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Proposed CRR Auction Credit Changes: Summary of NPRR 484

Proposed CRR Auction Credit Changes: Summary of NPRR 484. October 2012. Objective (1): Appropriately Collateralize The Future Credit Risk Associated With Holding CRRs:.

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Proposed CRR Auction Credit Changes: Summary of NPRR 484

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  1. Proposed CRR Auction Credit Changes: Summary of NPRR 484 October 2012

  2. Objective (1): Appropriately Collateralize The Future Credit Risk Associated With Holding CRRs: • Future credit risk is defined as the potential payment a CRR owner would have to make to ERCOT when the CRR settles in the DAM • The current methodology for mitigating this risk assumes all source-sink paths have the same level of risk. This has led to the majority of paths being over-collateralized relative to the actual credit risk, while some paths have been under-collateralized • NPRR 484 aims to rectify this by using historically settled, specific DAM source-sink prices at a P99-100 confidence interval to calculate the credit exposure risk • While it is likely that a P99-100 confidence interval will be more than adequate to capture the credit risk associated with specific paths, the calculation also allows for forward looking market pricing to be used via the use of the latest auction clearing price • As there may be a circumstance where either (a) historically cleared prices do not cover the potential credit exposure due to their lagging nature, or (b) a new auction has not yet occurred, ERCOT will have the ability to increase collateral requirements on a specific source-sink basis at their discretion: • TAC approval would be needed to keep this in place for more than 60 days • In this time period, either the historical price methodology should have “caught-up” or a new auction will have occurred • Should historic price data be deemed to be no longer relevant to forward credit exposure e.g. due to a transmission line upgrade, specific time periods can be excluded from the calculation with TAC review and ERCOT Board approval

  3. Current Methodology Has Led to the Collateral Held For Any Given Month Being Significantly Higher Than the Actual Credit Risk.. • Significant amount of collateral held compared to potential credit risk • Estimate assumes $1/MWh of FCE collateral posted for all CRR paths held by market participants • In reality this number is likely to be higher due to current FCE calculation • Actual delivery month payments (i.e. the credit risk mitigated by FCE collateral) made to ERCOT by CRR holders have been relatively low since Nodal Market implementation • The maximum payment made by all market participants who held CRRs was $5 M, and the average payment was $1.5 M • The maximum payment made by one single market participant was $1.7 M, and the average payment was $0.6 M Est. CRR FCE Collateral Vs Potential Monthly Credit Exposure by Delivery Month ($ M)

  4. …However, Those Paths That Have the Greatest Credit Exposure Risk Have a Much Lower Level of Collateralization Est. CRR FCE Collateral Vs Potential Worst Case Ctpty Credit Exposure by Delivery Month ($ M) • Collateral posted by those market participants who made payments to ERCOT at much lower levels • While current collateral methodology can lead to collateral postings higher than $1/MWh they may not capture full risk of path • FMM calculation includes look-back of most recent 30 days of DAM cleared prices • If auction clearing price was negative, CRR holder may be required to post this absolute value as additional collateral

  5. Objective (2): Allow Owners Of Forward CRRs To Post Collateral In Lieu Of Pre-Payment Of Awarded CRRs • A “Forward Month” is defined as any month further out than the prompt delivery month e.g. if an auction is held in Nov ’12, Forward Periods would be defined as any month beyond Dec ’12 • The current protocol requires owners of forward CRRs to pay the full notional value of a CRR at the time it is awarded. This results in ERCOT holding cash until CRR auction revenue is distributed to the owners of Load in the month after delivery • NPRR 484 would allow market participants to post collateral for forward CRRs instead of pre-payment: • From a credit exposure perspective there is no difference between posting collateral and pre-payment • Reduces the amount of cash ERCOT is holding • Reduces market participant working capital requirements • It is important to note the following: • The full notional value of all CRRs bid on will continue to be collateralized during the pre-auction process • All awarded CRRs that deliver in the prompt month will continue to be paid for in full before the month begins e.g. all CRRs held that deliver in Dec ‘12 will be paid for in Nov ‘12

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