[Federal Register Volume 76, Number 38 (Friday, February 25, 2011)]
[Rules and Regulations]
[Pages 10492-10498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4088]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 35
[Docket No. RM10-13-001; Order No. 741-A]
Credit Reforms in Organized Wholesale Electric Markets
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Final rule; order on rehearing.
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SUMMARY: In this order on rehearing, the Commission reaffirms in part
its determinations in Credit Reforms in Organized Wholesale Electric
Markets, Order No. 741, to amend its regulations to improve the
management of risk and use of credit in the organized wholesale
electric markets. This order denies in part and grants in part
rehearing and clarification regarding certain provisions of Order No.
741.
DATES: Effective Date: This order will become effective on March 28,
2011.
FOR FURTHER INFORMATION CONTACT:
Christina Hayes (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-6194.
Lawrence Greenfield (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-6415.
Scott Miller (Technical Information), Office of Energy Policy and
Innovation, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426, (202) 502-8456.
SUPPLEMENTARY INFORMATION:
Before Commissioners: Jon Wellinghoff, Chairman; Marc Spitzer,
Philip D. Moeller, John R. Norris, and Cheryl A. LaFleur.
Order on Rehearing
1. In Order No. 741, the Commission adopted reforms to credit
policies used in organized wholesale electric power markets.\1\ In the
instant order, the Commission addresses requests for rehearing of Order
No. 741. The Commission grants rehearing as to its establishment of a
$100 million corporate family cap on unsecured credit and extends the
deadline for complying with the requirement regarding the ability to
offset market obligations to September 30, 2011, with the relevant
tariff revisions to take effect January 1, 2012, but denies rehearing
in all other respects, as discussed below.
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\1\ Credit Reforms in Organized Wholesale Electric Markets,
Order No. 741, 75 FR 65942 (Oct. 21, 2010), FERC Stats. & Regs. ]
31,317 (2010) (Order No. 741).
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I. Background
2. As noted in Order No. 741, the Commission must ensure that all
rates charged for the transmission or sale of electric energy in
interstate commerce are just, reasonable, and not unduly discriminatory
or preferential,\2\ and clear and consistent credit policies are an
important element in ensuring rates that are just, reasonable, and not
unduly discriminatory or preferential. The management of risk and
credit requires a balance between protecting the markets from costly
defaults \3\ and ensuring that barriers to entry for market
participants are not prohibitive.
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\2\ 16 U.S.C. 824d, 824e.
\3\ In organized wholesale electric markets, defaults not
supported by collateral are typically socialized among all other
market participants.
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3. The Commission provided guidance to the industry on appropriate
credit policies in Order No. 888 \4\ and the Policy Statement on
Electric Creditworthiness.\5\ Credit policies among the organized
wholesale electric markets, however, developed in an incremental manner
leading to varying credit practices. Because these variable practices
posed a heightened risk to the stability of the organized wholesale
electric markets, and especially in light of recent events in the
financial markets, the Commission proposed that the different credit
practices among the organized wholesale electric markets be
strengthened.
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\4\ Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,
Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ]
31,036, at 31,937 (1996) (pro forma OATT, section 11
(Creditworthiness)), order on reh'g, Order No. 888-A, 62 FR 12274
(Mar. 14, 1997), FERC Stats. & Regs. ] 31,048 (1997), order on
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g,
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1
(2002).
\5\ 109 FERC ] 61,186 (2004) (Policy Statement).
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4. In Order No. 741, the Commission directed the regional
transmission organizations (RTO) and independent system operators (ISO)
to revise their tariffs to reflect the following reforms:
implementation of shortened settlement timeframes, restrictions on the
use of unsecured credit, elimination of unsecured credit in all
financial transmission rights (FTR) or equivalent markets,\6\ adoption
of steps to address
[[Page 10493]]
the risk that RTOs and ISOs may not be allowed to use netting and set-
offs, establishment of minimum criteria for market participation,
clarification regarding the organized markets' administrators' ability
to invoke ``material adverse change'' clauses to demand additional
collateral from participants, and adoption of a two-day grace period
for ``curing'' collateral calls.
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\6\ References to FTR markets in this order, as in Order No.
741, also include the Transmission Congestion Contracts (TCC)
markets in NYISO and the Congestion Revenue Rights (CRR) markets in
California Independent System Operator (CAISO).
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5. Requests for rehearing were filed by the New York Independent
System Operator, Inc. (NYISO), Morgan Stanley Capital Group Inc.
(Morgan Stanley), Financial Marketers,\7\ the American Public Power
Association (APPA), East Texas Cooperatives, Six Cities,\8\ Midwest
Transmission Dependent Utilities (Midwest TDUs),\9\ Twin Cities,\10\
and Southern California Edison Company (SCE). The New York Transmission
Owners filed an answer.\11\
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\7\ Financial Marketers are comprised of Energy Endeavors LP,
Big Bog Energy, LP, Gotham Energy Marketing, LP, Rockpile Energy,
LP, Coaltrain Energy, LP, Longhorn Energy, LP, GRG Energy, LLC, MET
MA, LLC, Pure Energy, Inc., Red Wolf Energy Trading, LLC, Jump
Power, LLC, Silverado Energy LP, JPTC, LLC, Blue Star Energy, LLC,
and Tower Research Capital LLC.
\8\ Six Cities are comprised of the Cities of Anaheim, Azusa,
Banning, Colton, Pasadena, and Riverside, California.
\9\ Midwest TDUs are comprised of Indiana Municipal Power
Agency, Madison Gas & Electric Company, Missouri River Energy
Services, Southern Minnesota Municipal Power Agency and WPPI Energy.
\10\ Twin Cities are comprised of Twin Cities Power, LLC, Twin
Cities Energy, LLC, TC Energy Trading, LLC, Cygnus Energy Futures,
LLC, and Summit Energy, LLC.
\11\ The New York Transmission Owners are comprised of Central
Hudson Gas & Electric Corporation, Consolidated Edison Company of
New York, Inc., Long Island Power Authority, New York Power
Authority, New York State Electric & Gas Corporation, Niagara Mohawk
Power Corporation d/b/a National Grid, Orange and Rockland
Utilities, Inc., and Rochester Gas and Electric Corporation.
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II. Discussion
A. Use of Unsecured Credit
1. Requests for Rehearing
6. Six Cities and Morgan Stanley seek rehearing of the Commission's
requirement that each ISO and RTO revise its tariff provisions to
reduce the extension of unsecured credit to no more than $50 million
per market participant and $100 million per corporate family.\12\
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\12\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 49-57.
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7. Morgan Stanley argues that the Commission should eliminate the
$50 million market participant cap. Morgan Stanley contends that the
separate caps--$50 million for a market participant and $100 million
for a corporate family--will encourage entities to reconfigure their
corporate structures to avoid the $50 million per entity cap and
instead use the $100 million corporate family cap. Morgan Stanley
asserts that such a structure will increase costs to market
participants, making the $50 million cap illusory and generating
unnecessary burdens for ISOs and RTOs without a corresponding
benefit.\13\
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\13\ Morgan Stanley, November 22, 2010 Request for Rehearing at
4-5 (Morgan Stanley Request).
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8. Conversely, Six Cities argue that the Commission should
eliminate the $100 million corporate family cap. They assert that the
Commission did not provide a rational explanation for permitting
affiliated entities to impose a greater degree of risk than individual
entities, and so should not have allowed the $100 million corporate
family cap. Six Cities also argues that the $100 million corporate
family cap could run up to $600 million if there was a default in every
ISO/RTO.\14\
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\14\ Six Cities November 19, 2010 Request for Rehearing at 12-14
(Six Cities Request).
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2. Commission Determination
9. The Commission grants rehearing on this issue. Specifically, the
Commission is persuaded that an entity reconfiguring its corporate
structure, to avoid the $50 million single-entity cap and to instead
take advantage of the $100 million corporate family cap, raises a
significant risk that is inconsistent with Order No. 741's intent to
lower risk. Additionally, the Commission has taken into consideration
Six Cities' point that affiliated entities should not be able to impose
a greater risk to the stability of organized wholesale markets than
individual entities. We agree that the cumulative danger posed by a
$100 million corporate family cap on the use of unsecured credit poses
an unacceptable risk to the organized wholesale electric markets; many
market participants either themselves or through subsidiaries
participate in multiple markets. We agree with Six Cities that the
default of a single entity could result in a significant cumulative
unsecured exposure if we were to allow the higher $100 million
corporate cap for unsecured credit originally permitted in Order No.
741. Socializing such losses to other market participants could lead to
even more significant market disruption than merely the default of a
single entity. The Commission therefore grants rehearing and finds that
the limit on the use of unsecured credit should be no more than $50
million per entity, including the corporate family to which an entity
belongs.\15\ This is the approach originally suggested by the
Commission in its Notice of Proposed Rulemaking \16\ and the Commission
is persuaded it should return to this proposal.
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\15\ While a corporate family may choose to have a single member
company participate in an RTO/ISO's market, or instead opt to have
more than one do so, in either case, the single entity or multiple
entities together will have a cap of no more than $50 million.
\16\ See Credit Reforms in Organized Wholesale Electric Markets,
Notice of Proposed Rulemaking, 75 FR 4310 (Jan. 27, 2010), FERC
Stats. & Regs. ] 32,651, at P 19 (2010).
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B. Elimination of Unsecured Credit for Financial Transmission Rights
Markets
1. Requests for Rehearing
10. APPA, Midwest TDUs, and Six Cities request rehearing on the
Commission's elimination of unsecured credit in the FTR markets.\17\
They argue that the Commission erred in eliminating unsecured credit
for all participants, particularly load-serving entities.
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\17\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 70-79.
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11. APPA and Midwest TDUs argue that the elimination of unsecured
credit in FTR markets will make it financially prohibitive for load-
serving entities to obtain and hold long-term FTRs of ten years or more
(LTTR).\18\ They contend that this is inconsistent with the
Commission's responsibilities, under section 217(b)(4) of the Federal
Power Act (FPA) \19\ and Order No. 681,\20\ to enable load-serving
entities to secure firm transmission rights on a long-term basis for
long-term power supply arrangements to serve their load. At a minimum,
they contend, the Commission should direct RTOs and ISOs to implement
Order No. 741 in compliance with section 217(b)(4) and Order No. 681.
Further, APPA and Midwest TDUs argue that they be allowed to request
exemptions under Order No. 741 to ensure that a load-serving entity's
access to LTTRs is not impaired.
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\18\ APPA November 19, 2010 Request for Rehearing at 1-3, 4-9
(APPA Request); Midwest TDUs November 22, 2010 Request for Rehearing
(Midwest TDUs Request).
\19\ 16 U.S.C. 824q(b)(4).
\20\ Long-Term Firm Transmission Rights in Organized Electricity
Markets, Order No. 681, FERC Stats. & Regs. ] 31,226, reh'g denied,
Order No. 681-A, 117 FERC ] 61,201 (2006).
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12. Midwest TDUs further argue that ISOs and RTOs manage risk in
the FTR markets by determining the creditworthiness of individual FTR
market participants. Moreover, Midwest TDUs contend that load-serving
entities are less of a credit risk because their bond resolutions give
explicit payment
[[Page 10494]]
priority to energy and transmission market service providers over
bondholders, in effect giving RTOs/ISOs a security interest in their
accounts receivable. APPA also contends that, although the Commission
noted the challenges in valuing FTRs, the Commission did not provide
guidance in how to address that issue.
13. Six Cities contends that the Commission should not have
eliminated unsecured credit for all types and holders of FTRs. Six
Cities notes that the CAISO has two types of FTRs: allocated CRRs,
which are used by load-serving entities to hedge congestion costs for
purchases to serve the needs of native load customers, and auctioned
CRRs, which may be purchased by any entity that satisfies CAISO's
qualification criteria. Six Cities argues that CAISO should be allowed
to differentiate between the two categories in setting credit
requirements. Specifically, Six Cities argues that load-serving
entities have no obligation to pay for allocated CRRs, thus cannot
default. By eliminating unsecured credit for all FTRs without regard to
the purpose for purchase, Six Cities argues that the Commission's
decision is not reasoned decision-making as required by the
Administrative Procedures Act.\21\
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\21\ Six Cities Request at 3, 10-12 (citing Petal Gas Storage,
L.L.C. v. FERC, 496 F.3d 695, 698 (D.C. Cir. 2007), and others).
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2. Commission Determination
14. The Commission denies rehearing. The Commission is not
persuaded that the elimination of unsecured credit in the FTR markets
is inconsistent with the statutory directive to facilitate access to
long-term FTRs. While section 217(b)(4) directs us to exercise our
authority under the FPA to ``enable[ ] load-serving entities'' to
``secure'' FTRs ``on a long-term basis,'' the statute does not require
that we guarantee the availability of unsecured credit, and does not
require that we ignore the risks posed by the use of unsecured credit.
Denying unsecured credit does not prohibit load-serving entities from
securing long-term FTRs, but rather merely requires use of some other
form of financing, e.g., the use of secured credit or the posting of
collateral. Moreover, there is nothing in the record to indicate that
acquisition of long-term FTRs will be prohibitively expensive. Our
reason for eliminating reliance on unsecured credit in the FTR markets
is to reduce risk to market participants, including risk to those
market participants that are load-serving entities. Those seeking
rehearing on this issue have failed to demonstrate that this risk can
and should be so readily discounted.
15. Nor is the Commission persuaded that unsecured credit in FTR
markets should be allowed for certain market participants based on the
``purpose'' of the entity engaging in the FTR market. The FTR market
exists to hedge, i.e., manage, risk, but there are no guarantees that
such hedges, even for load-serving entities, will themselves have no
risk. The risk of adverse FTR market outcomes and potential effects on
market participants led us to take these actions initially, and are no
more or less applicable to some participants than others based on the
``purpose'' of the participant.\22\ Finally, to the extent that certain
FTRs have inherently low risk, we expect that the RTO and ISO's credit
modeling will result in relatively low collateral requirements.
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\22\ The analysis in this paragraph, and the prior paragraph,
explains why, as a generic matter, we will not allow exemptions from
this requirement of Order No. 741.
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16. As to the question of how FTRs are valued, as we stated in
Order No. 741, this issue is beyond the scope of this proceeding.\23\
Regarding the Midwest TDUs' argument that where bond resolutions give
explicit payment priority to energy and transmission market service
providers over bondholders, in effect giving RTOs/ISOs a security
interest in their accounts receivable, first, it is not clear that such
payment priority would apply in the event of a default in an FTR
market. Furthermore, we are not persuaded that giving such payment
priority would provide a level of security comparable to the
elimination of reliance on unsecured credit.
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\23\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 76.
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C. Ability To Offset Market Obligations
1. Requests for Rehearing
17. Morgan Stanley, SCE, NYISO, and the New York Transmission
Owners seek rehearing of the Commission's directive that, if an ISO/RTO
wishes to allow netting of amounts owed to a market participant against
amounts owed by that participant, the ISO/RTO must revise its tariff to
include one of the following options: (1) Establish a central
counterparty; (2) require market participants to provide a security
interest in their transactions in order to establish collateral
requirements based on net exposure; or (3) propose another alternative,
which provides the same degree of protection as the two above-mentioned
methods.\24\
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\24\ Id. P 116-22. The Commission also left open the possibility
of setting credit requirements based on gross obligations. Id.
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18. NYISO requests clarification that the Commission intended that,
in the absence of a counterparty, security interest, or other
alternative, netting would only be prohibited across product or service
categories. If the Commission does not grant the clarification, NYISO
requests rehearing, arguing that an ISO/RTO be allowed to net amounts
owed against amounts receivable if supported by the doctrine of
recoupment. NYISO contends that, under the doctrine of recoupment, it
is inequitable for a debtor to enjoy the benefits of a transaction
without also meeting its obligations, so a market participant's
benefits from its sales within a category area are lawfully offset by
its obligations related to its purchases within the same product
category.\25\ NYISO argues that, in the event of a market participant's
bankruptcy, the bankruptcy court would allow netting within a product
or service category under the doctrine of recoupment.
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\25\ NYISO November 19, 2010 Request for Clarification or
Rehearing at 4 (citing In re Peterson Distributing, Inc., 82 F.3d
956 (10th Cir. 1996), and other cases). The New York Transmission
Owners support NYISO's arguments. New York Transmission Owners
December 8, 2010 Answer.
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19. SCE requests a similar clarification, and questions how ``gross
obligations'' is defined. SCE states that the Commission was not clear
whether requiring collateral posted to gross obligations would (i)
allow for netting within a given market but not between markets, (ii)
allow for netting for transactions deemed not to have participated in
the markets (e.g. E-schedules), or (iii) disallow netting both within
markets and across markets and require credit obligations to be
determined on an absolute gross basis.\26\
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\26\ SCE November 22, 2010 Request for Clarification or
Rehearing at 4 (SCE Request).
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20. SCE also requests that the Commission extend the time for
compliance with this tariff revision until October 1, 2012, or
alternatively, clarify that parties may move for an extension of time
if needed.\27\
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\27\ Id. at 5-6.
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21. Morgan Stanley argues that ISOs and RTOs should not require
market participants to post collateral to their gross obligations,
especially if they are netting amounts owed against amounts receivable
under their tariffs. Morgan Stanley contends that requiring collateral
to gross obligations will be very expensive, without corresponding
benefits. Morgan Stanley also asserts that ``other less costly (and at
least as effective) options are available.'' \28\ Morgan Stanley
requests in the
[[Page 10495]]
alternative that if the Commission retains this requirement, then it
should allow higher levels of unsecured credit to ameliorate the
effects of this provision.
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\28\ Morgan Stanley Request at 6, generally 5-7.
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2. Commission Determination
22. The Commission denies rehearing. In Order No. 741, the
Commission established requirements to minimize risk in the event of
bankruptcy (i.e., the options noted in paragraph 117 of Order No. 741,
and described above in paragraph 17) out of concern that the effect of
a default could be exacerbated by a bankruptcy court decision that does
not allow netting. Those concerns exist whether netting is performed
within a market product category or across market categories. A market
administrator must have legal support to net transactions, whether it
serves as a counterparty, has been granted a security interest in the
transactions, or employs some other solution, in the event of a legal
challenge to set-off during a bankruptcy proceeding.\29\ The record
before us does not clearly demonstrate that the availability of netting
will depend on whether it is within or across product categories, and
therefore we deny rehearing on this issue.
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\29\ Section 553 of the Bankruptcy Code, 11 U.S.C. 553, provides
that a creditor may offset payments owed to the debtor against
payments owed by the debtor, under certain circumstances.
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23. Our denial of rehearing is based in part on the testimony we
received during the May 2010 technical conference. In response to
questioning regarding set-off within product markets, Mr. Stephen
Dutton suggested that a bankruptcy court would be most likely to allow
netting within product categories if the ISO or RTO was acting in the
same capacity with respect to amounts owed and amounts owing.\30\ In
response to Mr. Dutton's comments, Mr. Harold Novikoff asserted that
the bankruptcy court would look at a different issue, specifically,
whether the ISO or RTO is a party to the transaction.\31\ Mr. Iskender
Catto reiterated Mr. Novikoff's opinion, indicating that a court would
look first to the identity of the counterparty, then the role served by
the counterparty.\32\ Based on this testimony, we believe that netting
within product categories may put an RTO or an ISO at risk, were it to
not adopt one of remedies we specified in Order No. 741.
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\30\ Testimony at Technical Conference on Credit Reforms in
Organized Wholesale Electric Markets, Tr. 93:2-16 (May 11, 2010)
(Mr. Stephen Dutton, Barnes & Thornburg).
\31\ Id. at 93:20-94:17 (Mr. Harold Novikoff, Wachtell, Lipton,
Rosen & Katz).
\32\ Id. at 94:24-95:11 (Mr. Iskender H. Catto, Kirkland & Ellis
on behalf of the Committee of Chief Risk Officers).
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24. The Commission also denies Morgan Stanley's request for
rehearing on the issue of posting collateral based on gross
obligations; this was merely one option presented in Order No. 741. The
Commission provided two other options to meet its requirements on this
matter and expressed its willingness to consider yet others that can be
shown to provide the same degree of protections as the two other
options set out in Order No. 741. In the absence of the RTO or ISO
taking advantage of such options, it is appropriate that credit
requirements be set based on gross obligations in order to minimize the
risk, and costs, of market participant default and a bankruptcy court
decision refusing to allow netting; anything less would not adequately
protect the market and participants in the markets.
25. As to SCE's request that the Commission delay the required
filing date of a compliance filing regarding this requirement to
October 1, 2012, we believe that such an extension is excessive.
However, we will extend the date for filing tariff revisions to comply
with this requirement related to the ability to offset market
obligations to September 30, 2011, with the relevant tariff revisions
to take effect January 1, 2012.
D. Minimum Criteria for Market Participation
1. Requests for Rehearing
26. APPA, Twin Cities, Six Cities, and Financial Marketers seek
rehearing on the Commission's determination that each ISO and RTO
should include in its tariff language that sets forth specific minimum
participation criteria to be eligible to participate in the organized
wholesale electric market, such as requirements related to adequate
capitalization and risk management controls.\33\
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\33\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 131-34.
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27. APPA requests that the Commission instruct RTOs and ISOs to
avoid unreasonable or onerous conditions on load-serving entities or
provide specific exemptions for them if needed. APPA states that
smaller, public power load-serving entities present ``minimal risk, and
related costs,'' so they should not have to comply with unreasonable or
onerous minimum criteria to participate in the market. Also, a default
by such a participant would not pose a risk of significant market
disruption.\34\
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\34\ APPA Request at 4-9.
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28. Twin Cities request that the Commission provide stronger
guidance on minimum criteria, and require that the criteria be uniform
across ISOs and RTOs. Twin Cities state that market participants that
participate in several markets are burdened by participating in
multiple stakeholder processes and they risk being treated differently
by different markets. Twin Cities request that the Commission establish
the minimum participation criteria, similar to that of the Commodity
Futures Trading Commission (CFTC) and Securities and Exchange
Commission (SEC), based on tangible net worth. Similar criteria,
established by the Commission to apply to all ISO and RTO markets,
would provide regulatory certainty, reduce risk, and promote the goal
of Order No. 741.\35\
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\35\ Twin Cities November 22, 2010 Request for Clarification or
Rehearing at 5-7 (Twin Cities Request).
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29. Six Cities requests that the Commission require that minimum
participation criteria be tiered or calibrated based on the magnitude
of a market participant's positions in the market. Because the size of
a participant's positions has an effect on the size of a risk that it
poses, there should be a correlation between the market participant's
positions and the minimum criteria.\36\
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\36\ Six Cities Request at 3, 10-12. Financial Marketers echo
these comments. Financial Marketers November 22, 2010 Request for
Rehearing at 13 (Financial Marketers Request).
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30. Financial Marketers express concern that the minimum criteria
will exclude small and mid-size companies, virtual traders, and new
entrants from participating in the RTO/ISO markets. They contend that
the Commission has praised such participants,\37\ and that customers in
Midwest ISO have suffered higher prices since Midwest ISO began
discouraging virtual trading by allocating high Revenue Sufficiency
Guarantee (RSG) charges to virtual transactions.\38\ Financial
Marketers further argue that the stakeholder process will not protect
small companies or new entrants, because large utilities will be able
to meet any minimum criteria and have a vested interest in excluding
competition.
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\37\ Financial Marketers Request at 3-4 (citing California
Independent System Operator Corp., 107 FERC ] 61,274 (2004), and
others).
\38\ Id. at 4-5.
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31. Financial Marketers argue that most smaller companies are fully
collateralized, and thus pose no threat. They contend that other
markets rely on collateral requirements to curb market
[[Page 10496]]
risk, and that the CFTC does not require minimum capitalization.\39\
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\39\ Id. at 29-31.
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32. Financial Marketers also note that ISO New England Inc. (ISO-
NE) and PJM Interconnection, LLC (PJM) have previously considered
minimum participation criteria, but abandoned their efforts after
concluding that they would reduce competition, result in greater market
power by existing large companies, and not provide any additional
protections to the market.\40\ Financial Marketers conclude that market
participants have developed businesses based on participation in the
organized wholesale electric markets, and regulations that would
prohibit their participation would result in a regulatory taking that
would require compensation.\41\
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\40\ Id. at 14-15.
\41\ Id. at 32-33.
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2. Commission Determination
33. The Commission denies rehearing. In Order No. 741, the
Commission deferred to stakeholder processes the determination of
reasonable minimum criteria for market participation.\42\ Because no
market participation criteria have yet to be filed, the Commission
cannot determine whether such criteria are or are not reasonable.
However, we note that we did not mandate a single set of criteria for
all participants in a market,\43\ and we see value in Six Cities'
suggestion that stakeholders consider whether some criteria can be
tiered or calibrated based on, for example, the size of a market
participant's positions. Such an approach would allow for
differentiation based on a market participant's characteristics, but
still reduce the market's exposure to the risk of a default. We remind
stakeholders that the Commission will review all criteria, including
both market-wide criteria and any tiered or calibrated criteria, when
such criteria are filed, to ensure that they are just and reasonable
and not unduly discriminatory or preferential.
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\42\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 132-33.
\43\ While we did indicate that criteria should apply to all
market participants rather than only certain participants, see Order
No. 741, FERC Stats. & Regs. ] 31,317 at P 133, our intent was that
there be minimum criteria for all market participants and not that
all market participants necessarily be held to the same minimum
criteria. For some criteria, holding all market participants to the
same minimum criteria may be appropriate. For other criteria,
however, it may be appropriate to hold different participants to
different minimum criteria, e.g., based on the size of the
participants' positions.
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E. Grace Period To ``Cure'' Collateral Posting
1. Requests for Rehearing
34. East Texas Cooperatives request rehearing on the Commission's
establishment of a two-day grace period to ``cure'' a collateral
call.\44\ East Texas Cooperatives assert that the Commission should not
have established a uniform two-day period because it was not supported
by sufficient evidence and the requirement will be onerous for small
market participants with small staffs and constrained budgets. East
Texas Cooperatives argue that most ISOs and RTOs already have two- or
three-day cure periods, and the matter should have been left to their
discretion. Alternatively, the Commission could establish a uniform
three-day ``cure'' period for all entities or, as a last resort, a
three-day period for not-for-profit load-serving entities, such as
cooperatives, municipalities, and other public power entities.
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\44\ Id. P 160-63.
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2. Commission Determination
35. The Commission denies rehearing. In establishing the two-day
cure period in Order No. 741, the Commission carefully weighed the
needs of market participants with the need for the mitigation of
uncertainty when the organized electric wholesale markets are under
stress. As we learned during the financial crisis, a market
administrator may request additional collateral when the market is
under stress. As a result, timely cure of a collateral deficiency is
critical. We also note that the CFTC called for a one-day cure period,
while others promoted a three-day cure period, and we found--and
continue to find--that the two-day cure period strikes a reasonable
balance between mitigating uncertainty in the market and providing for
the needs of participants.
F. Regulatory Flexibility Analysis
1. Requests for Rehearing
36. APPA, Six Cities, and Financial Marketers challenge the
Commission's conclusion that Order No. 741 ``will not have a
significant economic impact on a substantial number of small
entities.'' \45\ They contend that the Commission should analyze the
effect of Order No. 741 on small entities, as required by the
Regulatory Flexibility Act (RFA).\46\
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\45\ Id. P 184. The RFA definition of ``small entity'' refers to
the definition provided in the Small Business Act, which defines a
``small business concern'' as a business that is independently owned
and operated and that is not dominant in its field of operation. 5
U.S.C. 601(3) (citing section 3 of the Small Business Act, 15 U.S.C.
632). The Small Business Size Standards component of the North
American Industry Classification System defines a small electric
utility as one that, including its affiliates, is primarily engaged
in the generation, transmission, and/or distribution of electric
energy for sale and whose total electric output for the preceding
fiscal years did not exceed 4 million MWh. 13 CFR 121.201 (2010).
\46\ 5 U.S.C. 601-12.
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37. APPA and Six Cities argue that the Commission erred in
determining that small utilities within the balancing authority area of
an RTO have a choice as to whether to join the RTO. Because large
transmission owners are part of the RTO, they argue, small utilities
must join to obtain necessary transmission and ancillary services. APPA
estimates that more than a thousand public power distribution systems,
plus rural electric cooperatives, are located in states served by RTOs
and are ``small utilities'' within the meaning of RFA. APPA also
contends that public power systems have unique financial constraints
and may not be able to meet the new financial requirements that RTOs
might impose.\47\
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\47\ APPA Request at 10.
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38. In support of its argument, Six Cities cites Aeronautical
Repair Station Ass'n,\48\ in which, they state, the court held that
even though air carriers were the direct objects of the rule
promulgated by the Federal Aviation Administration (FAA), the employees
of the contractors and subcontractors were also subject to the rule.
The D.C. Circuit concluded that the FAA was required to analyze the
effect of the rule on the contractors and subcontractors.\49\ Six
Cities argues that the ISOs and RTOs are analogous to air carriers, and
market participants can be compared to the contractors and
subcontractors which are also directly regulated by the agency's
rule.\50\
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\48\ Aeronautical Repair Station Ass'n, Inc. v. FAA, 494 F.3d
161 (D.C. Cir. 2007).
\49\ Id. at 177.
\50\ Six Cities Request at 6-9.
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39. Financial Marketers argue that the Commission did not properly
analyze the effect of minimum participation criteria on small financial
traders under the RFA. Financial Marketers contend that the
Commission's directives will push small financial traders out of ISO/
RTO markets and prevent market entry by smaller companies.\51\
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\51\ Financial Marketers Request at 18-20.
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2. Commission Determination
40. The RFA requires that, when promulgating a final rule, an
agency must conduct an analysis that includes, among other things,
``(3) a description of and an estimate of the number of small entities
to which the rule will apply or an explanation of why no such estimate
[[Page 10497]]
is available; * * * and (5) a description of the steps the agency has
taken to minimize the significant economic impact on small entities
consistent with the stated objectives of applicable statutes * * *.''
\52\
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\52\ 5 U.S.C. 604(a)(3), (5).
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41. Under the RFA, an agency must consider the economic impact on
entities directly affected and regulated by the subject regulations.
The D.C. Circuit has held that Congress did not, however, intend to
require that the agency ``consider every indirect effect that any
regulation might have on small businesses in any stratum of the
national economy.'' \53\ More recently, the Seventh Circuit compared
the holdings in several cases considering the RFA, including
Aeronautical Repair Station Ass'n, and described the rule as follows:
``Small entities directly regulated by the proposed statute--whose
conduct is circumscribed or mandated--may bring a challenge to the RFA
analysis or certification of an agency. * * * However, when the
regulation reaches small entities only indirectly, they do not have
standing to bring an RFA challenge.'' \54\ The court further stated
that, where the regulation ``expressly'' addresses an entity's actions,
that entity is subject to an RFA analysis, and that, although the
regulation may affect the actions of other entities, those other
entities are not subject to an RFA analysis.\55\
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\53\ Mid-Tex Electric Cooperative v. FERC, 773 F.2d 327, 343
(D.C. Cir. 1985); see also Cement Kiln Recycling Coalition v. EPA,
255 F.3d 855, 868-69 (D.C. Cir. 2001).
\54\ White Eagle Cooperative Association v. Conner, 553 F.3d
467, 480 (7th Cir. 2009).
\55\ Id.
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42. We note at the outset that the regulations adopted in this
proceeding directly apply to RTOs and ISOs only, not small entities,
thus the Commission is not required to assess the impact of the rule on
small entities.\56\ In contrast to Aeronautical Repair Station Ass'n,
in which the regulations expressly required certain actions by small
entities, in this rulemaking, the regulations require specific actions
only by the RTOs and ISOs.\57\ Further, the relevant impact considered
under the RFA is the impact of compliance, including ``the projected
reporting, recordkeeping and other compliance requirements of the
proposed rule.'' \58\ Those obligations are directly imposed on RTOs
and ISOs only, and not market participants.
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\56\ Cement Kiln Recycling Coalition, 255 F.3d at 869.
\57\ Aeronautical Repair Station Ass'n, Inc, 494 F.3d at 177.
\58\ Mid-Tex Electric Cooperative, 773 F.2d at 342 (citing 5
U.S.C. Sec. 603(b)(4) and related legislative history).
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43. Additionally, in issuing Order No. 741, the Commission focused
on protecting the organized wholesale electric markets from default by
a market participant. In the event of a default by a market
participant, the losses related to that default must be socialized
among all other market participants, potentially leading to cascading
defaults, all leading to adverse effects on customers. The Commission
sought to balance measures intended to protect the market and market
participants from the risk of a default against the effect of the
measures on market participants. For instance, in establishing the cap
on unsecured credit,\59\ setting the two-day cure period,\60\ and, on
rehearing, allowing RTOs/ISOs to consider a market participant's level
of participation in the market in setting minimum criteria,\61\ the
Commission has sought to protect the markets and market participants
from the risk of a default, while providing consideration of the needs
of the market participants themselves.
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\59\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 50.
\60\ Id. P 161.
\61\ See supra P 33.
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44. The Commission thus has sought to accommodate market
participants' concerns while still meeting its responsibility to
protect markets to ensure that the resulting rates are just and
reasonable and not unduly discriminatory or preferential under FPA
sections 205 and 206; however, we are not obligated to conduct a
further analysis under the RFA. The regulations promulgated in Order
No. 741 and here direct the actions of the ISOs and RTOs in
administering the organized wholesale electric markets. While the
regulations may indirectly affect other entities--market participants,
including investor-owned utilities, municipalities and cooperatives,
and financial marketers, as well as customers of all kinds--we are not
required to conduct an analysis under the RFA on such entities in this
proceeding.
45. Furthermore, by requiring tariff revisions to protect the
markets and market participants from the risk and resulting cost of
default by others, we are not only protecting market participants from
the risk and resulting costs of default by others, but we are, in
particular, protecting those smaller market participants that are least
able to withstand a default. Smaller market participants have fewer
resources available to them to deal with a default when one occurs, and
thus it is particularly important for smaller market participants that
the Commission put in place measures that minimize the risk of a
default and the resulting cost of a default.
46. Further, we note that ISOs and RTOs are in the best position,
in the first instance, to assess to what extent credit practices, as
implemented in their markets, will have an adverse effect on their
market participants, as well as the potential harm to the market in the
event of a default. Thus, as noted in Order No. 741, ISOs and RTOs may,
through their stakeholder processes, propose specific exemptions for
individual entities whose participation is such that a default would
not risk significant market disruptions.\62\ We also note that, as the
ISOs and RTOs submit their compliance filings, interested persons will
have an opportunity to contest the various revisions as filed for
individual tariffs, and the Commission remains open to comments on the
particular revisions at that time. The Commission, however, will not,
at this time, adopt any exemptions.
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\62\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 165. We
also note that a market participant retains its right to
individually seek an exemption under section 206 of the FPA.
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III. Information Collection Statement
47. The Office of Management and Budget (OMB) regulations require
that OMB approve certain information collection requirements imposed by
an agency.\63\ The revisions in Order No. 741 to the information
collection requirements for ISOs and RTOs were approved under OMB
Control Nos. 1902-0096. While this order clarifies and revises aspects
of the existing information collection requirements, it does not add to
these requirements. Accordingly, a copy of this order will be sent to
OMB for informational purposes only.
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\63\ 5 CFR 1320.11.
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IV. Document Availability
48. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through the Commission's Home Page (http://www.ferc.gov) and
in the Commission's Public Reference Room during normal business hours
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A,
Washington, DC 20426.
49. From the Commission's Home Page on the Internet, this
information is available in the Commission's document management
system, eLibrary. The full
[[Page 10498]]
text of this document is available on eLibrary in PDF and Microsoft
Word format for viewing, printing, and/or downloading. To access this
document in eLibrary, type ``RM10-13'' in the docket number field.
50. User assistance is available for eLibrary and the Commission's
website during normal business hours. For assistance, please contact
FERC Online Support at 1-866-208-3676 (toll free) or 202-502-6652 (e-
mail at [email protected]), or the Public Reference Room at
202-502-8371, TTY 202-502-8659 (e-mail at
[email protected]).
V. Effective Date
51. Changes to Order No. 741 adopted in this order on rehearing
will become effective March 28, 2011.
List of Subjects in 18 CFR Part 35
Electric power rates, Electric utilities, Reporting and
recordkeeping requirements.
By the Commission.
Kimberly D. Bose,
Secretary.
In consideration of the foregoing, the Commission amends part 35,
subchapter B, chapter I, title 18, Code of Federal Regulations, as
follows:
PART 35--FILING OF RATE SCHEDULES AND TARIFFS
0
1. The authority citation for part 35 continues to read as follows:
Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7101-7352.
0
2. Section 35.47 is amended by revising paragraph (a) to read as
follows:
Sec. 35.47 Tariff provisions regarding credit practices in organized
wholesale electric markets.
* * * * *
(a) Limit the amount of unsecured credit extended by an organized
wholesale electric market to no more than $50 million for each market
participant; where a corporate family includes more than one market
participant participating in the same organized wholesale electric
market, the limit on the amount of unsecured credit extended by that
organized wholesale electric market shall be no more than $50 million
for the corporate family.
* * * * *
[FR Doc. 2011-4088 Filed 2-24-11; 8:45 am]
BILLING CODE 6717-01-P