Contrary to conventional wisdom, electricity demand isn’t immune to price elasticity, and rate designs can encourage conservation. In particular, inclining block rates coupled with dynamic pricing...
Long-Term Transmission Rights: A High-Stakes Debate
The absence of long-term transmission rights could exclude potential competition—and cause higher electricity costs.
costs of electricity.
Will Physical and Financial Rights Coexist?
In general, transmission-dependent market participants favor physical transmission rights, 15 while transmission owners and RTOs favor financial rights. 16 The basic issue raised by the advocates of physical transmission rights is one of certainty: They believe that physical rights provide a more certain hedge against price uncertainty than do financial rights. According to the Los Angeles Department of Water and Power, “It is only with the contractual security of physical rights that a load serving entity gains sufficient transmission security and has the ability to bring power from its resources home with reliability and price stability.” 17 According to the Transmission Agency of Northern California, “In California … transmission users have faced significant volatility and uncertainty in the use of financial rights.” 18
On the other hand, advocates of FTRs claim that financial rights are consistent with efficient power system dispatch, while physical rights can undermine efficient dispatch. For example, ISO New England believes that “physical rights are fundamentally inconsistent with economic dispatch.” 19 The Midwest ISO is concerned that “a system of physical rights … will either result in greater than necessary inefficiencies … or will require the dispatcher to violate certain transmission rights in pursuit of least cost dispatch.” 20 National Grid USA expects that “physical rights would undermine the efficient operation of the networked, bulk transmission system and existing financial transmission rights regimes.” 21
As a matter of economic theory, FTRs ideally can provide to transmission customers all of the hedging benefits that would be provided by physical rights; FTRs are fully consistent with economic dispatch, while physical rights can lead to uneconomic dispatch. The question is whether the theoretical strengths of financial rights are actually manifest in a world of imperfect institutions.
Hence, the debate over physical rights is fundamentally a debate about trust: Can financial rights, supposedly renewable from one year to the next, subject to congestion revenue adequacy tests and to rules that may change with evolving market design, be trusted to offer hedges of the same quality that have been offered historically by physical rights?
Who Should Guarantee Transmission Rights?
In the LMP-based RTO markets, RTOs attempt to offer quantities of transmission rights that do not exceed the quantities of power that can be physically delivered by the transmission system. This limitation on the quantity of transmission rights, which the industry refers to as the “simultaneous feasible test” for deliverable power, is logical but not necessary. One can imagine that certain firms could be in the business of speculating on the future costs of congestion, and could offer LTTRs for prices that reflected expected congestion costs plus a risk premium. One can further imagine that these firms could limit their risk by building new transmission when congestion costs became high enough, thus reducing their exposure to congestion costs and increasing power systems’ physical capabilities to deliver power. Because transmission owners are already in the business of building new transmission, and because transmission owners historically have offered long-term transmission service, one might also imagine that transmission owners