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An East Coast View: The Right Price for PJM

Fortnightly Magazine - October 1 1997

contracts (em called FTRs by the supporting companies (em between each location makes trading of such transmission congestion contracts difficult. It does not. Since FTRs are financial rights to congestion credits, or dollars, trading to acquire the desired level of hedging will be easy. This common basis for all FTRs facilitates forward and secondary markets for transmission. This is not true of CCEM's physical transmission rights proposal, which requires that each trader have exactly the physical right (em in size, time and location (em that matches its trade.

Does the proposal misallocate transmission rights? No. FTRs would go to those who purchase network service and firm point-to-point service as defined in the FERC pro forma tariff. Both sets of transmission users will thus share in paying the embedded costs of the transmission system, so they should both receive the benefits. FTRs ensure that these customers pay no more for energy than if they were served by their own (or contracted) resource.

Does the allocation of FTRs discriminate against utilities with plants close to load? No. The allocation does not distinguish between municipal or investor-owned utilities. Some utility (both muni and IOU) resources are close to loads; some are not. For utilities using network service, FTRs are assigned from the resources each utility designates as its network capacity resource to its load. Similarly, for firm point-to-point customers, an FTR is assigned from the source location to the load location.

If a designated resource is close to the load, then the differences in LMPs typically will be none or small, so the "value of the FTR" is also none or small. However, since the LMP difference is none or small, the need for a financial hedge is also none or small. Similarly, high-value FTRs are needed to hedge energy costs from remote resources at locations with much lower LMPs relative to the load location.

Some utilities will have to designate resources close to load, because that is what they own or have under contract. The associated FTRs obviously will not hedge trades from undesignated remote low-cost generators. To hedge these latter trades, the utility can purchase firm point-to-point transmission between that resource and the utility's load and receive the corresponding FTR. That FTR will hedge the utility for the trade and allow it to receive the benefit of the remote low-cost generator. Asking such a utility to pay for this firm transmission (and help pay for embedded costs) to get the FTR is not discriminatory; it's fair.

Does the FTR allocation system exclude marketers? No. Marketers can purchase either firm network or firm point-to-point service from their sources to loads. In exchange for paying a share of the embedded cost, they receive FTRs from the sources to the loads. Second, they can purchase existing FTRs owned by others in a secondary market at market price. In the future, marketers will also be able to acquire FTRs in an auction.

Can a municipal utility designate resources under purchased power contracts as the source for an FTR? Yes.

Is the price signal from LMP effective, given