MCWG Update to WMS

2/9/2010

Agenda Items• Exposure / Collateral Status Update

• 1/26 MCWG/CWG Joint Meeting– Potential NPRR to enable expiring CRRs to offset PTP bid credit exposure

• 1/31 MCWG/SEWG Joint Meeting– Potential NPRR to be issued by ERCOT to expedite the invoicing and payment period for

real time

• Other– 2/16 Due Date: Comments on the standard Guarantee and Letter of Credit form are due– 2/3 Due Date: CWG is updating the roster and accepting membership applications– ERCOT discretion exercised to decrease TPE and E1 for Operating Days 2/2 – 2/9

• Next MCWG Meeting scheduled for 2/23

Exposure / Collateral Update• Nodal Total Potential Exposure reported by ERCOT as of 12/31/2010 remains less than Zonal Estimated Aggregate Liability (TPE = ↓22% since 10/31)• Collateral Posted has increased since 10/31

• Cash/LOCs ↑169%• Guarantees ↑15%• Net Impact – Secured MPs are posting 5.7xTPE vs. 2.3xEAL

•Unsecured Credit Limits have increased

• Dollar % ∆ = ↑213%• Dollar / CPTY ∆ = ↑18MM from $13MM • # MPs ↑+6 from 20

•Note – Exposure reported does not include DAM Credit Exposure nor CRR Auction Credit Exposure as calculated in Section 4 and 7 of the Protocols

Source: Finance And Audit Committee Meeting Materials, ERCOT Market Credit Status, Sept 2010 – January 2011

2011 MCWG GoalsAction Item Deliverable Target Date Status

ERCOT unsecured credit policies Review of the unsecured credit cap Q1 TBDPre-DAM Credit Validation Determine if PTP Obligations can be

offset with CRRs Q2 In Progress

CMM Core SystemsTighten invoice timelines and collateral requirements Q2 In Progress

CMM Core Systems Examine adequacy of collateral held for forward risk Q2 TBD

ERCOT unsecured credit policiesExamine Form of LCs and guarantees

Q2 In Progress

Netting/Mutuality

Determine alternatives to First Priority Secured Interest agreements

In time for balance of year or annual

auctionTBD

CMM Core Systems Examine FCE calculationsIn time for balance of year or annual

auctionTBD

CRR Auction Credit Validation

Examine Initial Margin (A&M) and Collateralization of purchase price

In time for balance of year or annual

auctionTBD

Pre-DAM Credit ValidationReview e-factors or replacement for e-factors Q3 TBD

ERCOT unsecured credit policies Comparison to best practices Q3 TBDReview Investment Practices Recommend changes to current

investment practices Q3 TBD

ERCOT unsecured credit policiesComprehensive review of unsecured credit assignment Q4 TBD

DAM Point-to-Point Credit ExposureGoal - Determine if DAM PTP Obligations can be offset with CRRs

• Summary of Drafted NPRR language that would:– Clarify TPO credit exposure calculations for combined cycles– Clarify PTP credit exposure calculations as implemented pre go-live– Right size credit for DAM Energy Only Bid Curves to equate to the maximum

exposure rather than total area of bid curve– Right size credit for DAM PTP bids where a qualified expiring CRR offsets

potential cleared DAM exposure by reducing credit by PTP Bid Price

• CRR Offset Qualification Summary– MP provides Counter-Party ID, the CRRAH ID, and the CRR ID with the PTP

Obligation bid– PTP Bid submitted before 0X00 of the Day-Ahead– Same Source/Sink Pair, term, ∑ Q CRR ≥ ∑ Q PTP

• Next Step – Submit NPRR with Urgent Status

Examine Forms of LOCs and Guarantees

• F&A requested a review of the Guarantee Agreement to ensure that the standard form document adequately protects ERCOT’s and Market Participants’ interests

• Provide Chad Sealy with any initial questions, comments or suggested modifications to the existing language on standard Letter of Credit Agreement or Standard Guarantee Agreement by Close of Business, Wednesday, February 16, 2011

Reduce Real Time invoice timelines & Real Time collateral requirements

Considerations discussed on 1/26 and 1/31: Issue one Invoice per sub-QSE per business day on Operating Day +10 for RT versus

Operating Day +14 to +20 for RT

• Credit factors:– Increase the frequency for which RT invoices impact OUT

• Enable Market Participants to reduce posting requirements via issuing early PMTs• Reduce # of unbilled RT days completed and settled from 4 to 10 days• Reduce payment due date from 5 days to 3 days

– Review # days referenced in ADTE while taking forward exposure into consideration• A multiple of 36x was discussed in comparison to the current multiple of 40x

– Reduce # of unbilled statements referenced within AIL• Reduce Completed and Settled references due to expedited invoice cycle

– Potentially reduce time gap between ADTE and DALE values– TBD - Reductions in unsecured risk limits to reduce default risk

2/2 -2/9 ERCOT DiscretionDAM Revisions

– E1 Revisions• For Operating Days 2/4 & 2/5 ERCOT revised Energy Only Bid credit requirements by

decreasing Market Participant’s E1 values to 70% of calculated E1 values

– Uth %ile (i.e. PTP RT OTM risk)• For Operating Days 2/5 - 2/8 ERCOT revised the uth %ile from the 90th %ile to the 80th %ile

TPE Revisions– AIL Revision for Operating Days 2/2 – 2/9

• As of 2/2: 7 forward days discounted to 100% (0.667 x 150% =100%)• As of 2/3: 7 forward days discounted to 5% (0.05 x 150% =0.075%)

– ADTE Revision on 2/18• 2/2 will be removed from the ADTE calculation on 2/18

– DALE• Feb 4th DALE will be frozen till Feb 9th

• After Feb 9th DALE calculations will exclude Operating Days Feb 3rd and Feb 4th

Appendix

• PTP and CRR Settlement Example• Reason for CRR Offset• Real Time Settlement Information• Bid Curve Exposure Example

Net Day Ahead Risk to ERCOT versus Collateral Requirement

Forward Hedge pre DAM:• Resource Position 10 MWh• Load Position 10 MWh• CRR Position (Bus-Zone) 10 MWh

DAM Transaction and Exposure: PTP DAM Bid (w/ Uth%ile =$5)

• PTP Bid Details: Q= 10MWh , P= $50 , Bus-Zone

• DAM Credit Exposure =[Max[ 0, Pbid] + Uth%ile ] * Qbid= $50 + $5] * 10MWh = $550

Ex: Posting Requirements related to a QSE representing load and generation

Settlements & Invoices post DAM:

(Zone SPP = $100; GenBus SPP = $50) @ Resource = $50 * 10MWh = $500 @ Zone = $100 * -10MWh = $-1000 @ CRR = [$100-$50] * 10MWh = $500

Note:(1) Expiring CRR Offsets PTP Bid

(2) DAM Credit Exposure over estimates potential for cleared risk

Net Position 0 MWh

Net Exposure $0.00

$550 Collateral vs. $0 DA Settlement

Risk Aversion ExampleHB_South to LZ_South

• Market Participants that are risk adverse to real time congestion risk, may bid aggressively for PTPs in DAM to ensure the continuation of a CRR hedge that expires in the DAM

• Data from the 48 Hour South Disclosure Report identifies that market participants were bidding up to $230 / MWh for a PTP in the DAM, even when the DAM Settlement Price averaged near $0

• Real time risk avoided can be illustrated by the congestion observed between HB_South and LZ_South on operating days 1/12 and 1/13

Real Time Congestion Risk

Data from the 48 Hour South PTP Disclosure Report

Nodal Invoicing – Current StateDAM Invoice

Frequency Daily on BD, with the DAM Statement

Timing OD + 2 BD

Invoice Due Invoice Post + 3 BBD/BD

Invoice Payout Invoice Post + 4 BBD/BD(~OD + 6)

# / Month ~ 31 (e.g. month = Jan)

RTM Invoice

Frequency Weekly on Thursdays

Timing OD + 14-20 days

Invoice Due Invoice Post + 5 BBD/BD

Invoice Payout Invoice Post +6 BBD/BD(~OD + 21-28)

# / Month ~ 4 (e.g. month = Jan)

Nodal Invoicing – ProposedSettlement Invoice

Frequency Daily on Business Days

Timing OD + 2 for DAMOD + 10 for RTM

Invoice Due Invoice Post + 3 BBD/BD

Invoice Payout Invoice Post + 4 BBD/BD(~ OD + 6 for DAM~ OD + 14 for RTM)

# / Month ~ 21 (e.g. month = Jan)

DAM Energy Only Bid Curve calculations overlook maximum risk

DAM Bid Example & Clearing Price •Max Price Exposure Example

Quantity (MW)

Bid

Pric

e ($

/MW

)

1. 10MW 5x16 NZ @ $10

2. 500MW 5x16 NZ @ $2

3. 600MW 5x16 NZ @ $1

PCleared = $1/MWh ; 1,110MW Awarded

10

10

510 1110

2

1

A

B

C

Max Exp = $1/MWh

$100

$1020

$1110

Max Exposure = $1110

Area Under Curve = $4510