Proposed PJM Minimum Criteria for Market Participation Said to Drive Small Players Out of Market

July 1, 2011
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PJM has proposed two sets of minimum participation criteria which market participants would be required to meet in order to participate in the PJM market, which small firms have said will drive them out of the market.

Submission of a minimum participation criteria was directed by FERC's RTO credit "reform" order (Order 741), which delegated to the RTOs the development of specific policies.

In a compliance filing at FERC, PJM has proposed two sets of criteria which must be met by all market participants, addressing (i) capitalization; and (ii) risk management and verification.

For capitalization, PJM's proposed minimum financial requirements could be satisfied either by (1) meeting specified, minimum capitalization requirements, based either on tangible net worth or tangible assets, or (2) providing certain additional collateral above the amount of collateral otherwise required for trading.

For participants not in the Financial Transmission Rights (FTR) market, minimum capitalization requirements are a tangible net worth of $500,000 or tangible assets of $5 million.

For FTR market participants, the minimum capitalization requirement is either a tangible net worth of $1 million or tangible assets of $10 million.

The determination of "tangible" net worth or assets, "exclude[s] assets (net of any matching liabilities assuming the result is a positive value) which PJMSettlement reasonably believes to be restricted, highly risky, or potentially unavailable to settle a claim in the event of a default." A corporate guaranty from an affiliate may be used to satisfy the "tangible" net worth or assets requirements provided the guarantor satisfies the applicable tangible net worth or tangible asset requirements. If a participant provides collateral in addition to only a limited guaranty to increase its available credit, the amount of the collateral that will be considered Financial Security able to satisfy the requirements of the Credit Policy will be only 90% of the collateral provided.

Alternatively, the market participant could post additional collateral to meet the capitalization requirement, with such collateral not counting towards the specific credit requirements supporting the participant's trading activities.

For market participants not engaging in FTR auctions or virtual bidding, no additional collateral would be required even if not meeting the the tangible net worth or tangible assets tests, but only 90% of the amount of collateral otherwise provided by the participant would be considered Financial Security available to satisfy the requirements of the Credit Policy.

Market participants engaged in virtual trading but not FTR auctions would be required to post $200,000 in additional collateral. Market participants engaged in the FTR market would be required to post $500,000 in additional collateral.

With regard to risk management, PJM would require market participants to certify an adequate level of training as well as the existence of written policies and procedures for risk management that are approved by the participant's independent management function.

Smaller firms, particularly those in virtual trading, have informed PJM that the proposed requirements will force them out of the market. Aside from pricing convergence, virtual trading is particularly important to retail suppliers seeking to hedge load, especially smaller volumes.

PJM dismissed any concerns about potential market exits due to the regulations, and said any exits are an acceptable price for greater "stability" from the regulations and the claimed increase in protection from default they are to provide.

PJM's compliance filing also addresses the conditions under which it may find that a material change in the financial condition of a market participant has occurred. When a material change occurs, the participant may be required to provide financial security within two business days in an amount determined by PJMSettlement, with failure to provide such financial security resulting in default under the credit policy.

Notably, PJM will define a material change in financial condition as including, "revocation of a license or other authority by any Federal or State regulatory agency, where the license or authority is required or important to the participant's continued business, such as a market-based rate authorization or a State license to serve retail load."

PJM's filing was made in Docket ER11-3972.

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