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Efficiency of financial transmission rights markets in centrally coordinated periodic auctions

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  • Adamson, Seabron
  • Noe, Thomas
  • Parker, Geoffrey

Abstract

Electricity market design in the United States is increasingly dominated by locational marginal pricing (LMP) of energy and transmission. LMP markets are typically coupled with periodic auctions of financial transmission rights (FTRs) to hedge transmission price risks. While LMP designs offer considerable advantages, forward price discovery in these markets requires participants to form efficient expectations on spot congestion price differences. In this paper, we examine trends in the efficiency of one of the early LMP markets, the New York Independent System Operator (NYISO), analyzing a panel data set of over 9000 contracts over a six-year period beginning September 2000. We show that NYISO FTR markets were inefficient in their early years, but that market participants learned to predict forward prices and thus efficiency improved for FTRs not solely within the New York City/Long Island sub-region. FTRs within this sub-region, which has a number of special characteristics, remain relatively inefficient.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 32 (2010)
Issue (Month): 4 (July)
Pages: 771-778

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Handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:771-778

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Web page: http://www.elsevier.com/locate/eneco

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Keywords: Energy markets Electricity markets Financial transmission rights Learning Locational marginal price;

References

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  1. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
  2. Corrado, Charles J & Su, Tie, 1996. "Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(2), pages 175-92, Summer.
  3. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  4. Hadsell, Lester & Shawky, Hany A., 2009. "Efficiency and Profit in the NYISO Transmission Congestion Contract Market," The Electricity Journal, Elsevier, vol. 22(9), pages 47-57, November.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  6. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
  7. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
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Cited by:
  1. Deng, Shi-Jie & Oren, Shmuel & Meliopoulos, A.P., 2010. "The inherent inefficiency of simultaneously feasible financial transmission rights auctions," Energy Economics, Elsevier, vol. 32(4), pages 779-785, July.
  2. Pollitt, M. J., 2011. "Lessons from the History of Independent System Operators in the Energy Sector, with applications to the Water Sector," Cambridge Working Papers in Economics 1153, Faculty of Economics, University of Cambridge.

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