By Rory D. Sweeney

COLUMBUS, Ohio — Three economists, two lawyers and an electrical engineer walk into a bar…

Actually, they appeared on stage here for the latest installment in PJM’s ongoing debate over the role and value of financial transactions.

Independent Market Monitor Joe Bowring and the Massachusetts Institute of Technology’s John Parsons, both economists, explained to the annual meeting of the Organization of PJM States Inc. why they are critical of PJM’s current system for auction revenue rights and financial transmission rights.

Parsons cited the Monitor’s finding that PJM load has lost out on $1.7 billion in unreturned congestion surpluses over the past five years. That total, an average of almost $335 million a year, represents the difference between what load paid for ARRs and FTRs and what was returned to it. (See Table 13-37 in the Monitor’s second-quarter State of the Market report.)

Harvard economist William Hogan, whose theories have provided the basis for the structure, said he’s not sure of Bowring’s math, but he said it fails to capture all the dynamics of the system.

Dynamic Efficiency

Hogan said ARRs and FTRs were not designed to return congestion revenue to load as Parsons and Bowring contend, but to solve the “dynamic efficiency” problem — a way to hedge congestion costs in recognition that physical transmission rights are impossible under an open access transmission system. “If you want to have open access and nondiscrimination [in an electricity transmission system], this is the only way to do it,” he said.

PJM’s system is designed so demand customers pay their LMPs and power generators are paid their own LMPs. Load overpays by design, and the surplus in those congestion payments is supposed to be returned to load customers through FTRs and their associated ARRs, Parsons and Bowring contend. ARRs are created when the rights to FTR payments are auctioned off to hedge against the variability of FTRs. It’s through these markets that the differences between customers’ congestion payments and the FTR/ARR offsets they receive are created.

While some FTR buyers no doubt are speculators hoping to pay less than they’ll receive in congestion payments, Hogan said they are still providing fixed-price hedges to sellers looking for predictability. “The beneficiaries of the ultimate transmission congestion are the people on the load side, not the FTR holders.”

Parsons countered that the system is not “confronting honestly” how random and imprecise — or “stochastic,” as he put it — capacity can be on a transmission system. “The system is designed to kill two birds with one stone, but … have you ever seen anybody who can actually kill two birds with one stone?”

‘Fairy Tale’

“What you have right now is a fairy tale FTR system where rights are designed upfront, but you don’t know the right capacity of the system,” he continued. “You don’t have a product that actually reflects the true congestion and the true capacity under a point-to-point system. It would be better to step back and structure the system so that actually reflects the true congestion revenues and risks and the true capacity and risk.”

Bowring repeated his longstanding position that the benefits of financial trading to the market have not been proven — a statement that brought a scowl to the face of attorney Noha Sidhom of Inertia Power, a financial firm that trades FTRs.

The nodal concept using LMPs came about to address the inability to control the flow of electricity across the network, Bowring said. However, that’s the point when explicit point-to-point contract paths — the concept on which FTRs are based — became obsolete, he argued.

Stu Bresler, PJM senior vice president for operations and markets, acknowledged that FTRs were a design choice made in 1999, long before its full implications could be known.

“Joe’s correct that it was a simpler time back then,” said Bresler, the electrical engineer in the group. “The implementation of the monthly FTR auction was intended to give market participants the ability to have additional choices with what to do with their allocated rights.”

The economists’ theoretical debate was juxtaposed with real-world experience from Sidhom and attorney Marji Philips of Direct Energy, a load-serving entity that receives and sells FTRs.

‘Load Pays’

Philips said economists’ idyllic theories don’t account for the vagaries of PJM’s system. Despite all the modeling, market designs don’t account for everything, she said, and what’s left will undoubtedly follow the industry maxim that “load pays.” She cited FERC’s Sept. 15 order directing PJM to allocate balancing congestion to real-time load (EL16-6-001, ER16-121).

“There are causes of congestion that we don’t actually have pure cost causation [for], and the new FERC order says, ‘Well, let’s just stick it to real-time load because we don’t know where they’re coming from, and we think this should be a pure product.’ They have undermined the complete value of FTRs for load, which is to hedge our congestion risk,” she said. “What I love is that FERC says, ‘This is for load.’ Not a single load entity supported it.” (See Monitor Says FERC Erred in PJM FTR Ruling, Seeks Rehearing.)

Sidhom agreed that the market needs some tweaks, such as enhanced modeling, but insisted it provides an important service. She cited a MISO study that concluded optimizing wind into the RTO is saving consumers $316 million to $377 million annually — savings due in part, she said, to the work of financial traders. “Not bad for a 76 cents/MWh cost hedge,” she said. “I think that’s a great deal for consumers.”

“At the end of the day,” she added, “you need those FTR auctions to provide the appropriate pricing.”