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Coal's Raw Deal

The bias in RTO markets, and how FERC might fix it.

Fortnightly Magazine - September 2005
long-term grid rights way back in 1997, in one of its first decisions governing the California Independent System Operator (Cal-ISO). (See 80 FERC ¶61,128.) The DWR adds that the problem really is worse than it appears, since RMR generation (regulatory must-run) represents still another form of unhedgeable transmission risk.  The DWR claims that Cal-ISO “now frequently supplants” its market-based congestion management scheme in favor of reliance on must-offer generators that the ISO selects unilaterally.
Cal-ISO commented on June 27 that in its work to develop a new market design—the MRTU project—it is currently "modeling" CRRs (congestion revenue rights, an FTR-equivalent) of only two lengths: annual and monthly. It adds that it is "unlikely" that longer-term rights will be available in February 2007, when it hopes to have its new market up and running.

Here's an idea: Keep a certain percentage of transmission capacity separate from the RTO market, and make it available for long-term physical grid rights.

Yet experts say that such "carve-outs" erode the efficiency gains from LMP and a bid-based, security-constrained dispatch. FERC apparently agrees, as it has spent much time and effort attempting to limit the extent to which utilities can retain their grandfathered transmission contracts once the RTO moves to a so-called "Day 2" market. (See, e.g., 108 FERC ¶61,236, Sept. 16, 2004.)

Responding to FERC's request, the Sacramento Municipal Utility District (SMUD) claims that the problem of carve-outs eroding efficiency "is easily avoidable" if physical rights holders are given tradable rights. That, says SMUD, would encourage resale of unused contract rights in a secondary market, avoiding phantom congestion. SMUD cites the example of the WesTTrans (, a voluntary group of electric transmission operators in the Western Interconnection. SMUD claims that WesTTrans operates an OASIS site that, contrary to the norm, allows potential transmission service customers to query information from each provider at one time, rather than individually, which facilitates resales of physical grid rights.

SMUD's proposal typifies the feeling out West, where grid operators rely largely on a physical-rights model. SMUD adds, for instance, that the fledgling GridWest group plans on using physical transmission rights.

In any case, even MISO, borrowing heavily from PJM's design to build its own market, has conceded that absent any long-term rights to transmission, it seems likely that new or incremental investments in capacity "are likely to be suboptimal."

Working Within the System

Can the RTOs retain their purely financial grid rights, but simply offer FTRs with longer terms, to help out the coal plant developers?

Five years ago, the New York ISO had offered two- and five-year TCCs allocating as much as 15 percent of system-transfer capability to the five-year rights. Demand was lackluster, however. According to DC Energy LLC, only seven participants bought 2-year TCCs at the Spring 2000 auction. That number rose to 20 in the Fall 2000 auction, with 5-year TCCs awarded to 9 participants. Prices lagged accordingly. Two-year TCCs for transactions from Zone G (NYC) to Zone J (Hudson Valley) cleared in the Fall Auction at an average of $1.87/MWh. The equivalent TCCs for