FTR Mechanics

A generator in cheap-power western PJM sells to a load in expensive eastern PJM. Congestion charges cost the generator $20/MWh on every transaction. If the generator holds a Financial Transmission Right (FTR) on that path, it receives $20/MWh in FTR revenue, perfectly offsetting the congestion cost. The FTR turns an unpredictable congestion charge into a hedgeable financial risk.

FTRs are financial instruments, not physical rights. They pay their holder the congestion component of the LMP difference between two nodes. If congestion between points A and B averages $15/MWh, the holder of an A-to-B FTR receives $15/MWh for each MW of FTR they hold. RTOs allocate FTRs through auctions, where participants bid for the right to hedge specific transmission paths.

Calculate FTR value. A 100 MW FTR from western PJM to eastern PJM. Average congestion differential: $18/MWh. Annual FTR revenue: 100 MW x $18/MWh x 8,760 hours = $15.8 million. The generator paid $12 million for the FTR at auction, netting $3.8 million in profit while fully hedging its congestion exposure.

Who loses money on FTRs?

Anyone who overpays for a path that turns out to be less congested than expected. FTR auctions are forward markets: bidders guess at future congestion. If new transmission is built and congestion drops, FTR holders receive less than they paid. FTR markets have also attracted financial speculators (hedge funds, trading firms) who buy FTRs without any physical power position, purely betting on congestion patterns. Some have taken large losses when congestion shifted unpredictably.

---