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FERC Approves, Without Modification, Changes To Credit Requirement At New York ISO

Includes New Certification, Material Change Example, Reporting Requirements; NYISO Ability To Reject Applicants

January 27, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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FERC has approved without modification changes in its credit policy and requirements at the New York ISO

In doing so, FERC denied certain protests of the Energy Trading Institute (ETI), discussed further below

As previously reported, the NYISO had proposed to revise its tariffs to: (1) include an additional minimum participation criterion requiring Market Participants to have sufficient experience and resources to satisfy their obligations to NYISO as they become due; (2) allow the NYISO to reject a new applicant that presents an unreasonable credit risk to the ISO Administered Markets; (3) include an event or circumstance indicating that the Customer may present an unreasonable credit risk to the ISO Administered Markets as a specific example of a material adverse change in financial condition; and (4) clarify the requirement for Market Participants to report on certain regulatory investigations.

"In 2018, certain NYISO Market Participants defaulted on their payment and credit obligations to the NYISO market. Some of these Market Participants filed for Chapter 11 bankruptcy protection. Such defaults ultimately resulted in the NYISO terminating some of the entities from ongoing participation in its markets. In response to these events, and those observed by the NYISO in other wholesale electricity markets, the NYISO proposes revisions to its tariffs to enhance its ability to prevent or mitigate the risk of credit defaults in the NYISO-administered markets," the NYISO had said in its application

More specifically, under the policy adopted by FERC, the NYISO will include an additional minimum participation criterion requiring a Market Participant to certify that it has the appropriate experience and resources to satisfy its obligations to the NYISO as they become due.

The adopted changes include a revised list of examples that are considered a "material change", which trigger certain credit changes

Section 26.14 of the Services Tariff protects the ISO Administered Markets by allowing the NYISO to change the amount of Unsecured Credit granted to a Market Participant and the amount of a Market Participant’s Operating Requirement in the event there is a material adverse change affecting the risk of nonpayment by the Market Participant. Section 26.14 includes several illustrative examples of events that constitute a 'material adverse change.'

The NYISO will now add to the list of examples of material adverse changes, "an event or circumstance indicating that the Customer may present an unreasonable credit risk to the ISO Administered Markets."

The Services Tariff requires Market Participants to inform the NYISO of certain ongoing investigations that could have a material impact on the Market Participant’s financial condition.

Under FERC's order, the NYISO will clarify this requirement to recognize that some investigations may be confidential, and the Market Participant may therefore be prohibited from disclosing the existence thereof to the NYISO. The new language clarifies that a Market Participant is required to inform the NYISO of an investigation unless prohibited by law. The clarifying revisions also require that a Market Participant take reasonable measures to obtain permission to disclose information related to a non-public investigation to the NYISO.

"To bolster the NYISO’s ability to protect the ISO Administered Markets from potential defaults, the NYISO proposes adding a new section to the Services Tariff providing the NYISO express authority to reject an application from an entity seeking to become a Customer if the NYISO determines that the applicant’s participation in the ISO Administered Markets presents an unreasonable credit risk. This section will also include a requirement for the applicant to submit information or documentation reasonably required for the NYISO to evaluate its experience and resources. If the NYISO determines, based on the information required under Services Tariff Section 26.1.4 or other relevant information, that the applicant’s participation in the ISO Administered Markets presents an unreasonable credit risk, the NYISO may reject the application. The NYISO will provide the applicant with a written explanation of the reasons why the NYISO rejected its application. Adding these requirements allows the NYISO to take appropriate, proactive measures to help protect its markets from the risk of credit defaults that could arise from an applicant that presents unreasonable credit risks," the ISO said in its filing, which was adopted without change

NYISO will also add language to OATT Section 27.4 to explain that it will evaluate relevant factors to determine if an applicant should be treated as the same Transmission Customer that had caused a previous default, in order to prevent the purpose of the provision from being circumvented by the use of separate entities. Such factors "include but are not limited to, the interconnectedness of the business relationships, overlap in relevant personnel, similarity of business activities, overlap of customer base, if any, and the business engaged in prior to the attempted re-entry."

This provision is in response to a previously reported complaint, ultimately denied by FERC from an ESCO whose NYISO membership application was rejected as NYISO alleged that the new ESCO was common law successor by 'mere continuation' to an ESCO which previously defaulted and had debts at NYISO (see background here)

Among its protests, ETI argued that NYISO’s proposal to reject a new applicant that NYISO determines presents an unreasonable credit risk to NYISO-administered markets could lead to discriminatory decision making by NYISO, arguing, in part, that the NYISO has failed to provide ample information concerning what will constitute 'unreasonable credit risk'.

FERC denied this protest, stating, "We decline to require NYISO to be more specific at this time. We note that other terms in NYISO’s credit policy, such as material adverse change, are not narrowly and precisely defined and that striking a balance between providing sufficient flexibility to an RTO/ISO to protect the wholesale markets and providing certainty to market participants is an inherently difficult aspect of sound credit policy. Akin to the Commission’s finding in Order No. 741 that RTO/ISOs must be provided reasonable discretion to define a material adverse change, we find that it is impractical and undesirable to list all examples that constitute an unreasonable credit risk and limit NYISO to act to protect the wholesale markets only in specific instances enumerated in the tariff. We find that the proposed tariff language provides NYISO with the needed flexibility to protect the integrity of the NYISO-administered markets. However, we recognize ETI’s concern regarding the need for a record of the market administrator’s actions when exercising this discretion to protect the interests of market participants. NYISO’s proposed tariff language committing to provide a written explanation to any applicant rejected for creditworthiness reasons constitutes such a record and will provide transparency for market participants, which can address any potential for undue discrimination in implementation. Further, we note that, if a market participant believes that NYISO has acted in an unduly discriminatory or arbitrary manner in administering its tariff, it may seek relief by filing an FPA section 206 complaint at the Commission."

ETI also protested the proposed revisions in Section 27.4 of NYISO’s OATT that would allow NYISO to evaluate whether an entity should be treated as the same market participant that caused a prior default. In making its argument, ETI asserted that NYISO’s proposal to prevent market reentry after a bad debt loss circumvents well-established principles of corporate and insolvency law.

FERC disagreed, stating, "ETI does not identify what corporate or insolvency laws it has in mind and does not specify how the proposed tariff would lead to circumvention of such corporate and insolvency laws. Thus, we find ETI’s arguments to be unsupported and speculative."

Docket ER20-483-000

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