation with the Market Party submitting
the Bid or Bids at issue;21 or (3) if necessary, the NYISO will determine a reference level on
the basis of its own estimate of the Generator’s costs or an appropriate average of competitive
bids of similar facilities.22
The second mitigation provision requires NYC generators to offer zero ($0/MWh) for
their Spinning Reserves. This requirement predates the formation of the NYISO and
originates in a New York State Public Service Commission (“NYSPSC”) order23 that required
defined levels of 10-minute reserve to be located in NYC.24 This rule was the basis for the
provision in the Consolidated Edison of NY divestiture agreements that divested generation
was required to be offered for dispatch by the NYISO Security Constrained Dispatch
program.25 As discussed above, substantial additional Spinning Reserve capacity has been
added to the NYCA since 200326 and Spinning Reserves suppliers will also benefit from the
ability to adjust Day-Ahead offers in response to market signals. The NYISO is proposing to
remove the requirement that generators must offer zero ($0/MWh) from Section 23.5.3.3 of
its Services Tariff. Spinning Reserves suppliers must continue to offer this product even after
the revisions proposed in this filing take effect. Once the Bid limit (of $0/MWh) is raised, the
NYISO will calculate individual reference levels in accordance with the NYISO’s existing
Market Mitigation Measures for generators that offer this product.27
18 Affidavit of Dr. Pallas LeeVanSchaick at P 12 and 22.
19 See Services Tariff § 23.3.1.4.
20 See Services Tariff § 23.3.1.4.1.1 (accepted Bids in competitive periods over the most recent 90 day period for which the necessary input data are available to the ISO’s reference level calculation systems).
21 See Services Tariff § 23.3.1.4.1.3 (The reference level for a Generator’s Energy Bid is intended to reflect the Generator’s marginal costs).
22 See Services Tariff § 23.3.1.4.2 (this section applies if a reference level cannot be determined using method 1 or 2 due to insufficient data).
23 Section 23.5.3.1 is a reliability based requirement in response to NYSPSC Case No. 27302 that required specified levels of 10-minute reserve to be located and available in NYC.
24 See generally FERC Docket No. ER98-3169.
25 Id.
26 Affidavit of Dr. Pallas LeeVanSchaick at P 13 and 20.
27 See Services Tariff § 23.3.1.4.
Kimberly D. Bose, Secretary November 2, 2012
Page 5
The NYISO and the MMU believe that NYISO’s Market Mitigation Measures limit
the potential risk of the revisions proposed in this filing.28 The existing conduct-and-impact
framework will apply to these reserve markets upon the effective date of this filing and will
limit behavior that could have a substantial impact on clearing prices.29 The conduct-and-
impact framework consists of two parts. First, the conduct test identifies Operating Reserve
suppliers that increase their offer prices by a specified amount (the lesser of $50 per MWh or
300 percent) above their reference level. 30 Second, the impact test estimates the effect of
such conduct on clearing prices, and if the impact is estimated to be greater than $100 per
MWh or 200 percent, the conduct will be mitigated. 31 The NYISO’s Market Mitigation
Measures will protect these reserve markets from non-competitive behavior in the unlikely
event that either reserve market does not perform competitively going forward.32 The gradual implementation of these proposed revisions will provide additional protection to the NYISO customers. If the increased limits have negative effects on the market, the MMU will be able to recommend remaining at a certain limit or reverting back to the prior limit.33
The NYISO reviewed the market power impacts of removing the reference level cap
and spinning reserves Bid limit using the Herfindahl-Hirschman Index (“HHI”) and Pivotal
Supplier/Residual Supplier Indices (“RSI”).34 The NYISO evaluated market conditions on
an hourly basis during one high load period in the summer, July 2011, when most supplier
resources were in-service and one mild load period in a shoulder season, October 2011, when
a substantial share of supplier resources were on planned outages. The NYISO’s HHI and
RSI analysis evaluated market concentration indices for four products distinguished by
summer and shoulder seasons and peak versus off-peak hours.35 The four products evaluated were: (1) Spinning Reserve in Eastern New York; (2) Spinning Reserve in NYCA; (3) 10-
Minute Total Reserve in Eastern New York; and (4) 10-Minute Total Reserve in NYCA. The NYISO analyzed a total of sixteen different situations.
The HHI is a standard measure of market concentration based on each supplier’s
market share.36 The analysis showed that in most hours the average HHI values indicate a
lack of concentration in the reserves markets. There is, however, some evidence of
concentration in the NYC DAM Spinning Reserves market in certain low load hours. This
28 Affidavit of Dr. Pallas LeeVanSchaick at P 21.
29 Id.
30 Id. citing Services Tariff §23.3.1.2.1.2.
31 Id. citing Services Tariff §23.3.2.1.1.
32 Affidavit of Dr. Pallas LeeVanSchaick at P 22.
33 Affidavit of Dr. Pallas LeeVanSchaick at P 24.
34 See NYISO “Changes to 2 Ancillary Service Mitigation Provisions” Presentation to the Market Issues Working Group, February 2, 2012,
http://www.nyiso.com/public/webdocs/committees/bic_miwg/meeting_materials/2012-02-
02/AS_MitigationPresentation.pdf.
35 See Affidavit of Dr. Pallas LeeVanSchaick at P 14.
36 Affidavit of Dr. Pallas LeeVanSchaick at P 15.
Kimberly D. Bose, Secretary November 2, 2012
Page 6
increased concentration results from fewer available reserve suppliers during low demand
periods. The NYISO believes that the exercise of market power in these hours is unlikely.
The other existing Market Mitigation Measures and the gradual removal of the $0/MWh Bid limit are sufficient to protect the competitiveness of this reserve market. HHI statistics are not a definitive measure of potential market power; therefore, the NYISO also performed the RSI analysis to supplement the HHI results.
The Pivotal Supplier/Residual Supplier Indices evaluate whether one specific supplier is necessary to meet demand in the market. If one or more suppliers are pivotal, the market may be subject to substantial market power abuse.37 The NYISO did not identify any pivotal suppliers in any hours for the Non-Synchronized or Spinning Reserves markets for either July or October 2011.38 Similarly, the RSI did not indicate a cause for concern in either reserves market. As Dr. LeeVanSchaick explains, the RSI results suggest that there is limited potential for suppliers to exercise market power in these markets.39
The NYISO also conducted a Consumer Impact Analysis of this project, at the request
of several stakeholders, which showed potential gains from improved efficiency and generally
small increases in total load payments.40 The Consumer Impact Analysis reviewed potential
impacts on reliability, costs/market efficiencies, the environment, and transparency of the
market. According to the analysis, no negative impacts are expected on reliability or the
environment and no changes are expected to the transparency of the markets. With respect to
costs and market efficiencies, the NYISO found that Day-Ahead offer prices increased
slightly depending on the time of the day and the forecasted daily peak load. These slightly
higher prices result in Day-Ahead reserve commitment patterns that more closely resemble
the Real-Time due to better convergence of Day-Ahead and Real-Time prices. The study
found a potential gain from improved efficiency because when the Day-Ahead Market more
closely approximates the Real-Time operating conditions, the Real-Time Market is better
positioned to respond to any unanticipated conditions.
IV.PROPOSED TARIFF REVISIONS
The NYISO proposes the following revisions to Sections 23 and 30 of its Services
Tariff:
• Section 23.3.1.4.5 - revised to indicate that the reference level for 10-Minute Non-
Synchronized reserves shall be the lower of (i) the amount determined in accordance
with the provisions of Section 23.3.1.4.1.1, or (ii) $5.00 per MW. Revisions also
include the proposed implementation plan discussed in Section V of this filing letter.
37 Affidavit of Dr. Pallas LeeVanSchaick at P 18.
38 Affidavit of Dr. Pallas LeeVanSchaick at P 19.
39 Id.
40 See: presentation at http://www.nyiso.com/public/webdocs/committees/mc/meeting_materials/2012-03-
28/agenda_04_Ancillary_Service_Mitigation_Consumer_Impact_Analysis_MC.pdf.
Kimberly D. Bose, Secretary November 2, 2012
Page 7
• Section 23.5.3.3 - revised to indicate that In-City generators must Bid $5.00 or less for
the availability portion of Day-Ahead Spinning Reserves Bids. Revisions also include
the proposed implementation plan discussed in Section V of this filing letter.
• Section 30.4.6.2.12 - the proposed change sets forth the Market Monitoring Unit’s
role in monitoring and evaluating the 10-Minute Non-Synchronized reserves and Day-
Ahead Spinning Reserves markets that the NYISO administers. The proposed change
also sets forth the process for the Market Monitoring Unit to recommend adjustments
to the reference level cap used in Section 23.3.1.4.5 of the Market Mitigation
Measures and to the must Bid limit used in Section 23.5.3.3 of the Market Mitigation
Measures.
The tariff revisions proposed in this filing are submitted herewith in both clean and blackline versions.
V. PROPOSED IMPLEMENTATION PLAN
The NYISO proposes to implement the removal of the $2.52/MWh reference level cap
on 10-Minute Non-Synchronized reserves and the must Bid limit of $0/MWh on NYC DAM
Spinning Reserves in three or more steps. The NYISO requests approval of all steps in this
filing. As discussed below, the NYISO proposes to submit an informational compliance filing
to the Commission notifying it of the effective limit at least two weeks prior to implementing
a revision to the limit. The first step, proposed to be implemented on the effective date of this
filing, would increase the reference level cap on 10-Minute Non-Synchronized reserves to
$5.00/MWh and increase the must Bid limit on NYC DAM Spinning Reserves to $5.00/MWh or less. The second step would increase the reference level cap of 10-Minute Non-
Synchronized reserves to $10.00/MWh and increase the must Bid limit on NYC DAM
Spinning Reserves to $10.00/MWh or less. The third step would remove the reference level
cap on 10-Minute Non-Synchronized reserves and remove the must Bid limit on NYC DAM Spinning Reserves while maintaining the requirement that Generators offer NYC DAM
Spinning Reserves. The limits must be set at $2.52/MWh or $0.00/MWh (respectively for
each reserves market), $5.00/MWh, or $10.00/MWh until eliminated. A description of the
steps and lifting process, including the dollar limits, is included in the NYISO’s proposed
tariff revisions. Gradually lifting these requirements prior to their ultimate removal should
minimize abrupt impacts to the markets and will allow the competitiveness of the markets to be evaluated by the MMU as the restrictions increase.
The NYISO’s MMU will independently evaluate the competitiveness of both the 10-
Minute Non-Synchronized reserves market and Spinning Reserves market and issue
recommendations to the NYISO on when to move to the next step. The MMU does not have
to raise the two limits simultaneously; the stepped removal process of the $2.52/MWh
reference level cap on 10-Minute Non-Synchronized reserves and the must Bid limit of
$0/MWh on NYC DAM Spinning Reserves will progress independently. The MMU will
evaluate each market as part of its quarterly or State of the Market reports but may issue a
recommendation to move between steps at any time. The scope of the MMU’s evaluation
will include, but not be limited to, an analysis of: (i) the competitiveness of the reserves
Kimberly D. Bose, Secretary November 2, 2012
Page 8
market and whether there is conduct that the NYISO or the MMU determines to constitute an
abuse of market power; and (ii) how an adjustment to the limitation is expected to impact the
convergence of day-ahead and real-time prices for that reserves market. The MMU may
recommend maintaining the $5.00/MWh limits, lowering the $5.00/MWh limits (but not
lower than $2.52/MWh or $0.00/MWh, respectively), or raising the $5.00/MWh limit to
$10.00/MWh. After the second step, the MMU may recommend maintaining the
$10.00/MWh limits, lowering the $10.00/MWh limits back to $5.00/MWh, or removing the
limit entirely. This pattern of recommendations will continue until the restrictions are
completely removed. The limit in each reserves market must complete the stepping process
prior to complete removal of the restriction, i.e. increase from $2.52/MWh or $0.00 /MWh,
respectively, to $5.00/MWh, then to $10.00/MWh and then be removed.41
The MMU will make its first set of recommendations within seven months of the
effective date of this filing. The first evaluation for each reserves market will include data
from at least one of the following months; March, April, September or October. The MMU
will continue to make subsequent recommendations within six months of its latest
recommendation until the limits are completely removed. The NYISO will duly consider and,
absent any material change in circumstances, implement the MMU’s mitigation restriction
recommendation.
When, based on the MMU’s recommendation, either limit will be increased, decreased
or removed, the NYISO proposes to submit an informational compliance filing that includes
an appropriately revised tariff section (either Section 23.3.1.4.5 or Section 23.5.3.3)
specifying the limit from the options described above. The informational compliance filing
will specify the limit, from the defined set of options, and include tariff revisions containing
the actual limit to be in effect for the next period of time. For each revision in the selection of
one of the pre-specified limits, the NYISO will include the MMU’s recommendation with its
compliance filings. The NYISO will also provide contemporaneous notice of its decision to
Market Participants. Such notices will be provided to the Commission and Market
Participants at least two weeks prior to the implementation of a revised limit. When the
MMU recommends, and the NYISO implements, elimination of either restriction, the NYISO
will submit a compliance filing to the Commission removing the limits specified in Section
23.3.1.4.5 or Section 23.5.3.3, respectively, from the Services Tariff and containing the appropriate corresponding revisions to Section 30.4.6.2.12.
VI.EFFECTIVE DATE
The NYISO respectfully requests that the tariff revisions proposed in this filing be permitted to become effective on January 22, 2013; more than 60 days after the date of this filing. The NYISO intends to implement these revisions commencing with the January 22, 2013, Real-Time Market and the January 23, 2013, Day-Ahead Market.
41 The limits must be set at $2.52/MWh or $0.00/MWh (respectively for each reserves market), $5.00/MWh, or $10.00/MWh until eliminated.
Kimberly D. Bose, Secretary November 2, 2012
Page 9
VII. STAKEHOLDER APPROVAL
The NYISO’s Management Committee unanimously approved these tariff
amendments on May 30, 2012, with abstentions. The NYISO Board of Directors approved these tariff amendments on July 17, 2012.
VIII. SERVICE LIST
The NYISO will send an electronic link to this filing to the official representative of
each of its customers, to each participant on its stakeholder committees, to the New York
Public Service Commission, and to the New Jersey Board of Public Utilities. In addition, the
complete filing will be posted on the NYISO’s website at www.nyiso.com.
IV.CONCLUSION
WHEREFORE, for the foregoing reasons, the New York Independent System
Operator, Inc. respectfully requests that the Commission accept the proposed tariff changes identified in the Attachments hereto, with an effective date of January 22, 2013.
Respectfully submitted,
/s/ James H. Sweeney
James H. Sweeney, Attorney
New York Independent System Operator, Inc.
