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Dozen Retail Suppliers Warn Proposed ~1,000% Increase In PJM Minimum Capital Requirement To $5 Million Will Drive Retail Suppliers Out Of Business
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About a dozen retail energy suppliers have warned that a $5 million capitalization requirement being considered for PJM market participants could potentially cause many small business retail energy suppliers to go out of business
The Diversified Retail Energy for Americans by Minorities
Coalition (the DREAM Coalition), representing minority and women-owned/operated small
businesses that provide retail electric services, said in advance of a PJM Risk Management Committee meeting held this afternoon that a proposed nearly 1,000% increase to PJM's capitalization requirements is, "a solution in search
of a problem."
DREAM Coalition members include City Power & Gas, LLC, EcoPlus Power, LLC, Northeastern Power, LLC, Park Power, LLC, Pay Less Energy, LLC, Rushmore Energy, LLC, South Bay Energy Corporation, and Spartacus Energy Services, LLC. Joining these suppliers in a letter to PJM were All American Power and
Gas, LLC, Eligo Energy, LLC, Nordic Energy Services,
LLC, and Pure Energy USA, LLC
PJM is considering raising the minimum capitalization requirement for participation in PJM's markets, with one proposal potentially raising the minimum capitalization requirement for retail suppliers and other LSEs not engaged in FTR or virtual transactions to be $5 million in tangible net worth or $10 million in tangible assets.
The current requirement for market participants not engaged in FTRs is $500,000 in tangible net worth ($1 million for FTR participants) or $5 million in tangible assets
PJM's Risk Management Committee is considering a variety of new minimum capitalization levels for various market participants. For retail suppliers not engaged in FTR or virtual transactions, other proposals being considered include a $1 million tangible net worth requirement with potentially additional collateral required
"[T]he DREAM Coalition believes that increases to PJM’s capitalization requirements will have an
adverse impact in minority and women-owned/operated small business, potentially causing many
of them to go out of business," the DREAM Coalition said
PJM Staff in a presentation earlier this year said that, "PJM has observed trend of balance sheets reflecting low
TNW [Tangible Net Worth] while significant revenues are generated from PJM."
"This trend indicates revenues not being reinvested into the
business and market participants maintaining balance sheets
only to meet minimum capitalization requirements," PJM Staff said in such presentation
PJM Staff noted that the current minimum capitalization requirements were ordered by FERC in 2011, with PJM Staff stating that markets have changed significantly since such time
The DREAM Coalition said that the current minimum capitalization levels have, "functioned well," further stating, "There is no evidence that the existing framework has led to unreasonable
risks or market instability."
"The proposed change will unquestionably exclude significant numbers
of smaller participants that serve hundreds of thousands of customers, especially women- and
minority-owned/operated businesses, without demonstrating any clear, corresponding benefit to
PJM and the communities service directly or indirectly via PJM," the DREAM Coalition said
"Additionally, the new capital requirement amount is arbitrary without considering estimated
credit risk exposure of each market participant. There has been no information provided about the
rationale for this $5 million amount," the DREAM Coalition said
Stating that the current financial requirement levels are already negatively impacting small retail suppliers, the DREAM Coalition said, "The proposed change risks further consolidating the market among larger market participants
which will reduce customer choice, hurt end-user customers in the long run and expose PJM
stakeholders to highly concentrated credit risk with very damaging consequences."
"Barriers to entry are
already significant for small PJM Market Participants, particularly women- and minority-owned/
operated businesses, who routinely face systemic challenges in securing financing. These
participants generally have less access to capital markets and fewer opportunities to build financial
reserves than their larger counterparts. Increasing the minimum capitalization by 1,000% would
amplify these barriers, potentially excluding many women- and minority-owned/operated
businesses, from entering or remaining in PJM markets. This change would not merely make
participation more difficult—it would, for many, make it impossible," the DREAM Coalition said
"[A]n increase in the capitalization requirement risks consolidating market power
among larger PJM Market Participants. The proposed change could limit participation to a small
number of companies with substantial financial resources, reducing competition and innovation in
PJM’s markets. A healthy market depends on the contributions of diverse participants, where
competition drives efficiency, innovation, and cost reduction. By making it harder for smaller
participants to enter or stay in the market, PJM would risk stifling this essential competitive
dynamic. The reduced participation would undermine FERC’s goal of broad and inclusive market
participation, effectively allowing only the largest companies to dominate PJM markets,
weakening the diversity that benefits all stakeholders," the DREAM Coalition said
"Further, this proposed change unduly benefits larger market participants because it does
not consider the expected exposure of any market participant. The arbitrary proposed new capital
requirements of $5 million, while it may be excessive for small participants, may be too small for
larger participants with much bigger exposure to PJM. As a result, PJM risks consolidating
exposure with larger market participants and exposing all stakeholders to a concentrated risk of
these larger companies failing," the DREAM Coalition said
"PJM should explore financial support mechanisms that can help small
businesses meet capitalization requirements without excluding them from the market. This might
include collaborating with state and federal programs to provide credit guarantees or pooled
collateral options, which can alleviate the financial burden on smaller participants. Better access
to industry-backed credit support structures, such as surety bonds or letters of credit, could also
provide smaller businesses with the resources needed to comply with financial requirements," the DREAM Coalition said
"Additionally, PJM should consider adopting a more flexible approach to compliance
documentation for small participants, such as exemptions from certain audit requirements or less
onerous financial reporting standards. This would reduce the administrative burden on women- and
minority-owned/operated businesses, and ensure they are not pushed out of the market due to
overly restrictive requirements," the DREAM Coalition said
A post-meeting matrix of potential minimum capitalization levels has omitted any proposed amounts for market participants other than those engaged in FTRs or virtual transactions (previously, "other" market participants were grouped with virtual market participants, with virtual market participants now separately addressed as its own category)
PJM's review of the minimum capitalization levels is currently in the "options" phase of the stakeholder process. PJM has indicated that it is targeting a completion of addressing the "issue charge" related to minimum capitalization requirements by January 31, 2025
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October 29, 2024
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Copyright 2024 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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