Financial transmission rights (FTRs / CRRs)
Financial instruments that pay their holder the day-ahead congestion cost between two points on the grid — the standard hedge for locational price risk.
When transmission congestion splits prices between two locations, anyone buying power at one point and selling at another is exposed to that spread. Financial transmission rights exist to hedge it. An FTR between a source and a sink pays its holder the day-ahead congestion price difference between those two points — if congestion costs you money on the physical path, the FTR pays you back.
The instruments go by different names: FTRs in PJM, MISO, and ISO-NE; congestion revenue rights (CRRs) in ERCOT and CAISO; transmission congestion contracts (TCCs) in NYISO. All work the same basic way: the ISO auctions a feasible set of rights, collects congestion rent from the day-ahead market, and uses it to fund payouts.
Beyond hedging, FTR markets are where congestion expectations become tradeable. An FTR's auction price is the market's forecast of future congestion on that path, which makes auction results a uniquely informative dataset: they reveal where sophisticated participants expect the grid to bind next season — sometimes before the transmission planners say so publicly.
For the technical reader
An FTR from source s to sink k pays the holder (congestion component at k − congestion component at s) × MW for each day-ahead interval, as an obligation (can go negative) or an option (floored at zero, priced higher). The ISO's simultaneous feasibility test ensures the auctioned portfolio is supportable by the network, which in principle makes congestion rent sufficient to fund payouts; when outages or derates shrink actual transfer capability, revenue inadequacy forces pro-rata payout reductions in some markets.
Rights are typically allocated in annual and monthly auctions, with long-term strips for load-serving entities (auction revenue rights convert historical entitlement into auction proceeds or self-scheduled FTRs). Valuation is a portfolio problem over binding-constraint scenarios: expected payout is the shift-factor-weighted sum of expected constraint shadow prices, so FTR books are effectively positions on which constraints bind and how often.