1. CRR Default and the Nodal Market Wholesale Market Subcommittee February 20, 2008

2. PJM Default PJM has recognized defaults of FTR holders leaving the market carrying approximately $80M in default debt The FTR holders were undercollateralized and their counter-flow FTR Obligation position was significantly impacted by a planned transmission outage in New Jersey When invoiced Power Edge defaulted on the payment

3. What that means for ERCOT PJM is grappling with the difficult task of allocating this default to the remaining solvent market participants In ERCOT, defaults of this type will stay in the Day Ahead Market per current Nodal Protocol language Daily any market participant owed money would be paid a fraction of what is owed or nothing at all

4. Implications MP owed money in the DAM includes: CRR holders Sellers of energy Sellers of capacity Sellers of ancillary services CRR sellers Virtual offers DAM is voluntary It won’t take long for the volunteer pool to dry up, i.e. no day ahead market

5. Potential Solutions Axiom: “It is not a good idea to punish good behavior” We could leave things as-is (and pray it doesn’t happen) We could decline to sell CRR Obligations We could allocate defaults of this type in some other fashion We could work on our credit policy!

6. “As-is” Considerations Self schedules will not be impacted: market forced into forwards No A/S mkt clearing so no A/S DAM prices ERCOT forced to call supplemental A/S markets Not sure how CRRs and market clears without offers??? Others?

7. “No Obligations” Considerations Selling only CRR Options essentially eliminates credit risk It also essentially eliminates the CRR market In Real Time, actual flows include actual counter-flow effects In the CRR auction no such flows are considered in order to ensure revenue adequacy of the instrument Any paths that become “fully loaded” in the model eliminate any other CRRs that use that path in their makeup

8. “Alternative Allocation” Considerations Allocation should be known and flat Development of risk models and appropriate adders Should not penalize good behaviors

9. “Credit Policy” Considerations “Best offense is a good defense” Goal is to require sufficient collateral to mitigate or eliminate impact to the market Evaluation of potential value reversals May cause some positively valued CRRs to still require margining Could lead to “CRRs for the rich and famous” Can (should) be done in combination with any other option

10. Questions?