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FERC Clarifies Credit Policy for Transmission Providers, Grid Operators

FERC Clarifies Credit Policy for Transmission Providers, Grid Operators

FERC last Thursday clarified its credit policy for transmission providers with electric open access transmission tariffs (OATTs), independent system operators (ISOs) and regional transmission organizations (RTOs) through the issuance of a policy statement.

But FERC Commissioner Nora Brownell dissented from the move, arguing that the issue was more appropriately addressed through the rulemaking vehicle available to the federal agency.

"I really think this is kind of one of those issues that is very difficult to get your arms around, but could have an insidious effect on the development of the marketplace," she told reporters following the Commission's regular open meeting.

"Normally, I'm opposed to making more rules, as you know, but in this case I think it's really important that we focus on this....it's not one of those 'end of the world' dissents, but I appreciate chairman's willingness to say, 'look, we'll see what comes in in 90 days and revist this issue.'"

Among other things, the policy statement clarifies certain actions that ISOs and RTOs may take to reduce the impact of a default by a market participant, including shortening settlement periods from quarterly or monthly to weekly and netting obligations between counterparties.

In the policy statement, FERC asks RTOs and ISOs to report back to FERC within 90 days on their progress towards implementing these measures and any other measures to reduce default risk in their markets or, alternatively, their reason for not yet adopting these measures.

"I'll be pleasantly surprised if in 90 days we have lots of filings [that] say, 'Oh yeah, we thought this was a great idea and we've adopted it and it's implemented in the next 30 days,'" Brownell said. "What I suspect we're going to get is, 'We're thinking about it, it's going to through the stakeholder process, et cetera, et cetera."

FERC's clarifications address a number of credit-related issues that have arisen as the electric utility industry has evolved. Setting a clear and transparent policy will help to bring stability, certainty and reduced risk to both the transmission providers and customers, the Commission said.

Competition-driven changes in the electric utility industry have placed more emphasis on credit-related issues. Recent credit downgrades of some market participants have highlighted credit-related risks to transmission providers and ISOs and RTOs, FERC noted. At the same time, certain market participants have alleged that some transmission providers, ISOs and RTOs have sought excessive credit support, foreclosing full market participation by competitive entities and thus hindering development of fully competitive markets, the Commission said.

This week's policy statement order encourages OATT transmission providers, ISOs and RTOs to: (1) make their credit-related procedures and standards more transparent; (2) post on their websites the procedures they use to perform their credit analyses; and (3) provide customers with a written analysis of how the credit procedures and standards are applied to them.

In addition, OATT transmission providers, ISOs and RTOs must consider both qualitative and quantitative measures in assessing credit risk. Qualitative factors might include: an applicant's history; nature of the organization and operating environment; management and contractual obligations; and financial and accounting policies. Among the quantitative factors to be considered are financial statements, profitability, capital structure, and cash flow.

The policy statement is an outgrowth of a July technical conference the Commission held to discuss concerns and propose solutions to credit-related issues, particularly in light of recent price volatility within the energy industry and the downgrade of certain market participants by credit agencies.

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