Participants in Southwest Power Pool's transmission congestion rights markets whose portfolio holdings have allowed them to pay little or no financial security would be subject to new minimum collateral requirements under a proposal the grid operator hopes to put into effect May 1.
SPP's TCR markets award financial rights through annual and monthly auction processes that allow the holders of those rights to hedge against day-ahead market transmission congestion between two settlement locations.
While there are credit requirements in place for TCR portfolio holdings and TCR auction activity, SPP said in an Oct. 9 filing with the Federal Energy Regulatory Commission that entities are still able to acquire "large MWh-volume TCR portfolios with little to no financial security requirement."
As such, the grid operator proposed the creation of a minimum TCR collateral requirement of $0.10/MWh for all owned TCRs within a portfolio (ER21-79).
Default risk
According to SPP, the holdings-related and auction-related components of the existing total TCR credit requirement rely heavily on the TCR final reference price. That price is the difference between the mean of certain historical marginal congestion values from the prior two years and opposite flow marginal congestion values in the prior two-year period.
"Negative TCR final reference prices reflect TCRs that historically have settled as liabilities (i.e. payments) for the TCR holders, while positive TCR final reference prices historically have settled as assets for the TCR holders," SPP said.
Portfolios dominated by positive TCR final reference prices have been able to skirt posting much financial security based on SPP's structure for calculating collateral. "Furthermore, because a positive TCR final reference price is calculated based on historical data, it is possible that sudden changes in congestion patterns could result in the TCR holder having significantly less financial security posted than actual settlement amount ultimately due," SPP said. "This scenario can increase the risk of non-payment default."
Under the proposal, SPP would compare the new minimum TCR collateral requirement with the requirement calculated under the existing tariff language. TCR holders would then have to post financial security in the amount that was the greater of the two collateral requirement calculations for their TCRs held.
For TCR auction activity, "the $0.10[/MWh] minimum requirement would be multiplied by the maximum submitted MW [during an open TCR auction] and the TCR hours on a TCR bid or TCR offer curve to establish a 'minimum segment hold' for a TCR bid or a 'minimum offer segment' for a TCR offer," SPP said. That new minimum requirement would also be compared with the current methodology for existing auction-related requirements, and the greater of those two calculations would be the amount of financial security required for the relevant auction activity.
Testing results
SPP asked FERC to approve its minimum collateral requirements proposal as just and reasonable, and to set a May 1, 2021, effective date.
The grid operator noted that it retroactively tested the proposed minimum requirements on TCRs cleared in the 2018-19 annual auction, in which 77 entities acquired TCRs.
The existing credit requirements called for 42 of those entities to individually post collateral of less than $100,000. And as a group, those 42 entities acquired 145 million MWh of TCRs "with less than $400,000 in total financial security coverage," SPP said, adding that 31 of those entities "obtained [140 million] MWh in TCRs with $0 in total financial security requirement coverage."
Had the proposed minimum collateral requirement been in place, SPP's analysis resulted in a $14 million increase in required financial security from the group of 42 entities, as well as a $1.6 million increase in financial security from the other 35 entities that participated in the annual action.
"The results from this back-testing indicate that the majority of financial security requirement increases resulting from application of the proposed $0.10[/MWh} minimum TCR collateral requirement will come from credit customers whose TCR portfolios currently require little or no financial security," SPP said.
