NEPOOL Manual 6Financial Transmission Rights

Session Content

June 11, 2002

Douglas James, ISO New England

6/11/2002 2

Content of Today’s Session

• FTR/ARR Overview

• Brief Review of FTR Auction

• Discussion of FTR Auction Revenue Distribution– Qualified Upgrade Awards– 4-Stage Allocation

6/11/2002 3

FTR/ARR Overview

• SMD will introduce LMP in NE• SMD also includes financial

instrument to manage congestion risk: FTRs

• All FTRs initially made available by auction

• FTR Auction results in– FTRs– Auction Revenues

6/11/2002 4

FTR/ARR Overview

• FTR/ARR implementation basis:- NEPOOL OATT Schedule 14 & 15- Now MR 1X & Appendix C

NEPOOL Manual 6Financial Transmission Rights

Part 1 - FTR Auction

June 11, 2002

Douglas James, ISO New England

6/11/2002 6

Definition and Purpose

• What’s an FTR?– Financial instrument to manage congestion risk

• Entitles holder to share of Congestion Charges that arise during periods of congestion

• Settled hourly against differences in Congestion Compo- nent of Day Ahead Energy Market LMPs (Section 5)

• Defined in MW from point of receipt to point of delivery• Unidirectional

• How do I get one?• Created/Sold in ISO administered FTR Auction (Section 3)• Traded in Secondary Market (Section 4)

6/11/2002 7

FTR Valuation, Participation

• Valuation of FTRs– Benefit when FTR designation is in same direction as

congested flow• CC of DA LMP higher at point of delivery

– Liability when FTR designation is opposite congested flow• Any actual deliveries opposing the congested flow would

receive congestion credit offsetting such liability

• Requirements to participate– FTR Auction, Registered secondary trading

• Registered as FTR Customer• Financial Assurance Policy

– Unregistered secondary trading• No requirements, settle with registered holder

6/11/2002 8

FTR Auction Overview

• Auction: opportunity to acquire and sell FTRs– only way to create an FTR (may later subdivide)

• Short term and long term auctions– Initially monthly; full transmission capability– 2 six month auctions; 10 then 25 % of capability– Then annual; 50% of capability– Remainder of capability available in monthly

auctions

• On-peak and off-peak auctions– On-peak: weekday hours ending 0800 - 2300– Off-peak: weekday hours ending 2400 - 0700,

weekends, NERC holidays

6/11/2002 9

FTR Auction Overview (Continued)

• FTR Characteristics– Available between any Locations for which LMP

is calculated and posted: Hub, Load Zone, Node, External Node

– Designated as injections/withdrawals from Locations within and external to NEPOOL

– Magnitude to nearest 0.1 MW– Provides hedge for deliveries consistent with FTR– Do not hedge against losses

• FTR Auction is a Reconfiguration Auction– enables purchase of FTRs that are different from

those offered for sale in the auction

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Simultaneous Feasibility Test (SFT)• Preserves economic value of awarded FTRs

– must collect sufficient Congestion Charges to cover FTR credits (revenue adequacy)

– requires transmission system to support awarded set of FTRs during normal conditions

• Power Flow: quotes modeled as generation and load at injection/withdrawal Locations– model expected network topology for period– thermal ratings, interface limits– loop flows from other Control Areas– normal conditions and single contingency events– market feasibility test; not a reliability analysis

6/11/2002 11

Determining Winning Quotes

• Winning Quotes:– Set of simultaneously feasible FTRs with

highest total auction value– determined by bid and offer prices

• Steps:– download bids/offers from database– solve linear programming problem (LP)– check simultaneous feasibility (SFT)– iterate LP/SFT– upload results

6/11/2002 12

Auction Timeline

• ISO initiates, directs, oversees FTR Auction• Annual (initially, long-term) auction

– five business day quoting window opens five

business days before beginning of month

preceding period before FTRs are effective– results posted within six business days (intended

to be before monthly auction window opens)

• Monthly auction– five business day quoting window opens 15

business days before start of auction month– results posted within four business days

6/11/2002 13

Auction Business Rules

• Bids and Offers:– Must be Eligible FTR Bidder to buy/FTR Holder to sell– To sell, must own for entire auction period duration– Rejected quotes may be resubmitted in quoting period– Bids: are for purchases up to the specified quantity

(no minimum quantity may be specified)– Offers: are for sales up to the specified quantity (no

minimum); may specify a reservation price

• Outstanding FTRs modeled as fixed injections• Awarded FTRs may be acquired from FTR Holders

in secondary market: registered/unregistered FTRs

6/11/2002 14

FTR Secondary Markets Overview

• FTRs are originally awarded in the NEPOOL FTR Auctions

• FTRs may be freely traded on the secondary market

• NEPOOL FTR secondary trading market facilitates trade of existing FTRs between FTR Holders– Allows trading of existing FTRs only

– Transfer of ownership is automatically registered with the ISO for FTR trades made through eFTR

– FTRs can be traded independently of eFTR, however they can only be registered to the ISO via eFTR

• FTRs cannot be reconfigured in the secondary market; may be subdivided in time and quantity

6/11/2002 15

eFTR Secondary Trading Center

• FTR Holders can buy and sell FTRs directly with other FTR Holders through the Secondary Trading Center

• eFTR Secondary Trading Center allows users to:– View FTR Postings– Post FTRs for Resale– Buy and Sell FTRs

• The NEPOOL FTR Auction User’s Guide will have detailed instructions for participating in the secondary market (Guide is currently under development for mid-July release)

6/11/2002 16

Secondary Trading Business Rules

• An FTR can be split into multiple FTRs: – They may have different MW amounts, start and end

times than the original FTR– However, an FTR cannot be reconfigured into FTRs

with a larger MW value, earlier start time, later end time, or different from/to Locations

– FTR MW values can be split in 0.1 MW increments

• Deadline for all FTR trades for the Operating Day is the end of the previous Operating Day

• Once per day, updated FTR information reflecting the previous day’s trades is sent from the eFTR database to ISO NE’s settlement systems

6/11/2002 17

Tsm Congestion Credit Target Allocations

• Monthly Transmission Congestion Credit Target Allocations calculated with Hourly Positive and Negative FTR Target allocations summed separately for each FTR Holder– Positive FTR Target Allocations are compensated as

Transmission Congestion Credits– Negative FTR Target Allocations are added to the Congestion

Revenue for the month; FTR Holder is charged this amount

• Congestion Revenue available for a month is equal to:– Total Congestion Charges collected in the month, plus– FTR Negative Target Allocations for the month, plus– Any Congestion Revenue Excess from previous month

6/11/2002 18

Transmission Congestion Credits

• The ISO compares the total of all monthly Positive FTR Target Allocations to the total Transmission Congestion Revenues Available– If total Positive FTR Target Allocation is <=

Transmission Congestion Revenue,

• FTR Holders receive Tsm Congestion Credit equal to Positive FTR Target Allocation

– If total Positive FTR Target Allocation is > Tsm Congestion Revenue,

• FTR Holders receive shares of the Monthly Tsm Congestion revenues in proportion to their Positive Target Allocations

6/11/2002 19

Excess Tsm Congestion Revenues

• If there is any Excess Transmission Congestion Revenue remaining at year end, then:– Stage One: Excess Transmission Congestion

Revenue allocated in proportion to, but not greater than, any unpaid monthly Transmission Congestion Credit Target Allocations

– Stage Two: Any remaining Transmission Congestion Revenue is distributed pro-rata to entities who paid Transmission Congestion Charges in that calendar year

NEPOOL Manual 6Financial Transmission Rights

Part 2 - Auction Revenue Settlement

June 11, 2002

Douglas James, ISO New England

6/11/2002 21

ARR Overview

• FTR Auction revenues are distributed to:– Sellers of FTRs in the Auction, then

– Certain entities paying for new transmission upgrades via Qualifying Upgrade Awards, then

– Entities that pay Congestion Charges via the 4-stage process described in Appendix C

6/11/2002 22

ARR Definition & Eligible Entities

• ARRs represent shares of revenues generated by sale of FTRs in a specific auction and characterized by:– an injection Node/External Node– a withdrawal Node– a MW quantity

• ARRs are allocated to entities exposed to paying the cost of congestion in NEPOOL:– Transmission Customers – Congestion Paying Entities – Parties to Excepted Transactions, NEMA Contracts

6/11/2002 23

FTR & ARR Models

• Same model, derived from EMS & DAM model

• FTR: network, ratings, interface limits, contingency file (no load, no generation)

• ARR: network, ratings, interface limits, contingency file, load, generation

• ARR Input from FTR: clearing price at each Node, total auction revenue (+ same model)

6/11/2002 24

ARR Allocation: 4-Stage Process

• Stage 1 - ARRs (MW) are initially assigned based on:– Load ratio share of NEPOOL generators and tie

sources

• Load - NEPOOL metered peak load distribution, scaled up to meet generator capacity plus tie source capacity.

• Generation - demonstrated Seasonal Claimed Capability

• Tie Sources - based on rated Total Transfer Capacity

– Excepted Transactions (Attachments G & G2 of NOATT)• May elect special treatment – as a lumped transaction from

specific source(s) to sink(s) vs. generic load ratio share of all sources to each sink

6/11/2002 25

ARR Allocation: 4-Stage Process

• Stage 2 - Remove negatively valued ARRs, run SFT– Eliminate initially assigned ARRs having negative values

as determined by prices in associated FTR Auction

– Reduce remaining ARRs to achieve simultaneous feasibility; these are Stage 2 ARRs (both Excepted Transactions and load share ARRS are subject to reduction)

- For all non-NEMA ARRs, these are the final MW values; Stage 3 re-allocates NEMA ARRs only.

6/11/2002 26

ARR Allocation: 4-Stage Process

Stage 3 & 4 reallocate ARRs to NEMA LSEs

• Stage 3

– Replace NEMA Stage 2 ARRS with initial assignment of ARRs for NEMA Contracts

– Eliminate initially assigned NEMA Contract ARRs having negative values as determined by associated FTR Auction

– Reduce remaining NEMA Contract ARRs to achieve simultaneous feasibility, resulting in Stage 3 ARRs

6/11/2002 27

ARR Allocation: 4-Stage Process

Stage 3 & 4 reallocate ARRs to NEMA LSEs

• Stage 4– Stage 2 awards are adjusted for NEMA

Contract ARRs awarded in Stage 3

– Stage 2 awards (with NEMA adjustments) and Stage 3 awards are tested for simultaneous feasibility

– Only the NEMA Stage 2 ARR awards are reduced

• These are Stage 4 awards – the ARR MW allocation is complete

6/11/2002 28

ARR Valuation – MW to $

• Value 4-Stage ARR (MW) Awards

– At each destination Node (load), multiply each ARR award (in MW) by the difference in the clearing prices determined in that FTR Auction for the same origin Nodes or External Nodes and such destination Node as the ARRs.

• Sum $ Value of ARR Awards by Load Zone

• Apply Proportional Adjustment to Achieve Revenue Neutrality

6/11/2002 29

ARR Valuation – MW to $

• Distribute $ Shares Within Each Load Zone– In proportion to Real-Time Adjusted Load

Obligation, excluding External Transactions, within the Load Zone.

– With adjustments for Excepted Transactions and NEMA Contracts.

– RTALO at the time of the NEPOOL coincident peak for the month being settled.

6/11/2002 30

ARR Settlement Timeline

Auction revenues are settled on a monthly basis• Monthly Auctions:

– Auction revenues are collected and distributed in second month after the auction

– ARR quantities and values are calculated using data for the month in which the auctioned FTRs are effective

• Long-term Auctions: – Monthly share of revenue (by number of days in a

month) collected and distributed as for the monthly auctions.

6/11/2002 31

FTR Auction & ARR Timeline

Month Preceding the periodfor which FTRs are being Auctioned

Post Long Term Auction Results

within 6 BD

Post MonthlyAuction Results

within 4 BD

End ofAuctioned

Month- or -

1st Month forLong Term

FTRs

5th BD prior

End ofPreceding

Month~

Beginning ofAuctioned

Period

Last BD 15th BD 10th BD Last BD

Beginning ofPreceding

Month

MonthlyAuction

MonthlyAuctionCloses12 Noon

MonthlyAuctionOpensMidnight

Long TermAuction

Long TermAuctionOpensMidnight

Long TermAuctionCloses12 Noon

Beginning 5 business daysbefore the first business dayof the month preceding theperiod in which the FTRs areto be effective.

Beginning fifteen daysprior to the start ofthe auction month

Bill goes out by the 15th

Bill FTR Auction BidsDistribute Auction Revenues

All data needed to settle isavailable by the 3rd BD

after end of monthSettle FTRs

Allocate ARR Revenue

Auctioned FTRs Effective