Transmission Rights cant live with em cant live without em

1
Transmission Rightscant live with em cant
live without em

• Richard ONeill
• Chief Economic Advisor
• Federal Energy Regulation Commission
• richard.oneill_at_ferc.gov
• Workshop on Congestion Revenue Rights
• PUC of Texas
• Austin, TX
• September 5, 2003

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• Paradigm Change

• Transitioning from planning and dispatch to
  auction and market power mitigation models

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issues

• Types of rights
• point-to-point or flowgate both
• Obligations or options both
• Deratable rights
• Who caused the deration? Nature or Homo Sapiens
• get the incentives right
• Myth of the perfect hedge
• Preassigned or auctions both
• Auctions are not yet refined enough

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Why have tx rights and centralized auctions?

• Why have tx rights? Hedge locational prices
• Why have centralized auctions?
• Deal with externalities market power, network
  effects
• Transactions costs of bilateral markets are too
  high
• Choice imperfect regulation v. imperfect markets

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A market design that works

• Pre-day-ahead markets
• for transmission rights CRT/TCC/TRCs/FGRs
• for generation capacity/reserves (ICAP)
• market power mitigation via options contracts
• day-ahead market for reliability(valium
  substitute)
• simultaneous nodal market-clearing auctions for
  energy, ancillary services and congestion
• allow multi-part bidding
• higher of market or bid cost recovery
• allow self scheduling
• allow price limit bids on ancillary and
  congestion
• Real-time balancing myopic market
• markets are nodal-based LMP with fish protection

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Congestion Management using LMP

• Locational Marginal Pricing, or nodal pricing,
  calculates a spot price for node in the system
• without congestion (assuming no losses in LMP),
  Uniform system price
• prices differ when there is congestion
• Congestion price for an energy transaction is the
  difference between energy price at Point of
  injection (POI) and Point of withdrawal (POW)
• congestion price for a flow gate is shadow price
  of the flow gate (FMP)

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Lessons Learned Simplified Zonal Pricing
fails

• PJM (1997) single zone CMS creates incentives
  for arbitrage between bilateral and spot market
  results in administrative intervention
• California (1998 on) fixed zones experience
  increasing intrazonal congestion and new zones
• New England (1999 to 2002) single zone CMS
  unable to properly assign rising congestion costs
• You cant fool mother nature!!!!!

8
ISO New England, Daily Congestion Costs (Total
), May 1999 to January 2001
(These are "mitigated" costs i.e., adjusted to
account for local market power)
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0.00
5/1/1999
6/1/1999
7/1/1999
8/1/1999
9/1/1999
1/1/2000
2/1/2000
3/1/2000
4/1/2000
5/1/2000
6/1/2000
7/1/2000
8/1/2000
9/1/2000
1/1/2001
10/1/1999
11/1/1999
12/1/1999
10/1/2000
11/1/2000
12/1/2000
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Is transmission undersupplied?

• historically weak interconnections
• to prevent entry into IOU markets
• will greenfield transmission be built?
• Will new transmission technologies help ancillary
  services? yes
• DC subnetworks AC/DC converters
• FACTS/WAMS
• capacitors

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Transmission issues

• merchant v. system expansion both
• Private or public good hybrid
• transmission property rights weak or strong
• Rate making rate design and revenue requirements
• Return on equity
• Accelerated depreciation
• Performance incentives
• Unbundling and Paying for reliability Demand
  curve for reserves
• Market design and mitigation
• FTRs and load pocket market power
• Over-mitigation causes weak tx signals

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Transmission rights are underdeveloped

• Dispatchable tx
• beyond normal limits
• Network configuration
• Phase angle regulators
• Rights
• Weak no withholding of capacity
• Strong bidding rules
• Stronger withholding
• dormant secondary markets
• reliability markets pay for tx reserves
• market-based rates for Tx

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Transmission Rights Market Design Issues

• physical versus financial
• When markets clear physical financial
• When markets dont clear need financial rules
• Convexity required revenue adequacy
• point-to-point versus flow-based
• products
• obligations, options and hybrids
• Contingent rights
• initial allocation
• frequency of primary auction and products offered
• secondary market
• incentives for transmission expansion
• congestion risk management by RTO (sometimes
  called PTDF insurance)

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Point-to-Point Transmission Rights

• Essentially the same design implemented in PJM
  (1998) and New York (1999) planned for New
  England (2002)
• Differences in initial allocation schemes
• Specification of Right
• Financial right
• Point of injection (POI) and withdrawal (POW)
• Quantity at POI, POW (MW)
• Bid price (/MW)
• Obligation and options (in PJM)

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Point-to-Point Transmission Rights Advantages and
Disadvantages

• perfect hedge congestion costs
• independently of topology and network
  interactions
• Not easy to trade if system is nonlinear
• only be properly reconfigured in centralized
  auction
• ? Effect on transmission investment
• Modifications and Developments
• Define zones and hubs allow tx rights between
  them
• Hub-to-hub or zone-to-zone rights could be more
  liquid in secondary market

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Flowgate Transmission Rights

• Proposed by a number of newly forming RTOs
• market experience inter-zonal transmission
  rights in California ?
• Specification of Right
• Physical or financial right
• Identify transmission element(s) on which to
  define right line(s), transformer, etc.
  (flowgate)
• Use PTDFs to calculate quantity required on
  transmission element(s) (MW)
• Bid price (/MW)
• Option

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Flowgate Transmission Rights Advantages and
Disadvantages

• May lead to more liquid secondary market
• May be more effective incentive for
  transmission expansion
• -/? Number of active (binding) flowgates will
  be larger than anticipated
• - Active flowgates will change over time
• -/? May require RTO uplift (subsidy) to maintain
  liquidity of market
• -/? some proposals require RTO to guarantee
  flowgates for up to one year

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Merchant expansion

• Public good Eminent domain and environment
• Test contestability or no withholding
• Operation under control of RTO/ISO
• open breaker option
• system is no worse off
• TX property rights without withholding
• FTR and Flowgate rights
• Choice seems to be DC subnetworks

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Transmission rate design and revenue requirement

• Transco/Gridco does revenue requirement
• Cost-based traditional v. PBR
• Incentive compatible
• Benchmarking (EU) percent availability
• RTO does rate design
• Total revenue requirements via access charge
• TX rights auctions for forward rights
• Congestion fees
• system expansion must go thru planning process
• transmission property rights via RTO auction

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TX rights auctions

• Joint TX and generation auctions
• San Fran nomogram
• Hedging phase shifter settings
• Point(s) to Point(s) FTR/TCC/FCR/CRT
• perfect hedge except losses
• If constraint set is nonlinear, no options
  contracts
• Flowgate rights elements or combinations
• Option v. obligation contracts
• Approximations
• Linear PTP decomposable
• Nonlinear PTP not decomposable no PTP option

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A Rule for Flowgate Rights in a Joint Auction

• RTO provides data on all transmission constraints
  and historical patterns of congestion to
  transmission users
• Transmission users identify flowgates to hedge
  and bid for portfolios of financial flow-based
  rights
• RTO charges all transmission users, including
  holders of flow-based rights, actual congestion
  cost based on LMP (no subsidy)

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Augmenting the Transmission Rights Market

• Two-settlement system settling tx rights
  day-ahead
• Congestion bidding Bilateral transaction can
  specify maximum willingness-to-pay for
  congestioneffectively a spot point-to-point
  right

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Summary Do Both

• Efficient congestion management and tradable
  transmission rights crucial too in market design
• zonal pricing has failed
• LMP is theoretically and empirically sound
• RTO should not be in the business of subsidies
• Two paradigms for transmission rights are the
  point-to-point right and the flow-based right
• increasing transmission customer choice

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Wholestic Market Design AGORAPHOBIA
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