Workshop I: Proposed Qualifications &

Requirements for Market Entry and

Continued Participation by ERCOT

Counter-Parties

Gibson Hull, Associate Corporate Counsel

May 13, 2020

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Agenda

• Goal

• Why

• Background

• Audience

• Registration/Qualification Processes and Requirements:

Existing, Changes & New

• Estimated Cost

• Next Steps

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Goal

• In an attempt to mitigate market exposure, ERCOT is proposing

changes to qualifications and requirements for Qualified Scheduling

Entities (QSEs) and/or Congestion Revenue Right (CRR) Account

Holders (CRRAHs)—i.e., ERCOT Counter-Parties (CPs)—and new

obligations for continued participation for CPs.

– The ERCOT Protocols define Counter-Party as “a single Entity that is a

QSE and/or a CRR Account Holder. A Counter-Party includes all

registrations as a QSE, all subordinate QSEs, and all CRR Account

Holders by the same Entity.”

• ERCOT’s goal is to strike a balance between open access, competition

and barriers to entry, while protecting the integrity of the market as a

whole.

• Implementation Goal: Summer 2021 (April 2021 Board meeting)

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Why?Based on ERCOT’s review of various Know Your Customer (KYC) practices and

proposals in financial markets and other Independent System Operators (ISOs),

ERCOT is proposing to:

• Limit overall market exposure by potential bad actors

• Help avoid uplifts by:

– Reducing risk of bad actors re-entering the ERCOT market under a new

entity;

– Reducing risk of allowing participation by entities/individuals with poor

financial history or history of manipulating markets entering the ERCOT

market;

– Reducing risk of entities/individuals sanctioned in other markets from

entering the ERCOT market; and

– Increasing ERCOT oversight of financial health of CPs

• Conform with emerging standards of Self-Regulatory Organizations (SROs)—

e.g., Financial Industry Regulatory Administration (FINRA), New York Stock

Exchange (NYSE), etc.—best practices in the US financial industry, and financial

regulators such as the Securities and Exchange Commission (SEC), the

Commodities Futures Trading Commission (CFTC), and the Federal Energy

Regulatory Commission (FERC).

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Background: Timeline

June 2018

GreenHat default in PJM

September 2018 –October 2019

Market entry qualification & requirement discussions

among RTO/ISOs; ERCOT discussions with stakeholders

October 2019 –Today

ERCOT-proposed qualifications & requirements for market entry and

continued participation

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Background: GreenHat Energy Trading default in PJM

• 2014 - GreenHat Energy LLC (GreenHat) formed by principals previously

responsible for manipulation in CAISO and MISO markets

• 2015 - GreenHat acquires long term Future Transmission Rights (FTRs) in

PJM’s market with approximately $600K in collateral

• 2017 - Transmission upgrades were expected to negatively impact the values

of the FTRs; PJM began to question GreenHat regarding potential inability to

cover the FTR payments

• June 2017 - GreenHat and PJM execute a revenue assignment agreement

based on information from GreenHat that it had a third party contract worth

$62M; GreenHat continued to acquire FTRs without additional collateral

• June 2018 - GreenHat defaulted in the PJM market after amassing a portfolio

of FTRs totaling approximately 890 million MWh

• March 2019 - Report of PJM Independent Consultants (GreenHat Default)

• May 2019 - PJM Response (GreenHat Default)

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Background: ERCOT Stakeholder Discussions

• September 2018 – Market Credit Working Group (MCWG)/Credit Working

Group (CWG)

– GreenHat default discussion

• January – July 2019 – MCWG/CWG

– Discussion of PJM’s initial lessons learned from GreenHat default

– ERCOT Presentation - ERCOT’s current market entry qualification process

– Discussion of the Report of the Independent Consultants on the GreenHat

Default and PJM’s response

– ERCOT Presentations – Overview of domestic and global financial industry

market entry qualification processes

• Part I; Part II; Matrix

• August 2019 – ERCOT Board Finance & Audit Committee (F&A)

– ERCOT Assessment of Independent Consultant Recommendations on the PJM

GreenHat Default

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• A CP “is a single Entity that is a QSE and/or a CRR Account Holder. A

Counter-Party includes all registrations as a QSE, all subordinate

QSEs, and all CRR Account Holders by the same Entity.” See Protocol

Section 2.1.

Audience: Counter-Parties

CP

QSE CRRAH

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Audience: Counter-Parties - QSEs and Subordinate QSEs

• QSEs can split into subordinate QSEs (Sub-QSEs).

– See Protocol Sections 16.2.1(4) and (5)

• A QSE may partition itself into any number of Sub-QSEs.

• Sub-QSEs are treated as individual QSEs for practical purposes, including

communications and control functions.

• However, liability and financial security requirements fall to the single QSE responsible

for the Sub-QSEs (i.e., the legal entity registered with ERCOT as a QSE).

• This presentation only refers to the QSE responsible under the Standard Form Market

Participant Agreement (SFA); not Sub-QSEs.

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QSE

(registered

with ERCOT)

Sub-QSE

Sub-QSE

Sub-QSE

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Audience: Counter-Party Registration Statistics

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New Registrations by Year

2014 2015 2016 2017 2018 2019 As of 05/07/2020

QSEs 40 36 27 37 37 39 4

CRRAHs 22 19 18 36 27 45 5

05/07/2020 Active Pending Active

QSEs 146 12

CRRAHs 147 16

Yearly Average Registrations

2014 – 2019

QSEs 36

CRRAHs 27.8

*These QSE numbers do not include Subordinate QSEs.

Total Number of CPs

(05/07/2020)

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Audience: Counter-Party Registration Statistics

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2019 QSE/CRRAH Registrations by Month

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

QSEs 3 5 2 3 1 4 2 2 5 7 3 1

CRRAHs 1 6 3 3 3 2 6 6 7 5 2 1

*These QSE numbers do not include Subordinate QSEs.

2020 QSE/CRRAH Registrations by Month

Jan Feb Mar Apr

QSEs 2 5 6 1

CRRAHs 3 2 8 1

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Audience: Counter-Parties - Allocation of Credit and Settlement

CP Maintains

Financial

Security with

ERCOT for the

QSE/CRRAH

CRR Auction

Credit Limit Day-Ahead Market

(DAM) Credit Limit

Available Credit is Shared

ERCOT

CP

QSE CRRAH

ERCOT Determines Credit

Requirement for a CP

ERCOT settles

with the QSE

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Registration/Qualification Processes & Requirements

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Changes to Existing

Processes & Requirements

Existing

Processes & Requirements

New

Processes & Requirements

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New QSE/CRRAH Application

ERCOT Review

ERCOT Approval

ERCOT Continuous

Review

Applicant Appeal

via ADR

ERCOT Denial

No Appeal

ERCOT

Approval

ERCOT

Denial

MP Continuous

Compliance

QSE/CRRAH Registration Process

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QSE/CRRAH Registration - Overview

MP Application

Protocol § 23, Forms A and F

Identification Information(Legal Name, Address, Officers, Affiliates,

Contacts, DUNs)

Banking Information

Current: Officers & Affiliates

Proposed:

Principals & Affiliates

New: Regulatory Disclosures

New: Litigation Disclosures

New: History of Default Disclosures

Credit Application

Identification & Technical Information

Financial Statements

Compliance with Creditworthiness

Bankruptcy

Additional Minimum Participation

Requirements

Protocol § 22, Attachment J

Expertise in Markets

Market Operational Capabilities

Capitalization

Risk Management Capabilities

Verification of Risk Management Framework

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QSE/CRRAH Application – Changes & New Requirements

• 16 TAC 25.107(b)(11) Principal, as applicable to Retail ElectricProviders (REPs) is “An executive officer; partner; owner; director;shareholder of a privately held company; Shareholder of publiccompany with more than 10% of equity; or a person that controlsthe person in question.”

Principals & Affiliates

• Ongoing complaints, disciplinary record, compliance (SEC, CFTC,FERC, self-regulatory organizations, other ISOs, PUCs/securitiesboards)

• PUC – 10 years• See 16 TAC 25.107(g)(2)(B)(i) & (ii)

Regulatory Disclosures

• Convictions or found liable for fraud, theft, larceny, deceit, orviolations of securities laws, customer protection laws, or deceptivetrade practices

• PUC – no limitation• See 16 TAC 25.107(g)(2)(E)

Litigation Disclosures

• Defaults in any energy market• Entity default history with respect to any principal• Similar to 16 TAC 25.107(g)(2)(G) regarding history of Mass

Transitions

History of Default Disclosures

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QSE/CRRAH Application – ERCOT Review

TimelineProtocol §§ 16.2.2.3(1) & 16.8.2.3(1)

Current:

10 Business Days

Proposed:

60 Calendar Days

ReviewProtocol §§ 16.2 & 16.8

Verify Information

New: Background

Check

Credit Risk Assessment

New:

Credit Assessment

(TBD)

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QSE/CRRAH Application – ERCOT Review

• Current: ERCOT must deny within 10 Business Days orapplication is automatically deemed approved

• Proposed: ERCOT to have 60 Calendar Days forreview; eliminate automatic approval past a certainperiod

60 Calendar Days

• Third party background check service & ERCOT staffreview

• ERCOT will charge a basic application fee plus abackground check fee per principal; ERCOT maycharge additional amounts if necessary

Background Check

• ERCOT evaluating implementation of creditassessment to utilize qualitative and quantitative inputs

• Many ISOs utilize some form of credit scoring andevaluation beyond capitalization

Credit Assessment

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QSE/CRRAH Application - ERCOT Approval/Denial

ApprovalProtocol §§ 16.2.2.3 & 16.8.2.3

Applicant meets all requirements

& passes ERCOT review

Approval with Limitations

Determine type & amount of

limitation with respect to

creditworthiness

DenialProtocol §§ 16.2.2.3 & 16.8.2.3

Applicant fails to complete application or

meet technical requirements

Applicant poses an “unreasonable credit

risk”

Attempted re-entry by defaulted Entity or

Principals of a defaulted Entity

Mandatory wait period; Complete ban/bar

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QSE/CRRAH Application - ERCOT Approval/Denial

• Current: Different collateral requirements &creditworthiness standards for QSEs & CRRAHs

• Proposed: Require more cash, or limit the type ofcollateral for a lower credit assessment

Determine Type and Amount of

Limitation

(Creditworthiness)

• ERCOT may deny participation if an application orcurrent CP poses an “unreasonable credit risk”(i.e., GreenHat Energy)

• MISO proposed tariff: “An example ofunreasonable credit risk may be determined by butnot limited to market manipulation, a history ofmarket manipulation, a material financial default, ora history of material financial defaults.”

Pose “Unreasonable

Credit Risk”

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QSE/CRRAH Application - ERCOT Approval/Denial

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• Principals from a company that previously defaulted inERCOT will not be able to become a registered MarketParticipant by simply forming a new company.

Re-Entry of Defaulted MP/Principals

• Mandatory wait period for less serious defaults (e.g., allamounts repaid to market)

• Complete ban/bar from participation if a principal has ahistory of market manipulation/malfeasance in ERCOT,other energy markets, or other markets or exchanges

Mandatory Wait Period or Complete

Ban/Bar

Single Entity Theory – FERC Example

• In January 2019, North Energy Power LLC (North Energy) declared bankruptcy and defaulted in NYISO. The

principals of North Energy, using a different company called Light Power & Gas of NY LLC (LPGNY), applied to

participate in NYISO. LPGNY had essentially the same ownership, product, and customers as North Energy. NYISO

denied entry claiming that LPGNY had not repaid its defaulted amount, and could not merely re-enter under a

different name.

• LPGNY filed a complaint with FERC. FERC ruled in favor of NYISO, stating that under FERC’s single entity theory, an

agency may disregard the corporate form in the interest of public convenience, fairness, or equity; FERC further ruled

that North Energy and LPGNY were the same entity, and could not circumvent NYISO’s credit policies by using a

different entity. See generally Light Power & Gas of NY LLC v. New York Independent System Operator Inc., Order

Denying Complaint, Docket No. EL19-39-000, 167 FERC ¶ 61,232 (June 20, 2019).

• NYISO has since incorporated the reasoning in the FERC order into its standard credit policy.

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QSE/CRRAH Application - ERCOT Denial/Approval

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ERCOT Denial & MP Appeal

Protocol §§ 16.2.2.3(3) & 16.8.2.3(3)

ERCOT

ADR

Process

ERCOT Approval & Continued Review

New: Background

Checks

New:

Future Background

Checks

(Material Change)

ERCOT Approval & MP Compliance

Annual Risk Certification

Notice of

Material Change

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QSE/CRRAH Application - ERCOT Approval

• ERCOT will perform a background check if deemed necessaryas a result of information disclosed—e.g., Financial Statements;publicly available information

• ERCOT will charge for each additional background check

Background Checks

• MPs required to notify ERCOT of material changes; ERCOTmay perform a new background check as a result of a materialchange; One-day notice requirement; See ERCOT Protocol §§16.2.1(3) and 16.8.1(2)

• Need clear definition of material change; include unreasonablecredit risk

Future

Background Checks

(Material Change)

• Additional annual disclosure requirement in Section 22,Attachment J, requiring QSEs/CRRAHs to annually updateinformation not voluntarily submitted throughout the year as amaterial change

Annual Risk Certification

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QSE/CRRAH Termination

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Voluntary Termination by MP

Terminate

SFA with 30 day

notice

Involuntary Termination by ERCOT

Default

New:

Material change

results in

unreasonable credit risk

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MP Voluntary Exit or Involuntary Termination: Changes

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• ERCOT needs discretion to remove badactors on a case-by-case basis

• Current: Defaulting QSE has 1 or 14 days tocure a breach depending on the type; SeeProtocol § 16.11.6(3) and SFA § 8(A)

• Proposed: For material change resulting inunreasonable credit risk, ERCOT to havediscretion to allow cure within a certainamount of time (1-14 days)

• Example: A principal at Company A isconvicted of financial fraud unrelated toCompany A. ERCOT sends a breach noticeto Company A informing them that having aprincipal with a financially related felony is aviolation of the Protocols. The Companyaddress the situation to ERCOT’s satisfactionwithin a prescribed period to cure the breach.

Default:

Material change results in

unreasonable credit risk

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Estimated Cost

• Application Fee(s) (QSE/CRRAH)

– Proposed Application Fee:• Existing:

• New: Background Checks: Estimated– Estimated cost of third party background checks apx.

$150/principal/individual

– New: Ongoing Background Checks: /background check

• Additional ERCOT Full-Time Employees

– Credit

– Legal

• System Changes

– May affect implementation timeline

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Next Steps

• 2nd Workshop: July 29, 2020 (following TAC)

– Stakeholders to submit questions/written comments

directly to ERCOT (Gibson.Hull@ercot.com) by June

26, 2020 for consideration at next workshop

– ERCOT would like to manage this discussion at the TAC

level with ERCOT workshops

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Appendix: Other ISOs - PJM

PJM Interconnection (PJM)

• PJM filed proposed operating agreement and tariff amendments with FERC on March 31, 2020

– PJM Section 205 Submittal to Amend Applicable Sections of the PJM Operating Agreement and Tariff in Order to

Enhance PJM’s Credit Rules

• Proposed KYC Requirements:

– Audited financial statements

– Disclosures: (5 year look back)

• “Order to Show Cause” and/or enforcement action by regulatory bodies (FERC, SEC, CFTC, NFA),

against entity, principals, and affiliates.

• Energy market criminal or civil litigation that resulted in criminal penalties and/or enforcement actions.

• Agreements or formation documents for equity/hedge funds and/or other private LLCs to understand the

risk associated with the top 4-5 principals, and investors and how they may aggregate with other funds

– History of default: Use disclosures and non-public and public information for the entity, affiliates, and/or

principals of the entity as well as any financial issues

• Within PJM, Another ISO/RTO, energy market, exchange, etc., bankruptcy filings, litigation, or evidence of

fraud and manipulation, officer certifications and self-disclosures

– Implement a credit risk assessment to understand the financial or business risk associated with an entity.

– Implement an in-house credit risk score

– Seeking the authority to require more restricted collateral set position, term, and tenure limits; suspend

participation; and ban bad actors

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Appendix: Other ISOs - NYISO

New York Independent System Operator (NYISO)• NYISO proposed tariff revisions to change creditworthiness requirements on November 26, 2019

– Adds minimum participation requirement for MPs have appropriate experience and resources to satisfy

obligations as they become due

– Gives NYISO express authority to reject an application if NYISO determines that an applicant’s participation

presents an “unreasonable credit risk”

– Requires customers to submit information/documentation reasonably required for NYISO to evaluate experience

and resources

– Includes an event/circumstance indicating that a customer may present an “unreasonable credit risk” as a

specific example of “material adverse change” in financial condition; allows NYISO to change MP’s amount of

unsecured credit due to increased risk of nonpayment

– Requires MPs to report on investigations (unless prohibited by law), take reasonable measures to obtain

permission to disclose information related to non-public investigations to NYISO

– Clarifies what NYISO evaluates when an entity tries to reenter NYISO following a bad debt loss; specifies

whether applicant should be treated as the same entity that caused the default

– Officer Certification Form & Credit Questionnaire Form require KYC information—e.g., litigation & regulatory

investigations/sanctions, bankruptcy disclosures, experience and market participation of principals, access to

funding

• Energy Trading Institute (ETI) argued NYISO’s changes were vague, unduly burdensome, and potentially

discriminatory

• In January 2020, FERC accepted NYISO’s revisions as just and reasonable and not unduly discriminatory or

preferential

– FERC Docket No. ER20-483-000 - Order Accepting Creditworthiness Requirements

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Appendix: Other ISOs – MISO & SPP

Midcontinent Independent System Operator (MISO)• Filed tariff revisions with FERC on January 27, 2020 - currently under review

• Proposed KYC requirements:

– MISO's Section 205 Filing to Amend Tariff Provisions

– Disclosures:• Past and ongoing investigations against MP/affiliates/principals by FERC, SEC, CFTC, any exchange

monitored by the National Futures Association or other entity responsible for regulating activity in an

energy market

• Summary of any bankruptcy, dissolution, merger or acquisition in previous five years

• History of default:

– Entity/affiliate defaulted in a wholesale energy/non-wholesale energy market

– Material adverse change definition updated to include unreasonable credit risk

– Limitations on re-entry following default (aligned with single entity theory in FERC’s NYISO

order)

– Authority to restrict collateral, reject new applicants, and suspend current participants• No overall ban on reentry

Southwest Power Pool (SPP)• Formulating tariff changes and KYC requirements

• Goal: File tariff revisions with FERC in 2020

• Preliminary KYC disclosures to include:– Affiliates in all RTOs

– Board, shareholder, owner information

– Compliance information

– Adverse regulatory actions

– All RTO collateral

– Adverse civil actions and bankruptcy

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Appendix: Other ISOs – CAISO and ISO-NE

• California Independent System Operator (CAISO)

– CAISO does not consider the types of issues posed by GreenHat to likely

impact the CAISO market, and is not proposing changes to its existing

credit policies at this time

• FERC Docket No. AD20-6-000 - CAISO's Request for Technical Conference

and Petition for Rulemaking

• ISO New England (ISO-NE)

– ERCOT is not aware of ISO-NE discussions regarding credit policy

changes resulting from the GreenHat default

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Appendix: ETI’s Request for FERC Technical Conference

• On December 16, 2019, Energy Trading Institute (ETI) requested that

FERC hold a technical conference to discuss standardizing credit and

risk management rules and procedures across RTO/ISOs

– See Energy Trading Institute Request for Technical Conference and Petition for Rulemaking to

Update Credit and Risk Management Rules and Procedures in the Organized Markets, Docket

No. AD20-6-000 1 n.1 (December 16, 2019).

• The ISO/RTO Council requested that FERC decline ETI’s request

because each ISO/RTO is different and should be able to create

policies and procedures unique to their respective markets

– ERCOT is not subject to FERC jurisdiction and did not join the ISO/RTO filing. See Motion For

Leave to Respond and Response of the ISO-RTO Council, Docket No. AD20-6-000 1 n.1

(January 4, 2020).

• FERC has taken no action with respect to the request for a technical

conference at the time this presentation was posted

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