Credit risk

FERC Issues Show Order and Credit Risk NOPR | Troutman pepper

On July 28, 2022, FERC issued a show cause order stating that the rates of several Regional Transmission Organizations (“RTOs”) and Independent Network Operators (“ISOs”) appear unfair and unreasonable because they lack certain management practices credit risk. FERC also issued a related Notice of Proposed Rulemaking (“NOPR”) to allow all market participants to share credit information with each other so that they can more accurately assess the credit risks of market participants. . These two actions aim to improve the management of credit risk on the organized wholesale electricity markets.

In the show cause order, FERC found that California Independent System Operator Corporation (“CAISO”), ISO New England Inc. (“ISO-NE”), New York Independent System Operator, Inc. (“NYISO”) and Southwest Power Pool Inc. (“SPP”) tariffs appear unfair and unreasonable because they lack certain credit risk management practices. Specifically, FERC found that the tariffs lacked: 1) auction market mechanisms for calculating financial transmission right (“FTR”) security requirements; and 2) volumetric minimum collateral requirements for FTR market participants. FTRs, which are financial contracts that entitle the holder to daily hourly congestion income on a specific transmission path, support futures market activity by allowing market participants to hedge against the cost of transmission congestion in the RTO/ISO market. FERC explained that sound FTR credit policies are essential to protect the FTR markets and that it offers practices to ensure that FTR market participants maintain sufficient collateral to reduce the risk of mutualized default, that is- i.e. the risk that a default by a market participant is not backed by collateral and therefore needs to be socialized among all market participants. Pursuant to Section 206, each RTO/ISO has 90 days to justify why its rate remains fair and reasonable in light of FERC’s concerns or to explain changes that it believes would address those concerns.

In the NOPR, FERC is proposing revisions to Section 35.47 of its rules to allow RTOs/ISOs to share market participant credit information with other RTOs/ISOs for purposes of managing and mitigating credit risk. Currently, credit information is provided by market participants upon initial application for market participation status. This information is generally considered confidential and is not shared or updated. In 2021, FERC hosted a Technical Conference on Credit Risk Management Practices in Wholesale Electricity Markets where, among other things, panelists discussed that it would be useful to know whether a market was experiencing financial difficulties in another market (see November 10, 2020 edition of WER). In the NOPR, FERC explained that its proposed changes would allow RTOs/ISOs to better assess participants’ credit exposure to minimize risk and default. FERC invites comments on, among other things, whether there should be any restrictions on the types of credit information shared or on the management and use of credit information by RTOs/ISOs; whether RTO/ISO discretion to share or act on credit information should be limited to specific circumstances; and the advantages and disadvantages of a requirement to share credit information.

A copy of the NOPR is available here. A copy of the order is available here.