Physical transmission rights

What Is Physical Transmission Rights?

Physical transmission rights, within the context of energy markets, refer to the actual capacity or entitlement to move electrical power across the high-voltage transmission system from one point to another. Unlike financial instruments, these rights are not typically traded as separate, standalone securities. Instead, they represent the fundamental operational access that allows generators to deliver electricity to load-serving entities and consumers. The availability and allocation of physical transmission rights are crucial for maintaining grid reliability and enabling efficient power generation and consumption across interconnected regions.

History and Origin

Prior to the mid-1990s, the U.S. electric utility industry was largely characterized by vertically integrated electric utilities that owned and operated generation, transmission, and distribution assets. These utilities often provided bundled services, limiting access to their transmission networks by independent power producers. This structure could create barriers to competition.

A significant shift occurred with the issuance of landmark rulings by the Federal Energy Regulatory Commission (FERC). In 1996, FERC issued Orders No. 888 and 889, which aimed to promote wholesale competition through open access and non-discriminatory transmission services¹². These orders mandated that public utilities operating transmission facilities in interstate commerce file open access transmission tariffs and "unbundle" their wholesale power and transmission marketing functions¹⁰, ¹¹. This regulatory intervention fundamentally changed how power was transmitted, paving the way for greater competition in wholesale electricity markets by ensuring all eligible buyers and sellers had fair access to the grid. The goal was to remove impediments to competition and ultimately provide more efficient, lower-cost power to consumers⁸, ⁹.

Key Takeaways

• Physical transmission rights denote the actual ability or entitlement to flow electricity over the high-voltage transmission grid.
• They are a critical operational concept in restructured electricity markets, ensuring power can move from where it is generated to where it is needed.
• The regulatory framework, particularly FERC Order 888, unbundled transmission services to enable non-discriminatory access.
• Independent System Operators and Regional Transmission Organizations manage the allocation of physical transmission capacity.
• Physical transmission rights are distinct from financial instruments designed to hedge against transmission congestion management costs.

Interpreting the Physical Transmission Rights

In a practical sense, interpreting physical transmission rights involves understanding the physical capabilities and constraints of the electricity grid. While not a tradable quantity, the concept is inherent in the operational control exercised by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) over the high-voltage transmission network. These entities, such as PJM Interconnection (PJM) or the California Independent System Operator (CAISO), continuously monitor the system to ensure that the physical flow of electricity respects transmission line capacities and avoids overloading.

The "interpretation" of these rights is embedded in the energy dispatch processes, where power is scheduled and flowed based on available capacity and system conditions. If physical transmission capacity is limited between two points, it leads to congestion, meaning lower-cost power cannot reach certain consumers⁷. The RTO/ISO then takes actions, like re-dispatching generators or adjusting flows, to manage this congestion and ensure system reliability, effectively allocating the available physical transmission rights at any given moment.

Hypothetical Example

Consider a hypothetical scenario involving two power plants, Plant A and Plant B, and a major city, City X, all within an RTO's operational area. Plant A produces electricity at a lower cost than Plant B. Normally, the RTO's energy dispatch system would prioritize power from Plant A to meet City X's demand.

However, suppose a key transmission line connecting Plant A directly to City X experiences an unexpected outage or is operating at its capacity limit due to high demand in other areas. In this situation, the physical transmission rights from Plant A to City X are constrained. The RTO, responsible for grid reliability and balancing supply and demand, would then "interpret" these limited physical transmission rights. It might be forced to dispatch more expensive power from Plant B to City X, or from other available generators, even though Plant A's power is cheaper. This decision is made to ensure power continues to flow to City X, effectively allocating the available physical transmission capacity. The cost difference arising from this re-dispatch is known as congestion cost.

Practical Applications

Physical transmission rights are fundamentally about the flow of electricity on the grid and have critical implications across various aspects of electricity markets:

• Grid Operations: Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) manage the real-time allocation of physical transmission capacity. They use sophisticated models to forecast demand, schedule power generation, and ensure that physical power flows adhere to thermal limits and voltage stability, preventing blackouts⁶. PJM, for instance, actively manages congestion by re-dispatching generation around transmission constraints to deliver power at the lowest possible cost⁵.
• Market Design: The concept underpins the design of energy markets, particularly those employing locational marginal pricing (LMP). LMP reflects the marginal cost of delivering an additional megawatt-hour of electricity to a specific location, incorporating the cost of losses and, crucially, the cost of congestion due to physical transmission limitations.
• Transmission Planning: Utilities and system operators engage in long-term transmission planning to reinforce and expand the transmission system. This planning is driven by the need to ensure sufficient physical transmission rights are available to support future load growth, new generation interconnections (e.g., renewables), and overall market efficiency. The Federal Energy Regulatory Commission (FERC) plays a significant role in overseeing these planning processes. The transformation of the power utility industry, initiated by FERC Orders 888 and 889, required public utilities to open their transmission systems, which laid the foundation for modern transmission planning and market structures⁴.
• Ancillary Services: The physical constraints of transmission also necessitate various ancillary services, such as reactive power support and operating reserves, to maintain grid stability and allow for flexible management of physical power flows.

Limitations and Criticisms

While the unbundling of transmission services has been crucial for fostering competition, the concept of physical transmission rights, or rather the management of physical transmission, still presents limitations and faces criticisms:

• Congestion Costs: Even with sophisticated congestion management techniques employed by RTOs, physical transmission limitations can lead to significant congestion costs. These costs arise when lower-cost generation cannot be delivered due to grid constraints, forcing the dispatch of more expensive power. These costs are ultimately borne by consumers or market participants, affecting market efficiency. PJM, for example, notes that congestion occurs when the lowest-cost electricity cannot reach some consumers, leading to higher-priced power being needed³.
• Operational Complexity: Managing physical transmission rights in real-time within a vast, interconnected grid is incredibly complex. Factors like weather, forced outages, and sudden demand shifts can rapidly change available capacity, requiring continuous re-evaluation and adjustment of energy dispatch decisions.
• Inter-regional Seams Issues: Coordination between different RTOs and ISOs, often referred to as "seams issues," can be challenging when physical transmission flows cross their respective boundaries. Different congestion management methodologies can complicate efficient inter-regional power transfer.
• Investment Incentives: Ensuring adequate investment in new transmission infrastructure to alleviate long-term physical constraints can be a challenge. The complex regulatory and economic landscape, including cost allocation issues and siting challenges, can hinder the development of much-needed transmission lines, perpetuating physical limitations.

Physical Transmission Rights vs. Financial Transmission Rights

The distinction between physical transmission rights and financial transmission rights (FTRs) is crucial in understanding electricity markets.

While physical transmission rights refer to the actual ability to move power, financial transmission rights are a financial mechanism designed to mitigate the financial risk associated with price differences caused by physical congestion on the transmission system. For example, PJM administers a market for FTRs, which act as insurance policies for electricity distribution companies to protect against congestion costs¹. An FTR does not grant the holder the right to physically transmit power but provides a financial credit or charge based on the difference in locational marginal pricing between two points due to congestion.

FAQs

What is the primary difference between physical and financial transmission rights?

Physical transmission rights refer to the actual capacity to move electricity on the grid. Financial transmission rights are financial contracts that protect market participants from the costs associated with transmission congestion. One is about the physical movement of power, the other is about hedging financial risk.

Who manages physical transmission rights?

Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) are responsible for managing the physical flow of electricity and, by extension, the utilization of physical transmission capacity on the high-voltage grid. They ensure the reliable operation of the transmission system and handle congestion management.

Do physical transmission rights have a monetary value?

While not directly traded, the underlying physical transmission capacity has an indirect monetary value, as its scarcity can lead to congestion costs reflected in locational marginal pricing. These costs are what financial transmission rights are designed to hedge against.

How do physical transmission rights impact electricity prices?

When physical transmission capacity is constrained, it can prevent the flow of lower-cost electricity, forcing system operators to use more expensive power sources. This increases locational marginal pricing in the congested areas, directly impacting the price of electricity.

Are physical transmission rights the same as transmission service agreements?

No, they are related but distinct. Transmission service agreements are contracts that grant a party the right to use specific transmission services over a defined period. Physical transmission rights, as a concept, refer to the underlying capacity and operational management of the grid that makes those services possible.