Market Credit Working Group Update to WMS Wed. Oct 20, 2010

MCWG October 2010 Overview MCWG Activities Since September 2010 WMS Update Report on Joint MCWG/CWG Meeting Report on Joint MCWG/CWG Meeting Nodal Credit Readiness Nodal Credit Readiness Third Party providers Third Party providers 95 percentile of Real Time Day-Ahead and Point-to-Point Obligation (Possible Vote) 95 percentile of Real Time Day-Ahead and Point-to-Point Obligation (Possible Vote) Other topics Other topics Oliver Wyman Credit Report Oliver Wyman Credit Report CWG Update to F&A CWG Update to F&A MCWG parking lot for 2010 MCWG parking lot for 2010 Next Meeting MCWG Next Meeting MCWG

MCWG Activities Since September 2010 WMS Update MCWG met five times since the last WMS update September 28, 2010 (phone) September 29, 2010 (joint MCWG/CWG, webex) October 6, 2010 (joint MCWG/CWG face-to-face) October 8, 2010 (joint MCWG/CWG face-to-face) October 11, 2010 (joint MCWG/CWG, webex)

Report on Joint MCWG/CWG Meeting Nodal Credit Readiness Nodal Credit Readiness The Credit Work Group (CWG) has reviewed the Nodal Protocols and how collateral is determined and to the best of its knowledge all ERCOT systems should be ready to go live on December 1, The Credit Work Group (CWG) has reviewed the Nodal Protocols and how collateral is determined and to the best of its knowledge all ERCOT systems should be ready to go live on December 1, Credit calculations are functioning as per the Nodal Protocols based on data available during market trials in the CMM and CRR systems and the calculations adequately address credit risk in these areas Credit calculations are functioning as per the Nodal Protocols based on data available during market trials in the CMM and CRR systems and the calculations adequately address credit risk in these areas On October 5, 2010, CWG identified the issue with a calculation for PTP obligation bids noted below and unless corrected before go-live, CWG cannot confirm the adequacy of how credit is consumed in the DAM. ERCOT has reviewed the issue and currently has a plan to resolve it by November 5, Taking this into consideration, CWG confirms that DAM credit consumption adequately addresses credit risk. On October 5, 2010, CWG identified the issue with a calculation for PTP obligation bids noted below and unless corrected before go-live, CWG cannot confirm the adequacy of how credit is consumed in the DAM. ERCOT has reviewed the issue and currently has a plan to resolve it by November 5, Taking this into consideration, CWG confirms that DAM credit consumption adequately addresses credit risk. Issue: two discrepancies were discovered in respect to Section (d) in how credit limits are consumed for PTP obligation bids in the DAM such that Issue: two discrepancies were discovered in respect to Section (d) in how credit limits are consumed for PTP obligation bids in the DAM such that The ‘u’ factor is not considering the quantity involved The ‘u’ factor is not considering the quantity involved The ‘u’ factor times quantity is not considered for negative bids The ‘u’ factor times quantity is not considered for negative bids CWG recommends status updates regarding outstanding issues be provided at future ERCOT Board meetings. CWG recommends status updates regarding outstanding issues be provided at future ERCOT Board meetings. CWG voted to make the above recommendation on Monday, October 11 by unanimous vote, with 6 segments voting CWG voted to make the above recommendation on Monday, October 11 by unanimous vote, with 6 segments voting

Report on Joint MCWG/CWG Meeting Third Party Solution/Administration Providers Third Party Solution/Administration Providers Three presentations NASDAQ OMX Clearing Nodal Exchange VMAC Both NASDAQ and VMAC indicated that they will have credit solutions for ERCOT available Day 1 of the nodal market All three presentations, including contact information has been posted on-line

Report on Joint MCWG/CWG Meeting 95 th percentile of RT DA spread and 95 th percentile of PTP Obligations Allows only 1-2 outlier data points Impacts credit for 30 days forward A change to these elements cannot be made quickly past go live 95 th percentile of RT DA spread Protocol revision Programming change in MMS 95 th percentile of PTP Obligation (source-sink) Change to DAM Collateral Parameters document Parameter change in MMS ERCOT has no discretion to change percentile

Solutions for 95 th percentile of RT DA spread and 95 th percentile of PTP Obligations CWG voted to reduce the percentile from the 95 th percentile to the 85 th percentile at the joint meeting. Note –Change to the PTP Obligations is easier systematically than for the RT DA Spread Staff can also use the ‘e3’ factor to mitigate this issue For WMS review and possible vote (see documents) Draft changes to DAM Collateral Parameters document for 95 th percentile of the PTP Obligations and “e3” flexibility Draft NPRR for 95 th percentile of RT DA spread

Other topics NPRR drafts for WMS review in coming months NPRR drafts for WMS review in coming months To clarify the language in Section around the “u”th factor (noted in the CWG report) To clarify the language in Section around the “u”th factor (noted in the CWG report) To change how Energy Only Offer curve exposure is calculated in DAM To change how Energy Only Offer curve exposure is calculated in DAM Identified while reviewing how collateral is consumed in DAM Identified while reviewing how collateral is consumed in DAM Over-collateralizes EOO curves Over-collateralizes EOO curves Impact (based on ERCOT data from Sept ) Impact (based on ERCOT data from Sept ) Bid curves represented approximately 10-15% of bids submitted, with 85-90% of bids being submitted as fixed or variable Bid curves represented approximately 10-15% of bids submitted, with 85-90% of bids being submitted as fixed or variable Impacted CPs in Market Trials at the end of September, Most had a mix of bid curves and fixed/variable bids Impacted CPs in Market Trials at the end of September, Most had a mix of bid curves and fixed/variable bids Cannot be changed prior to go live Cannot be changed prior to go live

Oliver Wyman Credit Report ERCOT’s general credit practices, credit worthiness standards and credit exposure calculations meet or exceed industry standards and should fully support the transition to Nodal Collateral requirements are reasonably conservative Discretionary parameters do give ERCOT the ability to adjust collateral requirements post “go- live,” providing flexibility to reflect potential changes in the market’s appetite for risk From a governance perspective, the existing reporting relationship for credit meets best practice standards as it is fully independent of operational activities Given ERCOT’s experience in recent years with unique risk events, the credit risk management practices have proven to be flexible in responding to these events and conservative collateral requirements provide additional protection Recommendations include (i) would developing an explicit risk appetite statement and tolerance for aggregate credit risk, which would improve ERCOT’s overall governance and reduce potential confusion and disagreement concerning required collateralization levels We strongly suggest that the organization resume using the credit loss model as soon as possible (from the Oliver Wyman Executive Summary)

CWG Update to F&A Oct 19, 2010 CWG presented the CWG vote in favor of the ‘a’ and ‘m’ factors (a=0 and M=0.75 –TAC approved amounts) F&A voted-up the ‘a’ and ‘m’ factors BOD to vote on the factors Oliver Wyman Report was presented OW stated that ERCOT should develop a risk appitite statement, and begin running the PFE model again F&A voted in favor of credit readiness

MCWG Parking Lot for 2010 Direction of invoice timing change Direction of invoice timing change Perform bottom up review of existing creditworthiness standards (after CCRO Best Practices efforts) Perform bottom up review of existing creditworthiness standards (after CCRO Best Practices efforts) Reduction of settlement cycle due to PRR 568 (7days) Reduction of settlement cycle due to PRR 568 (7days) Further reductions in settlement cycles Further reductions in settlement cycles This includes looking at the potential to reduce the settlement cycle 30% with improved metering This includes looking at the potential to reduce the settlement cycle 30% with improved metering

Next Meeting MCWG Friday October 22 th 1:30PM (phone) Friday October 22 th 1:30PM (phone) Joint CWG/MCWG meeting Joint CWG/MCWG meeting Update on MCWG presentation to WMS Update on MCWG presentation to WMS ERCOT’s Nodal cutover plan for credit ERCOT’s Nodal cutover plan for credit Next Steps on reviewing nodal credit requirements Next Steps on reviewing nodal credit requirements Other business Other business