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FTR Options & FTR Option QUA

FTR Options & FTR Option QUA. Presentation to Markets Committee April 13, 2004 Michael Taniwha Manager, Market Administration. Introduction. Market Development Initiatives for FTR & QUA processes Applicable Market Rules driving change Introduction of FTR rounds to long-term FTR Auction

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FTR Options & FTR Option QUA

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  1. FTR Options & FTR Option QUA Presentation to Markets Committee April 13, 2004 Michael Taniwha Manager, Market Administration

  2. Introduction • Market Development Initiatives for FTR & QUA processes • Applicable Market Rules driving change • Introduction of FTR rounds to long-term FTR Auction • Introduction of FTR Options as additional value added FTR product • Investigation of alternatives for replacement of current Qualified Upgrade Awards • Recommendations/Feedback

  3. Market Development Initiatives for FTR & QUA Processes • Introduce FTR rounds to long-term FTR Auction • Example: Conduct long-term FTR Auction of three rounds of 20% (total 60% long-term), balance auctioned monthly • Introduce FTR Options to FTR product mix • FTR Auctions would provide for both FTR Obligations and FTR Options • Investigate alternatives to replace the currentQualified Upgrade Award Process (Incremental ARRs)

  4. Applicable Market Rules • Market Rule 1, section 7, clause 7.3.12 Financial Transmission Rights in the Form of Options. “When the ISO has the necessary software and hardware, the FTR Auctions shall allow for the acquisition of FTRs that do not create potential obligations to pay”. • Market Rule 1, appendix C, clause 8 Qualified Upgrade Awards. “…By December 31, 2004, The ISO will develop a permanent process to replace the Qualified Upgrade Award process. The Qualified Upgrade Award process shall continue until the permanent process is implemented”.

  5. Introduction of FTR rounds to long-term FTR Auction • Drivers for introducing FTR Rounds • Some interest expressed from FTR Market Participants to introduce FTR rounds • White-paper from Peter Crampton promotes introduction of price discovery in FTR Auctions through multi-period FTR rounds • Downside of introducing price discovery through rounds is greater complexity to FTR Auction process • Introduction of FTR Rounds would first require change to current QUA and ARR process

  6. Introduction of FTR Options as a new value added FTR product • Drivers for introducing FTR Options in the FTR Auctions • High level of interest from FTR Market Participants • Provides a lower risk transmission hedge product • Provides increased liquidity in FTR market and secondary trading • Compliance with Market Rule 1 and FERC SMD order • FTRO software is available from a number of software vendors • The ISO is now investigating the available product offerings

  7. Drivers for Replacing the Current Qualified Upgrade Award (QUA) Process • Drivers for investigating replacement to QUA process • Some interest from Market Participants to improve QUA process • Alternative method could provide entities that make transmission upgrades (not recovered via NEPOOL RNS rate) with a long-term property right that is tradable • Risk of maintaining current QUA process • Process is a highly time intensive process each month for ISO staff • Process is not easily scalable and may restrict introduction of FTR Rounds

  8. Investigation of Alternatives for a QUA Replacement Method • Alternatives currently being evaluated include • FTR Obligations • FTR Obligation QUA could be sold via secondary market or through monthly or long-term FTR Auctions • FTR Options • Has no downside risk for investor (compared to FTR Obligations) • FTR Option QUA could be sold via secondary market or through monthly or long-term FTR Auctions as well.

  9. Investigation of Alternatives for a QUA Replacement Method cont… • While use of FTR Options for QUAs may be theoretically feasible this has yet to be proven technically • Concept has yet to be tested in FTRO software • Technical investigation will cost time and money and must be ranked with other equally important Market Development initiatives • As QUA to date has only been a small percentage (1.5%) of the total ARR allocation is it worth spending time and money on a replacement process?

  10. Recommendations/Feedback • From the ISO’s operational and implementation timetable it would be preferably to solicit feedback from NEPOOL within the next couple of months • Follow up with an investigative project later this year for the design, cost, and implementation timetable for the proposed initiatives • Introduction of various enhancements would be implemented in 2005 and 2006

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