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Clean Currents: PJM Credit Changes Solidify "Dominance" of Large Incumbents

July 13, 2011
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Various proposals from PJM regarding increased credit requirements, in response to the FERC RTO credit "reform" order, will not help avoid the intended moral hazard or limit risk, and are instead, "just market barriers that solidify the dominance of large incumbent players," CCES LLC said in comments to FERC.

CCES LLC is the retail load-serving arm of Clean Currents.

As previously reported (see 7/1), PJM has proposed minimum criteria for market participation including, for participants not in the Financial Transmission Rights (FTR) market, minimum capitalization requirements of a tangible net worth of $500,000 or tangible assets of $5 million.

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 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.

Stricter requirements are proposed for participants active in the FTR market and virtual bidding.

"Specifically, the minimum participation requirements that have been proposed by PJM will make it difficult for CCES LLC to operate and grow as they will tie up a great deal of resources to satisfy newly expanded collateral requirements and other guidelines that are particularly burdensome for smaller companies," CCES said.

"The proposed required collateral is 10X what is presently required for companies starting out in the PJM Regional Transmission Organization (RTO). This multiple of collateral (of which $500,000 additional collateral cannot be used as collateral), is an unexpected impact to small businesses with no provisions to grandfather suppliers who are already participating with PJM," CCES added.

The proposed additional collateral requirements and policies, "are particularly burdensome to small companies who already have a higher cost of capital," CCES added.

"Smaller companies are unable to trade based on their balance sheets if such large portions, for example, $500,000 is posted to a third-party, presumably PJM. Such a posting reduces our credit requirements directly on a 1:1 basis as smaller companies cannot get unsecured letters of credit. The net result is a posting of 100% cash for all collateral requirements," CCES said.

Furthermore, CCES said that PJM proposal's to "arbitrarily" require additional non-usable collateral in the amount of $500,000, including a 10% discount to the cash collateral that is used that can be provided by a parent company or corporate guarantor, has not been explained by PJM and is not required by the Commodities Futures Trading Commission (CFTC).

"Furthermore, the one-size-fits-all number does not take into account the size and volume of transactions by various suppliers. Why should a small company provide the same amount of deductible collateral as the largest suppliers in the nation?" CCES asked.

CCES said that the PJM proposal mandates that companies provide audited financial statements on an annual basis. "Audited financial statements are a significant expense for small business and are not required for other business operations. Audited financial statements are also not required by FERC Order 741 or other FERC (or PJM) precedents," CCES said.

Furthermore, the PJM proposal requires all companies to have an independent risk officer unless trading is performed by an independent part of the company or third party contractor. "Small companies cannot afford to hire such an officer and often do not need to because the size of the transaction is relatively small and they are usually already factoring in the risk implications because they are trading their own money and are not speculating. There is no exemption for smaller vendors whose trading is done by the principals," CCES said.

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