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Long-Term Transmission Rights: A High-Stakes Debate

The absence of long-term transmission rights could exclude potential competition—and cause higher electricity costs.

Fortnightly Magazine - March 2006

Second, the opposing parties assert that the transmission rights offered by the RTOs already meet customers’ needs, and perhaps already constitute something equivalent to a long-term hedge. 8 For example, the PJM Interconnection believes that, because its annual financial transmission right (FTR) allocations can be renewed indefinitely from one year to the next, “its existing market design generally meets the long term needs of participants” 9 and that certain of its “FTR allocations are the functional equivalent of longer-term ARR/FTR entitlements for existing historic resource deliveries.” 10 PJM does concede, however, that its transmission rights regime “meets the long-term needs with respect to existing resources and new transmission resources, but does not necessarily provide for allocation of rights related to new resources and load growth.” 11 In other words, an investor in new generation would lack a mechanism for hedging against long-term transmission price risk.

Third, some opponents of LTTRs claim that LTTRs can lead to inefficiencies that harm consumers, including encouraging the exercise of market power by generators. 12

The opponents of LTTRs argue that regional stakeholder processes will be sufficient to provide any needed improvement in LTTR availability. 13 The arguments for allowing regional differences are that the regions have different system characteristics and state regulatory environments, and that the regions have different customer preferences for how LTTRs should be designed. 14

The division of opinion on the question of whether LTTRs are needed is more or less a division between “haves” and “have-nots”: the “haves” think that LTTRs are either unnecessary or are already available, while the “have-nots” think that LTTRs are essential to efficient competitive markets. In a sense, both groups are right. Market participants with large portfolios of generation assets tend to have geographic diversity that enables them to better manage transmission congestion risk relative to market participants with small portfolios. In addition, vertically integrated market participants have a relatively easier time building new transmission to serve their loads than do transmission-dependent market participants. The combination of these facts means that larger, vertically integrated utilities have less need for hedges against long-term congestion cost risk than do smaller, less integrated market participants.

A key policy question, therefore, is: Are the disadvantages of the smaller market participants attributable to real cost advantages of the larger participants, to the discriminatory practices of the larger transmission-owning participants, or to both cost advantages and discrimination? Do the larger, vertically integrated participants have real economic advantages, such as economies of scale, that naturally make them stronger competitors? Does vertical integration allow the larger firms to subtly discriminate in favor of their own generation resources by (for example) promptly building transmission to serve their own loads and generation while delaying transmission that helps other firms? If the cost advantages of the larger participants are real, then a survival-of-the-fittest policy ultimately will lead to lower costs of electricity. But if the advantages of the larger participants arise from discriminatory access to transmission, then a continuation of current policies—including the absence of LTTRs—will exclude from the market potential competition that could ultimately lead to lower