TX Nodal Market Trials Examining the Quality of Day Ahead Market Results

1. TX Nodal Market TrialsExamining the Quality of Day Ahead Market Results Presented By: Shannon Caraway, P.E. Vice President – Asset Management for Luminant Energy Nodal Advisory Task Force Meeting ERCOT Taylor Offices 7/19/2010 This report references two separate supplemental files: “07_13_2010.pdf” & “07_15_2010.pdf”

2. Table of Contents • Observation of Nodal Trials Day Ahead Market for 7-15-2010 • Low load clearing (59%)relative to load forecast 3 • Questionable clearing prices and basis spreads 4 • Questionable prices at Jack County 5 • Questionable prices at Martin Lake, Gateway, & Stryker 6 • Questionable prices at Fayette, Gideon, Hays, Lost Pines & Rio Nogales 7 • Questionable prices at Sandow 8-9 • Questionable A/S prices 10 • Observation of Nodal Trials Day Ahead Market for 7-13-2010 • Low load clearing (81%)relative to load forecast 12 • Questionable clearing prices and basis spreads 13 • Questionable South Hub to South Load Zone Spreads 14-16 • Questionable North Hub to North Load Zone Spreads 17-18 • Questionable West Hub to West Load Zone Spreads 19 • Other General Observations 20

3. Review of Day Ahead Market Results of 7-15-2010 • Significant amounts of ERCOT’s load forecast did not clear the market1 • Over the peak hour of the day (HE17) only 59% of the load from ERCOT’s load forecast was cleared by the DAM at the Load Zones • Although ERCOT’s peak hour load forecast was 59,760 MW, only 35,074 MW cleared • This percentage never exceed 67% (HE5) and got as low as 56% (HE16) • Effectively, the cleared load levels mimicked a typical spring or fall day rather than a summer peak day • Does ERCOT have an explanation for what may have caused this outcome? 1) Refer to the bottom row of page 1 from the supplemental pack titled “07_15_2010.pdf”

4. Review of Day Ahead Market Results of 7-15-2010 • The hub prices and respective hub basis spreads appear counter intuitive compared to the bi-lateral day ahead prices2 • Perhaps this is due in part to the fact that only ~60% of the forecasted load actually cleared the DAM 2) Refer to page 4 from the supplemental pack titled “07_15_2010.pdf”

5. Review of Day Ahead Market Results of 7-15-2010 • Counter intuitive bus price outcomes were observed at the Brazos Jack County plant3 • It experienced $1/MW SPPs all day long • Appears to be due to: • Overloads of the Wise County – Bridgeport 138 kV line • Associated with a contingency outage of the Jack County – Reno 138 kV line. • Settlement Point Prices at this bus cleared at $1/MW all day • Between May 7th and July 15th, this constraint has bound: • Nodal DAM – 8 different times • Zonal Real Time – 3 different times • Line Rating Anomalies • The Zonal and Nodal operations model has this line rated at 186 MVA • The Planning (SSWG) model has this line rated at 326 MVA for summer 2010 • Either there is a line rebuild that we couldn’t find that is running late or there is a potential ratings error • Luminant Energy reported this as a potential line ratings error to Market Trials on 7/8/10 • Has ERCOT had a chance to take a look at this? 3) Refer to the right hand side of the graphs on page 13 from the supplemental pack titled “07_15_2010.pdf”

6. Review of Day Ahead Market Results of 7-15-2010 • Counter intuitive bus price outcomes were observed for HE 23 & 24 at Martin Lake, Gateway, and Stryker4 • Martin Lake & Gateway averaged $13.16/MW below North Hub • Stryker averaged $14.78/MW below North Hub • Appears to be due to5: • Overloads of the Elkton – Athens 138 kV line • Associated with a contingency outage of the Trinidad – Styker & Trinidad – Mount Enterprise 345 kV double circuit line • Between May 26th and July 15th, the Elkton – Athens 138 kV line has bound • Nodal DAM – 28 days • Real Time – 0 days • Oncor has an SPS installed that protects the Elkton – Athens 138 kV line from post contingency overloads • SPS Modeling Error • Luminant Energy reported to Market Trials on 6/11/10 that the Nodal DAM wasn’t recognizing the Oncor SPS • ERCOT acknowledged to Luminant Energy on 6/16/10 that a software limitation exist in representing some SPSs and vendor was being contacted to discuss changes to logic • What is the status of correcting this SPS modeling issue? 4) Refer to the HE23 & HE24 columns of pages 14 and 15 from the supplemental pack titled “07_15_2010.pdf” 5) Refer to constraint #8 on page 5 from the supplemental pack titled “07_15_2010.pdf”

7. Review of Day Ahead Market Results of 7-15-2010 • Counter intuitive bus price outcomes were observed for HE 13 - 22 at Fayette, Gideon, Hays, Lost Pines & Rio Nogales6 • Fayette, Gideon, Hays, & Lost Pines experience discounts between $1.94/MW to $6.79/MW relative to South Hub • Rio Nogales experiences discount of $33.00/MW relative to South Hub • Appears to be due to7: • Overloads of the Seguin – Seguin West 138 kV line • Associated with a contingency outage of the Zorn – Marion & Zorn – Clear Springs 345 kV double circuit line • Between May 21st and July 15th, 2010, this constraint has bound • Nodal DAM – 27 different days • Zonal Real Time – 3 days • The severity and frequency of this constraint seems counter intuitive • Does ERCOT have an explanation for what may be causing this outcome? 6) Refer to the HE13 thru HE22 columns of pages 17 and 18 from the supplemental pack titled “07_15_2010.pdf” 7) Refer to constraint #7 on page 5 from the supplemental pack titled “07_15_2010.pdf”

8. Review of Day Ahead Market Results of 7-15-2010 • Counter intuitive bus price outcomes were observed for HE 1-6, 8-11, and 13 - 24 (i.e. all hours except 7 & 12) at Sandow8 • Sandow experiences average discount of $15.72/MW for the day relative to South Hub • Appears to be due to two constraints (one covered this page & one on the next)9: • Overloads of the Round Rock – Round Rock NE 138 kV line • Associated with a contingency outage of the Hutto – Gilleland Creek 138 kV line • Active HE 1-6, 11, 13-24 • Between June 18th and July 15th, the Round Rock – Round Rock NE constraint has bound • Nodal DAM – 7 different days • Zonal Real Time – 15 days • Key drivers of this constraint • Overloads of Round Rock – Round Rock NE became active after SPS #40 & #43 removed at Sandow and 138 kV buses there were rejoined • Constraint was further aggravated by completion of the Salado – Hutto 345 kV line and associated 345/138 kV auto at Hutto near July 1, 2010 • Potential mitigants • Near term – implementation of a RAP to manage overloads, Luminant submitted 3 different RAPs to ERCOT and Oncor for consideration on July 14, 2010 • Long Term – Oncor has scheduled rebuild of this line by Nov. 2010 8) Refer to the HE1-6, 8-11, and 13-24 columns of pages 17 and 18 from the supplemental pack titled “07_15_2010.pdf” 9) Refer to constraints #11 & 19 on page 5 from the supplemental pack titled “07_15_2010.pdf”

9. Review of Day Ahead Market Results of 7-15-2010 • Counter intuitive bus price outcomes were observed for HE 1-6, 8-11, and 13 - 24 (i.e. all hours except 7 & 12) at Sandow8 • Sandow experiences average discount of $15.72/MW for the day relative to South Hub • Appears to be due to two constraints (one covered this page & one on the prior)10: • Overloads of the McNeil AEN – Summit 138 kV line • Associated with a contingency outage of the Decker – ED_Blues & Decker – Walnut kV double circuit 138 kV line • Active HE 8-10 • Between May 12th and July 15th, McNeil AEN – Summit bound: • Nodal DAM – 17 different days (though usually associated with contingency: McNeil – Magnesium Plant 138 kV line rather than one referenced above) • Zonal Real Time – no instances found • Does ERCOT have an explanation for what may be causing this to bind in the Nodal DAM but not in Real Time? • Perhaps this constraint is being shielded by the Round Rock – Round Rock NE constraint • Perhaps there is something wrong with the DAM model 8) Refer to the HE1-6, 8-11, and 13-24 columns of pages 17 and 18 from the supplemental pack titled “07_15_2010.pdf” 10) Refer to constraint #14 on page 5 from the supplemental pack titled “07_15_2010.pdf”

10. Review of Day Ahead Market Results of 7-15-2010 • Counter intuitive RRS and RegUp price outcomes were observed for HE 111 • Prices were $400/MW in the Nodal DAM • Prices were $6.32/MW and $11.32/MW in Zonal for RRS & RegUp • Does ERCOT have an explanation for what may be causing this outcome? 11) Refer to the HE1 in the left table of page 30 from the supplemental pack titled “07_15_2010.pdf”

11. Review of Day Ahead Market Results of 7-13-2010 • As previously noted on slide 3, significant amounts of ERCOT’s load forecast did not clear the market on 7/15 • Luminant Energy noticed ~5 to 6 weeks ago during the Nodal DAM Market Trials that we were having difficulty getting our Load Zone bids filled at prices we expected to clear the market • To explore the cause of this, we began to increase our bid prices on a daily basis • Eventually we were able to get our bids filled, but some severe constraints began to show up frequently even though much less than ERCOT’s total load forecast was being filled in the DAM • Luminant Energy then became curious if the Nodal DAM could actually serve all of ERCOT’s load forecast due to the severity of these constraints • To test this out, Luminant Energy began to bid for additional energy purchases in each load zone in an attempt to clear 100% of ERCOT load forecast • The above referenced constraints became so severe that even at $200+/MW load offers will not clear for North, South, and West Load Zones • The July 13th Nodal DAM is one of the days that we conducted this test • The results of this Nodal DAM is being presented today to share what we found and foster discussion on potential solutions to the issues identified

12. Review of Day Ahead Market Results of 7-13-2010 • Significant amounts of ERCOT’s load forecast did not clear the market12 • Over the peak hour of the day (HE17) only 81% of the load from ERCOT’s load forecast was cleared by the DAM at the Load Zones • Although ERCOT’s peak hour load forecast was 58,589 MW, only 47,296 MW cleared • NLZ – 74%, SLZ – 62%, WLZ – 73%, HLZ – 93%, • AENLZ – 42%, CPSLZ – 116%, LCRALZ – 99%, RAYBNLZ – 102% • This ERCOT wide percentage never exceed 100% (HE5 & HE9) and got as low as 80% (HE16) • Effectively, the cleared load levels mimicked a typical early to mid May day rather than a summer peak day • The severe constraints observed are discussed on the following pages, in hopes that ERCOT will be able to determine what is causing these counter intuitive outcomes 12) Refer to the bottom row of page 1 from the supplemental pack titled “07_13_2010.pdf”

13. Review of Day Ahead Market Results of 7-15-2010 • The hub prices seemed unreasonably high given the load levels that cleared, bi-lateral day ahead prices shown for comparison13 • The respective hub basis spreads appear counter intuitive compared to the bi-lateral day prices 13) Refer to page 4 from the supplemental pack titled “07_13_2010.pdf”

14. Review of Day Ahead Market Results of 7-13-2010 • Severe congestion in South Texas results in extremely high South Hub (SH) to South Load Zone (SLZ) basis spreads14 • The On Peak 1x16 SH to SLZ basis spread was $102.20/MW • The Off Peak 1x8 SH to SLZ basis spread was $18.06/MW • This extreme congestion appears to be related to three separate constraints15 • Cont.: Batesville – Pearsall 138 kV line, Overload: Persall – Derby 69 kV line • Cont.: Batesville – Pearsall 138 kV line, Overload: Persall 138/69 kV auto • Cont.: Victoria – Macgruder 69 kV line, Overload: Victoria – N. Victoria 138 kV line • Between May 4th and July 15th: • Constraint #1 • Nodal DAM – 11 different days (and on 4 other days the overload occurred for a different cont.) • Zonal Real Time – 1 day • Constraint #2 • Nodal DAM – 11 different days (and on 2 other days the overload occurred for a different cont.) • Zonal Real Time – 2 days • Constraint #3 • Nodal DAM – 12 different days • Zonal Real Time – no instances found (ERCOT has a Mitigation Plan in place to control in Real Time) 14) Refer to the red and green line on the graphs on page 16 from the supplemental pack titled “07_13_2010.pdf” 15) Refer to constraint #9,10, and 24 on page 5 from the supplemental pack titled “07_13_2010.pdf”

15. Review of Day Ahead Market Results of 7-13-2010 • Deep dive into Constraint #1 & #2 from prior page • The line & auto ratings in both cases seem to be correct • For some reason there is substantially more congestion being encountered in the Nodal DAM than in Zonal Real Time even though much less load is being served • The graphs on page 16 and tables on pages 17 & 18 (supplemental files), illustrate: • That generator bus prices required to resolve this constraint ranged between $267.39/MW and $-2681.24/MW during the on-peak hours (spread of $2,948.63/MW) • The graphs on page 23 illustrate: • That load bus prices ranged between ~$4,600/MW and ~$-2600/MW (spread of ~$7,200/MW) • The table on page 5 illustrates: • Shadow prices on constraint #1 reaches $16,682/MW (HE20) • Shadow prices on constraint #2 reaches $2,975/MW (HE22) • All of this severe congestion is occurring even though only 62% of SLZ load is being cleared! • It seems like something is clearly wrong with this situation; however, Luminant Energy has not been able to further identify what the cause of the problem is • ERCOT’s pending release of the Nodal model is needed to study this issue further • Does ERCOT have an explanation for what may be causing this outcome?

16. Review of Day Ahead Market Results of 7-13-2010 • Deep dive into Constraint #3 from two slides back • The line rating seem to be correct • The nature and magnitude of this constraint has been duplicated in the Planning (SSWG) cases • As noted on slide 14, ERCOT has a Mitigation Plan (MP) in place to control in Real Time • Luminant Energy has been told by ERCOT that they aren’t currently modeling Mitigation Plans or PCAPs in the DAM (only SPSs & RAPs) • The table on slide 5 illustrates that the shadow price reaches $9,503.16/MW • All of this severe congestion is occurring even though only 62% of SLZ load is being cleared! • Proposed corrective action: • ERCOT model MPs and PCAPs in the Nodal DAM, identical to Nodal RTM • This will remove the arbitrarily different results being encountered in the Nodal DAM relative to real time operations

17. Review of Day Ahead Market Results of 7-13-2010 • Severe congestion in North Texas results in extremely high North Hub (NH) to North Load Zone (NLZ) basis spreads16 • The On Peak 1x16 NH to NLZ basis spread was $55.33/MW • The Off Peak 1x8 NH to NLZ basis spread was $0.42/MW • This extreme congestion appears to be related to two separate constraints17 • Cont.: Cedar Hill – Sorcey Road 138 kV line, Overload: Cedar Crest Sw. – Compton 69 kV line • Cont.: Jewett – Palestine 138 kV line, Overload: Trinidad – Winkler 138 kV line • Between May 4th and July 15th: • Constraint #1 • Nodal DAM – 9 different days • Zonal Real Time – no instances found • Constraint #2 • Nodal DAM – 7 different days (and on 5 other days the overload occurred for a different cont.) • Zonal Real Time – no instances found • DAM Shadow Prices • Constraint #1 – reaches $44,921.90/MW (HE15) • Constraint #2 – reaches $13,742/MW (HE19) 16) Refer to the red and green line on the graphs on page 13 from the supplemental pack titled “07_13_2010.pdf” 17) Refer to constraint #27 and #36 on page 5 from the supplemental pack titled “07_13_2010.pdf”

18. Review of Day Ahead Market Results of 7-13-2010 • Deep dive into Constraint #1 & #2 from prior page • The line ratings in both cases seem to be correct • Constraint #1 • This constraint is associated with an N-1 contingency, which seems strange given that the overloaded element is a radial 69 kV line. • Luminant Energy has verified the radial configuration of the Cedar Crest – Compton 69 kV line against Oncor system one-lines, the Planning (SSWG) & Zonal Operation models • Oncor has confirmed that they believe that it is appropriately modeled as a radial line in ERCOT’s Nodal model • Additionally, Luminant Energy has attempted to determine if there is any way that this line is being overloaded due to an N-0 (basecase overload) in the Nodal DAM and somehow erroneously being reported as an N-1 overload, it doesn’t seem to be • Luminant Energy originally submitted a question to Market Trials on this issue on 6/15/10, thus far no explanation has been found what is causing this issue • Constraint #2 • Luminant Energy has been unable to replicate this constraint in either Planning (SSWG) cases or Zonal Operation cases • The graph on slide 13 illustrates that there is no generator receiving prices anywhere near the NLZ price during the on-peak • The graph on slide 22 illustrates that the Compton Street 69 kV load bus experiences an LMP of ~$12,500/MW • ERCOT’s pending release of the Nodal model is needed to study this issue further

19. Review of Day Ahead Market Results of 7-13-2010 • Severe congestion in West Texas results in extremely high West Hub (WH) to West Load Zone (WLZ) basis spreads18 • The On Peak 1x16 WH to WLZ basis spread was $31.70/MW • The Off Peak 1x8 WH to WLZ basis spread was $3.95/MW • This extreme congestion appears to be related to a single constraint19 • Basecase overloads of Ennis Creek Sw 138/69 kV auto • Between June 5th and July 15th, this constraint has bound: • Nodal DAM – 16 different days • Zonal Real Time – no instances found • DAM Shadow Price – constraint reaches $13,829.10/MW (HE16) • The line rating appears to be correct • Luminant Energy has been unable to replicate the same severity of this constraint in either Planning (SSWG) cases or Zonal Operation cases • A lower magnitude of overload has been observed in the SSWG cases • Oncor has been contacted and asked if a RAP could be developed • ERCOT’s pending release of the Nodal model is needed to study this issue further – it seems like this is a combination of a real constraints and some sort of modeling phenomena making it worse in the Nodal DAM 18) Refer to the red and green line on the graphs on page 19 from the supplemental pack titled “07_13_2010.pdf” 19) Refer to constraint #4 on page 5 from the supplemental pack titled “07_13_2010.pdf”

20. Other General Observations • The severe levels of congestion examined for 7/13/2010 resulted in extreme revenue over collection by ERCOT20 • On 7/13/2010 – over collection was ~51% (or $28,301,949) • On 7/15/2010 – over collection was ~6% (or $1,884,821) • Luminant Energy is currently skeptical as to whether the Nodal DAM could clear ERCOT’s summer peak load forecast at any price due to the modeling errors outlined within • In any case, the extreme revenue over collection situation may present undesirable inequities of collection vs. distribution that potentially could be minimized going forward • Suggestions for Further Consideration • Implement Nodal DAM market shadow price caps that are consistent with the Nodal RTM shadow prices caps for all transmission constraints • Thus far in the Market Trials, when an observed DAM shadow price exceeds the RTM shadow prices caps, it is inevitably due to some sort of modeling anomaly • We are still researching this, but believe other Nodal ISOs follow this practice • Implement identical SPS, RAP, PCAP, & MP representation in Nodal DAM and the Nodal RTM • Much over the revenue over collection is due to the Nodal DAM omitting the MP at Victoria • We are still researching this, but believe other Nodal ISOs follow this practice 20) Refer to the tables on page 29 from the supplemental pack titled “07_13_2010.pdf & 07_15_2010.pdf”