PJM Submits Tariff Changes to Eliminate Potential for Unintended Higher Credit Requirements

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December 23, 2010

PJM has submitted to FERC modifications to its calculation of Peak Market Activity, used to set a market participant's credit requirements, to remove situations where a revised methodology adopted earlier this year could result in higher than anticipated credit requirements.

Under prior revisions, PJM instituted rules under which the Peak Market Activity for market participants resets twice per year, in October and April, subsequent to the summer and winter seasons, thereby allowing a participant to reduce the overall amount of financial security provided to PJM by better matching credit requirements to seasonal market activity fluctuations.  At the beginning of each semi-annual period, the Peak Market Activity is initially determined based upon the average of all nonzero invoice totals, excluding Financial Transmission Right (FTR) Net Activity and after giving effect to allowed credits for early payments, over the previous 52 weeks.  Importantly, within each respective semi-annual period, the Peak Market Activity is subject to an increase based upon the amount invoiced for a participant's transaction activity for all PJM markets and services, excluding FTR Net Activity, in any rolling one, two, or three-week period, ending within the respective semi-annual period.

"However, as a result of these modifications, it became apparent that there were very limited instances where application of the approved Tariff provisions could potentially result in higher than anticipated credit requirements for the affected Participant," PJM said.

In the first instance, since the initial Peak Market Activity is an average of all non-zero weekly invoices (i.e., invoices reflective of participant activity) over the prior 52 weeks, if the participant does not establish a new peak activity during a semi-annual period, its Peak Market Activity will remain at the value calculated at the respective semi-annual "reset", and can actually reflect activity up to 78 weeks old by the end of the six month period.

For example, the April 2011 reset calculation will include activity from April 2010 through March 2011, including, for purposes of this example, July 2010, when the participant's activity was seasonally high.  If this participant does not experience a new Peak Market Activity subsequent to the April 2011 reset, its credit requirement in September 2011 will continue to be the amount calculated at the April reset, which included the prior elevated activity in July 2010.  "As a result, even if this Participant significantly reduces its activity subsequent to July 2010, it will still be required to submit an increased contribution to its credit requirement that will not expire until the next semi-annual reset in October 2011," PJM said.

Secondly, those participants who incur only month-end invoice activity will skew the appropriate calculation of Peak Market Activity such that it will be disproportionate to their actual market activity.  Month-end invoices appear as part of a "week" for purposes of Peak Market Activity calculation, but if all other weekly invoices for that month are zero, those other weeks are eliminated, by operation of the stated calculation, from the determination of the appropriate Peak Market Activity during the April and October semi-annual resets.  The average "three week" activity will then only be comprised of three month-end invoices, and would exceed the actual credit exposure based on the expected level of the participant's market activity.

To resolve these problems, PJM proposed a tariff amendment to reflect that the determination of Peak Market Activity shall not exceed the greatest amount invoiced for a participant's transaction activity for all PJM markets and services, excluding FTR Net Activity, in any rolling one, two or three week period in the prior 52 weeks.  "This limitation squarely caps the determination based upon 52 weeks of prior activity and will avoid those instances where the calculation would reach back up to 78 weeks, and where it would include more than one month of actual invoice amounts," PJM said.

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