On March 1, 2016, the Federal Energy Regulatory Commission (“FERC”) accepted, subject to condition, the New York Independent System Operator, Inc’s. (“NYISO”) proposed revisions to the scarcity pricing mechanism NYISO uses in its real-time market, set forth in its Market Administration and Control Area Services Tariff (“Services Tariff”) and Open Access Transmission Tariff (“OATT”). In the order, FERC ordered NYISO to submit a compliance filing to clarify whether its proposed revisions apply to scarcity events, shortage events, or both.

NYISO uses shortage pricing to refer to the value placed on reserves when the market is short of operating, regulation, or transmission reserves. NYISO uses scarcity pricing to refer to the pricing rules used for energy and certain ancillary services in real-time during periods when NYISO has called on special case resources and the emergency demand response program (“SCR/EDRP”). SCR/EDRP provisions in NYISO’s OATT and Service Tariff allow NYISO to interrupt load service to some demand side resources and make payments to resources that curtail demand to provide load reduction to assist in maintaining system reliability.

Under NYISO’s existing scarcity pricing mechanism, NYISO performs an after-the-fact test that determines whether a scarcity event occurred. Specifically, NYISO adjusts real-time prices if it determines that the amount of SCR/EDRP resources called on to provide load reduction was greater than the amount of unscheduled 30-minute reserve capability available from eligible resources.

According to NYISO, its existing scarcity pricing mechanism has the potential to cause inconsistencies between resource schedules and pricing outcomes, which could result in uplift costs. NYISO explains further that its existing scarcity pricing mechanism also does not apply to NYISO’s proxy generator buses, which may result in inefficient scheduling of imports and exports during the periods when NYISO is likely to activate SCR/EDRP resources.

On November 30, 2015, NYISO proposed to incorporate scarcity pricing into the real-time optimization by establishing a supplemental 30-minute reserve requirement in real-time during the periods when NYISO has called upon SCR/EDRP resources to provide load reduction. NYISO explained that its proposal is intended to achieve two objectives: (1) ensuring consistency between resource schedules and pricing outcomes in real-time when NYISO activates SCR/EDRP resources, thereby reducing the potential for uplift costs; and (2) reflecting the impacts of scarcity pricing at proxy generator buses, thereby facilitating more efficient interchange transactions when NYISO activates SCR/EDRP resources in real-time.

The Utility Intervention Unit of the New York State Department of State (“UIU”) intervened and filed a protest of NYISO’s proposed changes. UIU asserted that NYISO’s proposed scarcity pricing mechanism fails to incorporate economic factors, implements a false reserve constraint that yields artificial price increases, and mandates higher operating reserve requirements whenever SCR/EDRP resources are deployed—whether or not they are ultimately necessary—and, consequently, may result in a recommitment and dispatch of generating resources.

In accepting NYISO’s proposed revisions to the scarcity pricing mechanism, FERC found that NYISO’s proposed changes will improve real-time price formation, reduce the potential for uplift costs, and increase price transparency. FERC rejected UIU’s arguments on grounds that they are beyond the scope of NYISO’s filing and otherwise outweighed by the improvements to pricing efficiency that the new pricing mechanism will yield.

The order is available here.