1. Nothing below this point Guide @ 2.68 Guide @ 1.57 Guide @ 1.97 Subtitle Guide @ 2.64 Guide @ 2.99 Nothing below this point Guide @ 0.22 Guide @ 4.77 Congestion Management Work Group November 8, 2011 Managing Stability Constraints in Nodal This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interest of Morgan Stanley trading desks. Such interest may conflict with your interests and recipients should be mindful of such potential conflicts of interest when reviewing this information. The views of the trading desk may differ from those of the Research Department or others at Morgan Stanley. Morgan Stanley may deal as principal in or own or act as market maker or liquidity provider for the securities/instruments (or related derivatives) mentioned herein. The trading desks may engage in a variety of trading activities (which may conflict with the position an investor may have) before or after providing this information, including accumulation of a position in the subject securities/instruments based on the information contained herein or otherwise. Morgan Stanley may also perform or seek to perform investment banking services for the issuers of the securities and instruments mentioned herein. Morgan Stanley is not a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice, including within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Please see additional important information and qualifications at the end of this material.

2. Only Source / Footnotes below this line Guide @ 2.68 Guide @ 1.64 Guide @ 1.95 Subtitle Guide @ 2.64 Guide @ 2.80 Only Source / Footnotes below this line Guide @ 0.22 Guide @ 4.69 L:\EPS\Other\Deanna Young (601892264) 10/9/2015 The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interests of Morgan Stanley trading desks. To the extent any prices or price levels are noted, they are for informational purposes only and are not intended for use by third parties, and are indicative as of the date shown and are not a commitment by Morgan Stanley to trade at any price. Please see additional important information and qualifications at the end of this material. 2 Direct Assignment of Congestion in Nodal  The fundamental premise of nodal market design is that the LMPs located at each unit reflect that unit’s impact (positive or negative) on transmission constraints  For thermal constraints this is simply represented by the electrical relationship or shift factor a unit has on the overloaded path  A 100MW unit with a 5% shift factor relationship to the overloaded element that is on the export side will be charged for 5MWs of impact to the path  For transient stability limits like the W-N constraint there are two aspects to the impact to path  The first is the current flow impact similar to that of a thermal constraint  The second is created by generation units with fast exciters but no power system stabilizers  ERCOT uses a matrix to manage the effect of these units

3. Only Source / Footnotes below this line Guide @ 2.68 Guide @ 1.64 Guide @ 1.95 Subtitle Guide @ 2.64 Guide @ 2.80 Only Source / Footnotes below this line Guide @ 0.22 Guide @ 4.69 L:\EPS\Other\Deanna Young (601892264) 10/9/2015 The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interests of Morgan Stanley trading desks. To the extent any prices or price levels are noted, they are for informational purposes only and are not intended for use by third parties, and are indicative as of the date shown and are not a commitment by Morgan Stanley to trade at any price. Please see additional important information and qualifications at the end of this material. 3 Sample of the Stability Impact to the Limit Unit Scenario All-Inservice 1 2099~2406 2 1441~1753 3 2060~2473 4 1621~1877 5 1520~2167  Currently we capture the impact the non-PSS units have on the current flow of the constraint  We do not capture the impact the unit has on the overall export limit Assume a unit on line causes the Unit Scenario to change from 1 to 2. This reduces the export limit by approximately 600MWs.

4. Only Source / Footnotes below this line Guide @ 2.68 Guide @ 1.64 Guide @ 1.95 Subtitle Guide @ 2.64 Guide @ 2.80 Only Source / Footnotes below this line Guide @ 0.22 Guide @ 4.69 L:\EPS\Other\Deanna Young (601892264) 10/9/2015 The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interests of Morgan Stanley trading desks. To the extent any prices or price levels are noted, they are for informational purposes only and are not intended for use by third parties, and are indicative as of the date shown and are not a commitment by Morgan Stanley to trade at any price. Please see additional important information and qualifications at the end of this material. 4 Proposed Solution  Continue calculating and charging for flow impacts (imbedded in the unit’s LMP)  Add to this amount a charge for the change in the stability limit impact  For Example:  A Unit is operating at 400MWs for 1 hour and has a SF of 0.7 to the constraint  W-N limit is binding with a Shadow Price of $50/MWh  The unit creates a 600MW reduction in the W-N limit by being on line  The unit will be charged: Flow Impact (Imbedded) + Stability Impact = Congestion Charge 400MW* 1h * 0.7 * $50/MWh + 600MW * 1h * $50/MWh = $44,000

5. Only Source / Footnotes below this line Guide @ 2.68 Guide @ 1.64 Guide @ 1.95 Subtitle Guide @ 2.64 Guide @ 2.80 Only Source / Footnotes below this line Guide @ 0.22 Guide @ 4.69 L:\EPS\Other\Deanna Young (601892264) 10/9/2015 The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interests of Morgan Stanley trading desks. To the extent any prices or price levels are noted, they are for informational purposes only and are not intended for use by third parties, and are indicative as of the date shown and are not a commitment by Morgan Stanley to trade at any price. Please see additional important information and qualifications at the end of this material. 5 Considerations  The unit’s stability impact may not be the same in all instances  Can a reasonable fixed proxy be used? (average for instance)  ERCOT is moving away from the current matrix method to its TSAT tool to provide better performance  Can that tool provide the impact of each unit without a PSS?  Can the settlement charge be implemented simply?  Would payments wind up as negative neutrality charge?  Is there a better method?

6. Only Source / Footnotes below this line Guide @ 2.68 Guide @ 1.64 Guide @ 1.95 Subtitle Guide @ 2.64 Guide @ 2.80 Only Source / Footnotes below this line Guide @ 0.22 Guide @ 4.69 L:\EPS\Other\Deanna Young (601892264) 10/9/2015 The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interests of Morgan Stanley trading desks. To the extent any prices or price levels are noted, they are for informational purposes only and are not intended for use by third parties, and are indicative as of the date shown and are not a commitment by Morgan Stanley to trade at any price. Please see additional important information and qualifications at the end of this material. 6 Conclusion  This allocation method provides a better “cost causation” link to the generator creating the congestion  While CREZ should resolve much of this specific problem, other similar issues may develop  If this is worth pursuing, I can write an NPRR to affect this change  Questions?