On September 21, 2023, the Commission issued separate orders on show cause proceedings finding that the existing tariffs of the California Independent System Operator Corporation (“CAISO”), ISO New England Inc. (“ISO-NE”), and the New York Independent System Operator, Inc. (“NYISO”) remain just and reasonable as to their collateral requirements for financial transmission rights (“FTR”) market participants. On the contrary, the Commission continued to find that Southwest Power Pool, Inc.’s (“SPP”) tariff appears to be unjust, unreasonable, and unduly discriminatory and therefore directed further briefing on a list of specific questions or for SPP to explain what changes to its tariff it believes would remedy the concerns identified by the Commission, within 60 days of the order.
On July 28, 2022, the Commission issued a show cause order indicating that CAISO’s, ISO-NE’s, NYISO’s, and SPP’s tariffs appear to be unjust and unreasonable because they lack certain credit risk management practices (the “Show Cause Orders”). More specifically, FERC found the tariffs were lacking in: 1) mark-to-auction mechanisms for the calculation of 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 Region Transmission Operator/Independent System Operator (“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. For more information on the show cause orders, see August 8, 2022 edition of the WER.
Regarding the September 2023 orders, the Commission determined that the currently effective CAISO, ISO-NE, and NYISO tariffs remained just and reasonable because the existing measures in the tariffs addressed the Commission’s initial concerns as expressed in the Show Cause Orders. Specifically, the Commission determined the following for each respective RTO/ISO. For CAISO, the Commission determined that because CAISO’s tariff uses a mark-to-auction valuation to address the risk that a Congestion Revenue Rights (CRR) portfolio may decline in value over time this approach mitigates the default risk of an FTR portfolio as it updates the collateral requirements to reflect the most recent valuation of the CRR position. Regarding ISO-NE, the Commission determined that ISO-NE’s tariff remained just and reasonable in the absence of a volumetric alternative minimum collateral requirement because ISO-NE’s alternative approach adequately scaled a participant’s required posted collateral with a participant’s FTR portfolio, based on the risk tied to each individual FTR path. Lastly, with respect to NYISO, the Commission similarly determined that its tariff remained just and reasonable because existing measures include an alternative approach that ensures that market participants maintain some minimal level of collateral that scales with the size of their FTR portfolio and cannot minimize their required collateral without correspondingly reducing their risk. Accordingly, the Commission terminated the show cause proceedings against CAISO, ISO-NE, and NYISO.
On the other hand, the Commission continued to find that SPP’s tariff appears to be unjust and unreasonable in the absence of a mark-to-auction collateral requirement or comparable alternative for FTR within its credit policies. The Commission explained that SPP’s current Transmission Congestion Rights (“TCR”) collateral requirements may be unjust and unreasonable because SPP’s existing reference price methodology does not incorporate updated TCR portfolio valuations and thus they fail to incorporate the increased risk of default that results from a TCR portfolio that declines in value. Additionally, the Commission expanded the scope of the show cause proceeding to further develop the record and directed SPP to make a filing within 60 days of the order either: (1) to show cause as to why its tariff remains just and reasonable and not unduly discriminatory or preferential and to provide responses to the specific questions; or (2) to explain what changes to its tariff it believes would remedy the identified concerns if the Commission were to determine that the tariff has in fact become unjust and unreasonable or unduly discriminatory or preferential and, therefore, proceeds to establish a replacement rate.