Annual Review of Credit Parameters

1. Annual Review of Credit Parameters Credit Work Group

2. Overview • Protocol Requirement • Background • Statistics • Recommendation Credit Work Group

3. Protocol Requirement 7.5.5.3 Auction Process • a) iii) …The values of A and M shall be posted on the MIS Public Area. The Technical Advisory Committee (TAC) shall review these values at least annually and may recommend, to the ERCOT Board, changes to these values that become effective at least 30 days prior to a monthly CRR Auction and 60 days prior to an annual CRR Auction…. 16.11.4.5 Determination of the Counter-Party Future Credit Exposure 2) The parameters to determine ACPE (X and Y) shall be posted on the MIS Public Area. The TAC shall review these values at least annually and may recommend to the ERCOT Board changes to these values. Current values A = $0.75 and M = 0 X = $1.00 and Y = $1.50 Credit Work Group

4. Background • In the CRR Auction, the A (Adder) and M (Multiplier) provide a level of coverage for the ongoing liability related to CRRs. • The X and Y variables are use in the ACPE component of the FCE calculation FCE o = FCEOBL o + FCEOPT o + FCRFGR o FCEOBL o = Max (ACPEOBL o, - FMMOBL o) Where: ACPEOBL o = (ACPE h, (j,k) * OBLMW o, h, (j,k)) Note: The Max (ACPEOBL, -FMMOBL) is performed daily on the portfolio of Obligations held for each CRRAH Credit Work Group

5. Background • Auction Clearing Price Exposure (ACPE) for PTP Obligations with the source j and the sink k for hour h—Exposure level calculated as follows: • if the PTP Obligation Auction Clearing Price is greater than $Y per MW, then Y * X divided by the PTP Obligation Auction Clearing Price; • if the PTP Obligation Auction Clearing Price is between $0 and $Y per MW, then $X per MW; and • if the PTP Obligation Auction Clearing Price is negative, then $X per MW, plus the absolute value of the PTP Obligation Auction Price per MW. Credit Work Group

6. ACPE ( based on x and y variables) • How significant is the ACPE to the FCE calculation? How often does the ACPE set the collateral amount? • ACPE has a significant impact on the FCE calculation • ACPE has driven the FCEOBL calculation • 65% of the time by CRRAH by day • 89% of the time by $ volume • How effectively has the ACPE covered the risk since market open with x = $1.00 and y = $1.50? • ACPE has covered the mean path value 96% of the time • ACPE has met or exceeded • the 90th percentile of the path value – 77% of the time • the 95th percentile of the path value – 60% of the time • the 99th percentile of the path value - 10% of the time Credit Work Group

7. FCEOBL statistics Credit Work Group

8. ACPE vs Percentile of the Path Value Credit Work Group

9. CRR Auction – Adder and Multiplier • How effectively has the CRR Auction covered the risk since market open with A(dder) = $0.75? • “A” has covered the mean path value 95% of the time • “A” has met or exceeded • the 90th percentile of the path value – 74% of the time • the 95th percentile of the path value – 60% of the time • the 99th percentile of the path value - 10% of the time Credit Work Group

10. A(dder) vs Percentile of the Path Value Credit Work Group

11. Next steps • Near term • Approve x, y, a and m “as is”, pending more comprehensive review • Consider changes to x and y and a and m • Mid – term • Consider “path specific” collateral for the CRR Auction elements and/or FCE components Credit Work Group