Electricity Markets

Report outlines PJM shortcomings leading up to FTR trader default

A report that examined the actions of the PJM Interconnection leading up to the default of GreenHat Energy LLC, a financial transmission rights trader in the PJM markets, concludes that the grid operator was late to recognize GreenHat as a problem and that PJM personnel “were naive about GreenHat’s assurances of creditworthiness and a future revenue stream pledged to PJM.”

In October 2018, the PJM board commenced a third-party review of the June 2018 default of GreenHat Energy LLC, an FTR trader in the PJM markets.  

The board formed a special committee of three board members to direct the review and hired the authors of the report as independent consultants with experience and expertise in energy markets, risk management, energy regulation, contracts law, and corporate governance practices.

Scope of the review

The scope of the review included PJM’s actions leading up to the default as well as recommendations for the future. The report did not investigate the actions of GreenHat itself, as those matters are under investigation by the Federal Energy Regulatory Commission, PJM noted on March 26. The report does note that two of GreenHat’s managers were also previously employed in JPMorgan Ventures Energy Corp.’s Houston-based Principal Investments unit, where they were implicated by FERC in that company’s manipulation of energy markets and exploitation of loopholes at CAISO and MISO that caused more than $125 million in damages, resulting in FERC fining JPMorgan $410 million.

The consultants said that the purpose of the study and the report was to: (1) set forth the facts and circumstances that led to a sizable default; (2) assess complications that emerged from PJM’s action or inaction; and (3) recommend changes to prevent, deter, or mitigate defaults that may occur in PJM’s FTR markets in the future, and increase the robustness of the PJM FTR markets going forward.

The study primarily focuses on the period from January 2016 through July 2018, immediately following PJM’s declaration of GreenHat’s default.

The report’s authors noted that they interviewed some thirty PJM professionals, some of them multiple times. In addition, they spoke with the Independent Market Monitor on several occasions and spoke at length with a number of FTR market participants.

“PJM’s staff, management, and Independent Market Monitor furnished us with hundreds if not thousands of documents and emails in response to all of our requests, and always erred on the side of inclusion when making documents available,” they noted.

 Report says PJM lacked staff with necessary training and credentials

The report’s executive summary details several findings that resulted from the review.

For example, the consultants said that PJM did not have staff with the necessary training and credentials to successfully manage the financial risks posed by the numerous participants in its FTR markets. “For a number of years prior to GreenHat, PJM’s FTR market participants self-regulated their conduct, and the market ran smoothly. GreenHat, however, provided a set of conditions for which the framework that PJM developed over time to manage risk was inadequate,” the report said.

In addition, the report said that PJM made a decision not to terminate GreenHat’s trading rights when PJM initially understood the potential for a default. “Instead PJM chose to manage the situation, which PJM believed could not get worse,” but the grid operator “did not effectively manage the situation, which grew materially worse.”

The report also said that PJM personnel “were naive about GreenHat’s assurances of creditworthiness and a future revenue stream pledged to PJM. What is more, they did not appreciate GreenHat’s determined ability to increase its position, and incur additional risk, thus expanding its losses well beyond anything PJM imagined could happen.”

According to the report, PJM mistakenly believed it would contain and control GreenHat’s behavior and risk, “which in the end it did not. If PJM were better prepared to monitor market participant behavior, and better measure risk, we believe it could have and would have responded more effectively to GreenHat’s empty assurances.”

The report also said that PJM was late to recognize GreenHat as a problem. “Had PJM declared a default upon first recognizing the GreenHat problem, the amount of the loss would have been substantial but far less than what PJM must deal with today. In any case, we find that even if PJM had made such a default declaration, our recommendations would stand as set forth in this document.”

In a news release, PJM noted that the report found that PJM did not violate any law, regulation or internal PJM policy.


The report provides several recommendations.

“Based on the complications discovered, the following specific actions should be taken by PJM and its members to reduce the probability of a similar failure in FTR markets and to develop more efficient markets that can grow and introduce new financial products creating opportunities for all PJM members to manage their risks in PJM markets,” the report said.

The recommendations are targeted at PJM’s wholesale energy markets group and do not encompass PJM’s larger grid operations functions.

The recommendations and complications addressed are as follows:

  • Advance credit/collateral best practices into the tariff (This recommendation would address PJM’s credit policy failing to address critical risks, the report said).
  • Clarify the role of PJM as manager of risk in financial markets (This recommendation addresses PJM not taking robust policy actions following precedent experience and PJM surrendering an early opportunity to stop or restrain GreenHat);
  • Build a customer awareness beyond market procedures and rules (The report said that PJM failed to perform adequate “know your customer” procedures);
  • Implement technical practices for participant risk management (The report said that PJM management failed to establish robust risk management tools and procedures);
  • Bring on-board and develop new expertise in risk management (Complications addressed with this recommendation are: PJM’s management mistakenly envisaged greater value than warranted in a GreenHat pledge agreement, PJM incorrectly believed that the GreenHat situation would not worsen and qualifications and training were not adequate);
  • Increase the frequency of long-term auctions (The report said that PJM market design flaws gave GreenHat room to develop because the infrequent auctions delayed assessments of the forward value of GreenHat’s portfolio); and
  • Make critical organizational changes (“An unwarranted air of confidence facilitated GreenHat’s ability to grow,” and “the business requirements of the financial markets portion of PJM is quite different from that of the rest of PJM,” the report said).

PJM noted in its news release that in 2018, the grid operator and its members developed a number of credit risk management changes that began to address issues and recommendations that are contained in the report, and work is already underway on a plan to complete these reforms.

In addition, PJM President and CEO Andrew Ott outlined several areas of a comprehensive action plan that include organizational changes, process improvements and the examination of additional market rule and credit risk management reform.

PJM said that actions will include, but are not limited to, establishing a new chief risk officer position, thoroughly reviewing and revamping processes and procedures in credit risk assessment and monitoring and creating a new coordination process for PJM’s Markets, Credit/Finance and Legal areas and its Independent Market Monitor.

The report is available here.

Association’s Kelly said FTR practices need to be looked at in wake of losses

Noting the “eye-popping losses” resulting from the default of GreenHat and the fact that load-serving entities including public power utilities are on the hook for losses from FTR-related defaults, Sue Kelly, President and CEO of the American Public Power Association, in September 2018 said that there is a strong argument to be made that financial entity participation in the wholesale markets, including FTR markets, should be investigated.

Kelly said that the Association is concerned about rules for the trading and funding of FTRs, which are intended to allow load-serving entities and other market participants to hedge the costs of day-ahead transmission congestion.