IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 23, NO.

4, NOVEMBER 2008 1783

A Comprehensive Assessment of the Evolution

of Financial Transmission Rights
V. Sarkar, Student Member, IEEE, and S. A. Khaparde, Senior Member, IEEE

Abstract—Financial transmission rights (FTRs) are complemen- Column vector containing the MW amounts of the
tary to the locational marginal pricing of energy. The basic aim base option FTRs.
of the FTR mechanism is to guard forward contracts from uncer-
tain congestion charges. FTRs are also useful to individual gener- Column vector containing the MW amounts of the
ators and loads for selling and buying power, respectively, at the base obligation FTRs.
prices of other locations. The concept has evolved, encompassing
many features such as a simultaneous feasibility test, various ways
diagonal matrix with equals to .
to conduct auctions and allocations and secondary trading. FTRs constant matrix containing the loading
also have a close relation to market power and transmission invest- factors of requested FTRs.
ment. This paper reviews most of the landmark research papers
on the evolution of the FTR concept. It reports a comprehensive constant matrix containing the loading
assessment of various facets of FTRs and allied issues. Financial factors of base FTRs.
transmission rights and flowgate rights (FGRs) are compared. The MW amount of an obligation FTR.
concept of long-term FTRs is discussed. The paper also touches
upon future proposals in this area. MW amount of an option FTR.
Index Terms—Allocation, auction, auction revenue right, finan- MW amount of a physical transaction.
cial transmission right, flowgate right, market power, obligation, Column vector containing the offer and bid
option, revenue adequacy, secondary trading, transmission invest- variables in the energy market.
ment.
Parameter vector (column) representing the net
nodal inelastic loads in the day-ahead market.
NOMENCLATURE: Vector (column) of net nodal injections caused by
the physical equivalents of active FTRs.
Price of an FTR of th type. Variable vector (column) signifying the net nodal
Path-branch sensitivity factor (or power transfer injections caused by .
distribution factor), relating the path of the th Upper limit on .
obligation FTR to a certain line, for a particular
network topology. constant matrix that converts nodal
injections into line flows.
Path-branch sensitivity factor, relating the path of
the th option FTR to a certain line, for a particular Variable vector (column) signifying the awarded
network topology. amounts towards all the FTR bids.
Variable vector (column) signifying the awarded
Total number of offers (from generators) and
amounts towards the obligation FTR bids.
bids (from loads and bilateral transactions) in the
energy market. Variable vector (column) signifying the awarded
amounts towards the option FTR bids.
LMP at the th price node.
Parameter vector (column) representing the base
LMP at the th price node minus LMP at the th amounts of all types of FTRs involved in the
price node. auction.
Number of rows in . Upper limit on .
Number of rows in . Parameter vector (column) representing the
Total number of network capacity constraints in pre-existing (i.e., existing before the auction)
the day-ahead dispatch problem. amounts of all types of FTRs involved in the
Bid price related to the th FTR bid. auction.
Column vector containing the line capacities
available in the day-ahead market.
Manuscript received May 22, 2007; revised June 08, 2008. First published
August 29, 2008; current version published October 22, 2008. Paper no. The forward capacity (as available in the day-ahead
TPWRS-00367-2007. market) of a certain line.
The authors are with the Department of Electrical Engineering, In-
dian Institute of Technology Bombay, Mumbai 400076, India (e-mail: The reverse capacity (as available in the day-ahead
vaskar@ee.iitb.ac.in; sak@ee.iitb.ac.in). market) of a certain line.
Digital Object Identifier 10.1109/TPWRS.2008.2002182

0885-8950/$25.00 © 2008 IEEE

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 1784
Total number of nodes.
vector of all zeros.
vector of all ones.
Value of the scalar or vector variable at the
solution point of the power dispatch problem.
Value of the scalar or vector variable (.) at the
solution point of the FTR auction problem.
Convex social-welfare function.
Optimal social-welfare as the function of . as PJM, New York, New England, and others [15]–[22]. Simi-
Objective function of the FTR auction problem.
Optimal value of as the function of
I. INTRODUCTION
ONGESTION management in restructured power sys-
C tems can be carried out efficiently through locational
marginal price (LMP)-based energy pricing [1]–[7]. The basis
of the LMP mechanism is the theory of electricity spot pricing
by Schweppe et al. [8]. Under the locational marginal pricing
approach, the independent system operator (ISO) calculates
power dispatch schedules by maximizing the social welfare
function within the available network capacity. The price of
energy at a location is determined by the rate of decrease of
optimal social welfare with respect to the fixed load increase at
that location. These prices are the locational marginal prices.
Locational marginal pricing can be carried out either on a
nodal basis or on a zonal basis. However, one major problem of
zonal pricing is accurately finding the zonal sensitivity factors
[9]. Thus, each pool participant (individual generator or load)
has to pay (load) or is paid (generator) the LMP at its loca-
tion, whereas each bilateral contract has to pay a congestion
charge (plus a loss charge if the system modeled in the LMP
calculation is lossy) according to the LMP difference between
its sink and source locations. The net collection (which is
generally nonnegative) of the ISO is termed the merchandizing
surplus. This kind of energy pricing can generate useful price
signals that assist in identifying suitable locations for building
new generators, load centers, and transmission facilities. For
instance, if the LMP at a certain location consistently displays
a higher value, it provides an initial indication that this lo-
cation may be a suitable place for building new generators.
At the same time, by penalizing each bilateral contract with
a location-dependent network usage charge, strong financial
incentive is applied, making it account for the congestion in
the transmission network. The pool prices also recognize the
system limits. The possibility of administrative transmission
load relief (TLR) thus becomes very small. Moreover, due to
the auction-based allocation of transmission capacity, relative
needs of the market players for the transmission usage are
suitably assessed.
Although the LMP mechanism has an appeal for efficient con-
gestion management, this mechanism inherently creates price
risk (in the form of unpredictable congestion charges), espe-
cially for long-term forward contracts. This may hamper long-
term power trading. However, long-term (or, at least, medium-
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IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 23, NO. 4, NOVEMBER 2008
term) forward contracts are desirable to increase competition in
the market as they play an important role in curbing the market
power of generators [10]–[12]. Therefore, the LMP mechanism
also needs the support of some complementary methodology or
tool to guard the long- and medium-term forward contracts from
congestion price risk.
Financial transmission rights (FTRs) are risk-hedging instru-
ments designed mainly with the aim to minimize the conges-
tion price risk for forward contracts [1], [13], and [14]. FTRs
are now successfully implemented in many power markets such
larly to the physical transmission rights (PTRs), FTRs also de-
fine transmission property rights, but in financial form. Under
.
PTR methodology, a market player must have sufficient trans-
mission reservation to get his transaction scheduled without any
network usage charge. A PTR is an option (i.e., the owner may
or may not use it) transmission right that may be either firm or
of use it or lose it type. Unlike PTRs, FTRs are completely fi-
nancial in nature and do not interfere with the power scheduling
process. Basically, an FTR provides its owner with some finan-
cial support to pay the congestion price that he is charged in
the day-ahead energy market for his transaction. An individual
generator or load can also buy an FTR to adjust its sale or buy
price, respectively, to the LMP of a different location. For this
purpose, a generator needs to buy an FTR “from” its location,
whereas a load needs to buy an FTR “to” its location.
The basic parameters defining an FTR are a source, a sink, a
validity period, and a MW amount. The source/sink of an FTR
need not be a single bus. It could be a load zone, or a hub, or an
interface for which an LMP is calculated and posted (i.e., it can
be any price node). For instance, in PJM, a network transmis-
sion service customer [23] can ask the ISO for an FTR from a
generator node to a load zone [17]. Moreover, in the case where
energy prices are calculated on a zonal basis [24] rather than
a nodal basis, FTRs are to be issued between individual zones
rather than between nodes. Under a hybrid pricing approach, in
which some energy prices are calculated at the node level and
others at the zone level, FTRs are available even between a node
and a zone.
Each FTR is assigned a monetary value for each hour de-
pending upon the day-ahead (or real-time if the day-ahead
market is absent) LMP outcomes for that hour (if network loss
is also considered in the dispatch model, only the congestion
components of LMPs are to be used for calculating the hourly
values of FTRs [22]). The FTR owners are paid by the ISO
according to the hourly values of their FTRs. However, the
settlement can be over multiple hours at a time.
The FTR mechanism has evolved with success since its in-
ception in 1992. The motivation of this paper is to acquaint
the reader with a comprehensive assessment of the evolution of
the FTR mechanism. An attempt is made to summarize all the
salient features of this mechanism in a comprehensible format.
The contribution of the paper is to provide insights into the
subtle and intricate aspects of the FTR evolution from various
perspectives. Later developments which stem from the need for
more flexible FTRs are also addressed in an integrated fashion.
The rest of the paper is organized as follows: The risk hedging
functionality of FTRs is described in Section II. The revenue
SARKAR AND KHAPARDE: COMPREHENSIVE ASSESSMENT OF THE EVOLUTION OF FTRS
adequacy issue and the concept of simultaneous feasibility test
are discussed in Section III. In Section IV, the FTR issuance
processes are described in detail. Some current practices and
proposals for the treatment of the revenue shortfall problem
are discussed in Section V. The scope of the secondary trading
of FTRs is discussed in Section VI. A comparison between fi-
nancial transmission right and flowgate right is carried out in
Section VII. The interrelationship between financial transmis-
sion right and market power is explained in Section VIII. A
small discussion regarding how FTRs can incentivize private
transmission investments is presented in Section IX. The con-
cepts of long-term FTR, contingent transmission right, and lo-
cational FTR are outlined in Section X. Finally, the paper is con-
cluded in Section XI.
II. RISK HEDGING FUNCTIONALITY OF FINANCIAL
TRANSMISSION RIGHTS
With regard to the hedging adjustability, currently exercised
FTRs can be classified into two categories: options and obliga-
tions. An obligation FTR is basically a fixed hedge FTR that al-
ways remains active. In contrast, an option FTR is an adjustable
hedge FTR that becomes active only when congestion occurs
in the forward direction. Irrespective of whether it is an option
or an obligation, the value of an active FTR is always given by
the product of its MW amount and the LMP differential on its
path. Note that in the FTR context, a path is simply defined
by a source-sink pair rather than an alternating series of lines
and nodes. The value of an inactive FTR automatically becomes
zero. Therefore, an obligation FTR may incur negative values at
certain hours owing to the occurrence of congestion in the re-
verse direction, whereas the value of an option FTR is always
nonnegative. The ability to implement transmission rights as
obligations is one of the major advantages of FTRs over PTRs.
The risk hedging functionality of FTRs is described below.
At a certain hour, the target payment (TP) towards the port-
folio of a MW obligation FTR and a MW option FTR
on Path is given by
if
if
Now, in this hour, the owner of this FTR portfolio has a physical
transaction of MW on the same path. His payment for this
transaction towards network congestion is given by
Therefore, the net payment made by the player for this transac-
tion and FTR combination is given by
if
if
From this expression of net payment, the following risk hedging
functionality of the above FTR portfolio can be seen.
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1785
1) If , the player always gets
benefit from (or, at least, never loses money due to) net-
work congestion. The player collects a net nonnegative
payment of if , and
of if . Therefore, he does not
see any price risk for this transaction.
2) If , the actual transaction is, in effect,
divided into the following three parts:
a) A transaction of MW on Path .
b) A transaction of MW on Path .
c) A transaction of MW on Path .
The first of the above transactions is always charged with
the LMP difference between the sink and source locations.
The second transaction is charged with this LMP difference
only when the sink LMP becomes lower than the source
LMP. Finally, the third transaction is never charged with
the LMP difference. The above set of transactions is equiv-
alent to the original transaction and FTR combination in
the sense that for both cases the net payment to the ISO re-
mains the same. Thus, it is clear that the player never loses
money for the second and third transactions. Moreover, the
second transaction gives him a benefit of in case
is negative. However, the second part does not give
any benefit when the player has to make a positive pay-
ment for the first part, i.e., when . Therefore,
the first part remains completely risky for the player, but
he observes no price risk in the second and third parts.
3) If , the obligation FTR itself creates a price
risk for its owner in that the player will have to make a net
positive payment of on the occurrence
of congestion in the reverse direction (i.e., when
).
It can be seen that only a fixed physical transaction can be
fully hedged by an obligation FTR alone. This transaction must
be of the same MW amount as that of the obligation FTR and
must be on the same path. That is why it is called a fixed hedge
FTR. Even if the MW amount of this transaction falls below the
MW amount of the respective obligation FTR, the market player
has risks having to make a net positive payment under network
congestion. This price risk is generated by the obligation FTR
itself and, therefore, is termed the downside risk. In case the
(1)
price risk is due to the physical transaction, it is called the upside
risk. For a case in which the transaction amount is not fixed, both
the upside risk and the downside risk can be avoided by using
a portfolio of an obligation FTR and an option FTR instead of
only an obligation FTR. This is because an obligation-option
combination is able to remove risk completely for a band of
(2) transactions. The MW amount of the obligation FTR defines the
lower boundary of this band, and its upper boundary is indicated
by the total portfolio amount. Therefore, the option FTR allows
its owner to adjust his hedge position, or, in other words, this
FTR provides to its owner an adjustable hedge.
Although option FTRs can provide more benefit than do obli-
gation FTRs, there is a certain trade-off that often makes obliga-
(3) tions preferable to options, and this is explained in Section IV.
Moreover, the above discussion on risk hedging is based upon
the assumption that the direction of congestion is quite uncer-
tain on a path. In a real system, there may be certain paths where
 1786 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 23, NO. 4, NOVEMBER 2008

the probability of congestion in the reverse direction is very low, ward and reverse directions assigned to the lines. The elements
and for those paths option FTRs are redundant. This is because of are the line loading limits as available in day-ahead
the per MW value of an obligation FTR will most of the time be market. Constraint (5) is the power balance constraint and other
the same as that of an option FTR on such a path. constraints are self-explanatory. A numerical illustration of the
One point that should be explicitly mentioned here is that power dispatch problem can be found in [26]. However, the La-
the discussion above basically explains how FTRs perform risk grangian of this optimization problem can be written as,
hedging for which, actually, they have been designed. As far
as the settlement is concerned, each obligation or option FTR is (9)
settled individually and without any bearing on the actual energy
where , , , and are the vectors of Lagrangian mul-
schedules. Therefore, a market player does not need to have a
tipliers. The LMP at a node is defined as the rate of decrease of
transaction on the path of his FTR to get the value of this FTR. In
optimal social welfare with respect to the increase of fixed (or
practice even, a market player may sometimes choose to hedge
inelastic) load at that node. Therefore, from the theory of sensi-
the congestion price risk on a certain path by means of an FTR
tivity analysis [27]
on a different path. However, upon such a decision, the market
player becomes exposed to the risk of the difference between
the LMP differentials on these paths. (10)
III. SIMULTANEOUS FEASIBILITY TEST
AND REVENUE ADEQUACY Each pool contract is settled according to these LMP values. The
congestion price to be paid by a bilateral contract is given by
Revenue adequacy is an important consideration in the is-
the rate of decrease of optimal social welfare with respect to the
suance of financial transmission rights. There should be enough
increase of the fixed transaction amount on the respective path.
collection from the network congestion to pay full FTR credits.
Therefore, this price is equal to the LMP difference between the
Revenue adequacy can be ensured through a mechanism called
corresponding locations. The net congestion collection (NCC)
simultaneous feasibility test (SFT) [10], [13], [17], and [25],
of the ISO is given by the sum of the payments made by the
which can be stated as: If the network capacity available in a
bilateral contracts, plus the sum of the payments made by the
day-ahead market is sufficient to accommodate the power flow
loads, minus the sum of the payments made to the generators,
caused by the physical equivalents of active FTRs at the rele-
i.e.,
vant hour, the congestion collection (day-ahead) must be greater
than or equal to the total FTR target payment at this hour. Ide-
ally, the network model to be used in the SFT should be the
same as that used for power scheduling. The relationship be-
tween simultaneous feasibility and revenue adequacy is estab-
lished below.
The day-ahead dispatch problem can be mathematically for- (11)
mulated as follows:
According to complementary slackness condition of KKT rule
[27]

s.t. (12)

Therefore, the expression for NCC can be finally written as

(4)

(5) (13)

(6) Let the net injection pattern caused by the physical equiv-
alents of active FTRs results in a feasible power flow condition
(7) within the network capacity that is available in the above energy
(8) market. Therefore
where
(14)
if is a generation at Node
if is a load at Node The total target payment (TTP) towards these FTRs can be cal-
culated as
if is not related to Node
Constraints (4) are the network capacity constraints. The matrix
converts nodal injections into the line flows both for the for- (15)

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SARKAR AND KHAPARDE: COMPREHENSIVE ASSESSMENT OF THE EVOLUTION OF FTRS
It should be mentioned again that irrespective of whether it is
an obligation or an option, the target payment towards an active
FTR is always given by the product of its MW amount and the
LMP differential on its path. Finally, the surplus amount (SA)
of the congestion collection is given by
(16)
Equation (16), in conjunction with (14) and the nonnegativity
condition of , proves that the surplus amount of the day-ahead
congestion collection must be nonnegative if the physical
equivalents of the active FTRs are simultaneously feasible.
Note that such a relationship between simultaneous feasibility
and revenue adequacy can be proven only for a linear power
flow model, where each constrained network quantity can be
expressed as a linear function of nodal injections [as in (4)]. A
linear power flow model may be either a linearized ac power
flow model or a dc power flow model. It was argued in [13]
that the above relationship between the simultaneous feasibility
of FTRs and revenue adequacy equally holds, even for an
ac power flow model (which is nonlinear and nonconvex in
nature). Currently, NYISO is the only market that employs this
type of power flow model to perform power dispatch calcula-
tion and SFT. However, the proof provided in [13] assumes
that in the dispatch problem, the injection at a node never hits
its lower or upper limit. This may not be a valid assumption,
since at certain hours, the injection at a node may touch a limit.
More prominently, if the load at a certain node is inelastic,
the injection at this node always remains at the limit. This is
because the upper and lower limits for a variable representing
an inelastic load must be the same. In reality, an SFT based on
an ac power flow model cannot guarantee revenue adequacy
[28].
In the above derivation, a lossless power dispatch model has
been considered. It should be mentioned that FTRs are able to
provide hedges only against network congestion. Still no rev-
enue adequacy test model is available to support loss-hedging
(i.e., providing hedges against both network congestion and
loss) FTRs. In the case in which network loss is also consid-
ered in the power dispatch model, each LMP is divided into
energy, congestion and loss components, and the congestion
components of LMPs are used to calculate the hourly values
of FTRs. The total collection of the ISO is also accordingly
divided in a net congestion collection and a net loss collection.
As before, the payments towards FTRs are made from the fund
of net congestion collection. The power dispatch problem still
employs a lossless power flow model for the calculation of line
flows, but some additional loads are created at the system nodes
to represent network loss [2]. As before, revenue adequate
congestion collection can be ensured by testing simultaneous
feasibility of the active FTRs on this lossless power flow model.
IV. FTR ISSUANCE PROCESS
FTRs are issued by the ISO by means of auction and/or al-
location. There may be different time horizons for the issuance
of FTRs. As an example, FTRs are auctioned both annually and
monthly in the PJM market.
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1787
A. FTR Auction
The FTR auction is basically a central mechanism by which
the requirements of the participating market players are jointly
assessed, compared, and then fulfilled to the best possible ex-
tent. In general, any market player can participate in an auc-
tion. First introduced in 1999 by NYISO, the auction mecha-
nism is currently in practice in PJM, NYISO, ISO-NE, MISO,
and CAISO. The different aspects of the FTR auction process
are discussed below.
1) Participation Types: Market players can participate in an
FTR auction mainly in the following four ways.
Self-scheduling: In this category of participation, a market
player submits a price-insensitive FTR request to the ISO,
i.e., the player is ready to spend any amount of money in
order to procure his required FTR.
Buy bid: In this category of participation, a market player
requests to the ISO for an FTR along with specifying the
maximum price he is willing to pay for this FTR.
Surrendering: In this category of participation, a market
player returns a portion of his current FTR to the ISO.
The player is ready to accept any payment (even negative
payment) for the returned FTR.
Sale offer: In this category of participation, a market player
offers a portion of his current FTR for sale, while speci-
fying the minimum sale price. A sale offer can be thought
of as a combination of a buy bid and a surrender. For in-
stance, a sale offer of 100 MW FTR at $20/MW is equiva-
lent to the combined participation of a buy bid for 100 MW
FTR at $20/MW and a surrender of 100 MW FTR.
There is also a proposal for the following type of participation
[29].
Conversion bid: In this category of participation, a market
player requests to the ISO to convert a portion of his cur-
rent option or obligation FTR into an obligation or option
FTR, respectively. The player also specifies the maximum
price (nonpositive for option-to-obligation conversion) he
wishes to pay for this conversion.
2) Auction Formulation: Each FTR auction is cleared
through an optimization calculation. A generalized auction
formulation for the clearance of obligation FTRs can be found
in [30], whereas [31] and [32] explain how to modify this
formulation when option FTRs are also included in the auction.
The objective function (which is similar to the social welfare
function in the energy market) of the auction optimization
problem is the negated quote-based sum of the issued amounts
towards all the FTR bids, and the function should be minimized.
The cleared amount towards each bid must lie within its lower
(which is zero) and upper (which is the requested amount)
limits. In order to ensure revenue adequacy, the simultaneous
feasibility condition (derived from the concept of SFT) must
be satisfied while issuing FTRs. In case all the FTRs are issued
for a same set of hours and conversion bids are absent, the
simultaneous feasibility condition can be stated as: The phys-
ical equivalent of each possible active-inactive combination
of individual FTRs (base as well as requested) must result in
a feasible power flow condition for each possible topological
scenario of the network. Here, the base FTRs are those entities
 1788
whose quantity values are considered to be constants during
the auction calculation. As an example, the FTR awarded to
a market participant in an annual auction is to be considered
as a base FTR in the subsequent monthly auctions. Similarly,
a self-scheduled FTR is a base entity in an auction. FTR
surrenders are also considered through base case modeling by
subtracting the surrendered amounts from the original FTR
amounts.
Note that we have to consider different active-inactive com-
binations of individual FTRs. This is because an option FTR
becomes inactive if congestion occurs in the reverse direction.
Similarly, different topological conditions of the network have
to be considered in order to take “ ” contingencies into ac-
count. Thus, using dc power flow model, the simultaneous fea-
sibility constraints for a certain line under a particular network
topology can be written as
(17)
The vectors , , and contain the loading fac-
tors (i.e., coefficient factors) of the different FTR terms in the
above simultaneous feasibility constraints. Here, , network capacity available for awarding new FTRs. Now, the
, and . The scaling
factors and vary between 0 and 1. The value of a scalling
factor would be 1 in case the corresponding constraint is already
overloaded or 100% of the available network capacity (i.e., ca-
pacity that is available for awarding new FTRs) is offered in the
auction. However, in the annual auction of ISO-NE, only 50%
of the available network capacity is offered to the auction par-
ticipants. In this case, both and are less than 1. The formu-
lation of the simultaneous feasibility constraints is numerically
illustrated in [32].
Note that, similarly to PTRs, counterflows caused by the
physical equivalents of option FTRs are also not considered in
the line flow constraints. In order to consider conversion bids
in an FTR auction, only a small amendment is required to the
above formulation. A conversion bid can be considered as the
buy bid for a special type of FTR, termed a conversion FTR.
The bid for a conversion FTR is to be treated in the same way
as an obligation or option FTR bid is done. The upper limit on
a conversion FTR variable is given by the requested conversion
amount and the lower limit is zero. The loading factor of a
conversion FTR term in a simultaneous feasibility constraint
can be calculated simply by subtracting the coefficient factor of
the original FTR from that of the new FTR. For example, the
loading factors of an obligation FTR and an option FTR on Path
1–2 are and 0, respectively, in a simultaneous feasibility
constraint. The loading factor of an obligation-to-option con-
version FTR on Path 1–2 in the given simultaneous feasibility
constraint can be then calculated as . Sim-
ilarly, the loading factor of an option-to-obligation conversion
FTR can be calculated as . Next, consider
that a market player initially (i.e., before the auction) had an
obligation FTR of 50 MW on Path 1–2. Upon a conversion
request, the market player is awarded an obligation-to-option
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IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 23, NO. 4, NOVEMBER 2008
conversion FTR of 20 MW on the same path in the auction.
At the end of this auction, in essence, the player retains an
obligation FTR of 30 MW and an option FTR of 20 MW on
Path 1–2.
3) Auction Pricing: Financial transmission rights are priced
following the same marginal pricing rule as that for the pricing
of energy [17]. The auction optimization problem can be com-
pactly formulated as
s.t.
(18)
(19)
(20)
Here, the vector contains all the requested obligation, op-
tion and converted FTR terms. Constraints (18) are the simulta-
neous feasibility constraints. and contain the loading fac-
tors of requested and base FTR terms, respectively, in simulta-
neous feasibility constraints. is the vector of scaling
factors. The network capacity offered in this auction is given
by , whereas indicates the total
Lagrangian of the above optimization problem can be written
as
(21)
The price of an FTR similar to can be calculated
as
(22)
In general, two FTRs are said to be similar (or of the same type)
if they have the same loading factor in any simultaneous fea-
sibility constraint. Therefore, according to (22), the price of an
FTR can be simply calculated by taking the sum of the products
of its loading factor and constraint shadow price over all the si-
multaneous feasibility constraints. The auction participant pays
or is paid this price depending upon whether this FTR is issued
or bought back, respectively, by the ISO.
The FTR prices exhibit the following properties.
• Total collection from an FTR auction must be nonnegative
if .
• In the case an FTR bid is fully or partially selected, the
price to be paid to the ISO for this FTR must be lower than
or equal to its bid price.
• In the case an FTR offer is fully or partially accepted, the
price to be paid by the ISO for this FTR must be higher
than or equal to its offer price.
• An FTR bid would be fully selected if its bid price is higher
than the clearing price of a similar FTR.
• An FTR offer would be fully accepted if its offer price is
lower than the clearing price of a similar FTR.
SARKAR AND KHAPARDE: COMPREHENSIVE ASSESSMENT OF THE EVOLUTION OF FTRS
It is beyond the scope of this paper to provide the mathemat-
ical proofs of these properties. Furthermore, obligation FTRs
are, in general, cheaper than option FTRs. This is because [as
obvious from (17)] the loading effect of (i.e., capacity consumed
by) an option FTR on any simultaneous feasibility constraint
cannot be lower than that of the obligation FTR with the same
parameters.
4) Time Differentiation of FTR Products: In order to track
the time variations (seasonal, weekly, or daily) of load, finan-
cial transmission rights are generally issued for different time
intervals over any time horizon. For example, separate FTRs are
issued for on-peak hours and off-peak hours in the PJM market
[17]. The PJM market also issues multi-interval FTRs with 24-h
validity within a day. A multi-interval FTR basically spans two
or more individual time intervals, whereas a single-interval FTR
remains valid only for the hours of a particular interval. In the
absence of multi-interval FTRs, an independent auction can be
conducted for each individual interval. However, if multi-in-
terval provision is also included, the auction has to be cleared
through a joint optimization calculation accounting for all the
time intervals simultaneously. There must be a separate set of
simultaneous feasibility constraints for each individual time in-
terval. The buyer of a single-interval FTR has to pay the price
for the corresponding interval only. However, the price to be
paid for a multi-interval FTR is the sum of the prices of the in-
dividual intervals spanned by this FTR [15].
5) Multi-Round Auction: Multi-round auctions are becoming
increasingly popular. For instance, the annual auction in the
PJM is conducted in four rounds [17]. In each round, a quarter of
the available network capacity (i.e., available for the auction as
a whole), plus any capacity not awarded in the previous round,
is offered to the auction participants. The results of a round are
published before the next round begins. Any FTR awarded in a
certain round can be offered for sale in subsequent rounds. The
main motivation behind the multi-round approach is to make the
auction process more flexible and competitive. This gives both
the winners and losers the opportunity to revise their bids and
try again following the result of an auction round [29].
B. FTR Allocation
Unlike an FTR auction, FTR allocation is not a bid-based
mechanism. Therefore, no market-based measure is associated
with the FTR allocation process as to the relative needs of the
participating market players. As a result, FTR allocation is gen-
erally kept restricted to the firm transmission customers only.
Furthermore, as option FTRs consume more network capacity
than do obligation FTRs, FTRs of the former type are generally
not issued via allocation. Different measures in different mar-
kets exist for the allocation of FTRs, such as existing transmis-
sion reservations, past transmission usages and load ratio shares
[17], [22], and [33]. FTR allocation can be carried out either on
a first-come-first-serve basis or through a joint clearance. There
are two alternative approaches for allocating FTRs, and these
are discussed below.
1) Direct Allocation: In this approach, an eligible market
player is awarded a firm FTR quantity completely free of cost.
Direct allocation of FTRs is currently carried out in MISO,
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1789
NYISO and CAISO [22], [33], and [34], and was formerly in
practice in the PJM market. The same simultaneous feasibility
condition as described in Section IV-A2 should again be sat-
isfied when allocating FTRs directly. In order to enhance the
retail-side competition, directly allocated FTRs are reassigned
among the load serving entities (LSEs) on a daily basis fol-
lowing the movement of retail customers [33]. This reassign-
ment is realized by assigning counterflow FTRs to the load-
losing LSEs. A counterflow FTR is basically an obligation FTR
that is assigned to a certain party in order to compensate the
power flow caused by the FTR assigned to another party [33]
and [35].
2) Auction Revenue Right: Auction revenue right (ARR) is
a mechanism through which the proceeds from an FTR auction
are distributed among the firm transmission customers. For in-
stance, in the PJM [17], ARR mechanism is used to distribute
the annual auction collection among the firm point-to-point and
network service customers. Each ARR is defined between a cer-
tain source-sink pair and for a certain MW amount. The ARRs
issued in the PJM market are all obligations, whereas only op-
tion ARRs are issued by the ISO-NE [17] and [33]. Similar to
FTRs, ARRs can also be time-differentiated (such as on-peak
ARRs, off-peak ARRs, and 24-h ARRs). The value of an ARR is
calculated in the same way as the value of an FTR is calculated.
Here, the term “LMP difference” indicates the obligation FTR
price on the ARR path for the relevant time interval. If the FTR
auction is multi-round, the weighted average of the LMP dif-
ferences from all the rounds is used to calculate the value of an
ARR. The ratio of the weight factors should be the same as that
of the basic network capacities offered in the individual rounds.
Basic network capacity means the total network capacity that is
offered in a round minus the capacity that is carried over from
the previous round. The total network capacity, offered in the
auction as a whole, is given by the sum of the basic network ca-
pacities offered in all the rounds.
In order to ensure revenue adequate auction collection, simul-
taneous feasibility must be checked while issuing ARRs, i.e., the
physical equivalent of each possible active-inactive combination
of ARRs issued for any time interval should collectively result
in a feasible power flow condition within the network capacity
offered in the corresponding FTR auction. Although ISO-NE
offers only option ARRs, all ARRs are considered to be obli-
gations in the SFT model, and their MW amounts are adjusted
later depending upon the price outcomes of the corresponding
FTR auction. However, in case an ARR owner is paid the full
value of his ARR, this revenue completely neutralizes the pay-
ment (plus giving him some additional benefit if it is an option)
that he has to make for getting an obligation FTR of the same
MW amount on the same path, i.e., ARR mechanism is, in ef-
fect, an indirect procedure for allocating FTRs. The PJM market
offers an additional flexibility to ARR owners, which is to con-
vert their ARRs directly into FTRs. Similar to directly allocated
FTRs, ARRs also follow the shift of loads among the LSEs.
It is often argued that the ARR mechanism is better than the
direct allocation approach because the revenue from an ARR
can be used to buy an FTR not only on the ARR path but also
on a different path. However, the same benefit can also be ob-
tained from a directly allocated FTR. The owner of the directly
 1790
allocated FTR can surrender this FTR in the forthcoming auc-
tion to generate an ARR equivalent revenue that can be utilized
to buy an FTR on a different path. Furthermore, the FTR quan-
tities awarded through a direct allocation are firm having zero
procurement cost. The ARR mechanism does not guarantee this
benefit. In the case of the ARR mechanism, FTRs are physically
released only through the auction while the firm transmission
customers are provided with some financial support to buy their
required FTRs. The main benefit of the ARR mechanism is that
it helps in better management of the simultaneous feasibility of
FTRs. In addition, the ARR mechanism provides more flexi-
bility to the ISO to deal with the problem of revenue deficiency
in an auction. However, it is beyond the scope of this paper to
present a detailed discussion on this matter.
V. TREATMENT OF REVENUE SHORTFALLS
Although every FTR issuance process employs some SFT
model that is generally linear, there may be certain hours when
day-ahead congestion collection becomes insufficient to pay full
FTR credits. The reason behind such revenue shortfall is that
FTRs are issued over a period of time during which the path-
branch sensitivities, base power flows (e.g., loop flows from
the neighboring control areas), and the contingency consider-
ation in the power dispatch model may vary. Therefore, the
SFT model may not be precise enough to cover all the hours
of the time horizon of interest successfully. Also, the network
topology may get changed because of accidental line outages. In
addition, line capacities may degrade. Owing to all these factors,
the active FTRs at a certain hour may not be simultaneously fea-
sible with respect to the actual network constraints in the power
dispatch model. Such infeasibility may, in turn, lead to inade-
quate congestion collection from the day-ahead market. Also, it
may not be possible to bridge completely the gap from the fund
of the real-time congestion collection.
However, as an ISO is a nonprofit-making entity, there must
be some mechanism to compensate for any such revenue short-
fall. In NYISO, revenue shortfall is compensated by imposing
uplift charges on the transmission owners [36]. The objective
here is to link transmission maintenance standards with revenue
inadequacy. NYISO also allocates net congestion surplus and
FTR auction revenues to the transmission owners. However, the
NYISO approach seems unable to provide proper maintenance
incentives due to the uniformity of uplift charges [37].
In another practical approach, as followed by the PJM,
CAISO, and MISO [37], FTR payments are derated when
revenue shortfall occurs. In the PJM [38], the positive FTR
payments are reduced (but never made negative) in proportion
to the respective target payments when revenue deficit occurs.
FTRs with negative targets are given full credits. The excess
congestion collection that gets accumulated over a month
is transferred (if nonnegative) into a balancing fund. This
balancing account also accumulates the excess FTR auction
revenue from this month. After the balancing account is up-
dated, the ISO first uses this fund to compensate partially
(on a pro-rata basis) or fully the unpaid FTR credits of the
particular month. The remaining amount in this fund is used to
compensate (partially or fully) the unpaid FTR credits from all
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IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 23, NO. 4, NOVEMBER 2008
the previous months. The same sequence is repeated for each
month within a planning period.
Unlike FTRs that are settled daily, ARRs are settled on a
monthly basis in the PJM market. The shortfall in the auction
collection is managed by derating the ARRs in the same way
as described above. At the end of each planning period, the un-
paid ARR credits are partially or fully compensated with the
amount that remains in the above balancing fund after compen-
sating the shortfalls in FTR payments. In the case some amount
still remains in the balancing fund, it is distributed among the
firm transmission customers on a pro-rata basis irrespective of
whether or not they hold FTRs for their transmission services.
In [37], it was shown that the above procedure for derating
FTRs may create a gaming opportunity for certain market
players, in that they can artificially create congestion on the
transmission system. In order to suppress such gaming op-
portunity, a direct assignment technique was suggested in
[37] based on the constraint shadow prices, their capacity
degradations, MW amounts of the FTRs, and the path-branch
sensitivity factors. The assumption behind this approach is that
the network capacity degradation is the only reason for revenue
inadequacy. Now, as mentioned earlier, there are also some
other factors which may create a revenue shortfall situation. As
a result, the suggested method may fail at certain instances, e.g.,
when revenue shortfall is caused by a line outage. However,
the shortcoming of this direct assignment algorithm can be
eliminated by use of a small modification. Initially, the net
load caused by the physical equivalents of active FTRs on each
simultaneous feasibility constraint is to be calculated. If the
total load on a simultaneous feasibility constraint is found to be
greater than its limit, the amount of overload is to be measured.
For example, if the limit of a constraint is 100 MW and the total
load on it is 120 MW, the amount of overload is 20 MW. Once
all the overload amounts are calculated, these quantities should
be used in the formula of [37] in lieu of capacity degradation
amount.
VI. SECONDARY TRADING OF FTRS
Once awarded through central auction or allocation, FTRs
can be traded bilaterally in a secondary market. In the secondary
market, an FTR can be split into multiple FTRs with different
MW amounts and different validity periods. The new owner-
ships are registered on the market database. However, in order
to meet revenue adequacy criteria, the original FTR is not al-
lowed to be broken into a collection of derived FTRs that loads
some simultaneous constraints more than does the original. Fol-
lowing are some simple rules followed in the PJM [17] for the
secondary trading of FTRs.
1) Rule 1: Option and obligation FTRs must be traded as op-
tions and obligations, respectively.
2) Rule 2: Each of the derived FTRs must be defined on the
same path as that of the original FTR.
3) Rule 3: The validity periods of two derived FTRs must not
partially overlap.
4) Rule 4: The sum of the MW amounts of all the derived
FTRs with the same validity period must be equal to the
MW amount of the original FTR.
SARKAR AND KHAPARDE: COMPREHENSIVE ASSESSMENT OF THE EVOLUTION OF FTRS
5) Rule 5: The validity period of any derived FTR must not
exceed the validity period of the original FTR.
In addition, an incremental limit has to be respected when
splitting an FTR. In the PJM, this limit is 0.1 MW, i.e., the MW
amount of each derived FTR transferred to a new owner must
be an integer multiple of 0.1.
However, due to the point-to-point nature of FTRs, the above
set of rules does not provide sufficient scope for the secondary
trading of these instruments. The extent of secondary trading
can be enlarged by means of the exchange mechanism described
in [39]. A simple interpretation (with a small modification) of
this exchange mechanism is that a market player can exchange
an existing FTR with the ISO for a new set of FTRs at no addi-
tional cost, where
1) the validity period of each new FTR must be less than or
equal to that of the original FTR;
2) the collective loading effect (may it be negative) of the new
set on any simultaneous feasibility constraint must not be
higher than that of the original FTR for any hour within the
validity period of the original FTR.
In a sense, this exchange mechanism complements the above
secondary trading rules by providing market players with an
additional provision to reconfigure their current FTRs.
VII. FINANCIAL TRANSMISSION RIGHT
VERSUS FLOWGATE RIGHT
Flowgate right (FGR) mechanism is the alternative to the FTR
mechanism in LMP markets. This mechanism was in practice in
the formerly ERCOT [19] zonal market. Unlike an FTR, which
is point-to-point (PtP), an FGR is defined on a transmission link
(or flowgate) in a certain direction. By definition, each FGR is
an option. The product of its MW amount and the shadow price
of the corresponding link gives the hourly value of an FGR in
the case that the link gets congested in the same direction. The
shadow price of a link in the energy market is defined as the rate
of increase of optimal social welfare with respect to the same
capacity increase in both directions of this link. However, if the
relevant link remains uncongested or congestion occurs in the
opposite direction, the value of the FGR becomes zero.
In order to preserve revenue adequacy, the total FGR amount
in any direction of a link is not permitted to be higher than
the capacity of the link in the particular direction. However,
no overall network-based SFT is required when issuing an
FGR. Initially, FGRs are issued through the central auction or
allocation process. In an auction, the purchaser of each FGR has
to pay the shadow price of the capacity constraint considered
in the auction. Once issued through central auction or alloca-
tion, FGRs can be freely traded in the secondary market. The
secondary trading rules for FGRs are similar to the secondary
trading rules for FTRs. A point-to-point transaction can be
fully hedged by a certain portfolio of flowgate rights. The MW
amount and direction of the required FGR on a flowgate are the
same as those of the physical flow caused by the transaction on
the particular flowgate.
The motivation behind the development of this link-based
concept was to enhance the decentralized trading of transmis-
sion rights [40]. Owing to its link-based nature, an individual
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1791
FGR is more tradable than an FTR. The flowgate approach is
based upon the following assumptions [41]:
1) power transfer distribution factors (PTDFs) are relatively
stable;
2) the number of commercially significant flowgates (CSFs)
is small and predictable.
Commercially significant flowgates are those flowgates
which are likely to be congested very often. FGRs are to be
issued only on CSFs. The higher tradability of an individual
FGR combined with a small number of CSFs can without doubt
enhance the overall tradability of transmission rights.
The applicability of the FGR mechanism to a system relies on
the structure of this particular system. This methodology is by
far compatible with zonal pricing with radial interconnections
among the individual zones. However, as discussed in [42] and
[43], FGRs may not be suitable for a meshed system owing to
the following reasons:
1) varying values of PTDFs;
2) presence of a large number of contingent flowgates.
The PTDF between a link and the path of a transaction may
vary depending upon the system loading condition. Also, other
controls, such as tap changing transformers’ tap positions, af-
fect the PTDF values. Now, the matching portfolio of FGRs for
a certain transaction has a direct functional relationship with the
actual PTDF values. Therefore, the uncertainty in PTDFs is fi-
nally translated into the form of uncertainty that a market player
faces about the risk hedging capability of his FGR portfolio.
However, a combined study of [44] and [45] indicates that the
DC PTDFs with current nominal network parameters may be
good references for defining the risk hedging ability of an FGR
portfolio over a long period of time.
A very serious problem arises, however, owing to the contin-
gency consideration in the power dispatch problem. The energy
market is generally cleared in such a way that the system can
sustain “ ” contingencies. Now, the PTDF values are dif-
ferent for different topologies of the network. As a result, each
physical line corresponds to multiple links or flowgates—one
for each topological condition of the network (i.e., each flow-
gate is defined by a physical line and network topology pair).
This, in turn, may lead to a multitude of CSFs. For example, let
the number of potentially congested lines in a power network
be only 10. However, apart from the base network topology, 20
different contingent topologies are also considered in the power
dispatch model for the sake of system security. Therefore, the
total number of CSFs can be as large as 200 (i.e., 20 10).
Such myriad CSFs clearly invalidate Assumption-2 and indi-
cate the impracticality of the FGR approach for this system.
Moreover, an additional problem arises in case the base network
topology gets changed because of some accidental line outages.
As a flowgate is defined by a certain line-topology combina-
tion, most of the previous flowgates become undefined in this
new system. This, in turn, creates an extra task of redefining the
existing FGRs with reference to the new system configuration.
In the case of the FTR mechanism, the field of influence of the
above factors is the revenue adequacy issue. However, in most
of the markets, “ ” contingencies are also considered in the
SFT model. Although line outages and distribution factor varia-
tions can create a revenue shortfall problem, its severity may be
 1792
reasonably minor [43]. The main reason for this is that simul-
taneous feasibility is sufficient but not necessary to make con-
gestion collection revenue adequate. Moreover, the set of FTRs
issued may still be simultaneously feasible. In addition, any rev-
enue shortfall can be compensated in future with excess conges-
tion collections. As a result, most of the LMP-based power mar-
kets running successfully have found FTRs rather than FGRs
to be more suitable for their systems. Even in a radial system,
FTRs can be made equally tradable to FGRs through the im-
plementation of the FTR exchange policy, which is discussed in
Section VI.
VIII. FTRS AND MARKET POWER
With regard to the interaction between FTRs and genera-
tors’ market power, there is consensus among some studies in
previous literature on the point that FTRs increase the market
power of the generators at the importing nodes [46]–[48]. On the
other hand, an analysis based upon the prisoners’ dilemma and
Cournot competition was presented in [49] with the inference
that FTRs are able to curb market power. However, the anal-
ysis presented in [49] is basically concerned with the long-run
profits of strategic generators rather than the long-run effect of
their strategies on market prices [50]. But, in the end, the rela-
tion of the term “market power” is with market prices, not with
the profits of generators. Therefore, [49] cannot properly justify
its proposition.
The market power, induced by FTRs themselves, counter-
acts to the competitive benefit that can be obtained by hedging
the LMP risk of the forward contracts. In order to suppress
the growth of such market power, FTRs should be prevented
from falling into the hands of strategic generators. In [51], it
was proposed that any FTR should be issued either from or to
a common point, determined by a certain measure called rel-
ative cross-price sensitivity. However, this approach seems to
interfere with the risk-hedging objective of the FTR mechanism
since a market player may not be able to collect the same quan-
tity for both the load end and generator end FTRs to hedge his
transaction. As a result, it may not be accepted for practical im-
plementation. FTR-induced market power should be mitigated,
but not at the cost of the risk-hedging benefit obtainable from
FTRs.
Unlike firm PTRs, FTRs cannot be used to withhold trans-
mission capacity. This is because FTRs are purely financial in-
struments. However, by submitting a false schedule, an FTR
owner, having no physical transaction to hedge, may artificially
increase the congestion level on the transmission system for
earning a higher profit. The situation is nicely exemplified in
[52]. The player, then, has to withdraw this false schedule in
the real-time market. As the direction of congestion usually re-
mains the same in both the day-ahead and real-time markets,
the real-time LMPs do not offset the day-ahead profit of the
strategic market player. Although this kind of strategic activity
does not indicate market power abuse, it causes a price rise at the
constrained in (i.e., importing power) nodes in the day-ahead
market. At the same time, as the unsold cheaper generations in
the day-ahead market now appear in the real-time market, and as
the previously blocked transmission capacity is also released in
the same market, the real-time prices at the constrained in nodes
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IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 23, NO. 4, NOVEMBER 2008
may fall below even the corresponding day-ahead prices. This,
in turn, causes a load movement from day-ahead to real-time. If
the load movement is large, the day-ahead prices again fall. As a
result, the loads now become attracted to the day-ahead market,
which again increases the day-ahead prices. When the transient
subsides (or becomes sufficiently attenuated), the constrained
in LMPs in the day-ahead market may be higher than those that
would have been present if the FTR owners had not behaved
strategically. However, it is debatable whether the strategy can
be continuously employed by an FTR owner.
IX. FTRS AND MERCHANT TRANSMISSION INVESTMENT
The transmission system has a key role to play to make
competition successfully materializes in the power sector. New
investments are required in transmission system in order to get
increased power supplies from cheaper generators. Apart from
regulated investments, private (or merchant) investments can
also be considered to reinforce the existing network. Unlike reg-
ulated investments, a private investment is not passed through
any central planning process, neither is there any regulated
tariff-based return on any private investment. However, efficient
transmission investments should be sufficiently incentivized. A
transmission investment is efficient if it increases social welfare.
It may be that there will be investments that are beneficial to
the investor but harmful to the society. Disincentives should be
provided to prevent such inefficient or detrimental investments.
The work of Bushnell and Stoft [53] suggested that incre-
mental FTRs (IFTRs) may provide correct investment incen-
tives to private investors. Under this paradigm, the additional
FTRs, made possible by an investment, are issued to the in-
vestor. Bushnell et al. proved that if the risk-hedging FTRs
match the power dispatch schedules in aggregate before the ex-
pansion, the net value of the incremental FTRs will be no greater
than the increase of social welfare owing to this expansion. An
interesting two-bus example illustrating the incremental FTR
concept can be found in [54]. Incremental FTRs are currently of-
fered in CAISO, MISO and NYISO, whereas PJM and ISO-NE
offer incremental ARRs (IARRs) [33]. However, there are many
obstacles to this particular market approach of transmission in-
vestment. The first problem is regarding the long-term issuance
of IFTRs. Before issuing an IFTR, a base case must be prepared
as to how many risk-hedging FTRs can be issued on the existing
network. An accurate modeling of such a base case is a diffi-
cult task as risk-hedging FTRs are issued periodically (yearly
and/or monthly). In [55] and [56], a proxy-award mechanism
was proposed to solve this problem, but the basis on which the
algorithm for determining proxy awards is built is not clear. An-
other problem is that it may not be possible to restore simulta-
neous feasibility by issuing IFTRs according to the investor’s
preference. In this context, a combined flowgate right and ad-
mittance right approach was proposed in [57] as an alternative
to the IFTR approach. However, the suggested approach seems
not to be able to differentiate new investments from existing re-
sources. Rather, this problem can be solved by issuing IFTRs in
the reverse directions of some of the investor’s preferred paths.
Other critical problems regarding merchant transmission invest-
ments are the possibility of the destruction of LMP differences
owing to a transmission investment, lack of coalition between
SARKAR AND KHAPARDE: COMPREHENSIVE ASSESSMENT OF THE EVOLUTION OF FTRS
the investor and the market players that benefit (i.e., free rider
problem), and the need for some regulatory oversight to prevent
potentially harmful investments [58]–[61]. There is also a threat
of a reduction in the value of an IFTR owing to the future invest-
ments.
X. OTHER FTR INSTRUMENTS
A. Long-Term Financial Transmission Right
A long-term (LT) FTR is an FTR (or ARR) with a term longer
than one year. LT FTRs can secure infrastructure financing and
can provide more price certainty to the transmission customers
serving long-term power contracts [33]. The interest in LT FTRs
has started growing among various market participants in the
U.S. markets since 2005. In July 2006, the Federal Energy Reg-
ulatory Commission (FERC) of the U.S. issued its final guide-
lines [62] for the implementation of LT FTRs in organized [63]
electricity markets. These are summarized below.
1) An LT FTR must be a PtP transmission right.
2) LT FTRs must be fully funded unless the situation is ex-
traordinary or voluntary agreements have been signed be-
tween LT FTR owners and the ISO.
3) LT IFTRs must be made available upon request to any party
that pays for transmission upgrades or expansions.
4) The term lengths of LT FTRs must be sufficient to fulfill
the needs of LSEs to hedge their long-term power supply
obligations.
5) LSEs must have priority over non-LSEs in the allocation
of long-term risk-hedging FTRs.
6) LT FTRs must follow the movement of retail customers.
7) The initial allocation of LT FTRs should be independent of
FTR auction.
8) Allocation of LT FTRs should balance any adverse eco-
nomic impact between participants receiving and not re-
ceiving the right.
B. Contingent Transmission Right
Contingent transmission right (CTR) [64] is basically a
group-FTR concept. A CTR allows its owner to hold FTR on
a number of alternative paths. This added flexibility provides
market players with an additional (and cheaper) support to
overcome the congestion price risk originating from the uncer-
tainty in their transaction paths.
Structurally, a CTR is defined by a MW amount and a set
of paths. The owner of the CTR can choose any path (but only
one at a time) from the given path set to convert his CTR into an
FTR. A CTR can be an obligation or an option. If it is an obliga-
tion, any FTR that it generates would be considered as an obliga-
tion FTR. Similarly, if it is an option, any FTR that it generates
would be considered as an option FTR. The generalized form of
the contingent transmission right is the multidimensional finan-
cial transmission right which is discussed in detail in [65].
C. Locational or Unbalanced Financial Transmission Right
Unlike a PtP FTR, a locational FTR (LFTR) [13] is defined
only for a point of injection (injection type) or a point of with-
drawal (withdrawal type). The hourly value of a withdrawal type
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1793
LFTR is given by the product of its MW amount and the LMP
(or the congestion component, or the congestion component
plus the energy component of the LMP) of the corresponding
location. If the LFTR is of the injection type, the negation of
the above product gives its hourly value. The bid price associ-
ated with an injection type LFTR request is usually nonpositive,
whereas it is usually nonnegative for a withdrawal type LFTR
request. Thus, an LFTR allows an individual load or generator
to freeze its buy or sale price, respectively, in advance (when
the auction is conducted) for a certain MW quantity. In other
words, an LFTR is similar to a forward contract between the
ISO and a generator or load. Therefore, LFTRs may increase
the traded volume of power in the forward market, leading to the
enhancement of market competitiveness. An LFTR must be an
obligation. Apart from satisfying network capacity constraints,
the physical equivalents of the LFTRs must be in balance (i.e.,
power balance) to ensure revenue adequacy.
XI. CONCLUSION
This paper provides a comprehensive insight into the FTR
mechanism employed in centralized power markets to provide
price guards to the forward contracts. An obligation FTR alone
can hedge a fixed transaction only, whereas a band of trans-
actions can be fully hedged by an obligation-option portfolio.
Simultaneous feasibility is an important consideration in the
issuance of FTRs. Auction and allocation are two alternative
mechanisms for issuing FTRs. Market players can participate
in an auction in a number of ways. In order to have revenue ad-
equacy at any hour within the time horizon of the auction, it
must be ensured that each possible active-inactive combination
of the FTRs be simultaneously feasible. All the FTRs issued in
an auction are marginally priced. Time-differentiated FTR prod-
ucts and multi-round auctions enhance the flexibility of market
players. The allocation of FTRs can be carried out directly or
through ARRs. Any centrally allocated or auctioned FTR can
be freely traded later in a secondary market. By means of an
exchange mechanism, it is also possible to reconfigure an FTR
without entering into any auction. Accidental line outages, line
capacity degradations, and imprecisions in the SFT model em-
ployed may sometimes cause revenue shortfall. Imposition of
uplift charges on transmission owners and temporary reduction
of FTR values are two major approaches to compensate revenue
shortfall. Strategic generators may acquire additional market
power through FTRs. This implies a need for some well-defined
and feasible rules for appropriately restricting the ownership of
these transmission rights. The alternative to the FTR mechanism
is the FGR mechanism. However, FGRs may not be suitable for
a highly meshed network. Apart from risk hedging, FTRs can
also be used to incentivize merchant transmission investments.
LT FTRs can provide more price certainty to long-term power
contracts. The future CTR will provide market players with an
additional support to get relief from the congestion price risk
originating from the uncertainty in their transaction paths. Fi-
nally, by means of LFTRs, individual generators and loads can
develop the flexibility to lock their sale and buy prices, respec-
tively, in advance.
 1794
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1795
.V. Sarkar (S’07) received the B.E. degree in electrical engineering from Bur-
dwan University, Bardhaman, India, in 2002 and the M.E. degree in electrical
engineering from the former Bengal Engineering College (currently Bengal En-
gineering and Science University), Kolkata, India, in 2004. He is currently pur-
suing the Ph.D. degree in the Department of Electrical Engineering at the Indian
Institute of Technology, Bombay, India.
His current research involves power system restructuring issues.
S. A. Khaparde (M’87, SM’91) received the Ph.D. degree in 1981 from the
Indian Institute of Technology, Kharagpur, India.
He is a Professor of electrical engineering at the Indian Institute of Tech-
nology, Bombay, India. He has authored several research papers and has coau-
thored two books. He is a member of the advisory committee of Maharastra
Electricity Regulatory Commission, India. His current research activities are in
the areas of power system restructuring.
Dr. Khaparde is on the editorial board of the International Journal of
Emerging Electric Power Systems.