PRR619 Procedural History DSWG discussed the need to reduce market exposure to default should negative bids be selected and result in negative $/MW MCPC for responsive reserve service PRR619 Drafted and sent to PRS in July WMS was silent on action for or against the PRR in its August 2005 mtg PRS did not garner enough votes to make a recommendation to TAC in its August 24 th mtg - Motion to recommend approval failed 2.5 to 3.5 PRS voted 3.8 to 2.1 to recommend the PRR to TAC in its October 27 th meeting TAC overwhelmingly rejected PRR619 at its October mtg and submitted request for WMS to review the issue for discussion / recommendation from WMS

Discussion on PRR619 1.Failure, in an Interval, of a LaaR to Provide Capacity it was cleared for by ERCOT results in ERCOT procuring capacity from active bids or opening a 2nd market. The party that “fails” to provide the service it is cleared for conceptually bears the cost Negative bid reverses the direction of the normal cash flow so the “Failing Party” is Paid by the “replacing party” if a Negative bid is in place when ERCOT procures the replacement capacity The Dollar exposure is limited by the max digits in bid software times (1150 MW LAAR limit minus the Self Scheduled LaaR) 2.Possible short pay to the market if a large negative bid in an interval is cleared and the entity with the negative bid is not financially able to pay.

Discussion on PRR619 (continued) 3.Instituting a forced proration on all LaaR Capacity Bids removes participant latitude to determine each QSE’s own bid strategy 4.Risk / Consequences of leaving negative bids in place and thus open to being cleared in secondary markets for RRS is well known to QSEs. 5.Excerpts from WMS August 2005 mtg minutes PRR 619 would give no incentive to bid negative although the capability is still there. There may be pros and cons regarding having a separate market for LaaRs. PRR 619 is a low cost alternative to protect the market from what might not ever happen but could happen. PRR would eliminate competition between loads that have different costs for interruption and that the market would lose the ability to differentiate between them. Practical effect of PRR 619 was that it would impose a zero-dollar floor and it was inconsistent with the way the market currently works and interferes with market processes that are already in place.