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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

taxes against which to apply the credit. In FTR parlance, this design often is described as a "use-it-or-lose-it" right.

The choice among these various designs remains racked by controversy.

Consultant Steve Walton explains why RTO West has thrown its lot with a financial FTR.

"We could not make the physical rights model work ... we began to have rules mandated on top of other rules."

Yet Walton adds that RTO West wants to encourage holders to trade FTRs in secondary markets. That's why it chose the use-it-or-lose-it model, to keep FTR holders from sitting on unsettled rights:

"There's very little incentive," says Walton, "in fact there's some disincentives for releasing them to the secondary market.

"If you're a party that's under state regulation, you release them and you make something, it will be swept up. If you release them and make a mistake, they will dink you for it. The best bet is to sit on them and capture the revenues."

Nevertheless, some experts, such as Michael Schnitzer of the Northbridge Group, favor an auction regime as a better way to ensure that FTRs are fully traded.

Schnitzer goes further, however, and suggests that FTRs may well hold the key to the vexing problem of encouraging investment for transmission system expansion. He constructs his argument by first explaining why it's important to add to the supply of FTRs with each transmission upgrade.

"Just as we have to decide and determine what FTRs are [allocated] for the existing systems ... so too when we add something to the grid we have to measure the new FTRs that have been created."

Schnitzer argues that awarding FTRs as private property rights to those who build new transmission offers an improved incentive over the controversial rate making technique of socializing grid upgrade costs through rolled-in rates, where everybody's transmission rate climbs a little bit. Schnitzer suggests that rolled-in rates will prove incompatible with a market design that incorporates locational principles to price energy and resolve congestion.

"If we do go the rolled-in route," says Schnitzer, "we undercut some of the benefits of LMP in terms of new generation location. We undercut the price signals that we're sending, because price differentials can be remedied by transmission investment that someone else will pay for. That's particularly damaging to distributed generation.

"After all," adds Schnitzer, "a transmission expansion is a bet against the future market prices at a couple of different places on the grid.

"It's the type of decision that we're willing to let generators make in the first instance, and it's not at all clear to me why we can't let market participants make those decisions with respect to transmission as well.

"I think the preferred grid expansion policy is one similar to what FERC does for natural gas pipeline expansion, where we have market-participant-funded expansions in return for property rights that are created."

Taken at face value, Schnitzer's comments imply that days are numbered for transmission regulation-that transmission in fact may be more risky than it seems.

The defining moment came late in the day, on

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