Federal regulators have approved new financial health requirements for companies that trade in PJM's wholesale power markets, requiring market participants to build tangible net worth to $2 million or show other proof of solvency. The Federal Energy Regulatory Commission accepted the changes in a July 26 order, and the rules took effect July 27.
New capitalization thresholds
The order raises the tangible net worth threshold for Financial Transmission Rights market participants to $2 million and requires all other market participants to grow their tangible net worth to the same $2 million level through a phased approach, verified through audited financial statements. FERC said the new capitalization policy is high enough to help participants absorb losses and cut the likelihood of insolvency, and found the rules do not present an unreasonable barrier to entry. The thresholds will rise 3% a year to account for inflation, beginning five years after the rules take effect.
Alternative paths to market access
Companies that cannot meet the net worth minimums can still qualify by demonstrating other evidence of financial health. PJM's rules let them post collateral, provide a letter of credit, obtain a surety bond or supply a corporate guaranty instead. FERC called the framework a way to make minimum capitalization requirements more uniform across market participants. "We find it reasonable to require Market Participants be solvent" to take part in PJM markets, the commission wrote in its order, adding that the rules encourage participants toward "stronger balance sheets and disciplined debt management." FERC noted the framework aligns with capitalization requirements it has approved for other grid operators nationwide.
Stakeholder reaction
The changes drew support from nearly all stakeholders during PJM's review process. Lisa Drauschak, PJM's senior vice president, chief financial officer and treasurer, said the rules give "reasonable access to PJM for both established and developing business entities." She added that the framework is "designed to keep step with inflation to remain durable in the future."
