DAM Collateral Requirements – Problems & Possible Solution

1. DAM Collateral Requirements – Problems & Possible Solution Shams Siddiqi, Ph.D. Crescent Power, Inc. shams@crescentpower.net Tel. (512) 263-0653 January 20, 2010

2. Problems with NPRR as Drafted • Provides credit (instead of requiring credit) for DAM Energy Only Offers – even in the absence of any DAM Energy Bid • Speculator who submits DAM EOO to “arbitrage” between DAM and RTM prices (thus exposing others to this price difference times offer quantity in case of default) is not only not required to post collateral but is actually given credit (for what?) • Significantly reduces collateral req. for DAM Energy Bids – even in the absence of any offsetting DAM Energy Offer • Speculator or unhedged load buying from DAM as price taker (say at $10,000/MWh – no cap in DAM) would no longer be required to post collateral for ability to pay if awarded as bid • Requires no collateral for congestion cost exposure for DAM Energy Bids and DAM Energy Offers at difference locations Crescent Power, Inc.

3. Example of DAM Clearing • DAM Energy Bids: • QSE1:1,000MW@$90/MWh QSE2:30,000MW@$5,000/MWh • QSE3:2,000MW@$10,000/MWh • DAM Energy Offers: • QSE2:30,000MW@$80/MWh and 1,000MW@$200/MWh • QSE4:500MW@$3,000/MWh • Then, DAM Clearing Price=$5,000/MWh and QSE3 would be at risk of defaulting • This situation can happen whenever there’s less excess supply offers from long participants or less virtual offers • Even though the hedged market (QSE2) is protected from this price spike, the price taking bid of QSE2 contributed to the price spike Crescent Power, Inc.

4. ERCOT DAM – What’s different? • ERCOT DAM has no mitigation(except for SU & ME caps), no mandatory offer req., no need to specify “virtual” or not – it was argued that price-sensitive DAM Energy Bids would self-mitigate the DAM • Other DAMs treat DAM as if physical – local market power mitigation, “emergency” procedures to bring in resources into the DAM that did not offer • ERCOT DAM has a unique inexpensive (credit-wise) tool to hedge congestion risk – the PTP Obligation that can be purchased in the DAM Crescent Power, Inc.

5. Possible Solution • Allow for credit for DAM Energy Offers that have corresponding DAM Energy Bids at the same location • Allow for reduced collateral for DAM Energy Bids that have corresponding DAM Energy Offers at the same location • Eliminate collateral req. for Three Part Supply Offers – risk is that supply will not show up or experience forced outage • This solution allows entities with weak credit to fully take advantage of DAM while not exposing the market to too much additional risk Crescent Power, Inc.

6. Solution helps QSEs w/weak credit • To minimize collateral req., QSEs can buy and sell at their supply location and use DAM PTP Obligations to hedge their congestion risk • E.g. if QSE bought supply at a Hub/Node and has load, QSE can buy and sell at the Hub/Node and buy PTP Obligations in DAM from Hub/Node to LZ to hedge their congestion risk • If QSE owns CRRs from Hub/Node to LZ, QSE has no additional cost for acquiring the corresponding DAM PTP Obligations • The collateral req. for DAM PTP Obligations is small – bid quantity times bid price plus the 95th percentile of RTM SPP at source minus RTM SPP at sink (regardless of bid price for the PTP Obligation) • This is equivalent to selling at supply location and buying at LZ that would require greater collateral • Both approaches accomplish what QSEs are wanting to do Crescent Power, Inc.