Authors: Shmuel S. Oren
August 29, 2000
John F. Kennedy School of Government, Harvard University

In a recent note Larry Ruff attempts to refute assertions made by Chao et al. (CPOW) with regard to the advantages of Flowgate rights (FGR) over point to point Firm Transmission Rights (FTR). The disputed claim is that unlike point-to-point FTRs that are defined as two way obligations, FGRs can be defined as one way options without reducing their ability to cover the full capacity of the grid so that all possible transactions can be hedged. Ruff correctly concludes that "if this were true it would indeed be a powerful argument in favor of a flowgate/FGR system over an LMP/FTR system". Unfortunately his attempt to disprove the above claim throws darkness on the subject and obscures the debate with gratuitous cynicisms. The true colors of Ruff's arguments come out in his concluding remarks were he states "Decentralized bilateral trading may be able to create something roughly equivalent to transmission hedges independent of the RTO, but this would be difficult and inefficient. And anything along these lines that can be done in a flowgate/FGR regime could be done at least as well in an LMP/FTR regime." So we are back to the old debate of centralized vs. decentralized markets. As the father of the POOLCO concept it is not surprising that Ruff's anti FGR thesis amounts to nothing more than reiteration of his disbelief in the potential of decentralized electricity markets. The remainder of this note will attempt to clarify and justify the assertions made in the CPOW and shed light on misconceptions that underlie Ruff's arguments.

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