Annual Review of Day Ahead Market Credit Requirements and Parameters

1. 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 Meeting

2. 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 • Supplement – background materials CWG/MCWG Meeting

3. Summary of Parameters CWG/MCWG Meeting

4. Current Values for DAM Credit Parameters and e-factors CWG/MCWG Meeting

5. Summary of e – factor settings CWG/MCWG Meeting

6. Summary of e – factor settings CWG/MCWG Meeting

7. Supplement CWG/MCWG Meeting

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 CWG/MCWG Meeting

9. Potential Impact on Bids – Examples CWG/MCWG Meeting

10. Potential Impact on EOOs – Examples CWG/MCWG Meeting

11. 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 Meeting

12. 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 Meeting