1. Setoff in a Bankruptcy ERCOT CWG June 27, 2008

2. Can ERCOT Setoff in a Bankruptcy? PJM and MISO have raised the issue of “mutuality” in power transactions with its members –Mutuality means the ISO is a party to the transaction – they take ownership –The ISO’s function as middlemen MISO has tried unsuccessfully in the past to address it –Security interest –FERC denied its request

3. Net Billing The ISO’s issue bills on a net basis In a bankruptcy the ISO’s setoff amounts held against amounts owed If mutuality is in question, then the ISO may have to send the defaulting party what they are owed and file a claim in bankruptcy to recover what it is owed

4. An Example ERCOT owes a QSE $2MM for market activity The QSE owes ERCOT $1MM for other market activity Under net billing the QSE receives $1MM If mutuality is in question ERCOT may need to send them the $2MM and put a claim in for the $1MM

5. Conclusion PJM’s outside counsel has advised them that a significant risk exists –Tower Research reportedly using this defense ERCOT legal needs to determine if the same risk is present Let PJM work through the process Determine a course of action based on PJM’s findings