Market Credit Working Group Update to WMS

1. Market Credit Working Group Update to WMS Wed. Oct 21, 2009

2. MCWG October 2009 Update Overview • Update on MCWG work on the two motions approved by WMS in July • Next MCWG Meeting • Future Items for MCWG

3. Update on motions approved by WMS at July Meeting (1) • Review options for shared short-pay fund (Participants and ERCOT Inc) • Expanded loss mutualization for entire market AND accelerated DAM • Work towards PRR’s to provide to WMS for review

4. Update on motions approved by WMS at July Meeting (2) • September 24th MCWG Conference Call • September 30th MCWG Sub-group -Examples • October 8, 2009 MCWG Face-to-face Meeting (plus Webex) • October 14th, MCWG Sub-group –Option 4/4a

5. MCWG October Meetings • Focus, loss methodology • Options Identified for Losses • New Options 4 and 4a identified and reviewed

6. Option 4 –Default Methodology • 180 days after the default, ERCOT would allocate default amount using, for the calendar month (currently) 90 days before the date on which ERCOT issues the Uplift Invoice and for each non-defaulting QSE and CRR Account Holder, the following (all amounts are in MWh): • RTM: Greater of • Sum over all Settlement Points: Adjusted Metered Load; OR • Sum over all Settlement Points: Metered Generation; • DAM: Greater of • Sum over all Settlement Points: (a) The amount of its Energy Offers cleared in the DAM at the Settlement Point; plus (b) The amount of its PTP Options cleared in the DAM or in the RTM with source at the Settlement Point; plus (c) The amount of its PTP Obligations cleared in the DAM with source at the Settlement Point; OR • Sum over all Settlement Points: (a) The amount of its Energy Bids cleared in the DAM at the Settlement Point; plus (b) The amount of its RT PTP Obligations purchased in the DAM with source at the Settlement Point; • CRR Market: Greater of • Sum over all Settlement Points: (a) The amount of its CRRs sold in the CRR Auction with source at the Settlement Point; OR • Sum over all Settlement Points: (a) The amount of its CRRs allocated or purchased in the CRR Auction with source at the Settlement Point.

7. Features –Option 4 • All entities with Load or Generation share in Default allocation regardless of their level of activity in ERCOT markets • By using the Maximum of Load or Generation, DAM Purchases or Sales, CRR Purchases or Sales, Entities are not excessively penalized for hedging like under Options 2 and 3 • Option 4 is essentially Option 3 corrected to eliminate the double (and even quadruple) penalties for having both load and generation and for hedging positions that are currently present in Option 2 and Option 3

8. Option 4 Allocation Equation • ∑p [Max{(OPTSsource p+OBLSsource p), (OPTPsource p+ OBLPsource p)} + Max{(DAESp+DAOPTsource p+ DAOBLsource p+ RTOPTsource p), (DAEPp+ RTOBLsource p)}] + Max[∑p (RTAMLp*4), ∑p (RTMG1p*4)] • ∑QSE/CRRAH(∑p [Max{(OPTSsource p+OBLSsource p), (OPTPsource p+OBLPsource p)} + Max{(DAESp+DAOPTsource p+DAOBLsource p+ RTOPTsource p), (DAEPp+ RTOBLsource p)}] + Max[∑p (RTAMLp*4), ∑p (RTMG1p*4)]) • 1. Excluding RMR volumes

9. Option 4(a) Allocation of Defaults 180 days after the default, ERCOT would allocate default amount using, for the calendar month (currently) 90 days before the date on which ERCOT issues the Uplift Invoice and for each non-defaulting QSE and CRR Account Holder, the following (all amounts are in MWh): RTM & DAM: Greater of Sum over all Settlement Points: (a) Greater of (i) Metered Generation at the Settlement Point or (ii) the amount of its Energy Offers cleared in the DAM at the Settlement Point; plus (b) The amount of its PTP Options cleared in the DAM or in the RTM with source at the Settlement Point; plus (c) The amount of its PTP Obligations cleared in the DAM with source at the Settlement Point; OR Sum over all Settlement Points: (a) Greater of (i) Adjusted Metered Load or (ii) the amount of its Energy Bids cleared in the DAM at the Settlement Point; plus (b) The amount of its RT PTP Obligations purchased in the DAM with source at the Settlement Point; CRR Market: Greater of Sum over all Settlement Points: (a) The amount of its CRRs sold in the CRR Auction with source at the Settlement Point; OR Sum over all Settlement Points: (a) The amount of its CRRs allocated or purchased in the CRR Auction with source at the Settlement Point. 9

10. Option 4(a) Allocation Equation • ∑p [Max{(OPTSsource p+OBLSsource p), (OPTPsource p+OBLPsource p)} + Max{(Max(RTMG1p*4, DAESp)+DAOPTsource p+DAOBLsource p+ RTOPTsource p), (Max(RTAMLp*4, DAEPp)+RTOBLsource p)}] • ∑QSE/CRRAH(∑p [Max{(OPTSsource p+OBLSsource p), (OPTPsource p+OBLPsource p)} + Max{(Max(RTMG1p*4, DAESp)+DAOPTsource p+DAOBLsource p+ RTOPTsource p), (Max(RTAMLp*4, DAEPp)+RTOBLsource p)}]) • 1. Excluding RMR volumes 10

11. Features of Option 4(a) 11 • All entities with Load or Generation share in Default allocation regardless of their level of activity in ERCOT markets • Difference from Option 4: • By using the Maximum of Metered Generation or cleared DAM Energy Offers, a Generator that sells its output in the DAM is allocated the same amount of Default loss as another Generator that sells the same amount of its output in the RTM • By using the Maximum of Adjusted Metered Load or cleared DAM Energy Bids, a Load that buys its energy in the DAM is allocated the same amount of Default loss as another Load that buys the same amount of its energy in the RTM

12. Default Methodology Summary • MCWG Sub-group has been working through examples of the impacts on different QSE’s for different scenerios for Options 4 and 4a • Full MCWG will review the work of the sub-group on October 30, 2009 (face-to-face) meeting • Once Default methodology is completed, then MCWG will begin working on the other part of Motion 2 (further shortening of DAM) as well as Motion 1 (Short-pay fund)

13. Next Meeting ~MCWG • Friday October 30, 2009 9:30 AM -3:00 CST (in person + Webex) • Topics • Review work of MCWG on Options 4 and 4a and complete recommendation to WMS for default methodology • Then second, Further acceleration of DAM (Completes Motion 2 from WMS) • Third, Short-pay Fund (Motion 1)

14. Future Items for MCWG • Direction of invoice timing change • Perform bottom up review of existing creditworthiness standards (after CCRO Best Practices efforts) • Reduction of settlement cycle due to PRR 568 (7days) • Further reductions in settlement cycles • This includes looking at the potential to reduce the settlement cycle 30% with improved metering