January 7, 2011 Review Nodal Exposure / Collateral as of end of December, 2010 Cheryl Yager

2 ERCOT Market Credit Status January 7, 2011

3 Benchmark Report as of December 31, 2010 January 7, 2011

4 Appendix January 7, 2011

5 Background Section 16 - total potential exposure (TPE) covers both historical risk and forward risk –Historical exposure may be invoiced or estimated (if invoices have not been generated) –Forward risk is, in large part, estimated based on historical activity in the “Core” credit calculation Underlying assumption - history is a reasonable predictor of the future (e.g. if an entity has been in the ERCOT market at 20% of its load, it is appropriate to assume they will be in the ERCOT market at 20% of load in the future) Key drivers of forward risk include volume and price Situations may arise when historical trends may not be the best predictor of future risk –Very low volume (or very low prices) in ERCOT market may result in a collateral requirement that is less than forward risk –Very high volume (or very high prices) in ERCOT market may result in a collateral requirement that is greater than forward risk January 7, 2011

6 Reasonableness Test - Benchmark To help evaluate the reasonableness of the calculated TPE in the new market, ERCOT has developed a “benchmark” tool –Data used in the report is from the CMM system –A CP’s TPE will be reviewed relative to a low end and a high end exposure calculation Generally expect most TPEs to be between the low and high end estimates The high end exposure relates to some level of default risk This tool is still a work in process and will be adapted over time ERCOT plans to use this tool to –Identify trends in the overall market –Identify individual CP’s TPE to review »The fact that a TPE is outside the range does not mean that an adjustment will be made, just that ERCOT will review the activity »May also identify calibrations to be made to the tool –In unusual or stress scenarios (as were experienced in Feb/Mar 2003, May, 2008), provide points of reference for level of adjustment »Benchmark report may be adapted as situations develop (e.g. If prices are expected to remain high, price factor in benchmark may be adjusted) January 7, 2011

7 Benchmark tool assumptions January 7, 2011 Low end TPE benchmark 1.Estimate of net historical activity (e.g. both positive and negative) PLUS 2.Low end estimate of forward liability Differs based on activity (load and generation or entities without load or generation) CP’s calculated FCE is included “as is” to address CRR risk High end TPE benchmark 1.Estimate of net historical activity (e.g. both positive and negative) PLUS 2.High end estimate of forward activity Differs based on activity (load and generation or entities without load or generation) CP’s calculated FCE is included “as is” to address CRR risk Note: The high end estimate is not intended to capture the maximum liability that can be incurred but a reasonable estimate of high end risk

8 Benchmark tool – historical estimates Historical activity includes –OIA – Outstanding Invoices –UDAA – Unbilled Day Ahead Activity –RTLCS – Real Time Completed and Settled activity (but not invoiced) from AIL –RTLCNS – Real Time Completed Not Settled activity from AIL –UFTA – Unbilled Final and True-Up Activity –PUL – Potential Uplift Historical data used in estimating forward risk (from CMM) –Average load volume over last 30 days –High load volume over last 30 days –Average generation volume over last 30 days –High generation volume over last 30 days –Average RT imbalance volume over last 30 days –High RT imbalance over last 30 days –Average RT price over last 30 days (CP specific – derived as total RT liability / RT volume in AIL report) Note: Volume data is settled data where available, RTL estimates from AIL report for days not yet settled January 7, 2011

9 Benchmark tool – forward risk CPs with LoadCPs with GenerationCPs w/o Load or Generation or with more imbalance than load/gen Low end Avg Load x 2 days x [(|Avg RT Price| x 1.0 – with a floor of $25 and a cap of $100] Avg Gen x.2 x 2 days x [(|Avg RT Price| x 1.0 – with a floor of $25 and a cap of $100] Avg Imbal x 2 days x [(|Avg RT Price| x 1.0 – with a floor of $25 and a cap of $100] High end High Load x 9 days x [(|Avg RT Price| x 1.5 – with a floor of $25 and a cap of $100] High Gen x.2 x 9 days x [(|Avg RT Price| x 1.5 – with a floor of $25 and a cap of $100] [(High Imbal) x 6 * days + [highest DAM sales for past 30 days x 2] x [(|Avg RT Price| x 1.5 – with a floor of $25 and a cap of $100] January 7, CPs with both load and generation will use the greater of columns 1 or 2 above. 2 CPs with no load and no generation will use the calculation described in column 3 3 CPs with some load or generation but with more imbalance volume than the absolute value of the sum of their load and generation, will use the higher of column1, 2 or 3 (and the high end estimate is based on 9 days in both calculations) Note: The above assumptions are as of December 31, All factors are subject to change as the tool evolves.