FERC Orders RTOs to Verify Market Participant Compliance With Risk Management Policies

FERC yesterday ordered the RTOs to engage in ongoing compliance reviews of market participants' risk management policies, further expanding the breadth of RTOs' power beyond their originally intended functions.

The directive came in orders on the various RTOs' filings to comply with FERC Order 741, the credit "reform" order which FERC has claimed, without substantiation, will reduce risk to the market. (10/22)

At ISO New England, New York ISO, PJM, Midwest ISO, and California ISO, FERC approved without modification the RTOs' proposed minimum participation criteria for entities to participate in the market. FERC dismissed protests that the proposed capitalization, tangible net worth, and additional collateral requirements would be unduly burdensome to small market participants, including small competitive retail suppliers.

For the specific minimum participation criteria at each RTO, see these earlier stories linked below. The earlier described proposals were accepted without modification:

PJM

NYISO

ISO-NE

FERC admitted that some of the accepted requirements, such as the requirement for audited financial statements from market participants, "may cause market participants to incur additional costs."

Despite this clear acknowledgement of higher costs from the order, which will undoubtedly flow to retail rates, neither FERC's Order 741, nor its orders on the compliance filings, contained any cost/benefit analysis of the new burdensome requirements, which is especially important as certain requirements (such as weekly settlements) will drastically reduce the amounts of any default should they occur, which raises the question of whether additional costly minimum participation and risk verification procedures, which will cost potentially millions in higher costs to market participants plus to the RTOs in now having to administer and monitor such provisions, are beneficial to the market.

The only major revision to the compliance plans ordered by FERC concerns implementation of the risk management verification requirements, which the RTOs proposed to meet by requiring market participants to certify to the RTO that they have various risk management procedures in place.

FERC found that a market participant officer-certified form that attests to the existence of risk management policies and procedures does not by itself satisfy the Order 741 requirement for verification of risk management policies, absent independent verification that the risk management policies and procedures are actually being implemented.

"We believe minimum participation criteria require [each RTO] to engage in periodic compliance verification to minimize risk to the market," FERC said.

This new requirement for RTOs to become active monitors of each market participant's implementation of risk management will undoubtedly require RTOs to hire new, dedicated staff (as staff must now review risk management at hundreds if not thousands of market participants), especially as it would appear evaluating risk management falls outside of any current RTO functions. While admittedly RTOs must ensure compliance with existing financial assurance requirements and calculate credit positions, these are more objective practices (e.g. has a market participant posted $X amount of security), while evaluating implementation of risk management activities would be entirely subjective.

"The Commission will not mandate a particular form of periodic verification of attestations concerning minimum risk management policies, practices, and procedures," FERC said. "However, such a periodic verification could include periodic review of risk management policies, practices, and procedures, and their implementation, conducted on a random basis or directed to certain market participants based on identified risk,"

FERC directed each RTO to make a compliance filing within 90 days to establish procedures to verify the required risk management attestations.

Dockets:
PJM: ER11-3972
ISO-NE: ER11-3953
NYISO: ER11-3949
MISO: ER11-3970
CAISO: ER11-3973