Additional Author: Jason Pham
On June 15, 2023, the US Federal Energy Regulatory Commission (“FERC”) adopted new regulations permitting any independent system operator or regional transmission organization (“ISO” or “RTO,” respectively) to share credit information on any market participant with any other ISO/RTO and requiring ISOs/RTOs to adopt tariffs or similar rules providing for credit information sharing.1
In organized wholesale electric markets, ISOs and RTOs that are regulated under federal law impose a variety of credit requirements on their market participants. These requirements include creditworthiness assessments and detailed provisions on corporate family credit limits and corporate intra-family credit exposure.2
ISOs/RTOs enforce these requirements to manage credit risks in their energy markets. These risks, when left unaddressed, can have substantial consequences for both the market and its participants. Notably, credit risks within ISOs/RTOs are mutualized, such that losses resulting from unrecoverable defaults by one market participant are shared among other participants, exerting financial pressure on the entire market.3 To illustrate, a recent case saw FERC pursuing penalties, refunds, interest, and disgorgements of profits totalling nearly a quarter of a billion dollars against a transmission rights trader in the PJM market.4 FERC alleged that the trader lacked sufficient capital and failed to meet creditworthiness standards. When the trader defaulted on its obligations to the market, other market participants were forced to shoulder the losses.
Generally, ISOs/RTOs were limited by their tariffs to treat credit information on their market participants as confidential and used for specific purposes, effectively restricting ISOs/RTOs from sharing such information with other ISOs/RTOs. However, in Order 895, FERC found that these limitations could hinder the ability of an ISO/RTO to assess and mitigate credit risks in its market, increasing the risks of mutualized defaults, and were therefore unjust and unreasonable and inconsistent with the Federal Power Act. The new regulations:
(1) Permit ISOs/RTOs to share with each other, but not other market participants, credit-related information about any market participant;
(2) Permit an ISO/RTO to use such information to the same extent and for the same purpose as information received from its own market participants; and
(3) Require an ISO/RTO that receives such information from another ISO/RTO to keep that information confidential as it would any other credit-related information received directly from its own market participants.
FERC effectively dismissed all objections and cautionary comments raised in the public comment period preceding Order 895. Stakeholders had argued that the absence of clear definitions, credit risk and default terms, and additional and uniform limitations on the categories of and uses for credit information shared among the ISOs/RTOs would lead to arbitrary information sharing and arbitrary credit decision-making. However, FERC declined to set forth more granular definitions, and FERC did not impose any of the substantive limitations or clarifications requested by any commenting party in the rulemaking proceeding.
Order 895 and its implementing regulation5 will take effect in August or September 2023; the final Federal Register release of the Order has not yet occurred. Each ISO/RTO will then separately propose its own implementing tariff provisions following the completion of its own stakeholder pre-filing consultative processes.
2 Every ISO/RTO has implemented a credit policy. An ISO/RTO typically conducts credit assessments when a new generator is seeking interconnection rights, an entity first seeks membership and market participation rights in the ISO/RTO, periodic (normally annual) membership renewal and reporting is required, or the ISO/RTO elects to review the participant’s credit, normally due to some credit-related event.