ERCOT Protocols Relating to Credit & Default Andrew Gallo Assistant General Counsel

Creditworthiness  §  Monitored by ERCOT (EAL, TEL, NLRI)  Formula plus ERCOT discretion  Financial Statements  MP has duty to maintain security in an amount at or above its TEL/EAL/NLRI  MP must inform ERCOT, w/n 3 Bus. Days if its financial situation “materially changes”  MP can meet req’ts by:  Guaranty  LOC  Surety Bond  Cash

Creditworthiness (cont’d)  ERCOT informs MP of change in collateral req’ts  MP must provide add’l collateral by 1500 on 2d Bank Bus. Day after ERCOT sends notice if notice sent before 1500  1700 if notice sent after 1500  Failure to timely post is a very bad thing (same result as “Payment Defaults” §16.2.9)

Payment Default  §  Every MP must ensure timely payment  Invoices  Collateral calls  No netting w/r/t sub-QSEs  Payments must be made by due date  “Available funds” (i.e. wire transfer; no ACH)  Next Bank Business Day if not a banking day  Failure to pay or post collateral = “Payment Default”  Cross-Default

Payment Default (cont’d)  SFA gives MP 2 Bus. Days to cure default  If default not cured, ERCOT Remedies:  No payments from ERCOT until MP fully cures (incl. TCR revenues, TCR credits, reimbursements for short payments and any other reimbursements or credits under any other agreement (§ )  Scheduling privilege may be revoked  QSE may have to self-arrange A/S  QSE cannot bid for A/S  ERCOT notifies MPs represented by QSE

Payment Default (cont’d)  ERCOT Remedies (cont’d):  Draw down or hold any security or other funds (even if they exceed the amt owed)  Amounts owed to ERCOT aggregated  Revocation of rights as a MP  Mass Drop of ESI IDs (per § )

Late Payments Late Payment  §  Every MP must ensure timely payment  Invoices  Collateral calls  Payments must be made by due date  “Available funds” (i.e. wire transfer; no ACH)  Next Bank Business Day if not a banking day  Paid Late = “Late Payment”

 First Late Payment in 12 mo. rolling period  ERCOT decides on Level I enforcement  Level I:  Must post collateral at 110% of TEL/EAL  Must provide w/n 2 Bank Bus. Days  Failure to do so = Payment Default  Must do so even if no collateral previously posted Late Payments (cont’d)

 Second Late Payment in 12 mo. rolling period  If no Level I action taken on 1 st LP, ERCOT may take Level I now  If Level I action taken on 1 st LP, ERCOT may take Level II action now  Level II:  MP must post collateral in cash or LOC of 110% of TEL/EAL  Due w/n 2 Bank Bus. Days  Failure to do so = Payment Default Late Payments (cont’d)

 Third Late Payment in 12 mo. rolling period  If no Level II action taken on 2 nd LP, ERCOT may take Level II now  If Level II action taken on 2 nd LP, ERCOT may take Level III action now  Level III:  Advise the authorized rep. that a subsequent Late Payment in the rolling 12 mo. period could result in termination of the MP’s right to schedule capacity or energy in the ERCOT Region; or  Take action under § and revoke MP’s rights and terminate agreements Late Payments (cont’d)

 Fourth Late Payment in 12 mo. rolling period  ERCOT may take Level III action  Level III:  Advise the authorized rep. that a subsequent Late Payment in the rolling 12 mo. period could result in termination of the MP’s right to schedule capacity or energy in the ERCOT Region; or  Take action under § and revoke MP’s rights and terminate agreements Late Payments (cont’d)

QSE Failure/Default  §  If QSE fails or ERCOT suspends it:  ERCOT notifies MPs represented by QSE  ERCOT assigns them to “Default QSE” (DQSE)  UNLESS the failed MP is a CR/LSE serving as its own QSE  Then, § , Revocation of a Market Participant’s Rights and Termination of Agreement will apply  MP represented by defaulting QSE must now:  Find a new QSE (w/n 72 hrs) or  Become an Emergency QSE (EQSE) (see next slide)  New QSE or EQSE must begin scheduling w/n 72 hrs

QSE Terminating Rel’p  § QSE terminating rel’p with LSE/Resource  QSE must give ERCOT 12 Bus. Days notice  Within 2 Bus. Days of learning of the intent to terminate, ERCOT must send a collateral call to MPs represented by QSE  Before the Termination Date:  MP must find a new QSE; or  Become an EQSE or VQSE by 4 th Bus. Day after notice  If MP meets collateral call sent by ERCOT, it’s an EQSE  If not, it’s a “Virtual” QSE (VQSE)  VQSE established to track financial loss  Mass Drop of ESI IDs (§ )

Timeline Review ERCOT Sends Notice of LSE Breach LSE must name new QSE or post collateral for EQSE by Noon End of cure period Mass transition of ESI IDs begins Last ESI ID transitions from Defaulting LSE *Top = Payment Default *Bottom = MP being dropped by its QSE *Dates in Business Days. 3 QSE Liability = 12 Business Days Failure to make payment/ collateral call Notice from QSE re: drop End of cure period Mass Transition begins 13 Market Exposure ERCOT Sends Notice of Breach 106 Market Exposure 1 Last ESI ID transitions from Defaulting MP

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