2016 49th Hawaii International Conference on System Sciences

Financial Transmission Rights in Changing Power Networks

Aleksandr M. Rudkevich Michael C. Caramanis Evgeniy A. Goldis

Newton Energy Group Boston University Newton Energy Group
arudkevich@negll.com mcaraman@bu.edu jgold@negll.com

Xiaoguang Li Pablo A. Ruiz Richard D. Tabors

Boston University Boston University Tabors Caramanis Rudkevich
lixiaog@bu.edu paruiz@bu.edu rtabors@tcr-us.com

Abstract
Many restructured power markets rely on Financial f m , F ( f m  Fm )  M  vectors of all enforced
Transmission Rights (FTRs). FTRs are financial constraint flows and limits, respectively in the market
contracts that entitle the holder to a stream of revenues network;
(or charges) based on the day-ahead hourly congestion
price difference across an FTR related energy path.
 m  M  N PTDF matrix reflecting the impact of
Holders obtain FTRs through an auction mechanism FTR positions on constraint flows in the market
relying on the solution of a specially formulated OPF network;
problem. FTR holders then receive or make payments B   set of branches that are closed in the auction
based on the outcome of Day Ahead (DA) energy network but open in the market network (missing
market. Known FTR properties (revenue adequacy) [1] branches);
guarantee that if the auction OPF and the DA market
have the same network topology, congestion rent
B   set of branches that are open in the auction
network but closed in the market network (acquired
collected in the DA market will be sufficient to pay all
branches);
FTR holders. DA market topology almost always
deviates from the auction topology. This may create am  B B  difference between auction and
underfunding problems. We propose a solution to market topologies;
topology-driven underfunding using Topology
 cm  a PTDF matrix reflecting the impact of FTR
Reconfiguration Rights (TRRs) financial transactions

corresponding to topology changes. Combinations of positions on branches in B under contingency c in
FTRs and TRRs guarantee revenue adequacy. the market network topology;
The work presented herein was funded in part by the Advanced  m,cc  a PTDF matrix reflecting the impact of
Research Projects Agency-Energy (ARPA-E), U.S. Department of transactions reinstating flows for missing branches
Energy, under Award Number DE-AR0000223.
B on branches in B under contingency c in the
market topology;
Nomenclature
( I  m )  a self-PTDF matrix reflecting the
N number of tradable FTR positions; impact of branches in B  on themselves under
M  number of monitored transmission constraints. contingency c;
For notational simplicity we assume that each
monitored branch is monitored for each contingency; Y  a vector of flows through missing branches as
c(k )  contingency corresponding to constraint k ; defined from the power flow solution in the auction
topology under all contingencies;
, topologies of auction and market network,
a m
Yc  a sub-vector of Y corresponding to
respectively;
X  an N  vector of net awarded FTR positions contingency c;
for all FTR paths in the network; y_,c ( jk )  flow through a missing branch j under
f a , F ( f a  Fa )  M  vectors of all enforced contingency c(k );
constraint flows and limits, respectively in the auction
network;

1530-1605/16 $31.00 2016 IEEE 2326

DOI 10.1109/HICSS.2016.291
Y  a vector of injections cancelling flows though
acquired branches in the market topology under all
contingencies;
Yc  a sub-vector of Y corresponding to contingency
c;
yc (, kj )  magnitude of injection cancelling the flow
though acquired branch j under contingency c(k );
a vector of shadow prices of transmission
constraints in the market.
1. Introduction
Financial Transmission Rights (FTRs) are essential
attributes of electricity markets based on Locational
Marginal Prices (LMPs)1. An FTR market plays two
crucial roles: 1) it provides means for distributing
congestion rent, the revenue surplus between load
payments and generator receipts, attributable to
transmission congestion, and 2) it allows market
participants to hedge the price risk associated with the
cost of transmission congestion.
Market participants obtain FTRs through a
specially designed auction mechanisms relying on the
solution of a specially formulated Security Constrained
Optimal Power Flow Problem (Auction SCOPF). The
outcome of the Auction SCOPF is a set of point-to-
point transactions denominated in MWs which satisfy
all security transmission constraints. In other words,
the set of FTRs is simultaneously feasible within the
transmission network as modeled in the auction.
FTR holders then receive or make payments hourly
based on the outcome of the Day Ahead (DA) energy
market. In each hour, the DA solution of a
corresponding SCOPF (Market SCOPF) results in
hourly LMPs. The holder of a given FTR is entitled to
receive (or obligated to make) a payment equal to the
MW amount of the FTR times the difference in LMP
congestion components between the FTRs end points.
A well-known result [1] guarantees that if the set of
FTRs remain simultaneously feasible in the Market
SCOPF, congestion rent collected in the DA market
will be sufficient to make payments to all outstanding
FTRs.
In reality, however, simultaneous feasibility of
outstanding FTRs in the Market SCOPF is not
guaranteed. In fact, it is often violated resulting in what
is known as an underfunding problem. For example,
PJM annual FTR underfunding was as high as 31% in
1
Different markets use different terms for congestion related
financial instruments and for nodal prices. For the purpose of this
paper we refer to those as FTRs and LMPs, respectively.
2327
2012-2013 and 28% in 2013-2014 [2]. The
underfunding in SPP in 2014-2015 was at about 20%
and the trend has shown an increase in underfunding
over one year [3]. A key factor behind this problem is
the difference between the network topology of the
auction SCOPF and the realized topology in a given
hour in the DA market. Other underfunding drivers
may be overallocation of FTRs, e.g., based on
grandfathered firm transmission rights, beyond what
the network can bear under some conditions, reduction
in transmission facility ratings, and changes in external
flows. In PJM, Real-Time (RT) congestion difference
with DA also can have a significant impact on FTR
underfunding.
Differences between auction and market network
topologies are practically unavoidable because
scheduled and forced outages of transmission facilities
are not captured in the auction SCOPF, which
represents the network using a single snapshot.
Furthermore, if the topology control methods [4-6]
become adopted in the future, these topology
deviations may become more frequent. Although it is
possible that the cost minimizing topology may reduce
the magnitude of the underfunding, the problem will
not go away, as shown using examples in [7-9].
The approach taken in this paper is to
systematically study how topology changes affect
revenue adequacy of FTRs and how to identify the
economic value of each topology change, and assign
that value to the entity responsible for that topology
change. We demonstrate that the economic value of
topology changes can be established in a manner that is
justifiable and unambiguous. We also demonstrate that
should each entity that causes topology changes
assume financial responsibility for that change, the
revenue adequacy of FTRs would become guaranteed
under the resulting changing topology.
The primary focus of this paper is on the impact of
topology change on revenue inadequacy. It does not
consider other factors influencing revenue inadequacy
such as constraint deratings, external flows or
appearance of new contingencies due to transmission
outages. Also, the paper offers an extension of the
revenue adequacy theorem [1] dealing with obligation
FTRs. This extension does not cover a more general
result in [10] addressing revenue adequacy for both
FTR obligations and FTR options.
2. Network topology, simultaneous
feasibility and revenue adequacy of
Financial Transmission Rights
For the purpose of this paper, the power network is
defined using a lossless DC model represented by the
following triplet: } where
is the
{ , C, F}
network topology, C is the set of enforced
transmission constraints (including contingency
constraints) and F is the vector of constraint limits.
All constraints are considered one-sided limits on
branch flows in two opposite directions are considered
as two distinct constraints.
Financial Transmission Rights (FTRs) are defined
as balanced point-to-point power transfers on the
power network. Each FTR is represented by the Point
of Injection (POI), Point of Withdrawal (POW) and
MW quantity, which may be positive or negative. We
assume that the FTR auction was conducted in the FTR
Auction Network a { a , Ca , Fa } . In a given
hour, the Day Ahead (DA) energy market clears in the
Market Network m { m , Cm , Fm } . In general, the
Auction and the Market networks may differ in all
three triplet components. However, in this paper we
assume that the set of constraints and constraint limits
do not change and focus entirely on changes in
transmission topology.
An FTR defined by its POI, POW, and MW
quantity determines an implied flow obligation on each
transmission constraint. This implied flow obligation
measured in MW is equal to the product of the FTR
MW quantity and the Power Transfer Distribution
Factor (PTDF) of that FTR on the constraint where
PTDFs are computed in the market network
{ m , Cm , Fm } .
m
This definition of the implied flow obligation is
directly connected to the FTR settlement mechanism
under which FTR holders receive congestion revenues
in the energy market based on the difference in
congestions components of DA LMPs between FTRs
POW and POI.
Constraints implied payout obligation to an FTR is
the product of the implied flow obligation to that FTR
and constraint shadow price in the DA market.
Similarly to implied flow obligations of constraints,
we can define original flow obligations as the product
of the FTR MW quantity and the Power Transfer
Distribution Factor (PTDF) of that FTR on the
constraint where PTDFs are computed in the auction
network a { a , Ca , Fa }.
} FTRs are deemed
simultaneously feasible in network { , C, F}
} original obligations will differ. If the constraint does
if power flows defined in that network by these FTRs
violate no constraints in set C .
The design of FTR markets rests on the following
well-known result establishing revenue adequacy
conditions.
2328
Revenue Adequacy Theorem. If a set of FTRs is
simultaneously feasible in the auction network a and
if the market network does not deviate from the auction
network ( a m ), then the congestion rent
collected by the system operator for each constraint in
the DA market will always be greater or equal to the
sum of constraints payout obligations to all FTRs.
This theorem in fact provides a strong guarantee of
revenue adequacy such that when two networks
coincide, revenue adequacy is maintained not only at
the system level but also at the level of each constraint.
Although this result is well known [1], for the
purpose of further discussions, it is useful to restate its
proof.
Proof. From the definition of a flow obligation,
and given that a m it is easy to see that the sum
of all flow obligations of a given constraint equals the
total flow through this constraint created by all FTRs
awarded in the auction. Because FTRs are
simultaneously feasible, the total flow does not exceed
the constraint limit.
If this constraint binds in the DA market, the total
flow in that constraint in the DA equals its limit and is
always greater or equal to the sum of all that
constraints flow obligations. As a result, constraint
revenues will be always greater or equal to that
constraints payout obligations.
If the constraint does not bind, its congestion rent is
zero but its payout obligations are also zero.
In sum, given the theorems conditions, congestion
rent of each constraint is greater or equal constraints
payout obligations to all FTRs.
Q.E.D.
3. Revenue adequacy when the auction and
market networks differ
When the auction and market networks are
different, revenue adequacy is no longer guaranteed.
These networks could vary in topology, set of enforced
constraints, imposed constraint limits and in all three
factors. The above stated revenue adequacy theorem
holds because when two networks coincide, the
implied obligations of each constraint equal its original
obligations. When topology changes, implied and
not bind, these differences have no financial
implications. For a binding constraint, if the sum of all
implied obligations exceeds the original obligations but
does not exceed the constraint limit, this constraint will
remain revenue adequate. When total implied
obligations exceed the constraint limit, then the
constraint becomes revenue inadequate. In sum,
changes in the network topology could violate revenue
adequacy both for individual constraints and for the
system as a whole.
One solution to the revenue adequacy problem
could be changing the FTR settlement mechanism, for
example, one can allocate congestion rent of each
binding constraint among FTRs using original flow
obligations. Although under this rule revenue adequacy
will hold, it will deprive FTRs of their fundamental
property of serving as financial instruments hedging
differences in LMPs caused by transmission
congestion. Indeed, when the market topology differs
from the auction topology, payments based on original
obligations will be inconsistent with DA market LMPs
and will not provide adequate hedge.
Thus, to solve the revenue adequacy problem it is
essential to preserve the hedging property of FTRs and
therefore make no modifications to the settlement
Figure 1. Aligning Market and Auction Network Topologies
mechanism and at the same time make sure that
constraint payout obligations do not exceed congestion
rent. Such a solution is possible only if it relies on
financial flows outside of the current DA market
settlements. Our objective is to identify these flows
based on the economic value of individual changes in
transmission topology.
Let us assume that the auction and market
topologies differ (
a 
m ) so that there is a set of

branches B that are open in the auction topology but
closed in the market topology, and there is a set of

branches B that are closed in the auction topology but
open in the market topology. All other branches
remain identical in both topologies. The difference
between two topologies is the union of sets B  and
m as the power flow
  
B which we will denote as am  B B
a under that contingency.
2329
If we impose power injections and withdrawals
implied by FTRs on the market network, the resulting
flow of power in that network will be different from
the one observed in the auction network, indicating that
the network capabilities are not as auctioned to FTR
market participants.
Our goal is to effectively replicate within the
market network the as-auctioned capability, as shown
in Fig. 1. It is important to note that added transactions
must replicate topology changes not only in the base
case topology but also under all contingencies defining
a set of constraints C. Under different contingencies,
the magnitudes of these transactions will be different.
As a result, each topology modification in  am should
be associated with a batch of point-to-point
transactions. All transactions in the batch will have
the same pair of POI and POW coinciding with end
nodes of the corresponding branch, but the MW value
of the transaction will depend on the contingency.
Transaction batches introduced to the market
network should meet the following criteria:
1) There is one transaction batch for each branch in
B  and one transaction batch for each branch in
B ;
2) Points of injection and withdrawal of each batch
transaction are end nodes of the branch associated
with that batch; and
3) Under each contingency, the superposition of
contingency specific transactions and all FTR
injections and withdrawals results in the same set
of power flows solution in
resulting from FTR injections in the auction
network
By defining such transaction batches we will replicate
within the market network the as promised capability
of the auction network and at the same time associate
each topology change with point-to-point batches.
Using the results of the DA market, we can then assign
each point-to-point batch an economic value and
therefore identify financial responsibilities associated
with each topology modification.
Proposition 1. If networks
a ,
m are not islanded, each constraint in the DA market will be always
there exists a unique set of transaction batches
satisfying conditions 1) through 3) above.
The proof of this proposition, provided in the next
section, relies on the concept of Flow Cancelling
Transactions (FCTs) and underlying analytical
techniques presented in [11].
Transaction batches imposed on network
m simultaneously feasible. Therefore the combined set of
effectively emulate topology changes aligning
m with market network and for each constraint the sum of
a . In many respects these transactions are similar to
FTRs: they are balanced, point-to-point transactions of
known MW quantities (positive or negative) and
defined on the same network topology
m as FTRs. Q.E.D.
We will call these transaction batches Topology
Reconfiguration Rights (TRRs) associated with
topology change  am .
Each TRR is associated with a transmission branch
that is either added to, or removed from, the auction
topology. Under each contingency, magnitudes and
directions of TRRs are uniquely determined by the
topology change  am and the set of FTRs. Introducing
a branch to the market network that was not present in
the auction or removing a branch from that network
would be equivalent to imposing an associated TRR
and so it entails a financial responsibility associated
with that topology change.
TRRs differ from FTRs in one important aspect.
FTR quantities remain fixed for all contingencies,
whereas TRR vary. However, if contingent quantities
of TRRs are known, given the outcome of the DA
market, as shown below, the economic value of each
TRR is not difficult to calculate. Indeed, consider a
constraint binding in the energy market. Given that
constraints contingency, we know the MW quantity of
the TRR and the PTDF of the TRR on the constraint.
Therefore, we can compute the constraints implied
flow obligation to the TRR as a product of the TRR
quantity and PTDF. Subsequently, constraints payout
obligation to the TRR is as a product of shadow price
and implied obligation. Similarly to FTRs, the value of
a TRR equals the sum by all binding constraints of
payout obligations to that TRR.
2330
Proposition 2: Extended Revenue Adequacy
Theorem. If a set of FTRs is simultaneously feasible
in the auction network { a , C, F}} , if the
a
market network m { m , C, F}} deviates from the
auction network in topology by the set of branches
 am and if both networks are not islanded, then the
congestion rent collected by the system operator for
greater or equal to the sum of that constraints payout
obligations to all FTRs and TRRs .
Proof. The proof here is very simple. The
superposition of FTRs and TRRs in the market
network results in the same flows as the superposition
of FTRs in the auction network in which FTRs are
FTRs and TRRs is simultaneously feasible in the
implied flow obligations to this combined set does not
exceed the constraint limit. Therefore for each
constraint, its total payout obligations never exceed
congestion rent collected for that constraint.
4. TRR quantities and values
If we impose all FTR positions X on the market
network, they will result in constraint flows f m
f m  m X (1)

Consider now the set of branches B that are
closed in the auction topology but open in the market
topology, and construct a vector Y of flows through
these branches as defined from the power flow solution
in the auction topology under all contingencies. These
flows are absent from the market network and we
should reinstate them as point-to-point transactions

associated with branches B . Superposing these flows
in the market network results in the vector of constraint
flows f
f   mY (2)

where  m is a PTDF matrix measuring the impact in
market topology of reinstated flows on constraints. A
minus sign appears in formula (2) because in order to
replicate a branch flow with a point-to-point
transaction an injection must be made at the receiving
node where power enters the system and withdrawal
must be made at the sending node where power exist guarantees that congestion rent collected in the market
the system. settlement will be sufficient to pay for FTRs and
Next, we consider the set of branches B that are TRRs:
open in the auction topology but closed in the market m F  m m X  m (m Y  m Y ) (7)
topology. Since these branches are absent from the
auction topology, to replicate the auction topology The product m  m represents the difference in
power flow we should introduce point-to-point
transactions that effectively eliminate impact of these congestion components of LMPs between the POW
branches on constraints in the market topology. Such and POI of FTRs and therefore the first term in (7) is
transactions were introduced in [11] and for each the sum of fully funded payments to FTR holders. The
contingency c their magnitudes are defined from the second term is the sum of all market values of all
following linear equations: TRRs:
T  m (m Y  m Y ) (8)
 ,c c  ,c
 X   Y  ( I   )Y  0
c
m m  m 
c
(3)
For a single missing branch, its TRR value will be
For each contingency, equation (3) effectively sets to equal to
M
T j   kkj y_,c ( jk )
zero interchange flows between each of the branches in
(9)
B and the rest of the network as if these branches k 1
were disconnected from the market network.
If disconnecting branches in B creates no islands, the For a single acquired branch, its TRR value will be
self-PTDF matrix is invertible [12] and this equation equal to
M
T j   kkj yc (, kj )
has a unique solution:
(10)
Yc  ( I   m,c )1 cm X   m,c,cYc
 (4) k 1

The combination of all sub-vectors of contingency- For valuation purposes TRR batches could be replaced
c with a single point to point transaction with the
dependent transactions Y  defines single vector Y . quantity determined by the following equations:
The impact of these transactions on constraint flows is T j
given by y_, j   M
(11)

f    mY (5)
 
k 1
k k
j

By construction, the resulting vector of constraint for a missing branch and

flows will be identical to the flows in the auction T j
network y , j  M
(12)
fa  fm  f  f
(6)  
k 1
k k
j

 
fa  m X   Y   Y
m  m 
for an acquired branch. As follows from (11) and (12),
This proves Proposition 1. Vectors Y , Y uniquely M

define TRR quantities reconfiguring the market

T j   y_, j  kkj   y_, j  LMPj
k 1
network to the as promised capability. The total (13)
M
T   y_, j  k  y , j  LMPj
number of elements in these two vectors is the number  j

am  B B multiplied by the

of branches in
number of contingencies. Computing this vector poses
no difficulties beyond traditional linear algebra
operations.
The first term in (6) represents implied flow
obligations of outstanding FTRs to all constraints. The
second and the third terms represent implied flow
oblations of TRRs associated with acquired and
missing branches, respectively. The revenue adequacy
j k
k 1
In other words, TRR values could be determined in
exactly the same manner as FTR values using the
difference in the POW and POI congestion components
of LMPs.
5. Numerical examples

2331
 Our numerical examples parallel the 3-bus model Table 3. Optimal Dispatch, Topology
1
developed and presented in [9]. A 3-bus model is Bus Gen LMP Cost
depicted in Fig. 2 contains two generators with A 65 MW $50 $3,250
marginal costs of $50/MWh and $100/MWh, both with B 65 MW $100 $6,500
unlimited capacity. Transmission lines A C and B C 0 $75
C have identical impedance. Parallel circuits A B(1) Total: $9,750
and A B(2) each have a twice higher impedance. All
the limitations in this system are set by transmission
constraints with transfer limits identified in Fig. 2. Table 4. Power Flow, Topology
1
Using this model, we consider two topologies Branch Flow LMP LMP SP Congestion
From To Rent ($)
topology
0 with both parallel lines connecting buses
A-B(2) 25 50 100 100 $2,500
A and B closed and topology
1 in which one of the A-C 40 50 75 0 0
two parallel lines is open. The optimal dispatch and B-C -10 100 75 0 0
power flow solutions for topology
0 is presented in Total: $2,500
Tables 1 and 2, for topology
1 - in Tables 3 and 4. The results of these valuations are presented in
For each topology we define a set of FTRs that are Tables 5 and 6.
simultaneously feasible in that topology but then we
evaluate these FTRs in another topology as if FTRs Table 5. Valuation of
1 FTRs in
0 Market with
determined in
0 were settled in the market with
1 an Acquired Branch
and vice versa. FTR (POI- Quantity Delta FTR
POW) (MW) LMP Obligation
A-B 35 50 $1,750
A-C 30 25 $750
Total: $2,500
Market Congestion Rent (Table 2): $3,750
Surplus (deficiency): $1,250

Table 6. Valuation of
0 FTRs in
1 Market with a
Missing Branch
FTR (POI- Quantity Delta FTR
POW) (MW) LMP Obligation
A-B 60 50 $3,000
A-C 30 25 $750
Total: $3,750
Market Congestion Rent (Table 4): $2,500
Figure 2. 3-bus network example [9] Surplus (Deficiency): ($1,250)

Table 7. TRR Valuation

Table 1. Optimal Dispatch, Topology
0
Case Missing branch Acquired branch
Bus Gen LMP Cost
A B(1) in the A B(1) in the
A 90 MW $50 $4,500 market market
B 40 MW $100 $4,000 From - To AB AB
C 0 $75 Calculated 25 25
Total: $8,500 TRR quantity
Binding A B(2) AB(1), AB(2)
Table 2. Power Flow, Topology
0 Constr.
Branch Flow LMP LMP SP Congestio Shadow price $100 $75
From To n Rent ($) PTDF 1/2 2/3 on both
A-B(1) 25 50 100 75 $1,875 LMP $50 $50
A-B(2) 25 50 100 75 $1,875 TRR Value $1,250 $1,250
A-C 40 50 75 0 0
B-C -10 100 75 0 0
Total: $3,750

2332
 As shown in these examples, FTRs defined in
topology
1 but settled in the topology
0 with an gambling mechanism primarily serving speculators.
acquired branch result in a revenue surplus of $1,250.
In contrast, FTRs defined in topology
0 but settled topology should bear direct financial responsibility for
in the topology
1 with a missing branch result in a responsibility justifies additional payment to the
revenue shortfall of $1,250.
Consider now corresponding TRR quantities and
values presented in Table 7. As this table demonstrates,
in the first case the negative TRR value is exactly
equal the revenue shortfall between congestion rent
and obligations to FTR holders. Collecting these
money from entities responsible for topology change
make FTRs fully funded.
In the second case the TRR value is positive,
indicating that the entity responsible for topology
change is eligible for a portion of congestion rent and
that TRR value is exactly equal to the revenue surplus.
6. Policy implications
Different FTR markets use different approaches
toward addressing the revenue adequacy problem. In
most markets, such as PJM and MISO, the policy in
place is to allocate the revenue inadequacy shortfalls to
FTR holders. The approaches for shortfall allocation
range from a simple proportional allocation among all
FTR holders to an elaborate scheme recently proposed
by CAISO [13]. Alternatively, in NYISO FTRs are
fully funded and the shortfall is allocated to
Transmission Owners (TOs) who receive auction
revenues [14].
In our view, the fully funded FTR approach is
justified if we recognize the fact that deviations of the
market topology from the auction topology effectively
violates the implicit agreement between FTR holders
and transmission owners and that this deviation must
entail financial responsibility. From a theoretical
standpoint, at the time of the FTR auction transmission
owners auction to FTR buyers financial access to these
assets. Asset owners therefore should provide a
financial guarantee to the buyers that the network used
in the energy market settlements must remain as
auctioned. From the FTR buyers perspective, auction
revenues are paid in exchange for that guarantee. If the
network is not delivered as auctioned, the buyer of the
FTR product should be entitled to a refund.
A deviation from this theoretical principle as
observed in practice results in making adjustments to
payouts made to FTR holders. Allocation of the
revenue shortfall to FTR holders reduces the
effectiveness of FTRs as congestion hedging
instruments for market participants with physical
positions (such as generators and load serving entities),
2333
and effectively makes FTRs appear more like a
Entities responsible for changes in network
topology changes they make. This financial
system either positive or negative which will assure
revenue adequacy of FTRs. Payments should be made
to the extent that changing the topology increases the
implied obligations of constraints to FTRs. At the same
time, to the extent that topology changes reduce
implied obligations of constraints to FTRs, responsible
entities should be entitled to the appropriate portion of
congestion rents and should in fact received payments
from the system operator.
As stated in [15], A good policy is to do as well as
possible in modeling the physical grid capacity and
awarding FTRs that are likely to be simultaneously
feasible in all subsequent dispatches. In the presence of
any remaining revenue adequacy, the declaratory
policy should be to maintain full funding of FTRs and
assign any revenue inadequacy to the beneficiaries of
the allocated auction revenue rights, chiefly the
transmission owners. In long run equilibrium this
policy should not significantly affect the net revenues
flowing to the transmission owners, but it should
provide the many efficiency benefits that can only be
obtained through fully funded financial transmission
rights.
We agree with the second part of this statement.
Assigning revenue inadequacy to transmission owners
will maintain the efficiency of FTRs as hedging
instruments which will benefit all market participants,
even those who apparently oppose this approach. An
argument could be made that in the long run such a
market would yield higher ARR revenues than under
the condition in which FTR buyers are facing an
additional risk of underfunding charges.
We however disagree that trying to award FTRs
that are likely going to be simultaneously feasible in all
future dispatches necessarily represents a good policy.
In contrast, we believe that the effect of changing
network topology should not be considered as an
inconvenience which needs to be minimized but as a
reality which can and should be managed to the benefit
of the users of the power grid. For example, if topology
control can benefit the system by reducing
transmission congestion costs and resulting in higher
social welfare, that benefit should not be undermined at
the sake of minimizing topology changes as potentially
increasing the revenue inadequacy problem.
Our proposed TRR-based mechanism for assigning
a financial responsibility for topology changes to
transmission owners on a facility-by-facility basis can
provide a strong justification for implementing such a
policy, because it is economically justifiable and
unambiguous. In markets like NYISO where auction
revenues are received by transmission owners, TRRs
could be applied directly as a mechanism that
explicitly and uniquely identifies the financial
responsibility of the owner of a transmission facility
for that facility being absent from, or present in, the
energy market.
In markets like PJM and MISO where auction
revenues are received by LSEs, implementation of the
TRR approach may require additional efforts because it
is difficult to make TOs financially responsible for
their actions if they receive no ARR revenues. It is
our understanding that presently TOs have no say as to
whether a facility scheduled to be on maintenance for
some time within the FTR auction horizon is modeled
as in-service in the auction. Typically, RTOs make this
decision based on the outage schedules provided.
Under the proposed approach, TOs will be made
financially responsible for the topology deviation
between the auction and the market and should
therefore be given a choice on how the facility would
be treated in the auction.
In the two examples considered in the previous
section TRR values were positive when topology
change resulted in more efficient market operation (in
this case, closing the line), and negative when topology
change resulted in a less efficient market operation.
This relationship suggests that the proposed TRR
approach could be used to set up an incentive for
transmission owners to improve the efficiency in their
transmission maintenance schedules and other possible
operations with topology reconfiguration. It is
important to note, however, that the observed
relationship does not always hold and that it is possible
to construct examples exhibiting the opposite
relationship between dispatch efficiency gain and
corresponding TRR value. Additional research is
needed to explore how well the TRR-based incentive
corresponds with the efficiency gain and loss
associated with corresponding change in network
topology.
7. References
[1] Hogan, W., 1992. Contract Networks for Electric Power
Transmission, Journal of Regulatory Economics 4, pp. 211
242.
[2] T. Horger. FTRSTF Presentation, March 5, 2015.
Available online at http://www.pjm.com/~/media/committees-
groups/task-forces/ftrstf/20150311/20150311-pjm-solution-package-
presentation.ashx
2334
[3] SPP Market Monitoring Unit. State of the Market
Report. Spring 2015. June 18, 2015. Available online at
http://www.spp.org/publications/QSOM_2015Spring.pdf
[4] E. B. Fisher, R. P. ONeill, and M. C. Ferris, Optimal
transmission switching, IEEE Trans. Power Syst., vol. 23,
no. 3, pp. 13461355, Aug. 2008.
[5] K. W. Hedman, R. P. ONeill, E. B. Fisher, and S. S.
Oren, Optimal transmission switching with contingency
analysis, IEEE Trans. Power Syst., vol. 23, no. 3, pp. 1577
1586, Aug. 2009.
[6] P. A. Ruiz, J. M. Foster, A. Rudkevich, and M. C.
Caramanis. Tractable transmission topology control using
sensitivity analysis, IEEE Trans. Power Syst., vol. 27, no. 3,
pp. 15501559, Aug. 2012.
[7] K. W. Hedman, S. S. Oren and R. P. ONeill, Optimal
transmission switching: economic efficiency and market
implications Journal of Regulatory Economics., vol. 40, no.
2, pp. 111140, Oct. 2011.
[8] S. S. Oren and K. W. Hedman, Revenue adequacy,
shortfall allocation and transmission performance incentives
in FTR/FGR markets 2010 IREP Symposium Bulk Power
System Dynamics and Control VIII (IREP), Buzios, Brazil,
August 1-6, 2010.
[9] S. S. Oren, Point to Point and Flow-based Financial
Transmission Rights: Revenue Adequacy and Performance
Incentives. Chapter 3 in: Financial Transmission Rights:
Analysis, Experiences and Prospects, Rosellon and
Kristiansen Ed., Springer. 2013.
[10] R. P. ONeill, U.Helman, B.F. Hobbs, W.R. Stewart, Jr.,
and M. H. Rothkopf, A Joint Energy and Transmission
Rights Auction: Proposal and Properties. IEEE Trans.
Power Syst., vol. 14, no. 4, pp. 10581067, Nov. 2002.
[11] P. A. Ruiz, A. M. Rudkevich, M. C. Caramanis, E. A.
Goldis, E. Ntakou, and C. R. Philbrick, Reduced MIP
formulation for transmission topology control, in Proc. 50th
Allerton Conf. on Communications, Control and Computing,
Monticello, IL, Oct. 2012, pp. 10731079.
[12] T. Gler, G. Gross, M. Liu, Generalized Line Outage
Distribution Factors. IEEE Trans. Power Syst, vol. 22, no. 2,
pp. 879-881, May 2007.
[13] California ISO. Allocating CRR Revenue Inadequacy
by Constraint to CRR Holders. Prepared by Department of
Market Monitoring, October 6, 2014.
[14] S. M. Harvey, Shortfall Allocation Methodology.
White paper prepared for New York Independent System
Operator, Inc., February 15, 2005.
[15] W.W. Hogan. Financial Transmission Rights, Revenue
Adequacy and Multi-Settlement Electricity Markets.
http://www.hks.harvard.edu/fs/whogan/Hogan_FTR_Rev_Adequacy
_031813.pdf