Revenue adequacy, shortfall allocation and transmission performance incentives in FTR/FGR markets

We examine the issue of revenue adequacy in Financial Transmission Rights (FTR) Markets and address two questions: a) How should revenue shortfalls in FTR markets be assigned to market participants? and b) How can active participation by transmission owners in FTR markets incentivize transmission performance through incremental and long term investment? In particular we focus on the possibility of short positions by transmission owners on financial Flowgate Rights (FGRs). Such positions would allow their holders to capture some of the FTR auction revenues in exchange for assuming liability for the corresponding FTR market revenue shortfall, which can be avoided through improvements in line ratings.