New market rules will take effect Thursday as part of PJM Interconnection's ongoing effort to lessen the effects of future defaults in its financial transmission rights market and limit market participants' exposure to costs tied to those defaults.
Tariff changes the Federal Energy Regulatory Commission approved will allow PJM to track FTR portfolios and mandate additional collateral if a portfolio begins to demonstrate a material decline in value (ER19-945). A trader's FTR auction and bilateral trading would be suspended under the new tariff language, while the value of its portfolio creates exposure in excess of its posted collateral.
PJM's existing market rules require traders participating in its FTR auctions to satisfy certain credit requirements, and reforms prompted by the June 2018 default of GreenHat Energy aim to ensure collateral posted by traders is commensurate with the risk posed by the size of their FTR portfolios.
GAP IN RISK MITIGATION
But the grid operator identified a gap in its efforts to mitigate the risk of undercapitalized market participants acquiring very large FTR positions, as it previously could not make a collateral call when an FTR portfolio's value was deteriorating even though a decline in market value could indicate increasing FTR risk.
PJM's January pitch to incorporate a mark-to-auction component into its credit policy "balances the need for ensuring sound credit management while limiting the impact to market participants in its FTR market," FERC said Monday in an order, which added that the commission found "persuasive FTI Consulting's analysis that PJM's proposal would have covered almost 99.9% of the mark-to-auction exposure on all FTR portfolios from the past three planning years."
With FERC signoff, the new mark-to-auction provisions will be implemented ahead of the 2019-20 FTR annual auction, slated to start April 9. An initial mark-to-auction valuation will be performed after that auction, allowing PJM to issue collateral calls if appropriate and remedy any circumstances that may be exposing the market to additional risk.
Going forward, a mark-to-auction valuation will be performed after each FTR auction by measuring the difference between the purchase price of each FTR in a portfolio and the price at which the same FTRs would have cleared in the just-completed auction, and adding those values to determine the gain or loss in value of the portfolio, according to PJM's filing.
REASONABLE TIME LINES
The mark-to-auction value will serve as the third component of PJM's FTR credit requirement, which already consists of a path-specific component that accounts for historical reference values, transmission upgrades and undiversified adders as well as a $0.10/MWh volumetric minimum credit requirement.
FERC said PJM's time lines for making collateral calls, collecting additional collateral and declaring a market participant in default were reasonable.
FERC rejected as outside the scope of the proceeding energy trader Vitol's argument that the new mark-to-auction mechanism would be a "suboptimal solution unless and until the pricing PJM uses for the marks is updated on a more-frequent, market-driven basis, as opposed to PJM's current auction schedule."
The commission said PJM's proposal need not demonstrate it is the "optimal solution" as long as it is found to be just and reasonable. Further, FERC pointed out that the mark-to-auction "calculations are performed in the context of PJM's current successive long-term, annual, and monthly auctions," and said that Vitol's gripes with the irregularity of the auction schedule were outside the scope of the proceeding.
