The U.S. Federal Energy Regulatory Commission recently allowed PJM Interconnection LLC to establish a separate entity to act as the contractual counterparty to transactions in PJM markets, effective January 1, 2011.

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On September 3, 2010, the U.S. Federal Energy Regulatory Commission (FERC) conditionally approved a filing by PJM Interconnection LLC allowing it to establish a separate entity to act as the contractual counterparty to transactions in the PJM markets. Effective January 1, 2011, this new entity—PJM Settlement—will serve as each market participants’ contractual counterparty to transmission and ancillary services transactions, and purchases and sales of energy products in PJM’s markets.

In May 2010, PJM submitted a filing under section 205 of the Federal Power Act to designate PJM Settlement as the counterparty to pool (as opposed to bilateral) transactions in PJM markets. In this capacity, PJM Settlement would be a buyer to each market seller and a seller to each market buyer, taking title to electricity and other products and assuming liability in its own name. According to PJM, this action would address an ambiguity regarding the identity of parties to pool transactions in PJM. PJM argued that this clarification would establish mutuality for bankruptcy purposes, which would ensure that PJM could enforce its netting and set-off provisions in the event of a default in the market. Although the proposal was approved by 95 percent of PJM’s Markets and Reliability Committee, a number of parties protested the filing, citing such unintended consequences as increased costs for market participants, increased tax liability and likely U.S. Commodity Futures Trading Commission regulation.

FERC rejected the comments and found PJM’s proposal to be just and reasonable. The Commission found that this arrangement “addresses ambiguity regarding the identity of contracting parties in PJM pool transactions by clarifying that there is a single, specified counterparty to market participants.” According to the Commission, PJM’s proposal offers a reasonable solution to the potential mutuality risk identified by PJM. Additionally, FERC refused to impose a requirement that PJM Settlement maintain a certain credit rating, noting that it will have the same credit profile as PJM. However, the Commission required PJM to provide additional information on the relationship between PJM and PJM Settlement. FERC also determined that PJM Settlement needs to file a rate schedule like all other public utilities, but it does not need market-based rate authorization because it will not be a “market seller.”

Under the proposal, PJM Settlement will take over a number of functions currently handled by PJM, including billing and settlement, invoicing and receiving payments, and receiving credit guarantees from market participants, but PJM Settlement will not be a market participant. While PJM Settlement would have a separate board of directors and officers from PJM, the new board and officers will be composed exclusively of PJM employees.

This order comes in the midst of FERC’s decision-making process regarding its Notice of Proposed Rulemaking on credit reforms for the organized electric markets (Credit NOPR), which was released in January 2010. The proposed rule sought to clarify the status of regional transmission operators and independent system operators as parties to each transaction within their respective markets. While a number of protestors to PJM’s filing requested the Commission to defer action, FERC decided not to wait until issuing a final rule on the Credit NOPR, but noted that PJM would be required to make any changes mandated by the final rule. For more information on FERC’s Credit NOPR, see FERC Proposes Credit Reforms for Organized Wholesale Electric Markets.