On September 21, 2023, the Commission approved, in part, PJM Interconnection L.L.C.’s (“PJM”) proposed tariff revisions regarding the calculation of the Financial Transmission Right (“FTR”) credit requirement (“September Order”). PJM’s revisions, among other things, would calculate collateral based on a historical simulation model (“HSIM”) instead of a historical value model. FERC accepted the proposal with the exception of PJM’s proposed 97% confidence interval in the HSIM model, and instead required PJM to use a 99% confidence interval.

FTRs are financial instruments that allow market participants to hedge or offset potential losses they may incur in the form of congestion charges that may be assessed when price differentials occur between two specified points on the grid. An FTR may be an asset or a liability to its holder, depending on whether the price of electricity between two points is higher or lower than the price indicated in their FTR. To protect the market against the risk of loss if a market participant defaults on its FTR portfolio, all market participants are required to provide collateral. FTR collateral requirements are reflected in the credit requirement provisions of the applicable RTO/ISOs’ tariffs.

On December 21, 2021, under section 205 of the Federal Power Act (“FPA”), PJM proposed to: (1) replace the approach of calculating collateral based on FTR historical value with an initial margin calculation from an HSIM model using a 97% confidence interval; (2) remove the undiversified adder; (3) remove the long-term FTR credit recalculation because prices are updated in real time under the HSIM model; (4) revise the $0.10/MWh volumetric minimum charge to apply after Auction Revenue Rights credits or mark-to-auction value adjustments; and (5) revise the tariff to provide that at the time of settlement, gains result in a decrease to and losses result in an increase to the FTR Credit Requirement. In its filing, PJM explained that it planned to move to a confidence interval of 99% within a reasonable period but that it was giving market participants time to adjust to the new model.

On February 28, 2022, the Commission rejected PJM’s proposal, stating that PJM failed to support the use of a 97% confidence interval. The Commission explained that using a 97% confidence interval would reduce market participants’ aggregate collateral requirement, which may not align with the actual risks of the participants’ positions. The Commission also initiated a FPA section 206 proceeding and required PJM to show cause as to why its existing FTR credit requirement remains just and reasonable or explain what changes to its tariff would remedy the Commission’s concerns.

In response, on June 3, 2022, PJM submitted its proposed FTR credit requirement again, but included additional support for the 97% confidence interval by providing results of back-test analyses for two additional months and a cost-benefit analysis comparing the incremental costs and benefits of moving from a 97% to 99% confidence interval. The Commission found that the June filing raised issues of material fact that could not be resolved based on the existing record and established paper hearing procedures, emphasizing its concerns over the proposed 97% confidence interval.

In its September Order, the Commission accepted PJM’s proposal but continued to find that PJM did not meet its section 205 burden to justify a 97% confidence interval because this interval failed to capture the price impact of major, unexpected events such as extreme weather events or power outages. The Commission then found, pursuant to its section 206 authority, that PJM’s existing FTR credit requirement was unjust and unreasonable for failing to properly correlate collateral requirements to portfolio risks. The Commission then established a just and reasonable rate by adopting PJM’s June 2022 proposed FTR credit requirements, with a 99% confidence interval. The Commission concluded that an HSIM model with a 99% confidence interval “strikes an appropriate balance in requiring adequate collateral to protect market participants against the consequences of default without begetting the adverse impacts.”

The Commission provided PJM with a 90-day transition period to implement the 99% confidence interval and required PJM to submit, within 30 days of the order, a compliance filing revising PJM’s tariff to incorporate the proposed revisions and 99% confidence interval.

A copy of the order, issued in Docket No. ER22-703 et al., can be found here.