What are Financial Transmission Rights?

Financial Transmission Rights (FTRs) are also referred to as Transmission

Congestion Contracts (TCC) and/or Congestion Revenue Rights (CRR).
Financial Transmission Rights replaces physical transmission rights in
centralized electricity markets.

A Financial Transmission Right is a financial contract for collecting an amount

of money which is determined by the difference between two nodal prices. To
determine the amount of money, you must first determine the "direction" of the
Financial Transmission Right from the point of view of the generating company
that holds the FTR. The payoff of the "sourcing" Financial Transmission Right
is defined by the nodal price in the other market minus the nodal price at the
generator. This is opposed to the opposite direction or the "sinking" direction
of the FTR - which is the payoff of the sinking FTRs - which is defined by the
nodal price at the generator minus price in the other market.

The Financial Transmission Rights is a point to point financial instrument used

to hedge congestion. Financial Transmission Rights gives the holder the
financial equivalent of physical network capacity. Ignoring losses, the effect of
the Financial Transmission Rights is to guarantee its’ holder that, for a
predetermined amount of energy, the holder’s price at the point of withdrawal
will be the same as the price at the point of injection. The Financial
Transmission Rights payoff is the difference in Transmission Congestion
between points of injection (e.g., a remote generator) and withdrawal (e.g., a
load center). Financial Transmission Rights are bought and sold in centralized
electricity markets for periods ranging from a month to several years; the value
of the FTR depends on expected transmission congestion.

Challenges to Forecasting Future Value of Financial Transmission

Rights

Forecasting electric power demand for months in advance to several years in

advance is a daunting task. Forecasting transmission congestion for these
same periods is even more daunting and challenging. Therefore, forecasting
the future value of Financial Transmission Rights requires the use of
simulation software that models the electricity markets under a range of
operating conditions, weather/climate conditions, load growth scenarios,
planned outages, transmission expansion and generation expansion
scenarios that effectively forecasts future expected value of the Financial
Transmission Right.
Financial Transmission Rights Auctions

Auctions are conducted to sell Financial Transmission Rights (FTRs). This

assists market participants in hedging their price risk when delivering energy
on the grid.

As previously discussed, Financial Transmission Rights are financial

instruments that entitle the holder to a stream of revenues (or charges) based
on the hourly congestion price differences across a transmission path in the
Day-Ahead Energy Market.

Financial Transmission Rights provide a hedging mechanism that can be

traded separately from transmission service. Market participants are able to
hedge against their congestion costs by acquiring FTRs that are consistent
with their energy deliveries.

Market participants can manage their FTR portfolios by using the eFTR tool.
Participants use eFTR to post their FTRs for bilateral trading as well as to
participate in the scheduled monthly, annual and long term FTR auctions.

Frequently Asked Questions About Financial Transmission Rights

What are Financial Transmission Rights?

Financial Transmission Rights are financial instruments that are awarded to

the highest bidder in Financial Transmission Rights Auctions. The winning
bidder entitles the holder to a stream of (future) revenues (or charges) based
on the hourly day-ahead congestion price differences across the specific
transmission path identified in the financial instrument.

NOTE: Owning a Financial Transmission Right does NOT entitle the owner to
any rights for physical delivery of electricity or power.

Why would a company need Financial Transmission Rights?

Holding or owning Financial Transmission Rights protects the company (and

the transmission company and its’ customers) from price increases of power
due to Transmission Congestion when their energy deliveries are consistent
with their firm reservations. Essentially, FTRs are financial instruments that
entitle the holder to rebates of congestion charges paid by the ISO and
Network Transmission Service Customers.

How are Financial Transmission Rights acquired?

Financial Transmission Rights can be acquired in one of the following; the

Long-Term FTR Auction, Annual FTR Auction, the Monthly FTR Auctions or
the FTR Secondary market.

What is “Transmission Congestion” and when does it occur?

The term “Transmission Congestion” is somewhat of a misnomer.

First of all, Transmission Congestion occurs when there is insufficient energy

to meet the demands of the customers of the transmission company.
Secondly, “Transmission Congestion” does not mean that the transmission
system is slowing down or that the electricity has become blocked or delayed.
It should be pointed out that operating a transmission system beyond its rated
capacity can result in line faults or electrical fires.

So, “Transmission Congestion” is actually a shortage of transmission capacity

to supply the transmission company’s customers. When Transmission
Congestion occurs, the transmission company is typically running at full
capacity and proper efficiency, however, they are unable to serve all of its’
waiting customers.

When Transmission Congestion happens in a competitive (deregulated)

market, there is a risk of “price gouging” from utilities that own or control
electric power transmission. Regulatory bodies are aware of this risk, and
most state’s Public Utility Commissions have built-in safeguards that protects
against price-gouging or abusive pricing, and that congestion-related energy
cost increases reasonably reflect the extra costs incurred in alleviating
Transmission Congestion. Typically, Transmission Congestion is corrected
by; “tuning the system” to increase its capacity or adding new transmission
infrastructure, or decreasing end-user demand for electricity through “Demand
Side Management” programs or “Automated Demand Response” programs.
See www.DemandSideManagement.com or
www.AutomaedDemandResponse.com for more information about Demand
Side Management and Automated Demand Response.

How are Financial Transmission Rights “cleared” through the FTR

Auctions?
The clearing mechanism of the FTR Auctions maximizes the quote-based
value of the set of FTRs awarded in each auction. The FTR Auctions will
calculate clearing prices for all FTR obligations at all buses, regardless of
whether they are bought or sold in the auction. The FTR Auctions will
calculate the clearing prices for FTR options for all valid FTR Option paths,
regardless of whether they are bought or sold in the auction.

Can an ARR holder self-schedule an FTR Option in the Annual FTR

Auction?

No. Since ARRs are only allocated in the form of Obligations, the FTR that is
self scheduled in the Annual FTR Auction must be an FTR Obligation.

What are the requirements for bidding in the Financial Transmission

Rights Auctions?

While the requirements may vary from state to state and ISO to ISO,
generally, in order to submit a bid to purchase Financial Transmission Rights,
you must be a member or a Transmission Service Customer. To submit an
offer to sell Financial Transmission Rights, you must own the Financial
Transmission Rights. You can sell any portion of the Financial Transmission
Right.

If I sell an FTR, what happens with my transmission reservation and my

congestion costs?

If you sell a Financial Transmission Right, you still have the right to deliver the
energy, and your curtailment priority does not change.

If you sell a Financial Transmission Right, you will pay any congestion charges
incurred in the delivery of energy to your sink. Actually everyone pays
congestion, only FTR owners get it back in the form of congestion credits.

Does a Financial Transmission Rights to a hub or a zone hedge you

against congestion for delivery to any bus in that aggregate?

No. Financial Transmission Rights will only protect you against delivery to that
aggregate.
Even though we are auctioning off a percentage of the capability for
each round of the Annual Financial Transmission Rights Auction, can a
participant bid 100% of their requested MW?

Yes. A participant can submit a bid for any positive MW amount.

Can there be a negative strike (bid) price for a Financial Transmission

Right bid?

If the Financial Transmission Right bid is for an FTR Obligation bid, the strike
(bid) price can be negative. If the FTR bid is for an FTR Option, then the strike
(bid) price cannot be negative.

How are Financial Transmission Right Options cleared in the auction in

conjunction with FTR Obligations?

The FTR Auctions maximize the quote-based bid value of a set of

simultaneous feasible FTRs awarded in the auction. To ensure feasibility,
counterflow created by an FTR Option bid must be ignored when FTRs bids
are tested for feasibility. Since you cannot pay for something that has no
downside, the clearing prices of an FTR Option Buy Bid will never be less than
zero. The clearing price of an FTR Option will always be greater than the
clearing price of an FTR Obligation for the same path.

Is there a limit to the number of FTR Obligations and FTR Options in the
FTR Auctions? What are the valid sources and sinks?

In the Long Term and Annual Financial Transmission Right Auctions, valid
sources and sinks for Financial Transmission Right Obligations are limited to
Hubs, Zones, Aggregates, Interface Buses and Generator Buses.

In the Monthly Financial Transmission Right Auctions, valid sources and sinks
include any single bus or combination of buses for which a Day-ahead LMP is
calculated and posted including Hubs, Zones, Aggregate Buses, Generator
Buses, and Load Buses.

In the Annual and Monthly Financial Transmission Right Auctions, the paths of
Financial Transmission Right Options are limited to a subset of the entire
transmission system. Option paths are not available in the Long Term FTR
Auction. The number of FTR Obligations and FTR Options are only limited by
the bids submitted by Participants.
Under what circumstances can the sink LMP (load) be less than the
source LMP (generator)?

Depending on the binding constraints that result, the LMP at a sink can be
less than the LMP at the source.

Can Financial Transmission Right Options be traded on the FTR

Secondary (Bilateral) Market?

Yes. Both FTR Options and FTR Obligations can be traded bilaterally in the
FTR Secondary Market.