Vote on Credit Revisions Initiative Delayed
VALLEY FORGE, Pa. — A proposal to revise PJM’s credit requirements for financial transmission rights in response to the historic GreenHat Energy default will be delayed a month but should still be on track for April implementation, PJM’s Lisa Drauschak told attendees at last week’s Market Implementation Committee meeting. RTO staff had previously planned to bring a problem statement and issue charge to the meeting for consideration.
“We think it’s important to take a breath,” Drauschak said, explaining that the RTO’s Credit Subcommittee has decided to further vet the proposals before it.
“We still feel we can get a filing to FERC in January” to be effective April 1, she said.
Dayton Power and Light’s John Horstmann asked that staff consider alternatives to the current market design to eliminate the structural credit flaws that allowed the default and to the usual stakeholder process that develops the credit requirements for the risky and sophisticated long-term FTR product. Attorney Steve Huntoon asked why the list of “lessons learned” from GreenHat didn’t address PJM’s efforts to increase GreenHat’s collateral. [Editor’s Note: Huntoon is a columnist for RTO Insider and is representing it in its effort to open meetings of the New England Power Pool to the press and public.]
GreenHat agreed to sign over the proceeds to two FTR sales that appear to have already been paid for. (See Doubling Down – with Other People’s Money.)
Staff said it will prevent the situation from occurring again by revising the credit policy to give the RTO increased authority to make collateral calls.
“That agreement did not come out of a collateral call. It came out of something else,” Drauschak said.
“If we had the authority to do a collateral call, we would have done that,” PJM counsel Jen Tribulski said.
Despite the revisions, staff were careful to avoid suggesting the FTR market has no risk of defaults.
“Nothing is 100% absolute,” Drauschak said.
However, stakeholders pressed PJM to take more responsibility for the market’s security.
“We agree that you can’t prevent defaults — those things will happen — but we depend on PJM to protect us,” Rockland Electric Co.’s Brian Wilkie said.
DC Energy’s Bruce Bleiweis questioned whether the lessons learned fully encapsulated the advice PJM received during the closed-door workshop that precipitated the document. He said he was told by one of the participants that they weren’t given an opportunity to review a draft of the RTO’s takeaways.
“These items did come out of the workshop. … I’m not sure why someone would say that, but these items did come out of the workshop,” Drauschak said, defending staff’s work.
Independent Market Monitor Joe Bowring, who attended the workshop, concurred that the document accurately reflected the results of the meeting.
Stakeholders deferred a vote on revising exceptions to capacity providers’ must-offer requirement after PJM changed its proposal from the last time it was presented to the MIC. Staff revised the proposal to give resources receiving an exception three years before being required to change their status from a capacity resource to energy-only. Capacity resources must offer any uncommitted capability into all capacity auctions unless they have been granted an exception.
PJM’s Pat Bruno explained that, after three consecutive years of exceptions, a unit would be modeled as energy-only in the capacity model, so its capacity megawatts would be reduced to zero and its owner would have 12 months to nominate its capacity interconnection rights (CIRs) elsewhere. The nominated generator wouldn’t have to be operational if it’s in the interconnection queue, he said. CIRs, which grant access to inject generation into the transmission system, have value and can be sold. (See PJM, Generators Debate Injection Rights for Exempted Capacity.)
The proposal, which has undergone several iterations, was satisfactory for some stakeholders.
“I feel pretty confident in this,” said Carl Johnson, who represents the PJM Public Power Coalition.
Bowring, however, objected to the changes.
“We’re not confident at all that this will prevent exercising market power,” he said, noting that resources could potentially delay reallocation of the CIRs for perhaps six years. “This is a very long time period. It’s not consistent with maintaining open access to the grid.”
Exelon’s Sharon Midgley said that while her company — which requested the rule changes — would like to vote, she was willing to wait another month.
Surety Bond Use
Stakeholders endorsed two competing proposals to allow use of surety bonds as credit in PJM’s markets, despite concerns raised by Bowring and others. The proposals will receive consideration at the Markets and Reliability Committee.
A proposal developed by the PJM Credit Subcommittee that would allow surety bonds as credit for all activity except FTR portfolios received 61% in favor in a sector-weighted vote, easily surpassing the necessary 50% threshold. The proposal would also set a $10 million cap per issuer for each member and a $50 million aggregate cap per issuer.
Exelon’s proposal, which would allow using surety bonds for all credit requirements with a $20 million cap per issuer for each member and a $100 million aggregate cap per issuer, received 58% in favor. Stakeholders also indicated their interest in making a change, voting 66% in favor of not keeping the status quo.
Bowring repeatedly asked PJM and Exelon, which proposed the change, to verify that surety bonds are as secure as letters of credit (LOCs), which the RTO currently accepts.
“We believe they are legally as strong,” PJM’s Hal Loomis said.
“They’re a weaker form of credit,” Bowring said. “That’s why they’re cheaper.” He asked PJM whether it had requested the opinion of the same expert panel it used for a review of FTR credit issues on the advisability of using surety bonds and whether it has determined whether exchanges permit the use of surety bonds in place of LOCs.
Midgley countered that surety bonds are cheaper than LOCs because of Basel III and a more robust underwriting process. Since 2008, banks must now realize LOCs as a liability on their balance sheet, which affects their capital ratios for regulatory purposes.
“We don’t share your view that this is an inferior product. … We would not be seeking to [get them approved] unless they were comparable,” she said. “What you have before you is a proposal that would reduce cost for market participants, provide diversification for PJM and, at the end of the day, benefit customers.”
“It’s extremely smaller than the amount of dollars we’re talking about in PJM,” Direct Energy’s Marji Philips said. “Now I am mindful of a huge default happening [again like GreenHat], so now I’m seeking detail.”
PJM staff’s proposal to modify the FTR forfeiture calculation rules to include loop flow impacts doesn’t go far enough for some stakeholders. Staff proposed incorporating loop flows when determining whether virtual transactions in the day-ahead market have a 10% or greater impact on coordinated market-to-market flowgates.
Chris Carpenter of VECO Power Trading would also like to see the FTR impact test relaxed so that a virtual trade that creates a very small contribution to an FTR’s settlement wouldn’t trigger forfeiture of the FTR profit. Exelon and NextEra Energy supported VECO, which proposed three alternatives to mitigate that situation:
- Forfeit the portion contributed by the “triggered” constraint instead of the entire FTR settlement value;
- Require the FTR to have a 0.1 distribution factor (DFAX) on the triggered constraint; or
- Require the triggered constraint to be “substantially linked” and contribute a “significant dollar share of the FTR settlement value.”
The current FTR impact test, which has been in effect only since last year, triggers forfeiture if the DFAX multiplied by the shadow price is greater than or equal to $0.01. The previous test triggered forfeiture if the DFAX was greater than or equal to 0.1.
“There is a pretty significant impact from that change,” Carpenter said. “From our perspective, this forfeiture amount doesn’t really line up with the impact of the activity.”
“One penny manipulation is manipulation,” the Monitor’s Howard Haas said. “What we have seen, under the current rule, is a dramatic reduction in forfeitures because of changes in behavior.”
Carpenter acknowledged the reduction but attributed it to market participants “not feeling the risk tradeoff is worth” attempting the virtual trades.
“My firm has stopped doing [increment offers] and [decrement bids] because we’re concerned about this rule,” Midgley said. “In the FERC proceeding, PJM raised concerns that the new rule would restrict legitimate market activity that promotes market convergence and increases market efficiency. I’m here today to say this is happening. … I think it’s a really beneficial conversation to have.”
Gabel Associates’ Michael Borgatti, representing NextEra, said the rule should be very selective in not penalizing unforeseen impacts and only punishing manipulative behavior.
“We agree that we think the PJM package takes a meaningful step forward. … Having a rule that serves as a [deterrent] to that activity is healthy,” he said. “It’s an oversimplification at best to say that a penny change in the FTR is tantamount to manipulation.”
Carpenter argued that the first alternative proposed is like CAISO’s forfeiture rule in that “the concept of forfeiting by constraint is something that has been done.”
Haas countered that CAISO’s definition of an FTR is different from PJM’s. “You have to rethink the FTR product itself,” he said.
— Rory D. Sweeney