Dive Brief:

• PJM Interconnection on Tuesday released an independent review of the default of financial transmission rights (FTR) trading company GreenHat Energy and the grid operator's response last year, concluding PJM personnel were "naive" about the company's assurances of creditworthiness and future revenue.​
• GreenHat defaulted in June of 2018, leaving PJM members to pick up around $165 million in losses so far. The Federal Energy Regulatory Commission is investigating the company's actions and GreenHat is no longer a PJM member.
• The grid operator said it has committed to developing new market rules this year to better address credit risks, as well as taking steps to make organizational and process improvements, including establishing a new chief risk officer position in the coming months.

Dive Insight:

PJM officials admit they were caught blindsided by GreenHat, saying the FTR market has typically been "self-regulated" and the company was trying to intentionally bypass trading rules.

"GreenHat was in particular looking to circumvent the rules, and that intent, we're not used to that," PJM President
and CEO Andrew Ott told Utility Dive. But PJM will now develop a "more sophisticated market surveillance, and we'll be getting better at looking at participant risk," he said.

"This default had a huge impact on our members," Ott said. "PJM takes it very seriously — the report was not designed to look at GreenHat, but at what PJM could do better."

FTRs are hedges against price swings when transmission is congested. GreenHat defaulted after it amassed a large position in the FTR market, which had low associated credit requirements. The congestion hedges appeared profitable, based on historical data, but transmission upgrades changed the fundamentals of the trade.

The company accumulated a more than 800 million MWh FTR portfolio, which became unprofitable. GreenHat defaulted in June 2018 when a net realized loss payment came due.

PJM personnel "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," the report found. And, "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."

Ott said the grid operator will now look to improve on three fronts:

• Organizational changes will include the establishment of a chief risk officer. "It's a position growing in importance in many companies," Ott said. "We'll be looking for someone who has actual experience. ... We're looking for experience we traditionally have not had here."
• To make process improvements, Ott said PJM will bring in outside expertise on risk assessment and monitoring, and review internal practices.
• Third, there will be market rule revisions. "Obviously, that's a big deal," Ott told Utility Dive. While organizational and process changes can be done in a matter of months, rule changes "will be a little longer."

For rule revisions, PJM will publish an opinion on the report's recommendations in mid-May, and will then get feedback from stakeholders. "We'll look to have recommendations to the board by the end of the year," Ott said.

FERC in February directed PJM to rerun an auction related to GreenHat's default, denying the grid operator a waiver of auction rules. The agency is currently running a non-public investigation of GreenHat and whether it "engaged in market manipulation or other potential violations of Commission orders, rules, and regulations," according to its January denial of PJM's waiver request.

"If we had more sophisticated expertise in market surveillance ... we might have seen some of this anomalous behavior and it would have been a red flag sooner," Ott said. Some stakeholders, however, pointed out risks to PJM before the default.

According to the independent report, "at least four different experts from FTR market participants had alerted PJM
management that, based on the publicly posted data they had analyzed, GreenHat's open positions had grown significantly and merited attention and action."