1 DAM Credit parameters review The “Procedures for Setting Nodal Day Ahead Market (DAM) Credit Requirements Parameters” is a document that is required per Protocol Section –Defines credit parameters and “e” factors –Protocols require that this document be reviewed at least annually –This document was last updated on July 19, 2011 In addition, Protocol section (6) (d) (iv) establishes a PTP Obligation discount factor with an initial value of 80% –This value is to be reviewed by TAC and approved by the ERCOT Board at least annually CWG/MCWG MeetingJanuary 26, 2012

2 Overview Summary of Parameters Current Values for DAM Credit Parameters and e-factors Summary of e – factor settings Summary of credit consumed in the DAM Next steps Supplement – background materials CWG/MCWG MeetingJanuary 26, 2012

3 Summary of Parameters CWG/MCWG MeetingJanuary 26, 2012

4 Current Values for DAM Credit Parameters and e-factors CWG/MCWG MeetingJanuary 26, 2012

5 Summary of e – factor settings CWG/MCWG MeetingJanuary 26, 2012

6 CWG/MCWG MeetingJanuary 26, 2012 Summary of e – factor settings

7 Summary of credit consumed in the DAM CWG/MCWG MeetingJanuary 26, 2012

8 Next steps Complete review at CWG / MCWG If changes are proposed, approval is needed by the Board no later than its July meeting. To achieve this: –F&A – June 2012 (no meeting scheduled in July) –TAC – May 2012 –WMS – April 2012 CWG/MCWG MeetingJanuary 26, 2012

9 Supplement CWG/MCWG MeetingJanuary 26, 2012

10 Percentiles Using a percentile of historical pricing or “e” factors allows the price or “e” factor ratio to be based in historical activity while throwing out some level of “outliers” Percentile of past 30 days historical “bid” pricing or “e1” factors –High percentiles are conservative –100% - the highest price or “e” factor ratio experienced in the past 30 days – this can be very high if there is much volatility or unusual activity –95% - extrapolated between the second and third highest price or “e” factor ratio experienced in the past 30 days – conservative but allows two “outliers” to be ignored –85% - extrapolated between the fifth and sixth highest price or “e” factor ratio experienced –50% - mid point price – uses a “common” price or “e” factor ratio Percentile of past 30 days historical “offer” pricing or “e2” factors –Low percentiles are conservative –3% - the lowest price or “e” factor ratio experienced in the past 30 days – can be very low if there is much volatility or unusual activity –25% - extrapolated between the seventh and eighth price or “e” factor ratio experienced –50% - mid point price – uses a “common” price or “e” factor ratio CWG/MCWG MeetingJanuary 26, 2012

11 Potential Impact on Bids – Examples CWG/MCWG MeetingJanuary 26, 2012

12 Potential Impact on EOOs – Examples CWG/MCWG MeetingJanuary 26, 2012

13 DAM Credit Parameters - General The default value of parameters for every Counter-Party are: e1 = 95th percentile of Ratio1 over the last 30 days where Ratio1 is a daily calculation as follows: Ratio1 = Min[1, Max[0, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared- EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM )]] except Ratio1 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 e2 = 0, e3 = 1, d = 85, a = 50, b = 45, y = 45, z = 50, u = 90, t = 50 CWG/MCWG MeetingJanuary 26, 2012

14 DAM Credit Parameters – Favorable Treatment If an Entity meets the requirements above for more favorable treatment, then the parameters for that Counter-Party are: e1 = 75th percentile of Ratio1 over the last 30 days where Ratio1 is a daily calculation as follows: Ratio1 = Min[1, Max[0, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared- EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM )]] except Ratio1 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 e2 = 25th percentile of Ratio2 over the last 30 days where Ratio2 is a daily calculation as follows: Ratio2 = 1 - Max[0, (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO - Q cleared-Bids )/ (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ))] except Ratio2 = 0 when ∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ) = 0 e3 = 1 d = 85, a = 50, b = 45, y = 45, z = 50, u = 90, t = 50 CWG/MCWG MeetingJanuary 26, 2012