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energy regulatory update

Should an Independent System Operator be a Party to Market Transactions?

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.