1. On the Efficiency of Transmission Congestion Contract Markets in New York talk presented at Eighth Annual POWER Research Conference on Electricity Industry Restructuring Berkeley CA 14 Mar 2003 by Afzal S Siddiqui, Emily S Bartholomew, Chris Marnay, and Shmuel Oren +1.510.486.7028 - C_Marnay@lbl.govC_Marnay@lbl.gov research supported by the Transmission Reliability Program, Distributed Energy and Electric Reliability, Office of Energy Efficiency and Renewable Energy, U.S. Dept of Energy

2. Outline I.Introduction to TCCs (Chris) II.NYISO TCC Auctions (Chris) III.Analysis of NYISO TCCs (Afzal) IV.Results (Afzal)

3. I.Introduction to TCCs II.NYISO TCC Auctions III.Analysis of NYISO TCCs IV.Results

4. Theory of Transmission Congestion Contracts (TCCs) loop flows invalidate contract path rights financial congestion rights supported by Hogan (1992) and Harvey, Hogan, & Pope (1996) price differential between nodes is true congestion cost TCCs are derivative financial instruments entailing rights or obligations to congestion rents collected between two specific nodes congestion is erratic so congestion rent risk is severe TCCs offer price certainty on point to point transactions straightforward strategy for converting historic transmission rights physical vs. financial rights debate continues

5. TCCs are Widespread TCCs considered by all U.S. ISOs Congestion Revenue Rights – SMD, CAISO Financial Transmission Rights – PJM, ISO-NE Transmission Congestion Rights – ERCOT Financial Transmission Options – RTO West FERC Standard Market Design proposes initial implementation of point to point financial rights presupposes efficiency of subsequent contract market

6. TCC Deployment long academic debate (Chao & Peck 1996, Oren 1997, Bushnell & Stoft 1997, Stoft 1999, Joskow & Tirole 2000) debate largely abstract – on all sides hedging benefit accepted but limits on implementation could render TCCs a blunt instrument thin and complex markets disconnection from actual dispatch a well functioning TCC market: implies price and rent roughly equal (i.e. on 45° line) differ by some risk premium

7. Three-Node DC Example

8. Actual Dispatch Will Differ From TCC Auction Result (nomogram faces correspond to congested flowgates) Day Ahead Outcome Auction Outcome Actual Dispatch

9. I.Introduction to TCCs II.NYISO TCC Auctions III.Analysis of NYISO TCCs IV.Results

10. Characteristics of NYISO Zones 31% 32% 31% 28% 33% 37% 38% 39% 71% 54% Percentages represent percentage of congestion hours, 2000 and 2001 source: electricitymarketdata.lbl.gov

11. NYISO TCCs - A Financial Tool not restricted to generators/loads/traders to purchase: market price determined in auctions for each point of injection/point of withdrawal (POI/POW) combination bid price can be positive or negative to collect: holders collect congestion component of day-ahead LBMP if POSITIVE holders obliged to pay if price is NEGATIVE TCCs purchased in auctions valid for every hour of effective period TCCs are obligations, not options

12. NYISO Initial Auctions initial auctions held twice yearly (spring and fall) ISO determines effective period (six months, one year, two years, or five years) for TCCs and percentage of TCCs to be awarded in each round each auction usually consists of two stages (separate for each effective period) multiple rounds exist for price discovery stage 1 does not allow re-sale between rounds stage 2 and subsequent monthly reconfiguration auctions allow holders to resell TCC analysis does not include stage 2, monthly reconfiguration auctions, or secondary market

13. I.Introduction to TCCs II.NYISO TCC Auctions III.Analysis of NYISO TCCs IV.Results

14. Initial Auctions Six-Month TCCs Stage 1 Only $8 mill.$991 /MW ($0.23/MWh) 2268,7928/24 – 10/19, 2001 Autumn 2001 $51 mill.$3,735 /MW ($0.85/MWh) 26413,5373/8 – 4/20, 2001 Spring 2001 $31 mill.$5,550 /MW ($1.27/MWh) 1415,6509/7 – 10/30, 2000 Autumn 2000 $52 mill.$10,663/MW ($2.43/MWh) 744,9033/20 – 4/20, 2000 Spring 2000 Total Revenue Generated by Auction Average Clearing Price Distinct POI/POW* pairs Total # MWs Auction Dates source: NYISO *POI – Point of Injection; POW – Point of Withdrawal

15. NYISO TCC Data Analysis Methodology scatterplot of price paid to obtain TCC and resulting congestion rent received using publicly available data OLS regression line to relate the two quantities insert 45° line to determine whether holders paid a positive or negative risk premium calculate percentage price deviation T – hours in effective period I – Point of Injection W – Point of Withdrawal PPI – Predictive Power Index R – congestion rent c – price of TCC geographical analysis using Predictive Power Index (PPI)

16. I.Introduction to TCCs II.NYISO TCC Auctions III.Analysis of NYISO TCCs IV.Results

17. NYISO TCC Data Analysis Results positive correlation between prices and rents direction of congestion usually predicted correctly if TCC market functioning efficiently we would expect to see data points scattered around 45° line what we see is a systematic bias below 45° line for positive TCC prices (and above it for negative TCC prices) geographical analysis confirms that price and rent relationship worsens as distance increases between locations

18. NYISO TCC Price/Rent Analysis Spring 2001 (Unique Awards) All Rounds Round 1Round 2Round 3Round 4 Average Price ($/MW) 64678868622371077 Average Rent ($/MW) 686563279938626 Correlation 0.660.620.800.790.71 % Correct predictions 68%65%74%72%70% % Winners 66%56%46%45%54%

19. NYISO TCC Price/Rent Scatterplot All Stage 1, 6-month TCCs 2000 and 2001 N = 2085

20. NYISO TCC Data Analysis Results positive correlation between prices and rents direction of congestion usually predicted correctly if TCC market functioning efficiently we would expect to see data points scattered around 45° line what we see is a systematic bias below 45° line for positive TCC prices (and above it for negative TCC prices) geographical analysis confirms that price and rent relationship worsens as distance increases between locations

21. NYISO TCC Price/Rent Scatterplot Round 4, Spring 2001 (Unique Awards) N = 109

22. Percent Deviation between Price and Rent: “ Expensive” vs. “Cheap” TCCs* *NYISO 6-month TCCs purchased in stage 1 of initial auctions 2000 and 2001

23. Percent Deviation between Price and Rent: Positive vs. Negative Priced TCCs* *NYISO 6-month TCCs purchased in stage 1 of initial auctions 2000 and 2001

24. NYISO TCC Data Analysis Results positive correlation between prices and rents direction of congestion usually predicted correctly if TCC market functioning efficiently we would expect to see data points scattered around 45° line what we see is a systematic bias below 45° line for positive TCC prices (and above it for negative TCC prices) geographical analysis confirms that price and rent relationship worsens as distance increases between locations

25. NYISO TCC Geographical Analysis Round 4, Spring 2001 (Unique Awards) N = 109 Points: 58 35 10 3 2 0 0 1 0 Geographic Index:

26. Conclusions effective decentralized operation of electricity industries requires efficient congestion management markets efficiency of NYISO TCC market empirically studied electricitymarketdata.lbl.gov TCCs are effective at securitizing physical transmission rights and providing perfect PTP coverage not good hedges because prices do not converge to rents scatterplot reveals that the market does not provide efficient pricing in several dimensions geographical analysis confirms that relationship between price and rent worsens with distance between locations owners of existing rights may not be accurately recompensed by subsequent sales at TCC auctions

27. Point-to-Point (PTP) Contracts provide a perfect hedge against congestion rent exposure price paid for the contract may not reflect the expected value of the hedged risky cash flow illustration: three-node DC example shift in “operating point” due to economic dispatch makes it difficult to obtain efficient prices

28. NYISO Load Zones source: NYISO website

29. NYISO Transmission System

30. NYISO Transmission Congestion Contracts (TCCs) “The right to collect or obligation to pay Congestion Rents associated with a single MW of transmission between a specified point of injection (POI) and point of withdrawal (POW). “TCCs are financial instruments that enable Energy buyers and sellers to hedge fluctuation in the price of transmission.” source: NYISO training manual

31. Initial Allocation holders of existing transmission agreements given option to convert to: grandfathered rights or grandfathered TCCs grandfathered rights or TCCs sold through auction when expired residual transmission capacity allocated to Transmission Owners (TOs) and must be sold

32. Reconfiguration Auctions/Secondary Market where holders can re-sell TCCs reconfiguration auction held monthly allows holders of TCCs to sell for every hour of the following month secondary market terms determined bilaterally between traders NYISO deals only with primary holder

33. NYISO TCC Price/Rent Scatterplot Round 4, Spring 2001, zoom in at origin

34. NYISO TCC Cost/Rent 90% Scatterplot Round 4, Spring 2001 (Unique Awards)

35. NYISO TCC Price/Rent Scatterplot All Stage 1, zoom in at origin

36. NYISO TCC Geographical Analysis Spring 2001 (Unique Awards)

37. NYISO TCC Geographical Analysis All Rounds, Spring 2001 (Unique Awards) 453 data points

38. TCC Price vs. # MW in Awards