Topics in the text: Credit and exit · Cost allocation
Credit and default · PDF pp. 1–4
PJM credit director Gwen Kelly distinguishes periodic settlements from the longer underlying payment obligation. She favors a known auction clearing price as the calculation base rather than a forecast of future capacity prices.
the underlying procurement commitments extend over a substantially longer period PDF p. 3
Credit and default · PDF pp. 4–6
Kelly uses a 9.5% discount rate, a BBB portfolio, a 4.05% default probability, 100% loss on unsecured exposure after default, and a 4.93% collateral funding cost. These are modeling inputs, not predictions for each supplier.
This does not mean that every LSE has a BBB credit rating or the same probability of default PDF p. 6
Credit and default · PDF pp. 7–10
Kelly compares the cost of posting security with losses other suppliers might absorb after a default. In Table 2 the combined cost is lowest at 40% among the collateral levels tested. That does not mean suppliers will pay 40% in settlements.
The 40% factor does not represent the percentage of gross RBP payments that PJM expects LSEs to pay PDF p. 10
Credit and default · PDF pp. 10–11
At an assumed clearing price of $555 per MW-day, the formula yields roughly $686,000 per MW of collateral, about 3.4 years of undiscounted payments. The final rate would depend on actual auction results; the total posted also depends on each supplier's allocated MW.
This amount is equivalent to approximately 3.4 years of undiscounted RBP payments per MW at the assumed clearing price PDF p. 11
FirstEnergy Service Company · Related public statement
FirstEnergy compared supplier security of $1.5 million per MW under the earlier design with the much smaller security required of sellers. That objection is a benchmark for the revised calculation, not an objection to the new $686,000 figure.
PDF p. 14Credit and default · PDF pp. 11–12
Kelly says qualifying cash, letters of credit or surety bonds could satisfy the obligation. She distinguishes this security from other PJM credit tools and describes reassessment of the rate after committed resources enter operation.
cash, letters of credit, or surety bonds, subject to PJM’s acceptance of the provider, form, and amount PDF p. 12
Credit and default · PDF pp. 13–14
Kelly supports the model as a balance between the supplier posting collateral and other suppliers exposed to a default. Her affidavit is evidence offered for PJM's filing, not an independent finding that the model is optimal.
the methodology balances the interests of LSEs required to post collateral against those of LSEs that may bear losses PDF p. 13
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