The Role of Auction Revenue Rights in Markets for Financial Transmission Rights
thesisposted on 15.08.2019, 14:59 by Jeffrey J Opgrand II
Financial Transmission Rights (FTRs) have been a feature of competitive electricity markets for nearly 20 years. FTRs are financial derivatives sold in periodic auctions. Revenues from the sale of these derivatives are passed through to electricity ratepayers to compensate them for transmission congestion payments they make in the spot energy market. FTR purchasers are effectively swapping their auction payment for an uncertain revenue stream over the life of the FTR. In recent years, industry market monitors have become concerned with the auctions’ performance in adequately compensating ratepayers – FTRs sell, on average, for a price less than the revenue they generate for the purchaser. This dissertation contributes to our understanding of FTR market functioning by studying the Auction Revenue Rights (ARR) management process, which is the predominate mechanism used in U.S. electricity markets to distribute FTR auction revenue to electricity ratepayers. This dissertation is organized into three essays, detailed below. The first essay demonstrates how the ARR process influences fundamental supply conditions in the FTR auction market and show how divergent auction equilibria emerge under different ARR decision-making regimes. Using market data from the PJM Interconnection, this essay finds empirical evidence that variation in ARR management strategies helps explain differences between an FTR’s auction price and its realized ex post value. The second essay studies the interaction of affiliated subsidiaries in auctions for FTRs. The essay documents a setting where a regulated utility routinely sells FTRs (through the ARR process) to an affiliated generation company in an auction where a portion of the revenue is passed through to the regulated utility’s retail customers. It appears that the affiliated generator may be placing strategic bids in the auction to minimize the price they pay for the derivatives, which would also minimize the revenue passed through to the regulated utility’s retail customers. The third essay studies the relationship between the long-term FTR auction market and the annual auction market in terms of ARR prices. Long-term auction clearing prices systematically overvalue FTRs that are along the paths of an ARR, thus providing electricity ratepayers with a biased signal of the potential value of their ARR allocations. Collectively, these three essays demonstrate the role of the ARR process in determining equilibrium FTR auction prices. Not only do ARR management decisions directly affect equilibrium prices, but ARRs constitute the mechanism by which auction revenues are passed through to ratepayers. Thus, any analysis of FTR auction revenue deficiency must include a thorough understanding and empirical incorporation of the ARR process into the analysis.