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Commission Watch

IOUs, RTOs duke it out over standardization.
Fortnightly Magazine - September 2004

transaction volumes, and credit-risk portfolios.

Dan Santee at Arizona Public Service agreed. He noted that while utility companies do make a quantitative analysis, they need to be free to make a qualitative analysis.

Thomas Foster, director of Investments, Regulatory Finance & Analysis at MidAmerican Energy Co., argued that real harm could come from a standardized FERC policy with no flexibility. If FERC sets up a policy that demands transparency and is cast in stone, then it could keep analysts from doing their jobs and taking into account the individual variations among companies that occur in the evolving marketplace, he said.

Robert Klein, group risk director at PacifiCorp, saw no reason to change the approach used under the OATT. He suggested posting credit-risk policies on OASIS Web sites, adding that universal standardization "is a bad solution to a problem that doesn't exist."

Disagreeing With Utilities

In comments filed in the proceeding, various RTOs/ISOs agreed that standardization is needed (Re Electric Creditworthiness Standards, Docket No. AD04-8-000). The New York ISO strongly supports FERC initiatives to develop creditworthiness standards for certain aspects of the electric industry, based on accepted business practices and trade credit principles. Rooting standards in the familiar framework will help ensure adequate collateral requirements to protect from defaults, the ISO says.

The Southwest Power Pool (SPP) RTO agrees, stating that although standardization generally is beneficial, FERC needs to recognize the need for credit and security differences among the RTO/ISO markets, as it has with other regional variations. SPP adds that generic standards need to be tailored to markets and products of varying stages of development and complexity.

Alan Yoho, California ISO financial systems analyst, also disagrees with the utilities. He says the ISO would like to see a credit policy that includes standardization of criteria for establishing creditworthiness, limits on amount of unsecured credit extended to credit- worthy entities, definitions of default events, enforcement mechanisms, timelines, billing and settlement, and default provider issues. He calls for shortening of the settlement period, which he calls "the most important step the FERC can take right now to minimize credit risks."

Minimizing Risk

FERC is exploring methods to reduce credit/default exposure in RTO/ISO markets. RTOs/ISOs typically are non-profit entities that administer the market on behalf of market participants. Therefore, market participants collectively extend credit to each individual market participant. So if one market participant defaults, the remaining participants must make up the shortfall. And while some RTO/ISO markets use insurance to minimize risks, such insurance can be expensive.

One suggestion for minimizing risk is to shorten the period of time for settlement.

At the technical conference, Patrick McCullar, president and CEO of Delaware Municipal Electric Corp., advocated accelerated settlements only for higher-risk companies.

In their filed comments in the docket, Louisville Gas & Electric Co. and Kentucky Utilities Co., while recognizing that shortening the settlement period would cut the amount of collateral needed, expressed concern that such actions directly would conflict with most bilateral arrangements with settlement terms of "net 20 days."

PJM asserted that shortening the settlement period would be the most difficult and