Generators Seek to Escape Tighter Credit Requirements

Fresh off scoring a victory which will needlessly add millions to retail electric rates, generators are now seeking to lighten their own credit burden under FERC's RTO credit "reform" order (ER11-3972 et. al.).

Issued in October of last year (10/22), FERC's order, among other things, mandated that all RTOs adopt weekly settlement, which, due to monthly billing cycles for retail customers, is essentially a transfer of capital to generators from load serving entities. The prior move to weekly settlement in PJM has already resulted in millions of additional costs to Maryland LSEs.

Furthermore, the FERC order directed the establishment of minimum participation criteria (such as a threshold amount of net worth or tangible assets), which further challenges small, competitive retail suppliers. The order also capped unsecured credit granted to market participants at $50 million.

Most of these changes negatively impacting LSEs were supported by generators as purportedly necessary to protect the market against defaults.

However, generators, including EPSA, Edison Mission Energy, and Exelon Corporation, are now seeking to walk back the protection provided to the market by FERC when it increases their costs, by seeking rehearing of FERC's order to include "seller credit" within the $50 million cap of unsecured credit.

Seller credit is inarguably unsecured, and thus clearly fell within the $50 million cap established by FERC. "[S]eller credit is unsecured credit because it is potential value to the participant rather than actual secured value to PJM," FERC said.

Notwithstanding this fact, PJM initially sought, and now EPSA and other generators are seeking on rehearing, to exempt seller credit from the unsecured credit cap, claiming that it does not pose the same risks.

EPSA argued that seller credit is more analogous to "netting" or offsetting, and thus is different from unsecured credit. Under seller credit, in the event of a default, the market participant's net sell position would offset the default, EPSA said.

While the creation of a central counterparty (PJM Settlement) was meant to protect the enforceability of netting during bankruptcy (through the creation of mutuality), the PJM Settlement construct has never been tested. Indeed, several market participants questioned whether the mere creation of a central counterparty would be recognized by bankruptcy courts as establishing true mutuality for transactions in the PJM markets, or whether the court would reject mutuality and thus not allow netting.

One market participant previously noted that, "A court looking to be restrictive could pierce the central counterparty model and reject it as a ruse designed merely to circumvent the mutuality requirement," especially since PJM retains the ability to short-pay, thus showing that the RTO was not truly taking on the debt obligation for market purchases but rather acting as an agent for many different buyers

EPSA itself said, in comments in RM10-13 filed on March 29, 2010, that the, "Commission's proposal to make an RTO a counterparty does not elaborate on how the RTO should act in the case of a default and does not establish mutuality among all parties of the defaulting transaction."

In short, the argument that seller credit poses a decreased risk since it is similar to offsetting is suspect, and FERC appropriately included it within the $50 million unsecured credit cap, which EPSA loved when it came to other market participants.

EPSA itself said that: "As EPSA advocates a weekly settlement period, a $50 million unsecured credit cap per market participant is reasonable ... The Commission did request comment on whether these proposals should 'be applied in the same way to all market participants or whether they should be applied differently to certain market participants depending on characteristics.' It is important for market certainty that this unsecured credit limit be evenly and universally applied" (EPSA Comments in RM10-13, March 29, 2010). Nowhere in those initial comments did EPSA cite the issue of seller credit, or seek to remove it from the supported $50 million cap.

In conclusion, EPSA laughably offers, "by treating Seller Credit as simply another form of unsecured credit, the Commission has reduced liquidity in the PJM markets and harmed competition, without providing any additional protection against the risk of default."

Of course, this comes from the organization that favors burdensome, unproven, and unnecessary requirements on all other market participants for the benefit of generators, which will harm competition by making it more difficult for new, smaller entrants to participate.

Indeed, despite the fact that weekly settlements do not "provid[e] any additional protection against the risk of default," they were championed by EPSA.

As noted by the New York PSC, because the NYISO's credit metrics were already so robust, weekly settlement provides de minimis decrease in risk. The New York PSC has succinctly stated, "[c]learly, weekly invoicing in New York would increase retail rates, but there is no evidence specific to New York that risk reduction benefits would equal or exceed these costs."

Indeed, a NYISO report found that weekly settlement would cost end users $6 million annually, while providing wholesale suppliers with $38 million in annual benefits.

The $6 million cost, New York Transmission Owners noted, takes into account estimated benefits to loads from weekly settlement. "However, stakeholders, representing the interests of consumers, demonstrated that those off-setting savings were significantly overstated," Transmission Owners said, reporting that the total increase in financing costs to end users, absent the offsets, will be $20 million annually.