By Rory D. Sweeney

VALLEY FORGE, Pa. — PJM members are grappling with a gambler’s dilemma in one of their markets: accept a heavy loss or keep rolling the dice and hope to get lucky. The difference could cost millions of dollars.

In responding to GreenHat Energy’s potentially record-setting default in its financial transmission rights market, PJM has asked the members who will pay for the loss to decide whether to liquidate the portfolio now and stomach hefty bills in the short term, or potentially let the positions run their natural course over the coming months and live with the slow bleed and constant risk that a position might go exceptionally bad.

PJM was left to contend with the issue after GreenHat defaulted on a $1.2 million payment in June. (See PJM Reeling from Major FTR Default.)

“We’ve been handed a pig’s ear to manage. I’m not sure how one does that,” said Susan Bruce, who represents the PJM Industrial Customers Coalition.

Neither option is optimal, but stakeholders have preferences generally based on their market interests. Their differences emerged at last week’s meeting of the Markets and Reliability Committee. After stakeholders approved a problem statementand issue charge to reconsider PJM’s plan for mitigating future defaults, Exelon representatives presented a motionto suspend any liquidation of the portfolio through November.

PJM rules require staff to attempt to liquidate the defaulted positions as quickly as possible by offering them in the monthly FTR auctions. However, staff found that the bids received to take the positions were roughly four times what the clearing prices on those paths had been prior to the default. Staff anticipate the liquidated positions could cost more than $24 million in August alone.

Cumulatively, the default has already cost members $42.5 million in three months, and the portfolio includes positions into the 2020/21 planning year.

Proposed Delay

At the MRC meeting, Exelon proposed directing PJM to request FERC approval to waive its rules requiring liquidation of the positions through Nov. 30, instead letting any that come due during that time period to go to settlement and accepting whatever the real-time cost turns out to be. FTR traders argued against the delay, saying it would allow the market to continue to be indefinitely bogged down by the defaulted positions.

“The purpose of our motion is to facilitate choice,” Exelon’s Jason Barker said. “Both paths have risks.”

While liquidation would quickly eliminate the risk, members would have no control over their costs and the liquidation results for August indicate that they “will be pretty high,” he said. Forestalling any potential liquidation until members have agreed on a plan “offers both choice and control” because it allows market participants time to take other positions in the FTR market to hedge against the likely losses. He offered to help advise members who don’t trade FTRs and said other experienced traders would likely offer the same.

“While we bear a big share of the default burden, we are also in a position to hedge our risks,” he said.

Bob O’Connell, with Panda Power Funds, pointed out that the plan requires retroactive FERC approval. PJM wouldn’t be following its Tariff until then, and “we can’t presume that FERC will accept the Tariff language,” he said. PJM attorney Chris O’Hara acknowledged the risk but was confident FERC would grant the waiver request.

“That is not unique to this position and not something that PJM hasn’t done before,” he said.

Bruce described the situation as “trying to choose what is the least-bad option among a suite of bad options” and asked how energy suppliers planned to handle passing the loss allocations on to their customers. Barker said it would likely vary from contract to contract, but he assured her that, “as the holder of one of the largest pig’s ears,” his company’s interests are “aligned” with its customers. Bruce asked for the process to be “very transparent” and ensure auditability.

Greg Carmean, executive director of the Organization of PJM States Inc., asked whether state regulators would have any authority over suppliers who choose not to take any proactive steps.

Barker declined two suggested friendly amendments to the proposal, the second of which would have given PJM the authority to analyze the FTR market and determine whether it would be best to offer positions into each monthly auction.

“We would prefer that the members have the choice about how to mitigate the risk, not PJM,” Barker said.

CFO Suzanne Daugherty said staff wants clarity on what the members want and that giving staff discretion would create “more ambiguity” and “might be something members end up regretting.”

Alternative

Greg Pakela of DTE Energy offered an alternative that he said would avoid putting “all of your eggs in one basket” by offering for liquidation half of every position that would otherwise go to settlement in the current month. Many FTR traders preferred DTE’s proposal, but other stakeholders felt it left many unanswered questions.

Greg Poulos, executive director of the Consumer Advocates of the PJM States, said he could not vote on the measure “even if he wanted to” because it had been posted too late for him to poll his members prior to the meeting.

The MRC approved Exelon’s proposal with 4.04 in favor in a sector-weighted vote, which precluded a vote on DTE’s proposal. From there, the proposal was moved to the Members Committee for an uncommon same-day vote. Several stakeholders expressed frustration at being required to consider the measure so quickly, but they also understood the need for expediency. PJM staff noted they had delayed closing the current FTR auction until after the MRC in order to confirm member preferences for how to handle the current positions.

James Ramsey with Suffolk Fund objected to the vote, which appeared to trigger a rule in PJM’s procedures that would block the vote from being taken. Staff confirmed Ramsey’s objection needed to occur in the MRC when the intention was announced to bring it for a vote at the MC, but Ramsey pointed to an example in the rules that appeared to allow a participant to level an objection in the MC. With the interpretation of the rule in question, Gabel Associates’ Michael Borgatti, who chairs the MC, called for a vote on whether the rules should be waived to allow for the vote. That motion received 4.43 in favor, surpassing the necessary 3.34 threshold in the sector-weighted vote.

The proposal was then approved by acclamation, with five votes in opposition and one abstention.