Day Ahead Market QSE’s Credit Requirements Concerns and Solutions August 14, 2008

2 Market Concerns  The current collateral requirements for QSEs to participate in the DAM are significant and based on potential offers and bids and not what is actually cleared through the market. Thus, market participants have an increased cost of credit.  Some are concerned that the significant collateral requirements on QSEs will discourage market participants from participating in the DAM, which will create inefficiencies and additional volatility. Additionally, unhedged QSE load in the DAM will result in increased default risk in real time.  CWG has been briefed on the issue and the WMS/CWG joint task force has meet to discuss possible solutions Requesting WMS to endorse one of the near-term solutions so the task force can move ahead and develop necessary language. Additionally, request WMS/CWG to further develop a long-term solution that offer the best resolution for the market

3 Daily Credit Calculations Available Credit Limit (ACL) is the credit line available for the QSE to participate in DAM & CRR auctions The Counter Party’s ACL is equal to the net of its Unsecured Credit Limit plus Collateralized Credit Limit minus the Total Potential Exposure (TPE) Collateral requirements for DAM Credit Validation is significant and conservative-  For each DAM Energy Bid : the bid Quantity X bid price  For each DAM Energy Offer : the offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour)  For DAM Energy Bids and DAM Energy Offers at the same SPP : the max credit exposure for the Energy Bid or Offer  For AS not self-arranged : the quantity of the AS X (95 th percentile of the hourly MCPC for the service over the previous 30 days for that hour)  For PTP Obligation Bids :The sum of quantity of the bid X (bid price, if positive, + the 95 th percentile of the hourly basis difference over the previous 30 days for that hour)

4 The Low Risk Market Player QSE 1 has 1000 MW physical generation & 500 MW load obligation  In DAM, QSE 1 Offers 1,000 MW of DAM 3-Part Energy Offers & 500 MW of DAM Energy Bids  QSE 1 would need collateral for –DAM 3-Part Energy Offers at Hub = offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour) 1000 X $4/MWh = $4,000 –DAM Load Obligation at Load Zone= the bid Quantity X bid price 500 x $50/MWh = $25,000  Total Credit requirements of $29,000 while QSE 1 net physical position of 500 MW is over-collateralized by DAM validation process

5 The High Risk Market Player QSE 2 has no physical generation & 500 MW load obligation & 1000 MW virtual generation  In DAM, QSE 2 Offers 1,000 MW of DAM Energy Offers & 500 MW of DAM Energy Bids  QSE 2 would need collateral for –DAM Energy Offers = offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour) 1000 X $4/MWh = $4,000 –DAM Load Obligation = the bid Quantity X bid price 500 x $50/MWh = $25,000  Total Credit requirements of $29,000 while QSE 2 was under- collateralized the basis risk and no show risk

6 Loss Comparison given Default RiskLow Risk PlayerHigh Risk Player RT-DA > $4/MWhHigher heat rate units dispatched < Collateral Required for RT Buy back energy at loss & collateral required > by delta RT-DA > $4/MWhHigher heat rate units not dispatched < Collateral Required for RT Buy back energy at loss & collateral required > by delta Tim- please provide additional details

7 Near Term Credit Solutions Reduce the impact of short term market price anomalies by either removing the data from the historical price distribution for energy offers  For example, reduce the 30 day 95 th percentile distribution to a XX th percentile based off MCPE analysis Distinguish between actual offers from physical assets and virtual units by reducing collateral requirements for 3-part energy offers  3-Part energy offers are credited back if the energy offer price would be reasonably struck based off the historical 30-day average Settlement Point Price (we are checking with Credit Management and Monitoring system team on the time to implement)

8 Long Term Credit Solutions Establish a policy that acknowledges on an individual basis the Market Participants credit worthiness, risk management practices, and historical performance (update Unsecured Credit Policy)  For example, for groups of Market Participants that meet a predetermined criteria, apply a multiplier greater than 1.0 to the pre- DAM available credit line Net out bids and offers volume if QSE has physical assets to cover the position for 3 part and energy-only offers Based off historical performance and good payment history, perform an analysis to provide some credit back DAM energy bid calculation Other alternatives to be discussed