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PJM Seeks To Implement New Minimum FTR Credit Requirement

July 30, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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PJM Interconnection, L.L.C. filed tariff revisions at FERC which it said are designed to, "limit potential credit exposure of PJM Members with Financial Transmission Rights ('FTR') portfolios, i.e. FTR Holders, that have little to no credit requirement relative to the megawatt-hour ('MWh') volume of positions in their FTR portfolios."

Specifically, PJM proposes a $0.10 per MWh minimum FTR credit requirement

PJM said that it establishes FTR Credit Requirements based primarily on the purchase price of each FTR relative to a calculated, path-specific historical proxy price (FTR Historical Value) that is determined using an adjusted three-year, weighted average of day-ahead congestion associated with the particular FTR transmission path. Fundamental in the design of current FTR Credit Requirements is the use of historical values in establishing collateral requirements, which have been in effect since the beginning of the FTR market over fifteen years ago. Under that design, if the purchase price of the FTR was higher than the FTR Historical Value for the FTR path, collateral was required. In contrast, if the purchase price of the FTR was lower than the FTR Historical Value for the FTR path, no collateral was required. The rationale for this rule was given that a cleared, below-FTR Historical Value bid was reasonably expected to be profitable, there should be no need for any collateral to cover the position, PJM said

PJM modified its Credit Policy provisions in a filing submitted on December 11, 2017, accepted by the Commission on January 19, 2018 with an effective date of April 1, 2018, to address potential exposure related to the projected decreased value of certain FTRs when congestion patterns on those FTR paths are affected by recent or future Regional Transmission Expansion Plan changes or other transmission upgrades. These revisions were necessary because under PJM’s prior credit rules those future transmission upgrades could lead to FTR Holders incurring under-collateralized losses due to the change in congestion on FTR paths affected by one or more Transmission System upgrades not being incorporated into the credit requirement for the affected FTR paths, PJM said

PJM said that, "Despite the recent improvements in PJM’s credit rules that have addressed a recently-experienced credit exposure, there remains a significant exposure for the rest of the PJM membership – specifically, the potential exposure from FTR Holders with large volume FTR portfolios having minimal or no credit requirements. PJM’s historical analysis showed significant number of large portfolios with minimal credit requirements based on the current FTR Credit Requirement calculation. For example, in the period analyzed from planning year 2013/2014 through planning year 2016/2017, one portfolio of 1.8 million MWh had a credit requirement of only $126. A second portfolio of 4.5 million MWh had a credit requirement of only $900. A third portfolio of 12 million MWh had a credit requirement of only $5,000. However, an unplanned event or slight change in expected congestion values can have a significant impact on a large portfolio due to size alone."

PJM proposes a two-step process for the determination of the applicable FTR Credit Requirement. The first step requires PJM to run the current path-specific FTR Credit Requirement calculation, which will remain unchanged. The second step will require PJM to also calculate, on a monthly basis at a portfolio level, a minimum credit requirement for FTRs either bid or held in an FTR Holder’s portfolio, equal to $0.10 per MWh. The greater of these two calculations will be the FTR Credit Requirement for the portfolio each month.

"PJM’s analysis of FTRs bought during the four annual auctions held from 2013 through 2016 indicates the implementation of the $0.10 per MWh minimum would have caused no credit requirement increase for almost fifty percent (50%) of FTR Holders, and many more would have seen only see a relatively small increase in their credit requirements," PJM said

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