HUNTON & WILLIAMS LLP
1900 K STREET, N.W.

WASHINGTON, D.C. 20006-1109

TEL202 • 955 • 1500

FAX202 • 778 • 2201

TED J. MURPHY

DIRECT DIAL: 202 • 955 • 1588
EMAIL: tmurphy@hunton.com

December 14, 2011

VIA ELECTRONIC FILING

Ms. Kimberly D. Bose, Secretary

Federal Energy Regulatory Commission 888 First Street, NE

Washington, DC 20426

Re: New York Independent System Operator, Inc., Docket No. ER11-3949-____ ,

Compliance Filing, Order No. 741, Verification of Market Participant Risk

Management Policies and Procedures and Request for Deferred Effective Date

The New York Independent System Operator, Inc. (“NYISO”) respectfully submits the
enclosed tariff revisions to comply with the Federal Energy Regulatory Commission’s
(“Commission”) directives in its September 15, 2011 order in the above-captioned proceeding
(“September 15 Order”) 1 and the Commission’s directives in Order No. 741.2 This filing
includes proposed compliance revisions to the NYISO’s Market Administration and Control
Area Services Tariff (“Services Tariff”) to satisfy the Commission’s directives in the September

15 Order and Order No. 741 with respect to the NYISO’s independent verification of Market Participant risk management policies and procedures.3

In preparing this filing the NYISO conducted several working group sessions with its

Market Participants to discuss the September 15 Order and Order No. 741 requirements and the
NYISO’s proposal for compliance.4 The NYISO made adjustments to its initial proposals and

1 New York Independent System Operator, Inc., 136 FERC ¶ 61,193 (2011).

2 Credit Reforms in Organized Wholesale Electric Markets, Order No. 741, FERC Stats. & Regs. ¶ 31,317 (2010), order on reh’g, Order No. 741-A, FERC Stats. & Regs. ¶ 31,320 (2011), reh’g denied, Order No. 741-B, 135 FERC ¶ 61,242 (2011).

3 Capitalized terms used but not defined in this filing shall have the meanings given to them in the Services

Tariff.

4 The NYISO hosted meetings with its Credit Policy Working Group on September 29, October 28, and November 18, 2011.

Ms. Kimberly D. Bose, Secretary December 14, 2011

Page 2

performed additional analyses to explore issues and questions raised in the stakeholder process. In addition, the NYISO coordinated extensively with the other ISOs/RTOs to discuss the
Commission’s requirements and methodologies for identifying the subset of Market Participants subject to review, and to develop, to the extent practicable, consistent risk-management
standards and verification processes across the ISO/RTO markets.

The Committee of Chief Risk Officers (CCRO) recently announced its intention to
develop industry-accepted minimum participation criteria, including appropriate risk
management practices, and provide for mechanisms to support the certification of these
practices.5 While the NYISO and other ISOs/RTOs did not retain the CCRO, the NYISO and
the other ISOs/RTOs participated in CCRO working groups to discuss risk management
standards. However, the NYISO vetted its proposed rules regarding risk management
verification through its shared governance process and, therefore, does not endorse the CCRO’s
establishment of risk management standards as the CCRO may not be representative or inclusive
of all NYISO Market Participants.

I.LIST OF DOCUMENTS SUBMITTED

The NYISO respectfully submits the following documents:

1. This filing letter;

2. A clean version of the proposed revisions to the Services Tariff (Attachment I); and

3. A blacklined version of the proposed revisions to the Services Tariff (Attachment II).

II.COMMUNICATIONS AND CORRESPONDENCE

Copies of correspondence concerning this filing should be served on:

Ms. Kimberly D. Bose, Secretary December 14, 2011

Page 3

Rensselaer, NY 12144Tel: (202) 955-1500

Tel: (518) 356-6000Fax: (202) 778-2201

Fax: (518) 356-4702tmurphy@hunton.com

rfernandez@nyiso.com
rstalter@nyiso.com

mlampi@nyiso.com*Kevin W. Jones6

Hunton & Williams LLP
951 East Byrd Street
Richmond, VA 23219
Tel: (804) 788-8200
Fax: (804) 344-7999
kjones@hunton.com

* -- Persons designated for service.

III.BACKGROUND

On October 21, 2010, the Commission issued Order No. 741 to amend its regulations to adopt reforms to credit policies used in organized wholesale electric markets to improve the management of risk.7 In Order No. 741, the Commission directed each ISO/RTO, in relevant part, to propose tariff revisions to establish minimum participation criteria, such as requirements related to adequate capitalization and risk management controls.8

On June 30, 2011, the NYISO submitted its tariff revisions to comply with Order No.
741, including revisions to establish minimum participation criteria and to require each Market
Participant to certify annually its compliance with these criteria. In the September 15 Order, the
Commission conditionally accepted the NYISO’s proposed tariff revisions, but also directed the
NYISO to make a compliance filing to establish, as part of the NYISO’s minimum participation
criteria, a periodic process for verification of Market Participant risk management policies and
procedures.9 The Commission did not mandate a particular form of periodic verification in the
September 15 Order. Rather, the Commission stated that “periodic verification could include
periodic review of risk management policies, practices, and procedures, and their

6 The NYISO respectfully requests waiver of 18 C.F.R. § 385.203(b)(3) (2011) to permit service on counsel for the NYISO in both Washington, D.C. and Richmond, VA.

7 Order No. 741 at P 1.

8 Id. at P 132.

9 September 15 Order at P 47.

Ms. Kimberly D. Bose, Secretary December 14, 2011

Page 4

implementation, conducted on a random basis or directed to certain market participants based on identified risk.”10

IV. DESCRIPTION OF PROPOSED COMPLIANCE TARIFF REVISIONS

A. Risk Management Verification

In this filing, the NYISO is proposing to add a new Section 26.1.3 to Attachment K of the Services Tariff to establish its rules for periodic verification of Market Participant risk
management policies and procedures. These rules supplement the NYISO’s existing ability to
require any Market Participant, at any time, to submit its risk management policies and
description of internal controls to the NYISO for review. Section 26.1.4 of Attachment K
requires Market Participants to submit to the NYISO, upon request, “any information or
documentation reasonably required for the ISO to monitor and evaluate Customer’s
creditworthiness and compliance with requirements set forth in the ISO Tariffs, ISO Procedures, and/or ISO Agreements related to settlements, billing, credit requirements, and other financial
matters.” Pursuant to this provision, the NYISO may request a Market Participant to submit its
risk management policies and procedures whenever the request appears, in the NYISO’s
discretion, to be warranted regardless of whether the Market Participant is subject to verification under the risk management provisions proposed in this filing.

In addition to the ISO’s existing discretion to request risk management policies and

procedures from any Market Participant under Section 26.1.4 of the Services Tariff, new Section

26.1.3.1 of the Services Tariff defines a subset of Market Participants that would categorically be
subject to verification based on identified risks, consistent with the September 15 Order.
Specifically, the subset of Market Participants subject to verification would be those active in the
NYISO-administered TCC market that hold high-risk TCC portfolios as identified by the two-
step screening process described below. The NYISO’s verification process focuses on the TCC
market because, as the Commission recognizes, the duration of TCCs creates unique risks that
are difficult to quantify and that distinguish TCCs from other wholesale electric market
products.11

As described in new Sections 26.1.3.1(a) and (b) of the Services Tariff, the first screen
would identify those Market Participants with a concentration of negative or low positive TCCs,
which do not solely own Grandfathered Rights and/or Fixed Price TCCs. The second screen
would then subject those identified Market Participants to verification unless the Market
Participant (i) maintains at least U.S. $10 million in assets or U.S. $1 million in tangible net
worth, and (ii) has participated in the TCC market, or similar market of another ISO/RTO, for
more than three years.

10 Id.

11 Order No. 741 at PP 70-72.

Ms. Kimberly D. Bose, Secretary December 14, 2011

Page 5

The NYISO defined the scope of Market Participants potentially subject to verification as those that hold a concentration of negative or low positive TCCs because these TCC
concentrations pose the greatest risk of payment default. Holders of negative TCCs must make congestion payments to the NYISO. Low positive TCCs run a disproportionately high risk of becoming negative TCCs. The NYISO further refined the scope, with stakeholder input, to make limited exceptions to the verification requirement for Market Participants that are well
capitalized and have more than three years of TCC market experience.

New Section 26.1.3.2 of the Services Tariff sets forth eight criteria that the NYISO will
assess when reviewing a Market Participant’s risk management policies and procedures. These
eight criteria were developed, as described above, in conjunction with the other ISOs/RTOs and
no stakeholders objected to these criteria. For each Market Participant subject to risk
management verification, continued eligibility to participate in the ISO-Administered Markets is
conditioned upon the NYISO notifying the Market Participant of successful completion of the
NYISO’s verification. A Market Participant subject to risk management verification and
satisfactorily verified by the NYISO, or other ISO/RTO with substantially similar verification
standards, shall be required to satisfy a subsequent verification if the Market Participant
materially changes its risk management polices and procedures or otherwise experiences a
material adverse change.

New Section 26.1.3.2 of the Services Tariff also provides that the NYISO may retain a third party to perform the review and verification function. The NYISO is continuing to
coordinate with the other ISOs/RTOs in an effort to identify an independent body to perform the verification function across all ISOs/RTOs.

B.Ministerial Tariff Revisions

The NYISO is proposing to make ministerial revisions to Section 26.1.1(d)(i) of the

Services Tariff to clarify that the capitalization requirements are minimum requirements and also clarify that Market Participants must provide a copy of their annual audited financial statements as evidence of their capitalization.

V.EFFECTIVE DATE

The NYISO respectfully requests that this filing become effective on June 30, 2012, which proposed implementation date will provide time for the NYISO to identify, in
coordination with other ISOs/RTOs, an independent body qualified to perform the verification process established by the proposed tariff revisions. In the event the NYISO has not engaged an independent body to perform the verification process by the proposed implementation date, the NYISO respectfully requests permission to defer the implementation of the proposed tariff
revisions, as appropriate, upon the filing of a notice and amended tariff sections with the
Commission by June 30, 2012 that indicate the revised effective date.

Ms. Kimberly D. Bose, Secretary December 14, 2011

Page 6

VI.SERVICE

This filing will be posted on the NYISO’s website at www.nyiso.com. In addition, the
NYISO will e-mail an electronic link to this filing to the official representative of each party to
this proceeding, to 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.

VII. CONCLUSION

Wherefore, for the foregoing reasons, the New York Independent System Operator, Inc. respectfully requests that the Commission take action as requested herein.

Respectfully submitted,

/s/Ted J. Murphy

Ted J. Murphy
Counsel to

the New York Independent System Operator, Inc.

cc:Michael A. Bardee

Gregory Berson
Connie Caldwell
Anna Cochrane
Jignasa Gadani
Lance Hinrichs
Jeffrey Honeycutt

Michael Mc Laughlin
Kathleen E. Nieman
Daniel Nowak

Rachel Spiker

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 14th day of December, 2011.

/s/ Joy A. Zimberlin

Joy A. Zimberlin

New York Independent System Operator, Inc

10 Krey Blvd.

Rensselaer, NY 12114 (518) 356-6207