1. Discuss infrastructure to support bilateral contracting between CSPs and REPs in the Retail Market Loads in SCED Sub-group May 22, 2014 1

2. Key Terms CSP = Curtailment Service Provider (i.e. 3 rd Party DR Provider) For simplicity, ‘REP’ is used in these slides as entity involved in transaction flow – REP settlement remains thru REP’s QSE, a separate entity 2

3. Objectives Design a transaction-based infrastructure to facilitate bilateral contracts between CSPs providers and REPs. Promote more robust competition in the DR space. Address the impact of customer switching on CSPs. Eliminate LMP-volumetric G issues. Provide notification and transparency for all parties involved and impacted by a DR transaction. Utilize retail electric service customer protection rules well-established by the PUCT for the solicitation of DR products and services. Eliminate complex changes to MMS/EMS for LRISv2. 3

4. Features of Bilateral Approach ALRs represented by REPs continue to participate in SCED on a ‘bid to buy’ basis – REP’s QSE is the only entity involved in ERCOT settlement Allows CSP to solicit customers directly CSPs gain ability to maintain DR relationships when customers switch REPs Creates incentive for CSPs and DR-friendly REPs to contract bilaterally to promote DR products and services CSP new role in market: Qualification to submit and receive ERCOT transactions Maximum flexibility for DR market 4

5. Customer ERCOT REPCSP 1) CSP and REP negotiate contract terms for DR products and services, settlement 2) REP markets bundled DR products/services with electric service 3) Interaction as currently designed Benefits: -Simplifies implementation and operations by ERCOT (no change) -Easiest to understand for customers? Status Quo: REP initiates DR product/service 5

6. Transaction-Based Bilateral Approach 6

7. Customer ERCOT REPCSP Existing relationship w/customer for electric service 1) CSP initiates DR service w/customer 2) CSP notifies ERCOT of DR relationship w/customer; identifies and provides ERCOT information about customer type, aggregation, response type, etc. Return transaction reveals REP of record to CSP. 3) ERCOT notifies REP of DR relationship between CSP and customer Benefits: -Provides CSP and REP with customer level DR information to facilitate bilateral contracts and partnerships -Improves ERCOT’s ability to centrally track and manage ALRs Manage CSP/ALR-REP relationships Service initiation by CSP Requires bilateral contract between CSP & REP New transactions Existing Contract or Negotiate New New transactions 7

8. Customer ERCOT REPCSP 1) REP submits bids to ERCOT for ALRs (negotiated in bilateral contracts with CSP) 3) M&V, ALR telemetry validation DR customer deployment 2) SCED dispatches ALR when LZ SPP is >= bid price Customer deployment flexibility, contractual terms dictate 8

9. Customer ERCOT REPCSP Settlement of DR customer deployment 1)ERCOT settles REP for load curtailment as reduced adjusted metered load (Base Point Deviations and CLREDP scores apply) 3) REP charges customer for actual metered consumption and may provide additional incentives for load reduction (DR service terms) 2) REP pays CSP for curtailment (G) based on bilateral contract terms including performance true ups Benefits: -No double payment by ISO -Eliminates the volumetric G problem -REP acts as single billing agent for customer 9

10. Customer ERCOT Old REPCSP 2) Switch transaction at ERCOT triggers 2 nd transaction notifying CSP of new REP 1) Customer with CSP relationship switches REPs via normal switching process (TDSP interaction not shown for simplicity) Manage ALR-REP relationships Customer switches REPs New REP Normal switching process (TDSP interaction not shown for simplicity) 3) CSP has option to continue serving customer; informs customer of service continuity or change 4) ERCOT notifies new REP of DR relationship 10 New transactions New transactions

11. Issues/concerns with this approach Forces CSPs to contract with REPs to deliver products and services to customers (is this a bad thing?) CSP incurs REP risk as well as customer risk (is this a bad thing?) – Operational – Credit REP may incur commercial risk as a result of CSP deployment REP incurs deployment compliance risk for the CSP (same as today) REP acts as settlement agent for CSP (same as today) Implement via TX SET/NAESB additions? 11

12. Customer ERCOT REPCSP Is there another way? LMP- Proxy $G? 2) SCED Base Points sent to CSP 5) REP charges customer for actual metered consumption Issues: -Complex implementation -Must implement Loads in SCED as a resource for this -Disruptive to REPs -Is critical mass realistic? -Define acceptable Proxy $G (target for litigation/dispute?) 6) CSP passes on DR payment at contract terms 4) ERCOT charges REP for adjusted metered load 1) CSP notifies REP of DR relationship with customer 3) ERCOT pays CSP for load curtailment (X) at LMP-Proxy $G Drawback: Customers on indexed price are ‘double-paid’? 12

13. 3 Ways to Implement LMP - G 1)Avoid it! (Status quo or bilateral approach) or L = Actual Load (MWh) C = Curtailment (MWh) G = Retail Rate 2) Volumetric LMP-G (Proving unworkable) Customer settlement = -(L+C)*G + LMP*C = -L*G + (LMP-G)*C 3) LMP – Proxy $G (Complex and disruptive to retail) Customer settlement = -L*G + (LMP-G)*C 13