Economic Analysis of Financial Transmission Rights (FTRs) with Specific Reference to the Transpower Proposal for New Zealand

Abstract

Setting aside certain complications that can arise due to market power it is a relatively straightforward matter to derive (if not implement) a valuation formula for FTRs and to relate FTR valuation with the proceeds of the FTR auction allowing for both taxation and auction efficiency. If the FTR auction is fully efficient and/or if FTR revenues and costs were not taxable then not only would FTR values be maximised but the revenues to grid-connected parties from that auction would also be maximised. The seemingly odd result that FTR auction efficiency affects FTR values flows from the fact that the latter benefit from a tax deduction on FTR acquisition costs which deduction is maximised under a fully efficient FTR auction.