DSWG Update to WMS

1. DSWG Update to WMS May 17, 2006

2. 2006 DSWG Goals Update

3. DSWG May Update WMS Action Needed

4. High Level Overview of Solutions * Icon size represents relative impact when compared with other alternatives.

5. Action Item for WMS Vote to support a long term solution for the negative LaaR bidding issue. Three motions to consider: • Eliminate the sunset date currently in Protocols • Eliminate the sunset date in the Zonal Protocols and implement Alternative C in Nodal Market Design • Implement Alternative C in the Zonal Protocols and implement in Nodal Market Design

6. C. Single RRS Bid Stack with Separate LaaR and Gen MCPCs if Oversubscribed Proposed Solution: Solution leverages ERCOT's existing clearing engines. If LaaR limit is reached a separate MCPC price for LaaR would be posted. To the extent the LaaR limit is not reached only one MCPC for both LaaR and Gen is cleared. = LaaR offer = Gen offer = Self Arranged More than 1,150 MWs of LaaRs Offered Below MCPC Less than 1,150 MWs of LaaRs Offered Below MCPC Gen MCPC Single MCPC 2,300 MW of RRS 2,300 MW of RRS = = LaaR MCPC Single Bid Stack Single Bid Stack

7. C. Single RRS Bid Stack with Separate LaaR and Gen MCPCs if Oversubscribed Proposed Solution: Solution leverages ERCOT's existing clearing engines. If LaaR limit is reached a separate MCPC price for LaaR would be posted. To the extent the LaaR limit is not reached only one MCPC for both LaaR and Gen is cleared. Pros: • If current LaaR participation levels persist, two separate RRS MCPCs would frequently occur; likely to result in a short term reduction in market RRS costs • Need for secondary RRS solicitations unlikely • Market based solution; bids should be more reflective of cost to provide service Cons: • Requires market participants to manage two MCPCs for Responsive Reserve and makes settlement more complex • May drive LaaR out of the RRS market if LaaR MCPC is consistently/significantly lower than Gen MCPC and result in higher total costs to market • Creates arbitrage opportunity for QSEs that self arrange large percentage of LaaR

8. Protocol Revision Required for Alternative C 6.6.3 ERCOT Day-Ahead Ancillary Service Procurement Process 6.6.3.1 General Procurement Requirements (8) ERCOT shall determine an hourly MCPC for each of the following Day-Ahead Ancillary Service markets: Regulation Up, Regulation Down and Non-Spinning Reserves. The hourly MCPC shall equal the highest-priced capacity reservation bid accepted in the Day Ahead market by ERCOT for that Ancillary Service for the hour. For Responsive Reserve Service, ERCOT shall determine a separate MCPC for LaaRs and Generation Resources. QSE’s representing LaaR and Generation Resources will be paid based on these separate MCPCs. A blended MCPC will be determined based on the formula’s and rules defined in Section 6.6.3.4 and QSEs representing LSEs with RRS obligations will be charged based on the blended MCPC. 6.6.3.4 Special Procurement Requirements for Responsive Reserve Service. 6.6.3.4.1 The MCPC for LaaR RRS and Generation Resources RRS shall be determined by the following rules/formula’s. RRS = LaaRSA + LaaRAward + GenSA + GenAward If LaaRSA + LaaRBid ≤ LaaRMax MCPCLaaR = MCPCGen = Highest Price in the bid stack for last MW of RRS Awarded Then, LaaRBid ≤ LaaRAward And MCPCBlended = MCPCLaaR = MCPCGen If LaaRSA + LaaRBid > LaaRMax Then, LaaRBid > LaaRAward And MCPCLaaR = Highest Price in the bid stack for last MW of LaaRAward And MCPCGen = Highest Price in the bid stack for last MW of GenAward MCPCBlended = (MCPCLaaR * LaaRAward ) + ( MCPCGen * GenAward ) LaaRAward + GenAward RRS = Total Amount of Responsive Reserves required (MW) LaaRMax = 50% of RRS or a lower amount as determined by a monthly engineering evaluation conducted by ERCOT staff LaaRSA = Amount of LaaR Self Arranged by all QSEs (MW) LaaRBid = Amount of LaaR Bids at or below the MCPCGen (MW) LaaRAward = Amount of LaaR Bids Awarded ERCOT-wide by the Market Clearing Engine-MCE (MW) GenSA = Amount of Generation Resources Self Arranged by all QSEs (MW) GenAward = Amount of Generation Resource Bids Awarded ERCOT-wide by the MCE (MW) MCPCLaaR = Market Clearing Price for LaaR ($/MW) MCPCGen = Market Clearing Price for Generation Resources ($/MW) MCPCBlended = Blended Market Clearing Price ($/MW)

9. Protocol Revision Required for Alternative E 4.4.11 Ancillary Services Bid Submittal QSEs may submit, by 1300, Ancillary Service bids to ERCOT for any Ancillary Service market open during the Day Ahead Period. Submitted bids remain active for any period until: (a) selected by ERCOT; or (b) automatically expired by software at the time selected by the QSE. Ancillary Service bids shall not exceed one thousand ($1,000) dollars per MW for any Resources. Until January 1, 2007, QSEs shall not submit bids to provide RRS at a price less than zero dollars. Any Ancillary Service bids in excess of one thousand ($1,000) dollars per MW will be rejected by ERCOT.

10. Action Item for WMS Vote to support a long term solution for the negative LaaR bidding issue. Three motions to consider: • Eliminate the sunset date currently in Protocols • Eliminate the sunset date in the Zonal Protocols and implement Alternative C in Nodal Market Design • Implement Alternative C in the Zonal Protocols and implement in Nodal Market Design