EBF 483
Introduction to Electricity Markets

10.2.2 Auction Revenue Rights

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In the presence of transmission congestion, the RTO collects some congestion revenue. We don't want the RTO to keep this money and earn profit, because it might then have some incentive to create transmission congestion rather than alleviating transmission congestion.

The RTO typically gives the congestion revenue back to the holders of FTRs. If the RTO gave away the FTRs for free, then this would be an easy story to tell. But the RTO auctions off the FTRs rather than giving them away. So it then has to find a way to get rid of the FTR auction revenue.

What happens in the US is that RTOs give the FTR auction revenue away to the owners of transmission lines (because they are the ones who put capital into the transmission system and they should be rewarded for doing so) or to electric utilities (because their ratepayers in many cases paid for the transmission lines before these markets even existed, so they should get the benefits). Each of these entities holds an "Auction Revenue Right" (ARR), which is just a share of the total FTR auction revenue.

The figure below shows how the money flows between the holders of FTRs and ARRs. It can be summarized as follows:

Flow of money between participants: congestion rent to RTO, RTO to FTR Revenue, FTR Auction to RTO, and RTO to ARR Holders.
Figure 10.4: The flow of money between participants in the market for Financial Transmission Rights and Auction Revenue Rights
Source: Seth Blumsack
  • The RTO collects congestion revenue, which is must give away.
  • The RTO auctions off FTRs, and collects revenue from that auction.
  • The congestion revenue is then given away to the holders of FTRs
  • The FTR auction revenue is then given away to the holders of ARRs.

In the end, this system is like the holders of FTRs buying those FTRs from the holders of ARRs, except that the RTO acts as a counter party to all of the transactions.