1. ERCOT CWG/MCWG April 24, 2013 DAM Credit Parameters

2. DAM Credit Parameters DAM credit parameters were determined during the nodal design in 2008-2009 We now have actual data and behaviors to help us determine the appropriateness of current parameters - Energy Bids - Likely assumed to be submitted by load only so a higher percentile was determined to be appropriate to protect the market against high $ purchases by REPs (Dth = 85 th p) - Today, Generators make use of Energy Bids to buy back hedges, and along with TPOs, usually enter the DAM fairly flat - Without buying back their OTC hedges, Generators would be exposed to the DA/RT basis spread as hedges settle against RT (see slide 7) - Three Part Offers - Submitted by Generators to sell MW – lack of clarity as to why the Zth percentile is lower than the Dth (Zth =50 th p) - Results in less credit offset to Generators for selling the same MW that they are buying with their Energy Bids - Results in very high collateral requirements in a high price environment which Generators must factor into capital structure at a cost to the market - E1 factor - Lack of clarity for use of 95 th p when no other percentiles are this high - Serves as a multiplier against the Bid price 1

3. Day-Ahead Market (DAM) – Price Percentiles The Day Ahead Market Credit Requirement is driven by 2 components: - DAM Energy Bids - Generators participate in this market to buy back existing hedges (at Hubs) - Three Part Supply Offer -Sell Plant MW's The DAM Credit Requirement for DAM Energy Bids and Three Part Supply offers are driven by: - Percentile calculation of the previous 30 Day Ahead Settlement Point Prices (DASPP) - DAM Energy Bids - Percentile Calculation (Dth) is 85 th - Three Part Offer - Percentile Calculation (Yth) is 45th & (Zth) 50 th - The Percentile is a point within a distribution of prices which represents the percentage of prices falling below such value. For example, the 90 th percentile is the value where 90% of the prices fall below such value Counterparties must post collateral based on the 85 th percentile of the previous 30 days of prices of DAM Energy Bids but only receives credit for the 45 th or 50 th percentile for Supply Offers (sell MW’s) Due to the percentile discrepancy, Generators who buy back their hedges in the DAM must post enormous collateral in the event of 5 days of extreme prices within a 30 day period. The Collateral required remains until the 16 th day of extreme prices or until there is less than 5 days of extreme prices within a 30 day period - The large collateral requirement due to the percentile discrepancy occurs for counterparties in spite of the fact that their DAM participation is flat 2

4. Example – Collateral Required During Normal Prices 3

5. Example – Collateral Required During Extreme Prices 4

6. Percentile Example – 4 Days Until Collateral Jumps The below table is an example of the number of days within the previous 30 days before the discrepancy of percentiles impacts collateral during extreme price events 5

7. “e” Factor Calculation “e” Factors are applied to the Day Ahead Market Credit Requirement when a bid price is higher than the Dth percentile - The amount of the difference in bid price and Dth percentile is multiplied by the “e” Factor The e1 Factor is calculated as follows: - e1 = 95 th percentile of Ratio1 over the last 30 days - Ratio1 = Min[1, Max[0,(Qcleared bids * PDAM – Qcleared TPO * PDAM – Qcleared EOO * PDAM)/(Qcleared bids * PDAM)] - Essentially the above calculation is a percentage of the excess of cleared bids (P*Q) over cleared TPO and EOO divided by total cleared bids (P*Q) - However, counterparties do not get a benefit for days where cleared TPO and EOO exceed cleared bids - The section of the calculation where it seeks the Max of 0 or the parenthetical quotient results in counterparties receiving zero credit for days where they enter the market long Counterparties who enter the DAM long on 28 of the previous 30 days will experience a significant rise in their “e” Factor with just 2 days of entering the market short. Similar to the price percentile discrepancy Generators who buy back hedges in the DAM receive no credit for TPO sales For every difference in price between Bid and Dth Percentile of $1,000 and a 10% e1 Factor, counterparties post an additional $100 per MW hour 6

8. Day Ahead/Real Time Settled GEN into Day Ahead Market ERCOT GEN sends DA MW to ERCOT GEN receives $50 for MW sold to ERCOT GEN Sells DA MW to C/P GEN sells MW to counterparty GEN receives $35 from counterparty for Sale Counterparty A GEN Buys RT MW for C/P Sale GEN receives MW to cover C/P Sale GEN pays ERCOT $75 RT for C/P MW ERCOT GEN Buys MW Energy Only GEN Receives $75 RT for C/P MW GEN pays ERCOT $50 DA to buy back C/P Hdg ERCOT DA Clears $50 RT Clears $75 Under above scenario, GEN still open to DA/RT spread The Energy Only purchase of the hedge MW flattens the DA/RT position 7 DAM TPO PRE DAM Hedge DAM Bid *Bilateral trx use RT prices