By Rich Heidorn Jr.

Burned by the GreenHat Energy default, PJM stakeholders appear to favor the RTO’s efforts to improve its risk evaluations of market participants. But some of the RTO’s proposed new procedures may face challenges before FERC.

During a daylong “page turn” of proposed Tariff and Operating Agreement revisions Wednesday, several stakeholders complained some of PJM’s proposed definitions are overly broad and said it seeks excessive authority to respond to credit risks.

The special meeting of the Markets and Reliability Committee covered language to implement rule changes approved by the Financial Risk Mitigation Senior Task Force (FRMSTF) in December. The RTO wants to bring the language to a vote of the MRC and Members Committee on March 26.

When task force members were asked whether they prefer changing the rules, all but four of 157 voters opposed the status quo (97%). But the proposed changes were approved on a more modest 101-57 vote (64%).

Wednesday’s session was an often tedious, occasionally fractious walkthrough of more than 100 pages of language changes in three sections of the OA and four sections of the Tariff.

Written Comments

Sparks flew early in the meeting when PJM officials refused to commit to accepting additional written comments, saying they wanted the meeting to be a “working session” to get stakeholders’ feedback.

“It’s very hard for us to provide comments on the fly,” said Noha Sidhom, of TPC Energy Fund, explaining that stakeholders might need to consult with their companies’ lawyers before taking a position. [Editor’s Note: Given an opportunity to review her quote per Manual 34, Sidhom said it was inaccurate but declined to say what was incorrect.]

“For PJM not to be upfront and not consider written comments, you’re setting yourself up for further delay and protests at FERC,” said economist Paul Sotkiewicz of E-Cubed Policy Associates, representing Elwood Energy. “It just leaves us feeling powerless.”

“That’s not my aim at all,” responded PJM facilitator Dave Anders. “I’m calling an audible. Let’s say we’ll accept written comments.”

But PJM Chief Risk Officer Nigeria Poole Bloczynski wasn’t willing to commit, citing concerns that some comments may be company-specific. “We haven’t said ‘no,’” she said, saying the decision on written comments would be made at the end of the session. “We want to make sure everyone hears the same thing.”

Sotkiewicz acknowledged Bloczynski’s concerns. “We’re not trying to have a one-on-one with PJM” through written comments, he said. But he said “from a due process standpoint, [rejecting written comments] doesn’t sound good. We can avoid a lot of that dust-up at the commission.”

PJM ended the meeting saying it would accept proposed changes to the language through Friday.

Facilitator Jen Tribulski said the proposed changes should be limited to changing terms “that you can’t live with” and not repeating issues raised during Wednesday’s session. “We would hope at this point that there’s not going to be a ton of redlines.”

“We want to reiterate: No comments,” Bloczynski said. “We’re looking for actual redlines.”

The MRC will hold another special session March 13, at which PJM staff will review changes made in response to the redlines or oral feedback.

‘Unreasonable Credit Risk’

There was no shortage of oral comments during the meeting, including frequent debate over whether the language was overly prescriptive or too vague.

Sotkiewicz complained that the rules would give PJM too much discretion to address what the rules call an “unreasonable credit risk,” noting that the term is undefined in the Tariff.

“There’s just too much latitude given to PJM to make calls on particular market participants,” he said. “It’s totally undefined and totally open to interpretation.”

Attorney Steve Huntoon, representing H-P Energy Resources, said PJM’s proposed changes to the term “market participant” could subject transmission customers and individual generators to burdensome reporting requirements.

He said stakeholders should vote against any change in the definition.

Anders responded by asking members to avoid advocacy over the coming vote. “We’re trying to work this out [collaboratively],” he said. “We’re trying to get it over the finish line so everyone can vote yes.”

At the end of the meeting, Tribulski promised PJM would address concerns that the term could apply to transmission customers. “We definitely heard the feedback,” she said. “So, we will tighten that up.”

‘Key Personnel’

PJM also received pushback on its plan to review whether an applicant to trade in PJM markets has “principal or key personnel in common” with a former member that has defaulted in PJM or other RTO/ISO markets.

Bob O’Connell of Panda Power Funds asked PJM to delete the term “key personnel,” saying if an individual is not an officer, “they’re not a key person.”

PJM attorney Jacqui Hugee disagreed, citing PJM’s experience with GreenHat, whose two principals had come to FERC’s attention for their roles in J.P. Morgan Ventures Energy Corp.’s scheme to manipulate the CAISO and MISO markets between 2010 and 2012. (See Doubling Down — with Other People’s Money.)

“If they go somewhere else and they’re not the principal of the company … I’d want to know that. … We want to know about these bad actors.”

O’Connell said he understood Hugee’s concern but worried about how applicants would meet the requirement. “Do I have to submit my full roster of employees?” he asked. “The issue is not the concept. The issue is the application.”

Sotkiewicz said PJM would be exceeding its authority by performing “ex ante enforcement.”

PJM attorney Steve Pincus said the RTO is using FERC guidance and trying to be practical: “It’s not productive to try to define every particular scenario,” he said.

Strategy Changes

Joe Wadsworth of Vitol challenged a requirement that market participants notify PJM of “material changes to [the company’s] business strategy.”

“I don’t see how that informs PJM on anything about the financial strength of an entity,” Wadsworth said. “It’s an overreach. At the end of the day, it’s the money. Do you have the money to support your position?”

Bloczynski said if a long-time financial transmission rights trader suddenly stops trading, “that’s noticeable. … We’re going to ask questions.

“Or you’ve acquired a new business … and will be participating in a different way,” she continued. “That’s something we’re going to want to know about.”

It’s okay for PJM to ask questions, responded Robert Viola, director of legal and compliance for Vitol. “The way this is written, if we don’t [disclose] it, we’re in breach of the Tariff.”

Anders said PJM will seek to address the concerns. “That sounds like a hot button for you,” he said.

The proposed rules include a table showing how PJM will determine a participant’s unsecured credit allowance based on parameters including the “internal credit score” assigned by the RTO. The credit score will be based on PJM’s evaluation of the companies’ profitability, liquidity and other measures.

Bloczynski said PJM would not make public its scoring model to avoid companies “manipulating their financials” to obtain a higher rating.

Jim Davis of Dominion Energy said PJM should rely on the ratings of external credit rating agencies where available, saying they are “very experienced” and “may have access to company personnel that PJM credit staff may not have access to.”

But Bloczynski said rating agencies’ gradings haven’t always been accurate, noting companies that were “rated investment grade and next day defaulted.”

Finding the Balance

Bloczynski also pushed back on some language changes, saying the existing terms — such as a reference to the “five most senior principals” — were added in response to earlier stakeholder requests for more detail.

She said PJM was seeking an appropriate balance. “We can be very prescriptive … and box ourselves in, or we can use some reasonable business practices, and that’s what we’re trying to do.”