By Michael A. Yuffee, Joseph B. Williams and Christopher J. Polito of McDermott Will & Emery LLP, Washington, D.C.
Washington, D.C., February 3, 2010 – On January 21, 2010, the Federal Energy Regulatory Commission issued a notice of proposed rulemaking on credit reforms for the organized electric markets.
The proposed rule, credit reforms in the organized wholesale electric markets, outlines a series of credit practices aimed at promoting market confidence and reducing the risk of defaults.
According to FERC Chairman Jon Wellinghoff, FERC has “been monitoring and improving the credit practices in the organized markets to enhance market efficiency and consumer protection.”
FERC requested comments on the following proposed credit practices:
Shortening the settlement cycle: The proposed rule limits the settlement cycle to seven calendar days and final payment to an additional seven days. FERC also requested comments on the practicality of moving to daily settlements within one year of implementing the seven-day cycle.
Use of unsecured credit: The proposed rule caps unsecured credit at $50 million per market participant in energy markets. FERC requested comments on an aggregated cap for corporate families and whether there should be different caps for different markets. Further, it requested comments on eliminating unsecured credit under a daily settlement cycle.
Financial transmission rights markets: The proposed rule eliminates unsecured credit in financial transmission rights markets.
Ability to offset market obligations: The proposed rule would require that administrators of organized markets be parties to each transaction in their markets with the purpose of clarifying their ability to manage defaults and offset market obligations.
Minimum criteria for market participation: The proposed rule aims to create minimum participation requirements, such as ensuring adequate capitalization and risk management capabilities, which FERC noted could be outsourced subject to verification.
Material adverse change: The proposed rule seeks clarification regarding the triggers for a “material adverse change” that would require a market participant to post additional collateral.
Grace period to cure collateral posting: FERC requested comments on the timeframe allowed for “cure” – posting additional collateral when requested by a market administrator – which can be as short as two business days under some market rules.
If adopted, these reforms would be implemented by regional transmission operators and independent system operators in tariff revisions. Comments on the proposed rule are due 60 days after publication in the Federal Register.
Michael A. Yuffee is a partner in the law firm of McDermott Will & Emery LLP based in the Firm’s Washington, D.C. office. As a member of the Energy and Derivatives Markets Group, Michael represents wholesale power marketers, financial institutions, merchant generators and integrated energy companies in a variety of regulatory, investigation, litigation and transactional matters. Mr. Yuffee can be reached at +1 202 756 8066
Joseph B. Williams is a partner in the law firm of McDermott Will & Emery LLP and is based in the Washington, D.C. office. He is a member of the Firm’s Energy and Derivatives Markets Practice Group, where he focuses on energy markets and trading and bankruptcy matters. Mr. Williams can be reached at +1 202 756 8236
Christopher J. Polito* is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office. As a member of the Energy and Derivatives Markets and Global Renewable Energy, Emissions and New Products Groups, C.J. focuses his practice on representing energy and commodity companies, financial institutions and trade associations in a variety of transactional, regulatory and risk management matters. Mr. Polito can be reached at +1 202 756 8168