MCWG Update to WMS 3/9/2010

Exposure / Collateral Update Nodal Total Potential Exposure reported by ERCOT as of 1/31/11 remains less than Zonal Estimated Aggregate Liability (TPE = ↓27% since 10/31) Collateral Posted has increased since 10/31 Cash/LOCs ↑225% Guarantees ↑14% Net Impact – Secured MPs are posting 6.2xTPE vs. 2.0xEAL Unsecured Credit Limits have increased Dollar % ∆ = ↑224% [Dollar / CPTY] ∆ = ↑19.6MM from $13.2MM # 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 – February 2011

2011 Status Update Action ItemDeliverableTarget Date Status ERCOT unsecured credit policiesReview of the unsecured credit capQ1 TBD Pre-DAM Credit Validation Determine if PTP Obligations can be offset with CRRs Q2 In Progress – TAC Vote 3/3 CMM Core Systems Tighten invoice timelines and collateral requirements Q2 In Progress – ERCOT assessing OD+9 or OD+10 CMM Core Systems Examine adequacy of collateral held for forward risk Q2 In Progress – MCWG reviewing options to decrease the default timeline ERCOT unsecured credit policies Examine Form of LCs and guarantees Q2 In Progress – Chad Seely to circulate comments Netting/Mutuality Determine alternatives to First Priority Secured Interest agreements In time for balance of year or annual auction TBD CMM Core SystemsExamine FCE calculations In time for balance of year or annual auction TBD CRR Auction Credit Validation Examine Initial Margin (A&M) and Collateralization of purchase price In time for balance of year or annual auction TBD Pre-DAM Credit Validation Review e-factors or replacement for e-factorsQ3 TBD ERCOT unsecured credit policiesComparison to best practicesQ3 TBD Review Investment Practices Recommend changes to current investment practices Q3 TBD ERCOT unsecured credit policies Comprehensive review of unsecured credit assignment Q4 TBD

Real Time Invoicing Update Two options are being considered Invoice 10 days after the Operating Date Invoice 9 days after the Operating Date Benefit to be evaluated Reduce working capital at risk by reducing ADTE multiple Reduce unbilled risk with comparable contractions in unsecured risk limits For further evaluation at an undetermined date Invoicing consolidated by Operating Date (net DAM and RT) Further reducing the Real Time statement / invoicing cycle Average ≈ 6.5 days

Margin Call Weekend Risk Cure Period Mass Transition Risk Default Risk Timeline MCWG is evaluating the risk associated with permitting a market participant 4 days to cure a financial obligation related to a margin call Industry Best Practices PJM & NYISO currently only provide 2 days to cure FERC is requiring all ISOs/RTOs to adopt a 2 day cure limit Reducing the cure period risk associated with a margin call may also provide for an opportunity to decrease the ADTE multiple Approximately +50% of the ADTE multiple covers future exposure (20-26 days) Provides 2 Bank Business Days to post financial security Provides 2 Bank Business Days to cure a “Payment Breach” 2 Non Bank Business Days Nodal Protocols Nodal Protocols Retail Market Guide, Section 7.11, 9F2, 9F3 T1 - T2T3 - T4T5 - T6T7 – T9 Mass Transition Timeline Eliminating 2 days from the cure period reduces the default uplift timeline associated with a mass transition by 2.8 days on average 1800 CPT Default confirmed & Mass Transition Notification sent

Real Time Load Estimates 2/21 SEWG Meeting Summary – MCWG requested SEWG to assist in improving the load estimates used to equate real time imbalance values before a statement is produced – ERCOT is evaluating the following potential inputs Current = Load ratio share from 2 weeks prior Proposed = – Using profile data that has been adjusted for actual weather – Using state estimator data – Update will be provided at next SEWG Meeting on 3/21

CRR Auction Credit Concerns Credit improvements for the balance of term auction have not been identified Netting/Mutuality Solutions: – Provide municipalities an AR lien exemption to obtain netting – ERCOT establish a Central Counterparty (PJM & FERC Solution) – Third Party Clearing 2/18 CRR Credit Subcommittee Results – Brainstorm yet to be evaluated – Positive Attributes: constraint based on cleared MWhs, auction credit limit tools, use of unsecured credit, FCE daily calc with inventory updates – Pre Auction: decrease collateral on negative bids, shorten credit lock down period, schedule around other ISO annual auctions, calculate max exposure or use shadow price as the price input – Pre & Post Auction: path/term specific risk adders, increase frequency of auctions & use ACP in MTM, revise settlement schedule, outsource to a 3 rd party, unsecured credit availability

NPRR Discussion NPRR Minimum PTP Option Bids and CRR Auction Fees NPRR Correct DAM Credit Exposure Language and Enable Qualified Expiring CRRs to Offset PTP Bid Exposure

Upcoming Meetings 3/10 – CWG/MCWG Meeting – NPRR Voting Items – Continue review of default timeline & forward exposure 3/TBD – Next CRR subcommittee meeting – Evaluate brainstorming session 3/30 – Joint MCWG/CWG Meeting – Agenda not yet determined