Stephen G. Whitley
President and Chief Executive Officer
New York Independent System Operator, Inc.
10 Krey Boulevard,
Rensselaer, NY 12144
Dear Mr. Whitley:
On behalf of its 36 members, the New York Municipal Power Agency (“NYMPA”)
requests that the New York Independent System Operator, Inc. (“NYISO”) and its Independent
Market Monitor (“IMM”) file a written report with the Federal Energy Regulatory Commission
(“Commission”) no later than August 1, 2008 that documents the NYISO’s investigation,
findings and actions taken in response to the dramatic increase in the Residual Adjustment and
uplift portions of NYISO Schedule 1 costs in 2008. The report should identify: (1) the specific
cause(s) for the increase(s) (e.g., the specific components of the Residual Adjustment charge and
uplift charge that have increased and the magnitude for each component); (2) whether these cost
increases are the result of NYISO errors or procedural or tariff deficiencies, or inappropriate
actions taken by a market participant or any other person; (3) the immediate actions NYISO has
and will undertake to mitigate or eliminate these cost increases; and (4) changes to be made by
the NYISO to its operations and procedures to monitor for, detect and prevent actions that would
cause such increases in the future. These unexplained cost increases undermine market
participant confidence in the NYISO markets and impose economic hardship on all load serving
entities (“LSE”), including NYMPA’s members. As such, NYMPA asks that the NYISO and the
IMM treat this request as a high priority and complete the investigation and written report by
August 1, 2008.
NYMPA and Its Members
NYMPA is a joint action agency that represents 36 municipally-owned electric utilities
throughout New York State. The members are listed in Attachment A. NYMPA’s members
have a statutory obligation to serve their electric customers. NYMPA was formed in 1996 and
began supplying power to its members in May 1998. Although NYMPA was formed in 1996,
the member municipal systems, for the most part, have been purchasing, paying for, and
distributing electricity to their customers for over 100 years. NYMPA was formed pursuant to
sub-section 119-o of the New York State General Municipal Law, which authorizes municipal
entities, by resolution, to agree to do jointly those things which they are authorized to undertake
on their own. NYMPA members are municipal electric systems that receive transmission service
pursuant to the NYISO’s Open Access Transmission Tariff (“OATT”) in the New York Control
NYISO Service Costs
The “ISO Services Charge” for scheduling, system control and dispatch service is
calculated in accordance with a formula filed at FERC and located in Schedule 1 of the NYISO’s
OATT.1 This charge is paid by all NYISO Transmission Customers.2 Transmission Customers
that take service under the NYISO’s Market Administration and Control Area Services Tariff
(“Services Tariff”) pay an additional charge under Schedule 1 of the Services Tariff.3
As explained in the OATT, the ISO Services Charge consists of six components:(1) ISO
Annual Budget and FERC Regulatory Fees; (2) ISO Unbudgeted Costs (excluding bad debt and
working capital contributions); (3) Non-ISO Facilities Payments (e.g., payments to Con Ed for
use of it Phase Angle Regulator); (4) Residual Adjustment and Bid Production Cost Guarantees;
(5) NERC and related Dues, Fees and Other Charges; and (6) Payments made to generators
pursuant to Incremental Cost Recovery for Units Responding to Local Reliability Rule 1-R3.4
NYISO Provides Insufficient Public Information about Residual Adjustments and Uplift.
NYMPA’s concern here is that a discreet part of one of the six components that comprise
the ISO Services Charge - - the Residual Adjustment - - has become the largest contributor of
costs to the ISO Services Charge, and no one seems to know why. In May 2008 alone, according
to the NYISO, the Residual Adjustment Charge constituted over 70% of the ISO Services
Charge.5 The magnitude of the Residual Adjustment in May 2008 is indicative of a trend of
increasing charges over the last five-to-six months. As Attachment B demonstrates, the Residual
Adjustment has been on the climb since January 2008. The Residual Adjustment, which is
charged solely to Transmission Customers - - primarily LSEs like NYMPA’s members - - is
designed to recover essentially any shortfall in revenues incurred by the NYISO to keep the
NYISO financially whole. According to Schedule 1, Section 4.A, this adjustment may be
positive or negative.
One would expect that in a properly designed and functioning market, the Residual
Adjustment costs and uplift costs would be a very small portion of the total Schedule 1 charge
because major cost contributors would be identified, traced back to their specific causes, and the
costs allocated to those that cause the cost to be incurred. Similarly, by isolating and tracking
such costs, the NYISO could readily identify when unexpected or unanticipated changes to these
costs have occurred and could investigate to determine the cause. Unfortunately, that is not the
The problem with the Residual Adjustment is that it is a black box. NYMPA and other
market participants have no way to understand exactly what is causing the increase in costs (i.e.,
insufficient granularity). Although the OATT lists a number of possible reasons for these costs,
the NYISO does not separately identify contributions from each cause. Rather, NYISO’s
revenue deficiencies are all lumped into a single component called the Residual Adjustment.
Consequently, NYMPA has no information to provide to its members to explain which of the
See NYISO’s OATT, Schedule 1, Section 2.
See NYSIO’s OATT, Schedule 1, Section 1.
See NYISO’s OATT, Schedule 1, Section 1.
See NYISO’s OATT, Schedule 1, Section 2.
See Attachment B.
many causes listed in the OATT is responsible for the increased Residual Adjustment payments -
- costs that in May 2008 were on average 600% greater than the Residual Adjustments for the
previous four months - - and, apparently, neither does the NYISO. According to the NYISO,
Residual Charges in May 2008 alone were an amazing $100 million!
To date, NYISO has offered little explanation regarding these cost increases. On June
18, 2008, at a Business Issues Committee (“BIC”) meeting, the NYISO made a five-minute
presentation identifying the increases but offering no answer as to the cause. On June 20, 2008,
the NYISO’s Manager of Market Monitoring held a market participant conference call that lasted
five minutes. NYISO notified participants on the call that it had contacted the Commission and
suggested potential causes for this and other problems, including differences in RTO/ISO market
practices and market design (i.e., seams differences) with its neighboring control areas and loop
flows around Lake Erie. NYISO’s June 20th presentation on the call lasted two and one-half
minutes, after which the NYISO refused to answer any oral questions. NYMPA understands that
NYISO Board Members have recently met with certain market participants to offer assurances
that the NYISO will undertake an investigation to discover the cause(s) of these cost increases.
The irony of course is that the NYISO was not the party to first identify these rising costs.
At a public power sector meeting held on April 29, 2008 in Castleton, New York, a
representative of the New York Power Authority (“NYPA”) first raised the question of why
NYISO ‘s uplift and Residual Adjustment charges for 2008 were so much higher than typical.
NYISO’s representatives at that meeting were unaware of this issue. The next month, May, saw
the highest Residual Adjustment charge in NYISO’s history. Two months have passed since
NYPA first raised the issue, yet market participants are no closer to understanding the cause(s) of
The Unexplained Rise in Residual Adjustment and Uplift Costs and Impact on NYISO
The increase in Residual Adjustment charges for NYMPA and all other New York LSEs
is no trivial matter. A comparison of costs of the components that comprised the ISO Services
Charge during May 2008 puts these costs into perspective. NYISO Residual Adjustment and
uplift charges in May 2008 dwarfed NYISO’s budgeted cost to operate the entire New York
● For May 2008, the total budgeted operating cost for the NYISO was approximately $9.8
● By comparison, for the month of May 2008, the Residual Adjustment Charge was $97
million - - almost 900% greater than the operating budget of the NYISO.7 The NYISO
NYMPA derived this NYISO-wide cost for operations by dividing (1) the sum of its
allocated share of the costs for NYISO Account Nos. 805, 809, 828, 829, 830, 832, 833 and 835
by (2) NYMPA’s load ratio share.
NYMPA derived this NYISO-wide Residual Adjustment cost by dividing (1) the sum of
its allocated share of the costs for NYISO Account No. 813 by (2) NYMPA’s load ratio share.
Uplift Charge for May 2008 was approximately $15.3 million or 55% greater than the
entire operating budget of the NYISO.8
A comparison of the monthly NYISO Residual Adjustment and uplift costs demonstrates
that although the costs in May 2008 were incredibly high, this increasing trend as demonstrated
by NYISO’s graph (Attachment B) and Attachment C was detectable at least as far back as
January 2008. If the NYISO in January 2008 had a process in place to track these costs and
investigate unexplained increases, it is reasonable to assume that market participants would not
have incurred these expenses.
These increased costs have a pernicious affect on NYMPA members’ finances. The cost
of Residual Adjustments and uplift alone have increased NYMPA members ratepayers costs
nearly one cent per kilowatt-hour. In other words, NYMPA members’ share of these two costs
for May 2008 alone was over $1.3 million.
The NYISO Must Take Immediate Action.
The NYISO must take immediate action to prevent any further incurrence of these types
of costs because LSEs cannot; once the NYISO incurs these costs, market participants have no
choice but to cover the NYISO.
First, the NYISO must give this investigation its highest priority. It must identify the
causes of these cost increases. To the extent these increases are caused by NYISO operational
errors, software problems, deficiencies in tariff language or ISO Procedures, etc., the NYISO
should take immediate corrective action. To the extent the cost increases are caused by market
participant actions, including market manipulation, the NYISO should identify and report
behavior that is inconsistent with NYISO tariff provisions and/or Commission regulations to the
Commission immediately. The NYISO’s IMM should participate in this investigation.
Second, the NYISO should implement mitigation measures to reduce or eliminate these
cost increases while its investigation is under way. With fuel prices at a high during the 2008
summer period, any artificial increase in energy -related costs like the Residual Adjustments or
uplift imposes significant and unnecessary costs on NYMPA’s members and every other LSE
that participates in the NYISO markets.
Third, the NYISO should develop procedures to monitor, detect and prevent future cost
increases. As part of this process, the NYISO must further identify and individually track each
of the components that comprise the Residual Adjustment charge and uplift charge.
Transparency of these costs is critical to identifying abnormal cost increases. It is disconcerting
to NYMPA’s members that another market participant, in his case NYPA, had to bring this
increasing cost trend to the NYISO’s attention. Had the NYISO been actively monitoring and
trending these costs, LSEs in New York may not have incurred these unjust and unreasonable
Finally, the NYISO should provide a full report to its market participants and the
Commission by August 1, 2008. NYPA first notified the NYISO in April 2008. LSEs cannot
This NYISO-wide value is derived by dividing (1) NYMPA’s share of NYISO Account
No. 812 by (2) NYMPA’s load ratio share.
afford three more months of these unreasonable costs. Consistent with the NYISO’s policy of
transparency, market participants must understand the cause of these cost increases, what the
NYISO is doing to mitigate or eliminate these cost increases and, importantly, the steps the
NYISO will take to monitor, detect and prevent future occurrences. To that end, the report
should include the following:
(1) An explanation of the NYISO’s current protocol for monitoring, detecting and
preventing abnormal increases in the Residual Adjustment and uplift charges;
(2) A description and plan with deadlines for implementing permanent improvements
to those protocols as a result of NYISO’s investigation. Those improvements
may include, without limitation, market rule changes, improved real-time
transaction scheduling, coordination of generation and transmission outages for
the purpose of minimizing economic impacts on customers, development of Lake
Erie Phased-Angle Regulator protocols, or any other action that the NYISO
concludes is required;
(3) A list of the specific causes that includes the specific contribution from each
(4) To the extent the cause(s) of the increase was the result of market manipulation or
other market participant actions contrary to Commission regulations or NYISO
tariff language or ISO procedures, a description of the actions and the market
participants engaged in those actions;
(5) To the extent the cause(s) of the increase was the result of NYISO errors,
software problems or deficiencies in tariff or ISO Procedures language, a list of
the actions and an implementation plan with deadlines that the NYISO will take
to correct those errors, problems or deficiencies;
(6) A list of interim mitigation measures the NYISO will implement to mitigate or
eliminate these costs;
(7) A detailed explanation with implementation deadlines of the procedural and
operational changes NYISO will implement to monitor, detect and prevent future
In addition, during July, the NYISO should provide weekly investigation status reports to market
participants and the Commission.
Only the NYISO is in a position to investigate the causes, propose mitigation measures,
and improve monitoring and detection to prevent recurrence. The impact of these costs on
market participants, particularly LSEs, is huge - - $100 million in May 2008 alone! Customers
cannot afford these costs.
Robert A. Mullane
New York Municipal Power Agency
Shelton M. Cannon Susan Court
Jamie Simler Anna Cochrane
Larry Gasteiger Connie Caldwell
Michael A. Bardee
Kathleen E. Nieman
Akron Frankfort Plattsburgh Lighting Department
Andover Green Island Power Authority Richmondville
Angelica Greene Rouses Point
Arcade Groton Salamanca Board of Public
Bath Electric & Gas System Hamilton Sherburne
Bergen Holley Silver Springs
Boonville Ilion Board of Light Co. Spencerport
Brocton Little Valley Springville
Castile Massena Electric Department Skaneateles
Churchville Mohawk Municipal Com. Theresa
Endicott Pen Yam Municipal Utility Wellsville
Fairport Municipal Philadelphia Westfield
NYISO Graph Showing Make-Up of Uplift Costs
Comparison of 2008 Monthly Uplift and Residual Adjustment Charges
Note: As the graph clearly demonstrates, the sum of the Residual Adjustments and uplift charges
(the red line) in each month since January 2008 has steadily climbed, peaking in April and May
2008, and far exceeds the NYISO’s operating budget (the blue line) which should be the largest
component in Schedule 1. The monthly Residual Adjustments in 2008, unlike in 2007, have all
been positive (i.e., a cost, not a credit) and also have peaked in April and May.