training nprr 206 and “e” factors august 10, 2010 nprr 206 and "e" factors

Training

NPRR 206 and “e” Factors

August 10, 2010

NPRR 206 and "e" Factors

2

Training Objectives

• Review the reason for Day Ahead Market (DAM) credit constraints

• Review the impact of NPRR 206 and 226 on DAM credit constraints

• “e” Factors - how “e” factors customize credit constraints based on each Counter-Party’s activity

• “e” Factors – Favorable treatment

– How to request favorable treatment

– CP requirements if favorable treatment is awarded

– Impact if CP requirements are not met

• “e” Factors - Administration

– Timing of changes to “e” factors

– Notifications

– ERCOT review of activity

NPRR 206 and "e" Factors August 10, 2010

3

Overview

• General Concepts and Terms

• Review NPRR 206

• “e” Factors – General

• “e” Factors - Favorable Treatment - CP Requirements

• “e” Factors – Process

• “e” Factors – ERCOT Monitoring


4

General Concepts and Terms


5

Objectives for credit constraints in Day Ahead Market

Objectives for having credit constraints in the Day Ahead Market (DAM)

• Ensure that a Counter-Party (CP) can pay for its activity in the DAM and any potential related activity in Real Time (RT)

– Bids to buy from DAM are covered

– RT impact from offers to sell in the DAM are covered

Objectives for changing credit constraints in the DAM (NPRR 206)

• Where risk seems reasonable, reduce collateral on bids to buy

• Where risk seems reasonable, provide some level of offset from offers to sell

Source of information

• Protocol Section 4.4.10 - Credit Requirement for DAM Bids and Offers

• Day Ahead Market (DAM) Collateral Parameters Process


6

NPRR 206 Terms

• Ancillary Service – a service necessary to support transmission of energy to Load while maintaining reliable operation of the Transmission Service Provider’s (TDSP’s) transmission system using Good Utility Practice

• DAM Energy Bids – a proposal to buy energy in the DAM at Settlement Point at a monotonically decreasing price with increasing quantity

• Day – Ahead Market (DAM) Energy-Only Offer (EOO)- A QSEs willingness to sell energy at or above a certain quantity at a specific Settlement Point in DAM. A DAM Energy-Only Offer Curve may be offered only in DAM. DAM Energy-Only Offer Curves are not Resource Specific

• Point-to Point (PTP) Obligation – A type of CRR that entitles the holder to be charged or to receive compensation and is evaluated in each CRR Auction and DAM as the positive and negative power flows on all directional network elements created by injection and withdrawal at the specified source and sink points of the quantity represented by the CRR bid or offer (MW).

• Three-Part Supply Offer (TPO) – an offer made by a QSE for a Generation Resource that it represents containing three components: a Startup Offer, a Minimum-Energy Offer, and an Energy Offer Curve


7

Summary of Parameters


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.

8

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


9

Percentiles


Example: Percentile values when there is a high level of price volatility

Data element SPP

1 75.772 73.713 1000.004 14.255 3000.006 150.007 111.468 20.579 92.74

10 2000.0011 90.0012 98.1113 99.6214 59.7815 132.9216 2500.0017 48.7418 150.0019 56.1420 77.2421 500.0022 80.2723 50.0024 80.0025 50.0026 450.0027 36.1028 80.0029 60.8730 128.37

A specific percentile of historical values from the past 30 days Percentile 95% 2,275.00 Percentile 85% 482.50

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

0 10 20 30 40

Series1

10

Percentiles


Example: Percentile values when prices are relatively stable

Data element SPP

1 75.772 73.713 100.004 14.255 300.006 150.007 111.468 20.579 92.74

10 125.0011 90.0012 98.1113 99.6214 59.7815 132.9216 112.0017 48.7418 150.0019 56.1420 77.2421 55.0022 80.2723 50.0024 80.0025 50.0026 45.0027 36.1028 80.0029 60.8730 128.37

A specific percentile of historical values from the past 30 days Percentile 95% 150.00 Percentile 85% 127.19

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

0 10 20 30 40

Series1

11

Review NPRR 206

August 10, 2010 NPRR 206 and "e" Factors

12

NPRR 206 – Summary of changes

1. Bids to buy energy – – Prior to NPRR 206 - collateral required for all bids to buy at full bid price– After NPRR 206 – collateral required for all bids to buy somewhere between full

bid price and a recent historical price level, depending on CPs recent DAM activity

2. Energy Only Offers (EOOs) to sell energy – – Prior to NPRR 206 – collateral required for most Energy Only Offers (EOOs) to

sell at the 95th percentile of any difference between the RT and DAM prices– After NPRR 206 –

• Still requires collateral for EOOs to sell at the 95th percentile of any difference between the RT and DAM prices

• HOWEVER, allows the possibility for offset / exposure reduction– If favorable treatment is requested and disclosure requirements are

met– For EOOs that are “likely to be awarded”– At a value that is reasonable– Considering the CPs recent DAM activity


13

NPRR 206 – Summary of changes (continued)

3. Three Part Supply Offers (TPOs)– – Prior to NPRR 206 – no collateral required; no offset / exposure reduction– After NPRR 206 –

• Allows offset / exposure reduction – For all TPOs that are “likely to be awarded” (e.g. no “e” factor

constraint)– At a value that is reasonable

4. Introduces entity-specific exposure adjustment variables (“e” factors) to be set by ERCOT that customizes collateral requirements by CPs based on their recent DAM activity

5. Addresses special cases (e.g. “negative” bids to buy and “positive” offers to sell)

6. Establishes parameters for valuing PTP Obligation Bids and Ancillary Services not self-arranged


14

Nodal Section 4.4.10 after NPRR 206 and 226

ERCOT shall calculate credit exposure for bids and offers in the DAM as follows:

(a) For each DAM Energy Bid, the credit exposure shall be calculated as the quantity of the bid multiplied by a bid exposure price that is calculated as follows:

(i) For each MW portion of the DAM Energy Bid where the price is less than or equal to zero (addresses negative bids –e.g. West Texas), the bid exposure price for that MW portion will equal zero.

(ii) For each MW portion of the DAM Energy Bid where the price is greater than zero, the bid exposure price for that MW portion will equal the greater of zero (e.g.

if historical prices are negative – again, West Texas) or the sum of (A) and (B):

(A) The lesser of:

(1) The “d”th (will be 95% initially and then 85%) percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days; and

(2) The bid price (e.g. if the historical price is $45 but the bid was $30, use $30).

(B) “e1” times (bid price minus (A)) when the bid price is greater than (A) (“e1” customizes bids based on historical activity).


15



Scenario Bid Price <= Historical Price Bid Price > Historical Pricedth Percentile DASPP 60 60

Bid Price 50 200e1 0.2 0.2

Formula Bid Price DASPP + e1 * (Bid Price - DASPP)60 + 0.2 * (200 - 60)

Bid Exposure Price 50 88

16


(b) For each MW portion of a DAM Energy Only Offer:

(i) That has an offer price that is less than or equal to the “a”th percentile (defines

EOO transactions that are “likely to be awarded” and is 50th percentile) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, the sum of (A) and (B) shall apply.

(A) Credit exposure will be:

(1) Reduced (when the “b”th percentile (45th percentile after 60 days) Settlement Point Price for the hour is positive (for offers that will generate money for the CP) ). The reduction shall be the quantity of the offer multiplied by the “b”th percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days times “e2” (“e2” customizes EOO based on recent history-allows an offset in some

circumstances) ; or

(2) Increased (when the “b”th percentile Settlement Point Price for the hour is negative (for offers that will cost the CP money) ). The increase shall be the quantity of the offer multiplied by the “b”th percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days (collateralizes at

quantity x historical price).

(B) Credit exposure will be increased by the product of the quantity of the offer times the 95th percentile of any positive hourly difference (difference can be minimal -

46 vs 45 or significant 2,250 vs 45) of Real-Time Settlement Point Price and Day-Ahead Settlement Point Price over the previous 30 days for the hour times “e3 (always

“1” so always collateralize for the price differential to cover arbitrage potential) .”


17


(ii) That has an offer price that is greater than the “a”th percentile (EOO that are more than 50th

percentile and therefore deemed “not likely to be awarded“) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, credit exposure will be increased by the product of the quantity of the offer times the 95th percentile of any positive hourly difference of Real-Time Settlement Point Price and Day-Ahead Settlement Point Price over the previous 30 days for the hour times “e3.” (same as (b)(i) (B))

(c) For each MW portion of the Energy Offer Curve of a Three-Part Supply Offer:

(i) That has an offer price that is less than or equal to the “y”th percentile (defines TPO transactions that are “likely to be awarded” and is 45th percentile after 60 days) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, credit exposure will be reduced (when the “z”th percentile (50th percentile after 60 days) Settlement Point Price is positive) or increased (when the “z”th percentile Settlement Point Price is negative) by the quantity of the offer multiplied by the “z”th percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days. (Note: there are no “e” factors on TPOs – if it is likely to be awarded, it will provide an offset or require collateral (if negative))


18


( c) (ii) That has an offer price that is greater than the “y”th percentile (defines TPO

transactions that are more than the 45th percentile and therefore deemed “not likely to be awarded”) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, the credit exposure will be zero.

(d) For PTP Obligation Bids, the sum of the quantity of bid multiplied by the bid price, if positive, plus the “u”th percentile (95th percentile) of the hourly positive price difference between the source Real-Time Settlement Point Price minus the sink Real-Time Settlement Point Price over the previous 30 days.

(e) For Ancillary Services not self-arranged, the product of the quantity of Ancillary Service not self-arranged times the “t”th percentile (50th percentile) of the hourly Market Clearing Price for Capacity (MCPC) for that Ancillary Service over the previous 30 days for that hour.

Grey box language for later

[NPRR131: Insert paragraph (4)(f) and renumber accordingly, upon system implementation:]

(f) For Ancillary Services Trades with ERCOT, the product of the quantity of Ancillary Service procured times the “t”th percentile of the hourly MCPC for that Ancillary Service over the previous 30 days for that hour.


19


(f) Variables “e1,” “e2,” or “e3”, which are applicable to items (a) through (c) above, under conditions described below, will be determined and applied at ERCOT’s sole discretion. Within the application parameters identified below, ERCOT shall establish values for “e1,” “e2,” and “e3” and provide notice to an affected Counter-Party of any changes to “e1,” “e2,” or “e3” before 0900 generally two Bank Business Days prior to the normally scheduled DAM 1000 by a minimum of two of these methods: written, electronic, or telephonic. However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter-Party do not adequately match the financial risk created by that Counter-Party's activities in the market. ERCOT shall review the values for “e1,” “e2,” or “e3” for each Counter-Party no less than once every two weeks. ERCOT shall provide written or electronic notice to the Counter-Party of the basis for ERCOT’s assessment, or change of assessment, of the exposure adjustment variable established for the Counter-Party and the impact of the adjustment.


20


(i) The value of each exposure adjustment “e1,” “e2,” and “e3” is a value between zero and one, rounded to the nearest hundredth decimal place, set by ERCOT by Counter-Party. The values ERCOT establishes for “e1,” “e2,” and “e3” for a Counter-Party shall be applied equally to the portfolio of all QSEs represented by such Counter-Party.

(ii) A Technical Advisory Committee (TAC)-recommended and ERCOT Board-approved procedure (“Procedures for Setting Nodal Day Ahead Market Credit Requirement Parameters”), which will be reviewed at least annually and posted on the MIS Public Area, will be used to define and modify the values of “e1,” “e2,” and “e3.”

(7) The variables to define the pre-DAM credit validation process referenced in item (6) above (including the standard setting for the “e1,” “e2,” and “e3,” if any) shall be posted on the MIS Public Area. TAC shall review these variables at least annually and may recommend to the ERCOT Board, changes to these values. If changes to these values are approved by the ERCOT Board, such revised values shall be posted on the MIS Public Area within three Business Days of ERCOT Board approval.


21

Summary of Parameter Settings


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

First 60 days First 14 days 1 0 1 0.95 0.50 0.20 - - 0.95 0.95

Next 46 days

95th percentile of "e1"s available, with a

minimum and a multiplier 0 1 0.95 0.50 0.20 0.25 0.25 0.95 0.95

Ongoing

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 0.95 0.50

Favorable

75 th 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 0.95 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 - "e1" as 1 and "e2" as 0 "trumps" d,a and b for first 14 days

N/A - "e2" at 0 "trumps" a and b for next 46 days

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

22

“e” Factors - General


23

“e” factors - Overview

General• Start out conservatively for the first 60 days

– At market open– For new entities as they enter the market

• After 60 days, provide for “default” (or general) values and allow for more favorable treatment if CP meets certain conditions

• ERCOT will monitor activity and may adjust “e” factors if activity warrants– DAM activity (changes in cleared bids, cleared offers, etc)– DAM activity vs ACL– DAM activity vs RT activity

“e” factor calculation• “e1” – modifies Bids(calculated based on values – quantity x price)• “e2” – modifies Energy Only Offers (EOOs) (calculated based on quantities only)• “e3” – modifies EOOs (and is currently set to “1”)• based on awarded bids and offers (settled or estimated) • “e” factors are calculated each day based on that day’s DAM activity• A percentile of the past 30 day’s e-factors are used


24

“e” factors – Overview


"e1" "e2" "e3"

First 60 days First 14 days 1 0 1

Next 46 days

95th percentile of "e1"s available, with a

minimum and a multiplier 0 1

Ongoing

Default / General

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

min or multiplier) 0 1

Favorable

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

or multiplier)25th percentile of "e2"s

for the past 30 days 1

Notes:

"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.

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

25

“e” factors - Formulas

“e1” – calculated based on relative values (quantity x price)

Days 15 – 60 after “Go Live”

Ratio0 = Min[1, Max{0.2, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-

EOO*PDAM) / (∑ h=1,24 Qcleared-Bids*PDAM) * 1.2}]

• except Ratio0 = 1 when ∑ h=1,24 Qcleared-Bids*PDAM = 0

After first 60 days

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” – calculated based on relative quantities

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


26

Ratio 1 Calculation

• E1 Ratio (Ratio 1) Calculation

Sample Data• Cleared Bids Volume = 300• Cleared Three Part Offers Volume = 20,000• Cleared Energy Only Offers Volume = 300• Average Cleared Price for Bids = 113.72• Average Cleared Price for Three Part Offers = 27.54 • Average Cleared Price for Energy Only Offers = 45.27



= Min[1, Max[0, (300 * 113.72 – 20000 * 27.54 – 300 * 45.27) / (300 * 113.72)]]

= Min[1, Max[0, -15.43]

= 0


27

Ratio 2 Calculation

• E2 Ratio (Ratio 2) Calculation

Sample Data• Cleared Bids Volume = 300• Cleared Three Part Offers Volume = 20,000• Cleared Energy Only Offers Volume = 300


= 1 - Max[0, (300 + 20000 - 300) / (300 + 20000))]

= 0.01


28

e1, e2 Percentile Calculation


Operating Date

Cleared Energy Only Offers Volume

Cleared Three Part Offers Volume

Cleared Bids Volume

Average Cleared Price for Energy Only Offers

Average Cleared Price for Three Part Offers

Average Cleared Price for Bids

e1 Ratio (Ratio 1)

e2 Ratio (Ratio 2)

e1 factor - General Case (95th percentile)

e1 factor - Favorable Case (75th percentile)

e2 factor - General Case

e2 factor - Favorable Case (25th percentile)

8/3/2010 300 20,000 300 45.27 27.54 113.72 - 0.01 0 0 0 0.018/2/2010 1,000 76,000 1,000 90.14 47.01 15.18 - 0.01 8/1/2010 1,000 76,000 1,000 90.14 47.01 15.18 - 0.01

7/31/2010 1,000 76,000 1,000 90.14 47.01 15.18 - 0.01 7/30/2010 1,000 76,000 1,000 65.06 43.69 13.08 - 0.01 7/29/2010 1,000 76,000 500 43.86 33.50 587.68 - 0.01 7/28/2010 1,000 76,000 1,000 51.11 47.01 14.07 - 0.01 7/27/2010 1,000 50,000 0 85.03 64.34 0.00 1.00 - 7/26/2010 500 50,000 500 50.09 34.77 50.68 - 0.01 7/25/2010 500 50,000 500 50.09 34.77 50.68 - 0.01 7/24/2010 500 50,000 500 50.09 34.77 50.68 - 0.01 7/23/2010 500 50,000 500 50.09 34.77 50.68 - 0.01 7/22/2010 500 50,000 500 50.09 34.77 50.68 - 0.01 7/21/2010 500 50,000 500 50.09 34.77 50.68 - 0.01 7/20/2010 800 40,000 800 52.05 44.64 12.18 - 0.02 7/19/2010 800 40,000 800 52.05 44.64 12.18 - 0.02 7/18/2010 800 40,000 800 52.05 44.64 12.18 - 0.02 7/17/2010 800 40,000 800 52.05 44.64 12.18 - 0.02 7/16/2010 1,000 40,000 800 54.05 40.26 20.11 - 0.02 7/15/2010 500 40,000 800 47.31 31.51 65.06 - 0.02 7/14/2010 800 40,000 800 53.93 43.44 21.98 - 0.02 7/13/2010 1,000 2,000 800 54.89 48.93 9.44 - 0.27 7/12/2010 100 2,000 100 521.48 95.89 89.69 - 0.05 7/11/2010 100 2,000 100 521.48 95.89 89.69 - 0.05 7/10/2010 100 2,000 100 521.48 95.89 89.69 - 0.05 7/9/2010 100 30,000 100 521.48 47.54 89.69 - 0.00 7/8/2010 100 30,000 100 521.48 47.54 89.69 - 0.00 7/7/2010 100 30,000 100 521.48 47.54 89.69 - 0.00 7/6/2010 100 30,000 100 521.48 47.54 89.69 - 0.00 7/5/2010 100 30,000 100 521.48 47.54 89.69 - 0.00

29

Potential Impact on Bids – Examples


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

August 10, 2010

30

Potential Impact on EOOs – Examples


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

August 10, 2010

31

“e” Factors - Favorable Treatment - CP Requirements


32

Favorable treatment – CP requirements

Notify ERCOT of expected changes due to change in activity, and the likely duration of such changes, to the following values as soon as practicable after being estimated by the Counter-Party and at least 2 Business Days in advance of when such changes become effective:

– If Ratio1 (for the day) is likely to be greater than the Counter-Party's currently assigned value of e1 for particular day(s) (based on the 75 percentile of the last 30 days of “e1”s), then the estimated daily values of Ratio1 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumptions used to arrive at those values; and

– If Ratio2 (for the day) is likely to be lower than the Counter-Party's currently assigned value of e2 for particular day(s) (based on the 25th percentile of the last 30 days of “e2”s), then the estimated daily values of Ratio2 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumption used to arrive at those values


33


• Forms and ongoing information requirement should be sent via e-mail

– Subject line – Credit “e” factors – favorable treatment requested / details

– During market trials – send to [email protected]

– After go live – send to [email protected]

• Forms

– Initial forms are attached. Forms will likely evolve over time.

1. “e” Factor - Change in Treatment Form

• Must be delivered to ERCOT at least 2 business days prior notification date

2. “e” Factor - Required Information Form

• Must be delivered to ERCOT as soon as available but at least 2 business days in advance of when such changes become effective


34


• ERCOT staff will confirm receipt of documents within 24 hours

– If “e” Factor - Change in Treatment Form – confirm request and award

– If “e” Factor - Required Information Form – confirm adequacy of information

– If an “e” Factor will be changed as a result of CP communication, an Ad Hoc notice will be sent


35

“e” Factors – Request for Change in “e” Factor Treatment Form


Day Ahead Market (DAM) Collateral Parameters Process Request for Change in “e” Factor Treatment Form

(Favorable/General for ‘e1’ and ‘e2’ factors)

The Counter-Party (CP) listed below requests (check one)

______general / default “e factor” treatment ______favorable “e factor” treatment

from ERCOT pursuant to the Day Ahead Market (DAM) Collateral Parameters Process. If favorable treatment is requested, CP agrees to notify ERCOT of expected changes due to change in activity, and the likely duration of such changes, to the following values as soon as practicable after being estimated by the Counter-Party and at least 2 Business Days in advance of when such changes become effective:

– If Ratio1 is likely to be greater than the Counter-Party's currently assigned value of e1for particular day(s), then the estimated daily values of Ratio1 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumptions used to arrive at those values; and

– If Ratio2 is likely to be lower than the Counter-Party's currently assigned value of e2 for particular day(s), then the estimated daily values of Ratio2 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumption used to arrive at those values

Note 1: If a CP does not make a specific request, that CP will receive general or default treatment under the DAM Collateral Parameters Process. Note 2: ERCOT may rescind favorable treatment immediately, possibly with minimal notice, if ERCOT believes risk is not being adequately addressed or if a CP does not meet the disclosure requirements. Legal Name of Counter-Party Legal Address of the Counter-Party DUNS Number Name: An Authorized Representative or Credit Contact

Title: Telephone: Fax: Email Address: Signature: Send form to [email protected]

36

“e” Factors – Required Information Form


Day Ahead Market (DAM) Collateral Parameters Process “e” Factors – Favorable Treatment

Required Information Form (for ‘e1’ and ‘e2’) The Counter-Party (CP) listed below receives favorable “e factor” treatment from ERCOT pursuant to the DAM Collateral Parameters Process and agreed to notify ERCOT of expected changes in DAM activity that impacts e-factors, the likely duration of such changes, as soon as practicable after being estimated by the CP and at least 2 Business Days in advance of when such changes become effective. Guidelines for providing information: 1) When Ratio1 is likely to be greater than the CP’s currently assigned value of “el” 2) When Ratio2 is likely to be lower than the CP’s currently assigned value of “e2” or 3) When the daily total for a CP of its DAM Energy Bid, EOO, or TPO volume

increase/decrease more than 20% from the prior day Legal Name of Counter-Party Legal Address of Counter-Party DUNS Number Operating day for which change will begin:__________________________________ Operating day for which change will end (if applicable):__________________________ Estimated daily value of Ratio 1:_____________________________________ Estimated daily value of Ratio 2:______________________________________ Underlying Assumptions Volume (daily MWHs) Price ($$s) Estimated DAM Energy Bid Estimated DAM Energy-Only-Offers Estimated Three-Part Supply Offer Explanation of anticipated change: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Contact (for questions): Title: Telephone: Fax: Email Address: Send form to [email protected]

37

“e” Factors – Process


38

“e” Factors – Bi-weekly Process - Market Trials

• Timing of regular or bi-weekly “e” factor updates– Initial notice - Wednesday, August 4th to be effective on Monday, August 9th – Preliminary schedules for planned “e” factor changes have been established

through January (market trials and cutover) – see upcoming slides– After cutover - ERCOT plans to review “e” factors on Tuesdays (or Wednesday), with

notices to go out before 9:00 am on Wednesday (or Thursday) mornings to be effective beginning with the Friday (or Monday) morning DAM

• Initial “e” Factor reset - data– August 4th “e” factor calculation is based on 30 days of data (which includes DAM

activity for operating days July 5th through August 3rd)• CMM is still populating data for the “e” factor calculation and did not have a

sufficient level of detailed DAM data prior to July 10th • If data was missing (e.g. DAM not run, CP not in market, etc), ERCOT “filled

in” missing day’s data (see example next page) – To the extent possible, data from the most recent prior day with DAM

activity was used» If a prior day’s data was not available, data from the closest forward

day was usedNPRR 206 and "e" Factors

39



Operating Day Data in CMM

Data used for "e" factor calc

5-Jul None - CMM not loaded 10-Jul6-Jul None - CMM not loaded 10-Jul7-Jul None - CMM not loaded 10-Jul8-Jul None - CMM not loaded 10-Jul9-Jul None - CMM not loaded 10-Jul10-Jul CP data 10-Jul11-Jul None - No DAM Run 10-Jul12-Jul None - No DAM Run 10-Jul13-Jul CP data 13-Jul14-Jul CP data 14-Jul15-Jul CP data 15-Jul16-Jul CP data 16-Jul17-Jul CP data 17-Jul18-Jul None - No DAM Run 17-Jul19-Jul None - No DAM Run 17-Jul20-Jul None - No DAM Run 17-Jul21-Jul CP data 21-Jul22-Jul None - No DAM Run 21-Jul23-Jul None - No DAM Run 21-Jul24-Jul None - No DAM Run 21-Jul25-Jul None - No DAM Run 21-Jul26-Jul None - No DAM Run 21-Jul27-Jul CP data 27-Jul28-Jul CP data 28-Jul29-Jul CP data 29-Jul30-Jul CP data 30-Jul31-Jul CP data 31-Jul1-Aug None - No DAM Run 31-Jul2-Aug None - No DAM Run 31-Jul3-Aug None - No DAM Run 31-Jul

Example of data used for “e” factors if a CP participated in each DAM executed between July 10th and August 3rd

40


• In conjunction with “e” factors being set on August 9, other NPRR 206 parameters were set consistent with how parameters will be set after the initial 60 days of the market. That is:

d = 0.85 z = 0.50

a = 0.50 u = 0.95

b = 0.45 t = 0.50

y = 0.45

• DAM runs next week should reflect each CP’s “e” factors.

• Of the 171 CPs evaluated,– 161 CPs activity did not warrant a change– 10 CPs activity did receive a change in either e1 or e2 factors.– 8 CPs requested favorable treatment.– No CPs requested specific “e” factors. – Notices were sent to all CPs to test ERCOT’s notification system.


41


• Special offer – reset “e” factor - today

Given the need for CPs to test how DAM runs with “e” factors, the short amount of time available for testing and the fact that DAM is running 7 days next week, ERCOT will allow CPs one opportunity to select specific “e” factors next week as follows:

– By sending an e-mail to [email protected] with “Credit – “e” factor – specific “e” factors requested” in the subject line and the e factors requested in the body of the e-mail

• ERCOT is not recalculating “e” factors but will allow “override” resets for “e1” and/or “e2” factors

– Request must be received (and ERCOT must have confirmed receipt via e-mail) by noon Tuesday

– Notices will be sent (without 2 days notice)

– Change will be effective for DAM runs beginning Wednesday am

– The next biweekly reset will be based on CP data


42


– Next biweekly “e” factor reset is planned for the DAM run on Friday, August 20 th for operating day Saturday, August 21st with notices sent by 9:00 am on Wednesday, August 18th

– Alternative or Favorable treatment• CPs should notify ERCOT of their desire to receive “favorable” treatment in

Market Trials – by sending an e-mail to [email protected] with “Credit – “e” factors

– favorable treatment requested” in the subject line

– Finally, if CPs do not believe their DAM activity in Market Trials in July and August is indicative of their projected activity after “Go Live”, they may request ERCOT to set their “e” - factors to reflect their anticipated activity

» By sending an e-mail to [email protected] with “Credit – “e” factor – specific “e” factors requested” in the subject line and the e factors requested in the body of the e-mail

» Any “override” will be effective until the next bi-weekly reset (e.g. must be requested again or factors will be reset based on data)


43



DAM runs from (Scheduled reset date) DAM runs to Operating Day from Operating Day to Notice deadline by 9:00 am

Market Trials

Friday, August 6, 2010 Thursday, August 19, 2010 Saturday, August 7, 2010 Friday, August 20, 2010 Wednesday, August 4, 2010Friday, August 20, 2010 Thursday, September 2, 2010 Saturday, August 21, 2010 Friday, September 3, 2010 Wednesday, August 18, 2010Friday, September 3, 2010 Thursday, September 16, 2010 Saturday, September 4, 2010 Friday, September 17, 2010 Wednesday, September 1, 2010Friday, September 17, 2010 Thursday, September 30, 2010 Saturday, September 18, 2010 Friday, October 1, 2010 Wednesday, September 15, 2010

44

“e” Factors – Bi-weekly Process – Preliminary Cutover Schedule


DAM runs from (Scheduled reset date) DAM runs to Operating Day from Operating Day to Notice deadline by 9:00 am

Initial 14 days

Tuesday, November 30, 2010 Monday, December 13, 2010 Wednesday, December 1, 2010 Tuesday, December 14, 2010No notices sent since "e" factors are set at 1/0/1

Next 46 daysTuesday, December 14, 2010 Tuesday, December 21, 2010 Wednesday, December 15, 2010 Wednesday, December 22, 2010 Friday, December 10, 2010Wednesday, December 22, 2010 Tuesday, January 4, 2011 Thursday, December 23, 2010 Wednesday, January 5, 2011 Monday, December 20, 2010Wednesday, January 5, 2011 Tuesday, January, 18, 2011 Thursday, January 6, 2011 Wednesday, January 19, 2011 Monday, January 3, 2011Wednesday, January 19, 2011 Friday, January 28, 2011 Thursday, January 20, 2011 Saturday, January 29, 2011 Monday, January 17, 2011

OngoingSaturday, January 29, 2011 Thursday, February 10, 2011 Sunday, January 30, 2011 Friday, February 11, 2011 Thursday, January 27, 2011Friday, February 11, 2011 Thursday, February 24, 2011 Saturday, February 12, 2011 Friday, February 25, 2011 Wednesday, February 9, 2011Friday, February 25, 2011 Thursday, March 10, 2011 Saturday, February 26, 2011 Friday, March 11, 2011 Wednesday, February 23, 2011

Thereafter, biweekly reset will occur every other Friday, with notice on Wednesday morning. If Friday is a holiday, then biweekly reset will be on the preceding business day.

45

“e” Factors – Bi-weekly Process – Notices

• ERCOT credit staff will notify CPs – of changes in “e” Factors– before 0900 generally two Bank Business Days prior to the normally scheduled

DAM 1000 – by a minimum of two of these methods: written, electronic, or telephonic.

• In Market Trials, ERCOT will initially send notices only by e-mail• After go live, ERCOT currently plans to send bi-weekly notices by e-mail and

regular mail– of the basis for ERCOT’s assessment, or change of assessment, of the exposure

adjustment variable established for the Counter-Party and the impact of the adjustment (written or electronic)

– However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter-Party do not adequately match the financial risk created by that Counter-Party's activities in the market.

• ERCOT will send required notices to the CP’s authorized representative(s) or credit contact(s)


46

“e” Factors – Ad hoc Process

• If ERCOT makes a change in a CPs “e” factors outside of the bi-weekly reset process, ERCOT credit staff will notify CPs

– of the changes in “e” Factors– as soon as practicable; however, notice may be less than one day, depending on the

risk factors– by a minimum of two of these methods: written, electronic, or telephonic.

• In Market Trials, ERCOT will initially send notices only by e-mail– of the basis for ERCOT’s assessment, or change of assessment, of the exposure

adjustment variable established for the Counter-Party and the impact of the adjustment (written or electronic)

• ERCOT will send required notices to the CP’s authorized representative(s) or credit contact(s)


47

“e” Factors - ERCOT Monitoring


48

ERCOT Credit staff monitoring

From General Procedures (Note: this is for all CPs, not just those seeking more favorable parameters)

• ERCOT may adjust "e" factors calculated using the formulas up or down based on ERCOT's judgment, so long as the reason is documented, and the documentation is provided to the Counter Party.

• ERCOT must re-examine (don’t have to change, just examine) "e" factors immediately if:– Counter Party exceeds 90% of ACL available to DAM (actual exposure exceeds credit limit)

– Counter Party’s Three Part Supply Offers (TPOs) “significantly” decrease, DAM Energy Only Offers (EOOs) "significantly" increase or decrease and/or DAM Energy Bids increase or decrease “suddenly”.

– Although not specifically listed in the procedure, we will also monitor for• Increase in RT activity relative to DAM – to monitor for arbitrage• Difference between CP provided information and what actually happened• Others

From Favorable Parameters section• ERCOT, in its sole discretion, will determine the adequacy of the disclosures (ERCOT

must understand why it is going to change and determine whether or not any increased risk should be reflected in a change in

e factors) made in 1 above and may require additional information as needed in evaluating whether a Counter Party is eligible for favorable treatment.


49


• ERCOT may change the triggers for providing information (as described in 1 above) to ensure reasonable levels of information are obtained (increase if not enough info, decrease if too

much info).• ERCOT may, but is not required, to use information provided to re-evaluate "e"

factors and may take other information into consideration as needed. Under routine procedure, ERCOT may change any "e" factor with at least 2 Bank Business Day's notice (see also Protocol language re: time of day – 9:00 am. Also, will need to discuss method of notification). However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter Party do not adequately match the financial risk created by that Counter Party's activities in the market.

• If ERCOT determines that information provided to ERCOT is erroneous or that ERCOT has not been notified of required changes (we will monitor for differences from what was

provided), ERCOT may set all parameters for the Counter-Party to the default values with a possible adder on the "e1" variable, at ERCOT's sole discretion, for a period of not less than 7 days and until ERCOT is satisfied that the Counter-Party is complying with the rules for more favorable treatment. In no case shall the adder result in an e1 value greater than one.


50


“e” Factors may be tightened if (including elimination of favorable treatment and/or other tightening up an e1 = 1, e2 = 0, e3 = 1)

– A CP does not make required disclosures

– A CP’s disclosures do not adequately explain changes

– A significant increase in RT activity is observed

– Exposure exceeds ACL

– A significant increase in offers and/or bids is observed

– Other factors indicate that risk factors exist


51

Questions?


52

Supplement

Day Ahead Market (DAM) Collateral Parameters Process


53


As required by Nodal Protocol Section 4.4.10, Credit Requirements for DAM Bids and Offers

Recommended by the 4/8/10 TAC and approved by the 4/21/10 ERCOT Board

General Procedure• ERCOT will evaluate and may adjust each Counter Party's "e" factors at least once

every two weeks.• ERCOT may adjust "e" factors calculated using the formulas up or down based on

ERCOT's judgment, so long as the reason is documented, and the documentation is provided to the Counter Party.

• For purpose of clarity, “e” factors will be rounded to the hundredth decimal place.• ERCOT must re-examine "e" factors immediately if:• Counter Party exceeds 90% of ACL available to DAM • Counter Party’s Three Part Supply Offers (TPOs) “significantly” decrease, DAM

Energy Only Offers (EOOs) "significantly" increase or decrease and/or DAM Energy Bids increase or decrease “suddenly”.


54


For First 14 Days of DAM

e1 = 1, e2 = 0, e3 = 1, d = 95, a = 50, b = 20, y = 0, z = 0, u = 95, t = 95 (all percentiles based on corresponding Zonal prices over last 30 days of the Zonal Market)

For Next 46 Days of DAM

e1 = 95th percentile of Ratio0 over the last 30 days or since first DAM

where Ratio0 is a daily calculation as follows:

Ratio0 = Min[1, Max{0.2, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-EOO*PDAM)/

(∑ h=1,24 Qcleared-Bids*PDAM) * 1.2}]

except Ratio0 = 1 when ∑ h=1,24 Qcleared-Bids*PDAM = 0

e2 = 0, e3 = 1, d = 95, a = 50, b = 20, y = 25, z = 25, u = 95, t = 95 (all percentiles based on Nodal prices over last 30 days or since start of Nodal Market)


55


After 60 Days of DAM

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:




e2 = 0, e3 = 1, d = 85, a = 50, b = 45, y = 45, z = 50, u = 95, t = 50


56


Counter-Party may request ERCOT for more favorable parameters by agreeing to all the conditions below:

Notify ERCOT of expected changes due to change in activity, and the likely duration of such changes, to the following values as soon as practicable after being estimated by the Counter-Party and at least 2 Business Days in advance of when such changes become effective:

– If Ratio1 is likely to be greater than the Counter-Party's currently assigned value of e1for particular day(s), then the estimated daily values of Ratio1 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumptions used to arrive at those values; and

– If Ratio is likely to be lower than the Counter-Party's currently assigned value of e2 for particular day(s), then the estimated daily values of Ratio2 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumption used to arrive at those values


57


• ERCOT, in its sole discretion, will determine the adequacy of the disclosures made in 1 above and may require additional information as needed in evaluating whether a Counter Party is eligible for favorable treatment.

• ERCOT may change the triggers for providing information (as described in 1 above) to ensure reasonable levels of information are obtained.

• ERCOT may, but is not required, to use information provided to re-evaluate "e" factors and may take other information into consideration as needed. Under routine procedure, ERCOT may change any "e" factor with at least 2 Bank Business Day's notice. However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter Party do not adequately match the financial risk created by that Counter Party's activities in the market.

• If ERCOT determines that information provided to ERCOT is erroneous or that ERCOT has not been notified of required changes, ERCOT may set all parameters for the Counter-Party to the default values with a possible adder on the "e1" variable, at ERCOT's sole discretion, for a period of not less than 7 days and until ERCOT is satisfied that the Counter-Party is complying with the rules for more favorable treatment. In no case shall the adder result in an e1 value greater than one.


58


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





ERCOT may adjust the value of e1 by changing the quantity of bids or offers to the values reported by the Counter Party in Condition 1 above or based on information available to ERCOT.


59




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

ERCOT may adjust the value of e2 by changing the quantity of bids or offers to the values reported by the Counter Party in Condition 1 above or based on information available to ERCOT.

e3 = 1

d = 85, a = 50, b = 45, y = 45, z = 50, u = 95, t = 50


60


FOR NEW COUNTER-PARTY THAT STARTS AFTER NODAL GO-LIVE

For First 14 DAMs after the Counter-Party becomes Active

e1 = 1, e2 = 0, e3 = 1 (all percentiles are the same as those in effect for the entire market)

For Next 46 DAMs after the Counter-Party becomes Active

e1 = 95th percentile of Ratio0 over the last 30 days or since first DAM where Ratio0 is a daily calculation as follows:

Ratio0 = Min[1, Max{0.2, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-EOO*PDAM) / (∑ h=1,24

Qcleared-Bids*PDAM) * 1.2}]


e2 = 0, e3 = 1 (all percentiles are the same as those in effect for the entire market)

After 60 DAMs after the Counter-Party becomes Active

Same as "After 60 Days of DAM" above.


training nprr 206 and “e” factors august 10, 2010 nprr 206 and "e" factors

Documents

e factors nprr

dam nprr

factors administrationtiming

e factorsaugust

market dam energy

dam bids

e factor ratio

impact of nprr