Should an Independent System Operator be a Party to Market
Transactions?
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In January 2010, the Federal Energy Regulatory
Commission (FERC) proposed new rules that are intended to
improve credit practices in organized, wholesale electricity
markets. One of the more controversial aspects of the proposed
rules is FERC's suggestion that an independent system operator
(ISO) or regional transmission organization (RTO) should be a
party to transactions that occur through the ISO/RTO's
organized markets. At present, an ISO/RTO acts as a central
administrator for settling payment obligations among market
participants; as part of a monthly billing/payment process,
the ISO/RTO nets amounts that are owed to each participant by
the market against amounts that the participant owes to the
market.
In the pending rulemaking proceeding, FERC
inquired whether an ISO/RTO should also "take title to the
underlying contract position of a market participant at the
time of settlement." FERC offered this mechanism with the idea
of protecting market participants and, ultimately, ratepayers
in the case of bankruptcy by a market participant. FERC
reasoned that, because the ISO/RTO does not take title, a
bankrupt entity might successfully argue that the
ISO/RTO cannot net amounts due to and from the market, on the
grounds that the Bankruptcy Code's requirement of mutuality is
lacking. According to FERC, if the ISO/RTO were a party
to each transaction, there would be no risk that netting or
setoff could not take place or be unwound.
On May 11, 2010, FERC held a technical
conference on this issue. Several commentators challenged
FERC's suggestion that bankruptcy courts would not allow
netting or offset. Other commentators asserted that an
ISO/RTO's rules already allow offsetting in the case of
bankruptcy or could be strengthened to allow offsetting
without having the ISO/RTO take title.
In addition, several commentators cautioned that
the proposed mechanism (introducing the ISO/RTO as a party to
market transactions) would create tax, accounting, and
administrative burdens for the ISO/RTOs. Other commentators
cautioned that the proposed mechanism might create
contractual, financial and tax issues for public power
entities.
Finally, commentators requested clarity on
whether FERC envisions that the ISO/RTO would be a full party
to all transactions or would acquire a more limited interest
at the time of settlement.
FERC has solicited additional comments with a
deadline of June 8, 2010. |