By Rich Heidorn Jr.

Stakeholders on Thursday overwhelmingly approved an overhaul of PJM’s rules for managing the credit risks of market participants.

“I applaud the investment by stakeholders and members in their actions to protect our energy markets,” PJM Chief Risk Officer Nigeria Poole Bloczynski told the Members Committee after the final vote.

The new rules were developed by the Financial Risk Mitigation Senior Task Force (FRMSTF) in response to the GreenHat Energy default in the financial transmission rights market.

The Markets and Reliability Committee approved the Operating Agreement and Tariff revisions in a 4.5 to 0.5 (90%) sector-weighted vote after PJM officials agreed to accept three friendly amendments and members rejected a motion to delay the vote. The MC later endorsed the rules by acclamation with one vote in opposition and three abstentions.

Exelon’s Sharon Midgley called the changes a “significant leap forward in PJM’s credit and risk management program.”

What Changes

After the default of Tower Research Capital’s Power Edge hedge fund in 2007, FERC ordered an end to collateral-free trading with the issuance of Order 741. PJM and other RTOs tightened their credit rules as a result.

But the changes weren’t enough to protect PJM against GreenHat, which purchased a staggering 890 million MWh of FTRs — the largest FTR portfolio in PJM — before defaulting in June 2018. (See Doubling Down – with Other People’s Money.)

PJM formed the FRMSTF to implement recommendations made by an independent investigation of the debacle, which led to the departure of the RTO’s CEO, CFO and general counsel and the hiring of Bloczynski. (See Report: ‘Naive’ PJM Underestimated GreenHat Risks.)

The new rules require companies wanting to become a market participant to provide PJM with financial records, corporate information and details of any prior defaults in energy markets or involvement in market manipulation.

To allow PJM to conduct ongoing risk evaluation, companies also must make annual officer certifications and notify the RTO of any “material adverse change in the financial condition of the participant or its guarantor.”

PJM will determine whether a company presents an “unreasonable credit risk” based on factors including “a history of market manipulation based upon a final adjudication of regulatory and/or legal proceedings, a history of financial defaults, a history of bankruptcy or insolvency within the past five years, or a combination of current market and financial risk factors such as low capitalization, a reasonably likely future material financial liability, a low internal credit score … and/or a low externally derived credit score.”

Unbeknown to PJM, GreenHat’s principals, Andrew Kittell and John Bartholomew, 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.

The new rules also seek to prevent applicants who have defaulted from participating in PJM markets under a different name. Factors for determining whether an organization should be treated as the same market participant that experienced a default include “the interconnectedness of the business relationships, overlap in relevant personnel, similarity of business activities, overlap of customer base and the business engaged in prior to the attempted re-entry.”

After GreenHat’s default, Kittell continued trading in PJM for a time under a new corporate name, Orange Avenue.

Amendments

PJM officials made several changes to the language Thursday in response to stakeholder comments at a second “page turn” on the proposals March 13. In addition, PJM accepted three “friendly” amendments to the proposal it had negotiated with stakeholders in the days before the MRC vote.

Bloczynski acknowledged before the votes that some members were concerned the new rules would result in “unintended consequences.”

“We do not believe this is the case,” she said. “However … I commit to you that we’ll continue to review and reform the language to ensure that what the Tariff contains is what we all intended.”

One amendment, sponsored by attorney Steve Huntoon, representing H-P Energy Resources, modified the definition of the term “market participant.”

Huntoon’s amendment eliminated the phrase “or any other PJM member whose application to participate in the PJM markets has been approved by PJM.”

As amended, the definition is “a market buyer, a market seller, an economic load response participant, an FTR participant, a capacity market buyer or a capacity market seller.”

“The problem is the definition of ‘PJM markets’ is very, very broad,” Huntoon said.

As originally written, Huntoon said, it could have inadvertently included generators that provide ancillary services directly, rather than through a wholesale affiliate, as well as transmission owners and customers, including hundreds of municipals and cooperatives that participate in PJM markets through wholesale entities like American Municipal Power and Old Dominion Electric Cooperative. It was an issue Huntoon had raised at the first “page turn” session in February. (See PJM Stakeholders Debate Credit Rule Changes.)

Gary Greiner, director of market policy for Public Service Enterprise Group, won two amendments, including one that makes the judgments of rating agencies such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, if available, “the source” for calculating the unsecured credit allowance of market participants. If no external ratings are available, PJM’s internal credit score will apply. If there is difference of opinion among rating agencies, the lowest rating will apply.

“It’s a metric that’s monitored by members, consistently applied and transparent,” Greiner said. “It’s what investors use to buy our stock and bonds.”

Bloczynski supported the change, saying, “We do not believe that this takes anything away from us.”

The rules include a scale ranging from “very low risk” (S&P/Fitch: AAA to AA-; Moody’s: Aaa to Aa3) to “high risk” (S&P/Fitch: BB- and below; Moody’s: Ba3 and below).

PSEG also won a change that PJM only “consider” rather than “apply” any changes to best practices or principles by third-party industry associations relating to risk management in the North American electricity, natural gas or electricity-related commodity markets.

PJM will “bring [the new policies] into the equation, but it won’t be applied it in a hard way that … members would be forced to put into their policies,” Greiner said.

Paul Sotkiewicz of E-Cubed Policy Associates, representing Elwood Energy, moved to delay the MRC vote to give other members time to submit friendly amendments.

But Bloczynski said the “amendments do not change the substance of anything that’s been put in front of you since December” and cautioned that a delay would prevent PJM from winning FERC approval of the changes in time to apply them for FTR auctions in June.

“We do not believe that more time to review the package is necessary or advisable,” she said.

Members voted almost 4 to 1 (80%) against a delay.