I. Introduction

This lays out the legal authority for proposing the credit reforms.

II. Background

This provides the history and background, including a conference on credit and capital issues held by the Commission in January 2009 that highlighted the need to reform credit management tools. In proposing the reforms, the Commission is acting to ensure that credit policies in place are sufficient to reasonably protect consumers against the adverse effects of default.

III. Discussion –

While asserting the need for specific requirements to achieve default protection, the Commission also recognizes that some market participants may pose different credit risks than others – for example, “….[municipalities] are pretty good credit risks.” The Commission is targeting tariff submissions conforming to these rules by June 30, 2011, to go into effect no later than 60 days after filing – i.e. to have the reforms in place before the winter peak season in 2011-2012.
The specific proposed reforms are:

A) Shortening the Settlement Cycle

This proposes that all RTO and ISO include credit provisions in their tariffs to implement a settlement cycle of no more than seven calendar days with no more than an additional seven calendar days for final payment. The Commission also seeks comments on whether it is practical to go to daily settlement within one year of implementation of weekly settlement. The Commission seeks comments on cash management costs for those wholesalers with retail buyers who pay on a 30-day basis.

Possible comments/questions: Can we go immediately to one-day to reduce the risk quicker? Can we develop an estimate of risk exposure for one week versus one day for each RTO and ISO?

B) Use of Unsecured Credit

The shortening of the settlement period will reduce the outstanding amounts on transactions. This enables the proposal to reduce the amount of unsecured credit to no more than $50 million per market participant. “Reducing the level of unsecured credit combined while shortening the settlement timeframe should reduce the risk of default and consequently reduce the cost of default that is shared among market participants.”

Possible comments/questions: Would the low cap discriminate against large participants and limit market liquidity (though larger players can post collateral or LCs above cap)? Should there be any unsecured credit at all?

C) Financial Transmission Rights (FTR) Markets

Reforms proposed in A and B will not apply to FTRs, because FTRs have a longer-dated obligation to perform which can run from a month to a year or more. FTRs also have unique risks – unforeseeable events, unplanned outages, unplanned weather conditions, etc. FTRs are relatively illiquid, increasing the inherent risk in their valuation. For example, PJM suffered a significant default in December 2007 that cannot be unwound even as the FTR holder goes bankrupt. Therefore this proposes that unsecured credit be eliminated for FTR markets.

Possible comments/questions: Should less liquid and long-dated transactions such as capacity rights be subjected to the same requirement?

D) Ability to Offset Market Obligations

Since the RTO or ISO does not take title even though it arranges for settlements and transactions between the market participants and the market administrator, it cannot net payments in the event of a bankruptcy by a market participant (e.g. Mirant in CAISO). The Commission proposes to require that each RTO and ISO clarify its status as a party to each transaction to eliminate any ambiguity as to their ability to manage defaults and to offset market obligations. The Commission seeks comments on ramifications of this proposal.

Possible comments/questions: Should an ISO or RTO assume the added risk of taking title to a transaction? Is it fair or legal to add this liability on the shoulders of the ISO or RTO? Would this requirement provide added incentives for the ISO or RTO to better manage its credit risks? Would this reduce the default socialization risk already borne by market participants? To what extent?

E) Minimum Criteria for Market Participants

The Commission proposes the requirement of minimum criteria (capital adequacy, risk management capabilities, etc.) for market participation. It is meant to strike a balance between providing market liquidity and limiting the exposure to defaults.

Possible comments/questions: Does the CCRO/PMC want to propose a specific number for capital adequacy (keeping in mind the need for small LSEs, municipalities and cooperatives to participate), and a specific set of risk management capabilities? What would be a set of well reasoned analyses that balances market liquidity and risk of loss from defaults?

F) “Material Adverse Change” (MAC)

Many tariffs allow the market administrator to require additional collateral if there is a MAC in the market participant’s credit status. However the ambiguity of the phrase MAC can impose great cost to the market participant or delay the delivery of collateral to the market administrator (negating the benefit of the collateral to protect against a loss from default). The Commission requests comment as to specific language regarding the circumstances under which a market administrator may invoke the MAC provision.

Possible comments/questions: Is this an opportunity for CCRO/PMC to offer specific language that is practical and fair? What process should we use to vet and arrive at a consensus among CCRO/PMC members? Is it realistic for us to try and develop this language or even a framework for FERC to use – i.e. to each his/her own comments?

G) Grace Period to “Cure” Collateral Posting

The Commission proposes to impose a standard requirement to remove ambiguity, and invites comments on the appropriate time period and whether it should be standardized among all organized wholesale markets (RTOs and ISOs) – e.g. two business days adopted by PJM.

Possible comments/questions: Should the CCRO/PMC consider suggesting an even shorter cure period? Two days may be too long to get collateral from a market participant under severe stress – an exchange like CME or ICE, or transaction counterparty with shorter cure period would get collateral ahead of the RTO or ISO – i.e. there may be nothing left for the market administrator. Perhaps the standard should allow for the shortest cure period that may be imposed by any exchange or counterparty that has a related role in the wholesale electricity markets.

IV. Environmental Analysis

No comments needed.

V. Information Collection Statement

No comments needed.

VI. Regulatory Flexibility Act Statement

The Commission declared that the proposed rule will not have significant impact on a substantial number of small entities, and therefore no regulatory flexibility is needed.

Possible comments/questions: Should CCRO-PMC affirmatively support FERC in this assertion?

VII. Comment Procedures

Comments may be filed in electronic (www.ferc.gov) or paper (14 copies) format.

VIII. Document Availability

The NOPR and comments are available to the public on the FERC website and in the Commission’s Public Reference Room during normal business hours.