FTR Risks and Failures

Financial transmission rights were designed to hedge congestion costs. In practice, they have produced spectacular losses for unsophisticated participants and windfall profits for sophisticated traders. The FTR market's failures reveal what happens when a complex financial instrument is layered onto an already complex physical system.

The GreenHat Energy collapse. In 2018, GreenHat Energy accumulated the largest FTR portfolio in PJM history (890 million MWh of FTR positions) with minimal collateral. When congestion patterns shifted, GreenHat defaulted on $179 million in losses. PJM's other market participants absorbed the cost through socialized uplift charges. The failure exposed inadequate credit requirements: GreenHat posted roughly $600,000 in collateral against positions that ultimately lost $179 million.

Structural problems. FTR markets assume stable congestion patterns. But transmission outages, new generation, and changing load patterns shift congestion unpredictably. Participants who purchase FTRs based on historical congestion can face losses when the grid changes. Additionally, FTR auctions consistently underfund congestion revenue: PJM's FTR market has been revenue-inadequate in most years, meaning FTR holders collectively receive less than the congestion rents collected.

If FTRs consistently lose money in aggregate, why do participants buy them?

Hedging value and information asymmetry. Load-serving entities buy FTRs to hedge their customers' congestion exposure, accepting below-market returns for certainty. Financial speculators buy FTRs when they believe their congestion forecasts are better than the market's. The GreenHat case showed what happens when speculative confidence meets inadequate risk controls.

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