1
Integrated Energy and Transmission Pricing
Shri Ram Vaishya, Student Member, IEEE and Vaskar Sarkar, Member, IEEE
Abstract—This paper introduces the concept of transmission
side bidding for availing power transmission services through a
market mechanism. The transmission side bidding, in essence,
refers to the direct market participation of transmission line
owners for selling their line capacities with appropriate price
offers. The transmission offers are submitted to the centralized
auction conducted by the independent system operator for car-
rying out dispatch scheduling or for the issuance of transmission
rights. Those are jointly cleared along with other bids and offers,
and bid-consistent prices are established by means of marginal
pricing. The uncertainty that gets involved in revenues or pay-
ments of market players because of the conventional transmission
pricing is, therefore, eliminated. By recognizing the criticality
of power flow interactions between different transmission lines,
the auction participation of transmission line owners is suitably
regulated. The issuance of financial transmission rights (FTRs)
is supplemented by assigning counterflow flowgate rights to the
transmission line owners so as to ensure revenue adequate FTR
settlement. Detailed case studies are performed to verify the
utility of the proposed transmission pricing methodology.
Index Terms—Centralized auction, counterflow flowgate rights,
financial transmission right, marginal pricing, transmission bid-
ding, transmission pricing.
N OMENCLATURE
𝜖 Offset term in the linear expression of the total
network loss.
𝜂 Total number of energy bids and offers.
𝝀 (𝑁𝐵 × 1) nodal LMP vector in the energy market.
𝝆𝒇 (𝐿 × 1) forward TMP vector in the energy market.
𝝆𝒓 (𝐿 × 1) reverse TMP vector in the energy market.
Ψ (𝐿 × 𝑁𝐵 ) DC power flow-based branch-node power
flow sensitivity matrix.
𝑲 (𝑁𝐵 × 1) loss distribution vector for the aggregated
network loss.
𝐿 Total number of transmission lines.
𝑳𝑭 (𝑁𝐵 × 1) vector of nodal loss factors.
𝑁𝐵 Number of network buses.
𝑃𝑙𝑜𝑠𝑠 Variable representing aggregate network loss.
𝒇 𝒊𝒙
𝑷𝒍𝒐𝒂𝒅 (𝑁𝐵 ×1) parameter vector representing the net nodal
fixed loads in the energy market.
𝒇 𝒕𝒓
𝑷𝒊𝒏𝒋 (𝑁𝐵 ×1) vector of net nodal power injections caused
by the physical equivalents of active FTRs.
𝑊 (.) Social-welfare function.
𝑊 𝑜𝑝𝑡 (∗) Optimal social-welfare as the function of *.
𝑿𝒆𝒏𝒓 (𝜂 × 1) variable vector representing the cleared
amounts towards energy bids and offers.
𝑿𝒇 𝒍𝒇 (𝐿 × 1) variable vector representing the cleared
amounts towards forward line flow capacity offers.
Shri Ram Vaishya (email: ee13p1013@iith.ac.in) and Vaskar Sarkar (email:
vaskar@iith.ac.in) are with the Department of Electrical Engineering, Indian
Institute of Technology Hyderabad, Kandi, Sangareddy 502285, India.
978-1-5090-3646-2/16/$31.00 ⃝2016
𝑿𝒇 𝒍𝒓 (𝐿 × 1) variable vector representing the cleared
amounts towards reverse line flow capacity offers.
0𝒙 (𝑥 × 1) vector of all zeros.
1𝒙 (𝑥 × 1) vector of all ones.
(.)𝑚𝑎𝑥 Maximum value of variable (.).
(.)∗ The optimal solution of a primal or dual variable.
I. I NTRODUCTION
The transmission pricing is a long debated issue since the
inception of power system deregulation. Unlike nodal quanti-
ties (i.e., active and reactive power injections), the power flows
over transmission lines are bound by certain laws of nature.
As a consequence, the simple flow conservation principle
between nodal quantities and line flows is not sufficient to
prepare the power transportation plan. In addition, the power
transportation should be instantaneous leading the capacity
concerns of transmission corridors. The complexities involved
in power transportation led to the motivation of creating mar-
ket only among the nodal entities (i.e., generators and loads).
Furthermore, the original practice was to have a completely
separate energy market, only based upon the demand-supply
balance, for fulfilling the power requirements of load entities.
Therefore, there was a single market clearing price throughout
the system in the case of a centralized market [1]. There
could also be complementary markets for the management
of network loss and congestion [2]. In any way, the entire
cost involved in power transportation had to be recovered (as
additional charges) through a regulatory procedure from the
trades that took place in the energy market. The subsequent
developments led to the incorporation of transmission loss and
congestion aspects in the energy market itself by establishing
locational marginal prices (LMPs) [3]-[4]. Therefore, the costs
incurred in power transportation because of network loss
and congestion are not to be separately recovered. However,
the costs incurred by transmission line owners (in terms
of establishment, operation, and maintenance) in providing
power transportation services are still not accounted in the
energy market. Therefore, the transmission pricing (which ba-
sically deals with recovering the costs of transmission service
providers) has been left as a regulatory procedure till date.
The conventional transmission pricing approaches are built
upon three main regulatory decisions with regard to the issues,
namely, 1) quantifying the transmission system usages made
by nodal entities, 2) usage discrimination, and 3) pricing
the usage of a transmission resource. There are two basic
paradigms for defining the usage of the transmission system.
In one category, the usage of the transmission system is
defined by means of a scalar with a consolidated view of
the entire network, e.g., postage stamp and the MW-Mile
c IEEE

methodologies. The other paradigm of transmission system
usage attribution takes a separate view of each individual
transmission line. Those are, 1) the principle of DC power
flow (DCPF) [5], 2) the principle of current flow [6], 3) the
principle of proportional sharing [7]-[8], and 4) the principle
of optimality [9]. There is also a mixed paradigm in which a
final scalar assessment is made based upon an initial vector
assessment. The power flow based MW-Mile methodology
[10], [11] and MVA-Mile methodology [12] falls under this
category.
There can be price discrimination between different en-
tities for the transmission system usages. For example, the
transmission system usages made by a generating entity and
a load entity may be charged at different rates [7], [13].
Another form of usage differentiation can happen with regard
to the treatment of counterflows. The issue of counterflows
arises in the case of DCPF and current flow based power
tracings. In one approach, counterflow usages of a transmission
line are charged at the same rate as that for the loading
usages, whereas, in the other approach, those are treated non-
chargeable [10], [11]. The transmission pricing can be carried
out ex-post or ex-ante [13]. In the case of ex-post pricing, the
network tariffs are determined based upon the actual power
flow profile obtained after clearing the market. On the other
hand, the ex-ante pricing [13] sets network tariffs based upon
the estimation of the future power flow profile.
The main shortcoming of the existing transmission pricing
methodologies is that those generate certain forms of price
uncertainty. In the case of ex-post pricing, the network tariffs
are imposed in the form of uplift charges leading to price
uncertainty for generating and load entities. In [7], it was
suggested that only load entities should be liable to pay
network tariffs. The particular approach can definitely mitigate
the price uncertainty issue of the conventional transmission
pricing provided all the loads are completely price-insensitive.
However, with the thrust on the efficient consumer load
management in the smart grid era [14], price-sensitive load
requests in the wholesale market are likely to be unavoidable.
For ex-ante pricing, price uncertainty is observed by the
transmission line owners since the actual power flow profile
may not always closely match the estimated power flow
profile. This can specifically happen since the generating and
load entities modify their offer and bid prices by taking
into account the network tariffs to be paid. The mismatch
between estimated and actual power flow profiles may lead
to insufficient collection to fulfill the revenue requirements of
transmission line owners as per the actual line usages. Finally,
there is still no clear basis to determine best of all the available
transmission pricing methodologies. The particular assessment
could be made only based upon some empirical ground.
In this paper, a concept of market based transmission pricing
is introduced. The shortcomings of the existing transmission
pricing methodologies can be overcome by creating a market
for procuring transmission services. That is, there can be
capacity offers from the transmission line owners, based upon
which the line flows should be scheduled. Although there
is no variable cost associated with a transmission line, the
concept of transmission market is justified on the background
2
of having markets for similar entities such as reactive power
compensators and hydro plants. The concept of transmission
market originally appears in the contract path theory [2]. How-
ever, the contract path methodology or any other decentral-
ized transmission market approach is practically inapplicable
because it neither obeys the physical laws of line flows nor
recognizes the necessity of a power pool. The implementation
of the transmission market needs close co-ordination with
the energy market through a centralized mechanism. The
specific contribution of this paper is to design an integrated
energy and transmission market based upon the principle
of LMP [3]-[4]. The transmission pricing methodology in-
troduced differs from the traditional concept of incremental
transmission pricing [10], [15] in that the transmission revenue
requirements (TRRs) are explicitly taken into account in the
dispatch scheduling. The financial transmission right (FTR)
market is consistently designed ensuring revenue adequate
FTR settlement. It is to be noted that a similar transmission
bidding concept was proposed in [16]. There, the transmission
bidding is, however, performed only for controlled transmis-
sion lines. In addition, no FTR related issues are taken into
account in [16]. On the other hand, the framework developed
in this paper is generalized enough to consider both controlled
and uncontrolled transmission lines while maintaining perfect
compatibility with the FTR mechanism.
The rest of the paper is organized as follows: The dispatch
scheduling under integrated energy and transmission pricing
is explained in Section II. The implementation of FTRs in the
new market environment is discussed in Section III. In Section
IV, case studies are performed to illustrate the functionality,
practicality, and benefit of market based transmission pricing.
Finally, the paper is concluded in Section V.
II. D ISPATCH S CHEDULING
Conventionally, the dispatch schedules are determined only
based upon the bids and offers from nodal entities. The
transmission line flows can be freely adjusted upto the physical
loadability limits. However, for the proposed market frame-
work, transmission line capacities are to be purchased by the
independent system operator (ISO). The dispatch schedules
should be prepared in a way so that the power flow over a
line does not exceed the line capacity that is purchased. The
forward and reverse line capacities are purchased by inviting
separate capacity offers for forward and reverse direction from
transmission line owners. In this paper, the dispatch scheduling
is carried out by employing the reference independent lossy
DC optimal power flow (DCOPF) model proposed in [4]. The
line capacities are expressed in terms of lossless flows. It is
assumed that there are sufficient reactive power supports at
all the buses to maintain a fixed bus voltage profile of one
per unit. The dispatch schedules are, as usual, obtained by
maximizing the social welfare or minimizing the social cost.
However, the social welfare or cost function must include the
costs of transmission line owners. The dispatch scheduling
problem can, therefore, be formulated as follows.
{ }
minimize 𝑍 = − 𝑊 (𝑿𝒆𝒏𝒓 , 𝑿𝒇 𝒍𝒇 , 𝑿𝒇 𝒍𝒓 ) (1)
such that
 3

𝒇 𝒊𝒙
𝒈1 : Ψ{𝑨𝑿𝒆𝒏𝒓 −𝑷𝒍𝒐𝒂𝒅 −𝑲𝑃𝑙𝑜𝑠𝑠 }−𝑿𝒇 𝒍𝒇 −𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
≤ 0𝑳 (2) A generating entity is paid and a load entity is charged ac-
𝒇 𝒊𝒙 cording to the LMPs at the respective locations. For a bilateral
𝒈2 : Ψ{𝑷𝒍𝒐𝒂𝒅 +𝑲𝑃𝑙𝑜𝑠𝑠 −𝑨𝑿𝒆𝒏𝒓 }−𝑿𝒇 𝒍𝒓 −𝑷𝒇𝒇𝒍𝒓 𝒊𝒙
≤ 0𝑳 (3) transaction, a congestion-cum-loss charge is applicable, which
( 𝒇 𝒊𝒙 )
ℎ1 : 1𝑵𝑩 𝑇 𝑨𝑿𝒆𝒏𝒓 − 𝑷𝒍𝒐𝒂𝒅 − 𝑃𝑙𝑜𝑠𝑠 = 0 (4) is given by the LMP difference between its sink and source
( 𝒇 𝒊𝒙 )
ℎ2 : 𝑃𝑙𝑜𝑠𝑠 − 𝑳𝑭 𝑇 𝑨𝑿𝒆𝒏𝒓 − 𝑷𝒍𝒐𝒂𝒅 −𝜖=0 (5) locations. In the same line, the transmission line owners are
𝒎𝒂𝒙 to be paid according to transmission marginal prices (TMPs)
𝒒1 : 𝑿𝒆𝒏𝒓 − 𝑿𝒆𝒏𝒓 ≤ 0𝜼 (6)
for the line capacities that they provide. The TMP vectors are
𝒒2 : −𝑿𝒆𝒏𝒓 ≤ 0𝜼 (7) obtained as follows.
𝒒3 : 𝑿𝒇 𝒍𝒇 − 𝑿𝒇𝒎𝒂𝒙
𝒍𝒇 ≤ 0𝑳 (8) { ( 𝒇 𝒊𝒙 }
𝒊𝒙 ) 𝑇
∂𝑊 𝑜𝑝𝑡 𝑷𝒍𝒐𝒂𝒅 , 𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
, 𝑷𝒇𝒇𝒍𝒓
𝒒4 : −𝑿𝒇 𝒍𝒇 ≤ 0𝑳 (9) 𝝆𝒇 = = 𝝁1 ∗ (14)
𝒒5 : 𝑿𝒇 𝒍𝒓 − 𝑿𝒇𝒎𝒂𝒙 ∂𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
𝒍𝒓 ≤ 0𝑳 (10)
{ ( 𝒇 𝒊𝒙 }
𝒊𝒙 ) 𝑇
𝒒6 : −𝑿𝒇 𝒍𝒓 ≤ 0𝑳 . (11) ∂𝑊 𝑜𝑝𝑡 𝑷𝒍𝒐𝒂𝒅 , 𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
, 𝑷𝒇𝒇𝒍𝒓
𝝆𝒓 = = 𝝁2 ∗ . (15)
Here, 𝑿𝒆𝒏𝒓 , 𝑿𝒇 𝒍𝒇 and 𝑿𝒇 𝒍𝒓 are the decision variables, ∂𝑷𝒇𝒇𝒍𝒓
𝒊𝒙

and 𝑃𝑙𝑜𝑠𝑠 is the other variable. Constraints (2) and (3) en-
sure that the line flows caused by the scheduled loads and
generations will not exceed the forward and reverse flow
capacities, respectively, purchased from the transmission line
owners. The 𝑿𝒆𝒏𝒓 vector is converted into nodal injections
by means of the (𝑁𝐵 × 𝜂) incidence matrix 𝑨. The base
capacity vectors 𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
and 𝑷𝒇𝒇𝒍𝒓
𝒊𝒙
are the line capacities that are
already purchased. For example, in a multi-settlement system,
the line capacities purchased in the day-ahead (DA) market
will add to the base line capacities in the hour-ahead (HA)
market. Similarly, the line capacities purchased upto the HA
market, will add to the base line capacities in the real-time
(RT) market. Constraint (4) is the power balance constraint
that, in essence, ensures zero slack power requirement [3].
The network loss caused by a particular generation and load
schedule (with respect a certain energy reference) is found
through (5). The other constraints simply ensure that the
cleared quantities towards bids and offers will not exceed
the specified limits. It is to be noted, although a particular
energy reference is to be chosen to find out Ψ, 𝑳𝑭 and 𝜖,
the final results are always reference independent [4]. For the
sake of simplicity, the controlled transmission lines are not
explicitly considered here. In addition, the security constraints
are also not included. However, controlled transmission lines
can be easily accommodated into the above formulation by
representing those in the form of bilateral transactions [17].
In the case the security constraints are included, the owner of
a transmission line should be paid mainly for the capacity that
is procured for the normal system operation.
The Lagrangian function of the optimization problem (1)-
(11) can be written as,
2
∑ 6
∑ model mismatch) in the FTR settlement. Alternatively, it can
Λ=𝑍+ 𝑇
(𝝁𝒋 𝒈𝒋 + 𝜅𝑗 ℎ𝑗 ) + 𝝑 𝒊 𝑇 𝒒𝒊
𝑗=1 𝑖=1
where, all 𝝁𝒋 , 𝜅𝑗 , and 𝝑𝒊 are the Lagrangian multipliers. The
LMP at a node is defined as the rate of the decrease of optimal
social welfare with respect to the fixed (or inelastic) load
increase at that node. Therefore, from the theory of sensitivity
analysis [18],
{ ( 𝒇 𝒊𝒙 }
𝒊𝒙 ) 𝑇
∂𝑊 𝑜𝑝𝑡 𝑷𝒍𝒐𝒂𝒅 , 𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
, 𝑷𝒇𝒇𝒍𝒓
𝝀 = − 𝒇 𝒊𝒙
∂𝑷𝒍𝒐𝒂𝒅
= −𝜅1 ∗ 1𝑵𝑩 + 𝜅2 ∗ 𝑳𝑭 − Ψ𝑇 (𝝁1 ∗ − 𝝁2 ∗ ). (13)
For each line, a pair of TMPs are calculated (for forward
and reverse flow directions, respectively), which are applicable
only for the owner of the respective transmission line. The
TMP can never be negative since 𝝁1 ∗ and 𝝁2 ∗ are always
non-negative according to the KKT necessary conditions of
optimality [18]. Therefore, there is no threat of negative
payment towards a offered transmission capacity.
Further, according to the KKT necessary conditions of
optimality, the LMP vector can be decomposed as follows [4].
𝝀𝒆 = −𝜅2 ∗ 1𝑵𝑩 (16)
𝝀𝒍𝒐𝒔𝒔 = 𝜅2 ∗ 𝑳𝑭 (17)
𝝀𝒄 = {(𝝁1 ∗ − 𝝁2 ∗ )𝑇 Ψ𝑲}1𝑵𝑩 − Ψ𝑇 (𝝁1 ∗ − 𝝁2 ∗ ). (18)
Here, 𝝀𝒆 , 𝝀𝒍𝒐𝒔𝒔 , and 𝝀𝒄 are the energy, loss, and congestion
components of the 𝝀, respectively. The net congestion collec-
tion (NCC) and the net loss collection (NLC) of the ISO from
nodal entities can be derived as follows.
NCC = 𝝁1 ∗ 𝑇 (𝑿𝒇 𝒍𝒇 ∗ +𝑷𝒇𝒇𝒍𝒇
𝒊𝒙
)+𝝁2 ∗ 𝑇 (𝑿𝒇 𝒍𝒓 ∗ +𝑷𝒇𝒇𝒍𝒓
𝒊𝒙
) (19)
𝒇 𝒊𝒙
NLC = −(𝝀𝒆 + 𝝀𝒍𝒐𝒔𝒔 )𝑇 (𝑨𝑿𝒆𝒏𝒓
∗
− 𝑷𝒍𝒐𝒂𝒅 ) = 𝜅2 ∗ 𝜖. (20)
Equation (19) reveals that the net congestion collection of the
ISO perfectly balances the net payment to the transmission line
owners. Therefore, the congestion components of locational
marginal prices in effect represent transmission prices for
nodal entities. The net loss collection in the DA market is
usually positive [19]. The loss collection of the ISO can be
used to partially compensate the revenue shortfall (that can
practically happen because of the simultaneous feasibility test
(12)
also be paid to the transmission line owner for lowering the
future transmission capacity offer prices.
In the case of the HA and RT markets, the generations and
loads that have already been scheduled, and the line capacities
that have already been purchased are to be kept outside the
market settlement. So far as there is no change in the network
model from the DA market to the HA or RT market, the NLC
in each of those markets will be zero and the additional line
capacities purchased can be adequately paid from the NCC.
It is to be noted that similar analytical results are obtained in
the case the matrix loss distribution model [20] is employed.

III. FTR I MPLEMENTATION
Financial transmission rights are useful tools to guard for-
ward contracts from the uncertainty of spatial LMP variation
[21], [22]. The owner of an FTR is paid according to the
congestion component of the day-ahead LMP difference over
its FTR path. Conventionally, FTR payments are funded from
the net congestion collection of the ISO in the DA market.
However, as was shown in the previous section, the net
congestion collection is to be fully consumed to pay the
transmission line owners in the case of integrated energy and
transmission pricing. Therefore, some other funding source is
required to make hourly FTR payments. One option to fund
FTR payments is to assign counterflow flowgate rights (FGRs)
to transmission line owners. A counterflow FGR is similar to
the conventional option FGR; however, instead of being paid,
the owner of a counterflow FGR has to pay the hourly value of
the respective FGR. The hourly values of FGRs are calculated
according to TMP. It is to be noted that the TMPs are, in
effect, similar to flowgate shadow prices. The collection from
counterflow FGRs can be used to pay the FTR owners.
In order to assign counterflow FGRs to transmission line
owners, it is required to purchase line capacities for the
issuance of FTRs. The line capacities purchased for the FTR
issuance are to be treated as counterflow FGRs in the DA
market. Let, the forward and reverse line flow capacities
purchased to issue FTRs be indicated by 𝑷𝒇𝒇𝒍𝒇 𝒕𝒓
and 𝑷𝒇𝒇𝒍𝒓
𝒕𝒓
, as in the energy market.
respectively. Therefore, the net FGR collection (NFC) of the
ISO would be as follows.
𝒇 𝒕𝒓 𝒇 𝒕𝒓 𝒇 𝒕𝒓 𝒇 𝒕𝒓
NFC = 𝝆𝑻 𝑻 ∗𝑻 ∗𝑻
𝒇 𝑷𝒇 𝒍𝒇 + 𝝆𝒓 𝑷𝒇 𝒍𝒓 = 𝝁1 𝑷𝒇 𝒍𝒇 + 𝝁2 𝑷𝒇 𝒍𝒓 . (21)
The total target payment (TTP) towards FTRs can be calcu-
lated as follows.
𝒇 𝒕𝒓 𝒇 𝒕𝒓
TTP = −𝝀𝒄 𝑇 𝑷𝒊𝒏𝒋 = (𝝁1 ∗ − 𝝁2 ∗ )𝑇 Ψ𝑷𝒊𝒏𝒋 . (22)
Therefore, the surplus amount (SA = NFC - TTP) left with
the ISO after the FTR settlement is given by,
SA = 𝝁1 ∗ 𝑇 (𝑷𝒇𝒇𝒍𝒇
𝒕𝒓 𝒇 𝒕𝒓
−Ψ𝑷𝒊𝒏𝒋 )+𝝁2 ∗ 𝑇 (𝑷𝒇𝒇𝒍𝒓
𝒕𝒓 𝒇 𝒕𝒓
+Ψ𝑷𝒊𝒏𝒋 ). (23)
The FTRs are issued by satisfying the following power flow
constraints.
−𝑷𝒇𝒇𝒍𝒓
𝒕𝒓 𝒇 𝒕𝒓
≤ Ψ𝑷𝒊𝒏𝒋 ≤ 𝑷𝒇𝒇𝒍𝒇
𝒕𝒓
. (24)
It is to be noted that a lossless network model is employed for
𝒇 𝒕𝒓
the FTR issuance (therefore, 1𝑵𝑩 𝑇 𝑷𝒊𝒏𝒋 = 0). Condition (24)
together with the non-negativity condition of 𝝁(.) ∗ ensures
non-negativity of the surplus amount derived in (23). There-
fore, there will certainly be revenue adequacy if the FTRs
of simultaneously feasible within the line capacities that are
purchased. However, since line capacities are to be purchased
even for the FTR issuance, FTRs can be issued only through
auctions. That is, the direct allocation of FTRs is not possible
under integrated energy and transmission pricing. The FTR
auction problem can be formulated in the traditional way [22].
Only the capacity offers from the transmission line owners are
to be included in the objective function and the network limits
are to be specified in terms of purchased capacities [as in (2)
and (3)]. In addition, the limits on the line capacity offers
4
are to be enforced [as in (8)-(11)]. In the case any controlled
transmission line is present, it has to be represented as an
obligation FTR. As for the energy market, the net collection
from the FTR issuance perfectly balances the net payment
towards transmission line owners in the FTR auction.
In order to verify the net position of a transmission line
owner over energy and FTR markets, two different situations
can be considered. In the case the day-ahead TMP is lower
than the TMP in the FTR auction, the capacity payment re-
ceived from the FTR auction overcompensates the counterflow
FGR liability. In the other case, the day-ahead TMP may have
higher value; however, this can happen only when a capacity
offer is fully selected (i.e., the maximum limit constraint on the
capacity offer becomes active) in the DA market. Therefore,
the counterflow FGR liability can be perfectly compensated
by using the payment for a portion of the capacity sold in the
DA market. The DA payment lost is substituted by the bid-
consistent payment for the same MW from the FTR auction.
Therefore, for both the above cases, the net payment received
by the transmission line owner is no lower than the revenue
requirement for the capacity sold in the DA market. Additional
bid-consistent payments may be received by selling capacities
in HA and RT markets. It is to be noted that a transmission
line owner is assumed to quote a flat rate in its capacity offer.
Moreover, the same price is quoted in the FTR auction as well
IV. C ASE S TUDY
Two different case studies are performed. In the first case
study, the net position of a transmission line owner over the
FTR and energy markets is numerically illustrated. The second
case study is performed to demonstrate the benefits of market
based transmission pricing over the conventional regulatory
transmission pricing. The base MVA for all the case studies
is taken to be 100. The base case system state for the loss
linearization is established through an initial lossless DCOPF
calculation. The loss distribution vector 𝑲 is also determined
based upon the aforementioned base case system state. The
base case line losses are initially distributed in 1:1 ratio over
the respective terminal buses in the form of additional loads.
A. Case Study 1: Demonstration of the market settlement for
transmission line owners
Consider a four-bus and five-line system. The line informa-
tion of the particular system is provided in Table I. Here, the
line loadability is assumed to be the same in each direction.
In addition, both forward and reverse capacities are offered at
the same price. The results of an FTR auction are produced
in Tables II and III. The FTR auction conducted here is a
single-round FTR auction and all the FTRs issued have the
same validity period and time-of-use. In addition, there is no
self-scheduled or previously issued FTR in the particular FTR
auction. The acronyms “Op” and “Ob” stand for “option” and
“obligation”, respectively. Tables IV and V produce the market
clearing results of a subsequent DA market. Apart from the
bids and offers shown in Table IV, a fixed load request of 50
MW at Bus 2 is also considered in the DA market.
 5

TABLE I TABLE VI
L INE I NFORMATION OF THE 4-B US S YSTEM (C ASE S TUDY 1) N ET P OSITIONS OF T RANSMISSION L INE OWNERS (C ASE S TUDY 1)

Line From To Impedance Loadability Offer price LineAuction revenue ($/h) FGR Net Target
id. (p.u.) (MW) ($/MWh) no. FTR DA liability ($/h) revenue ($/h) revenue ($/h)
TL1 2 3 0.01+𝑗0.15 100 1 TL1 99 45.23 99 45.23 45.23
TL2 3 4 0.02+𝑗0.15 51 2 TL2 178.5 90.17 102 166.67 90.17
TL3 4 1 0.01+𝑗0.1 95 1 TL3 95 25.21 95 25.21 25.21
TL4 4 2 0.02+𝑗0.2 36 2 TL4 126 0.21 72 54.21 0.21
TL5 1 2 0.015+𝑗0.1 25 1.5 TL5 34.5 172.65 158.84 48.31 37.5

TABLE II
FTR I SSUANCE R ESULTS (C ASE S TUDY 1) B. Case Study 2: Demonstration of the benefit of market based
transmission pricing
FTR Path Type Requested Bid Cleared Clearing
no. quantity price quantity price The particular case study is performed on the IEEE 118-
(MW) ($/MWh) (MW) ($/MWh)
FTR 1 1-3 Ob. 120 3.5 118 3.5
bus system. The generator, load, and transmission line data
FTR 2 2-3 Ob. 100 2.5 32 2.5 of the IEEE 118-bus system are provided in [23]. For the
FTR 3 2-4 Ob. 80 2 80 0.5 sake of simplicity, however, the minimum MW limits of the
FTR 4 1-4 Op. 50 1.5 0 1.5 generators are set to zero. In addition, the R/X ratio of each
line is taken as 0.1 for ensuring power flow accuracy in the
TABLE III DCOPF calculation. The line reactances are maintained at the
L INE C APACITY P URCHASE R ESULTS : FTR AUCTION (C ASE S TUDY 1)
original values. The price quoted by a generator is equal to
Line no. Capacity purchased (MW) TMP ($/MWh) its marginal cost of production. The full generation capacities
Forward Reverse Forward Reverse are offered in the energy market. All the loads are assumed
TL1 99 0 1 0 to be price insensitive. No bilateral transaction is considered
TL2 0 51 0 3.5
TL3 0 95 0 1 for this case study. The price quoted by a transmission line
TL4 0 36 0 3.5 owner is considered to be 2000 times of the ratio between
TL5 23 0 1.5 0 respective line reactance (p.u.) and line loadability (MW). No
TRR recovery is made for the unutilized line capacity.
TABLE IV The system load profile is assumed to exhibit monthly
DA M ARKET R ESULTS FOR N ODAL E NTITIES (C ASE S TUDY 1)
variations. The load data provided in [23] is treated as the
Bid Type Bus/ Requested Bid Cleared Clearing mean load profile for a particular time block of a day.
id. path quantity price quantity price The load profiles (pertaining to the above mentioned time
(MW) ($/MWh) (MW) ($/MWh) block) for different months are randomly generated from the
GB1 Generator 1 100 20 50.29 20
GB2 Generator 2 150 25 90.49 25 Gaussian distribution with a diagonal covariance matrix. The
TL1 Load 3 90 30 90 25.93 load standard deviation at a node is taken as 5% of the mean
TB1 Transaction 4-2 20 5 20 1.79 load. Fig. 1 shows the LMP profiles for the first six months
with transmission bidding.
TABLE V
L INE C APACITY P URCHASE R ESULTS : DA M ARKET (C ASE S TUDY 1)

Line no. Capacity purchased (MW) TMP ($/MWh)

Forward Reverse Forward Reverse
TL1 45.23 0 1 0
TL2 0 45.08 0 2
TL3 0 25.21 0 1
TL4 0 0.11 0 2
TL5 25 0 6.91 0

The final positions of the transmission line owners after

the DA market are summarized in Table VI. The revenue or
liability is aggregated over forward and reverse directions. The
target revenue corresponds to the minimum revenue that is
expected from the line capacity sold in the DA market. The
target revenue is calculated on the basis of the offer price.
In the case of Lines 1, 2, 3 and 4, the FTR auction TMPs
are greater than or equal to day-ahead TMPs. In contrast,
the TMP for Line 5 is higher in the DA market. However, it
can be seen that the net revenue of a transmission line owner
is no lower than the target revenue irrespective of the TMP
difference between the FTR auction and the DA market.
Fig. 1. LMP profile under market based transmission pricing.
In order to carry out the conventional transmission pricing,
the usage dependent pricing approach and the proportional
sharing principle are followed. The usage of a transmission
line is defined with respect to the receiving end flow. The
power loss in a transmission line is represented by means an
equivalent load at the sending end bus. Counterflow usages are
assumed to be non-chargeable. For the sake of simplicity in
illustration, network usages made by loads are also assumed to
be non-chargeable. The revenue requirement of a transmission

line owner is kept the same as in the case of transmission
bidding.
The transmission prices are charged on monthly basis. For
the first month, the transmission pricing is carried out ex-
post. However, for the subsequent months, the ex-ante pricing
is performed. As mentioned previously, a generating entity
will modify its cost function by including the network tariff
component. However, for the first month, the original cost
functions are retained. The resultant LMP profiles for the first
six months are shown in Fig. 2. The specific observation that
can be made here is the higher volatility of locational marginal
prices although the spatial LMP variation is less compared
to that with transmission bidding. However, compared to the
spatial price variation, the price volatility (or temporal price
variation) may be more harmful for the society. The situation
may worsen in the case of ex-post pricing since an entity
will then have to anticipate the network tariff to modify its
cost function. It can be seen that the overall range of spatial-
cum-temporal price variation is almost the same for both the
existing and proposed market systems. However, the problem
of temporal price variation is get rid of by converting it into the
less problematic spatial price variation through transmission
bidding.
Fig. 2. LMP profiles under proportional sharing based transmission pricing.
V. C ONCLUSION
The conventional transmission pricing methodologies can
create price uncertainty for nodal entities or transmission
line owners as well as are disputable with regard to making
a choice of overall superiority. To resolve those issues, an
auction based mechanism is proposed for the procurement
of transmission services. Therefore, the dispatch scheduling
problem is reformulated by including capacity offers from the
transmission line owners. The principle of locational marginal
pricing is followed. The line flows should be scheduled only
within the capacities that are purchased. The transmission
line capacities purchased are paid by using the fund of net
congestion collection from nodal entities. The issuance of
FTRs also requires capacity offers from transmission line
owners. Therefore, FTRs can be issued only through auctions.
The line capacities purchased in the FTR auction are used as
counterflow FGRs in the DA market to pay the hourly values
of FTRs. Thus, a transmission line owner is bid-consistently
paid only for the line capacity that is purchased in the energy
market. Since FTRs can be issued only through auctions, the
6
issuance of incremental FTRs is not possible. Although there
may be higher spatial variation of LMPs in the case of the
market based transmission pricing, it is shown in another case
study that LMPs are much more volatile for the conventional
and purely regulatory transmission pricing.
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