Congestion Revenue Rights

Congestion rent is a major, highly volatile charge currently faced by many participants in the LMP-based electrical energy markets. For this reason, the ISOs offer congestion revenue rights (CRR), also known as financial transmission rights or transmission congestion contracts. These are financial instruments that allow market participants to hedge against congestion charges when they schedule their generation, load and bilateral energy transactions.

However, a CRR is sometimes a financial obligation that requires the holder to pay the ISO when congestion reverses direction. This, among many other reasons, makes the procurement of CRRs, either through an allocation or auction mechanism, a very non-trivial exercise. The procurement of a set of CRRs that provides the market participant with sufficient hedging at minimal risk requires a clear understanding of numerous factors, including procurement rules and procedures, LMP forecasts, the network model, and the algorithms that process the ISO's simultaneous feasibility test.

At all levels from research to market implementation, Nexant has pioneered most of the industry's CRR modeling, algorithm and system development. Nexant applications and platforms run the CRR/FTR/TCC markets at CAISO, ERCOT, MISO and NYISO, and PJM and ISO-NE have study-mode versions. These applications include CRR auction clearing, allocation, secondary markets, and transmission service requests. They include many different financial instruments such as CRR obligations, options, multi-period CRRs, flow gates, and conversions. In this way, Nexant has acquired the industry's best hands-on insights and experience in the area of congestion rights. Our team of experts provides the following services to help clients deal with the profit-risk tradeoffs:

• Forecasts of congestion exposure, combining LMP forecasts with balanced injection/withdrawal schedules
• Creation of successful allocation and auction strategies
• We are uniquely able to conduct its studies with the identical software algorithms used in the relevant ISOs and RTOs
• Development of CRR portfolios with reduced risk under various sensitivities. This process uses a unique and proprietary portfolio theory approach.

We routinely work with clients to develop and implement strategies by time-of-use for multi-year, annual, seasonal or monthly periods. Nexant can also assist with secondary-market operations, including providing valuations for the CRRs to be purchased or sold.