1. RPRS TF and QSE Managers Report to PRS 1)Procurement (QSE Managers) 2)Cost Allocation (RPRS Task Force) –PRR 674 –PRR 676 –PRR 678

2. RPRS Procurement QSE Managers Working Group Brandon Whittle presented detailed discussion of how RPRS procurement engine works. RPRS procurement process does appear to reflect the intentions of the market participants with two areas identified for improvement: –Development of metrics to screen contingencies with no solution. –Method for identifying online units targeted for non-spin reserve service. Continue working with ERCOT regarding when and how much sigma bias should be used in the load forecast. Continue looking at ways to use the Non-Spin Reserve Market to address reliability related issues rather than relying on RPRS which is primarily for ensuring there is enough next day BES.

3. RPRS Procurement QSE Managers Working Group June 20 example: RPRS appeared to have significantly over- procured Unresolvable Contingency: –Gibbons Creek – Greens Prairie Dckt, Dansby – Atkins overloads Mitigation plan now in place, contingency removed

4. Summary of PRRs for Revised Allocation of Capacity Procurement Costs Problem: The current process pays for RPRS at MCPC based on a quantity X while collecting for the same type of capacity from “short” QSEs at MCPC for quantity Y. When X is less than Y QSEs receive the difference between dollars paid and dollars collected on a load ratio share. This creates an inequity in the market because credits are based on load ratio share and not on QSE’s relative “short” or “long” position in the market. Solutions: Three solutions have been proposed to address the allocation problem. Along with arguments for and against each, these alternatives are summarized in the table below.

5. PRRBasic DescriptionArguments ForArguments AgainstPossible Changes / Enhancements 674PRR-01 Temporary Alteration of Settlement Equations Related to the RPRS Under Scheduled Charge 071906 Submitted as a temporary solution, it recommends uplifting all RPRS procurement costs. Comments were subsequently submitted by the originating authors implying a permanent change and utilizing generic pricing for RPRS procurement. The basic argument for this change is that RPRS procurement is for reliability reasons and therefore should be uplifted and based on generic costs. It eliminates the “excess funds” problem. The recent sigma bias and June 20 th capacity procurement events support the position that RPRS procurement is reliability driven. Satisfying n-1 constraints while ensuring that power balance is achieved in the Step 2 (assignable portion) of capacity procurements also supports some rationale for a system- wide uplift. It provides an incentive for QSEs to go “short” since the capacity costs that are uplifted will be diluted and hence be lower on a per MWH than the true cost of procuring the capacity. It penalizes those QSEs that have already hedged against capacity shortfalls through bilateral contracts, thereby creating the situation where a QSE involuntarily pays twice for a hedge. It assumes that because capacity is procured for reliability reasons it should be priced at generic cost. At the 8-25-06 RPRS meeting the originating authors appeared to be willing to withdraw the portion of their comments recommending paying for all RPRS using generic costs.

6. PRRBasic DescriptionArguments ForArguments AgainstPossible Changes / Enhancements 676PRR RPRS Solution with Nodal RUC-type Procurement Using the approach to be used in the RUC nodal process, this PRR recommends assigning capacity procurement costs first to those QSEs that are short subject to a pre-defined limit, and then uplifting the remainder on a load ratio share basis. It suggests pricing all procurements at generic costs. It discourages QSEs from going short in order to avoid “first in line” assignments. It uses an approach that will be used in the Texas Nodal market. It limits the financial penalty to short QSEs. It eliminates the “excess funds” problem. It assigns costs that may be more rational to uplift particularly if they are more in line with the current Step 1 costs. It assumes that because capacity is procured for reliability reasons it should be priced at generic cost. At the 8-25-06 RPRS meeting, the originating author appeared willing to consider modifications to allow MCPC payment for Step 2 type costs. One way this could be implemented is by keeping the current Step 1 and 2 processes in order to derive the capacity cost rate.

7. PRRBasic DescriptionArguments ForArguments AgainstPossible Changes / Enhancements 678PRR Allocation of RPRS Over- Collection to long QSEs This PRR recommends distributing “excess funds” to QSEs that are “long”. The credit is pro-rated based in each QSEs ‘long” position. It eliminates the “excess funds” problem. It maintains and encourages QSEs to be “long” in the market. If one assumes that the current procurement process is correct and only subject to “fine tune” adjustments then this PRR offers a logical and efficient approach that is also consistent with the underlying intent of the current Protocols. By limiting the argument to “excess funds” the PRR sanctions the current capacity cost assignment process. Several RPRS participants have expressed the view that the current process over-penalizes QSEs that are “short”. None have been offered so far. An argument has been made for “long” QSEs” getting paid the marginal cost of the capacity, but instead this PRR uses average costs for the “excess funds” issue.