Based on a review of past default experiences, CCRO members contend that with greater programmatic attention to the principles of this new white paper, an ISO will greatly reduce the possibility of a participant default. Further, by doing so the ISO will better serve its members and meet its objective to host markets that support risk management for energy producers, transporters, and consumers.

The CCRO has a long tradition of promoting risk management best practices in ISO/RTO markets including:

• Publishing the white paper “Market Clearing in Energy Industry”, in 2006

• Publishing the report, “Power Market Netting Best Practices”, in 2010

• Providing written comments to FERC’s Credit Reforms in Organized Wholesale Electric Markets in 2010.

• This initiative: “Principles of Effective Risk Management Over ISO Market Participant Default

CCRO efforts promulgating best practices in ISO/RTO markets have been both proactive as in the case of the white paper Market Clearing in the Energy Industry and in response to systemic events in organized markets, such as the recent default by GreenHat Energy, LLC (“GreenHat”).

Our white paper initiative addresses the full range of risk management issues appropriate for an ISO to address, including:

1. GOVERNANCE

Starting with the Board of Directors, this section will recommend how an ISO may ensure effective governance over risks.

2. RISK ASSESSMENTS

This section’s recommendations define the processes and procedures to be used by the ISO risk function in carrying out its duty of fair and accurate risk measurements.

3. RISK CONTROLS

Before and after a company becomes a participant in an ISO market, the ISO should exercise effective controls to prevent the participation of inappropriate entities and limit the risks that each participant is able to take-on. These recommendations detail such controls that are both fair and effective.

4. COMMUNICATIONS

This section details how through effective risk communication, an ISO organization can most effectively become aware of and take appropriate actions to manage risks.

In 2019, as a result of a significant default by GreenHat, a PJM financial transmission rights (“FTR”) participant, the CCRO determined there was a need to review credit risk best practices for ISO/RTO’s in the North American marketplace. While final numbers on the amount of default, and recovery of those losses are still not fully known as of the date of publication of this white paper, losses are expected to be in excess of $200M, which will be socialized to the PJM market participants.

As a result, in 2019 the CCRO established the ISO/RTO Credit Risk Best Practices Working Group (“RTO WG”) with a mandate to review credit standards for North American ISO/RTOs, and publish a ISO/RTO credit risk best practices white paper. The efforts of the RTO WG leverages prior published studies and white papers, and builds upon them, including those mentioned above. The CCRO also utilized the “Report of the Independent Committee of Consultants to the PJM Board on the GreenHat Default”, whose authors also included Bob Anderson, the Executive Director of the CCRO.