PJM Formally Files At FERC To Allow Surety Bonds As Collateral, Except For FTRs

July 7, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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PJM formally filed tariff revisions at FERC to allow the use or surety bonds, which conform to proposed PJM requirements, as collateral, except for the Financial Transmission Rights (FTR) market

PJM proposes only to allow the use of surety bonds as Collateral when the surety bond contains terms favorable to PJM, with similar protections to letters of credit and that contain the "pay now/fight later" provisions that FERC has deemed to sufficiently provide RTOs with adequate protection against non-payment without increasing costs or creating unnecessary barriers to entry for smaller market participants.

The form of surety bond PJM proposed is largely identical to the surety bond used by ERCOT.

The form of surety bond was drafted to be as close to, or near equivalent to, a letter of credit so it approximates the result a letter of credit would provide PJM and its stakeholders with respect to financial assurance of payment.

Among other things, the PJM form of surety bond specifies that the surety, like the issuer of a letter of credit, agrees it will not assert defenses to a PJM demand for payment on the bond, agrees that its obligation to pay on the bond on demand by PJM is unconditional and absolute under all circumstances, waives its right to investigate or verify any matter, including factual matters, related to a demand for payment under the bond that would delay payment or delivery of funds, and requires the surety to pay out on the surety bond within one business day of the demand for payment. The only form of surety bond that PJM will accept will be the form of surety bond posted on its website, and PJM must approve any material changes to that form of surety bond before it will be accepted as Collateral

PJM’s proposal does not allow the use of surety bonds for Financial Transmission Right (FTR) market activity because (1) none of the RTOs have any significant experience with drawing down on surety bonds for financial assurance of market participants and PJM has none, (2) historically the size of the FTR defaults experienced in PJM have been significant, and (3) historically the vast majority of the significant defaults experienced by PJM Members have been in the FTR market.

See PJM's filing for more

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