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.govresearch supported by the Transmission Reliability Program, Distributed Energy and Electric Reliability, Office

of Energy Efficiency and Renewable Energy, U.S. Dept of Energy

Outline

I. Introduction to TCCs (Chris)

II. NYISO TCC Auctions (Chris)

III.Analysis of NYISO TCCs

(Afzal)

IV.Results (Afzal)

I. Introduction to TCCs

II. NYISO TCC Auctions

III.Analysis of NYISO TCCs

IV.Results

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

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

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

Three-Node DC Example

Actual Dispatch Will Differ From TCC Auction Result

(nomogram faces correspond to congested flowgates)

Day AheadOutcome

Auction Outcome

Actual Dispatch

I. Introduction to TCCs

II. NYISO TCC Auctions

III.Analysis of NYISO TCCs

IV.Results

Characteristics of NYISO Zones

31% 32%

32%

31%

28%

33%

37% 38%

39%71%

54%

Percentages represent percentage of congestion hours, 2000 and 2001

source: electricitymarketdata.lbl.gov

Load in NYISO Zones 2000 & 2001

New York City and Long Island account for 45% of load in NYCA

Total Load 2001: 169 TWh

NYC ROS

A

B

C

D

E

FGHI

J

K

Long Island

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

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

I. Introduction to TCCs

II. NYISO TCC Auctions

III.Analysis of NYISO TCCs

IV.Results

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

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 periodI – Point of InjectionW – Point of Withdrawal

PPI – Predictive Power IndexR – congestion rentc – price of TCC

TWI

TWI

TWI cRPPI ,,,

TWI

TWI

TWI

c

cR

,

,,

• geographical analysis using Predictive Power Index (PPI)

I. Introduction to TCCs

II. NYISO TCC Auctions

III.Analysis of NYISO TCCs

IV.Results

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

NYISO TCC Price/Rent AnalysisSpring 2001 (Unique Awards)

All RoundsRound 1 Round 2 Round 3 Round 4Average Price ($/MW) 646 788 686 2237 1077

Average Rent ($/MW) 686 563 279 938 626

Correlation 0.66 0.62 0.80 0.79 0.71% Correct predictions 68% 65% 74% 72% 70%

% Winners 66% 56% 46% 45% 54%

NYISO TCC Price/Rent ScatterplotAll Stage 1, 6-month TCCs 2000 and 2001

y = 0.5215x + 388.08

R2 = 0.6261

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

-75,000 -50,000 -25,000 0 25,000 50,000 75,000

TCC Price ($/MW)

Co

ng

esti

on

Ren

t ($

/MW

)

allS2000A2000S2001A200145-degree lineLinear (all)

N = 2085

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

NYISO TCC Price/Rent ScatterplotRound 4, Spring 2001 (Unique Awards)

y = 0.2559x + 365.85

R2 = 0.6178

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

-60,000 -40,000 -20,000 0 20,000 40,000 60,000

TCC Price ($/MW)

Co

ng

esti

on

Re

nt

($/M

W)

45-Degree Line OLS Regression

N = 109

Percent Deviation between Price and Rent: “Expensive” vs. “Cheap” TCCs*

0

2,000

4,000

6,000

8,000

10,000

12,000

< -500 -500to -100

-100to -50

-50 to-25

-25 to-10

-10 to0

0 to 10 10 to25

25 to50

50 to100

100 to500

>500

% deviation

MW

> $1/MWh ("expensive")

< $1/MWh ("cheap")

N = 32,882 (632 zero price)

mean deviation = -$0.21/MWh

*NYISO 6-month TCCs purchased in stage 1 of initial auctions 2000 and 2001

Percent Deviation between Price and Rent:

Positive vs. Negative Priced TCCs*

0

2,000

4,000

6,000

8,000

10,000

12,000

< -500 -500 to-100

-100to -50

-50 to-25

-25 to-10

-10 to0

0 to 10 10 to25

25 to50

50 to100

100 to500

>500

% deviation

MW

Negative Price N = 13,354

Positive Price N = 18,896

Zero Price N = 632

*NYISO 6-month TCCs purchased in stage 1 of initial auctions 2000 and 2001

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

y = 428.33x2 + 2238.2x + 1081.9R2 = 0.3354

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0 1 2 3 4 5 6 7 8

Pre

dic

tive P

ow

er

Ind

ex

($/M

W)

NYISO TCC Geographical AnalysisRound 4, Spring 2001 (Unique Awards)

N = 109

Points: 58 35 10 3 2 0 0 1 0

Geographic Index:

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

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

NYISO Load Zones

source: NYISO website

NYISO Transmission System

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

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

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

NYISO TCC Price/Rent ScatterplotRound 4, Spring 2001, zoom in at origin

y = 0.1309x + 491.9

R2 = 0.0229

-5,000

-2,500

0

2,500

5,000

-5,000 -2,500 0 2,500 5,000

TCC Price ($/MW)

Co

ng

esti

on

Ren

t ($

/MW

)

45-Degree Line OLS Regression

NYISO TCC Cost/Rent 90% ScatterplotRound 4, Spring 2001 (Unique Awards)

y = 0.5881x + 209.98

R2 = 0.5179

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

-25,000 -20,000 -15,000 -10,000 -5,000 0 5,000 10,000 15,000

TCC Price ($/MW)

Co

ng

esti

on

Ren

t ($

/MW

)

45-Degree Line OLS Regression

NYISO TCC Price/Rent ScatterplotAll Stage 1, zoom in at origin

y = 0.1558x + 319.32

R2 = 0.0463

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

-6,000 -4,000 -2,000 0 2,000 4,000 6,000

TCC Price ($/MW)

Co

ng

esti

on

Ren

t ($

/MW

)

allS2000A2000S2001A200145-degree lineLinear (all)

NYISO TCC Geographical AnalysisSpring 2001 (Unique Awards)

Round 1 Round 2 Round 3 Round 4 All RoundsGI-PPI Correlation 0.51 0.26 0.68 0.56 0.52Avg PPI for GI of 0 1924 2249 1368 1344 1765Avg PPI for GI of 1 1432 2055 1381 2885 1971Avg PPI for GI of 2 4099 4660 7728 8360 5724Avg PPI for GI of 3 5050 4547 3825 12459 6711Avg PPI for GI of 4+ 24748 15440 35884 24411 25013Avg PPI 2729 2718 2580 3423 2862

NYISO TCC Geographical AnalysisAll Rounds, Spring 2001 (Unique Awards)

Six-Month Award

y = 702.05x2 + 212.32x + 1631.8

R2 = 0.3518

0

10,000

20,000

30,000

40,000

50,000

0 1 2 3 4 5 6 7 8

GI

PP

I ($

/MW

)

453 data points

TCC Price vs. # MW in Awards

y = -1.0286x + 17.801

R2 = 0.0199

0

50

100

150

200

250

300

350

0 5 10 15 20

ABS Price ($/MWh)

# M

W in

Aw

ard

N = 2,084