Dive Brief:

• PJM Interconnection said Tuesday it has launched an independent investigation into the default of financial transmission rights (FTR) trading company GreenHat Energy, which accumulated an 890 million MWh FTR portfolio that became unprofitable.
• GreenHat was declared in default by PJM in June, leaving 992 out of PJM's 1054 members to pick up the tab on tens of millions in losses.
• PJM said it has "formed a special committee" composed of three board members who will be assisted by third-party independent experts to examine the default, determine how it occurred and make recommendations for future changes. 

Dive Insight:

GreenHat defaulted, in part, because of the low credit requirements associated with an enormous position it acquired over time — only to be undone by transmission upgrades that changed the historical congestion models the firm had banked on.

"When GreenHat acquired the majority of these positions starting in 2015 long-term FTR auctions, both historical congestion and the FTR auction clearing prices indicated that GreenHat’s portfolio would be profitable," PJM explained in a presentation on the default. "Accordingly, GreenHat had a low credit requirement based on the credit policy in effect at the time these positions were acquired."

PJM has been working to strengthen its credit rules since then, as it works to manage the losses left behind by GreenHat. The grid operator said it also petitioned the Federal Energy Regulatory Commission to amend liquidation requirements, in order "to minimize the impact to members of this and other defaults."

Examiners will have complete access to PJM records and staff for interviews and documentation review. To assist with the default analysis, PJM has hired experts from the Committee of Chief Risk Officers, Wolkoff Consulting Services, and counsel from Schnader Harrison Segal & Lewis LLP in Philadelphia.

The special committee will look into "the facts and circumstances" around GreenHat's market participation and default, examine PJM's actions and "make recommendations for the future of FTR markets," PJM said in its announcement.

In early 2017 it became obvious GreenHat's portfolio was in shaky shape because it was made up largely of prevailing flow FTRs "on paths for which future congestion was not expected to be consistent with historical congestion primarily due to the impacts of transmission system upgrades," according to PJM's analysis.