FTRs make hedging possible, but can PJM ensure full funding without playing favorites?
Bruce Radford is executive editor of Public Utilities Fortnightly. Contact him at firstname.lastname@example.org.
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.
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.