By Rich Heidorn Jr.

The ISO/RTO Council asked FERC on Friday to reject financial traders’ request for a rulemaking to update RTO credit policies, saying it would upset stakeholder proceedings on the issue.

The Energy Trading Institute asked the commission on Dec. 16 to schedule a technical conference by March 30 and convene a rulemaking to update FERC Order 741, its 2010 rulemaking on credit and risk management in the RTO/ISO markets (AD20-6).

Order 741 shortened settlement periods in the energy and ancillary services markets, reducing default exposure. ETI said the order— which also banned or limited unsecured credit and provided guidance on the use of netting and demanding additional collateral — was “appropriate at the time.”

GreenHat Concerns

“However, given the recent GreenHat default and the evolution of these markets over the last decade since the issuance of Order No. 741, ETI strongly believes that the commission and industry should engage in a dialogue to ensure that credit and risk management practices and procedures in the ISOs and RTOs are robust, do not create unnecessary barriers to entry or compliance burdens, and ensure that organized markets are secure in order to meet the commission’s goals of open access, competition and transparency.”

The group, whose members include Vitol, SESCO Enterprises and Appian Way Energy Partners, said FERC should insist that new policies are uniform across all markets. Allowing each grid operator to set its own minimum participation and risk policy requirements has created “a significant compliance burden” for market participants and resulted in a mix of policies that “are not effective in reducing exposure and detecting default risk,” ETI said.

“There should be one set of standards, one set of disclosures and one set of certificates for entities to comply with the commission’s rules,” ETI said.

IRC: Don’t Rush RTOs

The IRC, which includes the six FERC-jurisdictional RTOs/ISOs, did not challenge any of ETI’s criticisms in its filing Friday. Instead, it said FERC should allow the grid operators and their stakeholders to address their credit and risk management issues individually before considering a conference or rulemaking.

“At a minimum, these RTOs and ISOs should have time to gain experience with those rules before the commission facilitates a dialogue of best practices, schedules a technical conference and/or commences any rulemaking proceeding to examine further enhancements to credit policies and practices in organized electricity markets.”

IRC said a rulemaking would “upend those individual stakeholder processes and the timely submittal of reforms by individual RTOs and ISOs.” It proposed an alternative approach that it said acknowledges ETI’s concerns without becoming an impediment to stakeholder processes and filings before the commission.

“From a timing perspective, the IRC believes that the issues raised by ETI are best addressed once experience is gained with those individual RTO and ISO reforms. The IRC’s proposed approach is consistent with the commission’s prior determination that: ‘In matters of administrative regulation, a month of experience may be worth a year of hearings.’”

IRC said the commission has already approved revisions to the credit policies of ISO-NE (ER18-2293), MISO (ER20-73) and PJM (ER18-2090, ER19-945) since 2018.

NYISO proposed credit and risk management rule changes in November that are pending before the commission (ER20-483). (See “Yes to Enhanced Credit Requirements,” NYISO Management Committee Briefs: Oct. 30, 2019.)

MISO’s stakeholders have been working for seven months on a filing that was submitted to FERC on Monday (ER20-877). (See MISO Looks Beyond FTRs for Market Protections.)

“MISO’s filings are intended to improve the baseline by implementing well-considered measures,” the RTO said in a statement Monday.

PJM has also been working for seven months and hopes to submit its proposed credit and risk management rule changes by the end of March. (See “Credit Risk Tariff Revisions on Hold,” PJM MRC/MC Briefs: Jan. 23, 2020.)

SPP’s Credit Practices Working Group, which has been working for nine months, is reviewing draft proposals on capitalization requirements and other matters and expects the group to vote on the proposed changes by the end of the first quarter.

“The commission should not schedule a nationwide technical conference at this time. Instead, it should proceed to address filings that are before it or that RTOs/ISOs plan to submit in the near future,” IRC said.

Improvements Needed

ETI said improvements are needed in credit risk management, counterparty risk management and ISO/RTO internal risk management infrastructure and expertise. It says each of the RTOs should hire a chief risk officer who reports to its board — as PJM did following the GreenHat debacle. (See PJM Names Chief Risk Officer.)

The group said MISO, SPP and ISO-NE “have inapposite submission credit requirements, on the one hand requiring submission credit as much as 10 times the anticipated exposure and, on the other, far lower hold credit requirements for cleared positions that under-collateralize the actual exposure of the position.”

Despite FERC regulations prohibiting unsecured credit in financial transmission rights markets, the group says, MISO allows market participants to hold positions for which they have not posted collateral.

MISO returns hold credit to counterflow FTR holders at the beginning of every month even though the market participant holds the counterflow position open for the entire month, the group said. “MISO’s assumption is that the counterflow FTR’s value will remain in-the-money. However, this is not always the case. Put simply, the market participant then gets to hold those positions for free.”

ETI also criticized SPP, saying it gives transmission congestion rights holders “a credit for historically strong performing paths. By not establishing a basic credit requirement for any position, SPP allows for large portfolios (i.e., exposure) that require no collateral.”

“SPP’s FERC-approved credit and risk management practices are fair, reasonable and configured according to the specific design of our market and market participants,” RTO spokesman Derek Wingfield said in response to ETI’s criticism. “Because our Integrated Marketplace operates differently than other ISO/RTOs’ markets — our region is vertically integrated and we lack a capacity market, for example — it would not make sense that we would have the same credit requirements as our peers operating in other parts of the country.”

ETI said the technical conference should include representatives from exchanges, futures commission merchants and commercial entities with experience managing commodity risk. It wants FERC to follow the conference with a Notice of Proposed Rulemaking that will lead to adoption of industry best practices such as mark-to-auction tools to track changes in exposure and requiring variation margin as the value of a position changes.

Only PJM has implemented mark-to-auction valuation, a standard practice in other commodity markets, including commission-jurisdictional bilateral markets, ETI said.

The group likened the need for uniformity in minimum credit requirements to NERC’s national reliability standards. “Some foundational rules spanning all ISOs and RTOs are inherently necessary for credit models to function well.”

ETI suggested the minimum net worth requirement should be $1 million, which it said is “high enough to signal the risk of participating in the markets but not so high as to unnecessarily discourage entry or negatively impact liquidity.”

It criticized SPP’s proposal to require a market participant to have $20 million in capitalization regardless of a market participant’s activity — meaning the money cannot be used in another ISO/RTO market — as arbitrary and an unnecessary barrier to entry.

Markets ‘not Standardized’

IRC challenged ETI’s premise that the rules should be standardized, saying “the underlying markets to which the credit policies apply are not standardized. While an evaluation of areas of credit policy that lend themselves to standardization is appropriate, assuming standardization at the outset is not appropriate.”

“If the commission is inclined to facilitate a dialogue to identify whether specific credit policies should be made applicable on a uniform basis, the IRC requests that the commission allow the individual RTOs and ISOs to finalize their stakeholder discussions, submit their proposed tariff revisions to the commission and implement these changes first. This would allow each region and stakeholders to gain experience with those rules and begin to examine best practices that might be applicable across RTO/ISO markets. At that point, the commission could facilitate a more informal dialogue as a potential next step without necessarily scheduling a formal technical conference or commencing any rulemaking proceedings.”