UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION. ) PJM Interconnection, L.L.C. ) Docket No. ER )

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) ) Docket No. ER ) ANSWER OF PJM INTERCONNECTION, L.L.C. TO PROTEST AND COMMENTS ( PJM ), pursuant to Rule 213 of the Commission s Rules of Practice and Procedure, 18 C.F.R , hereby answers certain comments on and protests to PJM s October 1, 2018 filing 1 made pursuant to section 205 of the Federal Power Act ( FPA ) to revise provisions of the PJM Open Access Transmission Tariff ( Tariff ) and Amended and Restated Operating Agreement of PJM ( Operating Agreement ). Specifically, PJM proposed to give sellers in bilateral Financial Transmission Right ( FTR ) 2 transactions the ability to assume negatively valued FTR positions held by buyer Members declared to be in default when the seller has previously agreed to indemnify PJM and its Membership for the costs of such default. 3 1 Financial Transmission Rights Bilateral Transaction Indemnification Revisions of, Docket No. ER (Oct. 1, 2018) ( Indemnification Assumption Filing ). 2 All capitalized terms that are not otherwise defined herein shall have the same meaning as they are defined in the Tariff, Operating Agreement, or the Reliability Assurance Agreement among Load Serving Entities in the PJM Region. 3 PJM seeks leave to answer the protests and comments to its October 1, 2018 filing to assist the Commission s decision-making process and clarify the issues. The Commission regularly allows answers in such cases. See, e.g., PJM Interconnection, L.L.C., 139 FERC 61,165, at P 24 (2012) (accepting answers to a protest because they have provided information that assisted [the Commission] in [its] decision-making process );, 104 FERC 61,031, at P 10 (2003) (accepting answer because it will not delay the

2 The Tariff revisions made in the Indemnification Assumption Filing were requested by Shell Energy North America (US), L.P. ( Shell ). Shell, a PJM Member, has sold FTRs to GreenHat Energy, LLC ( GreenHat ), which defaulted on FTR payment obligations commencing on June 1, 2018, and is expected to continue its default through May 31, 2021, as additional FTR obligations in its portfolio come due. 4 The only critical responsive filings are a protest from Shell, which acknowledges that Shell is responsible for indemnifying PJM for charges associated with FTRs it sold GreenHat, 5 and comments by DC Energy, LLC ( DC Energy ). 6 Shell opposes the Indemnification Assumption Filing notwithstanding the fact that Shell was the only PJM Member that requested PJM include bilateral counterparty assumption Tariff revisions in the stakeholder process. DC Energy seeks clarification regarding the effects of PJM s proposal. Shell is the only PJM Member that bilaterally sold FTRs to GreenHat prior to GreenHat s default as reflected in the public data on the PJM FTR Center application. At the heart of Shell s protest is dissatisfaction with PJM s indemnification provision in Operating Agreement, Schedule 1, section 5.2.2(d)(iv), which provides that a proceeding, will assist the Commission in understanding the issues raised, and will [e]nsure a complete record upon which the Commission may act ); Ne. Utils. Serv. Co., 86 FERC 61,161, at 61,568 (1999) (accepting an answer to a pleading that sought affirmative relief and because the response aided in the Commission s analysis and disposition). 4 See Motion to Intervene and Protest of Shell Energy North America (US), L.P., Docket No. ER , at 2 (Oct. 22, 2018) ( Shell Protest ) ( Shell Energy is one such seller, and PJM has invoiced Shell Energy for amounts owed by GreenHat related to the FTRs Shell Energy sold to GreenHat. ). 5 See Shell Protest at 2. 6 Comments and Request for Clarification of DC Energy, LLC, Docket No. ER (Oct. 22, 2018) ( DC Energy Comments ). 2

3 seller under a bilateral FTR contract shall guarantee and indemnify the Office of the Interconnection, PJMSettlement, and the Members for the buyer s obligation to pay any charges associated with the transferred [FTR] and for which payment is not made to PJMSettlement by the buyer under such a bilateral transaction. 7 The section 5.2(d)(iv) indemnification obligation was previously accepted by the Commission and is part of PJM s current effective Tariff. PJM acknowledges, as it did during the stakeholder process, that the assumption of negatively valued FTRs by the indemnifying seller pursuant to the revisions proposed in this docket has the potential to change the allocation of benefits and burdens for each assumed FTR. Specifically, if a negatively valued position were assumed by an indemnifying seller pursuant to these revisions, there is a chance the assumed FTR could turn positive over the course of time and thus result in a payment or credit that if not assumed would have inured to the benefit of the other PJM Members. 8 But this potential benefit to Shell should not be used as a basis for Shell to demand benefits not afforded to it by the indemnification provision or to challenge PJM s implementation of the indemnification provision. The indemnification provision serves an important function by protecting PJM and Members from the possibility that a bilateral FTR sale which FTR holders are generally free to make will result in socialized default charges to the rest of the Members if a party to the bilateral FTR transaction defaults on its obligations. Thus it is clear that an indemnifying seller has an obligation to pay any charges associated with 7 Operating Agreement, Schedule 1, section 5.2.2(d)(iv) (emphasis added). 8 If the Commission determines this risk renders this proposal not just and reasonable, the Commission should simply reject the proposed Tariff revisions. 3

4 the FTRs it sold to a buyer, but does not grant an indemnifying seller any right to the positive gains from an FTR it sells on the bilateral market, as Shell suggests, nor or any right to step-into the shoes of GreenHat with respect to FTRs it conveyed to GreenHat. Under the terms of the Operating Agreement, Shell and indeed any indemnifying bilateral seller has no right to benefit from the financial upside of any FTR it has sold bilaterally within the PJM Market. These are the terms an indemnifying seller agrees to when it enters into a bilateral sale of FTRs under the Operating Agreement. Similarly, nothing in PJM s FTR indemnity provision entitles indemnifying sellers to the benefit of netting the positive credits of FTRs that the indemnifying seller may have also sold to the defaulting PJM Member against the losses from FTR charges. Thus, because an indemnifying FTR seller has no right to the financial upside of an FTR it sells to a buyer who later defaults, Shell s argument that an indemnifying seller should be allowed to assume all FTRs in a defaulting Member s portfolio for which it was the seller, including positively valued FTRs, is an attack on the existing Operating Agreement, and has no merit. 9 9 Shell makes plain, Shell Protest at 14, that its pleading seeks relief under section 206. That is procedurally improper a party may not combine a section 206 complaint with a protest to a section 205 filing. See, e.g., PJM Interconnection, L.L.C., 145 FERC 61,035, at P 35 n.19 (2013) ( Intervenor-proposed changes to PJM s existing tariff must be made through a complaint under section 206 of the FPA and not through protests to a section 205 filing. ); Otter Tail Power Co., 137 FERC 61,255, at P 23 (2011) ( The Commission discourages the combination of complaints with other types of filings, including protests. ). If the Commission accepted at face value Shell s argument that PJM s section 205 filing is woefully inadequate and not just and reasonable, then its response would be to reject the filing. But Shell has not made that case. The Indemnification Assumption Filing gives indemnifiers more flexibility than they currently enjoy to manage their obligation to pay any charges due from the FTRs they sold. That change, on its face, is just and reasonable. Shell simply wants more, notwithstanding its support 4

5 Regarding DC Energy s three requests for clarification, 10 PJM responds briefly as follows. PJM currently applies the indemnity clause in Operating Agreement, Schedule 1, section 5.2.2(d)(iv) as it is set forth in the Operating Agreement. That is, when a Member defaults on an FTR it bought bilaterally, PJM will invoice the seller of that FTR for charges the defaulting buyer failed to pay that were incurred in association with the FTR that was transferred bilaterally. As described in greater detail in the Indemnification Assumption Filing, the practical effect of PJM s proposed Tariff revisions will be to allow indemnifying sellers to elect to assume all of the negatively valued FTRs in a defaulting Member s portfolio for which it has provided the indemnity set forth in Operating Agreement, Schedule 1, section 5.2.2(d)(v) based on the most recent clearing price at auction for such FTR. PJM acknowledges, as it did during the stakeholder process and above, that the assumption of negatively valued FTRs by the indemnifying seller does in theory change the allocation of benefits and burdens. Namely, should an assumed FTR turn positive over the course of time and thus result in a payment/credit, then the indemnifying seller would receive that benefit, as contrasted with that credit inuring to the benefit of the other PJM Members. A defaulting Member s collateral will continue to be administered under PJM s Credit Policy in Tariff, Attachment P, including for the application of collateral against amounts owed due to FTR obligations. in the PJM stakeholder process for the section 205 change now before the Commission. Nothing in Shell s pleading demonstrates that the Commission should accommodate that ambition. 10 DC Energy Comments at 2 4. DC Energy asks how PJM applies its current indemnity provisions, what the practical effect is of PJM s proposal, and how a defaulting buyer s collateral will be treated. Id. 5

6 For the reasons set forth in this answer, and in the Indemnification Assumption Filing, PJM asks that the Commission accept the Tariff and Operating Agreement revisions proposed in the Indemnification Assumption Filing, effective December 1, Respectfully submitted, Craig Glazer Vice President Federal Government Policy 1200 G Street, N.W., Suite 600 Washington, D.C (202) (phone) (202) (fax) craig.glazer@pjm.com Jennifer Tribulski Associate General Counsel 2750 Monroe Boulevard Audubon, PA (610) (610) (fax) jennifer.tribulski@pjm.com /s/ Victoria M. Lauterbach Paul M. Flynn Victoria M. Lauterbach Wright & Talisman, P.C G Street, N.W., Suite 600 Washington, D.C (202) (phone) (202) (fax) flynn@wrightlaw.com lauterbach@wrightlaw.com Attorneys for November 6,

7 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Washington, DC, this 6th day of November /s/ Victoria M. Lauterbach Attorney for