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A Hope, A Wing, and A Prayer

On the virtues and vices of ICAP, ACAP, FTRs, hubs, flowgates, DAMs, and gaming.
Fortnightly Magazine - April 15 2002

for an agreed-upon social good.

"It means that we don't appear to have the political will to set high prices," says Shanker.

With price caps imposed, he explains, "we have to have another mechanism to make up the market-clearing revenues that are not allowed to be seen in the price-clearing of electricity. And the word for that is ICAP, capacity markets, whatever you want."

Some experts would aid ICAP markets by creating special transmission rights to ensure deliverability of the capacity. Shanker would foster ICAP by designing markets so that capacity trades over a time interval long enough to mimic the long lead times needed to add new generation capacity.

"You cannot have long-term capital assets where the reliability planning is based on sometimes as long as 24-month maintenance cycles ... and where the time for new entry is between 24 and 36 months and talk about a daily market.

"What you want is a time-step long enough to fulfill the objective. ... There's no way out of this. New York has monthly markets. It's wrong. PJM had daily markets and moved to three seasonal markets. It's much too short."

Interestingly enough, the CAISO MD02 market reform initiative would add an ICAP feature, but would call it ACAP, or "available capacity." According to CAISO market design manager Lorenzo Kristov, it appears that California might lean toward the now-maligned concept of a daily capacity obligation.

"ACAP," he explained, means that the designated resources "have a requirement to appear in the ISO's markets on a daily basis."

Transmission Rights

The issue of FTRs remains one of the most dynamic. As the discussion has evolved, the issue compels an entirely new look at how to fund grid expansion.

The issues are complex. FTRs can be viewed as physical, offering a sort of admission ticket to allow the holder to schedule a transaction, or as financial, as favored in the Northeast, which gives the holder a stream of revenues even if he does not deliver or receive physical energy.

Likewise, RTOs can design FTRs as options, awarding revenues to holders only if congestion occurs in the expected direction, or as obligations, as in PJM, requiring holders to pay the difference if it turns out the congestion has occurred in an opposite direction. An "obligation" model wins kudos from engineers and software programmers, because it makes the math easier. It forces FTR holders to settle all their rights and simplifies the process of mapping simultaneous feasibility of FTRs across a given set of security constraints.

PJM decided to allocate rights to load-serving entities when it created FTRs, while the New York ISO now auctions off FTRs and then allocates the revenues-a practice that FERC staffers appear to consider to be superior.

RTO West now has proposed a sort of hybrid FTR. That region would create what it says is a financial FTR, but in a twist, the holder could redeem the right only against an actual physical transaction. Think of the RTO West FTR as a tax credit. A tax credit has no value unless you owe