Resource /Energy Economics and Policy, Risk and Uncertainty,

Canchi, Devendra

Gotham, Douglas J.

Preckel, Paul V.

Sparrow, F.T.

English

Research Papers in Economics

 
 
 
Easy Money in FTR Auctions 
 
 
 
 
 
Devendra Canchi, Paul V. Preckel, Douglas J. Gotham, F.T. Sparrow  
 
 
 
Devendra Canchi is a graduate research assistant for the State Utility Forecasting Group (SUFG); 
Paul Preckel is Professor of Agricultural Economics and Faculty Director of SUFG; Douglas 
Gotham is Director of SUFG; and F.T. Sparrow is Professor Emeritus of Industrial Engineering 
and former SUFG Director.  SUFG is located in the Energy Center of Discovery Park at Purdue 
University, 500 Central Drive, West Lafayette, IN  47907-2022.   
 
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association 2010 
AAEA,CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 2010 
 
 
 
 
 
 
 
 
Copyright 2010 by Canchi, Preckel, Gotham and Sparrow. All rights reserved. Readers may 
make verbatim copies of this document for non-commercial purposes by any means, provided 
that this copyright notice appears on all such copies. EASY MONEY IN FTR AUCTIONS
Devendra Canchi, Paul V. Preckel, Douglas J. Gotham, F.T. Sparrow
Purdue University
Sell at 
LMPgen node
Buy at 
LMPcon node
Congestion Means Power flow 
on the line at its rated capacity
Nodal Pricing System
LMP: Locational Marginal Price, representing the opportunity cost 
of meeting a given demand situation, has three components.  
Congestion rents could be either positive or negative. They are 
highly volatile. Under the Nodal Pricing System, utility companies 
are exposed to an unprecedented uncertain price environment 
Hogan (1992)1 suggested a hedging contract, came to be known as 
Financial Transmission Right (FTR) Obligation
An institutional arrangement equipped to regulate prices in the 
wholesale electricity market to create an outcome mirroring that 
from a hypothetical competitive market equilibrium
Electric Power
Electric Power is a peculiar commodity (lack of significant 
storage capability and need for substantial delivery 
infrastructure). Industry was highly regulated. In late 
eighties, a new system to regulate prices began to gain 
acceptance.
Opportunity for Profitable Bidding
FTRA→B for $ - 25,838
Earned Risk-Free profit $ 4,689 per MW
A
B
C
Round - 1
FTRA→B 
A
B
C
Round - 4
FTRB→C 
A
B
C
Round - 2
FTRC→A 
Financial Transmission Rights
Opportunity cost associated with transmitting 1 MW of power flow 
from a given source node (point of injection) to a given sink node 
(point of withdrawal) is called congestion rent. 
All marginal costs are computed from the dual variables within the 
linear optimization problem solved by an independent entity to 
allocate generation assets for meeting demand reliably.  
FTR Obligation, designated in MWs and defined by source and sink 
nodes, affords the holder a counter cash flow to the congestion 
rent. For instance, a generator transmitting 1 MW of electric power 
from Node A to Node B, through holding a 1 MW A→B FTR earns a 
payoff that exactly offsets the incurred congestion rent. In contrast, 
negative congestion rent creates an obligation for the holder
FTR Obligation – A Unusual Financial Claim
The payoff structure immediately suggests that the payoff to a 
portfolio of FTRs  (same period and same number of MWs), such 
that they form a closed loop, should be zero. 
A
B
C
Individual contracts yield uncertain 
payoffs, but the portfolio always yields a 
deterministic payoff of zero. 
Auctions for FTR Obligations
In most wholesale electricity markets, FTR Obligations are sold in 
auction. In some markets, a multi round auction format is used. 
Investors’ bids specify source sink and MW quantity. The winners 
and clearing prices are announce at the end of every round. The 
clearing prices inherit a structure. For any set of FTRs (of equal 
MWs) cleared in the same round that form a closed loop, the 
clearing prices sum to zero. 
The pricing principle means, in any given round of the multi-round  
FTR auction, the portfolio of offsetting FTRs can only be acquired 
for $0
In any given round of the FTR auction, clearing prices are hence 
consistent, i.e. a portfolio with deterministic zero payoff can only 
be acquired for $ 0. 
Auction Clearing price of portfolio {FTRA→B, FTRB→C, FTRC→A} = 0
There is no such guaranteed clearing in a multi-round format
The following was observed in 2007 Annual FTR auction conducted 
by PJM Interconnection, the largest wholesale market in the 
country
FTRA→B    $ - 25,838
Round 1
FTRB→C $      9,621
FTRC→A    $    16,216
FTRA→B   $ - 24,168
Round 2
FTRB→C $      8,512
FTRC→A   $    15,656
FTRA→B   $ - 23,686
Round 4 
FTRB→C $      5,493
FTRC→A   $    18,193
Clearing Prices ($/MW)
In every round, clearing prices sum to zero. 
Consider a investor, who acquired the following 
three FTR Obligations in this auction.
The portfolio earns a deterministic zero-payoff. The investor 
acquired this zero-payoff portfolio of $ - 4,689 per MW
Risk Free Profits – Do they occur?
Bidders identities are not made public. Hence it is hard to 
conclusively determine if investors are successful in acquiring 
offsetting portfolios. Each round winners are however declared
Conclusions
Round 1 Round 2 Round 3
Average Deviation ($/MW)
Round 2
676.71    
Skewness of Deviation ($/MW) 1.31
Percent MW (non positive dev.) 51%
Percent FTRs (non positive dev.) 55%
Average Deviation ($/MW)
Round 3
-1,580.97 -2,995.61
Skewness of Deviation ($/MW) -6.76 -8.04
Percent MW (non positive dev.) 47% 53%
Percent FTRs (non positive dev.) 48% 62%
Average Deviation ($/MW)
Round 4
-3,059.09 -3,765.68 -1,759.77
Skewness of Deviation ($/MW) -7.47 -7.00 -6.76
Percent MW (non positive dev.) 48% 56% 58%
Percent FTRs (non positive dev.) 51% 59% 58%
In some cases, it is possible to impute bidders identities. Nearly 250 
instances of profitable bidding have been identified by imputing 
bidders identities. 
More importantly, given the pricing principle if prices decline 
progressively from one round to another, we cannot reject the 
possibility of bidders profitably acquiring offsetting portfolios.
Except for Round 2 versus Round 1, prices progressively decline in 
this auction. Hence we cannot reject the possibility that  investors 
profitably acquire offsetting portfolios.
Deviations in the 2007 Annual FTR Auction conducted by PJM Interconnection.
A shortcoming of multi-round auction for FTR Obligations is described. 
Examination of PJM auction data reveals that some investors are 
benefiting from transactions that result in risk-free profit. 
A thorough analysis involving the strategic behavior of the auction 
participants will greatly improve our understanding of these 
markets and potentially improve their overall efficiency.
1Hogan, William W. 1992. "Contract Networks for Electric Power Transmission." Journal of Regulatory 
Economics, 4(3), pp. 211-42.
FTRC→A for $   15,656 FTRB→C for $    5,493

Easy money in FTR auctions

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