Until now, Mark Gorton and his companies, which left Mid-Atlantic electricity players holding an $80 million bag recently when they defaulted on a contract, have kept silent. I called Gorton's Tower Research Capital a couple weeks ago, and they said they weren't commenting. The $80 million estimated loss, generated by Tower affiliate Power Edge, has to be borne by PJM's members -- including Baltimore Gas & Electric. Today, however, Gorton has sent a five-page, single-space letter to the members of PJM Interconnection, which manages the Mid-Atlantic grid. In it, he explains what happened, apologizes and argues against new, tougher collateral rules proposed by PJM to keep this from happening again. I can't find it on PJM's Web site yet. Thanks to the alert PJM member who sent it to me.

The highlights: Gorton is "sorry" about the default but makes no offer to cure it. Power Edge put up only $3 million in collateral to control the huge, money-losing trade. Power Edge acquired the position from another investor, according to Gorton. And PJM seems to have allowed an exception to its own, already lightweight collateral requirements, to let Power Edge acquire the position. Gorton blames the default on "a rare failure of a large transformer and schedule changes that caused overlapping of transmission outages each capable of handling 15-20% of the electrical load in Jersey City..." The changes, he says "radically transformed the make-up of the New Jersey electrical grid."

Some excerpts:

As manager of Power Edge, I am extremely sorry that a default associated with a fund I run has damaged PJM and its members. The current market structure and poor oversight of PJM created a situation where there was no institutional support to prevent a default. As manager of Power Edge, I depended more upon the collateral requirements of PJM as a risk management tool than was wise. My experience with other markets around the world led me to take false comfort in the collateral requirements of PJM.

The behavior of the Power Edge FTR portfolio these past few months has been a great lesson to me of the unpredictable nature of FTR values... I feel very badly about the default of Power Edge. I intend to work diligently to help rectify the structural problems at PJM that have allowed a situation like the Power Edge default to occur.

No offer to actually pay back the money that Power Edge owes. According to Gorton, Power Edge acquired its (eventually losing) position in "financial transmission rights" from another entity called Exel Power Sources LLC.

Despite being thinly capitalized, Exel was allowed to bid for a large number of FTR positions, and in Round 2, in particular. Exel won an unusually large amount of FTRs. Even before the term of the FTRs started, Exel was unable to meet its initial collateral requirements, and PJM knew it had a significant problem on its hands...

So in order to help Power Edge to take the entire Exel portfolio, PJM reduced the collateral requirements of taking the portfolio from $14.7 million to $3 million and allowed this $3 million to also be used to support bids in upcoming auctions. Power Edge would never have acquired the Exel portfolio if PJM had enforced its own collateral requirements.

And more:

Upon hearing of the default, the [PJM] Membership was understandably outraged that poor market regulation and oversight could have left them facing such a large socialization. Even after the default, Power Edge has continued to work with PJM in an attempt to mitigate this bad situation. Power Edge has always kept a low profile, and after the default, Power Edge did not come forward to explain the history behind the default. This silence is partially because Power Edge received assurances from PJM that PJM would engage in dialogue with us to resolve the issues at hand.