On October 21, 2010, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) released Order No. 741, Credit Reforms in Organized Wholesale Electric Markets.   The new rule finalizes credit reforms to allow for more liquidity while protecting consumer interests.

The organized wholesale markets are energy, transmission and ancillary service markets operated by independent system operators (“ISOs”) and regional transmission organizations (“RTOs”).  Over time the RTOs and ISOs have developed their own credit practices, but since market activity is not limited by region, FERC recognized that a default in one organized market could affect the other markets.  Thus, FERC issued a notice of proposed rulemaking in January of this year.

The new rule will require:

  • shortened settlement timeframes where the billing and payment period are no more than seven days each;
  • unsecured credit to be no greater than $50 million per market participant, and no more than $100 million per corporate family;
  • removal of unsecured credit in all financial transmission rights (FTR) markets;
  • RTO and ISO protocols that will not be allow the use netting and set-offs,  
  • establish of minimum criteria for market participation;
  • clarify when the organized market administrators may invoke a “material adverse change” to demand additional collateral; and
  • a standard grace period for collateral calls.

FERC also discussed how market participants may net transactions, and the Commission suggested two alternatives to whether a power market could offset or net deals where a participant has filed for bankruptcy.  FERC said one option is for markets to net transactions by making the market itself a counterparty to the deal, or participants could grant security interests in the transaction to the market. 

Each RTO and ISO will be required to submit a compliance filing with necessary tariff revisions, and the rule will take effect thirty days after publication in the Federal Register.  A copy of the final rule is available at www.ferc.gov and here.