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The Too-Perfect Hedge

Congress gives FERC an impossible task: Craft long-term transmission rights to save native load from paying grid congestion costs.

Fortnightly Magazine - May 2006

, whether the identified pairs of sources and sinks can support the nominated quantities of power at the same time without violating reliability rules), then, by definition, the congestion revenues that the RTO collects (LMP differentials) will exactly equal the amount needed to pay off the FTR holders (assuming FTRs are “obligation” instruments, and not options), regardless of whether the actual energy transaction schedules on the grid match the FTRs, or even whether the FTR holders choose to schedule any power at all.

This theorem thus allows RTOs to maximize savings in generation and in grid efficiency, and at the same time determine the winning bids in FTR auctions by clearing that single set of bids that produces the largest auction value (the sum of winning bids), while satisfying the simultaneous feasibility requirement.

In other words, if FERC should attempt to mix this system of financial rights with a limited set of carved-out long-term physical rights, the entire construct will come crashing down.

At TAPS, however, they believe they have a solution. TAPS points to a concept called a “dispatch-contingent FTR,” which the group likens to a transmission right developed in MISO to deal with carved-out physical rights, known as “MISO Option B,” and which FERC defines in its proposal at paragraph 81.

According to FERC and TAPS, the RTO software would “model” this type of right as a fully financial right, with the RTO instead of the LSE holding the rights to the revenue payout. Thus, the RTO would collect congestion revenue and then pay it back to itself. The LSE, meanwhile, could treat the right as a fully physical right, and would be required to schedule transmission in the day-ahead market to match the quantity and path of the right. This concept would also avoid another criticism of physical transmission rights: namely, that they give rise to the phenomenon known as “phantom congestion.” (See, Initial Comments of Transmission Access Policy Study Group, pp. 3-4, 30-33, FERC Docket No. RM06-8, filed March 13, 2006.)

A Stale Business Model?

A common refrain heard from many public power interests insists that EPACT sec. 1233 represents legislative validation of the traditional business model of meeting the utility obligation to serve native load through physical asset rights and long-term contracting. This idea purportedly justifies a preference for LSEs in allocation of LTTRs, even as it imposes adverse impacts on RTO market participants that hold short-term FTRs. Such impacts would be nonexistent, the argument goes, if enough transmission was built; the fact that such impacts are worrisome proves only that transmission infrastructure is too thin in the first place to support RTO market structures.

“Clearly, this bias is necessary,” writes engineer Dennis Delaney, representing an ad hoc group of small, consumer-owned electric systems from Arizona.

Nevertheless, many utilities argue also that business models have changed. As Exelon attorney and vice president Karen Hill puts it, “Serving native load using long-term static resources versus shorter-term dynamic market forces and generation resources is not a preferred business model.”

Representing Constellation Energy, attorney Deborah Carpentier (Dickstein, Shapiro, Morin &