ACL Methodology Proposal CWG Meeting ERCOT January 20 th,2014 Abu Moavu

Current Available Credit Limit Computation 1  Mr. Moavu explained that the current discount is effectively applied on the excess collateral held instead of on exposure which may unfairly reduce the credit limit of Counter-Parties that post significant amount of excess collateral over exposure. He proposed grossing up exposure by 110% instead of discounting the available credit limit by 90%. Mr. Moavu agreed to draft an NPRR and present to the group in the next meeting. ERCOT Credit staff will present the market impact of grossing the exposure solely for purposes of determining ACL. ComponentValueDescription Letter of Credit60 (A) Current ERCOT LC Posting TPEA15 (B) Total Potential Exposure Any TPES10 (C) Total Potential Exposure Secured CRR Lock0 (D) CRR Lock Amount TPEA+TPES+CRR25 (E) = B+C+D Unused Letter of Credit35 (F) = A - E ACL Buffer3.5 (G) = F x 10% Total Requirement28.5 (H) = E + G ACL DAM31.5 (I) = A - H Values in $ Millions The current computation unfairly penalizes counterparties posting excess collateral.  The current computation applies a buffer on the unused letter of credit/Excess Collateral.  This method unfairly reduces the Credit Limit of counterparties posting Excess collateral.  A better method might involve grossing up the Total requirement by 110% instead of discounting the ACL/Unused Letter of Credit by 90%.  2 counterparties having the same TPEA & TPES Requirements with different Letter of Credit postings have different Credit Requirements.

2 The proposed method fairly calculates credit requirements for all counterparties regardless of their letter of credit postings. * The CRR engine would not award CRR’s in excess of the lock amount hence a buffer shouldn’t be required on the CRR amount. Proposed Available Credit Limit Computation ComponentValueDescription Letter of Credit60 (A) Current ERCOT LC Posting TPEA15 (B) Total Potential Exposure Any TPES10 (C) Total Potential Exposure Secured TPEA+TPES25 (D) = B+C ACL Buffer2.5 (E) = D x10% CRR Lock0 (F) = CRR Lock Amount Total Requirement27.5 (G) = D +E + F ACL DAM32.5 (H) = A - G Values in $ Millions  The proposed approach applies a buffer on the true credit requirement (TPEA + TPES).  This method doesn’t reduce counterparty ACL based on excess postings.  The new method excludes the CRR lock amount* from the buffer calculation.  2 counterparties having the same TPEA & TPES Requirements would have the same credit requirements regardless of their LC postings.