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ERCOT Proposes Changes To Qualifications And Ongoing Requirements For Current, New QSEs To Mitigate Market Exposure

Cites Experience In New York ISO Where New ESCO Allegedly Affiliated With Defaulting Supplier Sought To Register At NYISO; Also Cites Greehat

May 11, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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ERCOT is proposing changes to the qualifications and requirements, including financial and credit standards, for Qualified Scheduling Entities (QSEs) and/or Congestion Revenue Right (CRR) Account Holders (CRRAHs) -- i.e., ERCOT Counter-Parties (CPs) -- seeking to enter the ERCOT market as well as new obligations for CPs to continue eligibility in the market.

ERCOT is proposing the measures, "in an attempt to mitigate market exposure."

"ERCOT’s goal is to strike a balance between open access, competition and barriers to entry, while protecting the integrity of the market as a whole," ERCOT said in a presentation

ERCOT set a goal of implementing the new measures by summer 2021

The ERCOT Protocols define Counter-Party as, "a single Entity that is a QSE and/or a CRR Account Holder. A Counter-Party includes all registrations as a QSE, all subordinate QSEs, and all CRR Account Holders by the same Entity."

Among the proposed changes is that principals from a company that previously defaulted in ERCOT will not be able to become a registered Market Participant by simply forming a new company

For defaults, ERCOT proposes that a mandatory wait period for re-entry or complete ban/bar be applied depending on the circumstances

A mandatory wait period would apply for less serious defaults (e.g., all amounts repaid to market). A complete ban/bar from participation in the market would apply if a principal has a history of market manipulation/malfeasance in ERCOT, other energy markets, or other markets or exchanges

ERCOT cited the example of North Energy Power LLC in the New York ISO market. ERCOT alleged that, "In January 2019, North Energy Power LLC (North Energy) declared bankruptcy and defaulted in NYISO."

ERCOT alleged that, "The principals of North Energy, using a different company called Light Power & Gas of NY LLC (LPGNY), applied to participate in NYISO. LPGNY had essentially the same ownership, product, and customers as North Energy. NYISO denied entry claiming that LPGNY had not repaid its defaulted amount, and could not merely re-enter under a different name. LPGNY filed a complaint with FERC. FERC ruled in favor of NYISO, stating that under FERC’s single entity theory, an agency may disregard the corporate form in the interest of public convenience, fairness, or equity; FERC further ruled that North Energy and LPGNY were the same entity, and could not circumvent NYISO’s credit policies by using a different entity."

See background on the FERC case here

ERCOT is also evaluating implementation of a credit risk assessment, utilizing qualitative and quantitative inputs, as part of the application process

Depending on the CP's credit profile, ERCOT would be authorized to require more cash, or limit the type of collateral for a lower credit assessment

ERCOT would be able to deny participation if an application or current CP poses an "unreasonable credit risk", as ERCOT cited the example of GreenHat Energy, which defaulted in PJM

The proposed new credit policy would include background checks, for which ERCOT would charge about $150 per principal, in addition to the $500 credit application fee.

CPs are required to file a notice of any material change with ERCOT. Under the proposal, such notice may trigger an additional background check or review of financial statements, etc.

The material change may also result in involuntary termination of the CPs market participation if the material change results in unreasonable credit risk

ERCOT said in a presentation that it needs discretion to remove bad actors on a case-by-case basis

Currently, a defaulting QSE has 1 or 14 days to cure a breach depending on the type

ERCOT proposes that for material change resulting in unreasonable credit risk, ERCOT shall have discretion to allow cure within a certain amount of time (1-14 days).

As an example, ERCOT stated, "A principal at Company A is convicted of financial fraud unrelated to Company A. ERCOT sends a breach notice to Company A informing them that having a principal with a financially related felony is a violation of the Protocols. The Company address the situation to ERCOT’s satisfaction within a prescribed period to cure the breach."

CPs would be required to file annual updates and risk certifications

The CP application process would include new or revised disclosure requirements concerning principals and affiliates, regulatory and litigation disclosures, and history of defaults.

Required regulatory disclosures would include ongoing complaints, disciplinary record, compliance (SEC, CFTC, FERC, self-regulatory organizations, other ISOs, PUCs/securities boards), with PUC compliance for the past 10 years required to be reported

Required litigation disclosures would include convictions or cases where found liable for fraud, theft, larceny, deceit, or violations of securities laws, customer protection laws, or deceptive trade practices

The automatic approval for CP applicants, currently triggered if ERCOT does not deny the application within 10 days, would cease under the proposed changes.

Instead, ERCOT would have 60 calendar days for a review, with no automatic approval past a certain period

In further stating the rationale for the changes, ERCOT said ERCOT is proposing to:

• Limit overall market exposure by potential bad actors

• Help avoid uplifts by:

     --- Reducing risk of bad actors re-entering the ERCOT market under a new entity;

     --- Reducing risk of allowing participation by entities/individuals with poor financial history or history of manipulating markets entering the ERCOT market;

     --- Reducing risk of entities/individuals sanctioned in other markets from entering the ERCOT market; and

     --- Increasing ERCOT oversight of financial health of CPs

• Conform with emerging standards of Self-Regulatory Organizations (SROs)— e.g., Financial Industry Regulatory Administration (FINRA), New York Stock Exchange (NYSE), etc.—best practices in the US financial industry, and financial regulators such as the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the Federal Energy Regulatory Commission (FERC).

ERCOT is holding a workshop on May 13, 2020 concerning the proposed changes

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