1 Exposure Stress Testing CWG/MCWG Suresh Pabbisetty, CQF, CSQA. ERCOT Public June 12, 2014

2 Exposure Stress Testing Background: SWCAP of $7000 was effective June 1, 2014 and $9000 SWCAP will be in place June 1, Operating Reserve price adders were effective June 1, These could increase the frequency of above-average prices. ERCOT is seeking to measure the impact of price scenarios on exposure. Risk: Increased volatility and high prices could result in a significant increase in exposure under stress conditions. ERCOT Public

3 Exposure Stress Testing Uncovered Exposure: RT exposure in excess of security posted in a stress scenario over one day. Increased Exposure = Σ i Σ p [(Volume Escalation Factor * Real Time Imbalance Volume) * (Stressed RTSPP – RTSPP)] Where i = stress interval, p = settlement point, RTSPP = Real Time Settlement Point Uncovered Exposure = Increased Exposure + TPE – CRR Locked ACL - Collateral Held A stress scenario is a market condition in which certain intervals have prices at the SWCAP and potential imbalance volume escalation. ERCOT Public

4 Exposure Stress Testing Notes: Stress scenarios are applied only to Real Time Market. Does not recalculate the affect on TPE (especially RTLE) once the high prices are settled. Requires an assumption of the number of stress intervals, price, and volume escalation levels. ERCOT Public

5 Exposure Stress Testing Assumptions: April 10, 2014 data used for base case. Prices are scaled based on January 6, 2014 Operating Day, hour 7. Stress case intervals begin at 15-minute interval #61 (ie 15:15). Imbalance volume escalation is applied uniformly across all Settlement Points. Derived incremental exposure is added to existing TPE calculation. ERCOT Public

6 Exposure Stress Testing ERCOT Public Scenarios: 1.One high price interval with no imbalance volume escalation. 2.Ten high price intervals with no imbalance volume escalation. 3.One high price interval with 10% imbalance volume escalation. 4.Ten high price intervals with 10% imbalance volume escalation. Additional Scenarios: 5.Twenty-eight high price intervals with imbalance volume similar to that of August 2011 event, during which there were 28 intervals (15- minute) that had prices close to cap over the period of August 2, 2011 through August 6, Four high price intervals with imbalance volume similar to that of January 6, 2014.

7 Exposure Stress Testing ERCOT Public Results: Note incremental exposure includes positive values only.

8 Exposure Stress Testing ERCOT Public Results: Note: Of the $460m incremental positive exposure in the August 2011, $390m is attributable to net load Counter-Parties, and $70m to net generation Counter-Parties.

9 Q & A ERCOT Public