Nodal Credit Monitoring and Management – Business Requirements

1. Nodal Credit Monitoring and Management – Business Requirements ERCOT CREDIT Department September 28, 2006

2. Overview • Business Requirements – Approach & Status • Highlights of Nodal Protocols • Highlights of Requirements • Discussion Topics • Questions 2

3. Business Requirements – Approach & Status • Identified the Business Processes and Sub-Processes • Engaged the vendor (ROME Corporation) in the Requirement Gathering Activities • Identified the Business Areas, Systems and Actors for each of the Processes • Designed the Activity Maps • Elaborated the Requirements • Drafted the Use Cases • Conceptual System Design in Progress • Test Cases in Progress 3

4. ZONAL Separate Sections for QSE and TCR Sections 16.2.4 through 16.2.10 for QSE Sections 16.8.4 through 16.8.8 for TCR Separate collateral for each type of activity NODAL Establishes entire financial relationship between ERCOT and a Market Participant under one contract rather than multiple contracts Combine QSE and CRR activity under one contract Section 16.11 references Counter-Party One collateral amount for all activities Highlights of Nodal Protocols 4

5. Highlights of Nodal Protocols 5

6. Highlights of Requirements - Business Processes/Sub-Processes 6

7. Highlights of Requirements - Credit Exposure Monitoring • Exposure calculations and evaluation of collateral adequacy performed on Business Days • Available Credit Limit (ACL) = Unsecured Credit Limit + Collateral Posted – Total Potential Exposure • Available Credit Limit to Day Ahead Market (DAM) & CRR provided on Business Days • DAM and CRR auctions to work within the Available Credit Limit 7

8. Highlights of Requirements – Timeline for Exposure Monitoring 8

9. Highlights of Requirements – Activity Map for Credit Exposure Monitoring 9

10. Highlights of Requirements – Timeline for Available Credit Limit (ACL) • ERCOT credit staff receives updated initial calculations from Credit Monitoring system (around 7:00 am) • Data updated for • Payments made through prior day • New invoices or settlement statements issued through prior day • Estimated AIL data through prior day minus one or prior day • ERCOT credit staff reviews and approves calculations, issues collateral calls, etc • Calculations updated for intra-day activity (TBD based on system/interface capabilities, etc) • For payments made same day through noon • For updates for AIL through prior day • For updates on same day DAM results • By 5:00 pm, ERCOT credit staff provide Available Credit Limit (ACL) to DAM and/or CRR auctions for following day auctions 10

11. Discussion Topics #1 - Allocation of Available Credit Limit (ACL) #2 - ERCOT’s assumption on Real Time Liability (RTL) #3 - Formula for ACL #4 - Future Credit Exposure – Weighting Factors #5 - ERCOT’s assumption on TOBLV, TOPTV, and TCRRV #6 - Protocol Language for FCEFGR #7 - Transfer of bilateral CRRs and credit requirements NOTE: Based on the outcome of the discussions, Nodal Protocol Revision may be required 11

12. Discussion Topic #1 - Allocation of Available Credit Limit (ACL) • DAM auction begins at 6:00 am, CRR auction (submission of bids/offers) begins at 12:01 (just after midnight) • When limits must be set for both DAM and CRR on the same day, how will ERCOT determine how much to go to DAM and how much to CRR? • By notice from QSE or defined in Protocol? • Default # or % predefined? • $ assigned to one (CRR) and remainder to other DAM at time of auction • Currently ERCOT will only be able to send one ACL per CP entity. If an entity has sub-QSEs, how will ERCOT know which entity to send it to (default - primary one) • Do MPs want to be able to subdivide ACL to sub-QSEs? 12

13. Discussion Topic #2 – ERCOT’s Assumption on Real Time Liability (RTL) • Real Time Liability (RTL) is a component of AIL, considered to be the equivalent of NLRI in the ZONAL Protocols • The Nodal Protocols require ERCOT to calculate (RTL) using settlement statement data for each operating day that is completed and settled. • For each operating day that is completed but not settled, Nodal Protocols require ERCOT to use higher of ERCOT’s estimate or Counter-Party’s estimate. • ERCOT intends to estimate the RTL using the liability arising from the Real Time Operations and other readily available estimated data but does not intend to fully estimate all liabilities 13

14. Discussion Topic #3 - Formula for AIL • Average Incremental Liability (AIL) as in the Protocol • Average Incremental Liability (AIL) as proposed • Reason for Change: • Data included in AIL is only a subset of data included in EAL; Therefore, AIL is used to test the reasonableness of EAL and not a replacement for EAL. 14

15. Discussion Topic # 4 -Future Credit Exposure – Weighting Factors • Protocol Definition for Weighting Factors for CRR in FCE FCE = FCEOBL + FCEOPT + FCEFGR • W1, W2, W3, W4 are weighting factors for the three components • W1 – Weighting Factor Associated with Auction Clearing Price • W2 – Weighting Factor Associated with Today’s Value of CRR • W3 – Weighting Factor Associated with Five Day Value of CRR • W4 – Weighting Factor Associated with Previous Month Value of CRR • If FCEOBL is positive, FCEOBL is calculated for all Monthly and Annual CRR for all remaining hours; Only if FCEOBL is negative, it is re-calculated for the remaining hours of the current month and next month; • FCEOPT is calculated for all Monthly and Annual CRR for all remaining hours of the current month and next month; • FCEFGR is calculated for all Monthly and Annual CRR for all remaining hours of the current month and next month; • Proposal: Weighting factors may be customized for the month for which CRRs apply • Reason: To apply the weighting factors appropriately for the CRR in the month they correspond to. For example, the set of weighting factors for FCEOBL for CRR applicable in April may be different from the set for FCEOBL for CRR applicable in November. 15

16. Discussion Topic # 5 – ERCOT’s Assumption on TOBLV,TOPTV, TCRRV • Nodal Protocol Language for TOBLV, TOPTV, TCRRV • TOBLV  Today’s PTP Obligation Value • TOPTV  Today’s PTP Option Value • TCRRV  Today’s FGR Value Considering the timeline of data transfer from other ERCOT IT systems to CMM and the execution timeline of credit exposure monitoring calculation, ERCOT assumes the following: • TOBLV  Today’s Most Recent PTP Obligation Value • TOPTV  Today’s Most Recent PTP Option Value • TCRRV  Today’s Most Recent FGR Value 16

17. Discussion Topic #6 – Protocol Language for FCEFGR • The Nodal Protocol Language for FCEFGR refer to the following three terms: • TCRRV  Today’s FGR Value • FDCRRV  Five-day FGR Value • PMCRRV  Previous Months’ FGR Value Proposal: Rename the three terms to TFGRV, FDFGRV and PMFGRV to align with the rest of the terminology for Flow Gate Rights 17

18. Discussion Topic # 7 – Transfer of bilateral CRRs and credit requirements • ERCOT credit staff evaluated two options when looking at the transfer process for CRRs. • Option 1: Handle somewhat manually as a “one off” • Option2: Handle in an automated way • If handled manually • Credit staff will generate and review calculations and approve the transfer • Business process would take 3-5 business days • If handled in an automated way • Transfers may be able to be handled more quickly • More costly to develop the system • No benefit of a “human” review of values for both entities • ERCOT credit staff recommends that the transfer of CRRs be handled as a “one off” process given the anticipated level of transfers. 18

19. Questions ? 19