Financial Transmission Rights (FTRs)

In ISO markets, market participants sometimes incur congestion costs that are in excess of the standard transmission costs. These manifest themselves as differences in Locational Marginal Price (LMP) between two pricing points when transmission is congested between the two points. 

Since congestion costs vary depending on system conditions, they can create significant cost uncertainty. For market participants who cannot afford such risk, it is important to create mechanisms to manage the risk of congestion costs. To hedge against the financial uncertainty, ISOs often offer financial transmission rights (FTRs). FTRs are allocated or auctioned off to the marketplace and provide a fixed-price guarantee associated with use of a certain transmission path.  If actual congestion costs are higher than the price of the FTR, the market participant is paid the difference by the ISO.  If on the other hand congestion costs are lower, the market participant pays the difference to the ISO. 

A simple example of an FTR