After nearly two hours of debate at Wednesday’s Markets and Reliability Committee meeting, PJM stakeholders endorsed tariff revisions on rules related to initial margining and closed out the work of the Financial Risk Mitigation Senior Task Force (FRMSTF).

The joint proposal by Duke Energy (NYSE:DUK) and Perast Capital Management won endorsement with a sector-weighted vote of 3.42 (68.4%), passing the 3.33 threshold for adoption. The proposal was initially endorsed at the Aug. 4 FRMSTF meeting with 69% support and was presented for a first read at the August MRC. (See “Initial Margining Solution,” PJM MRC Briefs: Aug. 25, 2021.)

Members also unanimously voted to sunset the FRMSTF, created in 2019 in the wake of the GreenHat Energy default. (See PJM Stakeholders OK Risk Management Task Force.)

Duke’s Matthew Holstein said that before GreenHat, FTR collateral was based upon the difference in bid/purchase price and the FTR’s historical performance, allowing GreenHat to select “free” paths whose cost was less than historical congestion

Holstein said the Duke/Perast proposal would make collateral requirements based upon volatility, which more closely relates to actual risk. It would also institute a minimum credit requirement, which would prevent a portfolio the size of GreenHat from ever existing again without a posting of collateral.

The proposal’s initial margining based on historical simulations methodology (IM-H) includes a 95% confidence interval, which represents the range of values likely to include a population value. PJM conducted analyses at confidence levels of 99%, 97% and 95% when evaluating the IM-H calculation.

Perast’s James Ramsey said they suggested 95% because the failure rate was reduced to 1.21% from the status quo of 8%. Ramsey said the 97% interval proposed in PJM’s proposal would cost an extra $140 million to achieve a failure rate improvement of 0.3%.

The PJM proposal only received 37% stakeholder support at the August FRMSTF meeting.

“You can summarize the two packages as the quality insurance plan versus the Rolls Royce insurance plan,” Ramsey said. “We believe the 95 is a vast improvement over where we are today and is the right cost-benefit.”

Tariff Language Debate

Several stakeholders, however, were concerned with the tariff language changes implementing the proposal and managed to get PJM to include a key calculation in them.

Troiano said that after the first read at the August MRC and reviewing stakeholder feedback, the RTO realized there was an “opportunity for confusion” in the previous redlines of the tariff language and some “unintended consequences.” PJM started over and redid the redline language, making sure it was “more concise” and “simpler” and contained fewer changes, she said.

Adrien Ford of Old Dominion Electric Cooperative noted that one section of the tariff revisions “seems to be missing” the exact weighting parameters that determine how the initial margin values for FTR obligations would be calculated, as detailed in the proposal.

“We’re totally willing to provide transparency to members, but there are other elements of the modeling assumption and simulations we believe must be held confidential,” Bloczynski said.

Ford said she “maintains the assertion” that the tariff language didn’t reflect the package before the committee and requested the parameters be included.

“We need integrity in this process, and that includes documenting the will of the committee,” Ford said.

David Anders, PJM’s director of stakeholder affairs, said he believed that “integrity’s maintained” in the redline language. Anders said there are portions of proposals for almost all issues that get documented in the governing document language like the tariff and the Operating Agreement, while other portions are contained in the implementing documents.

Ford said she “wasn’t satisfied” with that response and that she felt like she was “being discounted.” She said the main differences between PJM’s proposal and Duke/Perast’s was the confidence interval and the weighting. While Duke/Perast’s 95% confidence interval is reflected in the redlines, the weighting was left out. “The lack of documenting that here when it’s a key differential in the packages is a concern for me.”

“PJM is choosing which revisions it wants to include, which makes it convenient for PJM,” Hicks said. “While I understand why you want to do that, I can’t fathom this being acceptable.”

Bloczynski reiterated that PJM didn’t believe the weighting figures needed to be documented in the tariff and that it could be documented in the attachment. “I believe that most members trust us to run the market, make decisions and independently monitor risk management efficiently and effectively,” she said.

“To suggest that we can keep these numbers out when it is part of the filed rate is a dangerous precedent to set and runs contrary to everything regarding transparency, reflecting the will of the stakeholders and FERC precedent,” Sotkiewicz said.

PJM General Counsel Chris O’Hara said the RTO had “concerns” about the Duke/Perast proposal but was “trying to respect the stakeholders” by putting the endorsed proposal forward and including the weighting in the supplement document, where there could be an “easier path” toward changing the values if stakeholders decide they need to be changed in the future.

Sotkiewicz said by not adding the weighting, PJM was “setting this up for a really bad battle at FERC” over something that could be resolved by adding the numbers to the redlines.

Greg Poulos, executive director of the Consumer Advocates of the PJM States, said his group continued to support PJM’s proposal, citing findings in an independent consultant’s 2019 report of the GreenHat default. Poulos said the endorsed proposal “looks so much like deja vu” to actions taken by stakeholders after the $52 million credit default by Tower Research Capital’s Power Edge hedge fund in 2007. (See PJM Credit Adder Fails upon Heightened Review.)

Poulos said the report talks about how PJM brought recommendations to stakeholders after the 2007 default, but the membership decided to go in a different direction with reforms. The report said in italics that “PJM should be more assertive in pushing for action needed regarding any critical changes to credit policies, emergency discretion and the like.”

“I think PJM needs to take a stronger position even if certain stakeholders have a stronger voice and go a different way with this,” Poulos said.