Financial energy transmission rights could fall under the category of financial instruments but  transmission system operators assert they can benefit from the “incidental” activity exemption. Are they right?



Physical Transmission Rights (PTRs) are linked to cross border capacity and managed by TSOs providing the option to transport a certain volume of electricity in a certain period of time between two areas in a specific direction. The use-it-or-sell-it mechanism ensures that not nominated capacities get automatically sold in the day-ahead market.


Financial Transmission Rights (FTRs) are linked to cross border capacity and managed by TSOs or subsidiary entities and can be implemented to directly hedge risk in the day-ahead markets. FTRs as options entitle their holders to receive a financial compensation equal to the positive (if any) market price differential between two areas during a specified time period in a specific direction. FTRs as obligations in contrast also oblige holders to pay for a negative market price differential.


Contracts for Differences (CfDs) are contracts between two parties, where the underlying value is the price difference between two reference prices. Should the price difference be positive, then the buyer will receive money from the seller; should the difference be negative, then the buyer has to pay the difference to the seller

(source: “Transmission Risk Hedging Products – An ENTSO-E Educational Paper” of 20 June 2012


The document “Transmission Risk Hedging Products – An ENTSO-E Educational Paper” of 20 June 2012 presents the thesis that financial energy transmission rights (FTRs) in the form of options could fall under the category of financial instruments according to the Directive 2004/39/EC on markets in financial instruments (hereinafter referred to as the “Directive” or “MiFID”) and the Regulation 1287/2006 implementing Directive 2004/39/EC (hereinafter the “Regulation”) but that the Transmission System Operators (TSOs) managing these options could benefit from exemptions foreseen in MiFID or in the Regulation.


The general exemption which, according to ENTSO-E, could possibly apply to all different long-term transmission products, is the Article 2(1)(c) of the Directive (regarding “incidental” activity). Pursuant to the provision cited “Persons providing an investment service where that service is provided in an incidental manner in the course of a professional activity and that activity is regulated by legal or regulatory provisions (...)” are exempted from complying with the provisions of the Directive.


The reasons justifying, in the ENTSO-E opinion, incidental nature of PTR + UIOSI (Use-It-Or-Sell-It principle) and/or the FTR options are that generally the revenue generated through auctions thereof could represent a relatively small share of TSOs turnover and is due to be continuously reduced (assuming cross-border congestions disappear). Moreover, ENTSO-E recalls the argument that the issuance and the distribution of FTRs is not part of the core business of TSOs, since this is not part of the TSO tasks in article 12 of Directive 2009/72/EC.


Key facts


If market participants request transmission rights for both directions the amount of capacity allocated through FTR obligation auction is more than the capacity allocated through PTRs or FTR options auction due to netting. Once the capacity is allocated in one direction TSO can provide immediately the corresponding capacity in the opposite direction and therefore the volume of transmission rights might be higher.


A prerequisite for FTRs is that cross-border trades will always be handled through the power exchanges.


With PTRs actors have the possibility to nominate capacity and thus can trade bilaterally without having the PXs involved for the transaction (except for Italy where the declaration to the PXs is necessary).


ENTSO-E reserves, however, in the above Educational Paper that it does not have major expertise in financial law and therefore the above conclusions might need to be confirmed on certain aspects (e.g. are FTR to be considered as CfDs as defined in MiFID? Or should FTR be considered as “a derivative contract on the transportation costs for a commodity” (Recital 25 of the Regulation)).


The consequences of the qualifications at issue may involve in particular record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading etc.


As can easily be noticed the whole ENTSO-E conception is based on the MiFID wording for the “incidental” activity and this is the interpretation only. The regulatory clarification, in particular, at the EU financial authorities' level, would be of greater significance.

MiFID review

Considering the review process the MiFID is currently undergoing ENTSO-E observes a general exemption may be granted to all products issued by TSOs under Article 2(1)(n) of the modified Directive. The said provision states:

“This Directive shall not apply to transmission system operators as defined in Article 2(4) of Directive 2009/72/EC or Article 2(4) of Directive 2009/73/EC when carrying out their tasks under those Directives or Regulation (EC) 714/2009 or Regulation (EC) 715/2009 or network codes or guidelines adopted pursuant those Regulations”.

However, the clause would not apply to potential Joint Auction Office issuing FTRs.


ENTSO-E has prepared a response to the MiFID consultation proposing a modification of Article 2(1)(n) of MiFID in order to include also “any platform performing the allocation of long term transmission rights on behalf the transmission system operator” to be exempted from the application of MiFID.


Qualification of physical transmission rights


PTR + UIOSI in the ENTSO-E opinion are not financial instruments since they do not fulfil any of the conditions for financial instruments listed in the Directive.



Valuable perspective and background to the whole issue in the context of the target model for the Internal Electricity Market provides Supporting document to the ENTSO-E Draft Network Code on Forward Capacity Allocation of 28 March 2013 (besides, responses to the public consultation on the Forward Capacity Allocation network code are requested by 28 May 2013). Pursuant to the said document:


For day ahead and intraday timeframes flow based or coordinated NTC Capacity Calculation approaches are allowable by the target model. However, for the Forward Capacity Allocation timeframe the coordinated NTC approach is preferable, although the flow based approach is acceptable provided there is evidence that it can deliver higher efficiency.


Regarding the Forward market, which refers to timeframes prior to day-ahead (e.g. monthly, quarterly, yearly, multi-yearly periods), the target model generally prescribes that transmission capacity should be allocated in explicit auctions via Physical Transmission Rights (PTRs) with the "use-it-or-sell-it" principle or via Financial Transmission Rights (FTRs).


The target model for the Day Ahead market is based on implicit auctions, which means that cross-zonal capacity is allocated implicitly with the matching of the most competitive energy bids and offers. This process is commonly known as Market Coupling. More in detail, it was agreed that the target model should be based on a single price coupling EU algorithm.


In the Intraday market, where market participants trade energy to adjust their positions after the day-ahead market phase and before the balancing market, the target model also prescribes implicit allocation of capacity. However, unlike the day-ahead market, this should be based on continuous trading rather than auctions. Reliable pricing of scarce capacity complements the target model, while regional auctions can be implemented where appropriate.


In respect of the Balancing market, while the long term solution foresees a TSO-TSO model with a common merit order, its features and interim models are still part of the ongoing discussions around the Framework Guidelines on Balancing, published by ACER on 20 September 2012.