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Observed Nodal Credit Issues

Observed Nodal Credit Issues. MCWG – 12/10/2010. Observations. Day-Ahead Market Expiring CRRs do not offset calculated DAM Exposure TPE Collateral requirements related to RT-DA Spreads are excessive E-Factors do not incorporate PTP transactions CRR Exposure Calculations (Auction & FCE)

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Observed Nodal Credit Issues

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  1. Observed Nodal Credit Issues MCWG – 12/10/2010

  2. Observations • Day-Ahead Market • Expiring CRRs do not offset calculated DAM Exposure • TPE Collateral requirements related to RT-DA Spreads are excessive • E-Factors do not incorporate PTP transactions • CRR Exposure Calculations (Auction & FCE) • Auction exposure calculations overlook maximum risk associated with bid curves • Auction & FCE exposure calculations do not recognize offsetting risk

  3. Forward Hedge pre DAM: Resource Position 10 MWh Load Position 10 MWh CRR Position (Bus-Zone) 10 MWh DAM Transaction and Exposure: Option #1 (E1=0, D=100, Y&Z= 50) 10MWh, $0 TPO @ Resource =$ -50 10MWh, $200 EOB @ Zone = $ 100 Option # 2 (Uth =5) 10MWh, $50 PTP Bid Bus-Zone = $55 1 Expiring CRRs do not offset calculated DAM Exposure Ex: Posting Requirements related to a QSE representing load and generation 2 Net Position 0 MWh • Settlements & Invoices post DAM: • (Zone SPP = $100; GenBus SPP = $50) • @ Resource = $50 * 10MWh = $500 • @ Zone = $100 * -10MWh = $-1000 • @ CRR = [$100-$50] * 10MWh = $500 • Possible Solutions: • Recognize Expiring CRRs in/pre DAM • Enable CRRs to flow through to RT • Permit E-Factors to recognize offsetting risk • other 3 Net Exposure $0.00

  4. 1MW Buy DAM and Sell RT 1MW Sell DAM and Buy RT Virtual DA-RT Spreads are Over Collateralized by TPE Equations Assumption: E1 = 1; E2 = 0; PDAM =$40; PRT =$60 Assumption: E1=1; E2=0; PDAM=$60; PRT=$40; RT-DA=$10 Over Collateralization ≈ 64x Over Collateralization≈ 160x Under Collateralization≈ 7x • Reason for Collateralization Mismatch: • DAM & RT invoicing cycles are not aligned; thus, creating an unnecessary posting requirement for payment risk related to one leg of the financial time spread • Extrapolation equations overestimate potential exposure

  5. E-Factors do not incorporate PTP transactions Real Time Congestion Exposure can be managed by purchasing a PTP Day-Ahead, or by Transacting a Bid @ the Sink and Offer @ at the Source. • Ex. TPO & Bid @ Zone Transactions with the same risk profile but different E-Factor Treatment • Ex. PTP (Gen– Zone) • Ex. E-Factor Alt for PTP DAM Settlements 10MWh TPO = $50 10MWh EOB = $100 DAM Settlements 10MWh PTP Bid Bus-Zone = $50 DAM Settlements 10MWh, $50 PTP Bid Bus-Zone = $50 E-Ratio Calculations E-Ratio Calculations E-Ratio Calculations E1 Ratio= Min[1, Max[0, ((Qcleared-Bids*PDAM + Qcleared-PTPs*PSinkDAM - Qcleared-TPO*PDAM - Qcleared-EOO*PDAM -Qcleared-PTPs*PSourceDAM) / (Qcleared-Bids*PDAM + Qcleared-PTPs*PSinkDAM)]] = Min[ 1, Max[ 0, ($100 - $50)/$100]] = 0.50 E1 Ratio = Min[1, Max[ 0, ($0 - $0)/$0]] = 0 E1 Ratio = Min[1, Max[ 0, ($100 - $50)/$100]] = 0.50 E2 Ratio = 1 - Max[0, ((Qcleared-EOO + Qcleared-TPO - Qcleared-Bids)/((Qcleared-EOO + Qcleared-TPO + Qcleared-PTP))] = 1 – Max[0, (10 -10)/10] = 1 E2 Ratio = 1 – Max[0, (0 -0)/0] = 1 E2 Ratio = 1 – Max[0, (10 -10)/10] = 1 Incorporating PTPs into the E-Factor Equations provides equality for counterparties managing congestion risk

  6. CRR Bid Example & Clearing Price Max Price Exposure Example CRR Auction exposure calculations overlook maximum risk associated with bid curves 10 • 10MW 5x16 OBL (NHub,NZ) @ $10 • 500MW5x16 OBL (NHub,NZ) @ $2 • 600MW5x16 OBL (NHub,NZ) @ $1 • PCleared = $1/MWh ; 1,110MW Awarded Max Exp = $1/MWh A $100 2 23% Savings Bid Price ($/MW) B $1020 1 • CRR Auction Exposure(5x16 ≈ 336hrs) C $1110 Exp = [(M+1) * │PBid│ + A] * Q 10 510 1110 Quantity (MW) • [(0+1) * $10 + 0.75] * 10 * 336 = $36,120 • [(0+1) * $2 + 0.75] * 500 * 336 = $462,000 • [(0+1) * $1 + 0.75] * 600 * 336 = $352,800 • Total Exposure = $850,920 Alt. Exp = [(M+1)*Max[0,Min[ PMaxExp,PBid]+ A ]] *Q • [(0+1) * $1 + 0.75] * 10 * 336 = $5,880 • [(0+1) * $1 + 0.75] * 500 * 336 = $294,000 • [(0+1) * $1 + 0.75] * 600 * 336 = $352,800 • Total Exposure = $652,680

  7. CRR Auction Exposure Auction & FCE exposure calculations do not recognize offsetting risk A CRRAH managing Gen Bus to Load Zone congestion risk by legging into a GenBus to Zone CRR requires more collateral than purchasing a CRR from GenBus to Zone • Auction Submissions • Auction Cleared Values 10MW 5x16 OBL (NGen,NH) @ $10 10MW 5x16 OBL (NH,NZ) @ $10 10MW 5x16 OBL (NGen,NH) @ $0.75 10MW 5x16 OBL (NH,NZ) @ $0.75 Bid #1: Bid #2: 10MW 5x16 OBL (NGen,NZ) @ $20 10MW 5x16 OBL (NGen,NZ) @ $1.5 Recognizing offsetting CRR Exposure (i.e. SinkCRR1 = SourceCRR2) reduces FCE posting requirements by 50% • Future Credit Exposure = [ $10 + $0.75] * 3,360 = $36,120 = [ $10 + $0.75] * 3,360 = $36,120 Total = $72,240 ACPE = $3,360 ; FMM = $2,520 ACPE = $3,360 ; FMM = $2,520 Total = $6,720 Bid #1: Current Calculations Bid #2: = [ $20 + $0.75] * 3,360 = $69,720 = Max [ $3,360 ; -$5,040] = $3,360 Exp = [(M+1) * │PBid│ + A] * Q A = $0.75, M=0 FCE = Max[ ACPE , - FMM ] W1=100%, X=1, Y=1.5 Where:

  8. Other Issues Previously Discussed • Day-Ahead Market • Negative EO Bids do not require collateralization • Exposure calculations overlook maximum risk associated with Bid Curves • CRR Exposure Calculations (Auction & FCE) • Annual Auction Pre-Payment Requirements & Adequacy of FCE calculations • Collateral Requirements for Negative Bids • Adequacy of “A”, “X”, and “Y”

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