Credit and risk-management practices in the organized power markets are due for a fresh look, the Energy Trading Institute said in a filing urging the Federal Energy Regulatory Commission to convene a technical conference and rulemaking process to update regulations adopted a decade ago.
In the midst of the financial crisis, FERC in 2010 adopted credit reforms for markets operated by independent system operators and regional transmission operators aimed at improving how grid operators managed credit and market risk. Order 741 specifically shortened settlement cycles, placed restrictions on the use of unsecured credit including an all-out ban on unsecured credit in FTR-type markets, laid out grid operators’ rights to use netting and set-offs, established minimum criteria for market participation, and clarified when grid operators could demand additional collateral from market participants.
While Order 741 has served power markets well, the institute, or ETI, whose members participate as intermediaries between electricity producers and consumers, said the evolution of the markets over the past decade warrants another pass at the credit rules. In particular, ETI called for further improvements in the areas of credit risk management, counterparty risk management, and ISO/RTO internal risk management infrastructure and expertise.
ETI also advocated for revising, or better enforcing, regulations associated with power market credit practices. It pointed, for instance, to situations where market participants have been allowed to hold financial transmission rights positions without posting any collateral despite regulations prohibiting unsecured credit for FTR and equivalent products.
The group also cited the 2018 default of GreenHat Energy in the PJM Interconnection’s FTR market as a reason to start a new dialogue between FERC and industry to update credit policies. The group said such conversations would ensure that credit and risk management practices remain “robust, do not create unnecessary barriers to entry or compliance burdens,” and maintain organized markets in which market participants are secure to transact.
In line with the process that led to Order 741, ETI asked FERC to host a technical conference that brings together experts from the “exchanges, futures commission merchants and commercial entities that have been managing risk across multiple commodities successfully for several decades” to share information with the grid operators and FERC staff. Such a forum could then “explore a fruitful path forward to enhanced credit policies and procedures that better fulfill” Order 741’s objectives, ETI said.
The group noted that some grid operators have already teed up initiatives regarding their credit policies. ETI said it did not wish to slow those efforts, but urged FERC to consolidate them with the group’s request that a technical conference be held by March 30. Grid operators and stakeholders could then consider those discussions as they move forward with their own initiatives.
“In that vein, a notice of proposed rulemaking following the feedback received at the technical conference would help guide the discussion and expedite stakeholder efforts,” ETI added.
Changes ETI is looking for in a new rule include standardized minimum credit requirements across the organized markets and counterparty risk assessments that employ know-your-customer protocols that can alert a grid operator to an issue with a market participant before that issue becomes material to their creditworthiness and business operations. ETI said FERC should also explore through the technical conference and NOPR process mandating a chief risk officer role and risk management department within each ISO/RTO.
“One of the most troubling facts that came out of the GreenHat independent investigation report was that GreenHat was valuing its FTR portfolio as positive in its financial statements — and PJM accepted this valuation — when the mark-to-auction was $90 million negative,” ETI pointed out. “PJM staff did not have the resources or the expertise to accurately review the financial statements provided by GreenHat.”
To prevent this from happening again, the group recommended FERC consider ongoing training requirements for ISO/RTO staff in assessing credit and counterparty risk. (FERC docket AD20-6)
Jasmin Melvin is a reporter for S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.