Eric K. Runge and David T. Doot
Day, Berry & Howard

This month we consider the issue of the allocation of congestion revenue rights ("CRRs") in the context of the FERC's proposed Standard Market Design. While there is general agreement that CRR benefits should ultimately flow to load based on its support of the costs of the grid, there are differing views on how the CRR benefits should flow.

CRRs are financial instruments that allow their holders to receive the difference in the locational marginal prices ("LMP") for energy between two or more locations on the grid. Depending on congestion on the grid, congestion revenues that flow to CRR holders can amount to tens or hundreds of millions in dollars in aggregate per year in a given region. CRRs allow market participants to hedge their congestion cost risks and are, therefore, a critical component in a power market participant's portfolio of assets.

The FERC in the SMD Notice of Proposed Rulemaking proposed that CRRs be allocated through an auction of the CRRs as an end state of SMD. During a four-year transition period, however, the FERC will allow some regional flexibility on how CRRs are allocated.

There are two principal methods that have been proposed for the initial allocation of CRR benefits. One method would assign them to all transmission customers with firm transmission rights/obligations. Proponents of the direct assignment method contend that the primary objective of CRR allocation during the transition period should be to protect existing rights and customers. The other principal allocation method is to make all CRRs available through an auction and assign the rights to the revenues from the auctions ("Auction Revenue Rights" or "ARRs").

The two allocation approaches for both CRRs and ARRs share a primary purpose of distributing CRR benefits to those entities that pay the costs of the grid, but differ in their potential effects on wholesale energy markets and retail competition. While the proponents of direct assignment emphasize the importance of protecting existing rights holders from congestion cost exposure, the auction proponents contend that such protection should not undermine the development of markets intended for the ultimate benefit of end-use customers.

The CRR/ARR allocation method proposed for New England is an example of a regional method of allocating CRRs/ARRs that protects existing firm transmission customers, benefits load, and is consistent with the market-focused principles listed above. Under that method, all CRRs will be auctioned, thus maximizing their market value. Energy market participants will be able to acquire a portfolio of CRRs through the auctions that will enable them to best hedge their energy transactions and optimize the value of their assets. The auctions will provide an efficient means of reconfiguring CRRs, thus facilitating energy transaction flexibility, as well as a robust secondary market for CRRs. Unlike the assignment of CRRs to existing transmission rights holders, which could create a barrier to the entry of new market participants, the periodic auction approach treats existing and new market participants the same, with the most valued CRRs going to the highest bidders. The result should be enhanced liquidity and depth in the energy markets, which should ultimately benefit load.

While CRRs would be auctioned, ARRs would be assigned primarily on the basis of congestion cost responsibility as a function of serving load. Transmission customers who pay congestion costs and those entities to whom the congestion cost responsibility has been transferred will receive ARRs. Under this system, ARRs will follow the load, thereby providing an incentive for competitive suppliers to assume load obligation, and flowing the ARR benefits back to the load that pays the costs of the grid.

Although multiple variations of allocation methods may comply with the SMD final rule for the SMD transition period, the CRR/ARR method proposed for New England is more conducive to promoting vibrant energy markets and retail competition.

Runge is counsel and Doot is a partner in the Energy Practice Group of Day, Berry & Howard LLP. Runge can be contacted by phone at (617) 345-4735, or by e-mail at ekrunge@dbh.com; Doot can be contacted at (860) 275-0102, or by e-mail at dtdoot@dbh.com.