NPRR 206 DAM Credit Requirements Reduction: E Values and Percentiles Luminant Proposal

Goal – Encourage DAM Participation – Right size collateral requirements – Recognize offsetting risk – Reflect basis risk between offsetting bids and offers – Enable hedged entities to bid in a manner that ensures price risk is managed and unnecessary real time short positions are not a result of a bidding strategy that is constrained by unnecessary and burdensome working capital obligations NPRR 206 Goal and Luminant’s Current Proposal

BIDS (6)(a) 1 st 60 DaysAfter 60 Days Variable and Purpose (LUME)DescriptionLCRALUMEERCOTLCRALUMEERCOT DReflects a ceiling price that constrains collateral obligations for a bid when “E1” < 1 Percentile of DAM hourly SPP over last 30 days or 95 E1Enables a hedged entity (offsetting bids & offers) to bid as a price taker to ensure bids are cleared when offers clear (Avoid Real Time Short Risk). a) Variable from 0 to 1 b) Daily value c) If Bid Price > “D” then add exposure = E1% multiplied by the difference between the Bid Price and “D” Based on Load & Resource Imbalance, and Mismatch, with floor = 0.2? and multiplier = 2.0 x e1 Based on Load & Resource Imbalance, and Mismatch, with floor = 0.2 and multiplier = 1.2 x e1 a) 1 st 14 days e1=1, e2=0, & e3=1 b) after the 1 st 14 days set factors with “after 60 days” solution w/ multiplier = 1.2 x e1 and 0.2 floor 95%ile of ($Bids - $TPO - $EOO) / ($Bids) [cleared totals; i.e., P*Q] See next page for details: Based on cleared bids, offers, PTPs, and CRRs settled Use LCRA solution Set at least bi-weekly and reported / monitored daily 3 Bid Exposure = Conditional Cap Exposure Implementation + E1 Adjustment Bid Exposure = Bid Quantity x [ Min [ Bid Price, “D” ] + E1 x Max [ 0, Bid Price – “D” ]]

E1 = 50 th Percentile of the E1 observations calculated for each day over the last 30 days (Descending Sort) For each day’s E1 determination: E1 Observation = IF (a) the product of Bid Quantity Cleared and Cleared Price ≤ 0 THEN (b) E1 = 1 ELSE (c) E1 = Max [ 0 or [ Bid Risk – Offer Offsets – CRR Offsets + PTP Risk ] / Bid Risk] 4 Bid RiskDAM Energy Bids Cleared Q Cleared-Bids x P DAM-Cleared Offer Offsets Three-Part and DAM Energy Only Offers Cleared Q Cleared-3part x P DAM-Cleared + Q Cleared-EO x P DAM-Cleared CRR Offsets CRR Cleared Q CRR-Options x Max(0, P Sink DAM-Cleared – P Source DAM- Cleared ) + Q CRR-Obligations x (P Sink DAM-Cleared – P Source DAM-Cleared ) PTP Offsets PTP Cleared Q PTP x (P Sink DAM-Cleared – P Source DAM-Cleared ) BIDS - Luminant’s “E1” Definition Variable Definitions

1 st 60 DaysAfter 60 Days Variable and Purpose (LUME)DescriptionLCRALUMEERCOTLCRALUMEERCOT ADetermines if an Energy Only offer qualifies for offsetting bid exposure Percentile of past 30 day DAM hourly SPP BDetermines the magnitude for which an offer will offset bid exposure Percentile of past 30 day DAM hourly SPP E2Enables a hedged entity (offsetting bids & offers) to reduce bid exposure by “B” a) “Gives credit” to extent E2 > 0 (when $EOO < A) b) Value 0 to 1 c) Set min bi-weekly d) Reported daily 01-E100 See next page: Based on cleared bids, offers, PTPs, and CRRs settled 1 - Max [ 0 or ($EOO + $TPO-$Bid) / ($EOO + $TPO)] E3Enables exposure to be calculated on DAM EOO Quantity for which no offsetting bid exist a) requires credit to extent E2 > 0 (when $EOO > A) b) Value 0 to 1 c) Set min bi-weekly d) Reported daily 1111 [($EOO + $TPO-$Bid) / ($EOO + $TPO)] 5 ENERGY ONLY OFFERS (“EOO”) (6)(b) EOO Exposure = Energy Only Collateral Reductions + Energy Only Collateral Requirements EOO Exposure = [Q EOO:P≤ath x E2 x -SPP bth ] + Max [ 0, [SPP RT -SPP DA ] 95th ] x E3 x Q EOO

E2 = 50 th Percentile of the E2 observations calculated for each day over the last 30 days (Descending Sort) For each day’s E2 determination: E2 = 1 less Max [ 0 or ( Offer Risk – Bid Offsets – PTP Offsets + CRR Risk ) / Offer Risk ] 6 E3 to be in effect = 50 th Percentile of the E3 calculated for each day over the last 30 days (Descending Sort) For each day’s E3 determination: E3 = ( Offer Risk – Bid Offsets – PTP Offsets + CRR Risk ) / Offer Risk Offer RiskThree-Part and DAM Energy Only Offers Cleared Q Cleared-3part x P DAM-Cleared + Q Cleared-EO x P DAM-Cleared Bid OffsetsDAM Energy Bids ClearedQ Cleared-Bids x P DAM-Cleared CRR Offsets CRR ClearedQ CRR-Options x Max(0, P Sink DAM-Cleared – P Source DAM-Cleared ) + Q CRR-Obligations x (P Sink DAM-Cleared – P Source DAM-Cleared ) PTP Offsets PTP ClearedQ PTP x (P Sink DAM-Cleared – P Source DAM-Cleared ) ENERGY ONLY OFFERS – LT Luminant E2 and E3 Variable Definitions

1 st 60 DaysAfter 60 Days Variable and Purpose (LUME)DescriptionLCRALUMEERCOTLCRALUMEERCOT YDetermines if a 3 Part offer qualifies for offsetting bid exposure %ile of past 30 day DASPP below which EOOs qualify to “receive credit” 2550Up to Up to 50 ZDetermines the magnitude for which a 3 Part offer will offset bid exposure %ile of past 30 day DASPP used to calculate “received credit” to – to 75 7 THREE PART OFFERS (6)(c) Three Part Offer Exposure = A Qualifying 3Part Collateral Reduction Three Part Offer Exposure = [Q 3P:P≤yth x - SPP zth ]

1 st 60 DaysAfter 60 Days Variable and Purpose (LUME)DescriptionLCRALUMEERCOTLCRALUMEERCOT UDetermines the additional collateral obligation in excess of the notional value of the bid for potential out of the money exposure on PTP cleared bids Percentile of past 30 day RTSPP diff (source-sink) added to bid price*qty TDetermines the collateral obligation to offset the estimated notional value of Ancillary Services Percentile of past 30 day MCPC for that hour for that A.S. (times qty to calculate exposure) PTP Obligations & Ancillary Services (6)(d-e) PTP Exposure = Q Bid x [Max [ 0, P Bid ] + Max [ 0, [ RT-SPP Source –RT-SPP Sink ] ”u”th percentile ] ] Ancillary Services Not Self Arranged = MCPC ”t”th percentile x Q AS not self-arranged

LUME Summary Initial 60 Day Logic – Be Ultra-Conservative – Introduce a Minimum E1 value – Increase calculated E1 by 20% by multiplying 1.2 times E1 observations – Recognize offsetting risk at reduced levels E3 = 1 E2 = 1 – E1 Lower A,B,Y,Z (Contingent Offer Offsets) Increase D (Contingent Maximum Bid Posting Obligation) Post 60 Day Logic – Be Conservative – Utilize Data Available to ERCOT in variable calculations – E1: Allows Hedged Counterparties to bid in a manner that ensures RT short obligations are minimized by offsetting offers clearing without bids clearing – E2, A, Y: Recognize offsetting risk – B, Z, D: Reflect basis risk between bids and offers – Inclusion of CRRs and PTPs in E1, E2, E3 calculations recognizes basis risk and encourages basis risk management – E3: Posting obligation for Energy Only Offers – Develop a process (implementable by go-live) that is dependant on a counterparty’s historical activity to calculate exposure that adequately collateralizes risk, and provides ERCOT the discretion to recalculate when historical activity doesn’t align to current risk – Continue to develop a netting solution for the nodal parking deck