Document ID: FERC-2011-0288-0001
Agency: ferc
Document Type: Rule
Title: Credit Reforms in Organized Wholesale Electric Markets
Posted Date: 2011-02-25T05:00Z

[Federal Register: February 25, 2011 (Volume 76, Number 38)]
[Rules and Regulations]               
[Page 10492-10498]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25fe11-6]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM10-13-001; Order No. 741-A]

 
Credit Reforms in Organized Wholesale Electric Markets

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing.

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SUMMARY: In this order on rehearing, the Commission reaffirms in part 
its determinations in Credit Reforms in Organized Wholesale Electric 
Markets, Order No. 741, to amend its regulations to improve the 
management of risk and use of credit in the organized wholesale 
electric markets. This order denies in part and grants in part 
rehearing and clarification regarding certain provisions of Order No. 
741.

DATES: Effective Date: This order will become effective on March 28, 
2011.

FOR FURTHER INFORMATION CONTACT:

Christina Hayes (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6194.
Lawrence Greenfield (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6415.
Scott Miller (Technical Information), Office of Energy Policy and 
Innovation, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8456.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Jon Wellinghoff, Chairman; Marc Spitzer, 
Philip D. Moeller, John R. Norris, and Cheryl A. LaFleur.

Order on Rehearing

    1. In Order No. 741, the Commission adopted reforms to credit 
policies used in organized wholesale electric power markets.\1\ In the 
instant order, the Commission addresses requests for rehearing of Order 
No. 741. The Commission grants rehearing as to its establishment of a 
$100 million corporate family cap on unsecured credit and extends the 
deadline for complying with the requirement regarding the ability to 
offset market obligations to September 30, 2011, with the relevant 
tariff revisions to take effect January 1, 2012, but denies rehearing 
in all other respects, as discussed below.
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    \1\ Credit Reforms in Organized Wholesale Electric Markets, 
Order No. 741, 75 FR 65942 (Oct. 21, 2010), FERC Stats. & Regs. ] 
31,317 (2010) (Order No. 741).
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I. Background

    2. As noted in Order No. 741, the Commission must ensure that all 
rates charged for the transmission or sale of electric energy in 
interstate commerce are just, reasonable, and not unduly discriminatory 
or preferential,\2\ and clear and consistent credit policies are an 
important element in ensuring rates that are just, reasonable, and not 
unduly discriminatory or preferential. The management of risk and 
credit requires a balance between protecting the markets from costly 
defaults \3\ and ensuring that barriers to entry for market 
participants are not prohibitive.
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    \2\ 16 U.S.C. 824d, 824e.
    \3\ In organized wholesale electric markets, defaults not 
supported by collateral are typically socialized among all other 
market participants.
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    3. The Commission provided guidance to the industry on appropriate 
credit policies in Order No. 888 \4\ and the Policy Statement on 
Electric Creditworthiness.\5\ Credit policies among the organized 
wholesale electric markets, however, developed in an incremental manner 
leading to varying credit practices. Because these variable practices 
posed a heightened risk to the stability of the organized wholesale 
electric markets, and especially in light of recent events in the 
financial markets, the Commission proposed that the different credit 
practices among the organized wholesale electric markets be 
strengthened.
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    \4\ Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities; Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 
Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ] 
31,036, at 31,937 (1996) (pro forma OATT, section 11 
(Creditworthiness)), order on reh'g, Order No. 888-A, 62 FR 12274 
(Mar. 14, 1997), FERC Stats. & Regs. ] 31,048 (1997), order on 
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, 
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub 
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 
(2002).
    \5\ 109 FERC ] 61,186 (2004) (Policy Statement).
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    4. In Order No. 741, the Commission directed the regional 
transmission organizations (RTO) and independent system operators (ISO) 
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,\6\ adoption 
of steps to address

[[Page 10493]]

the risk that RTOs and ISOs may not be allowed to use netting and set-
offs, establishment of minimum criteria for market participation, 
clarification regarding the organized markets' administrators' 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.
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    \6\ References to FTR markets in this order, as in Order No. 
741, also include the Transmission Congestion Contracts (TCC) 
markets in NYISO and the Congestion Revenue Rights (CRR) markets in 
California Independent System Operator (CAISO).
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    5. Requests for rehearing were filed by the New York Independent 
System Operator, Inc. (NYISO), Morgan Stanley Capital Group Inc. 
(Morgan Stanley), Financial Marketers,\7\ the American Public Power 
Association (APPA), East Texas Cooperatives, Six Cities,\8\ Midwest 
Transmission Dependent Utilities (Midwest TDUs),\9\ Twin Cities,\10\ 
and Southern California Edison Company (SCE). The New York Transmission 
Owners filed an answer.\11\
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    \7\ Financial Marketers are comprised of Energy Endeavors LP, 
Big Bog Energy, LP, Gotham Energy Marketing, LP, Rockpile Energy, 
LP, Coaltrain Energy, LP, Longhorn Energy, LP, GRG Energy, LLC, MET 
MA, LLC, Pure Energy, Inc., Red Wolf Energy Trading, LLC, Jump 
Power, LLC, Silverado Energy LP, JPTC, LLC, Blue Star Energy, LLC, 
and Tower Research Capital LLC.
    \8\ Six Cities are comprised of the Cities of Anaheim, Azusa, 
Banning, Colton, Pasadena, and Riverside, California.
    \9\ Midwest TDUs are comprised of Indiana Municipal Power 
Agency, Madison Gas & Electric Company, Missouri River Energy 
Services, Southern Minnesota Municipal Power Agency and WPPI Energy.
    \10\ Twin Cities are comprised of Twin Cities Power, LLC, Twin 
Cities Energy, LLC, TC Energy Trading, LLC, Cygnus Energy Futures, 
LLC, and Summit Energy, LLC.
    \11\ The New York Transmission Owners are comprised of Central 
Hudson Gas & Electric Corporation, Consolidated Edison Company of 
New York, Inc., Long Island Power Authority, New York Power 
Authority, New York State Electric & Gas Corporation, Niagara Mohawk 
Power Corporation d/b/a National Grid, Orange and Rockland 
Utilities, Inc., and Rochester Gas and Electric Corporation.
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II. Discussion

A. Use of Unsecured Credit

1. Requests for Rehearing
    6. Six Cities and Morgan Stanley seek rehearing of the Commission's 
requirement that each ISO and RTO revise its tariff provisions to 
reduce the extension of unsecured credit to no more than $50 million 
per market participant and $100 million per corporate family.\12\
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    \12\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 49-57.
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    7. Morgan Stanley argues that the Commission should eliminate the 
$50 million market participant cap. Morgan Stanley contends that the 
separate caps--$50 million for a market participant and $100 million 
for a corporate family--will encourage entities to reconfigure their 
corporate structures to avoid the $50 million per entity cap and 
instead use the $100 million corporate family cap. Morgan Stanley 
asserts that such a structure will increase costs to market 
participants, making the $50 million cap illusory and generating 
unnecessary burdens for ISOs and RTOs without a corresponding 
benefit.\13\
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    \13\ Morgan Stanley, November 22, 2010 Request for Rehearing at 
4-5 (Morgan Stanley Request).
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    8. Conversely, Six Cities argue that the Commission should 
eliminate the $100 million corporate family cap. They assert that the 
Commission did not provide a rational explanation for permitting 
affiliated entities to impose a greater degree of risk than individual 
entities, and so should not have allowed the $100 million corporate 
family cap. Six Cities also argues that the $100 million corporate 
family cap could run up to $600 million if there was a default in every 
ISO/RTO.\14\
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    \14\ Six Cities November 19, 2010 Request for Rehearing at 12-14 
(Six Cities Request).
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2. Commission Determination
    9. The Commission grants rehearing on this issue. Specifically, the 
Commission is persuaded that an entity reconfiguring its corporate 
structure, to avoid the $50 million single-entity cap and to instead 
take advantage of the $100 million corporate family cap, raises a 
significant risk that is inconsistent with Order No. 741's intent to 
lower risk. Additionally, the Commission has taken into consideration 
Six Cities' point that affiliated entities should not be able to impose 
a greater risk to the stability of organized wholesale markets than 
individual entities. We agree that the cumulative danger posed by a 
$100 million corporate family cap on the use of unsecured credit poses 
an unacceptable risk to the organized wholesale electric markets; many 
market participants either themselves or through subsidiaries 
participate in multiple markets. We agree with Six Cities that the 
default of a single entity could result in a significant cumulative 
unsecured exposure if we were to allow the higher $100 million 
corporate cap for unsecured credit originally permitted in Order No. 
741. Socializing such losses to other market participants could lead to 
even more significant market disruption than merely the default of a 
single entity. The Commission therefore grants rehearing and finds 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.\15\ This is the approach originally suggested by the 
Commission in its Notice of Proposed Rulemaking \16\ and the Commission 
is persuaded it should return to this proposal.
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    \15\ While a corporate family may choose to have a single member 
company participate in an RTO/ISO's market, or instead opt to have 
more than one do so, in either case, the single entity or multiple 
entities together will have a cap of no more than $50 million.
    \16\ See Credit Reforms in Organized Wholesale Electric Markets, 
Notice of Proposed Rulemaking, 75 FR 4310 (Jan. 27, 2010), FERC 
Stats. & Regs. ] 32,651, at P 19 (2010).
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B. Elimination of Unsecured Credit for Financial Transmission Rights 
Markets

1. Requests for Rehearing
    10. APPA, Midwest TDUs, and Six Cities request rehearing on the 
Commission's elimination of unsecured credit in the FTR markets.\17\ 
They argue that the Commission erred in eliminating unsecured credit 
for all participants, particularly load-serving entities.
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    \17\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 70-79.
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    11. APPA and Midwest TDUs argue that the elimination of unsecured 
credit in FTR markets will make it financially prohibitive for load-
serving entities to obtain and hold long-term FTRs of ten years or more 
(LTTR).\18\ They contend that this is inconsistent with the 
Commission's responsibilities, under section 217(b)(4) of the Federal 
Power Act (FPA) \19\ and Order No. 681,\20\ to enable load-serving 
entities to secure firm transmission rights on a long-term basis for 
long-term power supply arrangements to serve their load. At a minimum, 
they contend, the Commission should direct RTOs and ISOs to implement 
Order No. 741 in compliance with section 217(b)(4) and Order No. 681. 
Further, APPA and Midwest TDUs argue that they be allowed to request 
exemptions under Order No. 741 to ensure that a load-serving entity's 
access to LTTRs is not impaired.
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    \18\ APPA November 19, 2010 Request for Rehearing at 1-3, 4-9 
(APPA Request); Midwest TDUs November 22, 2010 Request for Rehearing 
(Midwest TDUs Request).
    \19\ 16 U.S.C. 824q(b)(4).
    \20\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Order No. 681, FERC Stats. & Regs. ] 31,226, reh'g denied, 
Order No. 681-A, 117 FERC ] 61,201 (2006).
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    12. Midwest TDUs further argue that ISOs and RTOs manage risk in 
the FTR markets by determining the creditworthiness of individual FTR 
market participants. Moreover, Midwest TDUs contend that load-serving 
entities are less of a credit risk because their bond resolutions give 
explicit payment

[[Page 10494]]

priority to energy and transmission market service providers over 
bondholders, in effect giving RTOs/ISOs a security interest in their 
accounts receivable. APPA also contends that, although the Commission 
noted the challenges in valuing FTRs, the Commission did not provide 
guidance in how to address that issue.
    13. Six Cities contends that the Commission should not have 
eliminated unsecured credit for all types and holders of FTRs. Six 
Cities notes that the CAISO has two types of FTRs: allocated CRRs, 
which are used by load-serving entities to hedge congestion costs for 
purchases to serve the needs of native load customers, and auctioned 
CRRs, which may be purchased by any entity that satisfies CAISO's 
qualification criteria. Six Cities argues that CAISO should be allowed 
to differentiate between the two categories in setting credit 
requirements. Specifically, Six Cities argues that load-serving 
entities have no obligation to pay for allocated CRRs, thus cannot 
default. By eliminating unsecured credit for all FTRs without regard to 
the purpose for purchase, Six Cities argues that the Commission's 
decision is not reasoned decision-making as required by the 
Administrative Procedures Act.\21\
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    \21\ Six Cities Request at 3, 10-12 (citing Petal Gas Storage, 
L.L.C. v. FERC, 496 F.3d 695, 698 (D.C. Cir. 2007), and others).
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2. Commission Determination
    14. The Commission denies rehearing. The Commission is not 
persuaded that the elimination of unsecured credit in the FTR markets 
is inconsistent with the statutory directive to facilitate access to 
long-term FTRs. While section 217(b)(4) directs us to exercise our 
authority under the FPA to ``enable[ ] load-serving entities'' to 
``secure'' FTRs ``on a long-term basis,'' the statute does not require 
that we guarantee the availability of unsecured credit, and does not 
require that we ignore the risks posed by the use of unsecured credit. 
Denying unsecured credit does not prohibit load-serving entities from 
securing long-term FTRs, but rather merely requires use of some other 
form of financing, e.g., the use of secured credit or the posting of 
collateral. Moreover, there is nothing in the record to indicate that 
acquisition of long-term FTRs will be prohibitively expensive. Our 
reason for eliminating reliance on unsecured credit in the FTR markets 
is to reduce risk to market participants, including risk to those 
market participants that are load-serving entities. Those seeking 
rehearing on this issue have failed to demonstrate that this risk can 
and should be so readily discounted.
    15. Nor is the Commission persuaded that unsecured credit in FTR 
markets should be allowed for certain market participants based on the 
``purpose'' of the entity engaging in the FTR market. The FTR market 
exists to hedge, i.e., manage, risk, but there are no guarantees that 
such hedges, even for load-serving entities, will themselves have no 
risk. The risk of adverse FTR market outcomes and potential effects on 
market participants led us to take these actions initially, and are no 
more or less applicable to some participants than others based on the 
``purpose'' of the participant.\22\ Finally, to the extent that certain 
FTRs have inherently low risk, we expect that the RTO and ISO's credit 
modeling will result in relatively low collateral requirements.
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    \22\ The analysis in this paragraph, and the prior paragraph, 
explains why, as a generic matter, we will not allow exemptions from 
this requirement of Order No. 741.
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    16. As to the question of how FTRs are valued, as we stated in 
Order No. 741, this issue is beyond the scope of this proceeding.\23\ 
Regarding the Midwest TDUs' argument that where bond resolutions give 
explicit payment priority to energy and transmission market service 
providers over bondholders, in effect giving RTOs/ISOs a security 
interest in their accounts receivable, first, it is not clear that such 
payment priority would apply in the event of a default in an FTR 
market. Furthermore, we are not persuaded that giving such payment 
priority would provide a level of security comparable to the 
elimination of reliance on unsecured credit.
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    \23\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 76.
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C. Ability To Offset Market Obligations

1. Requests for Rehearing
    17. Morgan Stanley, SCE, NYISO, and the New York Transmission 
Owners seek rehearing of the Commission's directive that, if an ISO/RTO 
wishes to allow netting of amounts owed to a market participant against 
amounts owed by that participant, the ISO/RTO must revise its tariff to 
include one of the following options: (1) Establish a central 
counterparty; (2) require market participants to provide a security 
interest in their transactions in order to establish collateral 
requirements based on net exposure; or (3) propose another alternative, 
which provides the same degree of protection as the two above-mentioned 
methods.\24\
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    \24\ Id. P 116-22. The Commission also left open the possibility 
of setting credit requirements based on gross obligations. Id.
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    18. NYISO requests clarification that the Commission intended that, 
in the absence of a counterparty, security interest, or other 
alternative, netting would only be prohibited across product or service 
categories. If the Commission does not grant the clarification, NYISO 
requests rehearing, arguing that an ISO/RTO be allowed to net amounts 
owed against amounts receivable if supported by the doctrine of 
recoupment. NYISO contends that, under the doctrine of recoupment, it 
is inequitable for a debtor to enjoy the benefits of a transaction 
without also meeting its obligations, so a market participant's 
benefits from its sales within a category area are lawfully offset by 
its obligations related to its purchases within the same product 
category.\25\ NYISO argues that, in the event of a market participant's 
bankruptcy, the bankruptcy court would allow netting within a product 
or service category under the doctrine of recoupment.
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    \25\ NYISO November 19, 2010 Request for Clarification or 
Rehearing at 4 (citing In re Peterson Distributing, Inc., 82 F.3d 
956 (10th Cir. 1996), and other cases). The New York Transmission 
Owners support NYISO's arguments. New York Transmission Owners 
December 8, 2010 Answer.
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    19. SCE requests a similar clarification, and questions how ``gross 
obligations'' is defined. SCE states that the Commission was not clear 
whether requiring collateral posted to gross obligations would (i) 
allow for netting within a given market but not between markets, (ii) 
allow for netting for transactions deemed not to have participated in 
the markets (e.g. E-schedules), or (iii) disallow netting both within 
markets and across markets and require credit obligations to be 
determined on an absolute gross basis.\26\
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    \26\ SCE November 22, 2010 Request for Clarification or 
Rehearing at 4 (SCE Request).
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    20. SCE also requests that the Commission extend the time for 
compliance with this tariff revision until October 1, 2012, or 
alternatively, clarify that parties may move for an extension of time 
if needed.\27\
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    \27\ Id. at 5-6.
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    21. Morgan Stanley argues that ISOs and RTOs should not require 
market participants to post collateral to their gross obligations, 
especially if they are netting amounts owed against amounts receivable 
under their tariffs. Morgan Stanley contends that requiring collateral 
to gross obligations will be very expensive, without corresponding 
benefits. Morgan Stanley also asserts that ``other less costly (and at 
least as effective) options are available.'' \28\ Morgan Stanley 
requests in the

[[Page 10495]]

alternative that if the Commission retains this requirement, then it 
should allow higher levels of unsecured credit to ameliorate the 
effects of this provision.
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    \28\ Morgan Stanley Request at 6, generally 5-7.
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2. Commission Determination
    22. The Commission denies rehearing. In Order No. 741, the 
Commission established requirements to minimize risk in the event of 
bankruptcy (i.e., the options noted in paragraph 117 of Order No. 741, 
and described above in paragraph 17) out of concern that the effect of 
a default could be exacerbated by a bankruptcy court decision that does 
not allow netting. Those concerns exist whether netting is performed 
within a market product category or across market categories. A market 
administrator must have legal support to net transactions, whether it 
serves as a counterparty, has been granted a security interest in the 
transactions, or employs some other solution, in the event of a legal 
challenge to set-off during a bankruptcy proceeding.\29\ The record 
before us does not clearly demonstrate that the availability of netting 
will depend on whether it is within or across product categories, and 
therefore we deny rehearing on this issue.
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    \29\ Section 553 of the Bankruptcy Code, 11 U.S.C. 553, provides 
that a creditor may offset payments owed to the debtor against 
payments owed by the debtor, under certain circumstances.
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    23. Our denial of rehearing is based in part on the testimony we 
received during the May 2010 technical conference. In response to 
questioning regarding set-off within product markets, Mr. Stephen 
Dutton suggested that a bankruptcy court would be most likely to allow 
netting within product categories if the ISO or RTO was acting in the 
same capacity with respect to amounts owed and amounts owing.\30\ In 
response to Mr. Dutton's comments, Mr. Harold Novikoff asserted that 
the bankruptcy court would look at a different issue, specifically, 
whether the ISO or RTO is a party to the transaction.\31\ Mr. Iskender 
Catto reiterated Mr. Novikoff's opinion, indicating that a court would 
look first to the identity of the counterparty, then the role served by 
the counterparty.\32\ Based on this testimony, we believe that netting 
within product categories may put an RTO or an ISO at risk, were it to 
not adopt one of remedies we specified in Order No. 741.
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    \30\ Testimony at Technical Conference on Credit Reforms in 
Organized Wholesale Electric Markets, Tr. 93:2-16 (May 11, 2010) 
(Mr. Stephen Dutton, Barnes & Thornburg).
    \31\ Id. at 93:20-94:17 (Mr. Harold Novikoff, Wachtell, Lipton, 
Rosen & Katz).
    \32\ Id. at 94:24-95:11 (Mr. Iskender H. Catto, Kirkland & Ellis 
on behalf of the Committee of Chief Risk Officers).
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    24. The Commission also denies Morgan Stanley's request for 
rehearing on the issue of posting collateral based on gross 
obligations; this was merely one option presented in Order No. 741. The 
Commission provided two other options to meet its requirements on this 
matter and expressed its willingness to consider yet others that can be 
shown to provide the same degree of protections as the two other 
options set out in Order No. 741. In the absence of the RTO or ISO 
taking advantage of such options, it is appropriate that credit 
requirements be set based on gross obligations in order to minimize the 
risk, and costs, of market participant default and a bankruptcy court 
decision refusing to allow netting; anything less would not adequately 
protect the market and participants in the markets.
    25. As to SCE's request that the Commission delay the required 
filing date of a compliance filing regarding this requirement to 
October 1, 2012, we believe that such an extension is excessive. 
However, we will extend the date for filing tariff revisions to comply 
with this requirement related to the ability to offset market 
obligations to September 30, 2011, with the relevant tariff revisions 
to take effect January 1, 2012.

D. Minimum Criteria for Market Participation

1. Requests for Rehearing
    26. APPA, Twin Cities, Six Cities, and Financial Marketers seek 
rehearing on the Commission's determination that each ISO and RTO 
should include in its tariff language that sets forth specific minimum 
participation criteria to be eligible to participate in the organized 
wholesale electric market, such as requirements related to adequate 
capitalization and risk management controls.\33\
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    \33\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 131-34.
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    27. APPA requests that the Commission instruct RTOs and ISOs to 
avoid unreasonable or onerous conditions on load-serving entities or 
provide specific exemptions for them if needed. APPA states that 
smaller, public power load-serving entities present ``minimal risk, and 
related costs,'' so they should not have to comply with unreasonable or 
onerous minimum criteria to participate in the market. Also, a default 
by such a participant would not pose a risk of significant market 
disruption.\34\
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    \34\ APPA Request at 4-9.
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    28. Twin Cities request that the Commission provide stronger 
guidance on minimum criteria, and require that the criteria be uniform 
across ISOs and RTOs. Twin Cities state that market participants that 
participate in several markets are burdened by participating in 
multiple stakeholder processes and they risk being treated differently 
by different markets. Twin Cities request that the Commission establish 
the minimum participation criteria, similar to that of the Commodity 
Futures Trading Commission (CFTC) and Securities and Exchange 
Commission (SEC), based on tangible net worth. Similar criteria, 
established by the Commission to apply to all ISO and RTO markets, 
would provide regulatory certainty, reduce risk, and promote the goal 
of Order No. 741.\35\
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    \35\ Twin Cities November 22, 2010 Request for Clarification or 
Rehearing at 5-7 (Twin Cities Request).
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    29. Six Cities requests that the Commission require that minimum 
participation criteria be tiered or calibrated based on the magnitude 
of a market participant's positions in the market. Because the size of 
a participant's positions has an effect on the size of a risk that it 
poses, there should be a correlation between the market participant's 
positions and the minimum criteria.\36\
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    \36\ Six Cities Request at 3, 10-12. Financial Marketers echo 
these comments. Financial Marketers November 22, 2010 Request for 
Rehearing at 13 (Financial Marketers Request).
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    30. Financial Marketers express concern that the minimum criteria 
will exclude small and mid-size companies, virtual traders, and new 
entrants from participating in the RTO/ISO markets. They contend that 
the Commission has praised such participants,\37\ and that customers in 
Midwest ISO have suffered higher prices since Midwest ISO began 
discouraging virtual trading by allocating high Revenue Sufficiency 
Guarantee (RSG) charges to virtual transactions.\38\ Financial 
Marketers further argue that the stakeholder process will not protect 
small companies or new entrants, because large utilities will be able 
to meet any minimum criteria and have a vested interest in excluding 
competition.
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    \37\ Financial Marketers Request at 3-4 (citing California 
Independent System Operator Corp., 107 FERC ] 61,274 (2004), and 
others).
    \38\  Id. at 4-5.
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    31. Financial Marketers argue that most smaller companies are fully 
collateralized, and thus pose no threat. They contend that other 
markets rely on collateral requirements to curb market

[[Page 10496]]

risk, and that the CFTC does not require minimum capitalization.\39\
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    \39\ Id. at 29-31.
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    32. Financial Marketers also note that ISO New England Inc. (ISO-
NE) and PJM Interconnection, LLC (PJM) have previously considered 
minimum participation criteria, but abandoned their efforts after 
concluding that they would reduce competition, result in greater market 
power by existing large companies, and not provide any additional 
protections to the market.\40\ Financial Marketers conclude that market 
participants have developed businesses based on participation in the 
organized wholesale electric markets, and regulations that would 
prohibit their participation would result in a regulatory taking that 
would require compensation.\41\
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    \40\  Id. at 14-15.
    \41\ Id. at 32-33.
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2. Commission Determination
    33. The Commission denies rehearing. In Order No. 741, the 
Commission deferred to stakeholder processes the determination of 
reasonable minimum criteria for market participation.\42\ Because no 
market participation criteria have yet to be filed, the Commission 
cannot determine whether such criteria are or are not reasonable. 
However, we note that we did not mandate a single set of criteria for 
all participants in a market,\43\ and we see value in Six Cities' 
suggestion that stakeholders consider whether some criteria can be 
tiered or calibrated based on, for example, the size of a market 
participant's positions. Such an approach would allow for 
differentiation based on a market participant's characteristics, but 
still reduce the market's exposure to the risk of a default. We remind 
stakeholders that the Commission will review all criteria, including 
both market-wide criteria and any tiered or calibrated criteria, when 
such criteria are filed, to ensure that they are just and reasonable 
and not unduly discriminatory or preferential.
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    \42\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 132-33.
    \43\ While we did indicate that criteria should apply to all 
market participants rather than only certain participants, see Order 
No. 741, FERC Stats. & Regs. ] 31,317 at P 133, our intent was that 
there be minimum criteria for all market participants and not that 
all market participants necessarily be held to the same minimum 
criteria. For some criteria, holding all market participants to the 
same minimum criteria may be appropriate. For other criteria, 
however, it may be appropriate to hold different participants to 
different minimum criteria, e.g., based on the size of the 
participants' positions.
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E. Grace Period To ``Cure'' Collateral Posting

1. Requests for Rehearing
    34. East Texas Cooperatives request rehearing on the Commission's 
establishment of a two-day grace period to ``cure'' a collateral 
call.\44\ East Texas Cooperatives assert that the Commission should not 
have established a uniform two-day period because it was not supported 
by sufficient evidence and the requirement will be onerous for small 
market participants with small staffs and constrained budgets. East 
Texas Cooperatives argue that most ISOs and RTOs already have two- or 
three-day cure periods, and the matter should have been left to their 
discretion. Alternatively, the Commission could establish a uniform 
three-day ``cure'' period for all entities or, as a last resort, a 
three-day period for not-for-profit load-serving entities, such as 
cooperatives, municipalities, and other public power entities.
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    \44\ Id. P 160-63.
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2. Commission Determination
    35. The Commission denies rehearing. In establishing the two-day 
cure period in Order No. 741, the Commission carefully weighed the 
needs of market participants with the need for the mitigation of 
uncertainty when the organized electric wholesale markets are under 
stress. As we learned during the financial crisis, a market 
administrator may request additional collateral when the market is 
under stress. As a result, timely cure of a collateral deficiency is 
critical. We also note that the CFTC called for a one-day cure period, 
while others promoted a three-day cure period, and we found--and 
continue to find--that the two-day cure period strikes a reasonable 
balance between mitigating uncertainty in the market and providing for 
the needs of participants.

F. Regulatory Flexibility Analysis

1. Requests for Rehearing
    36. APPA, Six Cities, and Financial Marketers challenge the 
Commission's conclusion that Order No. 741 ``will not have a 
significant economic impact on a substantial number of small 
entities.'' \45\ They contend that the Commission should analyze the 
effect of Order No. 741 on small entities, as required by the 
Regulatory Flexibility Act (RFA).\46\
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    \45\ Id. P 184. The RFA definition of ``small entity'' refers to 
the definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. 5 
U.S.C. 601(3) (citing section 3 of the Small Business Act, 15 U.S.C. 
632). The Small Business Size Standards component of the North 
American Industry Classification System defines a small electric 
utility as one that, including its affiliates, is primarily engaged 
in the generation, transmission, and/or distribution of electric 
energy for sale and whose total electric output for the preceding 
fiscal years did not exceed 4 million MWh. 13 CFR 121.201 (2010).
    \46\ 5 U.S.C. 601-12.
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    37. APPA and Six Cities argue that the Commission erred in 
determining that small utilities within the balancing authority area of 
an RTO have a choice as to whether to join the RTO. Because large 
transmission owners are part of the RTO, they argue, small utilities 
must join to obtain necessary transmission and ancillary services. APPA 
estimates that more than a thousand public power distribution systems, 
plus rural electric cooperatives, are located in states served by RTOs 
and are ``small utilities'' within the meaning of RFA. APPA also 
contends that public power systems have unique financial constraints 
and may not be able to meet the new financial requirements that RTOs 
might impose.\47\
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    \47\ APPA Request at 10.
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    38. In support of its argument, Six Cities cites Aeronautical 
Repair Station Ass'n,\48\ in which, they state, the court held that 
even though air carriers were the direct objects of the rule 
promulgated by the Federal Aviation Administration (FAA), the employees 
of the contractors and subcontractors were also subject to the rule. 
The D.C. Circuit concluded that the FAA was required to analyze the 
effect of the rule on the contractors and subcontractors.\49\ Six 
Cities argues that the ISOs and RTOs are analogous to air carriers, and 
market participants can be compared to the contractors and 
subcontractors which are also directly regulated by the agency's 
rule.\50\
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    \48\  Aeronautical Repair Station Ass'n, Inc. v. FAA, 494 F.3d 
161 (D.C. Cir. 2007).
    \49\ Id. at 177.
    \50\ Six Cities Request at 6-9.
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    39. Financial Marketers argue that the Commission did not properly 
analyze the effect of minimum participation criteria on small financial 
traders under the RFA. Financial Marketers contend that the 
Commission's directives will push small financial traders out of ISO/
RTO markets and prevent market entry by smaller companies.\51\
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    \51\ Financial Marketers Request at 18-20.
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2. Commission Determination
    40. The RFA requires that, when promulgating a final rule, an 
agency must conduct an analysis that includes, among other things, 
``(3) a description of and an estimate of the number of small entities 
to which the rule will apply or an explanation of why no such estimate

[[Page 10497]]

is available; * * * and (5) a description of the steps the agency has 
taken to minimize the significant economic impact on small entities 
consistent with the stated objectives of applicable statutes * * *.'' 
\52\
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    \52\ 5 U.S.C. 604(a)(3), (5).
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    41. Under the RFA, an agency must consider the economic impact on 
entities directly affected and regulated by the subject regulations. 
The D.C. Circuit has held that Congress did not, however, intend to 
require that the agency ``consider every indirect effect that any 
regulation might have on small businesses in any stratum of the 
national economy.'' \53\ More recently, the Seventh Circuit compared 
the holdings in several cases considering the RFA, including 
Aeronautical Repair Station Ass'n, and described the rule as follows: 
``Small entities directly regulated by the proposed statute--whose 
conduct is circumscribed or mandated--may bring a challenge to the RFA 
analysis or certification of an agency. * * * However, when the 
regulation reaches small entities only indirectly, they do not have 
standing to bring an RFA challenge.'' \54\ The court further stated 
that, where the regulation ``expressly'' addresses an entity's actions, 
that entity is subject to an RFA analysis, and that, although the 
regulation may affect the actions of other entities, those other 
entities are not subject to an RFA analysis.\55\
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    \53\  Mid-Tex Electric Cooperative v. FERC, 773 F.2d 327, 343 
(D.C. Cir. 1985); see also Cement Kiln Recycling Coalition v. EPA, 
255 F.3d 855, 868-69 (D.C. Cir. 2001).
    \54\ White Eagle Cooperative Association v. Conner, 553 F.3d 
467, 480 (7th Cir. 2009).
    \55\ Id.
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    42. We note at the outset that the regulations adopted in this 
proceeding directly apply to RTOs and ISOs only, not small entities, 
thus the Commission is not required to assess the impact of the rule on 
small entities.\56\ In contrast to Aeronautical Repair Station Ass'n, 
in which the regulations expressly required certain actions by small 
entities, in this rulemaking, the regulations require specific actions 
only by the RTOs and ISOs.\57\ Further, the relevant impact considered 
under the RFA is the impact of compliance, including ``the projected 
reporting, recordkeeping and other compliance requirements of the 
proposed rule.'' \58\ Those obligations are directly imposed on RTOs 
and ISOs only, and not market participants.
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    \56\ Cement Kiln Recycling Coalition, 255 F.3d at 869.
    \57\ Aeronautical Repair Station Ass'n, Inc, 494 F.3d at 177.
    \58\ Mid-Tex Electric Cooperative, 773 F.2d at 342 (citing 5 
U.S.C. Sec.  603(b)(4) and related legislative history).
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    43. Additionally, in issuing Order No. 741, the Commission focused 
on protecting the organized wholesale electric markets from default by 
a market participant. In the event of a default by a market 
participant, the losses related to that default must be socialized 
among all other market participants, potentially leading to cascading 
defaults, all leading to adverse effects on customers. The Commission 
sought to balance measures intended to protect the market and market 
participants from the risk of a default against the effect of the 
measures on market participants. For instance, in establishing the cap 
on unsecured credit,\59\ setting the two-day cure period,\60\ and, on 
rehearing, allowing RTOs/ISOs to consider a market participant's level 
of participation in the market in setting minimum criteria,\61\ the 
Commission has sought to protect the markets and market participants 
from the risk of a default, while providing consideration of the needs 
of the market participants themselves.
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    \59\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 50.
    \60\ Id. P 161.
    \61\ See supra P 33.
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    44. The Commission thus has sought to accommodate market 
participants' concerns while still meeting its responsibility to 
protect markets to ensure that the resulting rates are just and 
reasonable and not unduly discriminatory or preferential under FPA 
sections 205 and 206; however, we are not obligated to conduct a 
further analysis under the RFA. The regulations promulgated in Order 
No. 741 and here direct the actions of the ISOs and RTOs in 
administering the organized wholesale electric markets. While the 
regulations may indirectly affect other entities--market participants, 
including investor-owned utilities, municipalities and cooperatives, 
and financial marketers, as well as customers of all kinds--we are not 
required to conduct an analysis under the RFA on such entities in this 
proceeding.
    45. Furthermore, by requiring tariff revisions to protect the 
markets and market participants from the risk and resulting cost of 
default by others, we are not only protecting market participants from 
the risk and resulting costs of default by others, but we are, in 
particular, protecting those smaller market participants that are least 
able to withstand a default. Smaller market participants have fewer 
resources available to them to deal with a default when one occurs, and 
thus it is particularly important for smaller market participants that 
the Commission put in place measures that minimize the risk of a 
default and the resulting cost of a default.
    46. Further, we note that ISOs and RTOs are in the best position, 
in the first instance, to assess to what extent credit practices, as 
implemented in their markets, will have an adverse effect on their 
market participants, as well as the potential harm to the market in the 
event of a default. Thus, as noted in Order No. 741, ISOs and RTOs may, 
through their stakeholder processes, propose specific exemptions for 
individual entities whose participation is such that a default would 
not risk significant market disruptions.\62\ We also note that, as the 
ISOs and RTOs submit their compliance filings, interested persons will 
have an opportunity to contest the various revisions as filed for 
individual tariffs, and the Commission remains open to comments on the 
particular revisions at that time. The Commission, however, will not, 
at this time, adopt any exemptions.
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    \62\ Order No. 741, FERC Stats. & Regs. ] 31,317 at P 165. We 
also note that a market participant retains its right to 
individually seek an exemption under section 206 of the FPA.
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III. Information Collection Statement

    47. The Office of Management and Budget (OMB) regulations require 
that OMB approve certain information collection requirements imposed by 
an agency.\63\ The revisions in Order No. 741 to the information 
collection requirements for ISOs and RTOs were approved under OMB 
Control Nos. 1902-0096. While this order clarifies and revises aspects 
of the existing information collection requirements, it does not add to 
these requirements. Accordingly, a copy of this order will be sent to 
OMB for informational purposes only.
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    \63\ 5 CFR 1320.11.
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IV. Document Availability

    48. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through the Commission's Home Page (http://www.ferc.gov) and 
in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, 
Washington, DC 20426.
    49. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, eLibrary. The full

[[Page 10498]]

text of this document is available on eLibrary in PDF and Microsoft 
Word format for viewing, printing, and/or downloading. To access this 
document in eLibrary, type ``RM10-13'' in the docket number field.
    50. User assistance is available for eLibrary and the Commission's 
website during normal business hours. For assistance, please contact 
FERC Online Support at 1-866-208-3676 (toll free) or 202-502-6652 (e-
mail at FERCOnlineSupport@FERC.gov), or the Public Reference Room at 
202-502-8371, TTY 202-502-8659 (e-mail at 
public.referenceroom@ferc.gov).

V. Effective Date

    51. Changes to Order No. 741 adopted in this order on rehearing 
will become effective March 28, 2011.

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By the Commission.
Kimberly D. Bose,
Secretary.

    In consideration of the foregoing, the Commission amends part 35, 
subchapter B, chapter I, title 18, Code of Federal Regulations, as 
follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

0
1. The authority citation for part 35 continues to read as follows:

    Authority:  16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

0
2. Section 35.47 is amended by revising paragraph (a) to read as 
follows:

Sec.  35.47  Tariff provisions regarding credit practices in organized 
wholesale electric markets.

* * * * *
    (a) Limit the amount of unsecured credit extended by an organized 
wholesale electric market to no more than $50 million for each market 
participant; where a corporate family includes more than one market 
participant participating in the same organized wholesale electric 
market, the limit on the amount of unsecured credit extended by that 
organized wholesale electric market shall be no more than $50 million 
for the corporate family.
* * * * *
[FR Doc. 2011-4088 Filed 2-24-11; 8:45 am]
BILLING CODE 6717-01-P