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The Long and Short of Grid Congestion

FTRs make hedging possible, but can PJM ensure full funding without playing favorites?

Fortnightly Magazine - March 2016
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Let's talk about financial transmission rights. But it's going to get technical, so hold on tight.

FTRs were the subject last month, when the Federal Energy Regulatory Commission (FERC) held a technical conference to review two tariff amendments that PJM proposed late last year to ensure that FTRs can continue to provide a viable means, as they were designed to do, of hedging against the risk of costly grid congestion.

PJM's twin proposals, now pending at FERC, attack a problem seen in past years known as FTR underfunding. That's what happens when the sum total of congestion charges that PJM collects when it clears the day-ahead market proves too low to cover PJM's obligation to pay off all the market players who hold FTRs as a hedge against that congestion.

Financial traders believe PJM’s proposal discriminates since they are more likely to hold counter-flow FTRs. –Bruce Radford

PJM's solution would impact both types of financial transmission rights. It would affect both "prevailing flow" FTRs, of the type that utilities typically buy, which represent a "long" hedge; and 2) also "counter-flow" FTRs, which we might best describe as a "short" sale of congestion, and which are purchased more often by financial traders that owe no load-serving obligation. (See FERC Dkts. EL16-6 & ER16-121, filed Oct. 19, 2015.)

Of course, FTR underfunding may well prove impossible to eliminate entirely. FERC itself acknowledges that markets are unpredictable - that no one can design a financial hedge that guarantees protection against all types of risk.

Yet now we see something new. With PJM stakeholders unable to agree on formal tariff amendment to solve underfunding, PJM's grid operators and engineers lately have undertaken ad hoc efforts to minimize the problem. In simple terms, PJM operators recently have revised certain engineering assumptions, such as transmission availability, the likelihood of outages, and the likelihood of interchange transactions with neighboring regions, such as MISO or New York, and so forth. With these tweaked assumptions, which essentially adopted a more conservative view of existing grid capacity available to support FTR hedging positions, PJM changed the mathematical analysis that tests for "simultaneous feasibility." And simultaneous feasibility is what helps govern the official forecast of how many FTRs can be issued and sold without breaking the bank.

But these tweaks have come at a cost. PJM's changed engineering assumptions in fact have created winners and losers, making more difficult for load-serving utilities (LSEs) to hedge congestion risk. So in one sense, PJM's new tariff proposals filed in October seek to undo some of the damage caused by the recent ad hoc attempts at a fix.

Can PJM find a way to assure revenue adequacy for FTRs without playing favorites among market participants? The utilities generally favor PJM's new proposals (as do state regulators in Maryland and New Jersey), but financial traders see red, fearing they'll become second-class citizens in PJM's wholesale day-ahead energy market.

FTRs: A Primer 

Financial Transmission Rights mark the second of two key concepts - the

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