1. Future Ancillary Services: Description of Pricing Proposals ERCOT Staff September 15, 2014 1

2. There is general consensus that the proposed AS procurement constraints are appropriate –The constraints allow substitutability between different AS where applicable, and hence mitigate liquidity concerns At the August 25 th FAST/TAC workshop concerns were raised about the proposed formula for FFR (FFR1 & FFR2) MCPC that came out of the discussions of the various FAST work sessions and workshops The following slides describe the FAST proposal and the Alternate Proposal 1 and Alternate Proposal 2 Introduction 2

3. Keeps the current policy of pricing equivalent AS MW awards the same for equivalent AS types. i.e. –FRRS-Up, FRRS-Down, FFR1, FFR2, CR2, SR2 awards priced the same as the corresponding equivalent RegUp, RegDown, PFRS, CR1, SR1 AS respectively –In the case of FFR, the ratio (R) determines the equivalence of R MW of PFR to 1 MW of FFR –If the RegUp, RegDown, PFR, CR1, SR1 MCPCs reflect opportunity costs, then the corresponding equivalent FRRS-Up, FRRS-Down, FFR1, FFR2, CR2, SR2 MCPCs will also reflect the same opportunity costs FAST Proposal 3 ASMCPC FRRS-UpRegUp MCPC FRRS-DownRegDown MCPC FFR1Min(Ratio * PFR MCPC, VOLL) FFR2Min(Ratio * PFR MCPC, VOLL) CR2CR1 MCPC SR2SR1 MCPC

4. In case there is a need to replace FRRS-Up, FRRS- Down, FFR1, FFR2, CR2 or SR2 responsibility with an equivalent RegUp, RegDown, PFR, CR1 or SR1, the FAST proposal will, in general, make the cost of replacement of these AS consistent with the cost of replacing a given AS type with exactly the same AS type (i.e. PFR for PFR, etc.) FAST Proposal 4

5. This proposal attempts to keep the current policy of pricing equivalent AS MW awards the same for equivalent AS types The only difference from the FAST proposal is with the determination of MCPC for FFR1 and FFR2 –Starting with the FAST formula for MCPC for FRRS-Up, FRRS- Down, FFR1, FFR2, CR2, SR2, subtract the shadow price of the constraint that limits how much of that AS can be procured. This shadow price includes any opportunity costs if present –The resulting computed price for each of the FRRS-Up, FRRS- Down, FFR1, FFR2, CR2 and SR2 is compared to each of the respective equivalent MCPCs for RegUp, RegDown, PFR, CR1, and SR1. –If this computed price is less than the MCPC for RegUp, RegDown, PFR, CR1, and SR1, then the MCPC for FRRS-Up, FRRS-Down, FFR1, FFR2, CR2, and SR2 is set to the equivalent MCPC of RegUp, RegDown, PFR, CR1, and SR1 respectively –The end result is that the MCPC for FRRS-Up, FRRS-Down, CR2, SR2 are the same as the MCPC from the FAST proposal Alternate Proposal 1 5

6. 6 ASMCPC FRRS-UpRegUp MCPC FRRS-DownRegDown MCPC FFR1Max( PFR MCPC, Ratio * PFR MCPC – Shadow Price of FFRmax constraint 1 – Shadow price of FFR1max constraint 1 ) FFR2Max( PFR MCPC, Ratio * PFR MCPC – Shadow Price of FFRmax constraint 1 ) CR2CR1 MCPC SR2SR1 MCPC 1 Opportunity costs, if present, will be included in the shadow prices

7. In case there is a need to replace FFR1 or FFR2 responsibility with an equivalent PFR, then this proposal leads (when the ratio is greater than 1) to a replacement cost that may be inconsistent with the cost of replacing PFR MW with another PFR MW Occurs when Shadow price of FFRmax constraint and/or FFR1max constraints is binding and the Ratio (R) is greater than 1 Alternate Proposal 1 7

8. This proposal changes the current policy of pricing equivalent AS MW awards the same for equivalent AS types –Starting with the FAST formula for MCPC for FRRS-Up, FRRS- Down, FFR1, FFR2, CR2, SR2, subtract the shadow price of the constraint that limits how much of that AS can be procured. This shadow price includes any opportunity costs if present –This resulting computed price is the MCPC for each of the FRRS-Up, FRRS-Down, FFR1, FFR2, CR2, and SR2 –The end result is that even though substitutability is maintained, the resulting MCPCs for FRRS-Up, FRRS-Down, FFR1, FFR2 CR2, SR2 are as if they were cleared on their own offer stack Alternate Proposal 2 8

9. Alternative Proposal 2 9 ASMCPC FRRS-UpRegUp MCPC – Shadow price of FRRS-Upmax constraint* FRRS-DownRegDown MCPC – Shadow price of FRRS-Downmax constraint* FFR1Ratio * PFR MCPC – Shadow Price of FFRmax constraint* – Shadow price of FFR1max constraint* FFR2Ratio * PFR MCPC – Shadow Price of FFRmax constraint* CR2CR1 MCPC – Shadow price of CR1min constraint* SR2SR1 MCPC – Shadow price of SR1min constraint* *Opportunity costs, if present, are included in the shadow price

10. In case there is a need to replace FRRS-Up, FRRS- Down, FFR1, FFR2, CR2, SR2 responsibility with an equivalent RegUp, RegDown, PFR, CR1, SR1, then this proposal leads to a replacement cost that may be inconsistent with the cost of replacing a given AS type with exactly the same AS type (i.e. PFR for PFR, etc.) Occurs when the shadow price of the constraint that is subtracted is binding Alternate Proposal 2 10