PJM Completes Analysis of Recent Market Payment Default and Announces Steps to Mitigate Future Risk Exposure

VALLEY FORGE, Pa., Dec. 26 /PRNewswire/ -- Following an analysis of recent payment defaults by two market participants, PJM Interconnection has initiated steps to further prevent future defaults related to Financial Transmission Rights (FTRs).

"PJM continues to be concerned that making market entry attractive to new participants may expose other members to the risk of defaults for under- collateralized positions," said Karl V. Pfirrmann, PJM's interim president and chief executive officer. "While there are inherent risks associated with participating in a competitive market, we recognize the need for a better balance between risk exposure and a more secure playing field for all market participants. Mitigating the impact of these types of defaults in concert with our members will be a high priority for PJM in the coming weeks."

On December 21, PJM submitted a filing to the Federal Energy Regulatory Commission (FERC) credit policy enhancements for FTRs, supported by its Members Committee. The proposal would tighten collateral requirements for FTRs to better reflect congestion volatility based on an evaluation of monthly congestion patterns over the last three years. This would permit PJM to require additional credit collateral as market participants bid on FTRs, instead of waiting until congestion charges occur.

In addition, PJM believes there is a need for additional credit screens for undiversified FTR bidding activity. Those changes will focus on collateral postings for undiversified portfolios and incorporating the projected impact of planned outages on congestion patterns. The changes have not been finalized and will be discussed as part of PJM's stakeholder process, culminating in consideration of the new policy at the January 24, 2008 Members Committee meeting.

The latest default was communicated to members on December 20 and involved Power Edge LLC, which is in default for its November payment on the company's open FTR counterflow positions acquired during the spring 2007 annual FTR auction. The estimated payment default for its November invoice through to May 2008 is $80 million. This default represents 0.3% of the total transactions for 2007 in the PJM marketplace as of the close of the November billing.

The actual payment default may differ from this amount due to many factors that could affect congestion flows, including atypical weather patterns and unplanned transmission or generation outages.

In October, PJM members were notified that another member, Exel Power Sources, LLC was in payment default. Consequently, Exel's aggregate payment default is $4.5 million through November with additional charges likely through May 2008.

PJM had been working prior to the November 2007 payment default to amend credit requirements to mitigate the likelihood of such defaults such as this occurring. . This past year, a proposal to change PJM's credit requirements as applied to counterflow FTR positions was approved in part and denied in part by the Federal Energy Regulatory Commission (FERC). Elements of that filing, which would have mitigated but not eliminated this type of default, were protested by certain market participants. A revised proposal to address those concerns was overwhelmingly approved by PJM stakeholders and comprised the Dec. 21 submission.

"Our position for some time has been that the best opportunity for mitigating potential payment defaults in the FTR market is to require collateral equal to the risk at the time bids are submitted and thereby reduce the exposure to all market participants," Pfirrmann said.

In addition to mitigating defaults in the future, PJM is pursuing the collection of overdue invoices and taking steps to terminate Power Edge's membership. The company's transaction rights already were terminated when it was unable to fulfill a collateral call earlier this month.

As is PJM's practice in responding to out-of-the-ordinary market occurrences, it has asked the PJM Market Monitor to cooperate with the analysis of this situation and review the drivers and impacts of the default on other market participants.

FTRs are financial rights that provide PJM market participants with a hedge against transmission congestion charges in the day-ahead energy market. Counterflow FTRs, which Power Edge LLC purchased, are an opposite hedge for participants. They are financial rights associated with the flow of power on a transmission line flows in the opposite direction of a transmission constraint. A member using the line to transmit power would pay the counterflow FTR purchaser a fee.

In the 2007 annual FTR auction, PJM for the first time saw unprecedented new interest by new participants in bidding solely for counterflow FTR positions. The FTR portfolios of some of the new companies are not as diverse as those of most other market participants and are therefore more vulnerable to changing system conditions. The current credit issues that the PJM market is experiencing are not due to the FTR auction design, but rather the result of the narrowly focused FTR portfolios of these companies and less diverse total market positions taken by these new entrants into the PJM market.

Members of the media who have further questions regarding this issue may call and address questions to Karl Pfirrmann or Vice President of Markets Andrew L. Ott on Wednesday, December 26 from 1 p.m. to 2:30 p.m. Please call the PJM media line at 866-756-6397 to arrange an interview or for more information.

PJM Interconnection ensures the reliability of the high-voltage electric power system serving 51 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region's transmission grid, which includes 6,038 substations and 56,250 miles of transmission lines; administers a competitive wholesale electricity market; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. Visit PJM at www.pjm.com.