1. DSWG Update to WMS May 17, 2006

2. 1 2006 DSWG Goals Update

3. 2 DSWG May Update WMS Action Needed

4. 3 High Level Overview of Solutions AlternativeResolves Credit Issue Market Cost to Implement Time to Implement Market Participants Impacted LaaR Participation Impact A. Collateralization for Negative Bids Early 2007 C. Single RRS Bid Stack with Separate LaaR and Gen MCPCs if Oversubscribed Early 2007 D. LaaR RRS Offered Below MCPC is Prorated when Market Oversubscribed Late 2006 E. Eliminate Sunset Provision on Current Solution Late 2006 * Icon size represents relative impact when compared with other alternatives.

5. 4 Action Item for WMS Vote to support a long term solution for the negative LaaR bidding issue. Three motions to consider: 1.Eliminate the sunset date currently in Protocols 2.Eliminate the sunset date in the Zonal Protocols and implement Alternative C in Nodal Market Design 3.Implement Alternative C in the Zonal Protocols and implement in Nodal Market Design

6. 5 C. Single RRS Bid Stack with Separate LaaR and Gen MCPCs if Oversubscribed 2,300 MW of RRS = Proposed Solution: Solution leverages ERCOT's existing clearing engines. If LaaR limit is reached a separate MCPC price for LaaR would be posted. To the extent the LaaR limit is not reached only one MCPC for both LaaR and Gen is cleared. Single Bid Stack = LaaR offer = Gen offer Single MCPC = Self Arranged Less than 1,150 MWs of LaaRs Offered Below MCPC 2,300 MW of RRS = Single Bid Stack Gen MCPC More than 1,150 MWs of LaaRs Offered Below MCPC LaaR MCPC

7. 6 C. Single RRS Bid Stack with Separate LaaR and Gen MCPCs if Oversubscribed Proposed Solution: Solution leverages ERCOT's existing clearing engines. If LaaR limit is reached a separate MCPC price for LaaR would be posted. To the extent the LaaR limit is not reached only one MCPC for both LaaR and Gen is cleared. Pros: If current LaaR participation levels persist, two separate RRS MCPCs would frequently occur; likely to result in a short term reduction in market RRS costs Need for secondary RRS solicitations unlikely Market based solution; bids should be more reflective of cost to provide service Cons: Requires market participants to manage two MCPCs for Responsive Reserve and makes settlement more complex May drive LaaR out of the RRS market if LaaR MCPC is consistently/significantly lower than Gen MCPC and result in higher total costs to market Creates arbitrage opportunity for QSEs that self arrange large percentage of LaaR

8. 7 Protocol Revision Required for Alternative C 6.6.3ERCOT Day-Ahead Ancillary Service Procurement Process 6.6.3.1General Procurement Requirements (8)ERCOT shall determine an hourly MCPC for each of the following Day-Ahead Ancillary Service markets: Regulation Up, Regulation Down and Non-Spinning Reserves. The hourly MCPC shall equal the highest-priced capacity reservation bid accepted in the Day Ahead market by ERCOT for that Ancillary Service for the hour. For Responsive Reserve Service, ERCOT shall determine a separate MCPC for LaaRs and Generation Resources. QSE’s representing LaaR and Generation Resources will be paid based on these separate MCPCs. A blended MCPC will be determined based on the formula’s and rules defined in Section 6.6.3.4 and QSEs representing LSEs with RRS obligations will be charged based on the blended MCPC. 6.6.3.4 Special Procurement Requirements for Responsive Reserve Service. 6.6.3.4.1 The MCPC for LaaR RRS and Generation Resources RRS shall be determined by the following rules/formula’s. RRS = LaaR SA + LaaR Award + Gen SA + Gen Award If LaaR SA + LaaR Bid ≤ LaaR Max MCPC LaaR = MCPC Gen = Highest Price in the bid stack for last MW of RRS Awarded Then, LaaR Bid ≤ LaaR Award And MCPC Blended = MCPC LaaR = MCPC Gen If LaaR SA + LaaR Bid > LaaR Max Then, LaaR Bid > LaaR Award And MCPC LaaR = Highest Price in the bid stack for last MW of LaaR Award And MCPC Gen = Highest Price in the bid stack for last MW of Gen Award MCPC Blended = (MCPC LaaR * LaaR Award ) + ( MCPC Gen * Gen Award ) LaaR Award + Gen Award RRS = Total Amount of Responsive Reserves required (MW) LaaR Max = 50% of RRS or a lower amount as determined by a monthly engineering evaluation conducted by ERCOT staff LaaR SA = Amount of LaaR Self Arranged by all QSEs (MW) LaaR Bid = Amount of LaaR Bids at or below the MCPC Gen (MW) LaaR Award = Amount of LaaR Bids Awarded ERCOT-wide by the Market Clearing Engine-MCE (MW) Gen SA = Amount of Generation Resources Self Arranged by all QSEs (MW) Gen Award = Amount of Generation Resource Bids Awarded ERCOT-wide by the MCE (MW) MCPC LaaR = Market Clearing Price for LaaR ($/MW) MCPC Gen = Market Clearing Price for Generation Resources ($/MW) MCPC Blended = Blended Market Clearing Price ($/MW)

9. 8 Protocol Revision Required for Alternative E 4.4.11Ancillary Services Bid Submittal QSEs may submit, by 1300, Ancillary Service bids to ERCOT for any Ancillary Service market open during the Day Ahead Period. Submitted bids remain active for any period until: (a) selected by ERCOT; or (b) automatically expired by software at the time selected by the QSE. Ancillary Service bids shall not exceed one thousand ($1,000) dollars per MW for any Resources. Until January 1, 2007, QSEs shall not submit bids to provide RRS at a price less than zero dollars. Any Ancillary Service bids in excess of one thousand ($1,000) dollars per MW will be rejected by ERCOT.

10. 9 Action Item for WMS Vote to support a long term solution for the negative LaaR bidding issue. Three motions to consider: 1.Eliminate the sunset date currently in Protocols 2.Eliminate the sunset date in the Zonal Protocols and implement Alternative C in Nodal Market Design 3.Implement Alternative C in the Zonal Protocols and implement in Nodal Market Design