DEFAULT FUND MCWG date 1

General Concept  Operate as a mutual fund  Set a funded cap  Set entity ongoing responsibility  Set process to redistribute  Use for all defaults 2

How the fund would work Default Fund Initial Funding Default Coverage Monthly Rebalancing Interest? Default Repayment Includes payments by defaulted party and other participants per default allocation mechanism New EntrantsExiting Parties 3

Initial Funding  Decision: Limit for the fund  $20mm  $10mm  Decision: Entity funding responsibility  Risk based  Same as allocation mechanism  Funding entities hold “shares” of the fund equal to their current % of total fund  Decision: Can entities use their funded amount against their ERCOT collateral requirements?  Decision: How quickly will initial funding take place? 4

Fund Management  Decision: Managed by ERCOT or other? (Fees?)  Decision: How will funds be held?  Low interest bearing account  Market fund  If ERCOT, managed against other ERCOT liabilities  Monthly true up  Realign ownership based on initial funding mech  Distribute interest earned or penalties repaid if any  Per decision on repayments: Request additional funds to replenish until repayments made Distribute any repaid amounts 5

Default Distribution  Should a default occur:  All funds held by defaulted party used first Question: Can fund be legally limited this way?  Remainder of default charged to fund at large  Decision: Should remaining funding entities replenish the fund or wait until allocation? 6

New Entrants/Exiting Entities  At monthly true up:  New entities will be aggregated in with all remaining entities as a part of the reallocation calculation  Any entities exiting the market will be distributed funds related to their holdings in the fund 7

Example  Fund is set at $20mm  10 participants with equal responsibility  $2mm required per participant  Payments are required monthly at rate determined earlier  Each entity holds 10% share of the fund 8

A Default Occurs  One of the entities defaults with $11mm liability  His portion of the fund covers the first $2mm, the remaining $9mm is from the fund holdings of others  The fund has 9 participants and holds only $9mm  Each participant now has $1mm interest in the fund  Depending on decision made earlier:  The participants begin to rebuild the fund  The fund stays at this level awaiting allocation  In all cases collection efforts take place for the remaining $9mm and used to replenish the fund 9

Monthly Reallocation  Back to original example:  10 participants/$20mm/$2mm each  Assume 1 participants liability decreases to 5% and another increases to 15%  The 5% party is paid $1mm out of the fund  The 15% party is required to pay $1mm into the fund  The holdings of the parties are adjusted accordingly 10

Participant Entrance/Exit  Original example  1 party leaves  At Monthly Reallocation that entity is paid $2mm, all others pay in $222k  All others now  Original example  1 party enters and must pay into the fund $1mm  All others are paid $100k and their share of the fund drops to 9.5% or $1.9mm 11

Entrance/Exit Under Default  If the fund is not at the cap during an Exit  The entity is paid for holdings per ratio at time of exit  Continues to receive ratio of payments returning moneys into the fund  Does not receive any additional interest allocations  A participant that enters during default must still pay in as if the fund were at the cap  Does not receive payback from recoveries from defaulted party or default allocations (did not pay into event, shouldn’t receive from event) 12

Cost/Benefit  Costs:  Administrative fees  Float on amount posted (full if not netted)  Benefit:  Vastly improved payment timeline (no short pays)  Additional margin if posting is greater than margin amount (full if not netted) 13