An econometric framework for evaluating the efficiency of a market for transmission congestion contracts

The goals of this paper are to 1) simulate the ex-ante riskiness of purchasing a TCC, and 2) evaluate the efficiency of the TCC market in New York State to determine if there is evidence of under-pricing. Three VAR models are estimated using only market data available before the auction. This model is then used to simulate the daily payouts of a TCC for the following summer. A Monte Carlo procedure simulates the daily summer temperatures, the levels of quantity demanded and prices over the summer months. The main empirical result is that the market price paid for the most important TCC, in terms of volume, (the Hudson Valley to New York City) is higher than the mean of the simulated payouts even though the actual payout was higher than the market price. The market prices for the other two TCCs are lower than the means of the simulated payouts, and as a result, there is no consistent evidence of under-pricing in this analysis of the market for six-month TCCs in the summer of 2006.