135 FERC ¶ 61,242 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Before Commissioners: Jon Wellinghoff, Chairman; 

 Marc Spitzer, Philip D. Moeller, 

 John R. Norris, and Cheryl A. LaFleur. 

Credit Reforms in Organized 

Wholesale Electric Markets 

Docket No. RM10-13-002 

ORDER NO. 741-B 

ORDER DENYING REHEARING 

(Issued June 16, 2011) 

1. In Order No. 741, the Commission adopted reforms to credit policies used in 

organized wholesale electric power markets, including caps on unsecured credit.1

 

Subsequently, in Order No. 741-A, the Commission granted rehearing as to, as relevant 

here, its establishment in Order No. 741 of a separate cap on unsecured credit for 

corporate families. In the instant order, the Commission denies requests for rehearing of 

its decision in Order No. 741-A to eliminate the separate cap on unsecured credit for 

corporate families. 

Background

2. In Order No. 741, the Commission directed regional transmission organizations 

(RTOs) and independent system operators (ISOs) to revise their tariffs to reflect the 

following reforms: implementation of shortened settlement timeframes, restrictions on 

the use of unsecured credit, elimination of unsecured credit in all financial transmission 

rights (FTR) or equivalent markets, adoption of steps to provide legal support for netting 

and set-off of transactions in the event of bankruptcy, establishment of minimum criteria 

for market participation, clarification regarding the organized markets’ administrators’ 

 1 Credit Reforms in Organized Wholesale Electric Markets, Order No. 741, 75 

FR 65942 (Oct. 21, 2010), FERC Stats. & Regs. ¶ 31,317 (2010), order on reh’g, Order 

No. 741-A, 76 FR 10492 (Feb. 25, 2011), FERC Stats. & Regs. ¶ 31,320 (2011). 
Docket No. RM10-13-002 - 2 - 

ability to invoke “material adverse change” clauses to demand additional collateral from 

participants, and adoption of a two-day grace period for “curing” collateral calls. 

3. In Order No. 741-A, the Commission denied most requests for rehearing, but, as 

relevant here, the Commission granted requests for rehearing as to its establishment of a 

$100 million corporate family cap on unsecured credit. The Commission was persuaded 

that an entity could reconfigure its corporate structure to avoid the Commission-ordered 

$50 million single-entity cap to take advantage of the higher $100 million corporate 

family cap, posing an unacceptable risk to the organized wholesale markets. The 

Commission further explained that the default of a single market participant could result 

in a significant cumulative unsecured exposure if the Commission allowed the higher 

corporate family cap, and that socializing such losses to other market participants could 

result in an even more significant market disruption than if the default were by a single 

market participant. Thus, the Commission found that the limit on the use of unsecured 

credit should be no more than $50 million per entity, including the corporate family to 

which an entity belongs.2

4. Requests for rehearing were filed by the Designated PJM Transmission Owners 

(PJM TOs),3

 Duke Energy Corporation (Duke), and Edison Electric Institute (EEI) 

(collectively, Petitioners). 

Discussion

A. Requests for Rehearing

5. Petitioners all request rehearing solely on the issue of the Commission’s decision 

to reduce the cap for corporate families from $100 million to $50 million. They argue 

that the Commission’s decision was arbitrary and capricious, and based on speculative 

concerns not supported by evidence. Both EEI and PJM TOs argue that there is no 

evidence that a market participant would create special entities to qualify for the 

$100 million cap and that it is unlikely that an entity would restructure to take advantage 

of the $100 million cap. EEI states that there are significant regulatory requirements 

placed on corporate restructuring, especially for investor-owned utilities. EEI also argues 

that there is no evidence that a market participant and its affiliates would operate in every 

 2

 Order No. 741-A, FERC Stats. & Regs. ¶ 31,320 at P 9. 

3

 PJM TOs, which are owners or affiliates of owners of transmission in PJM 

Interconnection, L.L.C. (PJM), include: American Electric Power Service Corporation; 

Exelon Corporation; FirstEnergy Service Company; Public Service Electric and Gas 

Company; and Virginia Electric and Power Company. 
Docket No. RM10-13-002 - 3 - 

RTO or ISO market and thus could aggregate unsecured credit allowances up to 

$600 million. 

6. EEI further argues that there are already RTO and ISO credit policies and 

procedures in place to manage any risks associated with unsecured credit. EEI contends 

that RTO and ISO credit policies have been developed through stakeholder processes and 

thus meet the needs of market participants and consumers and can be re-evaluated as 

needed. EEI further contends that the Commission’s decision fails to take into account 

the fact that different entities place different risks on the markets. EEI argues that 

utilities that are affiliated with large holding companies are not likely to have created the 

market risks that the Commission is correcting, but will incur increased costs that will be 

passed on to customers. 

7. PJM TOs similarly argue that the increased costs of liquidity to large utility 

companies with multiple operating affiliates participating in the markets will be 

substantial. By way of example, PJM TOs note that each of Exelon’s three corporate 

entities has a $33 million unsecured credit limit. If these three companies post collateral 

for credit over a $50 million cap, then PJM TOs state that the costs of maintaining the 

necessary level of liquidity to do business would increase by over $1 million.4

 It argues 

that these additional costs are not justified, given that Exelon’s current risk profile 

supports the current amount of unsecured credit for its three affiliates. It also argues that 

the Commission failed to give sufficient consideration to the safeguards currently 

afforded to market participants by RTOs and ISOs. 

B. Commission Determination

8. The Commission denies rehearing. The Commission is not persuaded that the 

establishment of a single cap on unsecured credit for all entities of no more than 

$50 million is arbitrary or based on speculative concerns. We note that organized 

commodity markets, both here and abroad, do not use any unsecured credit, and the fact 

that the Commission is allowing the RTOs and ISOs to provide up to $50 million of 

unsecured credit per entity recognizes the differences between the markets. Moreover, 

allowing this level of unsecured credit in the organized wholesale electric markets 

reflects the Commission’s efforts to reasonably manage credit risk while not 

unreasonably raising costs for market participants. 

9. Petitioners argue that it is unlikely that an entity would restructure to take 

advantage of the $100 million cap. We are not persuaded that the need to obtain 

regulatory approvals is a sufficient deterrent to an entity that wants to take advantage of a 

 4

 PJM TOs May 21, 2011 Request for Rehearing at n.18. 
Docket No. RM10-13-002 - 4 - 

 

$100 million corporate family cap, particularly in light of the greater risk that such an 

entity imposes on the organized wholesale markets. Thus, we believe that a risk remains, 

as articulated in Order No. 741-A, that market participants will reconfigure their 

corporate structure to avoid the $50 million single entity cap on unsecured credit. 

10. While it is uncommon for an entity to participate in all jurisdictional markets, 

participation across multiple markets is becoming a more common practice5

 and may 

become an even more common practice in the future, especially as organized wholesale 

markets continue to evolve. This development argues for measures to prevent one large 

entity from causing large cumulative disruptions due to a default where there is a 

$100 million corporate family cap in each market. 

11. The Commission also is not persuaded by Petitioners’ arguments that the potential 

increased costs of doing business are not justified. While the Commission recognizes 

that reducing the use of unsecured credit may increase costs for some market participants, 

it believes that eliminating a separate $100 million corporate family cap in favor of a 

single $50 million cap will help to prevent the even greater costs and market disruptions 

that could result from unsecured credit defaults. As the Commission has stated on 

numerous occasions, managing risk and credit necessarily involves balance. While the 

Commission seeks to assure liquidity, and therefore competition, in the organized 

wholesale markets, it also must take into account the need to mitigate potentially large 

disruptions in these markets through sound credit policy. 

12. Finally, we are not persuaded by Petitioners’ arguments that RTO and ISO credit 

policies and procedures regarding the use of unsecured credit are sufficient to manage 

any risks associated with a higher cap on unsecured credit for a corporate family. In 

Order No. 741, while the Commission recognized that unsecured credit is extended after 

an RTO/ISO has performed a credit analysis, it further noted that the assumptions upon 

which any credit analysis is made can change rapidly.6

 We are not persuaded otherwise. 

5

 According to data submitted in the 2010 fourth quarter Electric Quarterly 

Reports, at least 37 companies trade in four or more RTO/ISO markets. Indeed, 

14 companies trade in five or more RTO/ISO markets. 

6

 Order No. 741, FERC Stats. & Regs. ¶ 31,317 at P 50. 
Docket No. RM10-13-002 - 5 - 

The Commission orders: 

The requests for rehearing are denied as discussed in the body of this order. 

By the Commission. 

( S E A L ) 

Kimberly D. Bose, 

Secretary.