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FERC Allows PJM Settlement to Guarantee Obligations of PJM
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December
31, 2010
FERC approved PJM Settlement, Inc.'s request to guarantee the obligations of PJM
and authorized other securities-
The securities-
Shell Energy North America had raised concern that the structure in which PJM and PJM Settlement provide guarantees to each other will degrade the credit quality from the status quo. Shell noted that PJM Settlement has no assets, that its source of working capital is funds to be borrowed from a bank by PJM, and that it must loan any cash it receives from market participants to PJM on an unsecured basis.
Shell further noted that PJM Settlement has received a guaranty from PJM, which has no funds of its own, and that PJM Settlement must guarantee, "all amounts owed by PJM." Shell said that it would be reluctant to grant unsecured credit to a counterparty with these characteristics, particularly where, if PJM incurred civil liability due to employment issues, such liability would be guaranteed by PJM Settlement.
Shell further argued that PJM Settlement should remain a "lockbox" and not pay to PJM the money it receives as the counterparty to transactions in the PJM markets. PJM is not a market participant, and Shell argued that the cash paid by market participants to PJM Settlement is for the purpose of paying other market participants, and, therefore, should not leave PJM Settlement. As market participants will now be exposed to PJM Settlement as their exclusive counterparty, PJM Settlement should not be permitted to offer a guarantee to PJM, and payments should not be diverted for purposes other than payments to its counterparties, Shell said.
FERC, however, ruled that the PJM Settlement Guaranty of PJM's obligations is, "compatible with the public interest."
"The PJM Settlement Guaranty facilitates achieving and maintaining an 'entity' credit rating for both PJM and PJM Settlement, consistent with PJM's current credit rating. Such credit ratings are within the corporate purposes of Applicants and consistent with performance as public utilities because they enable the continuation of the public utility services currently provided by PJM and will not impair PJM Settlement's ability to provide service as a public utility. Further, the PJM Settlement Guaranty avoids the potential for a lowered credit rating for one or both entities, which could raise costs above present levels," FERC said.
Constellation Energy had reported that the PJM and PJM Settlement Guaranties are not structured in the standard form of guaranties used in the marketplace. Constellation stated that such documents typically identify the guarantor, the obligor, and the beneficiary/obligee; the documents provided identify the guarantor and obligor, but not the beneficiary/obligee. Constellation raised concern that the documents provided make it appear that PJM Settlement is the beneficiary/obligee, and not PJM members, and that, in case of a default, a court might question the standing of an independent and individual PJM member to seek payment by the guarantor.
FERC dismissed Constellation's concerns as outside the scope of a section 204 securities proceeding.
The Commission also authorized PJM to make available to PJM Settlement its available capacity on its $50 million Line of Credit with National Cooperative Services Corporation (NCSC). PJM Settlement is authorized to borrow from PJM the available capacity on its $50 million Line of Credit with NCSC.
PJM Settlement is also authorized to issue short-
PJM Settlement Compliance Filing
Separately, in Dockets ER10-
FERC did partially acknowledge one concern raised by Shell, as Shell said that the compliance tariff provided little comfort to market participants that PJM Settlement will be a counterparty and not merely a billing agent. Specifically, Shell stated that it would expect PJM Settlement to make appropriate representations, such as good title to the products it is selling, in either the tariff or a service agreement of some sort.
FERC directed PJM and PJM Settlement to file a revised tariff, or provide an explanation as to why a revision is not necessary, with respect to whether PJM Settlement will be providing a guarantee of good title as well as other warranties or agreements to operate as a counterparty. "If PJM Parties do not propose a tariff revision, they should explain how their proposal will provide sufficient protection to buyers and is sufficient to establish PJM Settlement as a legitimate counterparty," FERC said.
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