In an order issued March 21, 2013, the Federal Regulatory Commission (“FERC” or “Commission”) accepted the New York Independent System Operator, Inc.’s (“NYISO’s”) January 18, 2013 compliance filing (as amended January 25, 2013), subject to the requirement that the NYISO make an additional compliance filing. The filing proposed revisions to the NYISO’s Market Administration and Control Area Services Tariff (“Services Tariff”) to implement a new interface pricing policy in response to certain interregional transactions in and around the Lake Erie region for which loop flow is an issue.

Several years ago, the NYISO identified a need to address unscheduled, circuitous power flows around Lake Erie that cause market distortions. FERC accepted the NYISO’s short-term solutions in 2008, but required that NYISO work with neighboring system operators to develop a comprehensive, long-term solution. Since that time, the NYISO has worked with PJM, MISO, and the IESO to develop and implement an interface pricing initiative and other proposals. In subsequent orders, the Commission approved a framework for implementation and clarified that, while the NYISO’s interface pricing rules must be “compatible” with PJM’s, the rules need not be identical. Further, the Commission’s orders in this proceeding do not require the NYISO to abandon its economic evaluation of external transactions or design its market to adopt the interface pricing rules, and the rules apply only to interfaces where unscheduled Lake Erie loop flows are an issue.

Under the proposal, the NYISO will model the Ontario/Michigan interface as an uncontrolled/free flowing transmission path and include expected unscheduled power flows in both the day-ahead and real-time markets. It will also retain its existing NERC e-Tag scheduling path validation process to price external transactions and ensure that the external transaction bids will be economically evaluated and scheduled, consistent with their expected power flow impacts. In addition, among other provisions, the proposal also specifies how the NYISO will determine expected unscheduled power flow in the day-ahead and real-time markets, and describes how prices will be calculated at for the Keystone proxy generator bus, free-flowing tie lines, and the NYISO’s direct interconnection with Hydro Quebec. In response to a protest from the PJM Independent Market Monitor (“PJM-IMM”), the NYISO further proposed that it revise its OATT to provide that, if the NYISO learns that a path is being scheduled in a manner inconsistent with expected annual flows, the NYISO will seek FERC authorization to add additional prohibited scheduled paths.

In approving the compliance filing, FERC found that the NYISO’s interface pricing proposal and supporting explanations satisfy the requirements of prior orders in the proceeding, and that the PJM-IMM’s alternative proposals failed to identify a more efficient pricing solution. FERC rejected the PJM-IMM’s request that the NYISO be required to broaden the reach of its proposal to apply to all external transactions, especially because doing so would be costly and inefficient. FERC further rejected an argument that the NYISO eTag path validation approach fails to identify each of the potential scheduled market paths that may have non-conforming actual flows, as there is no evidence that transactions of this sort are being scheduled. In addition, FERC noted with approval the NYISO’s explanation that its existing prohibited paths, working in operation with its proposed interface pricing rules, will produce the same pricing results as the PJM-IMM’s recommendations covering virtually all external transactions over the last two years.

Under the order, the NYISO must make an additional compliance filing within 60 days. FERC has accepted the NYISO’s proposal to add additional prohibited paths, as may be appropriate, pursuant to the procedures outlined by the NYISO in its answer to the PJM-IMM, and has directed the NYISO to propose tariff revisions accordingly. In reaching this decision, FERC declined to adopt the New York Transmission Owners’ (“NYTOs’”) position that an exigent circumstances filing would be a more appropriate vehicle for additional revisions, but stated that the NYTOs may renew their concerns when the NYISO submits the proposed tariff revisions. FERC also noted that this is a “narrow situation” and the proceeding has already undergone extensive stakeholder discussions.