Revisions to Credit Exposure Calculations by using Electricity Futures Prices Suresh Pabbisetty, FRM, ERP, CQF, CSQA. Lead Technical Analyst, Credit May 18, 2016

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices New Acronyms: –MAF = Market Adjustment Factor –RFAF = Real-Time Forward Adjustment Factor –DFAF = Day-Ahead Forward Adjustment Factor –PFAP = Projected Forward Average Price –FWAP = Forward Weekly Average Price –WF = Weight Factor for forward week –HRSAP = Historic Real-Time Settled Average Price –HDSAP = Historic Day-Ahead Settled Average Price –FHP = Forward Hourly Price –rhub = Reference Hub –W = Forward Calendar Week 2

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices New Acronyms: –fwh = Forward Week Hour –nfwh = Number of Forward Week Hours –hrh = Historic Real-Time Hour –nhrh = Number of Historic Real-Time Hours –hdh = Historic Day-Ahead Hour –nhdh = Number of Historic Day-Ahead Hours –rll & rul = RFAF Lower Limit and RFAF Upper Limit –dll & dul = DFAF Lower Limit and DFAF Upper Limit –lrq = Look-back period for Real-Time market for all QSEs –ldq = Look-back period for Day-Ahead market for all QSEs 3

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices Market Adjustment Factors (MAF): Need for this factor and its definition was extensively discussed during NPRR638 and definition was modified with consensus CWG suggested to include exactly the same language into this NPRR Used to provide for the potential for overall price increases based on changes to ERCOT market rules or market conditions. ERCOT shall initially set this factor equal to 100%. This factor will not go below 100%. ERCOT will provide Notice to Market Participants of any change at least 45 days prior to effective date along with the analysis supporting the changes 4

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices Forward Hourly Price (FHP): Futures Hourly Price of the Reference Hub rhub for Forward Week Hour fwh  The most recent mark–to-market price available for an electricity futures product that includes the forward week hour fwh for the reference Hub rhub. ERCOT will disclose to the market the source of its selected electricity futures product(s) used for FHP. In the event that an ERCOT-selected electricity futures product(s) becomes unavailable or unsuitable for the intended purpose, ERCOT will select substitute electricity futures product(s). ERCOT will notify Market Participants of any change in the electricity futures product(s) at least 60 days prior to the beginning of their use. In the event that 60 days’ notice cannot be given, ERCOT will notify Market Participants as far prior to use as practical. 5

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices Forward Weekly Average Price (FWAP): Average of Forward Hourly Prices(FHPs) of all the hours in the forward week Projected Forward Average Price (PFAP): Weighted average of three forward weeks corresponding FWAPs Historic Day-Ahead Settled Average Price (HDSAP): Multiply all the terms of Average of RTSPP of all the hours from settled RTM operating days (14 days) used in most recent RTLE calculation Historic Day-Ahead Settled Average Price (HDSAP): Average of DASPP of all the hours from settled DAM operating days (7 days) used in most recent DALE calculation 6

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices Real-Time Forward Adjustment Factor (RFAF): Ratio of PFAP to HRSAP subjected to the limits/guardrails rll and rul Day-Ahead Forward Adjustment Factor (DFAF): Ratio of PFAP to HDSAP subjected to the limits/guardrails dll and dul MCE Change: Remove SAF multiplication from all components of MCE Apply multiplication of RFAF*MAF to all components of MCE except IMCE IMCE was introduced in NPRR 620 and applicable for traders. It’s calculation is based on Price Caps but not the actual prices, hence change in forward prices do not impact this calculation Administrative changes to subscripts to align them with their definitions 7

PUBLIC Revisions to Credit Exposure Calculations by using Electricity Futures Prices EAL Change: Apply multiplication of RFAF to RTLE Apply multiplication of DFAF to DALE Reports Change: A new report called “Forward Adjustment Factors Summary Report” is added to the list of reports published under MIS certified area This report gets published once a day This report include the details necessary to be able to fully shadow RFAF and DFAF. 8

PUBLIC Credit Exposure Analysis using ICE Prices Questions 9