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FOR IMMEDIATE RELEASE: September 17, 2008

SCHUMER: GREEDY ENERGY TRADERS RAN SCAM THAT FLEECED NY CONSUMERS OF UNTOLD MILLIONS - SENATOR TO PRESS HIS 3-POINT PLAN TO TURN THE LIGHTS OUT ON THE SHADY PRACTICES


From January to July, Rogue Energy Traders Exploited Loophole to Shirk Transmission Fees - Passing on Higher Charges to Consumers

Scam Cost NY Consumers Up to $400 Million in Additional Fees; Put NYS At Risk of Blackout

Schumer Meets with FERC Head to Seek Redress for Consumers, Close Potential Loopholes, Increase Market Monitoring, Press for More Aggressive P

Following a personal meeting with the Federal Energy Regulatory Commission Chair, U.S. Senator Charles E. Schumer today pressed his three-point plan to seek redress for New York consumers and municipalities after this summer’s trading scam fleeced New York consumers of untold millions and put an extra burden on the New York area’s power grid. Between the months of January and July of 2008, market traders were using deceptive energy trading practices that slammed consumers with millions of dollars in unnecessary, additional fees and posed a threat to the electric system's reliability.

 

In an effort to protect consumers and local municipalities, Senator Schumer urged FERC to conduct a more aggressive, public investigation of the energy trading scam and its full consumer impact; permanently close potential market loopholes; and increase market monitoring. Schumer said he would follow-up with legislation if necessary.

 

“New Yorkers were ripped off by a group of rogue energy traders and we must make sure it doesn’t happen again,” Schumer said. “Today I had a list of questions, as long as my arm, for Mr. Kelliher: how much did these trades cost New Yorkers; when did FERC first know about this and are there other loopholes that could be exploited? Bottom line, FERC must determine the full consumer impact and quickly put the lights out on these shady practices.”

 

According to a July 21st filing with FERC by the New York State Independent System Operator (NYISO), beginning in at least January of this year, one or more market participants began to schedule circuitous and inefficient routes for transmission between states. Direct transactions between two points – principally from New York to the PJM Service Territory in either Pennsylvania or New Jersey – were scheduled to be “sent” on a roundabout course that purportedly would travel around Lake Erie, transporting power through Ontario, Michigan and Ohio and then back to the intended destination in Pennsylvania or New Jersey.  

 

This practice of scheduling power on circuitous routes around Lake Erie was unnecessary and costly to New York utilities, power producers, and consumers.  The economic motive for this practice appears to be evading fees associated with sending power over congested, direct lines between New York and New Jersey for which there is a more costly transaction fee. But even though the power was scheduled to be sent on that roundabout route, the physical properties of electricity dictate that it travels principally on the path of least resistance -- often the shortest path -- meaning it still traversed the congested lines in New York the traders were trying to evade.

 

While the New York Independent System Operator (NYISO) has yet to determine the exact costs of these trading practices, some estimate that increased congestion and “uplift” fees have cost consumers as much as $125 million in April and May of this year alone, and as much as $240-290 million overall.  It appears that this practice may have played at least a part in New Yorkers spiking utility bills, as well as the record bills faced by many municipal electric utilities.  Furthermore, as the scheduling concealed the volume of traffic that would travel on certain transmission paths, system reliability was threatened due to unanticipated power loads traveling on already highly congested lines. Without proper monitoring, this could lead to regional and more system-wide outages and blackouts.      

 

 The unannounced power flowing over portions of the transmission grid had several serious economic impacts on New York ratepayers, including:

 

  • Uplift Charges: The scheduling over circuitous paths increase unexpected congestion on transmission lines the cost of which is not attributable to a particular market participant. Then, in the Day-Ahead Market, the NYISO was forced to increase congestion charges to all users of the interface. That creates “uplift” in prices for all customers, the burden of which is passed onto to residential on commercial users.

 

  • Congestion Rent Shortfalls: The NYISO issues Transmission Congestion Contracts (TCC) with owners of transmission that rely on fully utilizing their capacity. These contracts can provide a benefit to consumers because, when capacity is maximized, the transmission owners pay a credit back to their customers under an arrangement with NYISO. However, if they cannot collect rents from all those who are using the lines – because some are piggybacking for free – a diminished credit is given. DC Energy, a party to this case with FERC estimates that congestion rent shortfalls has cost consumers on the order of $40 million since the beginning of 2008.

 

  • Costly Generation: With congestion clogging up transmission lines, utilities cannot rely on buying cheap power and must ramp up costly generation. In these instances, the NYISO would have to pay a premium to generators to hastily supply power when it cannot be brought in through transmission. This expensive fix would, again, be passed on directly to the consumer.  

 

To illustrate the cost of this practice on a single day, the NYISO calculated that on May 26, 2008 over 2000 megawatts (MW) were scheduled on the circuitous Lake Erie route:  travelling to western New York before entering Ontario, then the Midwest Independent System Operator via Michigan and Ohio and then back to PJM in New Jersey or Pennsylvania.  According to their analysis, on this day alone, $800,000 in uplift and congestion fees was attributable to this trading practice.  

 

In Upstate New York, small cities like Plattsburgh, Rouses Point and Tupper Lake, for example, have been hit with exorbitant uplift fees from NYISO, hundreds of thousands of dollars in excess of what they usually pay.  The full impact on consumers is still unknown but could have affected consumers and municipalities across New York State.

 

Today, in an effort to seek full redress for New York consumers, Senator Schumer pushed his three-point proposal to ensure that FERC’s investigation is thorough and institutes the right safeguards to prevent the trading practices from happening again. Schumer called for FERC to:

 

  • Launch a vigorous public investigation, including full consumer impact: Currently FERC is conducting a closed investigation that has no set conclusion date and precludes third parties from being involved. The investigation must also address key questions like: how much exactly did these schemes cost consumers and whether any laws or tariffs were broken. Schumer urged FERC to investigate how best to seek redress for the consumers.

 

  • Institute more stringent market oversight: In their initial petition, the NYISO asked for the ability to share scheduling and trading information with other Regional Transmission Operators (PJM, Ontario, etc). Schumer pushed FERC to approve this request in order to bring more stringent market oversight. Schumer also urged transparency in how uplift charges are calculated, which would also help in determining when someone is taking advantage of the system.

 

  • Close off Further Loopholes: The NYISO identified – and FERC closed off -- 8 different trading paths that were being used by traders. There is a concern from some utilities that the NYISO might not be aware of other trading practices that are passing on costs to consumers.  FERC could require the NYISO to put an administrative process into place so that any inappropriate changes to loop flows can be immediately detected and mitigated.

 

“Make no mistake about it, I will not stop until we get to the bottom of this scheme and New Yorkers receive the compensation they deserve,” Schumer said.  "It is the foundation of American justice and due process that investigations of alleged wrong doing be conducted in the light of day, not behind closed doors, and I will press FERC to do just that." 

 

Schumer was one of the first to call for a full investigation into the scam. In August, Schumer called for a full investigation into the massive and unprecedented price increases and how they are linked to the trading practice. Schumer wrote a personal letter to FERC Chairman Joseph Kelliher demanding an immediate investigation into the practices and urging that FERC take immediate action to permanently close the loophole.  Schumer also called for FERC to preemptively take steps to identify potential other paths traders could attempt to use in the future that would also game the markets. Finally, Schumer called for FERC to permanently shut down the eight identified circuitous routes and search for more.

 

Schumer wrote, “It is absolutely critical that FERC determine exactly who have been engaging in these practices; for how long has they have been occurring; and how much it has cost New York consumers and municipalities.”

 

FERC subsequently announced that they had begun the investigation in May of 2008, during the period when circuitous route trades were occurring. However, they did not put a stop to these trades until petitioned by the NYISO in July, 2008.

 

 As a means of preventing further such incidents, Schumer asked FERC to grant the NYISO’s request that market monitors to be given better access to NERC tag information and bidding and scheduling information. The NYISO has asked that market monitors be given the authority to share bidding and scheduling information between different Regional Transmission Organizations such as New York’s NYISO, Ontario's IESO, the Mid-Atlantic states’ PJM, the Midwest’s MISO, and ISO-New England.  In filings, the NYISO has asserted that that the inability of market monitors to share confidential information with each other impeded its efforts to try to identify and resolve the loop-flow issue. Schumer asked that the market monitors be given this authority immediately, subject to suggested confidentiality provisions, to prevent further transmission problems.

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