1. February, 2012 ERCOT Public ERCOT CRR Update Matt Mereness ERCOT Manager Day-Ahead Market and CRR Auction

2. 2 Agenda Recap of Annual CRR Auction and Lessons Learned CRR Next Steps in 2012 ERCOT Tactical / Short-term ERCOT/Market Strategic Discussions (and consider priority) Appendix of detailed PCRR/CRR examples Deferred- 2012 CRR Market Notice discussion February, 2012ERCOT Public

3. 3 Recap of Annual CRR Auction for 2012/2013 2012 Annual Auction (55% of system capacity) Bids/Offers received Oversubscribed in round 1 with total of 226,749 (10k bid limit -> 1,765) 147,708 Options 79,041 Obligations Round 2 with 90,620 54,535 Options 36,085 Obligations Credit Lock = $1,210,866,611 2013 Annual Auction (15% of system capacity) Bids/Offers received Round 1 with total of 190,359 122,788 Options 67,581 Obligations Credit Lock = $441,763,674 Issue/Risk – Second occurrence of 200k bid limit oversubscription Issue/Risk – Credit lock of $1.6 billion for 3 weeks and overlap with Dec monthly auction February, 2012ERCOT Public

4. 4 Recap of Annual CRR Auction for 2012/2013 Execution times of Annual CRR Auction 2012 Annual Auction (55% of system capacity) 60 hours for final run of Peak WD 14 hours for final run of Peak WE 7.5 hours for final run of Peak Off-Peak 2013 Annual Auction (15% of system capacity) 194 hours for final run of Peak WD* 50 hours for final run of Peak WE 36 hours for final run of Peak Off-Peak Issue/Risk– Execution time took 8-days for one component of auction February, 2012ERCOT Public

5. 5 Recap of Annual CRR Auction for 2012/2013 NOMCR and Outage Metrics Posted 72 models for auction (3TOU x 12 months x 2 years) 2012 Annual Auction (55% of system capacity) Snapshot taken 8/17/2011 NOMCRs: 526 NOMCRs part of model build 490 Approved status (for Testing or Production) 36 Other status (Received, Resubmitted, Submitted, Add’l data required) Outages- 18 Outages part of model build Used 8 in model build 2013 Annual Auction (15% of system capacity) Snapshot taken 6/28/2011 NOMCRs: 725 NOMCRs part of model build 674 Approved status (for Testing or Production) 51 Other status (Received, Resubmitted, Submitted, Add’l data required) Outages- 8 Outages part of model build Used 1 in model build Question, how were long-term planned changes in model build, such as CREZ lines in annual model? February, 2012ERCOT Public

6. 6 Annual CRR Auction for 2012/2013 Lessons Learned : –Both years of Auction published on time (completed execution between Oct31- Nov16) –Lessons learned: Credit- Significant market credit hold of $1.6 billion for 3 weeks, so team looking for feedback to propose changes to timing and sequence to alleviate coinciding credit collateral posting (next bullet). Sequence/timing- Considering with market changes to execute 2-year auction in separate bid and credit windows for each year to relieve market credit and improve analysis of results. Technical- 2013 PeakWeekDay auction executed for 194 hours, so evaluating performance improvement options for next year’s auction (software, servers, configuration). Bid Limit of 200,000- Market was oversubscribed for 2012 so looking at options whether to consider no changes, or to consider alternative minimum bids prices, reduce maximum bids per CRRAH in first round, or curtailment of least value bids prior to running auctions. February, 2012ERCOT Public

7. 7 Agenda Recap of Annual CRR Auction and Lessons Learned CRR Next Steps in 2012 ERCOT Tactical / Short-term ERCOT/Market Strategic Discussions (and consider priority) Appendix of Examples February, 2012ERCOT Public

8. 8 CRR Next Steps in 2012 ERCOT Tactical / Short-term –Implementation of NPRR395 (credit posting), NPRR357/430 (credit screening) –Market requests such as CRR Model Build paper, PCRR and CRR Offers in Auction –Consider CRR Calendar and Protocol changes to separate 2-year Annual Auction –Improve system performance of 2013 PeakWeekDay Auction ERCOT/Market Strategic Discussions (and consider priority) –Options around 200,000 Bid Limit –CRR Payment Schedule options –Rolling Auction options and approaches February, 2012ERCOT Public

9. 9 Agenda Recap of Annual CRR Auction and Lessons Learned CRR Next Steps in 2012 ERCOT Tactical / Short-term Model Build Process (slides + whitepaper) PCRR and CRR Offers in Auction (slides + Appendix) Separate 2-year Annual Auction Improve system performance for Annual Auction ERCOT/Market Strategic Discussions (and consider priority) Next Steps for 2012 Market Notices February, 2012ERCOT Public

10. 10 CRR Model Build Process CRR Team will support the CRR Model Build Process as an “Other Binding Document” Current draft for market consideration posted with this presentation Summary of process CIM snapshot from current production model Apply NOMCRs to create model for Outage Evaluation Perform Study to determine most constraining day of month (outages) That day of month becomes model build date to build: Using current CIM model Applying all approved NOMCRs leading up to that date (future model) Applying Outages Topology Processor creates model file to pre-process for CRR CRR Engineer applies all other supporting data- Forecasted Temps, LDF, etc Model uploaded into CRR system and posted to market Multi-month models are same as monthly methods repeated into future months February, 2012ERCOT Public

11. 11 ERCOT PublicFebruary, 2012 2013 Annual Auction (15% of system capacity) Operations Model = 6/28/2011 (18 months before Jan 1, 2013) NOMCRs = 725 in-flight (most future NOMCR = 6/1/2012) Outages = 8 Outages in model build study, used 1 in model build across months 2012 Annual Auction (55% of system capacity) Operations Model = 8/17/2011 (4 months before Jan 1, 2012) NOMCRs = 526 in-flight (most future NOMCR = 7/11/2012) Outages = 18 Outages in model build study, used 8 in model build Question- Were long-term planned changes in model build, such as CREZ lines? Answer is “No”, but there was at least one CREZ line with a NOMCR that was accepted (Scurry South – Dermott 345 kv double circuit). ERCOT has studied amount of change in accuracy of dates of future improvements and excluded them from consideration in 1-2 years in future (see next slide for example) CRR Model Build for Annual Auctions

12. 12 ERCOT PublicFebruary, 2012 CRR Model Build- Sample of Changes in Energization Dates

13. 13 PCRR and CRR Offer Explanation Reminder that Network Model is scaled for auction at: Year 2 – Scaled to 15% of ratings/capacity Year 1 – Scaled to 55% of ratings/capacity Monthly – Scaled to 90% of ratings/capacity For any PCRRs or previously awarded CRRs: For Year2 and Year1 the ownership is scaled-down to represent the “base CRR” capacity on the scaled-down model that affects how much more capacity can be sold. No scaling down in monthly auction. For Allocated PCRRs, the CRRAH has the option to: - Hold the PCRRs and pay for their value in the CRR Auction (at discount) or - Offer their PCRRs into the market These offers can be up to 100% of their MW value, even if it exceeds the scaled-down model, and potentially be fully cleared and transferred to another CRRAH (since this is a transfer of ownership, not incremental capacity on the network model). February, 2012ERCOT Public

14. 14 PCRR and CRR Offer Explanation Detailed examples in the appendix, but a high level annual auction example: 100MW line with 80MW PCRR ownership for Year1- 55% Auction Offer from CRRAH NOIE to sell 80MW PCRR Bid from CRRAH X at high price to buy 100MW February, 2012ERCOT Public Bus ABus B 55MW capacity = 100 MW rating (100x55%) less 44MW CRR baseload (80x55%) 11 MW for sale from ERCOT 100 MW bid 100MW line 80 MW offer Assuming high bid price from CRRAH X : CRRAH X = Clears the 80MW (offer) + 11MW (system) = 91MW CRRAH NOIE = Sells all 80MW, 0 Remaining Note in monthly auction, the 91MW ownership is scaled down to 90% to become CRR baseload, just as PCRR was.

15. 15 Separate 2-year Annual Auction Annual Auction processes and systems are already separated in terms of: Credit lock, Modeling, Bid window, Auction solutions ERCOT proposal to consider separating credit/bid/auction windows for each year to relieve market credit and improve analysis of results. February, 2012ERCOT Public Year 1 Year 2 Oct/Nov All credit/bids/auctions in flight simultaneously Year 1 Year 2 Oct/Nov Year 2 credit/ bids/auctions Nov/Dec Year 1 credit/ bids/auctions Current Proposed

16. 16 Improve System Performance 2013 Annual Auction (15% of system capacity) 194 hours for final run of Peak WD Risk– Execution time took 8-days for one Time-of-Use auction segment, and thus time for a re-execution due to credit or solution issue is limited. Mitigation plan- ERCOT in process of re-executing 194 hr run on upgraded platform to benchmark Linux technology and newer Nexant code. Testing progress. February, 2012ERCOT Public

17. 17 Agenda Recap of Annual CRR Auction and Lessons Learned CRR Next Steps in 2012 ERCOT Tactical / Short-term ERCOT/Market Strategic Discussions (and consider priority) –Options around 200,000 Bid Limit –CRR Payment Schedule options –Rolling Auction options and approaches Appendix of Examples February, 2012ERCOT Public

18. 18 Options around 200,000 Bid Limit Bid trending of all auctions since go live Exceeded 200,000 bid limit two times resulting in Round 2 February, 2012ERCOT Public

19. 19 ERCOT PublicFebruary, 2012 Options for consideration Auction for the auction- ERCOT to conduct an auction/allocation for the bid capacity Questions to consider regarding timing, involvement of money Complexity of more people, processes, timing Additional chance for “self-reduction of bids” If 200k exceeded, introduce an additional day for self-reduction by CRRAHs of known over-subscribed amount before invoking the low bid limit quantity Increase minimum Option bid price Reserve bid capacity for higher value bids, but no guarantee of <200k limit Remove credit constraint in CRR Clearing engine Allows P-Q Curves (example up to 10 segments) Curve counts as single bid, estimate would consolidate 30-50% of bids Forced ranking of 200,000 bids Take all option bids, rank by price, and curtail down to 200,000 limit ERCOT and Vendor will continue to test 200,000 threshold Options around 200,000 Bid Limit

20. 20 ERCOT PublicFebruary, 2012 Options for consideration Part of NPRR357 was concept of paying for CRRs only in the prompt month Revisiting of collateral requirements of CRR ownership No comments from CRR team on payment schedule or collateral Could be considered in context of current annual auction Could be considered with rolling auction In response to some questions about credit default processes during auction, Protocols 7.5.5.3 (1) (b) ERCOT may review preliminary CRR Auction results to ensure that post auction collateral requirements are satisfied for all CRR Account Holders participating in the CRR Auction. If it is practicable to rerun the applicable CRR Auction, and the post CRR Auction collateral requirements for a Counter-Party are not satisfied, ERCOT: (i) Shall promptly notify the Counter-Party of the amount by which its Financial Security must be increased and allow it until 1500 on the next Bank Business Day from the date on which ERCOT delivered Notification to increase the Financial Security. (ii) If sufficient Financial Security is not received by 1500 on the next Bank Business Day, ERCOT shall void all of the Counter-Party’s bids and offers in the CRR Auction and rerun the CRR Auction without that Counter-Party’s activity. CRR Payment Schedule

21. 21 ERCOT PublicFebruary, 2012 Open discussion to gather options and priorities for market rolling auction Tenor/horizon of auctions (shorter/longer) Percentage of capacity auctioned each annual, month, or other period Potentially minimize model builds with transition from monthly to seasonal periods Example, utilize seasons for Annual and Quarterly Monthly would only be offered at granularity in prompt month Is there a target to sell every period in year at monthly frequency, or quarterly? CRR Rolling Auction Concepts Execute monthly for each month (once)? Execute 3 future quarters/seasons, on quarterly basis? Release up to X% per season?

22. 22 ERCOT PublicFebruary, 2012 Questions? Any comments on tactical or strategic issues and priorities?

23. 23 ERCOT PublicFebruary, 2012 APPENDIX of EXAMPLES Treatment of Baseload in the CRR Allocations & Auctions

24. 24 CRR Allocation/Auction Process Annual PCRR Allocation (For Year 2012 and 2013) Monthly True-up Allocation (In Year 2012) Annual Auction (For Year 2012 and 2013) Monthly Auction (In Year 2012) Annual PCRR Allocation (For Year 2014) Annual Auction (For Year 2013 and 2014) Monthly True-up Allocation (In Year 2013) Monthly Auction (In Year 2013) February, 2012ERCOT Public

25. 25 Constraint Factor & Baseloading FactorAnnual/MonthlyAllocation/Auction Constraint Factor Baseloading Factor Annual Allocation Year 1 100% Year 2 100% Auction Year 1 55% Year 2 15% Monthly Allocation 100% Auction 90%100% February, 2012ERCOT Public

26. 26 PCRR Treatment in Annual Auction for Year 2012  In the Annual PCRR Allocation for year 2012, Market Participant MP1 requested 20 MW obligation with the path A->B, PeakWeekDay, for January 2012 and was fully allocated.  In the Annual Auction, MP1 is holding 20 MW obligation and offering 5 MW for sale @$0.1/MWh  Market Participant MP2 is bidding 90 MW obligation to buy with the path A->B @$0.25/MWh.  The base load held by MP1 is scaled to 55%*20=11 MW, and the transmission capacity of A->B is scaled down to 55%*100=55 MW. Bus A Bus B 100 MW rating 20 MW February, 2012ERCOT Public

27. 27 PCRR Treatment in Annual Auction for Year 2012 (continued) Bus A Bus B 55 MW rating 11 MW  The auction is to sell the 55% of remaining transmission capacity, which is 55%*(100-20) = 44 MW.  After the auction is run,  5 MW is sold by MP1  49 MW is awarded to MP2  The final CRR ownership:  CRR1: 15 MW owned by MP1  CRR2: 49 MW owned by MP2 February, 2012ERCOT Public

28. 28 PCRR Treatment in Annual Auction for Year 2012 (continued) Bus A Bus B 55 MW rating 11 MW  The power flow on line A->B is ScaledPCRRMW + AwardedBidMW - SoldOfferMW =55%*20 + 49 – 5 = 55 MW. Therefore A->B is binding.  Clearing price of path A->B is $0.25/MWh February, 2012ERCOT Public

29. 29 Monthly (True-up) Allocation in Year 2012 Bus A Bus B 100 MW rating 15 MW  The base load is 15+49=64MW and the basdloading factor is 100% (no scaling).  The line rating is 100 MW and the constraint factor is 100% (no scaling).  The power flow on the line A->B is 64 MW. 49 MW  The baseloading factor is 100% (no scaling), and therefore the base load is 15+49=64MW.  The constraint factor is 100% (no scaling), and therefore the line rating is 100*100%=100 MW.  The initial power flow on the line A->B is 64 MW. February, 2012ERCOT Public

30. 30 Monthly Auction in Year 2012 Bus A Bus B 90 MW rating 15 MW  The baseloading factor is 100% (no scaling), and therefore the base load is 15+49 = 64 MW.  The constraint factor is 90%, and therefore The line rating is 100*90% = 90 MW.  The power flow on the line A->B is 64 MW.  The remaining transmission capacity is 90-64 = 26 MW. 49 MW February, 2012ERCOT Public

31. 31  In the Annual PCRR Allocation for 2013 as the year 2, Market Participant MP1 is requesting 100 MW obligation with the path A->B, PeakWeekDay, in January 2013 and gets fully awarded. Bus A Bus B 100 MW rating 100 MW PCRR Treatment in Annual Auction for Year 2013 as Y2 February, 2012ERCOT Public

32. 32  In the Annual Auction, MP1 is holding 100 MW obligation and offering 80 MW for sale @$0.1/MWh  Market Participant MP2 is bidding 190 MW obligation to buy with the path A->B @$0.25/MWh.  The base load held by MP1 is scaled to 15%*100 = 15 MW, and the transmission capacity of A->B is scaled down to 15%*100 =15 MW. PCRR Treatment in Annual Auction for Year 2013 as Y2 (continued) February, 2012ERCOT Public

33. 33 Bus A Bus B 15 MW rating 15MW  The auction is to sell the 15% of remaining transmission capacity, which is 15%*(100-100) = 0 MW.  After the auction is run,  80 MW is sold by MP1  80 MW is awarded to MP2  The final CRR ownership:  CRR1: 20 MW owned by MP1  CRR2: 80 MW owned by MP2 PCRR Treatment in Annual Auction for Year 2013 as Y2 (continued) February, 2012ERCOT Public

34. 34 Bus A Bus B 15 MW rating 15 MW  The power flow on line A->B is ScaledPCRR+AwardedBidMW-SoldOfferMW =15%*100 + 80 – 80 = 15 MW. Therefore A->B is binding.  Clearing price of path A->B is $0.25/MWh PCRR Treatment in Annual Auction for Year 2013 as Y2 (continued) February, 2012ERCOT Public

35. 35 Bus A Bus B 55 MW rating 11 MW  The base load is 15+49=64MW and the basdloading factor is 100% (no scaling).  The line rating is 100 MW and the constraint factor is 100% (no scaling).  The power flow on the line A->B is 64 MW.  In September 2012, the Annual PCRR Allocation is to only allocate PCRR for year 2014, and there is NO annual PCRR allocation for year 2013.  In the Annual Auction for year 2013 as the year 1, the baseloading factor is 55% (scaling), and therefore the base load is 20*55%+80*55%=11+44=55 MW.  The constraint factor is 55%, and therefore the line rating is 55*100%=55 MW. PCRR Treatment in Annual Auction for Year 2013 as Y2 (continued) 44 MW February, 2012ERCOT Public

36. 36  The base load is 15+49=64MW and the basdloading factor is 100% (no scaling).  The line rating is 100 MW and the constraint factor is 100% (no scaling).  The power flow on the line A->B is 64 MW.  Suppose MP3 is willing to buy obligation bid 120 MW @ $0.8/MWh.  Suppose MP1 and MP2 are offering 20 MW @0.1$/MWh and 80 MW@ 0.25$/MWh for sale respectively.  The final solution:  MP1 sold 20 MW  MP2 sold 80 MW  MP3 bought 100 MW  The final CRR ownership: CRR1: 20 - 20 = 0 MW CRR2: 80 - 80 = 0 MW CRR3: 100 MW Bus A Bus B 55 MW rating 11 MW 44 MW PCRR Treatment in Annual Auction for Year 2013 as Y2 (continued) February, 2012ERCOT Public

37. 37 Bus A Bus B 90 MW rating  The baseloading factor is 100% (no scaling), and therefore the base load (from MP3) is 100 MW.  The constraint factor is 90%, and therefore the line rating is 100*90% = 90 MW.  The initial power flow on the line A->B is 100 MW, and the line’s rating will be extended to 100 MW in order to achieve the feasible solution. 100 MW Monthly Auction in Year 2013 February, 2012ERCOT Public