brodsky nyiso white paper

8/9/2019 Brodsky NYISO White Paper

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megawatts for $20, which the Utility A accepts. Generator C, the highest cost generator,offers the final 10 megawatts for $30, and Utility A once again accepts. Most people wouldassume that, as in most auctions, Utility A would then pay each generator the agreed prices,$10, $20, and $30 respectively, for a total cost of $60, and then resell it to customers.

Not so. Under the rules set by the NYISO, Utility A is required to pay each generator thehighestprice paid to any generator that day. In other words, Generator A, who was willing tosell for $10, receives $30; Generator B, who was willing to sell for $20 receives $30, andGenerator C who was willing to sell for $30 receives $30, for a total cost to Utility A of $90.This price-fixing scheme hugely inflates the cost of electricity to residential and businesscustomers; in our example, to $90 instead of $60, a 50% increase over the marginal marketprice. It also makes some generators hugely profitable, giving them an annual profit marginof forty, sixty, even a hundred percent annually.

The NYISO calls this the Market Clearing Price. As a result every year New Yorkers pay

over $2.2 billion in excess electric bills.

Excessive Compensation and Costs

The compensation expenses of the NYISO are extraordinary high. They vastly exceed whatwas projected, its' total budget being three times higher than what was described in 1997 at thetime of formation, is now over $150 million. In 2009, the ISO had a payroll of about $5 millionfor its top 20 officers, with three of them making over $500,000. Without effective review of theISO budgets, the enormous cost is passed through to retail purchasers like Con Edison, who inturn pass those costs on to the consumer.

The ISOs most egregious compensation offenses include:

Directors who work 12 hours per week are paid over $120,000 a year.

In 2008, the CEO was paid $902,603. In 2009, he was expected to be paid $625,000.

In 2008, while the NYISO was searching for new executive leadership, the temporaryChairperson and CEO received $351,500 for four months work.

A Director who served as both director and president for four months received$240,250.

Some NYISO secretaries are paid $125,000.

NYISO employment contracts specify that the board chair, president and CEO getfirst-class or charter flights whenever they travel and housing allowances are given tocertain employees.

Bonuses for executives are close to 30 percent.

Most rank and file employees receive bonuses of 15 percent.

Consulting fees for the 2008 fiscal year totaled $30 million, with $8.6 million goingto one law firm.


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These salaries are enormous, inconsistent with the amount of work one would expect tobe done, and a real burden on consumers. Because the NYISO is a not-for-profit created underNew York law, law controls the salaries it pays. N-PCL 202(a)(12) provides Each corporation. . . shall have the power in furtherance of its corporate purposes . . .[t]o elect or appoint officers,

employees and other agents of the corporation, define their duties, fix theirreasonablecompensation and the reasonable compensation of directors, and to indemnify corporatepersonnel. Such compensation shall be commensurate with services performed. N-PCL 515(b) also provides that [a] corporation may pay compensation in a reasonable amount tomembers, directors, or officers for services rendered. The Attorney General has the power andthe obligation to pursue this matter under his statutory powers.

Unethical and Illegal Activities

The NYISO should protect New Yorkers from illegal and unethical activity, especially whenit causes ratepayers to pay higher bills than they should. A pattern of such behavior exists, and

the NYISO has repeatedly turned its' back on these events and let them go unpunished. It hasrepeatedly refused to take steps stop corrupt and illegal activities that have caused excessive andunnecessarily high electric rates. In the NYISOs existence, it has only investigated threeinstances of potential market manipulation, with no legal ramifications stemming from theinvestigation. Listed below are few of the most recent scandals, along with examples oforganizations such as AARP, and independent energy experts alleging wrongdoing by the ISO:

State agencies asked for a federal probe of an alleged power-market manipulation schemethat cost New Yorkers $250 million. Out of state utilities took advantage of a loophole toboost profits, resulting in higher energy costs for New Yorkers across the state. A 14-month investigation agreed that the scheme occurred and later changed the rules to

prevent future scams, however the ISO did not seek to receive refunds from any of theparties involved.

The New York ISO identified three power plants that it believes were overpaid by $2.7million in the Fall of 2009. The ISO did not accuse any of the plants of wrongdoing.Instead, it asked federal regulators to change the rules so that plants will have to submitlower bids in the future. The ISO has refused to seek refunds to customers.

A federal audit in 2009 criticized the way the New York ISO polices itself. The FederalEnergy Regulatory Commission (FERC) criticized the ISOs internal monitoringstructure, saying there was potential for conflicts of interest with their chain of command.

The Federal Energy Regulatory Commission wrote that this may impede theindependence of the market-monitoring function vis--vis market design function. Thisis not the first time that FERC has found these problems.

Saying the NYISOs policies inflate electric prices paid by consumers, the AARPpublished a report in December of 2009 that calls for the state Legislature to impose newoversight measures on the organization, including requiring the ISO to follow New York


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open meeting laws, require the bids, bidders, and computer computations in NYISOswholesale electricity market auctions to be public after no longer than two days, andallow the legislature and governor to appoint the board of directors.

Energy expert Robert McCullough, who famously was amongst the first to report marketmanipulation by Enron, found similar data while investigating NYISO. In his report onMarch 2009, he stated Every day, at least one market participant in the state submitsbids far higher than any credible estimate of cost - $1000/MWh. By comparison, the costto produce electricity is significantly less than $100/MWh, even using relativelyexpensive fuels like natural gas. This high bidding illustrates that generators aregaming the market or intentionally withholding power to create a price spike, or artificialscarcity.

THE BRODSKY PLAN FOR REDUCING THE COST OF ELECTRICITY TO NEW YORKS'

FAMILIES AND BUSINESSES

The NYISO is little known, costly, and fixable. The price-fixing market-clearing pricescheme strikes most people as illogical and a complete rejection of the public interest, freemarket principles, and honest and effective administration. It is a gigantic rip-off of ourresidential and business electricity users. It is not inevitable, it is the result of a series of choicesby the energy industry and the state and federal governments who bless and tolerate it. Theexcessive compensation problem and the refusal to end illegal and unethical behavior aresimilarly the result of choices made by the people in charge of the NYISO. The next AttorneyGeneral is uniquely situated to address these problems and reform the system in ways that willsave billions of dollars. He or she has the power and the economic, social, political, ethical and

legal responsibility to end these abuses. We today announce a multi-pronged proposal that webelieve will help the people and businesses of New York to reduce their electric bills by 10-15%at a minimum.

As Attorney General, I will on my first day in office commence several parallel actionsunder existing statutory authority and seek the cooperation of both the legislature and governoron additional policy remedies.

The two most well known statutory tools available to the Attorney General are the MartinAct, dealing with securities fraud, and the Donnelly Act, dealing with monopolistic practices. Weapply both of these laws to the problems in the NYISO. There is reason to believe however, that

such litigation will be complicated and time-consuming. While they will be invoked, clearer andsurer remedies can be found in the Attorney Generals existing powers contained in New YorksNot-For-Profit Corporation Law and the Estates, Powers, and Trusts law. These laws conferspecial powers on the Attorney General and the courts to supervise, investigate, restructure andreform all of New Yorks not-for-profit corporations. Because the NYISO is organized as a ClassB not-for-profit corporation it is subject to these powers. We specifically reference the followingsections of the Not-For Profit law:


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1) 114. Visitation of supreme court.

2) 706. Removal of directors.

3) 714. Removal of officers.

4) 717. Duty of directors and officers.

5) 1101. Attorney General's action for judicial dissolution.

We also reference in the Estates, Powers, and Trusts Law 8-1.4 Supervision of trusteesfor charitable purposes.

The text of each of these sections is included at the end of this White Paper.

The use of these extraordinary powers is not uncommon. Most recently, AttorneyGeneral Cuomo has invoked them in his ongoing investigation of a not-for-profit corporation inthe Bronx, called the Soundview HealthCare Network.

The actions of the NYISO are so damaging to the public, so contrary to the publicinterest, and so outside the proper function of a Type B not-for-profit created under the laws ofthe State that such an investigation and reform is legal, justified and necessary. It is importantthat the Attorney General use them to stop alleged political corruption. It is perhaps moreimportant that he or she use them when the effects of the damaging not-for-profit conduct strikesat the economic and social well-being of so many millions of New Yorkers. The price fixing

market-clearing-price scheme, the huge and excessive compensation, and the repeated failureto stop illegal and unethical practices are in violation of state law. The statutory power is there. Iwill use it in the interest of all the people and businesses of the State.

The Attorney General should inquire into NYISO board member selection, payments toNYISO board members, the ability of sellers and traders committee voting to block reformsbenefiting buyers, marginalization of the interests of consumer/voters, absence of any mission toobtain energy at the least cost, absence of rules against anomalous bidding, executivecompensation, lobbying expenses, incentive of buyers like Con Edison to resist high prices whenthey can pass through all charges to consumers and their affiliates are also NYISO participantswho may benefit from high and spiking prices, and a host of other issues.

We conclude where we began, in the belief that the Attorney General has an obligation tobe the first protector of the people of the State. The scandalous rip-off of New Yorkers must end.It must end for the senior citizen in Queens or Manhattan who every month pays more than he orshe needs to keep their power. It must end for the business owner in upstate New York who paysfar more than what the market should be to keep their business open. It must end for the hightech new economy entrepreneurs in Long Island and the Hudson Valley whose ability to start a


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new business is deeply effected by the cost of electricity. And the Attorney General has thepower and obligation to lead and win this struggle. Thats what I will do on Jan 1.

TEXT OF STATUTORY PROVISIONS OF NEW YORKS' NOT-FOR-PROFITCORPORATION LAW AND ESTATES, POWERS, AND TRUSTS LAW CITED ABOVE ASTHE BASIS FOR THE ATTORNEY GENERALS INVESTIGATION AND REFORM OF THENYISO

114. Visitation of supreme court.

Type B and Type C corporations, whether formed under general

or special laws, with their books and vouchers, shall be subject

to the visitation and inspection of a justice of the supreme

court, or of any person appointed by the court for that purpose

the court may order that notice of at least eight days, with acopy of the petition, be served on the corporation and the

persons charged with misconduct, requiring them to show cause at

a time and place specified, why they should not be required to

make and file an inventory and account of the property,

effects and liabilities of such corporation with a detailed

statement of its transactions during the twelve months next

preceding the granting of such order.

On the hearing of such application, the court may make an order

requiring such inventory, account and statement to be filed, and

proceed to take and state an account of the property and

liabilities of the corporation, or may appoint a referee for

that purpose.

When such account is taken and stated, after hearing all the

parties to the application, the court may enter a final order

determining the amount of property so held by the corporation,

its annual income, whether any of the property or funds of the

corporation have been misappropriated or diverted to any other

purpose than that for which such corporation was incorporated,

and whether such corporation has been engaged in any activity

not covered by its certificate of incorporation.

706. Removal of directors.

(d) An action to procure a judgment removing a director for

cause may be brought by the Attorney General or by ten percent

of the members whether or not entitled to vote. The court may


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bar from re-election any director so removed for a period fixed

by the court.

714. Removal of officers.

(c) An action to procure a judgment removing an officer for

cause may be brought by the attorney-general, by any director,

by ten percent of the members, whether or not entitled to vote,

or by the holders of ten percent of the face value of the

outstanding capital certificates, subvention certificates or

bonds having voting rights. The court may bar from re-election

or reappointment any officer so removed for a period fixed by

the court.

717. Duty of directors and officers.

(a) Directors and officers shall discharge the duties of

their respective positions in good faith and with that degree of

diligence, care and skill which ordinarily prudent men would

exercise under similar circumstances in like positions. In the

administration of the powers to make and retain investments

pursuant to section 512 (Investment authority), to appropriate

appreciation pursuant to section 513 (Administration of assets

received for specific purposes), and to delegate investment

management of institutional funds pursuant to section 514

(Delegation of investment management), a governing board shall

consider among other relevant considerations the long and short

term needs of the corporation in carrying out its purposes, its

present and anticipated financial requirements, expected

total return on its investments, price level trends, and general

economic conditions.

(b) In discharging their duties, directors and officers,

when acting in good faith, may rely on information, opinions,

reports or statements including financial statements and other

financial data, in each case prepared or presented by: (1) one

or more officers or employees of the corporation, whom the

director believes to be reliable and competent in the matters

presented, (2) counsel, public accountants or other persons asto matters which the directors or officers believe to be within

such person's professional or expert competence or (3) a

committee of the board upon which they do not serve, duly

designated in accordance with a provision of the certificate of

incorporation or the bylaws, as to matters within its


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designated authority, which committee the directors or officers

believe to merit confidence, so long as in so relying they

shall be acting in good faith and with that degree of care

specified in paragraph (a) of this section. Persons shall not

be considered to be acting in good faith if they have knowledgeconcerning the matter in question that would cause such reliance

to be unwarranted. Persons who so perform their duties shall

have no liability by reason of being or having been directors or

officers of the corporation.

1101. Attorney General's action for judicial dissolution.

(a) The Attorney General may bring an action for the

dissolution of a corporation upon one or more of the following

grounds:

(1) That the corporation procured its formation through

fraudulent misrepresentation or concealment of a material fact.

(2) That the corporation has exceeded the authority

conferred upon it by law, or has violated any provision of law

whereby it has forfeited its charter, or carried on, conducted

or transacted its business in a persistently fraudulent or

illegal manner, or by the abuse of its powers contrary to public

policy of the state has become liable to be dissolved.

(b) An action under this section is triable by jury as a

matter or right.

(c) The enumeration in paragraph (a) of grounds for

dissolution shall not exclude actions or special proceedings by

the Attorney General or other state officials for the annulment

or dissolution of a corporation for other causes as provided in

this chapter or in any other statute of this state.

Estates, Powers and Trusts Law

8-1.4 Supervision of trustees for charitable purposes

(i) The attorney general may investigate

transactions and relationships of trustees for the purpose of

determining whether or not property held for charitable purposes

has been and is being properly administered.

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