Proposed CRR Auction Credit Changes

1. Proposed CRR Auction Credit Changes August 2012

2. Objectives of CRR Collateral Methodology Changes • Proposal primarily focuses on modifying the way collateral is calculated for the “Future Exposure” related to holding a CRR where “Future Exposure” is defined as the potential payment that would need to be made by a CRR holder if the reference DAM price settles at a negative number. The key elements of the proposal are: • Replace the pre-auction collateral adder “A” ($0.75/MWh) and the post-auction FCE calculations with an adder based on the credit exposure risk associated with owning individual CRR obligations on a source-sink basis • Given the lack of a liquid forward CRR market, historic settled DAM prices represent the best available data. Proposal uses P95-P100 historical sink-source DAM prices, broken up by TOU, as a proxy for a monthly price, e.g. 18 days for 5*16, 8 days for 2*16, 28 days for 7*8 • For CRRs held for current month delivery, the Path Specific DAM Based Adder will not roll-off until the last day of the delivery month • This proposal would allow Market Participants to post collateral for the notional value of awarded CRRs for “Forward Months” in lieu of pre-paying • A “Forward Month” is defined as any month further out than the prompt delivery month i.e. if an auction is held in Nov ’12, Forward Periods would be defined as any months beyond Dec ’12 • The full notional value of all CRRs bid on will continue to be collateralized during the pre-auction process • Note - CRRs awarded for the prompt month will continue to be paid for in full before the month begins

3. CRR Subgroup Meeting – Key Takeaways • Potentially add the impact of the “portfolio effect” as part of the Future Credit Exposure calculation • Include ability to modify historical adder when applicable • Addition of a “state change” adder which will give ERCOT the discretion to change collateral requirements for any given source-sink pairing based on historical DAM prices • Include the ability to replace the Path Specific Adder with the most recent Auction Clearing Price (“ACP”), if the ACP for any given month is lower than the current Path Specific Adder • Owning a number of CRR paths is likely to provide some degree of correlation benefit i.e. in the event of default, the holder of a portfolio of CRRs would have some paths that require payments to ERCOT, while others would require payment from ERCOT to the CRR holder • As “State Change” cannot be quantified, should initially be set at $0/MWh. • To the extent that an event occurs that results in a particular source-sink path being under-collateralized via the proposed methodology, ERCOT reserves the right to revise collateral requirements • Would mitigate the circumstance where market participants know of a future event that could change the pricing of a particular path but it has not yet been reflected in historic prices