Comment Text:
We are writing in regard to the Commodity Futures Trading Commission’s (“CFTC”) proposed order on the Independent System Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Commission.
We understand that the draft order presents significant issues for market participants of ISOs/RTOs in that the proposed exemption would apply only to those ISO/RTO market participants that qualify as “appropriate persons” or “eligible contract participants” as defined by the CFTC in sections 1a(18) and 4(c)(3)(a) through (j) of the Commodity Exchange Act (“CEA”). We further understand that these “appropriate persons” are those with a net worth exceeding $1,000,000 or total assets exceeding $5,000,000. This threshold ignores all the work implemented by the ISOs/RTOs regarding minimum financial criteria for participation in their electricity markets. We believe these thresholds are arbitrary and have no basis in fact, unlike the requirements already implemented by the ISOs/RTOs under the auspices of the Federal Energy Regulatory Commission (“FERC”).
We therefore urge the CFTC to exercise its discretion and expand the definition of “appropriate persons” for the purposes of the exemption sought by the ISO/RTO joint request, to include all market participants that satisfy the eligibility requirements established by the ISOs/RTOs to participate in the markets they administer.
Background
Tarachand Enterprises, Inc. (“Tarachand”) or its predecessor has been a market participant of NYISO since 2003. We engage in energy transactions, as defined in the above named petition. Tarachand has never been in default of our financial obligations or requirements.
In 2009, NYISO undertook a reform of credit requirements which:
1. Increased the NYISO’s ability to monitor credit requirements for energy transactions in its market and to prevent a market participant which has eroded its collateral from entering into more energy transactions.
2. More closely aligned collateral requirements according to the type of energy transaction.
3. More closely aligned collateral requirements based on the location of the energy transaction.
Since implementation of these collateral requirements in the fall of 2009, we are unaware of any payment defaults caused by losses in energy transactions in the NYISO market.
Following passage of the Dodd-Frank Act, FERC implemented new financial requirements for the various ISOs/RTOs. Collateral requirements increased significantly for small market participants, even though the energy transactions taking place in the ISOs/RTOs have never been considered part of the swaps or derivatives at the root of the crisis.
Since the FERC requirements came into force, organizations with less than $1,000,000 in tangible net worth have had to post a deposit with the NYISO. This deposit cannot be used to satisfy any collateral requirements for positions taken in the markets administered by the NYISO.
The enhanced and increased collateral requirements of recent years have reduced default risks in the NYISO. Since its inception in late 1999, NYISO’s default rate is remarkably low. Increasing collateral requirements from current levels would reduce default risks only a negligible amount, if at all, at great cost to the ISOs/RTOs and their market participants in terms of interference with their efficiently functioning markets.
Financial Contagion
Furthermore, there is little risk of defaults in ISOs/RTOs spreading to the rest of the economy. Market participants are responsible for the default risk of the member participants. If one member fails in its obligations, the other market participants are responsible for sharing the net cost of the default. The risk of default is limited to the ISO/RTO and not the greater financial community.
Since deregulation of the electricity industry and formation of the ISOs/RTOs, many companies that were/are market participants have gone bankrupt, and none has posed a significant threat to the financial health of ISOs/RTOs or their market participants. Examples of bankruptcies include Mirant, NRG, Calpine, Dynegy, and, infamously, Enron. In no case was there the remotest threat of financial contagion. Indeed, these cases have shown that the time-tested, current bankruptcy laws are adequate to address defaults in FERC regulated ISOs/RTOs.
One of the main thrusts of Dodd-Frank was to end “too-big-to-fail”, the disorderly collapse of systemically important organizations. By definition, small market participants are not systemically important. The imposition of addition requirements on small market participants, driven by a piece of legislation primarily intended to address the consequences of too much influence of large companies, is at cross-purposes to the legislative spirit of Dodd-Frank, because the market concentration of large companies will increase due to the forced exit from the markets of small participants.
Impacts to Electricity Markets
The current proposal by the CFTC will have direct, negative effects on ISO/RTO electricity markets. The exodus of small market participants may include organizations that engage in energy transactions, reserve or regulation transactions, and forward capacity transactions. These participants provide liquidity to the markets they transact in, and aid in the price discovery process.
The current proposal is likely to affect special case resources and demand response providers. Small market participants in these categories are in the vanguard of innovation and entrepreneurship in electricity markets. The exclusion of these market participants will have a chilling effect on development of new technologies to provide renewable energy and the systems that complement the integration of renewable resources, such as flywheels and advanced battery systems.
The small businesses that would be forced to cease operation under this proposal provide jobs to Americans and pay taxes to federal, state, and local jurisdictions. The benefits of this proposal are negligible, and the costs, in a struggling economy, are substantial. This proposal delivers no discernible benefits, while running counter to efforts of other parts of the federal government to stimulate the economy. In short, this proposal is not in the public interest.
Sincerely,
Timothy M. Kirchman
President,
Tarachand Enterprises, Inc.
Chestnut Hill, MA 02467
