Financial trading in the wholesale power markets can bring benefits to consumers, but those transactions may warrant more scrutiny and certain reforms, officials for a market operator and a market monitor told lawmakers Nov. 29.
Financial transmission rights are instruments used to offset market participants' transmission congestion costs in the day-ahead market. Virtual transactions are purely financial trades that do not involve the physical transmission of electricity. Both were on the hot seat in the latest "Powering America" hearing convened by the House Energy and Commerce subcommittee on energy.
"Measuring the overall contribution and benefits of financial transactions in the electricity markets is difficult," subcommittee Chairman Fred Upton, R-Mich., said.
The purpose of the hearing, he said, was "to take a hard look at whether FTRs and virtual trading make sense and answer this question: Does financial trading make the electricity markets more efficient and, in turn, result in benefits to consumers?"
Advocates of financial trading in the power markets pointed to the liquidity, price competition and hedging benefits such trades bring to those markets, while critics argued that certain financial products extract value from the markets without providing equivalent benefits in return.
Auctioned FTRs siphon away ratepayer savings
Eric Hildebrandt, director of market monitoring at the California ISO, took a hard line that grid operators' practice of auctioning FTRs was costing transmission ratepayers nationwide at least $400 million a year. CAISO ratepayers alone have lost about $75 million per year since 2009, he said.
This "major market design flaw" could be remedied by forgoing these auctions and instead allocating "all congestion revenues collected by [independent system operators] … back to transmission ratepayers," he said
The auctioned FTRs are "paid off … using congestion revenues that would otherwise be refunded to transmission ratepayers," Hildebrandt said. "Unfortunately, the revenues ISOs collect from the auctioned FTRs are consistently much lower than what the ISOs pay out. This makes FTRs highly profitable for financial entities, but these profits directly reduce congestion revenues refunded back to ratepayers."
Responding to the concern that consumers are not getting value from FTRs, TPC Energy CEO Noha Sidhom, who testified on behalf of the Power Trading Institute, insisted that "the problem is not with the FTR product, the problem is with the [CAISO] market design."
"They've got significant modeling issues so they'll clear you out of the money all the time," she said. Using an equities market analogy of someone wanting to buy a stock at $30 and having a broker sell it to him or her for $60, she said, "that happens in California all the time."
Sidhom contended that CAISO's outage scheduling also is a problem in that "over 50% of the time the outages are not submitted in a timely manner to be modeled in the auction, and that's what causes a lot of what Dr. Hildebrandt is referring to as revenue adequacy — the underfunding of the payments going back to the load-serving entities."
PJM Interconnection Senior Vice President and General Counsel Vince Duane opted not to take a side in the FTR market debate. He offered that the Federal Energy Regulatory Commission was equipped to "separate the baby from the bathwater" and put rules in place to prevent any unjust siphoning of revenue by financial traders.
PJM stakeholder process questioned
To that point, PJM has proposed tariff changes to counter situations in which virtual trades purportedly extract value from the markets without providing any benefits. Specifically, the grid operator proposed allocating (FERC docket ER18-86) a portion of uplift costs to up-to congestion transactions, or UTCs, and reducing (FERC docket ER18-88) the availability of nodes at which virtual transactions may be placed. The proposals emanated from a stakeholder process organized by PJM's Energy Market Uplift Senior Task Force.
Wesley Allen, CEO of Red Wolf Energy Trading, who appeared before the panel on behalf of the Financial Marketers Coalition, contended that virtual traders' participation in the wholesale markets "has been under attack" as "some have grown weary of competition and long for the former structure."
PJM's proposals on virtual transactions, in particular, were prime examples of "minority interests not being protected" in the markets, Allen said. He called for reforms of PJM's voting structure and stakeholder process, which he said allowed the proposals at issue to pass solely on the support of utilities while "everybody else [voted] in a different way."
Further, he contended that stakeholder processes should be relegated to resolving smaller issues, not questions of market design. "It's analogous to the inmates running the asylum," he said
But Duane countered that both load and supply interests overwhelmingly voted in favor of the PJM proposals.
"The fundamental test in our belief is that financial trading has to benefit physical participants and the system as a whole, including the consumers, generators and transmission customers," Duane said. "The question of whether these transactions bring that kind of value … will have to be resolved by FERC and that's why they're there, to address those types of controversies."
