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PJM launches independent review of nearly $50 million FTR market default

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PJM launches independent review of nearly $50 million FTR market default

The PJM Interconnection said Oct. 16 that its board of managers launched an independent investigation of the default of financial transmission rights trader Greenhat Energy LLC that caused PJM members to incur financial losses.

The board created a special committee that will be directed by PJM board members Susan Riley, who will serve as chair, and Mark Takahashi. It will conduct an independent review of the June default, according to a statement.

The board members will be assisted by independent third parties including Robert Anderson, executive director of the Committee of Chief Risk Officers, an independent nonprofit organization of companies focused on best risk-management practices. Neal Wolkoff, CEO of Wolkoff Consulting Services, former chairman and CEO of the American Stock Exchange, and former COO of NYMEX, will also lend a hand.

PJM declared GreenHat Energy in payment default June 21, and in accordance with its operating agreement, the grid operator began liquidating the FTR positions on which GreenHat defaulted. However, the bids received in the July auction to liquidate the position lit a fire under FTR clearing prices due to the risk premium being added.

PJM halted the liquidation process to allow its members to decide how best to manage the risk associated with the GreenHat portfolio. What was a complicated stakeholder process culminated in a decision to halt any further liquidation of the defaulted positions and instead let the portfolio go to settlement. PJM filed that proposal with the Federal Energy Regulatory Commission on Oct. 1, with a requested Dec. 1 effective date.

"I think not liquidating in the auction is a reasonable answer for the balance of the planning year, especially given that is what the members, who bear the cost of the default, preferred," Abram Klein, managing partner at Appian Way Energy Trading, said in a late-September email. The GreenHat default allocation assessments, including actual portfolio net losses and positions liquidated in August, had reached almost $50 million through September.

The special committee announced Oct. 16 that it will look into the "facts and circumstances" associated with GreenHat's FTR market participation and subsequent default and PJM's actions.

The special committee will also address questions raised by market participants about the circumstances and degree to which PJM communicated with its members leading up to the default. PJM's Liaison Committee, which provides direct communication between the grid operator's members and its board, forwarded several questions to PJM in an Oct. 10 letter. One such question involves whether internal monitoring or communications from member companies alerted PJM to the "deteriorating value of GreenHat's portfolio." According to the Liaison Committee letter, it appears PJM recognized the FTR portfolio was "problematic" as early as February 2017.

Market participants allege GreenHat exploited a loophole in PJM's FTR market credit policy and long-term FTR clearing process that allowed it to build a large portfolio without posting enough collateral to cover potential losses. On June 4, DC Energy, a trading firm that participates in PJM's FTR market, filed a fast-track complaint with FERC (FERC docket EL18-170) regarding PJM's credit policy due to concerns that GreenHat was amassing a large FTR portfolio without posting adequate collateral.

"DC Energy has been concerned for some time with the apparent existence of open FTR portfolios in PJM that require no or very minimal collateral," according to the filing. That concern had "grown acute" due to "a single market participant" appearing to have amassed an 890-MWh FTR portfolio while also being able to post zero or very minimal collateral under PJM's tariff, DC Energy said.

PJM's members hope that the investigation will help them better understand the grid operator's "decisionmaking on this issue," the liaison committee said in its letter. PJM said it has been working with stakeholders to strengthen credit rules, including collateral requirements, along with other measures to protect members from defaults in the FTR market.

Jared Anderson is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.