The Lake Erie
Loop Flow Mystery
The circuitous scheduling of electricity by a few New York
wholesale market participants has imposed significant costs on
municipal utility customers—and underscores the need for
reform of the ISO/RTO markets By Alice Clamp
F
or years, electricity flow around Lake Erie has been split, with much of and chaos” imposed on day-ahead and real-time markets by such cirthe power going in a counterclockwise direction. But sometime in 2007— cuitous scheduling. In May of that year, said Mullane, the ISO’s residual
no one is sure exactly when—that began to change. More electricity started adjustment charge represented 70 percent of its services charge.
flowing in a clockwise direction.
Also in August 2008, APPA told FERC that New York utilities were exClockwise flow of electricity around Lake Erie caused congestion on the periencing “high, unexplained” uplift charges levied on them by the NYISO
lines of the New York Independent System Operator (NYISO), the state’s since the beginning of the year. Scheduling practices by certain market pargrid operator. Because electricity flows along the path of least resistance, it ticipants, said APPA, were needlessly increasing costs to other market
doesn’t always go where it has been scheduled. Although several NYISO participants.
market participants had scheduled power along transmission line paths
“Something is clearly wrong here,” said APPA. “This commission, if it is
running clockwise around the lake, about
to ensure that consumers only pay just and
80 percent of that power actually flowed direasonable rates, as the Federal Power Act rerectly from New York to the PJM
quires, must get to the bottom of it.”
In a perverse way, the loop flow
Interconnection, which operates a transIn addition to the impact on New York utilmission system covering parts of 13 states
ities, APPA told FERC, public power utilities
problem might be a “silver lining in
from Illinois to New Jersey. This unschedoutside the NYISO’s footprint that rely on the
disguise,” said Bolbrock. “It caused
uled flow of electricity led to higher “uplift”
grid operator to transmit hydro power from
costs—the costs incurred to relieve congesthe New York Power Authority to their comthe ISO to do things that make sense,
tion within a zone and imposed on all grid
munities had reported increasing—but
even in the absence of this issue. And
customers—and, ultimately, higher electricunexplained—charges associated with the
ity prices for consumers.
transaction.
it got FERC’s attention.”
The unnamed NYISO market particiIndeed, several states neighboring New
pants that scheduled power along
York began to notice, and complain, about
clockwise paths apparently did so because
rapidly growing congestion charges in early
of pricing differences among various regional transmission organizations 2007, according to David Straus, an attorney with Thompson Coburn in
(RTOs). It cost less to move electricity from New York through Ontario to Washington, D.C., who represents utilities in seven neighboring states that
the Midwest Independent Transmission System Operator (MISO) and then purchase hydro power from NYPA.
to PJM than it did to send the power from New York straight to PJM.
“We noticed drastic fluctuations in the bills that we received from NYPA
By mid-2008, municipal utilities, joint action agencies and the American for hydro allocations in 2007, which included ISO pass-through charges,”
Public Power Association complained to the Federal Energy Regulatory said Jim Jablonski, executive director of the Public Power Association of
Commission about the Lake Erie loop flow problem. Loop flow is defined New Jersey. “But in the first part of 2008, things started to explode.”
as the difference between scheduled and actual flow on a path.
A certain amount of scheduling on a circuitous path through Canada
Robert Mullane, general manager of the New York Municipal Power and MISO, terminating in PJM, helps the loop flows, said David Patton, exAgency, protested to the NYISO in an August 2008 letter about the “costs ecutive director of Potomac Economics, the NYISO’s independent market
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Public Power . January-February 2010 . APPAnet.org
F
or starters, a repurposed NYISO might adopt rules that would
unmask the identity of bidders, release spot market bid data
“
within 24 hours to publicly reveal strategic bidding tactics,
forbid anomalous bidding, and require disclosure of marginal
costs,” said Norlander.
adviser. “Both we and the NYISO were aware of these scheduling practices
before they became large enough to be problematic,” he said. Asked when
they became problematic, Patton said: May 2008.
But in their August 2008 filing, utilities in the seven neighboring states
said they had complained about excessive charges more than a year before.
“It appears, therefore, that either the NYISO is wrong about when the circuitous scheduling began or that such scheduling practices are merely one
cause, not the cause, of the enormous cost increases faced by the neighboring states and other market participants,” Straus noted in a FERC filing.
One contributing factor to the increased circuitous scheduling was a
change in the NYISO’s policy that resulted in a much lower hourly price of
electricity purchased at the New York-Ontario border than at the New YorkPJM border in Pennsylvania, according to Peter Behr, a reporter for E&E
Publishing. “Energy traders and utility marketers “detected this arbitrage
opportunity at the end of 2007 and began scheduling more trades through
the New York-Ontario transmission gateway, locking in the arbitrage profit
with simultaneous buy-sell orders,” Behr said in a Sept. 8, 2009, ClimateWire article. “The shift quickly became a flood.”
“The circuitous transactions, by capitalizing on the pricing incentives,
simply exposed rather than created a market inefficiency,” said Gerald Norlander, executive director of the Public Utility Law Project (PULP), a private
nonprofit organization that represents the interests of low-income consumers in utility and energy matters.
NYISO’s first steps
“In general, you can address any problem like this in two ways: changes in
pricing rules or an injunction,” said Potomac Economics’ Patton. “One addresses the incentive and the other precludes it.”
After consulting with Potomac Economics, the NYISO took the latter action, filing a request with FERC in July 2008 to preclude the use of
circuitous paths around Lake Erie.
“The ban on circuitous scheduling helped to bring down the uplift
charges,” said Rich Bolbrock, an adviser to the Municipal Electric Utilities
Association of New York, the New York Municipal Power Agency and the
New York Power Authority, and formerly the executive vice president for
power markets at the Long Island Power Authority.
Although the ISO did act to address the problem, he said, “it took too
long to find out about the problem and it took too long to do something
about it.”
Here’s what the NYISO did. In May 2008, it initiated more timely updates of the day-ahead loop flow assumptions, which reduced uplift costs,
said Ken Klapp, the ISO’s senior communications and media relations specialist. After asking FERC in July 2008 “to investigate the behavior of
certain market participants that appeared to be exacerbating loop flows
around Lake Erie,” said Klapp, the ISO took several other steps.
The ISO’s ban on scheduling of circuitous transactions reduced uplift
costs and congestion resulting from the high-volume loop flow. In October
2008, the ISO asked FERC to let the ban remain in place until “a better so-
lution” was developed and implemented, said Klapp, a request that FERC
approved.
The significant change in circuitous scheduling around Lake Erie and
the resulting impact on loop flows “identified a need for enhanced analysis
capability within the ISO’s operations,” said Klapp. So the ISO adopted
“rigorous monitoring procedures to provide improved transparency and to
better address congestion costs,” he said. This included “a daily review of
market outcomes to identify unusual or unexpected market outcomes to
identify the root-cause source of certain uplift and other marketplace
costs.”
The task of daily monitoring fell to a newly created group—the Operations Analysis & Services group—headed by the ISO’s vice president of
operations. The group was to coordinate its analysis with the ISO’s independent market monitor and internal market monitoring.
Pressure for better oversight of the market came from New York’s municipal utilities. “We had asked the ISO for a monitoring plan,” said
Bolbrock. “And in the fall of 2008, the ISO started a daily review process.”
In the spring of 2009, the ISO continued to make changes to its operations, said Klapp. Among them:
G Implementing improvements to its day-ahead market software to reduce certain uplift costs resulting from local reliability rule commitments
G Implementing procedures to invoke the NERC transmission loading
relief procedure to reduce Lake Erie loop flows that result in uplift costs.
In a perverse way, the loop flow problem might be a “silver lining in disguise,” said Bolbrock. “It caused the ISO to do things that make sense,
even in the absence of this issue. And it got FERC’s attention.”
While the ISO was changing the way it oversaw the wholesale market,
FERC was conducting a non-public investigation of the problem.“It would
have been nice to allow the public to participate,” said Thompson
Coburn’s Straus.
All the ISO’s actions resulted in a “dramatic” drop in uplift costs, said
Klapp. Those costs were 87 percent lower in May 2009 than in 2008, 69
percent lower in June 2009 than in June 2008 and 40 percent lower in July
2009 than in July 2008.
Paying the price
Talk of costs, however, raises the question of how much utilities in New
York and other states—and their customers—had to pay for the circuitous
scheduling around Lake Erie.
Joint action agencies and municipal utilities buying hydro power from
NYPA paid over the odds for that electricity. “By paying unnecessary
charges, the value of hydro power was diminished,” said Straus.
The bills for the Public Power Association of New Jersey average
roughly $200,000 a month, which worked out to about 2 cents per kilowatt-hour, said the association’s Jablonski. “But in mid-2008, we had a
bill of around $800,000. That meant the cost of the electricity that we
were buying had gone to more than 5 cents/kWh. When we took the
bill apart, we found that our NYPA hydro payment had not changed.
Public Power . January-February 2010 . APPAnet.org 11
Patton estimated that up to $96 million in
system-wide uplift costs had been shared among
all market participants as a result of circuitous
scheduling around Lake Erie.
The escalation occurred in the NYISO
charges.”
The NYISO’s independent market adviser,
David Patton, worked with the ISO staff “to develop an estimate of the cost to the markets of
the transactions covering the period from Jan. 1,
2008, to July 22, 2008, when the ISO’s ban
took effect,” said the ISO’s Klapp. Patton estimated that up to $96 million in systemwide
uplift costs had been shared among all market
participants as a result of circuitous scheduling
around Lake Erie.
PULP’s Norlander has cited the costs to some
New York municipal utilities. A few examples:
$282,000 in March 2008 and $150,000 in May
2008 for Plattsburg; $161,000 in May 2008 for
Lake Placid. Andrew McMahon, supervisor of
the Massena Electric Department, was quoted in
the July 18, 2009 Watertown Daily Times as saying “…it probably cost us about $1 million.”
In a June 10, 2008, Webinar, Suez Energy Resources NA, a provider of retail electricity
services to industrial and commercial customers,
estimated that the circuitous schedules cost the
market $25 million in April and $100 million in
May.
What FERC did
A year after it announced that it would conduct
a non-public investigation of the loop flow problem, FERC made public the results. In a July
2009 report, the commission said its Office of
Enforcement found no market manipulation;
rather, traders were “openly responding to price
signals…and therefore did not commit market
manipulation.”
In an accompanying order, FERC directed the
NYISO to submit within six months a “longterm, comprehensive solution” to the Lake Erie
loop flow issue, which the commission said
“gave rise last year to allegations that market manipulation and tariff violations increased market
prices in New York.” Based on its staff investigation, FERC said it had determined that “there
was no deception or fraudulent concealment
and, thus, no market manipulation on the part
of any market participants.”
“We would have liked the conclusions of
12
FERC’s investigation to be otherwise,” said
Thompson, Coburn’s Straus. “In recent years,
FERC has been reluctant to find anyone guilty of
any malfeasance. One gets a bit skeptical. In this
case, FERC thought that the markets did it,
rather than people who took advantage of the
markets.”
Accountability seems to be lacking, he said.
“One has to be skeptical about investigations
that are done in private.”
FERC’s decision gives a green light to traders
to engage in the same or similar behavior, said
the PULP’s Norlander. “The lesson of the FERC
order seems to be that it is okay for sellers to
game the market rules if a tactic is not specifically forbidden and is done for the purpose of
making money.”
Because there was no market manipulation or
tariff violations, said FERC, no refunds were
called for.
“Just because FERC couldn’t find evidence of
market manipulation doesn’t mean it didn’t happen,” said Bolbrock, who advises New York’s
municipal utilities. “We were looking for restitution.”
New Jersey’s Jablonski said: “We understand
certain folks who get sophisticated can figure out
ways to game the system. We believe they
should be held accountable, but because no
rules were broken, despite our protests, and
since they didn’t violate laws or tariffs, they
didn’t have to be named and they got to keep
the money.”
PULP’s Norlander pointed to the California
ISO, which had a tariff rule against anomalous
bidding. “That was important in obtaining billions of dollars in refunds after market
manipulation in the state, because the Ninth Circuit required FERC to consider refunds under
Section 309 of the Federal Power Act.” That section gives FERC authority to order refunds if it
finds violations of the filed tariff and imposes no
temporal limitations.
“As far as I can determine, the NYISO has
no similar rule against anomalous bidding that
would give rise to claims for refunds under a
tariff violation theory,” said Norlander. “If there
is one, there should have been refunds under
Public Power . January-February 2010 . APPAnet.org
FPA Section 309.”
The New York Post reported that Sen. Charles
Schumer, D-N.Y., was disappointed “that FERC’s
ruling confirmed the exploitation of this loophole by greedy energy traders, but did not help
New Yorkers who got taken advantage of.”
Proposed NYISO solutions
NYISO President & CEO Stephen G. Whitley
believes the competitive bulk power market is an
advantage in addressing loop flows. The physical
phenomenon and resultant cost penalty existed
prior to market restructuring, he said. In that era
costs were “socialized for payment by all consumers,” he said.
“The transparency of the wholesale electricity
markets allows us to effectively monitor and
identify complex transactions,” Whitley said.
“Loop flows, for example occur in every power
system due to the laws of physics that govern the
actual flow of electricity. When loop flows are
exacerbated by certain market transactions, however, their impact becomes apparent in the
marketplace. Market transparency enables grid
operators to effectively identify and address such
problems.”
In its July 2009 order, FERC instructed the
NYISO to work with other regional market operators to address interface pricing and congestion
management. “We are developing ways to better
coordinate monitoring efforts with neighboring
grid operations to enhance regional coordination,” said the ISO’s Klapp.“We’re also
evaluating possible tariff provision changes to address inefficient market outcomes.”
He said that the ISO is focusing on three potential market solutions to loop flow:
G Buy-through of congestion
G Congestion management
G Interregional transaction coordination.
These are market solutions, said Bolbrock.
“We hope they will be included in the ISO’s January 2010 report to FERC.”
Buy-through of congestion. “If a market
participant schedules a transaction and that
transaction causes congestion, the participant
would have one of two options: pay for the congestion or have the contract cut by the ISO,”
In August 2009, the ISO told FERC that its focus
on market design as the sole solution to Lake Erie
loop flow is too narrow.
said Bolbrock. “It’s a simple concept: the entity
causing the congestion could pay for the cost or
have the transaction curtailed. It seems doable
and it makes sense.” The regional market organizations would have to agree on how to do this,
he added. “But that shouldn’t be hard.”
Congestion management. “If there is
congestion in the NYISO, normally it would
have to run more expensive generation,” said
Bolbrock. “But under this concept, if less expensive generation would solve the congestion
problem, PJM would run that, and there would
be a compensation mechanism.” Congestion
management makes sense for any congestion
problem if cheaper generation can be run in another ISO, said Bolbrock. He calls this concept a
no-brainer. “But you need cost sharing and an
operations protocol to do it.”
Interregional coordination. When an interchange is scheduled between ISOs, it is
scheduled for one hour, said Bolbrock. “Things
happen, generators or transmission lines trip,
but that doesn’t change the transactions between ISOs.” The ISOs are looking into a faster
interchange schedule, he said, 15 minutes or
less. “This would be helpful. The ISOs could respond to situations. And it makes sense—with
or without the loop flow issue.”
In addition to the market solutions, the NYISO also has proposed a physical solution. In
August 2009, the ISO told FERC that its focus
on market design as the sole solution to Lake
Erie loop flow is too narrow. The optimal solution, said the ISO, will take all available options
into account and incorporate a combination of
physical and market methods of controlling or
mitigating the effect of Lake Erie loop flow.
The physical solution is something known as
phase angle regulators (PARs). They are electrical
devices that can promote the redirection of
power from one circuit to another. PARs have the
potential to conform actual power flows to
scheduled power flows, reducing unscheduled
loop flows.
The catch is that the PARs are not yet operational. Soon after four units were installed on the
Michigan-Ontario grid border earlier in this
decade, one PAR failed. Wrangling about control
14
of the units has prevented their activation. Ontario’s Independent Electricity System Operator,
the Midwest Independent System Transmission
Operator and Michigan-based International
Transmission Co. (ITC) are trying to reach agreement on operating protocols for the PARs. ITC
owns the PAR facilities on the U.S. side of the
Michigan-Ontario interface.
ITC has said it expects to spend roughly $33
million to install two PARs that will replace the
failed unit. It wants the NYISO to include in its
report to FERC a discussion of “how the costs
associated with the PARs can effectively be
shared by consumers in NYISO’s service area
and the service areas of other regional transmission organizations that will benefit from the
PARs’ operation.”
While the new PARs would increase phase
shifting capability and reduce unscheduled loop
flows, said ITC, they won’t eliminate them. Bolbrock agreed, noting that the PARs are not
adequately sized to always control loop flow.
“They are a partial solution, not a total
solution.”
In early September 2009, NYISO President
and CEO Whitley, told representatives of the
Municipal Electric Utility Association of New
York State about the market and physical solutions that the ISO is proposing to address the
loop flow problem.
A more vigilant NYISO?
The NYISO told FERC in early September 2009
that three generators had abused market power
in its wholesale electricity markets. When any of
the three generators were required to run for reliability purposes, they submitted bids that
significantly exceeded each facility’s marginal operating cost, said the ISO. It asked FERC to
approve a cap on the generators’ bids in the future.
“The good news is that the ISO saw this and
acted on it,” said Bolbrock. “The ISO is much
more aware. I think this came out of the new
monitoring group.”
But, noted PULP’s Norlander, the NYISO did
not disclose the amount of overcharges received
by the high bidders and it did not disclose how
Public Power . January-February 2010 . APPAnet.org
long they had been doing it. “When the exercise
of market power in the NYISO receives public attention, it results in rule changes going forward
and no refunds to customers.” Each episode, he
said, “increases the complexity of market rules
while providing no real remedy for buyers who
suffer from overcharges.”
The NYISO “rigorously monitors market behavior to sustain and enhance the competitive
marketplace for wholesale electricity,” said the
ISO’s Klapp. “We make course corrections to
address issues,” said ISO President and CEO
Whitley. “While there appears to be no violation of existing standards in the [case of the
three generators], we are adjusting controls to
address specific conditions observed on the
power system.”
The challenge of change
As the loop flow issue was heating up, APPA was
preparing a white paper—Consumers in Peril—
that examined the RTO market failures and
pointed to the need for fundamental market reform to protect consumers.
“We took this white paper to our legislators in
Washington, D.C.” said New Jersey’s Jablonski.
“We told them that we have a good example of
why the markets need to be reformed. We told
them about the Lake Erie loop flow problem.”
Bolbrock said he would like to think that
FERC is “starting to get the message.” One
possible indication may be the commission’s
acceptance of a complaint filed by private
parties in New England about the behavior of
the ISO there. “This may be significant.” he
said. Following a complaint by Connecticut
Attorney General Richard Blumenthal earlier
in 2009, FERC has agreed to investigate the
market practices of the New England ISO.
Blumenthal alleged that several power companies manipulated the market and those
firms owed ratepayers more than $50 million. FERC said that while the attorney
general had “provided little evidence in support of these allegations” of market
manipulation, it would grant an investigative
hearing before a commission judge to probe
the practices of the generators operating
within the ISO as well as the power grid
manager itself.
Blumenthal said he expected the investigation
to deliver “a stunning jolt of transparency and
truth to the public about gross manipulation of
our power markets.”
“Here’s another example of the need for true
market reform, which would avoid this kind of
manipulation,” said Jablonski.
Things have become “horrendously complex,” said Bolbrock, because of different market
designs. “The least sophisticated system should
be adopted by all the ISOs. That would be a
huge improvement,” he noted. “But it won’t
happen any time soon.”
FERC may possibly be receptive to change,
said Jablonski. “When we presented our latest
proposal to commission staff, they said the suggestions were worthy of consideration.”
The commission must “reinvigorate its purpose—to protect consumers,” said Thompson
Coburn’s Straus. “In many situations in recent
years, its purpose is to protect the theory of market-driven pricing, rather than consumers who
pay those prices. It has been a frustrating
decade. Pricing has rewarded old generation and
expensive transmission, protection against any
failure. It has rewarded these entities for risks
they don’t incur.” New Jersey’s Jablonski agreed.
“We are not seeing a lot of generation and transmission being built commensurate with the
money being taken in.”
So what can be done to advance reform of the
RTO/ISO markets?
PULP’s Norlander suggests that the NYISO
“could be better aligned with the public interest
if it were reorganized and its board were appointed by the governor and confirmed by the
state Senate.
“This was done with the California ISO after
the manipulation of its markets,” he said. The
D.C. Circuit Court of Appeals upheld the reorganization after FERC attempted to undo it and
retain the private ISO utility model, he noted.
“For starters, a repurposed NYISO might
adopt rules that would unmask the identity of
bidders, release spot market bid data within 24
hours to publicly reveal strategic bidding tactics, forbid anomalous bidding, and require
disclosure of marginal costs,” said Norlander.
“A board with a better public mission and balance might protect buyers against
manipulation, and begin to seek refunds from
market gamers.”
At the federal level, it may not be appropriate
for Congress to write detailed ISO/RTO rules to
address the loop flow issue without first holding
hearings to determine if the problem lies with
the law or with FERC, said Norlander. “Through
substantive legislation or budget bills, Congress
might require FERC to hold hearings on the
flaws in the RTO/ISO markets and to consider
major reforms of the ‘organized’ private utility
spot markets, which FERC has refused to do.”
Requiring FERC to enforce the public filing
and transparency and review provisions of the
Federal Power Act might help too, said Norlander, because FERC approves RTO/ISO tariffs that
allow lengthy delays in disclosure of bidding data
and require sellers’ identities to be masked.
Another option, suggested Norlander, is for
the U.S. Senate to insist on appointment of any
new FERC commissioners. “None of the sitting
commissioners is from a restructured state, and
all are ‘organized’ spot market enthusiasts.”
New Jersey’s Jablonski said he can’t pick up
the phone and talk to the president. “But if the
Obama administration wants to do something in
the area of energy, specifically electricity, it’s market reform.” I
Alice Clamp is a writer in
Lovettsville, Va., and a frequent contributor to Public Power.
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