PJM on Thursday asked FERC to rehear a previous decision rejecting the RTO’s plan to modify its financial transmission rights credit requirement calculation, defending its original December filing (ER22-703).

The commission on Feb. 28 rejected PJM’s proposal to modify the FTR credit requirement by implementing an initial margin calculation from a historical simulation (HSIM) model using a 97% confidence interval, saying the RTO failed to support the plan because its independent auditors only validated the model at a 99% confidence interval.

FERC directed the RTO to file within 60 days to show cause why its existing FTR credit requirement remains just and reasonable or explain what tariff changes will remedy the commission’s concerns. (See FERC Rejects PJM’s FTR Credit Requirement Proposal.)

Stakeholders voting at a March 23 PJM Members Committee meeting endorsed a motion for the RTO to refile the original proposal “accompanied by some new supporting rationale.” (See Stakeholders Encourage PJM to Defend FTR Filing.)

“The Feb. 28 order errs by disregarding nearly all of the substantial evidence PJM presented in support of the December Section 205 filing,” PJM said in its rehearing request.

Rehearing Request

In its filing Thursday, PJM said it presented “abundant evidence” supporting its December filing to show the proposed use of the 97% confidence interval was just and reasonable and that FERC’s February order “addresses little of that evidence.” The RTO said the commission’s order limited discussion of the 97% confidence interval to two aspects, including:

• • • an independent auditor’s evaluation of the HSIM model, “offered only as a supplemental check on the model’s technical capability,” which the order discounted because the model reviewed by the auditor used a 99% confidence interval; and
    • the estimation that the overall level of collateral would be lower under the HSIM with a 97% confidence interval “compared to the level of collateral under the current effective rules” and that the proposed tariff revisions don’t show how “sufficient collateral to address the riskiest market participants” will be collected.

“Neither of these bases for the rejection of the December Section 205 filing is well-founded, and both should be withdrawn on rehearing,” PJM said in its request. “The Feb. 28 order never engages with the large bulk of the evidence PJM provided in support of the HSIM with a 97% confidence interval — as if that evidence had never been presented. Such fundamental failure by the commission to address the record evidence is a signal of unlawful agency conduct, which the commission now has an opportunity to correct on rehearing.”

PJM highlighted three issues it took away from the commission’s February order.

First, PJM said the order asserted the RTO did not demonstrate the HSIM model “would operate as represented across extreme events or that the initial margin estimates would cover expected losses.” PJM said back-testing analyses included in the filing “made those very demonstrations” and that FERC “misunderstands the limited purpose of the additional check provided by the independent auditors’ validation of the HSIM model.”

PJM said the back-testing failure rate, or the instances when the initial margin was not adequate to cover potential losses, “did not exceed 3% which is consistent with the model confidence interval of 97%.”

“The Feb. 28 order erred in disregarding PJM’s evidence that the HSIM model with a 97% confidence interval would operate as represented across extreme events, and that the initial margin estimates would cover expected losses,” PJM said.

Second, PJM said FERC’s order disregarded recent RTO tariff revisions regarding the “assessment of participant riskiness” and misinterpreted how the HSIM addresses risk when looking at the 97% confidence interval.

PJM noted that FERC found that the RTO “failed to demonstrate that its proposed FTR credit revisions are reasonably calibrated to ensure that market participants will be required to provide adequate collateral relative to the risks of their positions” because the “proposed 97% confidence interval would result in a reduction in market participants’ aggregate collateral commitments relative to the existing FTR credit requirement.”

“It is possible the Feb. 28 order is using interchangeably the distinct issues of the riskiest participants (which concern a particular participant’s demonstrated ability and willingness to honor its financial obligations) and the riskiest portfolios or positions (which concern the level of risk that the potential losses on a particular portfolio might exceed the posted collateral),” PJM said in its request.

Finally, PJM said FERC’s conclusion that the RTO did not demonstrate the 97% confidence interval is just and reasonable “assumes away most of the evidence PJM did present.”

PJM said it demonstrated that the failure rate under the 97% confidence interval “was less than 2%, compared to an 8% failure rate under the currently effective rules.” It also said testimony from Chief Risk Officer Nigeria Bloczynski showed the 97% confidence interval embodies “a high confidence interval and a significant improvement to the PJM collateral practices.”