A power marketer's perspective of financial transmission right

Along with the implementation of locational marginal pricing (LMP), most, if not all, of the wholesale power markets have developed some form of financial instrument for market participants to hedge against the price risk of transmission congestion. For example, the PJM market has developed such a financial instrument called financial transmission right (FTR). In PJM, FTR is a financial contract that entitles the holder to a stream of revenues (or charges) based on the transmission reservation level and hourly LMP differences across the specific transmission path. Hence, FTR can be used to hedge against congestion charges. PJM determines the total amount of FTRs that can be granted to transmission customers based on results from a simultaneous feasibility test. This is to ensure that the energy market will be revenue adequate. Since a local serving entity is granted FTRs based on its peak load, it may have to give back FTRs due to too many customers switching to new suppliers. On the other hand, a host utility, as a provider of last resort, may suddenly find itself with insufficient FTRs to serve additional loads due to FTR oversubscription, as a result of its obligation to reinstate former retail customers. FTR is financially binding, because FTR is imbedded in the accounting system for the duration of the transmission service contract to provide a stream of revenues or charges. Three examples are given to demonstrate that FTR can be a financial liability to its holders.