PJM Interconnection will create a new chief risk officer position as part of an effort to better protect its members against risks in the grid operator's financial transmission rights market in the wake of a multimillion-dollar default.
The March 26 announcement came as PJM's board of managers released the findings of an independent review of the June 2018 default of financial transmission rights trader Greenhat Energy LLC. The amount owed currently stands at $165 million, PJM spokeswoman Susan Buehler said, the costs of which could be allocated among PJM members.
The independent review, launched in October 2018, looked at PJM's actions leading up to the default but did not investigate the actions of GreenHat itself, as those are under investigation by the U.S. Federal Energy Regulatory Commission.
A report from consultants who conducted the review said PJM did not violate any law, regulation or internal policy and made recommendations to improve PJM's market rules, internal structure and credit policies to protect members against excessive risk in the financial transmission rights market.
Based on the difference in the hourly congestion price difference between two points on the grid, financial transmission rights, or FTRs, are financial instruments that offer a way to manage electricity delivery costs in the day-ahead markets. The holder of an FTR is entitled to revenues if congestion occurs between two points on the grid in the same direction as stated in the contract and is charged if congestion occurs in the opposite direction. Market participants can purchase FTRs through monthly, annual and long-term auctions, as well as in the secondary market.
According to the report, PJM did not have staff with the necessary training and credentials to successfully manage the financial risks posed by the numerous participants in its FTR markets. The grid operator also chose not to terminate GreenHat's trading rights when PJM initially understood the potential for a default, choosing instead to manage the situation, which PJM incorrectly believed would not get worse.
The report also said PJM personnel were "naive about GreenHat's assurances of creditworthiness and a future revenue stream pledged to PJM," and were late to recognize the trader as a problem.
Going forward, PJM should, among other things, hire a chief risk officer, institute training programs for risk management and conduct a general review of the FTR market and other PJM markets, to evaluate the risks and rewards of potential structural reforms.
"We recognize the shortcomings identified in this review," said PJM President and CEO Andrew Ott in a statement. "PJM takes the cost of this default very seriously, and we are committed to reforms that better protect market participants in the future."
Along with the new chief risk officer position, PJM will review and revamp processes and procedures in credit risk assessment and monitoring and create a new coordination process for its markets, credit/finance and legal areas and its independent market monitor. Ott added that PJM will work with members and federal regulators to evaluate the other changes recommended in the report.