FERC Filings
EPSA Comments on Long Term Transmission Rights in Markets with Locational Pricing
Comments
As the notice and attendant FERC staff papers highlight, the Commission has heard from some market participants in RTO/ISO regions that there is interest in obtaining long term transmission rights – i.e., longer than one year – in markets with locational pricing. In those markets, Financial Transmission Rights (FTRs) allow market participants to hedge against transmission congestion costs for terms up to one year. While there are market participants that have expressed an interest in longer terms for transmission rights, the current FTR program has achieved appropriate transitional allocations, operates in a non-discriminatory manner and offers hedging opportunities for all market participants consistent with what is simultaneously feasible on the transmission system. The FTR systems in LMP-based markets are working well for EPSA member companies. However, additional tools, products and features that may further improve market operations, could, if appropriately crafted and implemented, offer additional market opportunities in the organized markets, if these features are fully vetted by stakeholders to protect against unintended or negative impacts to the existing market.
EPSA has advocated and continues to advocate the use of FTRs to support an efficient, non-discriminatory open access transmission market and underpin the operation of competitive wholesale electricity markets. In several regions of the country – those operated by RTOs or ISOs – the transition to FTRs has occurred successfully and represents an important breakthrough for those markets. This was a crucial step forward in the transition to efficient wholesale electricity markets; hence, EPSA urges the Commission to consider carefully any proposal that may upend or impact those markets and the benefits which flow from them to all customers. Certainly, to the extent that the expressed interest in longer term FTRs is a part of or prelude to a more general desire of certain market participants to be excluded from or carved out of the existing LMP-based markets, the Commission should flatly reject that outcome.
While EPSA remains cautious looking ahead, the implementation of a limited program of longer-term financial transmission rights might be pursued, but will pose certain market dynamics or outcomes which require consideration. The Commission must consider, for instance, that there may be a level at which it is not feasible to offer more long term transmission rights without compromising market liquidity, economic efficiency or system reliability. With this in mind, any limited introduction of long-term transmission rights should occur in a careful, measured and conservative manner. If the inclusion of this or any new product is to prove fruitful, it will require a detailed vetting and consideration by all affected market participants. This level of examination and negotiation is best left to the RTO stakeholder processes. Further, the quantity of multi-year FTRs that could be made available will need to be carefully assessed and likely phased in to allow the market to gain experience.
A. Progress Achieved Through Financial Transmission Rights Model
Under a “physical” approach to transmission rights, congestion costs are the costs of curtailment of transmission service and/or generation redispatch when congestion occurs. These costs are generally unrelated to the economic value of the constrained transmission facilities as well as to the transactions that cause the congestion. They are typically spread among a wide variety of market participants, many of whom do not directly cause the congestion or benefit from the transactions involved with it. The costs of curtailment and redispatch in this market model have been subsidized unevenly by certain market participant groups, thereby obscuring the costs of the system and eliminating any signals for investment or system needs. Further, the reliance on Transmission Loading Relief (TLR) curtailment in this physical rights model is inefficient and discriminatory.
In the short term, this manner of managing congestion and its associated costs leads to an inefficient dispatch of generation and an inefficient use of transmission capacity. Longer-term, misallocated congestion costs lead to poor investment decisions and inadequate infrastructure. Hence, it was and is crucial to introduce and maintain FTRs in an LMP-based congestion management environment in order to ensure efficient scheduling and dispatch of generation and the efficient use of transmission capacity, giving market participants the ability to accomplish their commercial objectives while allowing flexibility to achieve efficient operations.
In this environment, it is the Commission’s responsibility to consider the governing policy principles which underpin the LMP-based markets and ensure non-discriminatory, efficient transmission service. The fundamental principles of competitive markets – which have been supported by recent findings in the State of the Markets Report, of economic savings for customers in organized, LMP-based markets in New England, PJM and New York – must be maintained and protected. Within that context, any hindrances to the progress of the competitive model may take us too far back, harking to the days of reliance on TLRs in order to operate the system. Such a retreat will damage markets that, while not yet perfect, are currently working efficiently and reliably and, as a result, generating cost savings for customers of all classes. Further, there may be a need for the Commission to consider revisions and improvements to Order No. 888 and utilities’ Open Access Transmission Tariffs (OATTs) before making changes or decisions on the implementation of long term transmission rights in the organized markets. Such changes contemplated under the rubric of Order No. 888 may address market participants’ concerns, and could impact the development or need for long term transmission rights. At the same time, it is also possible that the introduction of long-term transmission rights will result in discriminatory services, leading to less efficient use of the system. Hence, it is reasonable that the consideration of long-term transmission rights occur concurrently or subsequent to such proceedings.
B. Carving Out Physical Rights for Certain Transmission Customers
While not necessarily the primary driver on these issues, there is concern that the discussion of long-term transmission rights is underpinned by the desire to revert to physical rights for certain classes of transmission customers. FERC staff suggests that
long-term transmission rights could alternatively be created by exempting certain transmission users from the RTOs price-based congestion-management system. These customers could retain the right to physically schedule their power but would not pay congestion charges nor receive financial transmission rights. Even on a limited basis, this is a step backward that is not acceptable; it would bifurcate the RTO and ISO markets, balkanize the transmission grid and organized markets and threaten market liquidity. Further, carving out physical rights for certain transmission customers will create reliability concerns because these carved out customers will have no incentive to redispatch generation or implement demand response where transmission system overloads may exist. EPSA is concerned that, should the Commission consider any proposal to offer a carve-out of physical rights or long-term rights to certain types or groups of market participants, the result will be the establishment of administratively chosen winners and losers in the market and the reinstitution of discriminatory transmission access and service. This will result in less efficient use of the transmission system, the subsidization of one subset of market participants by other market participants and an increase in electricity costs across the board for all classes of customers.
The re-introduction of physical transmission rights into the established markets would create a product which many market participants would perceive as superior to financial transmission rights. This would allow market participants who receive such physical rights to enjoy superior service, thereby degrading the remaining service. Further, because physical rights would represent a higher level of service, non-discriminatory access to the physical rights product would result in most market participants choosing the physical rights product. Physical rights and financial rights are fundamentally incompatible. Thus the hybrid market envisioned by the proponents of physical transmission rights simply cannot work efficiently.
Finally, financial transmission rights lead to efficient scheduling and dispatch of generation and the efficient use of scarce transmission capacity, as they give market participants the ability to accomplish their commercial objectives while allowing flexibility to achieve efficient operations. The re-introduction of physical rights into markets that have progressed to the financial model will only degrade FTRs and the resultant positive market signals and economic efficiency they provide. Further, the introduction of physical rights must be necessarily accompanied by some type of physical curtailment of those rights, such as TLRs in times of congestion. It is highly unlikely that it will be feasible to manage efficiently these attendant physical curtailment options in parallel with the FTR/ARRs in the organized markets. For these reasons, EPSA urges the Commission to dismiss any notion that it is possible or advantageous to consider a carve-out of physical transmission rights in markets that have accomplished the transition to the financial transmission rights model.
C. Impacts Posed by Long-Term Transmission Rights
Should the introduction of longer-term or multi-year FTRs be considered in certain markets, the Commission must ensure that the program is well-considered and offers opportunities to all market participants. The introduction of any new market elements requires stakeholders to balance pros and cons, understanding that there may be compromises required to sustain those market elements. In this case, there are several possible system and market impacts that could arise through the introduction of long-term, multi-year transmission rights. FERC staff has raised many of these issues in the May 11 staff papers; EPSA agrees that the following pose concerns and would require solutions before the implementation of multi-year transmission rights in the organized LMP markets.
(1) Multi-year FTRs may not be able to accommodate a changing system – changing in both the physical configuration of the system (based on transmission and generation facilities) and arrangements for serving load. The Commission raises these concerns in the May 11 Notice and attendant staff papers. EPSA shares these concerns. Implicit in this concern is what ability the RTO or ISO has to forecast congestion scenarios, and over what period of time such forecasting can be reliable. This problem is endemic to a long-term transmission right, as changes in the grid will cause FTR valuations to be inadequate, both for revenue collection and hedging congestion costs. It may be difficult or even impossible to conduct a meaningful simultaneous feasibility analysis out several years due to not only the uncertainty of grid topology, but also uncertainty regarding the installation of new generators and retirement of old generators, and the uncertainty about base case power flow conditions.
(2) Revenue shortfalls also remain a problem in terms of how such shortfalls are funded, and what impacts the resultant socialization may have on the organized markets.
(3) The inclusion or reliance on long-term FTRs may not be compatible with retail choice programs, as retail commitments do not necessarily extend beyond one year. Hence, along with transmission grid topology forecasting, long-term FTRs require load forecasting that may not be feasible or realistic in many markets.
D. Suggestions for Moving Forward
While there are several open questions and certain untenable proposals on the table, there are some suggestions that may allow the Commission and organized markets to consider the viability of a long-term transmission rights program.
(1) If offered at all, long-term or multi-year FTRs must be offered and allocated in a non-discriminatory manner, accessible to all transmission users.
(2) It is critical that the Commission not allow the philosophy of current transitional FTR allocations, which may be based on historical usage, to be altered. The transitional allocation relied upon in some LMP-based markets has been achieved through careful stakeholder input and compromise in order to tie FTRs with load, cost causation with costs. Should the introduction of long-term transmission rights change or upset this premise, the transmission system will be used less efficiently and greater FTR inequities among transmission users will be created.
(3) Currently, one-year FTRs may be offered as options, which must be maintained in order to allow the greatest amount of flexibility for FTR holders. However, FTRs with terms longer than one year must be offered as obligations in order to maintain system integrity. This scenario, however, does not fully address the revenue adequacy problems that may occur and which are outlined by the Commission in the Staff Papers.
(4) As is the case in the current formula for one-year FTRs, there must be creditworthiness requirements which cover the full term of any FTR offered for longer than one year as well.
(5) An alternative to offering long-term FTRs in the current markets may be to examine whether tariffs can be changed to allow market participants to purchase firm point-to-point service as an additional hedge. In addition to the network charge already paid by load serving entities (LSEs), LSEs would agree to pay for point to point service and in return receive additional protection from congestion. Such service could sink at load points similar as network service and would offer additional certainty to transmission customers.
(6) The Commission could consider some type of narrow, surgical longer-term offering, perhaps three to five years in length. Such an offering must be narrow enough so as not to adversely impact existing shorter term FTRs or the transmission system overall or create a barrier to market entry in retail choice states and states with standard offer service competitive solicitations where the identity of load serving entities changes annually. On any transmission system, there is a finite number of FTRs that can be allocated; implementation of long-term FTRs will necessarily impact the existing FTR landscape. To introduce too many FTRs, or to overly skew FTRs toward longer terms, could involve intolerable trade-offs in the marketplace or undermine the efficient operation of the transmission system. Finding this sweet spot, which offers multi-year rights without adversely impacting existing rights or degrading system efficiency, may require that the Commission rely on RTO and/or ISO stakeholders to vet scenarios for implementation in their regions.
(7) The Commission should review and understand the current market participant behavior patterns in the existing FTR/ARR markets. If, for instance, market participants typically sell FTRs in those markets, essentially releasing short term hedges, this would tend to militate against the need for longer term congestion hedges.
(8) The Commission should consider the extent to which the organized markets already provide market participants with the opportunity to hedge their long term congestion risk. Products exist today that will allow a load serving entity to purchase fixed price delivered power for a multi-year term thereby obviating the need for longer term FTRs.. The bilateral energy markets may themselves provide the solutions to the concerns leading to this inquiry.