FERC proposes to revisit credit practices and risk management for organized wholesale market in a January 21 rulemaking proposal. The seven proposed revisions across the board would reign in credit and reduce the default exposure of market operators beginning before the 2010-2011 winter-heating season. Public comment on the proposed revisions must be filed with the FERC by March 29, 2010.

The first revision would contract to seven days (per PJM and ISO New England) and ultimately one day the settlement cycle, with no more than an additional seven days for final payment. The second revision would reduce unsecured credit to no more than $50 million per participant, with a possible aggregate limit for entities within the same corporate family. The third revision recognizes the long-period of exposure (months or even years) to unpredictable risks that attend financial transmission rights (FTR) and would eliminate altogether unsecured credit in FTR transactions. The fourth revision takes its cue from the California energy crisis and proposes to make the market administrator a party to all contracts so that it would be able to offset liabilities against claims; because the California ISO was not such a party, it became exposed to the claims of the creditors of bankrupt Mirant, but could not pursue Mirant’s liabilities to California ISO market participants.

The fifth revision is less specific and proposes that RTOs and ISOs specify in their tariffs the minimum risk management and hedging capability that they will require as a condition of market participation.

And the sixth and seventh revisions are related: On one hand, the sixth would have the market operator detail under what circumstances it can claim that a “material adverse change” has occurred and demand from a participant additional collateral; on the other hand, the seventh (per PJM) would standardize the grace period for curing a material adverse change to two business day before additional collateral can be required.

FERC asks some important questions in connection with these proposed revisions. What sort of credit facility will retail service providers require if they confront a seven- or one-day settlement, but are on a thirty-day payment cycle with their customers? More generally, FERC asks whether all of these revisions should apply equally to all market participants.