Seeking the Best of Old and New, FERC Solicits Ideas on How to Create Long-term Transmission Rights in Markets With Locational Pricing

Taking another look at a controversial feature of restructured electricity markets, the Federal Energy Regulatory Commission ("FERC") recently invited the public to comment on how long-term transmission rights could exist in markets that manage congestion with  locational pricing.  While market participants in restructured markets can purchase Financial Transmission Rights ("FTR") to hedge against congestion costs, FTRs have a term of only one year.  In contrast, the life of a generating stations and the term of a typical power purchase agreements extend over many years, possibly decades.  This temporal asymmetry, according to FERC, is what is driving the interest in creating longer-term transmission rights.  To be considered by the agency, public comments must be submitted to FERC by June 27, 2005.  

In power markets based on the open-access principles of FERC's Order No. 888, grid users can purchase network integration transmission service or firm point-to-point transmission service, both of which are available on a long-term basis.  These transmission services offer their own protection against transmission congestion.  In restructured electric power markets that use locational pricing, where congestion can increase energy prices, entities can hedge against congestion costs by purchasing FTRs and thereby receiving congestion revenues that, at least in part, offset congestion charges.  However, FTRs are relatively short-term instruments, as no organized power market in the U.S. offers FTRs for more than a one-year.  In addition, there may not be enough FTRs available at any given time to satisfy demand for them. 

Among the obstacles FERC identified to the use of long-term FTRs are that FTRs must be allocated the transmission system capabilities expected to exist in a given year.  Long-term capability scenarios, however, are hard to forecast.  Consequently, there are valuation problems based on the difficulties of predicting system congestions for future years; liquidity concerns since the market for FTRs of a specific duration could be thin; as well as other complications.  FERC is interested in hearing about the need for long-term transmission rights and the problems caused by the lack of them; what entities or markets are most affected by their absence; whether regional transmission organizations or independent system operators have plans to address this; and, perhaps most importantly, what are FERC's options for creating markets in long-term transmission rights.  

For assistance in preparing or submitting comments to FERC on this important initiative, please contact the Energy Markets & Regulation practice group in the Washington, DC office of Bracewell & Giuliani.  (FERC Docket No. AD05-7-000) [NEW MATTER]