MCWG Update to WMS

1. MCWG Update to WMS Loretta Martin LCRA , Chair Josephine Wan AE, Vice Chair 05/07/2014

2. MCWG Update to WMS • General Update • -March 19th Joint MCWG/CWG Meeting • Reviewed NPRRs for their credit impact • All operational without any credit impact except – • NPRR 612– Reduction of Cure Period Subsequent to Event of Default • - CWG/MCWG has reviewed the NPRR and filed the following comments: • “CWG has reviewed NPRR 612 and determined that it benefits the market by reducing credit exposure by one day.”

3. MCWG Update to WMS • Review Credit Insurance • Michael Mathews, Chair of CWG, informed the group about his update to F&A Committee. • He explained that the idea to pursue a credit insurance policy is to: • 1) Better collateralize market credit exposure when we’re unable to reasonably predict the spike in power prices. • CWG recommended to further investigate the credit insurance option and then report back to the committee for direction. - Next Step • Mr. Ruane at ERCOT told the group that he will invite an insurance broker to attend the next joint meeting to present the group information about credit insurance. How does a credit insurance coverage works, and what does it mean to ERCOT to have a credit insurance, etc. The draft insurance parameters to be provided to the carrier will be further discussed in the next meeting.

4. MCWG Update to WMS • Review Current EAL Credit Methodology Performance • Bill Barnes from NRG presented to the group a graph that shows, • In a normal operating day if a pricing event occurs in an hour and a market participant is short in MWs, by applying the current EAL credit methodology, for those participants that are not sufficiently collateralized prior to the occurrence of an event will be unable to cover their credit risk exposure. • The current collateral requirement is high after the event occurred, and this may prevent a participant from accruing exposure for multiple events but it does little to reduce exposure to the current event. • If a market participant is unable to cover collateral requirements in advance days, the default and mass transition process will be accelerated and reduce the accrued amount of unpaid invoices. • Bottom Line: Reduction of unpaid funds uplifted to remaining Market Participants. This risk has increased significantly with recent market design changes. • The group agreed that the current collateral rules may not provide adequate protection in the event of a sustained spike in power prices; thus, credit insurance maybe the more efficient approach to cover future credit exposure. http://www.ercot.com/calendar/2014/04/20140416-CWGMCWG • Next Steps • ERCOT will be following up this matter by running some stress testing.

5. MCWG Update to WMS • Review Seasonality draft NPRR NRG and BTU have provided their comments to this draft NPRR. • ERCOT has posted an updated draft Seasonality NPRR and circulated to the group for comment and feedback. • This latest draft includes the following updates: • It shows the look back number of days as “tbd’. • It also incorporates BTU’s formulaic simplifications. • Next Step • This draft NPRR will go through the stakeholder process, and eventually it will return back to CWG and MCWG for review of credit implications.

6. MCWG Update to WMS • ERCOT Credit Updates Vanessa Spells provided the following updates for the various issues: • NPRR 601 (Inclusion of Incremental Exposure in Mass Transitions to Counter-Parties that are Registered as QSEs and LSEs and Provide POLR Service) – Pending to be reviewed by TAC. • NPRR 606 (Removal of Risk Management Verification Fee) – PRS for Impact Analysis. • NPRR 612 – Reduction of Cure Period Subsequent to Event of Default – Pending at PRS for IA review. • NPRR 597 (Utilize Initial Estimated Liability (IEL) Only during Initial Market Activity) –Pending at TAC to review. • NPRR 621 (Counter-Party Specific Calculations for M1 Variable) – Pending at PRS for consideration.