MCWG Update to WMS 2/9/2010

Agenda Items Exposure / Collateral Status Update 1/26 MCWG/CWG Joint Meeting – Potential NPRR to enable expiring CRRs to offset PTP bid credit exposure 1/31 MCWG/SEWG Joint Meeting – Potential NPRR to be issued by ERCOT to expedite the invoicing and payment period for real time Other – 2/16 Due Date: Comments on the standard Guarantee and Letter of Credit form are due – 2/3 Due Date: CWG is updating the roster and accepting membership applications – ERCOT discretion exercised to decrease TPE and E1 for Operating Days 2/2 – 2/9 Next MCWG Meeting scheduled for 2/23

Exposure / Collateral Update Nodal Total Potential Exposure reported by ERCOT as of 12/31/2010 remains less than Zonal Estimated Aggregate Liability (TPE = ↓22% since 10/31) Collateral Posted has increased since 10/31 Cash/LOCs ↑169% Guarantees ↑15% Net Impact – Secured MPs are posting 5.7xTPE vs. 2.3xEAL Unsecured Credit Limits have increased Dollar % ∆ = ↑213% Dollar / CPTY ∆ = ↑18MM from $13MM # 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 – January 2011

2011 MCWG Goals 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 CMM Core Systems Tighten invoice timelines and collateral requirements Q2 In Progress CMM Core Systems Examine adequacy of collateral held for forward risk Q2 TBD ERCOT unsecured credit policies Examine Form of LCs and guarantees Q2 In Progress 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

DAM Point-to-Point Credit Exposure Goal - Determine if DAM PTP Obligations can be offset with CRRs Summary of Drafted NPRR language that would: – Clarify TPO credit exposure calculations for combined cycles – Clarify PTP credit exposure calculations as implemented pre go-live – Right size credit for DAM Energy Only Bid Curves to equate to the maximum exposure rather than total area of bid curve – Right size credit for DAM PTP bids where a qualified expiring CRR offsets potential cleared DAM exposure by reducing credit by PTP Bid Price CRR Offset Qualification Summary – MP provides Counter-Party ID, the CRRAH ID, and the CRR ID with the PTP Obligation bid – PTP Bid submitted before 0X00 of the Day-Ahead – Same Source/Sink Pair, term, ∑ Q CRR ≥ ∑ Q PTP Next Step – Submit NPRR with Urgent Status

Examine Forms of LOCs and Guarantees F&A requested a review of the Guarantee Agreement to ensure that the standard form document adequately protects ERCOT’s and Market Participants’ interests Provide Chad Sealy with any initial questions, comments or suggested modifications to the existing language on standard Letter of Credit Agreement or Standard Guarantee Agreement by Close of Business, Wednesday, February 16, 2011Chad Sealy

Reduce Real Time invoice timelines & Real Time collateral requirements Considerations discussed on 1/26 and 1/31: Issue one Invoice per sub-QSE per business day on Operating Day +10 for RT versus Operating Day +14 to +20 for RT Credit factors: – Increase the frequency for which RT invoices impact OUT Enable Market Participants to reduce posting requirements via issuing early PMTs Reduce # of unbilled RT days completed and settled from 4 to 10 days Reduce payment due date from 5 days to 3 days – Review # days referenced in ADTE while taking forward exposure into consideration A multiple of 36x was discussed in comparison to the current multiple of 40x – Reduce # of unbilled statements referenced within AIL Reduce Completed and Settled references due to expedited invoice cycle – Potentially reduce time gap between ADTE and DALE values – TBD - Reductions in unsecured risk limits to reduce default risk

2/2 -2/9 ERCOT Discretion DAM Revisions – E1 Revisions For Operating Days 2/4 & 2/5 ERCOT revised Energy Only Bid credit requirements by decreasing Market Participant’s E1 values to 70% of calculated E1 values – Uth %ile (i.e. PTP RT OTM risk) For Operating Days 2/5 - 2/8 ERCOT revised the uth %ile from the 90 th %ile to the 80 th %ile TPE Revisions – AIL Revision for Operating Days 2/2 – 2/9 As of 2/2: 7 forward days discounted to 100% (0.667 x 150% =100%) As of 2/3: 7 forward days discounted to 5% (0.05 x 150% =0.075%) – ADTE Revision on 2/18 2/2 will be removed from the ADTE calculation on 2/18 – DALE Feb 4 th DALE will be frozen till Feb 9 th After Feb 9 th DALE calculations will exclude Operating Days Feb 3 rd and Feb 4 th

Appendix PTP and CRR Settlement Example Reason for CRR Offset Real Time Settlement Information Bid Curve Exposure Example

Net Day Ahead Risk to ERCOT versus Collateral Requirement Forward Hedge pre DAM: Resource Position 10 MWh Load Position 10 MWh CRR Position (Bus-Zone) 10 MWh DAM Transaction and Exposure: PTP DAM Bid (w/ Uth%ile =$5) PTP Bid Details: Q= 10MWh, P= $50, Bus- Zone DAM Credit Exposure =[Max[ 0, P bid ] + Uth%ile ] * Q bid = $50 + $5] * 10MWh = $550 Ex: Posting Requirements related to a QSE representing load and generation Settlements & Invoices post DAM: (Zone SPP = $100; GenBus SPP = Resource = $50 * 10MWh = Zone = $100 * -10MWh = CRR = [$100-$50] * 10MWh = $500 Note: (1) Expiring CRR Offsets PTP Bid (2) DAM Credit Exposure over estimates potential for cleared risk Net Position 0 MWh Net Exposure $0.00 $550 Collateral vs. $0 DA Settlement

Risk Aversion Example HB_South to LZ_South Market Participants that are risk adverse to real time congestion risk, may bid aggressively for PTPs in DAM to ensure the continuation of a CRR hedge that expires in the DAM Data from the 48 Hour South Disclosure Report identifies that market participants were bidding up to $230 / MWh for a PTP in the DAM, even when the DAM Settlement Price averaged near $0 Real time risk avoided can be illustrated by the congestion observed between HB_South and LZ_South on operating days 1/12 and 1/13 Real Time Congestion Risk Data from the 48 Hour South PTP Disclosure Report

Nodal Invoicing – Current State DAM Invoice FrequencyDaily on BD, with the DAM Statement TimingOD + 2 BD Invoice DueInvoice Post + 3 BBD/BD Invoice PayoutInvoice Post + 4 BBD/BD (~OD + 6) # / Month~ 31 (e.g. month = Jan) RTM Invoice FrequencyWeekly on Thursdays TimingOD days Invoice DueInvoice Post + 5 BBD/BD Invoice PayoutInvoice Post +6 BBD/BD (~OD ) # / Month~ 4 (e.g. month = Jan)

Nodal Invoicing – Proposed Settlement Invoice FrequencyDaily on Business Days TimingOD + 2 for DAM OD + 10 for RTM Invoice DueInvoice Post + 3 BBD/BD Invoice PayoutInvoice Post + 4 BBD/BD (~ OD + 6 for DAM ~ OD + 14 for RTM) # / Month~ 21 (e.g. month = Jan)

DAM Energy Only Bid Curve calculations overlook maximum risk DAM Bid Example & Clearing Price Max Price Exposure Example Quantity (MW) Bid Price ($/MW) 1.10MW 5x16 $ MW 5x16 $ MW 5x16 $1 P Cleared = $1/MWh ; 1,110MW Awarded A B C Max Exp = $1/MWh $100 $1020 $1110 Max Exposure = $1110 Area Under Curve = $4510