Transmission Owners’ Comments on the ISO’s Proposed Topics
for the Comprehensive Shortage Pricing Review
February 4, 2014
At the January 8, 2014 meeting of the Market Issues Working Group (MIWG), the ISO presented
proposed topics for the comprehensive shortage pricing review1 that it committed to perform in a May
9, 2013 filing in Docket No. ER13-909-001,2 and asked for market participants to submit comments on its
proposal. The Transmission Owners (“TOs”)3 submit these comments in response to that request.
In the May Filing, the ISO stated:
[I]n response to requests raised by concerned stakeholders during the consideration and
review of the tariff amendments that were submitted in the Feb. 8[, 2013] Filing, the
NYISO committed to provide a comprehensive evaluation and proposal regarding
scarcity pricing by the 2nd quarter of 2014 … [which would] include an evaluation,
stakeholder review, assessment and prioritization of the following issues:
(i)
(ii)
(iii)
(iv)
The locations for which reserves are procured
The reserves (type and amount) procured for those locations
The reserve demand curve MW and value set points and
The implementation and triggering of scarcity pricing.4
Consistent with that commitment, the presentation made to the MIWG proposed reviews that
were associated with each of the four topic areas identified in the preceding quote from the May Filing.
As indicated by TO representatives at the MIWG meeting, we are concerned that examining
questions in each of these areas, on a piecemeal basis, is not the most productive approach. Rather, we
believe it would be more productive for the ISO first to identify concerns about the existing rules for
setting prices during scarcity and shortage conditions, and then to assess whether changes in any or all
of those four areas would help to address those concerns more effectively than they are addressed by
the current pricing rules.
One of the concerns that this review should address is inconsistency between prices for energy
and operating reserve at times when SCRs and EDRP participants have been activated in a region that is
1
Comprehensive Shortage Pricing Review (presented Jan. 8, 2014) (“MIWG Presentation”).
2
New York Independent System Operator, Inc., Response to Request for Further Information, Proposed Tariff
Amendments to Revise Ancillary Service Price Calculations During Periods of Scarcity and Request for Commission
Action No Later Than July 1, 2013, Docket No. ER13-909-001 (filed May 9, 2013) (“May Filing”).
3
The TOs include Central Hudson Gas & Electric Corporation, Consolidated Edison Company of New York, Inc.,
Long Island Power Authority, New York Power Authority, New York State Electric & Gas Corporation, Niagara
Mohawk Power Corporation d/b/a National Grid, Orange and Rockland Utilities, Inc., and Rochester Gas and
Electric Corporation.
4
May Filing at 3.
not either (i) the entire New York Control Area (“NYCA”) or (ii) Load Zones F through K. Under such
conditions, under both the scarcity pricing procedure that was in place previously and under the scarcity
pricing procedure that took effect in July, 2013, if energy prices are set at scarcity levels, the area in
which scarcity prices are used for energy will not be the same as the area in which operating reserve
prices are set at scarcity levels.5 As a result, in some locations, either the energy price will reflect
scarcity and operating reserves prices will not, or operating reserves prices will reflect scarcity and the
energy prices will not. As the TOs demonstrated in filings made last year in Docket No. ER13-909, this
sort of inconsistency can produce unreasonable outcomes for settlements with generators in those
areas that are scheduled to produce energy in the day-ahead market but are then scheduled to use that
capacity to provide operating reserves in the real-time market, or are scheduled to provide operating
reserves in the day-ahead market but are then scheduled to use that capacity to produce energy in the
real-time market.6
After enumerating the areas that the instant review would encompass, the May Filing went on
to say, “The NYISO will also solicit stakeholder feedback on additional items to include in this
comprehensive evaluation. These efforts will include stakeholder evaluation of the cost/benefits of
achieving the enhancement requested by the … NYTOs.”7 But the MIWG Presentation makes no
mention of the TO proposal. In order to comply with the commitment made in the May Filing, this
review must include such a review.
In the ISO’s report on scarcity pricing events this past summer, the ISO acknowledged that
inconsistent pricing of energy and ancillary services led to the need to make Day-Ahead Margin
Assurance Payments (“DAMAPs”) to some generators that were adversely affected by the inconsistent
pricing, while other generators realized windfall profits due to the inconsistent pricing. Fortunately, the
impact of inconsistent pricing last summer was relatively small.8 But as the TOs explained in the
comments we filed on that report, “One should not jump to the conclusion that this summer’s
experience demonstrates that the impact of inconsistent pricing will be immaterial going forward….
[T]he impact of inconsistent pricing this [past] summer was relatively small because the area in which
energy and Operating Reserve prices were inconsistent during the July Heat Wave was also quite small.
5
There is also a potential for inconsistency between energy and regulation prices whenever SCRs and EDRP
participants have been activated in a region that is the entire New York Control Area, but for simplicity, the
discussion to follow will focus on inconsistency between energy and operating reserve prices.
6
See, e.g., New York Independent System Operator, Inc., Motion for Leave to Answer and Answer of the New York
Transmission Owners, Docket No. ER13-909-000 (filed Apr. 2, 2013), Att. I (Affidavit of Michael D. Cadwalader) at
¶¶ 35-41.
7
May Filing at 3.
8
New York Independent System Operator, Inc., Informational Report, Docket No. ER13-909-001 (filed Oct. 31,
2013), Att. I (“Scarcity Pricing Report”) at 10.
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In the future, when SCRs and EDRP participants are activated, inconsistent pricing may affect a much
larger area, in which case the impact of inconsistent pricing would also be expected to be larger.”9
As we went on to explain, price inconsistency during future scarcity pricing events could have a
larger impact for two reasons. First, energy prices in a broad region could reflect scarcity for an
extended period, while operating reserve prices in that region do not. In July 2013, there was a period
when energy prices in Load Zones G through K reflected scarcity but operating reserves prices in that
region did not, but fortunately, that inconsistency only lasted for five minutes. Its impact was
accordingly very small, but such differences may persist for longer periods in the future, with a
correspondingly greater impact.10 Second, operating reserves prices in a broad region may reflect
scarcity for an extended period, while energy prices do not. In July 2013, this did not occur because
SCRs and EDRP participants were activated in Load Zones G through K (when they were not activated
throughout the NYCA). Since eastern operating reserves prices apply to resources in Load Zones F
through K, this meant that the potential for the scarcity-based operating reserve price and non-scarcitybased energy prices during those hours was limited to resources in Load Zone F. But if future activations
of SCRs and EDRP participants are limited to resources in smaller regions, the area in which operating
reserves prices might reflect scarcity, while energy prices do not, could be much larger than it was in
July.11
We also note that the ISO proposed, in both the MIWG Presentation and the Scarcity Pricing
Report, to examine the consequences of inconsistent pricing of energy at proxy generator buses (where
scarcity pricing does not apply) and at internal locations.12 Currently, the ISO may charge a non-scarcitybased real-time price to importers who reduce their real-time import schedules below the amount of
energy they were scheduled to produce in the day-ahead market, while paying a scarcity-based realtime price to internal generators that are dispatched up to replace those imports. The difference
between the scarcity-based price the ISO pays for energy produced by the internal generator and the
non-scarcity-based price it collects from the importer may cause the ISO to incur a loss that must be
made up through bid production cost guarantee payments (“BPCG”).13
9
New York Independent System Operator, Inc., Comments of the New York Transmission Owners on the New York
Independent System Operator, Inc.’s Report on its Application of Scarcity Pricing During the Summer of 2013,
Docket No. ER13-909-001 (filed Oct. 31, 2013), Att. I (“TO Comments”) at 7.
10
See TO Comments at 7-9.
11
See id. at 9.
12
MIWG Presentation at 10, Scarcity Pricing Report at 11.
13
The potential impact on uplift charges resulting from inconsistent pricing of energy at internal and external
locations that is shown in this example is similar to the potential impact on uplift charges resulting from
inconsistent pricing of energy and ancillary services, which is another reason why the ISO should review the latter
if it is going to review the former. Under the current rules, if the real-time energy price at a location does not
reflect scarcity while real-time prices for operating reserves at that location are based on scarcity, the ISO may pay
a scarcity-based price for additional operating reserve purchased in the real-time market at that location, while
only receiving a non-scarcity-based price for the offsetting reduction in the energy output below the day-ahead
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Using a scarcity-based price at the proxy generator bus in this example would eliminate the
BPCG payment in this example, thereby reducing uplift charges, but there are other cases where
applying scarcity pricing at proxy generator buses would increase uplift charges. Suppose that in a given
hour, the ISO schedules 100 MWh more imports in the real-time market than were scheduled in the
day-ahead market, and correspondingly reduces the amount of energy that an internal generator is
dispatched to provide, so that its output in that hour is 100 MWh below its day-ahead schedule. Also
suppose that generator’s day-ahead and real-time energy offer to produce that energy is $150/MWh,
and that it sets the real-time price that is calculated for both its location and the proxy generator bus
before scarcity pricing is applied. If that generator is charged the $500/MWh scarcity-based price for
the difference between its day-ahead and real-time energy schedules, but imports only receive the
$150/MWh non-scarcity-based price, the ISO will collect 100 MWh × $500/MWh = $50,000 from the
generator and pay 100 MWh × $150/MWh = $15,000 for the additional imported energy, leaving it with
a residual of $35,000. However, the generator, which incurs a loss of 100 MWh × ($500/MWh –
$150/MWh) = $35,000 in losses relative to its day-ahead margin, will be eligible for a Day-Ahead Margin
Assurance Payment (“DAMAP”) to make up this loss. Consequently, the $35,000 residual collected by
the ISO will fund the $35,000 DAMAP. On the other hand, if imports receive the $500/MWh scarcitybased price, then the ISO would not collect a $35,000 residual in this example. It would still need to pay
the DAMAP to the generator that was dispatched below its day-ahead schedule, so uplift charges would
be $35,000 higher than they would have been if scarcity pricing had not been used at the proxy
generator bus. The net impact that applying scarcity pricing at proxy generator buses would have on
uplift charges should be considered in the ISO’s assessment of whether to apply scarcity pricing at proxy
generator buses.
Additionally, during past discussions in the MIWG and other stakeholder fora, the TOs have
proposed several other modifications to the current scarcity pricing rules that the ISO should consider as
part of this review.

As noted above, as part of its review of scarcity pricing in the summer, the Market Monitoring
Unit called for the ISO to “develop[] more flexibility in calling DR, including varying quantities
and staggering times if possible.”14
o
One mechanism for accomplishing this would be to develop mechanisms for limiting the
area in which SCR and EDRP participants are activated. For example, during some
occasions, it might only be necessary to activate SCR and EDRP participants on the 138
kV system in New York City, or even in certain load pockets.
schedule. The resulting loss would be recouped through uplift charges, just like the loss in this example that
results from inconsistent pricing of imports and energy provided by internal generation.
14
Presentation of Quarterly Report on the New York ISO Electricity Markets, Third Quarter 2013 (presented Jan.
15, 2014), at 23.
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o
However, this could increase the possibility that scarcity pricing would be applied to
operating reserves but not energy in a broad area, thereby making it more important to
address the concerns regarding inconsistent pricing expressed above.

If the ISO could activate smaller quantities of SCRs and EDRP capacity in a given area, this could
give market participants needed incentives to submit offers below the $500/MWh cap. Offers
below the cap are currently rare, but that is not surprising as SCRs and EDRPs currently face little
risk that offering $500/MWh will cause their offers not to be accepted.

When assessing whether the reduction in load provided by SCRs and EDRP participants was
needed in order to avoid shortages, the ISO’s current scarcity pricing procedures assume perfect
response by participants in those programs. This assumption is not realistic. Given that
information reflecting the actual performance of these resources during a particular activation
will not be available to the ISO in time for it to incorporate that information into the
determination of whether scarcity pricing was warranted for that activation, the ISO should
consider using historical information to gauge what sort of response was likely to occur, and to
modify the test that it uses to determine whether scarcity pricing should be applied to take the
anticipated amount of response into account. For example:
o
Suppose that 500 MW of SCR and EDRP capacity was activated and there were 475 MW
of Available Reserves.
o
The current scarcity pricing procedures would conclude that shortages were only
avoided as a result of the demand response and would proceed to apply scarcity pricing
to energy.
o
Also suppose that historical data on demand response indicate the amount of demand
response that is provided in this instance is only expected to be 90 percent of the
amount that was activated, or 450 MW.
o
Then, under the revised test, the ISO would determine that shortage pricing should not
be applied, because historical performance indicates the SCRs and EDRP participants
only are anticipated to have provided 450 MW of load reduction, which is less than the
475 MW of Available Reserves. Consequently, shortages would not have occurred even
without that demand reduction.
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