Evaluating the Performance of Financial Transmission Rights Auction Market: Evidence from the U.S. Midwest Energy Region
Authors: Junjie Sun and Wenzhuo Shang
Working Paper, Department of Economics, Iowa State University, Revised November 2006
Abstract:
This paper applies empirical methods to analyze performance of financial transmission rights (FTRs) auction markets in the Midwest energy region (MISO). The data we used are monthly FTR auction clearing prices and associated congestion revenues for the period April 2005 - March 2006. Based on the preliminary statistical analysis, we summarize and present the stylized facts about the MISO FTR auction market. Moreover, we fit the data with linear regressions and nonparametric kernel regressions, and carry out a bootstrap-based goodness-of-fit test on the linear versus kernel fits. The revenue sufficiency results suggest that the MISO FTR market is systematically losing money, which suggests that the market participants exhibit some degree of risk affection. More data are needed in order to obtain meaningful economic analysis such as estimating the impact of an agent's risk preference on his willingness to pay for the premium of FTR in this complex market. It would be especially helpful to acquire the actual bidding and asking prices of market participants in the MISO FTR auctions over time.
Keywords: Financial transmission rights (FTRs), FTR auctions, Congestion revenues, Risk hedging, Nonparametric estimation, Kernel regression, Goodness-of-fit test.
JEL Codes: G1, L9, C14