Commissioner James Danly Dissent Regarding PJM Interconnection, L.L.C.

Commissioner James Danly Statement
February 5, 2021
Docket No. ER21-972-000

Section 15.1.5(i) of the Amended and Restated Operating Agreement of PJM Interconnection, L.L.C. (Operating Agreement) has one purpose: to protect PJM Members from the consequences of a payment default by an entity with inadequate collateral participating in PJM Interconnection, L.L.C. (PJM) markets.  The tariff achieves this objective by prohibiting entities from further participation in PJM markets if unable to post adequate collateral following a collateral call.  The purpose of section 15.1.5(i) is sound—once a market participant is subject to an unanswered collateral call, prohibiting further participation in PJM markets prevents that entity from assuming further uncollateralized obligations in additional transactions, and in this way magnifying its obligations that, in the event of default, can only be made up by other PJM Members.  The lesson learned from inadequate collateral is fresh in our minds; PJM’s failure to obtain sufficient collateral from GreenHat as it continued to acquire large, unprofitable Financial Transmission Rights positions caused PJM to incur significant losses—passed on, of course, to PJM Members—upon GreenHat’s default.[1]

In this proceeding, PJM asks the Commission to waive the protections of section 15.1.5(i), protections afforded by the tariff to the PJM Members.  It makes this request in order to allow Panda Stonewall LLC (Panda Stonewall) to continue selling capacity, energy, and ancillary services in PJM’s markets following Panda Stonewall’s failure to provide adequate collateral in response to a collateral call.  This collateral call followed PJM’s determination that Panda Stonewall represented “an unreasonable credit risk to the PJM Markets and had experienced a Material Adverse Change under the terms of the Tariff.”[2]  As PJM explains:

For over three years, Panda Stonewall has been collecting, subject to refund, a rate for reactive power service in PJM that exceeds the rate recommended by a Commission administrative law judge in an initial decision that remains pending Commission action.  See Panda Stonewall LLC, 167 FERC ¶ 63,010 (2019).  PJM’s determination that Panda Stonewall presents an unreasonable credit risk and the resulting Collateral Call is a direct result of the financial liability that is likely to result from resolution of the reactive power rate proceeding.[3]

PJM asserts that, although it has determined that Panda Stonewall’s continued participation in PJM markets represents an unreasonable credit risk, the risk to PJM Members from granting the waiver is less than the risk of denying the waiver and prohibiting Panda Stonewall’s participation in these markets.  This is because, according to PJM, Panda Stonewall needs the revenues it earns from PJM’s markets to have any chance of paying its potential refund liability.  PJM asserts that granting the waiver will “permit Panda Stonewall to continue to generate a positive revenue stream from the PJM Markets, which can help satisfy the remaining amount due to satisfy the Collateral Call.”[4]  It appears that, in the interim, PJM is collecting some unspecified weekly settlement amounts that otherwise would be payable to Panda Stonewall, and is placing those amounts into Panda Stonewall’s collateral account which is held by PJM.[5]

In essence, we are being asked to approve PJM making a bet—one that is backed by the PJM Members—that allowing Stonewall Panda to continue participating in PJM’s markets without posting adequate collateral will not result in a greater default than if PJM were to enforce section 15.1.5(i) of the Operating Agreement and prohibit Panda Stonewall from participating in PJM markets until it can satisfy its collateral call.  This may be a reasonable bet and, in fact, it seems like it may well work out.  But PJM has provided no information whatever by which the Commission can evaluate the likelihood of this bet paying off.  PJM has not provided an estimate of the potential liability, how much it is collecting from Panda Stonewall, or the rate at which Panda Stonewall’s potential liability might increase as it continues participating in the market.[6]  Worse yet, PJM has not proposed to collect any specific amount from Panda Stonewall’s weekly settlements, nor has PJM proposed any limit on how long it may allow Panda Stonewall to participate in its market while failing to provide adequate collateral, or how great an ultimate refund liability PJM will allow Panda Stonewall to accumulate during its continued participation.

I would not oppose granting PJM’s waiver request if these deficiencies were remedied.  A waiver could be appropriate if the Commission were presented with sufficient information by which we could be satisfied that there were reasonable bounds placed upon the risk the PJM Members are being forced to assume as a result of Panda Stonewall’s continued participation with inadequate collateral.  For example, we could grant a waiver of limited duration, requiring in the interim that PJM provide more detailed information on the extent of Panda Stonewall’s potential liability, the amount of money PJM is collecting for Panda Stonewall’s collateral account, and an ongoing evaluation of the risk posed by Panda Stonewall’s continued participation in the market.[7]  After receiving and evaluating these submissions, we would be better able to determine whether to extend the waiver and, if necessary, place conditions on the extension, such as requiring a certain amount, or percentage, of Panda Stonewall’s market settlements to be placed in its collateral account, to require the ongoing submission of information regarding Panda Stonewall’s potential liability, or to limit the duration of the waiver.

Today’s order does none of those things.  Instead, the Commission has approved PJM’s waiver request and allowed PJM to subject PJM Members to what PJM itself declared to be Panda Stonewall’s unreasonable credit risk.  This approval comes despite the absence of record evidence regarding the scale of the risk PJM Members will assume and without establishing any limits on this risk.  Instead, the Commission has approved PJM’s waiver request subject only to two toothless conditions: (a) that PJM collect some unspecified amount of Panda Stonewall’s weekly settlement revenues and place them in Panda Stonewall’s collateral account; and (b) that PJM make informational filings every 30 days “to provide the Commission with information on Panda Stonewall’s progress toward satisfying PJM’s Collateral Call . . . .”[8]  These conditions provide no real protection to PJM Members from Panda Stonewall’s unreasonable credit risk and require the submission of no real information to the Commission regarding the extent of that risk.  Instead of establishing clear limitations and insisting upon substantive submissions, the Commission has ceded its responsibility to PJM, granting PJM total discretion to determine both the amount of money to be collected and the information to be provided.

I do not suggest that PJM is inappropriately favoring Panda Stonewall or that PJM is indifferent to the risks this waiver places on PJM Members.  Nor do I believe the Commission should micromanage the manner in which PJM confronts credit risk and potential defaults.  But I cannot support today’s order which, in my view, represents an abdication of the Commission’s responsibility to take a hard look at proposals to waive tariff provisions intended to protect PJM Members from defaults and to ask the questions and impose the conditions necessary to ensure that such waivers are consistent with the public interest.

Finally, I also dissent from that part of today’s order granting a retroactive effective date to the requested waiver.  As I have explained before, such retroactive waivers exceed our statutory authority, as the courts have held on numerous occasions.[9]  To the extent the Commission determines that a waiver is appropriate, the Commission should make the waiver effective as of January 28, 2021, the date PJM filed its waiver request.  The Commission then should rely on its authority under Federal Power Act section 309 to find that no action should be taken against PJM for its failure to apply section 15.1.5(i) of the Operating Agreement prior to January 28.[10]

For these reasons, I respectfully dissent.