CRR Transaction Limits NPRR463 Implementation Update

1. CRR Transaction LimitsNPRR463 Implementation Update Matt Mereness ERCOT Manager Day-Ahead Market and CRR Auction ERCOT Public

2. Agenda • Implementation timeline of NPRR463 • TAC approval needed for transaction limits per protocols • Limited analysis and evidence • Recommended options for WMS/TAC consideration ERCOT Public

3. Outline of key dates for Rolling Auction Transition • NPRR463 “CRR Auction Structure Enhancements” Board Approved June 2012 • A.K.A. 6-month Rolling Auction or Long-Term Auction Sequence • Milestones and Key Dates • Internal • September development of Nexant scope/requirements • Oct/Nov focus on Integration issues/scope • October FTE hired to support rolling auction started • December 19 project moved into Execution • Internal testing Jan/Feb/Mar (FAT and iTest) • External • Dec 31 ERCOT released draft CRR Calendar inclusive NPRR463 Long-Term Auction • WMS & TAC reviewed and approved CRR Calendar • Market Notice of CRR Calendar released and posted Feb 7 • Market Notice of NPRR463 Go-Live Released March 1, 2013 • Included details of NPRR463 Q&A webex/calls March 20 & 22 • Review of Bid Transaction Limits (CMWG/WMS- March) • Seeking March Board Approval of NPRR521 (increase Seq 1 from 60% to 70%) • TAC approval of Bid Transaction Limits (April 4 meeting) • Go-Live April (Models post April 2, Auction Notice post April 10, Credit Lock April 29) ERCOT Public

4. TAC Approval needed for CRR transaction limits 7.5.2 CRR Auction Offers and Bids • (b) The Technical Advisory Committee (TAC) shall establish transaction limits for the CRR Auctions for Participating CRR Account Holders. As part of TAC consideration to establish or change transaction limits, ERCOT shall provide upon TAC request to TAC or a TAC-designated subcommittee the historical number of transactions submitted by each CRR Account Holder and the number of active CRR Account Holders aggregated up to the associated Counter-Party for each requested CRR Auction without identifying the names of the CRR Account Holders or Counter-Parties. Upon TAC approval of a change in transaction limits, ERCOT shall post these values as part of the next regularly scheduled CRR Auction Notice. Only Participating CRR Account Holders are allowed to submit transactions in the relevant CRR Auction. • Current approved TAC limits are: • 7,500 transactions (offers and bids) for monthly • 2,500 transactions for Year 1 Annual Auction (retired) • 3,500 transactions for Year 2 Annual Auction (retired) • Needed are TAC limits for Long-term Auction Sequences • Sequence 1 – First 6-months (60-70% model) • Sequence 2 – Second 6-months (45% model) • Sequence 3 – Third 6-months (30% model) • Sequence 4 – Fourth 6-months (15% model) ERCOT Public

5. Limited analysis and evidence CRR transaction limits Issue at hand: • With the current market design and vendor capabilities, no CRR auction can process more than 200,000 CRRs (potential increase by end of year) • Existing inventory is counted as transactions, so a “compounding effect” as discussed at TAC last year prior to annual auctions (Y2+Y1+Monthly ownership) • Rolling auctions increase compounding effect (see below) Bid transaction capacity remaining for Monthly bids/offers Seq1- Ownership 200,000 Transaction Limit Seq2-Ownership Yr1- Ownership Seq3-Ownership Yr2-Ownership Seq4-Ownership PCRR PCRR Prior Annual Rolling Auction ERCOT Public

6. Limited analysis and evidence CRR transaction limits The only market data to consider multi-month bidding effects are annual CRR Auctions: - Transaction bid limit - Number of transactions in auction - CRR Inventory awarded Seq1- Ownership 200,000 Transaction Limit Seq2-Ownership Yr1- Ownership 2500 limit > 133k trans > 39k CRRs Seq3-Ownership Yr2-Ownership 3500 limit > 121k trans > 23k CRRs Seq4-Ownership PCRR PCRR Prior Annual 12-months Rolling Auction 6-months ERCOT Public

7. Transaction Bid Limit Details • For Year 1/2013 annual auction ran in Nov  2012 (which had 2500 limit): • Total number of Transactions (bids and offers) entered by market into the auction 133k • Total number of Awards 39k • Number of Transactions that were 12-month strips 29k • Number of Awards that were 12-month strips 5.5k • Number of Transaction that were more multi-month (including the 12-month) 75k • Number of Awards that were multi-month 17k • Number of CRRAH that bid more than 2,400 bids 21 of 118  • Repeat for Year 2/2014 annual auction ran in Dec 2012 (which had 3500 limit) • Total number of Transactions (bids and offers) entered by market into the auction 121k • Total number of Awards 23k • Number of Transactions that were 12-month strips 31k • Number of Awards that were 12-month strips 3k • Number of Transaction that were more multi-month (including the 12-month) 71k • Number of Awards that were multi-month 8k • Number of CRRAH that bid more than 3,400 bids 5 • For monthly auctions in 2012 (7500 limit) • Total average number of transactions submitted 120k • Average number of awards 15k • Number of CRRAH that bid more than 7,400 bids 5 to10 ERCOT Public

8. Consideration of Monthly Market Bidding Activity • Monthly auction activity is 100k-140k • To maintain that monthly liquidity, need to consider restricting transaction limits to only sell in previous 4 auctions a total of 60-100k, • Else consider curtailing monthly bid transaction limit below 7,500. ERCOT Public

9. Recommended options • Option 1: • Single 2,000 limit for all 4 Sequences • Allows each Counterparty 6,000 bids/offers for each 6-month period • 1,000/month - 6,000/multi-month-strips • Can observe market behavior of single limit to assess next auction • Option 2: • Decreasing limits for forward sequences • 2,500 / 2,250 / 2,000 / 1,750 (Seq1-4 respectively) • Protects future inventory from overselling • ERCOT opinion • Start with Option1 in Spring, and consider evolving to Option2 in Fall Sequences (re-vote in fall) ERCOT Public

10. APPENDIX ERCOT Public

11. Market Notice with Market Call information: • NOTICE DATE:  March 1, 2013              / NOTICE TYPE:  M-A030113-01 CRR / DAY AFFECTED:  April 1, 2013 • SHORT DESCRIPTION:  Implementation details for NPRR463 • INTENDED AUDIENCE:  CRR Account Holders, Counter-Parties, and credit personnel • LONG DESCRIPTION:  On April 1, 2013, Nodal Protocol Revision Request (NPRR) 463, CRR Auction Structure Enhancements, shall become effective. NPRR463, which was approved by the ERCOT Board on June 19, 2012, replaces the annual Congestion Revenue Right (CRR) Auction with a semi-annual sequence of four consecutive six-month CRR Auctions, defined as CRR Long-Term Auction Sequences. As presented to and approved by the Technical Advisory Committee (TAC) on February 7, 2013, ERCOT will implement and execute the first Long-Term Auction Sequence in accordance with the TAC approved CRR Activity Calendar.    • The implementation of NPRR463 is a significant change in CRR market design, structure, and timing. In order to help the market with transitional issues, ERCOT will be hosting two WebEx meetings to present an implementation overview, key dates, and to answer any questions from Market Participants. The intent is to cover the same standard material with each WebEx, so Market Participants are not expected to attend both sessions. The meeting dates are as follows: • Wednesday, March 20, 2013 (14:00 – 15:30 CPT) • http://www.ercot.com/calendar/2013/03/20130320-CRR • Friday, March 22, 2013 (10:00 – 11:30 CPT) • http://www.ercot.com/calendar/2013/03/20130322-CRR • Protocols for NPRR463 will become effective on April 1, 2013, followed by the key dates and activities below that will be further reviewed on the market calls. • Long-Term Auction Sequence 1 (CRRs for July – December 2013) • Post Network Model – April 2, 2013 • Post Auction Notice and open Credit Window – April 10, 2013 • Credit Lock – April 29, 2013 • Bid submission close – May 2, 2013 • Results posted – May 16, 2013 • Long-Term Auction Sequence 2 (CRRs for January – June 2014) • Summary of dates from Credit Lock to CRR Results being posted – May 20 – June 6, 2013 • Long-Term Auction Sequence 3 (CRRs for July – December 2014) • Summary of dates from Credit Lock to CRR Results being posted – June 10 – 27, 2013 • Long-Term Auction Sequence 4 (CRRs for January – June 2015) • Summary of dates from Credit Lock to CRR Results being posted – July 1 – 18, 2013 • Reminder that monthly auction activities are not changed by NPRR463 and will continue to run in parallel to the Long-Term Auction Sequences. • As part of this implementation, CRR Auction Revenue (CARD) Extracts will start containing Bill Determinants with suffixes in the format of “YYYY-N-S” representing the year, number and sequence used for the corresponding Annual CRR Auctions. This will start with the July 2013 CARD Extract. • ERCOT also plans to discuss NPRR521, Transitional CRR Auction Capacity Value for Initial CRR Long-Term Auction Sequence, on the market calls. NPRR521, which is on an urgent timeline for March TAC and Board consideration, requests for the first auction sequence network model capacity to be increased from 60% to 70%. A Market Notice will be sent with the status of this NPRR after consideration by the ERCOT Board. ERCOT Public

12. Spring 2013 CRR Calendar- Long-term Auction Sequences MAY JUNE JULY Sequence1 July-Dec 2013 60% or 70% Sequence2 Jan-Jun 2014 45% Credit Lock and Run dates April29-May17, 2013 Sequence3 July-Dec 2014 30% Credit Lock and Run dates May20-Jun7, 2013 Sequence 4 Jan-Jun 2015 15% Credit Lock and Run dates June10-28, 2013 Credit Lock and Run dates Jul1-19, 2013 ERCOT Public

13. Winter 2013 CRR Calendar- Long-term Auction Sequences NOV DEC JAN FEB Sequence1 Jan-Jun 2014 60% Sequence2 Jul-Dec 2014 45% Credit Lock and Run dates Oct28-Nov15, 2013 Sequence3 Jan-Jun 2015 30% Credit Lock and Run dates Nov18-Dec6, 2013 Sequence 4 Jul-Dec 2015 15% Jan6-Jan24, 2014 Jan27-Feb14, 2014 ERCOT Public

14. Approved calendar posted Calendar posted for next 2 years: http://mis.ercot.com/misapp/GetReports.do?reportTypeId=11180&reportTitle=CRR Activity Calendar&showHTMLView=&mimicKey ERCOT Public

15. Oversold Risk (reason for NPRR521) 55% System previously sold in Year1 15% System previously sold in Year2 First auction Sequence2 Jan-Jun 2014 45% Sequence1 July-Dec 2013 60%(or 70%) Sequence3 July-Dec 2014 30% Sequence 4 Jan-Jun 2015 15% Potential issue beyond only having 5% incremental capacity in Seq 1 Scenario of oversell on 100MW line: Sold Y2 2013 as 15% model -> 15MW award cleared in Y2 Sold Y1 2013 as 55% model Y2 inventory was scaled to 55% of 15MW = 8.25MW reserve Y1 clears remaining 46.75MW (55MW-8.25MW reserved) Sequence 1 Inventory = 15MW + 46.75MW = 61.75MW reserved In sequence 1, no longer scaled with NPRR463 60% Model = 60MW, but already sold 61.75MW Potentially no new sales unless counterflow ERCOT Public

16. CRR Roadmap 2012 2013 Q3 Q4 Q1 Q2 Q3 Q4 NPRR 357/430 Credit Q3 NPRR 453 Yr 1 / Yr 2 Execution Q3/4 CRR Upgrade to Linux Hardware Q3/4 NPRR463 – 6 month / Rolling Auction Break-up scaling PCRR/CRR Integration fixes and improvements ERCOT configuration / testing Requirements – Oct 2012, Test - Jan, Prod – April 2012-2013 work in parallel on: Stress testing 200,000 bid limit on Linux Potential Future Changes: NPRR407 Phase 2 – CRR Credit (initiate 1Q?) SCR769 - Read-only Role (initiate 1Q?) NPRR455 - CRR Shift Factors NPRR484- CRR Credit Calculations CRR API - Leverage new Nexant functionality PhaseShiftTxfrmr Optimization Refine Hub calculation for outage redistribution ERCOT Public

17. Current Auction Structure - 1x/Year In 4th Quarter of each year, sell next 2 years of CRRs at monthly granularity in an annual 12-month optimization - Year 1 on 55% Model - Year 2 on 15% Model - Optimize each time-of-use across multi-period months for annual - Monthly auction is 90% and optimize across 3 times of use 90% of System/Model in Monthly Auction Year 1 55% of Model OnPeak WkDay OffPeak OnPeakWkEnd Year 2 15% of Model OnPeak WkDay OffPeak OnPeakWkEnd ERCOT Public

18. 2013 Auction Structure - 2x/Year In 2nd and 4th Quarter of each year, sell next 2 years of CRRs at monthly granularity in an 6-month optimization - First 6-months at 60%, Second 6-months 45%, Third at 30%, Fourth at 15% - Optimize each time-of-use across multi-period months for annual - Monthly auction is 90% and optimize across 3 times of use 90% of System/Model in Monthly Auction 60% 45% 30% 15% ERCOT Public