Financial Transmission Rights holders asked PJM and Market Monitor Joe Bowring last week to take action to address the continuing shortfall in FTR funding. They received sympathy but no commitments.

In June, the Federal Energy Regulatory Commission rejected a complaint (EL13-47) by FirstEnergy Solutions Corp. that sought to bill all transmission users to make up the shortfalls. While PJM largely supported FirstEnergy’s proposed solution, the Monitor rejected it as “simplistic” and unfair to load.

The commission urged PJM and its stakeholders to reach a consensus solution and to work with its neighbors to reduce congestion on the RTO’s borders. In August, the commission granted rehearing in the case, keeping the docket open but offering no timetable for further action.

$1.1 Billion

In the interim, market participants say, the problem has only gotten worse. Cumulative shortfalls have grown to more than $1.1 billion (see chart). DC Energy’s Bruce Bleiweis told the Members Committee Thursday that March “could be the worst ever.”

“It’s a problem that hasn’t gone away,” said Bleiweis. “We’re still looking for action.”

PJM introduced FTRs in 1999, intending them to provide a financial hedge against the costs of day-ahead transmission congestion.

The value of an FTR is based upon the difference between the day-ahead congestion price between a specific source and sink. The quantity of FTRs to be auctioned is supposed to be limited by transmission capacity.

But a PJM stakeholder report found that revenues were falling short because pre-auction modeling failed to capture some transmission outages and deratings. The modeling also could not account for market-to-market flowgates added in the middle of a planning period.

Consensus Elusive

Since the report, PJM officials have worked with MISO to reduce congestion resulting from cross-border flows.

Last spring, stakeholders also approved two modeling changes recommended by the Financial Transmission Rights Task Force that were expected to provide modest improvements. But members were unable to reach consensus on others, including several proposed by the Monitor. (See MIC Rejects Change to FTR Long-Term Auction Modeling.) The task force was disbanded in December.

With no solutions coming from the stakeholder process and no action from FERC, Goldman Sachs’ J. Aron & Co. seized upon PJM’s ad hoc creation of a pricing interface in the ATSI region during the Sept. 10-11 heat wave. PJM’s action, intended to make demand response set prices in the area, exacerbated underfunding by $23 million over the two days, J. Aron said in a filing in the FirstEnergy docket in December.

FTR holders found a new opportunity to bring the issue up when Bowring gave members a presentation on the 2013 State of the Market report, which also criticized the creation of such interfaces.

Harry Singh, of Goldman Sachs, said market participants used to be able to buy 1.2 or 1.3 FTRs for a path they were looking to hedge, but that the technique no longer works because the level of underfunding varies significantly from day to day. On Feb. 14, for example, the funding was only 30%; on Sept. 10 and 11 it approached zero.

In 2010, load serving entities converted almost 63% of their Auction Revenue Rights (ARRs) to FTRs, Singh said. In 2013, only 31% did so. “That tells you people think it doesn’t work as a hedge,” Singh said. Instead, he said, the market has become a way to speculate on uplift and the level of underfunding.

Sympathy, No Commitments

Bowring and PJM CEO Terry Boston acknowledged the problem but were noncommittal about pursuing solutions.

“I’m almost certain the stakeholder process is not going to come to a resolution on this issue,” Boston said. “But we need to keep it on the table.”

The State of the Market report declared the FTR market performance competitive. But it said the market design was flawed because it “incorporates widespread cross subsidies which are not consistent with an efficient market design and over sells FTRs.”

The Monitor noted that the market has responded to the shortfalls by reducing bid prices and increasing bid volumes.

Clearing prices for FTR obligations averaged $0.30/MW in planning year 2013/14, down from $0.71/MW in 2010-11. FTR obligation sell offers dropped to $0.05/MW down from $0.22/MW over the same period.

The report reiterates eight recommendations Bowring made in an April 2013 filing in response to the FirstEnergy complaint.

Bowring said the eight recommendations could increase the FTR payout ratio to almost 96% from the current rate in the mid-70s. The recommendations included a reduction in the allocation of ARRs, the elimination of portfolio “netting” and using probabilistic analysis to improve transmission outage modeling.

In response to a question from Bleiweis, Bowring said he had considered making a Section 206 filing to win FERC approval for his proposed changes. “It’s really a question of timing,” Bowring said, adding that he’d like “to see if others will join us” in support.