The Skinny on Auction Revenue Rights (ARRs) and Financial Transmission Rights (FTRs)

By Ian M. Palao

Many suppliers are not aware of the FTR/ARR market and what it can provide.

The primary function of the FTR Market is the allocation of Auction Revenue Rights (ARRs) and the auction of Financial Transmission Rights (FTRs). ARRs/ FTRs get issued based on transmission capacity and as a means to provide a financial hedging mechanism to the Load Serving Entities and other Market Participants against congestion charges in the ISOs Day-Ahead Market.

Auction Revenue Rights (ARR)

An Auction Revenue Right is a Market Participant’s entitlement to a share of revenue generated in annual FTR auctions. A Market Participant’s firm historical usage of the ISO’s transmission system determines its share and depending upon the FTR auction clearing price of an ARR path, the share could result in revenue or a charge.

Basically, this is FREE MONEY. If you do not participate in these auctions you may be leaving thousands or tens of thousands of dollars that are rightfully yours unclaimed.

Financial Transmission Rights (FTR)

The annual (PJM) and Monthly (MISO) FTR auctions are conducted prior to the beginning of each planning year, and they are conducted in three rounds. Each round is comprised of multiple markets –peak and off-peak.

ARR/FTR Relationship: ARRs provide a revenue stream to the firm transmission customers, as a result of the FTR Auction, to hedge against congestion charges.

Source: PJM State & Member Training Dept.
https://pjm-eis.com/~/media/etools/ftr-center/ftr-module-oflmp-and-ftr-course.ashx

Frequently asked questions on ARR/FTRs
from the learn.pjm.com learning center

What are Auction Revenue Rights?

Answer: Auction Revenue Rights or ARRs are entitlements allocated annually to firm transmission service customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction. ARRs are another hedging mechanism available to PJM’s transmission service customers.

What are Financial Transmission Rights?

Answer: Financial Transmission Rights or FTRs allow market participants to offset potential losses (hedge) related to the price risk of delivering energy to the grid. FTRs are a financial contract entitling the FTR holder to a stream of revenues (or charges) based on the day-ahead hourly congestion price difference across an energy path.

FTRs are a method to bypass congestion charges associated with PJM’s Locational Marginal Pricing or LMP. They give market participants the ability to attain a better price certainty when delivering energy across the grid.

FTRs are worth the economic value determined by the day-ahead hourly congestion prices. The FTR serves as a benefit, or credit, to the holder if it represents a flow of energy in the same direction as the congested flow. The FTR serves as a liability, or charge, to the holder if it represents a flow of energy in the opposite direction as the congested flow.

Learn more about all PJM’s Markets (PDF).

When and how do I acquire FTRs?

Answer: Market participants can obtain Financial Transmission Rights four ways:

  • Market participants can bid for FTRs in PJM’s long-term FTR Auction, providing FTRs for periods of one to three years.
  • Market participants can bid for them in PJM’s FTR Annual Auction, in which FTRs for transmission capability of the entire PJM Control area are available.
  • Market participants can bid for FTRs in FTR Monthly Auctions. This is usually where leftover FTRs are sold.
  • Market participants can buy FTRs in a secondary bi-lateral market where market participants buy and sell FTRs between one another.

For additional information on how and when to file your submissions, please contact Matt Faria at POWWR to learn more.

When and how do I acquire ARRs?

Answer: ARRs can be acquired in the following mechanisms:

  • Annual ARR Allocation – ARRs requested by firm and network transmission customers are allocated on an annual basis.
  • Daily ARR Reassignment – ARRs allocated for the planning period will be reassigned on a proportional basis within a zone as load switches between load serving entities within the planning period.
  • Residual ARR Allocations – ARRs allocated to firm and network transmission customers as a result of increased transmission capability that was not modeled in the Annual ARR Allocation for paths which were pro-rated in Stage 1 of the Annual ARR Allocation. 

How do I participate in the FTR auction?

  • Answer: PJM Members and PJM Transmission Service Customers are eligible to bid (attempt to purchase) Financial Transmission Rights (FTRs). In addition, PJM Members and Transmission Service Customers are eligible to offer (attempt to sell) FTRs. All FTR positions not supported by Auction Revenue Rights credits must be supported by collateral, which should be provided (by wire or bank letter of credit) to PJM’s Credit Department, and once recorded, specifically set aside for FTR use in PJM’s eCredit tool. Tariff Attachment Q and PJM’s Credit Overview Document bot

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Ian M. Palao Is V.P. of Strategic Energy Services, at POWWR