Market Credit Working Group Update to WMS Wed. Nov 18, 2009

MCWG Meetings Since October Update October 30, 2009 MCWG Face-to-face Meeting (plus Webex) October 30, 2009 MCWG Face-to-face Meeting (plus Webex) November 9, 2009 MCWG Face-to-face Meeting (plus Webex) November 9, 2009 MCWG Face-to-face Meeting (plus Webex)

MCWG November 2009 Overview Update on the Two Motions Approved by WMS in July re: DAM Update on the Two Motions Approved by WMS in July re: DAM Vote on Default Methodology Vote on Default Methodology Update on DAM Credit Requirements Update on DAM Credit Requirements Joint MCWG and Settlement & Extracts Working Group Meeting re: DAM Acceleration Joint MCWG and Settlement & Extracts Working Group Meeting re: DAM Acceleration

DAM Motions Approved by WMS Review options for shared short-pay fund (Participants and ERCOT Inc) Review options for shared short-pay fund (Participants and ERCOT Inc) Expanded loss mutualization for entire market AND accelerated DAM Expanded loss mutualization for entire market AND accelerated DAM

Update on Motions Approved by WMS Completed work on Loss Mutualization (First part of Second Motion) Completed work on Loss Mutualization (First part of Second Motion) Overview of Option 4 (b) and Option 4 (c) Overview of Option 4 (b) and Option 4 (c)  Vote on Default Methodology Discussions on options for acceleration of DAM Payment timeline Discussions on options for acceleration of DAM Payment timeline MCWG Agreed to begin outreach to COPS via Settlement and Extracts Working Group (Second part of second motion) MCWG Agreed to begin outreach to COPS via Settlement and Extracts Working Group (Second part of second motion) Options for shared short-pay fund (Participants and ERCOT Inc) discussed Options for shared short-pay fund (Participants and ERCOT Inc) discussed

Loss Mutualization Option 4 (b) Option 4 (b) Max MWh based Allocation of Default Max MWh based Allocation of Default Presented by Shams Siddiqi, Ph.D. Presented by Shams Siddiqi, Ph.D. Option 4 (c) Option 4 (c) Proposal is to amend option 4(b) by allowing for a reduction factor Y to be applied to congestion components; initial proposal is to have Y = 1 Presented by Sadao Milberg, DC Energy

DAM Acceleration MCWG has discussed potential for acceleration of DAM MCWG has discussed potential for acceleration of DAM Determined Max pre go-live nodal is a reduction of 2 days (reducing time from receipt of invoice to pay from 4 business days to 2 business days) Determined Max pre go-live nodal is a reduction of 2 days (reducing time from receipt of invoice to pay from 4 business days to 2 business days) One further day post go-live MAY be possible with further changes to processes One further day post go-live MAY be possible with further changes to processes Any changes require discussion with COPS Any changes require discussion with COPS Reduction in DAM payment timeline has potential impacts Reduction in DAM payment timeline has potential impacts Positive, reduction in credit risk and reduction in cost of transacting in DAM Positive, reduction in credit risk and reduction in cost of transacting in DAM Negative, impact on settlement groups (i.e. time to pay, check-out) Negative, impact on settlement groups (i.e. time to pay, check-out) MCWG has begun out-reach to COPS via the Settlement and Extracts Working Group MCWG has begun out-reach to COPS via the Settlement and Extracts Working Group MCWG presented at the SEWG November 16 th meeting MCWG presented at the SEWG November 16 th meeting Joint face-to-face meeting for Monday December 7, 2009 Joint face-to-face meeting for Monday December 7, 2009

Short-Pay Fund Discussions on different proposals for establishing a market fund to absorb short payments Discussions on different proposals for establishing a market fund to absorb short payments One proposal is to continue to short-pay the market rather than establish a market fund One proposal is to continue to short-pay the market rather than establish a market fund Issues outstanding with establishing a market fund Issues outstanding with establishing a market fund Size of the fund Size of the fund How to fund the Fund How to fund the Fund Ownership of funds in the Fund Ownership of funds in the Fund Replenishment of Fund (i.e. default or participant leaving the market orderly, etc) Replenishment of Fund (i.e. default or participant leaving the market orderly, etc)

Market Fund Options Option A Option BOption COption D Inception of fund: Pool funding based on uplift mechanismPool funding based on uplift mechanism (example: 4(b)) Pool funding is risk based (e.g. CRR obligations) No fun d option – short pay/uplift invoices only (example: 4(b)) Replenishment : Uplift invoices (max of $2.5M/month); refunds to initial payers to fund plus normal funding invoices if the fund wasn’t at cap at the time of default. Short paid Market Participants get first priority Same mechanism as inception In/OutMarket Participants have title to funds, held in trust by ERCOT. Refundable on market exit. ERCOT ISO, governed by Protocols. Not refundable. Cap Target?Set by TAC & Board ERCOT, Inc backstop Set by Board, starts at $xx

DAM Credit Requirements Issues have been raised with the pre-DAM validation (credit requirements) Issues have been raised with the pre-DAM validation (credit requirements) Protocols provide for credit at the offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour) Protocols provide for credit at the offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour) Only those positions that are at the same SPP are nettable for calculating the credit requirements (at the same SPP, then use the max) Only those positions that are at the same SPP are nettable for calculating the credit requirements (at the same SPP, then use the max)

Example ~Credit Requirements DAM QSE 1 has 1000 MW physical generation & 500 MW load obligation QSE 1 has 1000 MW physical generation & 500 MW load obligation In DAM, QSE 1 Offers 1,000 MW of DAM 3-Part Energy Offers & 500 MW of DAM Energy Bids In DAM, QSE 1 Offers 1,000 MW of DAM 3-Part Energy Offers & 500 MW of DAM Energy Bids QSE 1 would need collateral for QSE 1 would need collateral for DAM 3-Part Energy Offers at Hub = offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour) 1000 X $4/MWh = $4,000 DAM 3-Part Energy Offers at Hub = offer quantity X (95 th percentile of the hourly difference between RT and DAM SPP over the previous 30 days for that hour) 1000 X $4/MWh = $4,000 DAM Load Obligation at Load Zone= the bid Quantity X bid price 500 x $50/MWh = $25,000 DAM Load Obligation at Load Zone= the bid Quantity X bid price 500 x $50/MWh = $25,000 Total Credit requirements of $29,000 while QSE 1 net physical position of 500 MW is over-collateralized by DAM validation process Total Credit requirements of $29,000 while QSE 1 net physical position of 500 MW is over-collateralized by DAM validation process Assume Market Participant operates a baseload unit 24x7. Total collateral requirement is $696,000 per day for this transaction alone. ERCOT invoicing and settlement procedures could increase the collateral computation substantially. Assume Market Participant operates a baseload unit 24x7. Total collateral requirement is $696,000 per day for this transaction alone. ERCOT invoicing and settlement procedures could increase the collateral computation substantially. From Luminant Presentation to MCWG

Next Meeting ~MCWG Joint meeting MCWG and SEWG Monday December 7, :30 AM -4:30 CST (in person + Webex) Joint meeting MCWG and SEWG Monday December 7, :30 AM -4:30 CST (in person + Webex) Topics Topics Review DAM Acceleration jointly with SEWG Review DAM Acceleration jointly with SEWG Review Short-pay fund Review Short-pay fund Review DAM Collateral Requirements (if Time) Review DAM Collateral Requirements (if Time)

Future Items for MCWG Direction of invoice timing change Direction of invoice timing change Perform bottom up review of existing creditworthiness standards (after CCRO Best Practices efforts) Perform bottom up review of existing creditworthiness standards (after CCRO Best Practices efforts) Reduction of settlement cycle due to PRR 568 (7days) Reduction of settlement cycle due to PRR 568 (7days) Further reductions in settlement cycles Further reductions in settlement cycles This includes looking at the potential to reduce the settlement cycle 30% with improved metering This includes looking at the potential to reduce the settlement cycle 30% with improved metering