U.S. Financial Transmission Rights: Theory and Practice
This paper reviews both theoretical and empirical studies of financial transmission rights (FTRs) in the major U.S. wholesale power markets. Although the current literature hold more negative views about FTRs, this paper presents a simple illustrative 2-stage model to study the competitive behaviors of electricity generators and load serving entities (LSEs) and analyzes the welfare effects of FTRs in the restructuring U.S. wholesale power market framework. The analysis focuses on a competitive two-node electricity network model where there is one generator and one LSE in each node with linear marginal cost and demand function, supervised by an independent system operator (ISO). In the first-stage of modelling, a no-rights benchmark model is developed to solve for the optimal quantity of power production and consumption and derive the locational marginal price for each node, which serve as the building blocks to solve for the optimal FTR hedge positions in the second-stage model. Once a stochastic parameter shock is introduced, the second-stage model shows that the acquisition of optimal FTRs by the risk averse generators and LSEs increases and in general strictly increases the social welfare compared with the case where there is no FTRs available. This result provides a counterexample to the somewhat negative views about FTRs held by other economists in the literature and provides some economic explanations to the fact that FTRs are widely adopted as a financial hedge instrument in the major U.S. wholesale power markets.
|Date of creation:||24 Mar 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
- Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993.
" Risk Management: Coordinating Corporate Investment and Financing Policies,"
Journal of Finance,
American Finance Association, vol. 48(5), pages 1629-58, December.
- Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
- Lyons, Karen & Fraser, Hamish & Parmesano, Hethie, 2000. "An Introduction to Financial Transmission Rights," The Electricity Journal, Elsevier, vol. 13(10), pages 31-37, December.
- Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
- Bessembinder, H., 1989.
"Forward Contracts And Firm Value: Investment Incentive And Contracting Effects,"
89-06, Rochester, Business - Managerial Economics Research Center.
- Bessembinder, Hendrik, 1991. "Forward Contracts and Firm Value: Investment Incentive and Contracting Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 519-532, December.
- Brian T. Kench, 2004. "Let's Get Physical! Or Financial? A Study of Electricity Transmission Rights," Journal of Regulatory Economics, Springer, vol. 25(2), pages 187-214, 03.
- Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
- 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.
- Steven Stoft, 1999. "Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-23.
- Hogan, William W., 2003. "Transmission Market Design," Working Paper Series rwp03-040, Harvard University, John F. Kennedy School of Government.
- Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
- Rosellón Juan, 2003. "Different Approaches Towards Electricity Transmission Expansion," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-32, September.
When requesting a correction, please mention this item's handle: RePEc:isu:genres:12266. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Curtis Balmer)
If references are entirely missing, you can add them using this form.