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Auction Revenue Rights
ISO New England collects the revenue generated from the sale of FTRs at auction. This revenue is not retained by the ISO but is distributed through Auction Revenue Rights (ARRs).
ARRs are rights or entitlements to the proceeds the ISO receives from the sale of FTR at auction. Auction revenues are allocated first to entities that pay for transmission upgrades, if and to the extent that the upgrade makes it possible to award additional FTRs in the FTR auction (by virtue of increasing transfer capability on the transmission system). These revenues are called Qualified Upgrade Awards, or QUAs.
After the QUAs are allocated, the remaining auction revenues are then distributed to entities that pay the congestion costs associated with supplying electricity to serve demand. This is done through a four-stage process designed to allocate auction revenues in relation to the amount of load served in the SMD load zone areas (while recognizing certain grand fathered transactions) and to where congestion occurs. In essence, the auction revenue allocation provides these entities a revenue stream that could be used to help insulate them against congestion costs or the costs incurred with acquiring FTRs at auction.
What Are the Benefits?
While variations in LMPs can provide incentive for efficient market operation, this volatility also creates uncertainty for market participants, especially for those responsible for serving demand in congested areas. Financial hedging instruments such as FTRs help market participants manage their congestion-related risks. FTRs provide certainty to market participants in the face of variations in day-ahead LMPs by helping them offset potentially higher costs caused by congestion.
ARRs provide congestion-paying load serving entities a revenue stream that can be used to help insulate them against congestion costs or to defray costs incurred with acquiring FTRs at auction.
