Risk and Abnormal Returns in Markets for Congestion Revenue Rights

In organized energy markets that use locational pricing, power generators and energy suppliers procure Financial Transmission Rights (FTRs) to hedge against grid congestion charges, while third party speculators attempt to capture a return with these extremely volatile contracts. The paper develops a novel methodology for estimating systematic risk of individual FTRs and detecting the presence of abnormal returns among these financial instruments. The prevalence of congestion paths with abnormal returns could be used by policy experts as an efficiency measure when assessing the performance of FTR markets. Being the only organized energy market in the Western Interconnection, California has implemented a version of FTRs officially known as Congestion Revenue Rights (CRRs). This paper applies the proposed methodology to all auctioned CRRs from 2009-2015 period. Our analysis identifies the paths that exhibit persistent abnormal returns with the majority of them being positive. It also contrasts the patterns of risk and abnormal returns between On-Peak and Off-Peak CRRs, and finds no significant differences