January 7, 2011

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

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ERCOT Market Credit Status

January 7, 2011

# of QSEs*

Estimated Aggregate Liability

($) % of EAL

Total Unsec Credit Limit /

Security Posted # of CPs*Total Potential Exposure ($) % of TPE

Total Unsec Credit Limit /

Security Posted

Exposure in the ERCOT Market (owed to ERCOT)

QSEs that meet ERCOT Creditworthiness Standards

Ratings over BBB- 12 42,709,571 14% 420,997,225 U 14 33,407,516 10% 441,817,381 U

QSEs that do not meet ERCOT Creditworthiness Standards

Ratings below BBB- or not ratedCash & Letters of Credit 59 131,279,856 42% 920,770,067 S 69 159,077,995 48% 974,860,138 SGuarantee Agreements 23 137,864,416 44% 722,420,514 S 23 141,317,203 42% 753,420,514 S

Total Exposure 94 311,853,842 100% 106 333,802,714 100%

Other QSEs in the ERCOT Market (ERCOT owes)

QSEs that meet ERCOT Creditworthiness StandardsRatings over BBB- 14 (5,523,651) 91% 405,064,972 U 12 (1,625,120) -69% 384,244,816 U

QSEs that do not meet ERCOT Creditworthiness StandardsRatings below BBB- or not rated

Cash & Letters of Credit 90 (567,764) 9% 28,402,571 S 70 (743,674) -31% 77,566,325 SGuarantee Agreements 11 - 0% 65,322,000 S 9 - 0% 12,752,000 S

Total 115 (6,091,415) 100% 91 (2,368,794) -100%

Total 209 197

U: For QSEs that meet ERCOT's Creditworthiness Standards, amount of unsecured credit granted.S: For QSEs that do not meet ERCOT's Creditworthiness Standards, amount of Security posted.

Note 1: Guarantee Agreements provided to meet a QSE's collateral requirements by entities that meet ERCOT's Creditworthiness Standards. Guarantee Agreements provided to meet financial statement requirements by entities that do not meet ERCOT's Creditworthiness Standards are not included on this schedule.

as of 11/30/2010 as of 12/31/2010

ERCOT Market Credit Status

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Benchmark Report as of December 31, 2010

January 7, 2011

# of CPs

Ave Gen Vol

Ave Load Vol

% CPs

% Gen Vol

% Load Vol CP TPE

Low Benchmark

High Benchmark

Above Highw/ No Load and No Generation 12 0 0 27,708,800 3,975,055 5,183,536w/ Load and/or Generation 29 153,075 47,447 78,908,604 20,669,135 41,200,649 Subtotal 41 153,075 47,447 21% 20% 6% 106,617,405 24,644,189 46,384,186

Below Loww/ No Load and No Generation 3 0 0 (742,895) 1,687 5,774w/ Load and/or Generation 5 42,895 91,314 2,766,490 5,922,571 52,845,214 Subtotal 8 42,895 91,314 4% 6% 12% 2,023,594 5,924,258 52,850,988

Between High and Loww/ No Load and No Generation 82 0 0 10,663,491 4,411,836 14,876,208w/ Load and/or Generation 66 575,800 637,956 212,129,430 85,026,528 350,847,401 Subtotal 148 575,800 637,956 75% 75% 82% 222,792,921 89,438,364 365,723,610

Total 197 771,769 776,717 100% 100% 100% 331,433,920 120,006,811 464,958,783

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Appendix

January 7, 2011

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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

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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

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Benchmark tool assumptions

January 7, 2011

• Low end TPE benchmark1. 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 benchmark1. 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

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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

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Benchmark tool – forward riskCPs with Load CPs with Generation CPs w/o Load or

Generation or with more imbalance than load/gen

Low endAvg 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 endHigh 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, 2011

1 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 33 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, 2010. All factors are subject to change as the tool evolves.