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DAM Credit parameters review

• The “Procedures for Setting Nodal Day Ahead Market (DAM) Credit Requirements Parameters” is a document that is required per Protocol Section 4.4.10

– Defines credit parameters and “e” factors

– Protocols require that this document be reviewed at least annually

– This document was last updated on July 19, 2011

• In addition, Protocol section 4.4.10 (6) (d) (iv) establishes a PTP Obligation discount factor with an initial value of 80%

– This value is to be reviewed by TAC and approved by the ERCOT Board at least annually

CWG/MCWG MeetingJanuary 26, 2012

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Overview

• Summary of Parameters• Current Values for DAM Credit Parameters and e-factors• Summary of e – factor settings• Summary of credit consumed in the DAM• Next steps• Supplement – background materials

CWG/MCWG MeetingJanuary 26, 2012

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Summary of Parameters

CWG/MCWG MeetingJanuary 26, 2012

Summary of Parameters

NPRR 206 Parameters

Parameter Applies to: Calculated: Used to:

d DAM Energy Bids Percentile of 30 days recent historical pricing of awarded DAM Energy Bids

value a DAM Energy Bid for credit purposes

a EOOs Percentile of 30 days recent historical pricing of awarded EOOs

determine whether a EOO is likely to be awarded

b EOOs Percentile of 30 days recent historical pricing of awarded EOOs

value an EOO for credit purposes

y TPOs Percentile of 30 days recent historical pricing of awarded TPOs

determine whether a TPO is likely to be awarded

z TPOs Percentile of 30 days recent historical pricing of awarded TPOs

value a TPO for credit purposes

u PTP Obligation Bids Percentile of 30 days recent historical difference between the RT source and sink

value a PTP Obligation Bid for credit purposes

t Ancillary Services Percentile of 30 days recent historical pricing for Capacity

value Ancillary Services for credit purposes

"e" Factors Parameters

Parameter Applies to: Calculated: Used to:

"e1" DAM Energy Bids Defined ratio (Ratio1) comparing balance between awarded DAM Energy Bids, EOOs and TPOs. Calculated daily by CP. Calculated based on values (quantity x price). A specified percentile from the past 30 days Ratio1 is used.

modify DAM Energy Bid exposure and set value between recent historical pricing (when "e1" is near "0") and bid price (when "e1" is near "1")

"e2" EOOs Defined ratio (Ratio2) comparing balance between awarded EOOs, TPOs and DAM Energy Bids. Calculated daily by CP. Calculated based on quantities only. A specified percentile from the past 30 days Ratio2 is used.

modify EOO exposures and allow between no offset value (when "e2" is near "0") and full offset value at the 45th percentile of historical prices (when "e2" is near "1") for offers likely to be awarded.

"e3" EOOs Valued at 1 require collateral for 95% of the price difference between DAM and RT for all EOO offers, whether likely to be awarded or not.

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Current Values for DAM Credit Parameters and e-factors

CWG/MCWG MeetingJanuary 26, 2012

Bids EOOs EOOs

Bids - %ile of historical price - exposure value

EOOs - %ile of historical price -

likely to be awarded

EOOs - %ile of historical price - value for offset

TPOs - %ile of historical price -

likely to be awarded

TPOs - %ile of historical price - value for offset

PTP Obligation Bids - %ile of RT Source/Sink diff

Ancillary Services - %ile

of MCP for Capacity

"e1" "e2" "e3" d a b y z u t

Default/ General

95th percentile of "e1"s for the past 30 days (no

min or multiplier) 0 1 0.85 0.50 0.45 0.45 0.50 0.90 0.50

Favorable

75th percentile of "e1s" for past 30 days (no min

or multiplier)25th percentile of "e2"s

for the past 30 days 1 0.85 0.50 0.45 0.45 0.50 0.90 0.50

Notes:

"e1" modifies Bid exposures and sets value between recent historical pricing (when "e1" is near "0") and bid price (when "e1" is near "1")

"e2" modifies EOO exposures and allows between no offset value (when "e2" is near "0") and full offset value at the 45th percentile of historical prices (when "e2" is near "1") for offers likely to be awarded.

"e3" modifies EOOs and requires collateral for 95% of price difference between DAM and RT for all EOO offers, whether likely to be awarded or not.

N/A - "e2" at 0 "trumps" a and b

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Summary of e – factor settings

CWG/MCWG MeetingJanuary 26, 2012

"e1" General - 95th percentile in the last 30 days

13-Jan-11

No "e" factor activity during

period NetEqual to 1 212 158 54 67%Between .75 and 1 11 11 14%Between .50 and .75 7 7 9%Between 0 and .50 9 9 11%Total 239 158 81 100%

"e2" General - set at "0"

Note: All Counter-Parties currently receive the "general" percentiles noted above as no Counter-Party has requested to receive favorable treatment. For information only, statistics on the favorable percentiles are included on the next slide.

6 CWG/MCWG MeetingJanuary 26, 2012

Summary of e – factor settings

"e1" Favorable - 75th percentile ile in the last 30 days

13-Jan-11

No "e" factor activity during

period NetEqual to 1 204 158 46 57%Between .75 and 1 8 8 10%Between .50 and .75 7 7 9%Between 0 and .50 20 20 25%Total 239 158 81 100%

"e2" Favorable - 25th percentile in the last 30 days

13-Jan-11

No "e" factor activity during

period NetEqual to 1 14 14 17%Between .75 and 1 4 4 5%Between .50 and .75 6 6 7%Between 0 and .50 13 13 16%Equal to 0 202 158 44 54%Total 239 158 81 100%

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Summary of credit consumed in the DAM

CWG/MCWG MeetingJanuary 26, 2012

Lowest Daily Credit

Consumed

Highest Daily Credit

Consumed

Average Daily Credit

Consumed

February, 2011 79,592,968 272,901,406 120,131,756 March, 2011 63,140,880 92,212,465 78,205,623 April, 2011 70,847,823 105,276,526 86,683,692 May, 2011 70,058,278 118,994,366 92,749,921 June, 2011 103,470,508 148,012,226 125,385,557 July, 2011 101,301,623 169,491,089 127,301,873 August, 2011 124,919,861 344,487,991 246,581,523 September, 2011 109,191,928 235,347,697 150,508,068 October, 2011 39,358,413 73,562,788 59,115,060 November, 2011 41,370,278 86,363,631 63,161,990 December, 2011 58,371,404 116,245,986 86,016,327

Credit consumed by type of transactionEnergy bids 85 to 90% PTP bids 25 to 30%Energy only offers 1 to 3 %Three part offers - 10 to - 20%

Total Credit Consumed in the DAM

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Next steps

• Complete review at CWG / MCWG• If changes are proposed, approval is needed by the Board no

later than its July meeting. To achieve this:– F&A – June 2012 (no meeting scheduled in July)

– TAC – May 2012 – WMS – April 2012

CWG/MCWG MeetingJanuary 26, 2012

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Supplement

CWG/MCWG MeetingJanuary 26, 2012

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Percentiles

• Using a percentile of historical pricing or “e” factors allows the price or “e” factor ratio to be based in historical activity while throwing out some level of “outliers”

• Percentile of past 30 days historical “bid” pricing or “e1” factors – High percentiles are conservative

– 100% - the highest price or “e” factor ratio experienced in the past 30 days – this can be very high if there is much volatility or unusual activity

– 95% - extrapolated between the second and third highest price or “e” factor ratio experienced in the past 30 days – conservative but allows two “outliers” to be ignored

– 85% - extrapolated between the fifth and sixth highest price or “e” factor ratio experienced

– 50% - mid point price – uses a “common” price or “e” factor ratio

• Percentile of past 30 days historical “offer” pricing or “e2” factors – Low percentiles are conservative

– 3% - the lowest price or “e” factor ratio experienced in the past 30 days – can be very low if there is much volatility or unusual activity

– 25% - extrapolated between the seventh and eighth price or “e” factor ratio experienced

– 50% - mid point price – uses a “common” price or “e” factor ratio

CWG/MCWG MeetingJanuary 26, 2012

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Potential Impact on Bids – Examples

CWG/MCWG Meeting

Scenarios Total Total Total e1

History of: Q P Q P Q P

Bid being

considered

(d) - Recent

historical price (A) (B) (A) + (B)

Only bids (no offers) 1,000 50 50,000 - 40 - - 45 - 1.000 100.00 45.00 45.00 55.00 100.00 Primarily bids 1,000 50 50,000 20 40 800 10 45 450 0.975 100.00 45.00 45.00 53.63 98.63 Balanced - more bids than offers 1,000 50 50,000 500 40 20,000 400 45 18,000 0.240 100.00 45.00 45.00 13.20 58.20 Balanced - more offers than bids 800 50 40,000 500 40 20,000 400 45 18,000 0.050 100.00 45.00 45.00 2.75 47.75 Primarily offers 10 50 500 500 40 20,000 400 45 18,000 0.000 100.00 45.00 45.00 - 45.00 No bids (only offers) - 50 - 500 40 20,000 400 45 18,000 1.000 100.00 45.00 45.00 55.00 100.00

Potential Impact on BidsTPO ClearedBids Cleared EOO Cleared

January 26, 2012

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Potential Impact on EOOs – Examples

CWG/MCWG Meeting

Scenarios Total Total Total e2

History of: Q P Q P Q P

Offer being

considered (assume likely to occur)

(b) - Recent

historical price

Offset allowed

Only bids (no offers) 1,000 50 50,000 - 40 - - 45 - 0.00 46.00 45.00 - Primarily bids 1,000 50 50,000 20 40 800 10 45 450 1.00 46.00 45.00 45.00 Balanced - more bids than offers 1,000 50 50,000 500 40 20,000 400 45 18,000 1.00 46.00 45.00 45.00 Balanced - more offers than bids 800 50 40,000 500 40 20,000 400 45 18,000 0.89 46.00 45.00 40.00 Primarily offers 10 50 500 500 40 20,000 400 45 18,000 0.01 46.00 45.00 0.50 No bids (only offers) - 50 - 500 40 20,000 400 45 18,000 0.00 46.00 45.00 -

Potential Impact on EOOsTPO ClearedBids Cleared EOO Cleared

January 26, 2012

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DAM Credit Parameters - General

The default value of parameters for every Counter-Party are:

• e1 = 95th percentile of Ratio1 over the last 30 days

• where Ratio1 is a daily calculation as follows:

• Ratio1 = Min[1, Max[0, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-

EOO*PDAM) / (∑ h=1,24 Qcleared-Bids*PDAM)]]

except Ratio1 = 1 when ∑ h=1,24 Qcleared-Bids*PDAM = 0

• e2 = 0, e3 = 1, d = 85, a = 50, b = 45, y = 45, z = 50, u = 90, t = 50

CWG/MCWG MeetingJanuary 26, 2012

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DAM Credit Parameters – Favorable Treatment

If an Entity meets the requirements above for more favorable treatment, then the parameters for that Counter-Party are:

• e1 = 75th percentile of Ratio1 over the last 30 days

• where Ratio1 is a daily calculation as follows:

• Ratio1 = Min[1, Max[0, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-

EOO*PDAM) / (∑ h=1,24 Qcleared-Bids*PDAM)]]

except Ratio1 = 1 when ∑ h=1,24 Qcleared-Bids*PDAM = 0

• e2 = 25th percentile of Ratio2 over the last 30 days

• where Ratio2 is a daily calculation as follows:

• Ratio2 = 1 - Max[0, (∑h=1,24 (Qcleared-EOO + Qcleared-TPO - Qcleared-Bids)/

(∑ h=1,24 (Qcleared-EOO + Qcleared-TPO))]

except Ratio2 = 0 when ∑ h=1,24 (Qcleared-EOO + Qcleared-TPO) = 0

• e3 = 1

• d = 85, a = 50, b = 45, y = 45, z = 50, u = 90, t = 50

CWG/MCWG MeetingJanuary 26, 2012