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PJM filed with the Federal Energy Regulatory Commission (FERC) on May 27 to double the requirements for participants in financial transmission markets, while other participants face a net worth requirement that would be increased fourfold.

PJM said the changes reduce risk posed by under-capitalized participants, improve the ability of a market participant to absorb losses and are in line with similar minimum requirements approved by FERC for other grid operators.

John Fox, chief credit officer of Capital Foundry, called the proposal “outrageous” and said the increase will be a “a stretch” for the companies served by his firm.

Large energy service companies often have banking relationships through a corporate parent, he said, while capital requirements on small retail energy providers (REPs) make it hard for them to continue operations.

In PJM’s proposal, participants in financial transmission and other markets both will have the $2 million requirement.

Participants will be able to add to their tangible net worth incrementally over five years. Starting in the sixth year, tangible net worth requirements will increase by 3% annually.

PJM said the effectiveness of the current requirements has been reduced by inflation over the last 15 years.

Participants that cannot comply may still participate in PJM markets by posting collateral, a cash deposit, letter of credit or a surety bond. A corporate guaranty can be established at an amount at least equal to the tangible net worth threshold.

By comparison, tangible net worth requirements are $1 million in ISO New England and the New York Independent System Operator.

Market participants in the Electric Reliability Council of Texas must post collateral of $500,000.

PJM asked FERC to make the new capital requirements effective on July 27. Many companies have announced their intent to intervene in the pending case at FERC but have yet to do so.

Energy Artisans, a Maryland firm that advises energy buyers, project developers and governments, said that payment defaults in PJM in recent months are de minimis when compared to overall collateral and exposure levels.

The proposed capitalization increases may disproportionately affect public power entities, independent power marketers, developers of renewable energy and smaller retail suppliers.

Many of these entities manage risk conservatively and participate in wholesale markets without creating meaningful exposure to other market participants, Energy Artisans said.

Old Dominion Electric Cooperative, a sizeable generation and transmission company in Virginia with 11 distribution coops as members, urged FERC to approve PJM’s request.

“Unpaid default obligations are socialized across all non-defaulting members,” Old Dominion said. “Because load-serving entities bear a portion of these assessments, the cost of defaults that could have been prevented through adequate capitalization standards are ultimately passed onto consumers.

“Old Dominion supports PJM’s efforts to proactively address potential harm to consumers, rather than wait to act in the wake of a significant default event.”

The PJM Independent Market Monitor said it agrees with the cooperative and also supports approval of PJM’s request at FERC.

Against the backdrop of PJM’s proposal, Fox said large companies have worked over the last decade to persuade state legislatures and public service commissions to increase the barrier to entry for small REPs.

These developments provide an opportunity for Capital Foundry, which Fox said has a reasonably sized portfolio of energy service companies to support. The financier would like to add more REPs to that group by taking a senior secured interest in their business.

Capital Foundry will finance a REP’s billing receivables and unbilled receivables, or the energy consumed but unbilled because of utility billing cycles, Fox said. The company also provides deposits to independent system operators and wholesale suppliers on behalf of REPs.

“We will advance against the unbilled because we get a download every day and know [how much] energy has been consumed,” Fox said. “A conventional banker looks at the unbilled as not eligible. They are very rigid in some of those things, which is fine with us.

“Our role has expanded. We believe it will become increasingly more difficult for the smaller guys to stay in business without a merger or acquisition.”

Regulators and consumer advocates in many states in past years have found cases of retailers selling power not backed up by supply or interactions that consumers did not understand.

While this did not help the industry’s reputation, the days of questionable business practices by REPs are largely in the past, he said.

“The guys that we finance we do not have that problem,” Fox said. “We are very careful about who we will support to make sure that they are compliant. But the big companies still would rather that the small guys were not there.”

In seeking to finance more REPs, Capital Foundry requires a detailed application, background checks and personal credit checks.

If Capital Foundry decides to proceed with an applicant, an examiner will check bank statements, profitability and accounts payable. The applicant’s books should have been reviewed by a certified public accountant every quarter, at minimum.

“We want to make sure we are dealing with a company that is properly managed, with the right background and consultants. We do not want to take on somebody that is going to create a problem both for them and us.”

A team of portfolio managers monitors the applicant’s positions in the power markets.

The applicant is expected to be hedged and have strong risk management, Fox said.

“We prefer all variable pricing because of fluctuations,” he explained. “The problem with fixed pricing is that you have to be 100% hedged and even then, it is a gamble on extreme weather, which would upset the gross and net margins. As there are changes in the supplier’s cost of energy, those are passed on to the user.”