The PJM Interconnection last week called on FERC to take action to prevent defaults on trades involving financial transmission rights (FTR) positions in the regional transmission organization (RTO), which are leaving its members holding the bag.
PJM has targeted New York-based hedge fund Tower Research Capital LLC and its affiliate Power Edge LLC, an electricity speculator that defaulted on millions of dollars in trades last year and this year. On Jan. 22 Power Edge defaulted on more than $19.9 million due on its net short FTR portfolio, and it defaulted on $16 million that was due on Feb. 20, PJM told the Federal Energy Regulatory Commission in a filing last Monday.
PJM projects that Power Edge will have defaulted on $66-70 million through May of this year. Other companies have defaulted as well. Exel Power Sources LLC is projected to be in default of $4.7-5 million by the end of May; Dell Light Inc., $200,000; and PJS Capital LLC, $1.3-1.7 million, according to the RTO, which coordinates transmission in 13 states and the District of Columbia.
PJM said it expects to file a formal complaint against Tower and its affiliates with FERC “within the next week” seeking disgorgement of profits, refunds and penalties from the company. It also reported that its market monitoring unit is reviewing the trading activity of the Tower companies and may refer the matter to the Commission’s Office of Enforcement.
“This manipulation, to benefit the affiliate [Power Edge], knowingly increased the default allocation faced by the other PJM members. Tower’s actions raise serious concerns under the Commission’s antimanipulation rules,” PJM charged.
In the meantime, it has asked FERC to approve a proposed change to its default allocation provisions of the PJM operating agreement, which would foreclose any opportunity for market participants to game the system and shift the risk of uncovered short FTR trades to other PJM members.
The proposed change would give PJM a limited right to require certain affiliates of a defaulting party to make up the default, and a limited right to apply such affiliates’ posted security to a default to the extent the security relates to its FTR positions.
The Commission rejected a similar request by PJM last October, saying that while the RTO’s existing default rules posed some risk, it saw no reason to immediately approve a change. Within a few weeks of that decision, Power Edge defaulted on payments to PJM, the Baltimore Sun reported in a story earlier this year. Because Power Edge is a limited liability corporation, PJM has little recourse and must spread its losses among its members, it said.
“The issue in this proceeding is whether it is just and reasonable to allocate the cost of defaults from risky FTR trades first to FTR-trading affiliates of the defaulting party rather than pro rata to all PJM members, where the entity controlling the affiliates chose to concentrate its riskiest trades,” PJM noted.
“This [proposed] change is designed simply to close a loophole that might otherwise invite market participants unfairly to take advantage of the default backstop provided the PJM members in the limited case of defaults on FTR counterflow positions.”
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