On July 28, 2022, FERC issued a show cause order indicating that several regional transmission organization (“RTO”) and independent system operator (“ISO”) tariffs appear to be unjust and unreasonable because they lack certain credit risk management practices. FERC also issued a related Notice of Proposed Rulemaking (“NOPR”) to allow all market operators to share credit-related information among themselves so that they can more accurately assess market participants’ credit risks. Both actions aim to improve credit risk management in organized wholesale electric power markets.

In the show cause order, FERC found that the California Independent System Operator Corporation (“CAISO”), ISO New England Inc. (“ISO-NE”), New York Independent System Operator, Inc. (“NYISO”), and Southwest Power Pool Inc. (“SPP”) tariffs appear to be unjust and unreasonable because they lack certain credit risk management practices. More specifically, FERC found the tariffs lacking in: 1) market-to-auction mechanisms for the calculation of financial transmission right (“FTR”) collateral requirements; and 2) volumetric minimum collateral requirements for FTR market participants. FTRs, which are financial contracts that entitle the holder to day-ahead hourly congestion revenue over a specific transmission path, support forward market activity by allowing market participants to hedge against the cost of transmission congestion in the RTO/ISO market. FERC explained that sound FTR credit policies are essential to protecting FTR markets and that it proposed practices are intended to ensure that FTR market participants maintain sufficient collateral to reduce mutualized default risk, i.e. the risk that a default by one market participant is unsupported by collateral and therefore must be socialized among all market participants. Pursuant to section 206, each RTO/ISO has 90 days to either show cause as to why its tariff remains just and reasonable in light of FERC’s concerns or to explain what changes it believes would remedy those concerns.

In the NOPR, FERC proposes revisions to section 35.47 of its regulations to permit RTOs/ISOs to share market participants’ credit information with other RTOs/ISOs for purposes of credit risk management and mitigation. Currently, credit information is provided by market participants during the initial application for market participation status. Any such information is generally deemed confidential, and is neither shared nor updated. In 2021, FERC held a technical conference discussing credit risk management practices in wholesale electric markets where, among other things, panelists discussed that it would be helpful to know if a market participant were experiencing financial distress in another market (see November 10, 2020 edition of the WER). In the NOPR, FERC explained that its proposed changes would allow RTOs/ISOs to better assess the participants’ credit exposure to minimize risk and defaults. FERC seeks comment on, among other things, whether there should be restrictions on the types of credit related information shared or RTOs’/ISOs’ management and use of credit-related information; whether RTOs’/ISOs’ discretion in sharing or acting on credit-related information should be limited to specific circumstances; and on the benefits and burdens of a requirement to share credit-related information.

A copy of the NOPR is available here. A copy of the order is available here.