An Empirical Assessment of the Success of Financial Rights Auctions in PJM and New York

An Empirical Assessment of the Success of Financial Rights Auctions in PJM and New York Prepared by Susan L. Pope EUCI Electric Power Market Performance Conference September 20, 2001

1 TOPICS Financial Transmission Rights Auction Mechanics Auction Example Counterflow Auction Results PJM New York Observations

2 FINANCIAL RIGHTS Overview The uncertainty of congestion charges for transmission use under an LMP system creates a demand for congestion hedges, or financial transmission rights (FTRs or TCCs). FTRs enable market participants to lock-in a price for transmission prior to the day-ahead market. The owner of an FTR is paid the hourly cost of congestion ($/MWh) between two locations on the transmission system designated by the FTR. If the FTR owner s net injections and withdrawals match the FTR quantities, then the FTR is equivalent to a physical transmission right. FTRs are financial investments that provide the financial equivalent of firm transmission for market participants that use their FTRs to support physical bilateral transactions.

3 FINANCIAL RIGHTS Financial Instruments The owner of an FTR is paid the hourly cost of congestion ($MWh) between two locations in the transmission system in every hour. There is a financial settlement after the dispatch in which the ISO collects congestion costs from users of the system through charges for energy and transmission and pays congestion rents to owners of FTRs. Market participants do not have to hold FTRs in order to schedule use of the system. Market participants with FTRs are paid the market value of their rights even if they do not undertake a corresponding energy transaction.

4 AUCTION MECHANICS Rationale An auction is one of the potential mechanisms for allocating financial transmission rights, such as FTRs or TCCs. An FTR auction is a desirable market element even if FTRs are also allocated using other mechanisms: Ensures that all feasible FTRs are made available to market participants. Allows FTR holders to reconfigure FTRs acquired through other mechanisms. Allows market participants to sell counterflow forward, making additional congestion hedges available in forward markets.

5 AUCTION MECHANICS PJM and NYISO The open access tariffs of PJM and the NYISO both provide for the sale of financial transmission rights via auctions. PJM holds monthly auctions for FTRs corresponding to uncommitted grid transfer capability. The NYISO holds periodic auctions for long-term TCCs (corresponding to uncommitted grid transfer capability and transfer capability initially allocated to native load), as well as monthly reconfiguration auctions. NEPOOL is in the process of developing a long-term FCR auction. The NYISO and PJM auctions have many common elements.

6 AUCTION MECHANICS In both PJM and the NYISO: Bidding Buyers can bid for an FTR between any combination of receipt and delivery buses, including the PJM hubs and NY zones. 1 Each bid to buy an FTR states the maximum price in dollars per MW that the buyer is willing to pay for that FTR. It will pay no more than its bid, but may pay less. Each bid to sell an FTR can state the minimum price in dollars per MW that the seller is willing to accept for that FTR. It will sell its FTR for no less than its bid, but it may receive more. 1 In New York, bids must be between locations (buses, zones or external proxy buses) at which the NYISO calculates prices in the day-ahead market.

7 AUCTION MECHANICS Selection of FTR Awards The FTRs awarded in the PJM and NYISO auctions are selected to maximize the value of the awarded FTRs (based on buyers bids) net of the value of FTRs sold (based on sellers reservation prices). The awards are made subject to the constraint that the awarded FTRs be simultaneously feasible in a contingency constrained dispatch in conjunction with all outstanding FTRs (i.e., previously acquired FTRs not sold into the auction). The simultaneous feasibility test means the ISO will generally collect enough congestion charges through the LMP system to pay congestion rents to FTR holders.

8 AUCTION MECHANICS FTR Pricing Each FTR buyer in the PJM and NYISO auctions pays the market-clearing price for the FTRs it purchases and each FTR seller receives the market- clearing price for the FTRs it sells. The prices of all FTRs sold in the auction are related through the impact of the transmission flows associated with those FTRs on binding transmission constraints. The auction therefore values all FTRs, whether or not they are bought or sold in the auction. The ISOs publish the prices of all FTRs relative to a reference bus.

On-Peak FTRs Purchased and Sold in PJM May 1999 FTR Auction Source Sink Owner Buy/Sell MW Price ($/MW) Price ($/MWh) WESTERN HUB ECARviaCEI Duke Energy Trading & Marketing L.L.C. Sell 49.8 10.00 0.030 ATHENIA 26 KV IM GRP SADDLEBR 230 KV T2-3 Public Service Electric and Gas Company Buy 36.2 (1.00) (0.003) BRUNNERI 18 KV UNIT01 WHEMPFIE 69 KV BUS_N Public Service Electric and Gas Company Buy 1.8 5.00 0.015 BRUNSWIC 230 KV 26KV EDISON 13 KV UNIT11 PP&L Inc. Buy 2.5 40.71 0.121 BRUNSWIC 230 KV 26KV EDISON 13 KV UNIT11 PP&L Inc. Buy 2.5 40.71 0.121 DEANS BRUNSWIC 230 KV 26KV Public Service Electric and Gas Company Buy 125.0 29.96 0.089 DEANS PIERSOAV 230 KV T-2 Public Service Electric and Gas Company Buy 81.4 90.00 0.268 EASTERN HUB NYPP-E Southern Company Energy Marketing L.P. Buy 4.0 141.63 0.422 EASTERN HUB NYPP-E Southern Company Energy Marketing L.P. Buy 10.0 141.63 0.422 EASTERN HUB NYPP-E Southern Company Energy Marketing L.P. Buy 20.0 141.63 0.422 JCPL PSEG PP&L Inc. Buy 1.0 220.02 0.655 PEACHBOTTOM PSEG PP&L Inc. Buy 2.5 146.29 0.435 WESTERN HUB NYPP-E Southern Company Energy Marketing L.P. Buy 4.0 133.57 0.398 WESTERN HUB NYPP-E Southern Company Energy Marketing L.P. Buy 10.0 133.57 0.398 WESTERN HUB NYPP-E Southern Company Energy Marketing L.P. Buy 20.0 133.57 0.398 WESTERN HUB NYPP-E PP&L Inc. Buy 1.0 133.57 0.398 WESTERN HUB NYPP-W Southern Company Energy Marketing L.P. Buy 4.0 53.36 0.159 WESTERN HUB NYPP-W Southern Company Energy Marketing L.P. Buy 10.0 53.36 0.159 WESTERN HUB NYPP-W Southern Company Energy Marketing L.P. Buy 20.0 53.36 0.159 WESTERN HUB NYPP-W PP&L Inc. Buy 1.0 53.36 0.159 9

10 AUCTION MECHANICS Reconfiguration The centralized FTR auction provides a mechanism for reconfiguring point-to-point FTRs. The FTRs acquired in the auction may be different from those sold into the auction. The FTRs acquired in the auction may even differ from any of the outstanding FTRs. The FTRs acquired in the auction are determined by the bids of the market participants, not by decisions of the transmission owners.

95 MW Thermal 80 MW Thermal 90 MW Thermal 80 MW Thermal SYSTEM CONFIGURATION New IPP L Orange DC Red DC Blue DC Green DC C W M New Gas A Old Gas Y D X Z B New Coal Old Nuke V N Yellow DC P New Gen 11

12 AUCTION EXAMPLE System The example assumes a transmission system with the following characteristics: Thermal constraints of 80 MW between Buses D and M and between Buses D and N, 95 MW between Buses M and X, and 90 MW between Buses N and X. The reactance on each transmission line is the same. There are no transmission losses.

13 AUCTION EXAMPLE Bids A set of bids to buy and sell FTRs in the auction is provided in the following table. BIDS IN FTR AUCTION Bids to Sell FTRs Bids to Buy FTRs Seller FTR Holdings FTRs Offered For Sale (MW) FTR Injection Bus FTR Withdrawal Bus Price Bid ($/MW) Buyer Offers to Buy FTRs (MW) FTR Injection Bus FTR Withdrawal Bus Price Bid ($/MW) Orange 75 75 B W $5,000 Orange 25 A W $3,750 Orange 25 25 B W 4,000 Yellow 25 L V 2,500 Yellow 10 10 P V 8,750 Red 30 P W 6,900 Red 25 25 A W 4,700 Red 20 L W 2,000 Red 25 25 A W 4,125 Blue 20 P W 7,750 Red 5 0 P W Blue 25 B W 4,900 Blue 50 A W 4.800 Blue 25 B W 4,000

14 AUCTION EXAMPLE The results of this auction are as follows: Value Maximization BIDS TO SELL FTRs FTRs Offered FTR FTR FTRs Owned Value of FTRs For Sale Injection Withdrawal Price Bid FTRs Sold After Auction Retained Seller (MW) Bus Bus ($/MW) (MW) (MW) ($) Orange 75 B W $5,000 0 75 $375,000 Orange 25 B W 4,000 25 0 -- Yellow 10 P V 8,750 0 10 87,500 Red 25 A W 4,700 25 0 -- Red 25 A W 4,125 25 0 -- BIDS TO BUY FTRs Offers to FTR FTR FTRs Purchased Value of FTRs Buy FTRs Injection Withdrawal Price Bid in Auction Acquired Seller (MW) Bus Bus ($/MW) (MW) ($) Orange 25 A W $3,750 0 -- Yellow 25 L V 2,500 25 $62,500 Red 30 P W 6,900 0 -- Red 20 L W 2,000 0 -- Blue 20 P W 7,750 20 155,000 Blue 25 B W 4,900 25 122,500 Blue 50 A W 4,800 15 72,000 Blue 25 B W 4,000 0 -- Total $874,500

15 MW 80 MW Thermal 80 MW Thermal 25 MW 95 MW Thermal 90 MW Thermal 15 AUCTION EXAMPLE Feasibility Test Injections and withdrawals corresponding to the set of awarded FTRs (along with Red s 5 MW FTR from Bus P to Bus W, which was not sold in the auction) are simultaneously feasible. POWER FLOW CORRESPONDING TO FTRs AWARDED IN THE AUCTION New IPP L Orange DC Red DC Blue DC Green DC W C M New Gas A 60 MW 85 MW 140 MW Old Gas Y B 100 MW D 55 MW 90 MW X 35 MW Z New Coal Old Nuke BINDING V 35 MW N Yellow DC P New Gen

16 AUCTION EXAMPLE Reconfiguration The power flow corresponding to the FTRs that are outstanding at the conclusion of the FTR auction differs from the power flow corresponding to the initial allocation of FTRs. This is because there has been some reconfiguration of FTRs. 35 MW of FTRs from Bus A to Bus W have been reconfigured into 20 MW of FTRs from Bus P to Bus W and 10 MW of FTRs from Bus L to Bus V. SALES AND PURCHASES OF FTRs IN AUCTION FTRs Sold in Auction FTRs Bought in Auction FTR FTR FTR Injection Withdrawal Injection FTR Seller Bus Bus MW Buyer Bus Withdrawal Bus MW Orange B W 25 Blue B W 25 Red A W 50 Blue P W 20 Yellow L V 10 Blue A W 15

POWER FLOW CORRESPONDING TO FTRs AWARDED IN THE AUCTION New IPP Green DC New Gas Old Nuke New Gen Orange DC Red DC Blue DC Old Gas 140 MW 85 MW New Coal 35 MW 90 MW L Yellow DC 25 MW C M 60 MW A BINDING 15 MW D 100 MW 55 MW B N 35 MW P W Y X Z V 17 95 MW Thermal 90 MW Thermal 80 MW Thermal 80 MW Thermal

18 AUCTION EXAMPLE Reconfiguration This reconfiguration of FTRs has occurred as a result of the bids placed by bidders in the auction. In the auction power flow, the transmission line connecting Buses N and X is at its limit. Different FTRs have different impacts on flows on the constrained line, so that the number of FTRs that can be awarded without overloading the line varies from one FTR to another. 20 MW of FTRs from Bus P to Bus W plus 10 MW of FTRs from Bus L to Bus V cause the same flows on the N to X line as 35 MWs of FTRs from Bus A to Bus W. Blue s bid for 20 MW of FTRs from Bus P to Bus W plus the Yellow s bid for 10 MW of FTRs from Bus L to Bus V is greater than Blue s bid for 35 MW of FTRs from Bus A to Bus W.

POWER FLOW CORRESPONDING TO FTRs AWARDED IN THE AUCTION New IPP Green DC New Gas Old Nuke New Gen Orange DC Red DC Blue DC Old Gas 140 MW 85 MW New Coal 35 MW 90 MW L Yellow DC 25 MW C M 60 MW A BINDING 15 MW D 100 MW 55 MW B N 35 MW P W Y X Z V 19 95 MW Thermal 90 MW Thermal 80 MW Thermal 80 MW Thermal

20 AUCTION EXAMPLE FTR Pricing The marginal FTR awarded in the auction is the FTR from A to W purchased by Blue at a price of $4,800/MW. All other FTRs can be valued based on how they trade off with the marginal award from A to W over the limiting line, which is N to X. TRADEOFFS FTR N-X Flows Price L-V ¼ $2,400 A-W ½ $4,800 P-W ¾ $7,200

21 AUCTION EXAMPLE The complete results of the auction are shown below: Results BIDS TO SELL FTRs PAYMENTS FOR FTRs PURCHASED AND SOLD IN THE AUCTION FTRs Offered FTR FTR FTRs Owned Value of FTRs for Sale Injection Withdrawal Price Bid FTRs Sold After Auction Retained Seller (MW) Bus Bus ($/MW) (MW) (MW) ($) Orange 75 B W $5,000 0 75 $375,000 Orange 25 B W 4,000 25 0 -- Yellow 10 P V 8,750 0 10 87,500 Red 25 A W 4,700 25 0 -- Red 25 A W 4,125 25 0 -- BIDS TO BUY FTRS Offers to FTR FTR FTRs Bought in Net Payment Buy FTRs Injection Withdrawal Price Bid Auction FTR Price Made for FTRs Buyer (MW) Bus Bus ($/MW) (MW) ($/MW) ($) Orange 25 A W 3,750 0 4,800 -- Yellow 25 L V 2,500 25 2,400 60,000 Red 30 P W 6,900 0 7,200 -- Red 20 L W 2,000 0 2,400 -- Blue 20 P W 7,750 20 7,200 144,000 Blue 25 B W 4,900 25 4,800 120,000 Blue 50 A W 4,800 15 4,800 72,000 Blue 25 B W 4,000 0 4,800 -- Total $36,000

22 COUNTERFLOW The New World The FTR auction provides a mechanism for market participants to: Value future locational differentials. Buy and sell redispatch services on a forward-market basis. Buy and sell energy on a forward-basis through a futures market at trading hub.

Off-Peak FTRs Purchased and Sold in June 1999 FTR Auction Source Sink Owner Class Buy/Sell MW Price ($/MW) Price ($/MWh) WESTERN HUB PECO Enron Energy Services, Inc. Off Buy 10.0 (3.50) (0.010) ATHENIA 26 KV IM GRP SADDLEBR 230 KV T2-3 Public Service Electric and Gas Company Off Buy 7.5 (1.00) (0.003) EDGEMOOR 23 KV UNIT05 HARMONY 138 KV ONE Public Service Electric and Gas Company Off Buy 50.0 0.07 0.000 BRUNNERI 18 KV UNIT01 WHEMPFIE 69 KV BUS_N Public Service Electric and Gas Company Off Buy 50.0 0.90 0.002 DEANS PIERSOAV 230 KV T-2 Public Service Electric and Gas Company Off Buy 67.3 25.00 0.068 DEANS BRUNSWIC 230 KV 26KV Public Service Electric and Gas Company Off Buy 37.4 25.00 0.068 PPL NYPP-E PP&L, Inc. Off Buy 2.5 60.75 0.165 PEACHBOTTOM PSEG PP&L, Inc. Off Buy 5.0 61.51 0.167 SUSQT10 230 KV T10 PSEG PP&L, Inc. Off Buy 2.5 68.37 0.186 MICKLETO 69 KV CT_1 AECO Atlantic Electric Off Sell 59.0 0.34 0.001 MICKLETO 69 KV MOBIL AECO Atlantic Electric Off Sell 43.5 0.34 0.001 CHAMBERS 230 KV CCLP AECO Atlantic Electric Off Sell 245.0 0.36 0.001 CONEMAUG 115 KV DIESEL AECO Atlantic Electric Off Sell 0.4 0.37 0.001 CONEMAUG 22 KV UNIT 1 AECO Atlantic Electric Off Sell 32.0 0.37 0.001 CONEMAUG 22 KV UNIT02 AECO Atlantic Electric Off Sell 33.0 0.37 0.001 PEDRICKT 230 KV PCLP AECO Atlantic Electric Off Sell 116.0 0.39 0.001 BRIDGEPO 230 KV LOGAN AECO Atlantic Electric Off Sell 218.0 0.40 0.001 DELCOTAP 13 KV DELCO AECO Atlantic Electric Off Sell 75.0 1.17 0.003 On-Peak FTRs Purchased and Sold in June 1999 FTR Auction Source Sink Owner Class Buy/Sell MW Price ($/MW) Price ($/MWh) BRUNSWIC 230 KV 26KV EDISON 13 KV UNIT11 PP&L, Inc. On Buy 5.0 (32.98) (0.094) BRUNSWIC 230 KV 26KV EDISON 13 KV UNIT11 PP&L, Inc. On Buy 5.0 (32.98) (0.094) ATHENIA 26 KV IM GRP SADDLEBR 230 KV T2-3 Public Service Electric and Gas Company On Buy 2.5 (1.00) (0.003) EDGEMOOR 23 KV UNIT05 HARMONY 138 KV ONE Public Service Electric and Gas Company On Buy 50.0 0.12 0.000 BRUNNERI 18 KV UNIT01 WHEMPFIE 69 KV BUS_N Public Service Electric and Gas Company On Buy 50.0 1.76 0.005 DEANS BRUNSWIC 230 KV 26KV Public Service Electric and Gas Company On Buy 30.5 45.00 0.128 DEANS PIERSOAV 230 KV T-2 Public Service Electric and Gas Company On Buy 5.2 50.00 0.142 TRENTON 138 KV 26KV-1 SEWAREN 26 KV 26KV PP&L, Inc. On Buy 5.0 81.40 0.231 PENELEC PSEG PP&L, Inc. On Buy 1.0 103.46 0.294 WESTERN HUB PSEG PP&L, Inc. On Buy 1.0 111.87 0.318 AECO PSEG PP&L, Inc. On Buy 1.0 117.05 0.333 NEWFREEDOM PSEG PP&L, Inc. On Buy 2.5 117.27 0.333 PEACHBOTTOM PSEG PP&L, Inc. On Buy 5.0 120.90 0.343 SUSQT10 230 KV T10 PSEG PP&L, Inc. On Buy 2.5 134.69 0.383 SUSQT10 230 KV T10 PSEG PP&L, Inc. On Buy 2.5 134.69 0.383 SUSQUEHA 24 KV UNIT01 PSEG PP&L, Inc. On Buy 10.0 136.05 0.387 JCPL PSEG PP&L, Inc. On Buy 5.0 161.96 0.460 MICKLETO 69 KV CT_1 AECO Atlantic Electric On Sell 59.0 0.50 0.001 MICKLETO 69 KV MOBIL AECO Atlantic Electric On Sell 43.5 0.50 0.001 CHAMBERS 230 KV CCLP AECO Atlantic Electric On Sell 245.0 0.54 0.002 PEDRICKT 230 KV PCLP AECO Atlantic Electric On Sell 116.0 0.59 0.002 BRIDGEPO 230 KV LOGAN AECO Atlantic Electric On Sell 218.0 0.61 0.002 DELCOTAP 13 KV DELCO AECO Atlantic Electric On Sell 75.0 1.92 0.005 23

24 COUNTERFLOW Negative Purchases PJM data illustrate the potential for counterflow FTRs to be purchased at negative prices in the auction These transactions effectively permit generators (or other parties) to sell congestion management services on a forward basis through the FTR auction. The transactions arranged through the auction are more complex than bilateral exchanges of counterflow; the FTRs purchased at negative prices in the auction do not directly correspond to any sold at positive prices. The ability of generators to sell congestion management forward facilitates hedging by loads by increasing the available quantity of congestion hedges.

FORWARD SALE OF REDISPATCH BY NEW COAL New IPP Green DC New Gas Old Nuke New Gen Orange DC Red DC Blue DC Old Gas 141.5 MW 1 MW New Coal 35 MW Yellow DC 85.5 MW 90 MW L 25 MW 60.5 MW A N 1 MW 16.5 MW 56 MW 100 MW B C D 35 MW P M W Y X Z V 25 95 MW Thermal 90 MW Thermal 80 MW Thermal 80 MW Thermal

26 COUNTERFLOW Redispatch Example New Coal can sell redispatch services in the auction by bidding to buy an FTR from Bus Z to Bus P. Awarding a 1 MW FTR from Bus Z to Bus P to New Coal would free up 0.75 MW on the N to X constraint. This would allow the sale of a 1.5 MW FTR from Bus A to Bus W worth $7,200 MW. Thus New Coal would be paid $7,200 to hold the FTR from Bus Z to Bus P. This is equivalent to selling an FTR from Bus P to Bus Z into the auction.

FORWARD SALE OF REDISPATCH BY NEW COAL New IPP Green DC New Gas Old Nuke New Gen Orange DC Red DC Blue DC Old Gas 141.5 MW 1 MW New Coal 35 MW Yellow DC 85.5 MW 90 MW L 25 MW 60.5 MW A N 1 MW 16.5 MW 56 MW 100 MW B C D 35 MW P M W Y X Z V 27 95 MW Thermal 90 MW Thermal 80 MW Thermal 80 MW Thermal

28 COUNTERFLOW Redispatch Example By buying an FTR from Bus Z to Bus P, New Coal essentially sells its redispatch services in the forward market. In real time: New Coal would inject power at Bus Z and withdraw power at P, being paid the difference between Bus Z and Bus P. New Coal would pay the difference between Bus Z and Bus P to the ISO for holding the FTR. New Coal would receive the price at Bus P for energy sold into the spot market. New Coal has essentially sold the price difference between Bus Z and Bus P forward.

29 AUCTION RESULTS Forward Congestion Prices The PJM and New York auctions value FTRs between all points within their respective control areas. 0.618 NYPP - West 1.195 0.383 PJM FTR On-Peak Auction Prices ($/MWh) May 2001 1.430 0.135 NYPP - East 1.195 0.183 0.103-0.296-0.373-0.031 0.096 0.175 0.084 0.191 0.218 0.629 0.632 0.021 0.607-0.127 1.263 0.104 0.645 0.285 0.170 0.168 0.131 0.662 0.636 0.567 0.404 0.579 230 KV Transmission Line 345 KV Transmission Line 500 KV Transmission Line 0.043 1.297 1.275 Western Hub is the Reference Bus The number reflects the price of on FTR from the Western Hub to that location. 0.095

PJM

PJM FTR On-Peak Auction Prices ($/MWh) May 1999 NYPP - West 0. 398 0.061 0.057 0.059 NYPP - West 0.159-0.92 0.015-0.092 0.002-0.007 0.019-0.010-0.035-0.111-0.063-0.086-0.041-0.038-0.303-0.029 0.978-0.49 0.332 0.026-0.131-0.021-0.025-0.021-0.025-0.071-0.021-0.0219-0.0152-0.0218 230 KV Transmission Line 345 KV Transmission Line 500 KV Transmission Line -0.008-0.0216 Western Hub is the Reference Bus The number reflects the price of on FTR from the Western Hub to that location. -0.009 31

32 FTR AUCTION RESULTS First Auction PJM held its first auction of financial transmission rights in mid- April 1999 for May FTRs. PJM auctions are for uncommitted grid transfer capability, as well as for the reconfiguration of outstanding FTRs. The auction resulted in forward market prices from the Western Hub to every location in PJM for both peak and off-peak periods. Although relatively few FTRs were sold in the first FTR auction, several thousand MWs were offered for sale by FTR holders.

May-01 Jun-01 Jul-01 Mar-01 Apr-01 Feb-01 Jan-01 Dec-00 Nov-00 Oct-00 Sep-00 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - PJM FTR Auction FTR Purchases Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Feb-00 Jan-00 Dec-99 On-Peak Purchases Off-Peak Purchases Month 33 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 May-99 MW FTRs

34 PJM AUCTION RESULTS Trading Volume The volume of FTR purchases (at positive or negative prices) in the PJM auction has risen dramatically since the auction began in May 1999. Over 7,000 MW of on-peak FTRs have been purchased in recent FTR auctions. Over 6,000 MW of off-peak FTRs have been purchased in several recent auctions.

Mar-01 Apr-01 May-01 Feb-01 Jan-01 3500 3000 2500 2000 1500 1000 500 0 Number of Purchase Transactions Jan-00 through May-01 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Date Off-Peak Bought On-Peak Bought 35 May-00 Apr-00 Mar-00 Feb-00 Jan-00 Transactions

36 PJM AUCTION RESULTS Transaction Volume The number of separate purchase transactions has also increased dramatically since the monthly auctions began with 36 transactions in May 1999.

Mar-01 Apr-01 May-01 Feb-01 Jan-01 40 35 30 25 20 15 10 5 0 PJM Average FTR MW/Transaction Jan-00 through May-01 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Date Off-Peak Bought On-Peak Bought 37 May-00 Apr-00 Mar-00 Feb-00 Jan-00 MW

38 PJM AUCTION RESULTS Transaction Size Overall, the average size of an auction purchase (in MW/transaction) has declined. It appears that buyers have become increasingly sophisticated in sizing and targeting their bids.

Mar-01 Apr-01 May-01 Feb-01 Jan-01 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% On-Peak PJM FTRs Into or Out of a Hub Jan-00 through May-01 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Date Source Sink 39 May-00 Apr-00 Mar-00 Feb-00 Jan-00 Percent of MWs Transacted

40 PJM AUCTION RESULTS Trading at Hubs Interestingly, the volume of on-peak auction purchases going into or coming out of one of PJM s hubs has not shown a strong upward trend (at least since January 2000). It appears that more FTR purchases are made to hedge energy purchases at the hubs than to hedge energy sales at the hubs.

6,000 5,000 4,000 3,000 2,000 1,000 - PJM FTR Auction On-Peak FTR Purchases and Sales May-01 Jun-01 Jul-01 41 Mar-01 Apr-01 Feb-01 Jan-01 Dec-00 Purchases -- Positive FTR Price Purchases -- Negative FTRPrice Sales Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Month May-99 MW FTRs

42 PM AUCTION RESULTS FTR Sales The volume of FTR sales in the PJM auction superficially appears rather low. Because FTRs are financial instruments and unidirectional, market participants can sell an FTR from B-A by purchasing an FTR from A-B. If account is taken of FTR purchases at negative prices, it can be seen that FTR sales have also been substantial.

6,000 5,000 4,000 3,000 2,000 1,000 - PJM FTR Auction Off-Peak FTR Purchases and Sales May-01 Jun-01 Jul-01 Mar-01 Apr-01 Feb-01 Jan-01 Dec-00 Purchases -- Positive FTR Price Purchases -- Negative FTR Price Sales Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Jun-99 Month 43 May-99 MW FTRs

44 PJM AUCTION RESULTS FTR Sales Off-peak FTR purchases and sales in the form of FTR purchases at negative prices have also risen substantially.

45 PJM AUCTION RESULTS Trader Activity Between January 2000 and May 2001, the data show the following trends in participation in the PJM FTR auctions: The number of different winning bidders increased over time, from 5 or 6 in the spring of 2000 to 13-15 in the spring of 2001. In all months, between 70% and 90% of the MW volume was transacted by the most active three traders in that month. A short list of parties were among the top three traders in any month, based on MW volume: El Paso Merchant Energy, Enron, First Energy Trading Services, Morgan Stanley Capital Group (15 months), Niagara Mohawk Energy Marketing, PECO Energy Power Team (16 months), PP&L, PSE&G.

New York

47 NY AUCTIONS Importance In New York, TCC auctions are the primary mechanism for allocating financial transmission rights. Thus, for example, 3,000 MW of TCCs were sold in the first auction even though no TCCs were released for sale.

Summary of Initial TCC Auctions -- New York Year 2000 2001 Season Spring Autumn Spring Autumn (current) 1 Auction Type Initial Initial Initial Initial Initial Initial * Initial * Initial Initial * Initial * Initial 2 TCC Durations Two-Year Six-Month Five-Year Two-Year Six-Month Two-Year One-Year Six-Month Two-Year One-Year Six-Month 3 Valid All-Hours All-Hours All-Hours All-Hours All-Hours All-Hours All-Hours All-Hours All-Hours All-Hours All-Hours 4 Stage 1 Rounds 4 4 3 2 2 0 0 4 0 0 4 5 % of TCCs Sold 35% 65% 23% 23% 54% 0% 0% 100% 0% 0% 100% 6 % /Round 9% 16% 8% 12% 27% 0% 0% 25% 0% 0% 25% 7 Start Date May-00 May-00 Nov-00 Nov-00 Nov-00 May-01 May-01 May-01 Nov-01 Nov-01 Nov-01 8 End Date Apr-02 Oct-00 Oct-05 Oct-02 Apr-01 Apr-03 Apr-02 Oct-01 Oct-03 Oct-02 Apr-02 [1] Note: Some TCC durations were not offered for sale in the Initial Auctions of 2001, but were offered in the Stage Two reconfiguration rounds. (Marked with asterisk). [2] Duration of TCCs offered in sub-auction. [3] All TCCs offered so far are valid in all-hours, but market rules make allowances for TCCs valid only during peak or off-peak times. [4] The number of rounds in Stage 1. [5] = Number of TCCs in given sub-auction / number of TCCs in all sub-auctions. [6] = Number of TCCs in given round of sub-auction / number of TCCs in all sub-auctions. [7] Date on which TCCs sold in sub-auction become valid. [8] Date on which TCCs sold in sub-auction expire. 48

49 NY AUCTIONS Auction Types New York currently holds two types of auctions: Initial auctions, held every 6 months to sell TCCs of varying durations (5-year, 2-year, 1-year and 6 months). Stage 1 sells TCCs for uncommitted grid transfer capability, transfer capability assigned to native load, and also allows reconfiguration of outstanding TCCs. Stage 2 is for reconfiguration only. Reconfiguration auctions, held monthly starting in June 2000. In addition, the NYISO has coordinated reconfiguration auctions for 1-year and 2-year TCCs in the spring and fall of 2001.

50 NY AUCTIONS Longer-Term TCCs The current allocation of transfer capability to support long-term TCCs is: 35%: 2-year TCCs sold spring 2000. 15%: 5-year TCCs sold fall 2000. 15%: 2-year TCCs sold fall 2000. 35%: 6-month TCCs sold spring 2001.

QUEBEC NY ISO 5-Year TCC Auction Average TCC Auction Prices ($/TCC hour) November 1, 2000 - October 31, 2005 Prices portrayed for a TCC from the reference bus GLEN PARK 0.1233 ST. LAWRENCE -0.0481 FRANKLIN -0.0848 NINE MILE 0.1971 NIAGARA 0.3632 GINNA 0.3127 MARCY 0.0000 ALBANY 4.0579 DUNKIRK 0.5382 MILLIKEN 0.5179 JENNISON 1.1966 GILBOA 3.1458 HICKLING 0.7987 PJM 0.7409 GOUDEY 1.0536 HIGH FALLS 3.3673 Transmission Lines (345 kv and above) Transmission Lines (230 kv) BOWLINE 3.4093 ASTORIA 4.3082 PORT JEFFERSON 3.6501 BARRETT 3.6042 51

52 NY AUCTION RESULTS 5 Year In the autumn of 2000, the NYISO held an auction of long-term TCCs valid for the period from November 1, 2000 through October 31, 2005. 1,567 MW of TCCs were awarded. These awards defined a complete set of forward congestion prices for generators in New York.

NYISO 5-Year TCC Auction Nodal Prices PTID Generator Zone Round 1 Round 2 Round 3 Average LBMP $/MWh 23518 ASTORIA 5 N.Y.C. $ 182,985.39 $ 166,413.66 $ 217,011.78 $ 188,803.61 $ 4.3082 23526 BOWLINE 1 HUD_VL $ 146,863.35 $ 127,923.79 $ 173,445.40 $ 149,410.85 $ 3.4093 23545 BARRETT 1 LONGIL $ 155,295.37 $ 134,949.91 $ 183,599.61 $ 157,948.30 $ 3.6042 23555 PORT_JEFF_3 LONGIL $ 157,280.87 $ 136,656.45 $ 185,949.29 $ 159,962.20 $ 3.6501 23563 DUNKIRK 1 WEST $ 25,604.60 $ 20,167.01 $ 24,990.90 $ 23,587.50 $ 0.5382 23573 ALBANY 3 CAPITL $ 175,402.35 $ 151,571.86 $ 206,529.95 $ 177,834.72 $ 4.0579 23579 GOUDEY 7 CENTRL $ 45,778.73 $ 40,202.06 $ 52,540.42 $ 46,173.74 $ 1.0536 23584 MILLIKEN 1 CENTRL $ 23,030.86 $ 19,093.05 $ 25,960.91 $ 22,694.94 $ 0.5179 23599 GILBOA CAPITL $ 136,339.54 $ 117,273.46 $ 159,971.64 $ 137,861.55 $ 3.1458 23600 ST_LAWRENCE NORTH $ (1,873.74) $ (1,944.57) $ (2,505.97) $ (2,108.09) $ (0.0481) 23603 GINNA GENESE $ 14,159.44 $ 11,360.23 $ 15,595.32 $ 13,705.00 $ 0.3127 23621 HICKLING 1 CENTRL $ 35,469.99 $ 29,853.87 $ 39,689.37 $ 35,004.41 $ 0.7987 23625 JENNISON 1 CENTRL $ 51,664.07 $ 45,208.38 $ 60,448.95 $ 52,440.47 $ 1.1966 23744 NINE_MILE_2 CENTRL $ 8,970.59 $ 7,045.59 $ 9,900.54 $ 8,638.91 $ 0.1971 23754 HIGH_FALLS HY HUD_VL $ 146,384.67 $ 126,436.27 $ 169,887.72 $ 147,569.55 $ 3.3673 23760 NIAGARA WEST $ 16,189.55 $ 13,356.52 $ 18,209.77 $ 15,918.61 $ 0.3632 23778 GLEN_PARK MHK_VL $ 5,412.87 $ 4,588.74 $ 6,211.16 $ 5,404.26 $ 0.1233 24008 NYISO_LBMP_REFERENCE MHK_VL $ - $ - $ - $ - $ - 24054 FRANKLIN_FALL_HYD NORTH $ (3,353.24) $ (3,596.40) $ (4,200.01) $ (3,716.55) $ (0.0848) 61847 PJM_PROXY_BUS PJM $ 33,764.81 $ 27,715.94 $ 35,924.67 $ 32,468.47 $ 0.7409 53

54 NY AUCTION RESULTS Auction Rounds A distinctive feature of the New York long-term TCC auctions is that they are structured to take place in rounds to allow market participants to adjust their strategies in the course of the auction. This is not an iterative bidding process; market-clearing prices are determined and TCCs are sold in each round. This process allows market participants to adjust the TCCs they seek to buy as the auction proceeds.

NYISO 5-Year TCC Auction Binding Constraints Contingency Constraints: Round 1 Round 2 Round 3 Freshkills 138 kv Phase Angle Regulator for tower contingency : X X X Goethals North to Freshkills 345 kv X X X Goethals South to Freshkills 345 kv X X X Goethals to Linden 230 kv X X X East 13 th St. 345/69 kv Transformer for bus contingency: X X West 49 th St. East 13 th St. 345 kv X X East 13 th St. Farragut 345 kv X X East 13 th St. 345/138 kv Transformer #14 X X East 13 th St. 345/138 kv Transformer # 15 X X Inghams Phase Angle Regulator 115 kv for tower contingency: X X X Marcy Coopers Corners 345 kv X X X Edic Fraser 345 kv X X X Plattsburgh Grand Island 115 kv X X X Parishville Colton 115 kv for contingency: X X Moses Willis 230 kv X Moses Willis 230 kv X Willis Plattsburgh 230 kv X Willis Plattsburgh 230 kv X Plattsburgh 230/115 kv Transformer X Marcy 765/345 kv Transformer T1 X Marcy 765/345 kv Transformer T2 X Chateauguay Massena 765 kv X Leeds Pleasant Valley 345 kv for loss of Leeds Pleasant Valley 345 kv X Nine Mile Pt. Scriba 345 kv for loss of Nine Mile Pt. Clay 345 kv X Packard Huntley 230 kv for loss of Packard Huntley 230 kv X X 14 22 12 55

56 NY AUCTION RESULTS Active Constraints A large number of constraints were binding in the three rounds of the 5-year FTR auction. 19 constraints were binding in all three rounds. 40 constraints were binding in one or more rounds. At least 25 constraints were binding in every round. NYISO 5-Year TCC Auction Binding Constraints Normal Loading Constraints: Round 1 Round 2 Round 3 Gowanus South Greenwood 138 kv X X X Fresh Kills Phase Angle Regulator 138 kv X X X Tremont Phase Angle Regulator 138 kv X Dunwoodie E179th Street 138 kv X X X Dunwoodie Sherman Creek 138 kv X E179th Street Hellgate 138 kv X X X Rainey Vernon 138 kv X X X Jamaica Corona 138 kv X X X Greenwood Vernon 138 kv X X West 49 th St. 345/138 kv Transformer X X X Dunwoodie Rainey 345 kv X X X Goethals South Gowanus South 345 kv X X X Cedars Rosemont 115 kv X X X Eastview Kensico 138 kv X Central East Interface X X X 12 13 13

New York TCC Monthly Reconfiguration Auction Purchases and Sales 3,500 Total TCCs Purchased Total TCCs Sold 3,000 2,500 MW TCCs 2,000 1,500 1,000 500 * * 0 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 * Data not posted Month 57

58 NY AUCTION RESULTS Reconfiguration Volume The volume of TCC purchases in New York s monthly reconfiguration auctions quickly reached a substantial level.

New York TCC Monthly Reconfiguration Auction Purchases, Sales and Purchases at Negative Prices 3,500 3,000 Purchases -- Positive TCC Price Purchases -- Negative TCC Price Sales 2,500 MW TCCs 2,000 1,500 1,000 500 0 * Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Date * Data not posted 59

60 NY AUCTION RESULTS Sales As in PJM, New York market participants have sold congestion management forward by purchasing TCCs at negative prices. Aquila and Mirant were among the entities selling counterflow TCCs in the June 2001 reconfiguration auction. June 2001 Seller Point of Injection Point of Withdrawal TCCs Price MW/Month Aquila Hudson Valley Zone G West Zone A 100 -$9,380.27 Mirant Mohawk Valley Zone E Marcy (NYISO Reference Bus) 10-510.53

61 OBSERVATIONS The experience to date with FTR auctions suggests a few conclusions: Conclusions Point-to-point financial transmission rights work and are accepted as a fundamental part of an open access electricity market. Auctions of point-to-point financial transmission rights can be implemented, either as periodic reconfiguration auctions or as the primary mechanism for allocating financial transmission rights. Monthly reconfiguration auctions have proved to be highly successful mechanisms for reconfiguring point-to-point financial transmission rights and have proved to be highly liquid.

62 OBSERVATIONS Next Steps The development of point-to-point financial transmission rights is not complete. Areas of continuing development include: Allocating point-to-point financial transmission rights for transmission expansions. Implementing point-to-point multi-duration financial transmission rights auctions. Implementing the simultaneous feasibility test for point-topoint financial options.

63 Susan L. Pope (617) 761-0104 350 Massachusetts Ave. 2700 East Bypass 2000 Powell St. 1603 Orrington Ave. Suite 300 Suite 4800 Suite 600 Suite 2000 Cambridge, MA 02139 College Station, TX 77845 Emeryville, CA 94608 Evanston, IL 60201 (617) 252-9994 (409) 694-2421 (510) 653-9800 (847) 475-1566 (617) 621-8018 fax (409) 694-2442 fax (510) 653-9898 fax (847) 475-1031 fax 445 S. Figueroa St. 1700 Broadway 201 South Main 1725 Eye Street, NW 26th Floor 38th Floor Suite 900 Suite 800 Los Angeles, CA 90071-1630 New York, NY 10019 Salt Lake City, UT 84111 Washington, DC 20006 (213) 621-0228 (212) 468-7878 (801) 364-6233 (202) 466-4422 (213) 621-0277 fax (212) 468-7879 fax (801) 364-6230 fax (202) 466-4487 fax Av. Julio A. Roca 781, Piso 4 40/43 Chancery Lane 180 Bloor Street West 9th Floor, 1 Willeston St. (1067) Buenos Aires London WC2A 1JA, England Suite 1400 P.O. Box 587 Argentina 44 171 269 0500 Toronto, Ontario M5S 2V6 CanadaWellington, New Zealand 54 11 4345 1813 44 171 269 0515 fax (416) 927-0479 64 4 472 0590 54 11 4345 1814 fax (416) 927-7621 fax 64 4 472 0596 - fax