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					MCWG - Options to Reduce
 Collateral Requirements

  Joint SEWG / MCWG Meeting
         January 31, 2011
       Summary of 1/26 Discussion (1 of 3)
1. Invoicing all available settlement statements on a single daily
   invoice
Considerations:
•   Issue one Invoice per sub-QSE or per Counter-Party per business day
•   Credit factors:
      – Increase the frequency for which RT invoices impact OUT
          • Reduce payment cycle
          • Enable Market Participants to reduce posting requirements via issuing early PMTs
     – Reduce # of unbilled statements referenced within AIL
     – Potentially reduce time gap between ADTE and DALE values
     – Review # days referenced in ADTE while taking forward exposure into
       consideration
     – Consider reductions in unsecured risk limits to reduce default risk
         Summary of 1/26 Discussion (2 of 3)
2. Change RT settlement to x days after Operating Day


Considerations:
•   Reduces settlement timeline
•   Credit factors:
     – Increase the frequency for which RT invoices impact OUT
          • Reduce payment cycle
          • Enable Market Participants to reduce posting requirements via issuing early PMTs
     –   Reduce # of unbilled statements referenced within AIL
     –   Potentially reduce time gap between ADTE and DALE values
     –   Could skew credit requirements for any MP not settled on actual data
     –   Consider adding another settlement to mitigate the impact of the reduced
         timeline – i.e. settlements on OD+7, OD+14, OD+59 and OD+180.
      Summary of 1/26 Discussion (3 of 3)
3. Invoice based on Operating day (i.e. net Day-Ahead and Real
   Time Invoice)
Considerations:
• Credit factors
    – DAM Credit Simplifications: (1) Possibly reduce/eliminate the need for “E-Factors”, bid value
       posting requirements, and offset calculations (2) Revise “UDAA” to capture RT to DA time risk
    – ADTE and DALE timing gap reduced
• Decrease Real Time settlement cycle
    – Ex. Issue RT invoice on day 7 or 8 rather than day 10
    – Further clarification required from ERCOT to resolve concerns around the
      quality of settlement data
• Increase Day-Ahead settlement cycle
    – Ex. Issue DA Invoice on day 7 or 8
    – Could skew credit requirements for any MP not settled on actual data
    – Consider adding another settlement to mitigate the impact of the reduced
      timeline – i.e. settlement binding &/or credit binding on OD+7, OD+14, OD+59
      and OD+180.
                      Appendix

• MCWG/CWG Presentations from 1/26/2011
  – Page 5 to 9
     • “Reduction in Settlement Timeline and/or Payment
       Cycle”, presented by Loretto Martin
  – Page 10 to 20
     • “Forward Risk” , presented by Cheryl Yager
Reduction in Settlement Timeline
     and/or Payment Cycle
      Joint MCWG / CWG Meeting
            January 26, 2011
                    FERC Order 741

• “Each organized wholesale electric market must have tariff
  provisions that … (b) adopt a billing period of no more that
  seven days and allow for a settlement period of no more than
  seven days.”
           Day-Ahead and Real-Time Market Settlement Timeline

DAY-AHEAD MARKET

     OPERATING       OPERATING                         OPERATING                                 OPERATING              OPERATING            OPERATING
                                                                                                  DAY +4
       DAY -1           DAY                             DAY +2*                                                          DAY +5**             DAY +6**
                                                                                                       Or
                                                                                                                        17:00 on third        17:00 on next
      DAY-AHEAD
                                                                                                 48 hours after       Bank Business Day    Bank Business Day
     MARKET BEGINS                                                                              posting of DAM                             after Payment Due
                                                                                                                      after DAM Invoice
        10:00                                                                                     Statement                  Date                 Date



                                                   DAM STATEMENT                               DAM EXTRACTS           PAYMENT DUE           PAYMENT DUE
                                                    AND INVOICE                                  NP 11.5                TO ERCOT               TO MPs
REAL-TIME MARKET                                     NP 9.2.4, 9.3                                                       NP 9.4.1             NP 9.4.2

       OPERATING          OPERATING           OPERATING                      OPERATING             OPERATING                                  OPERATING             OPERATING
                                               DAY +12                                              DAY +61                                                          DAY +182
          DAY              DAY +10*                                           DAY +59*                                                        DAY +180*
                                                    Or                                                      Or                                                           Or

                                              48 hours after                                       48 hours after                                                   48 hours after
                                             posting of Initial                                    posting of Final                                               posting of True-Up
                                               Statement                                             Statement                                                        Statement




                          RTM INITIAL        RTM INITIAL                     RTM FINAL              RTM FINAL                                RTM TRUE-UP            RTM TRUE-UP
                          STATEMENT           EXTRACTS                      STATEMENT               EXTRACTS                                  STATEMENT               EXTRACTS
                            NP 9.5.4           NP 11.5                        NP 9.5.5               NP 11.5                                    NP 9.5.8               NP 11.5

                                                                     PAYMENT DUE           PAYMENT DUE                            *Must be a Business Day or move to next Business Day.
                             RTM INVOICES Issued                      TO ERCOT**             TO MPs**                 **Must be a Bank Business Day or move to next Bank Business Day.
                                 Every Thursday*                        NP 9.7.1              NP 9.7.2
                                      NP 9.6                         17:00 on fifth Bank   17:00 on next Bank
                                                                     Business Day after    Business Day after
                                                                      RTM Invoice Date     Payment Due Date
                           Discussion

• What options do we want to consider?
   – Combine all available RT and DA settlement statements on a single
     daily invoice to MPs?
   – Change Initial Settlement to x days after operating day?
   – Will additional resettlements be necessary?
   – Reconsider later in year?
   – Other suggestions?
            Discussion Continued

Order to accomplish?
Forward risk
Cheryl Yager




               January 26, 2011
  Impact of reducing settlement, invoicing
          and/or payment cycles
• Goal: Reducing settlement, invoicing and/or payment cycles (to reduce
  outstanding invoices and improve netting).

• Expected impact on Historical Risk
    – Improved netting should reduce risk by reducing the amount of outstanding
      liability (invoices and estimated historical activity)
    – It will correspondingly reduce collateral held (when collateral is required)
    – Conclusion – for historical risk, improved netting can be expected to
        1.   For defaulting entities with unsecured credit - Reduce losses
        2.   For defaulting entities with posted collateral – Improve capital efficiency; have minimal
             impact on losses since it reduces both risk and collateral held



    Note: Losses to date have been for entities with posted collateral



                                                                                              January 26, 2011
  Impact of reducing settlement, invoicing
          and/or payment cycles
• Possible impact on Forward Risk
    – Critical forward risk factors resulting from our physical, energy only market
      may not be mitigated by improved netting
         • Volume taken from the real time market at time of default
         • Price volatility
         • Entities that historically net activity, may be unwilling or unable to net at the time of default
    – ERCOT currently collateralizes for forward risk based on recent invoices
         • If invoice amounts are reduced, less collateral will be held for forward risk
    – Concern – tightening cycle times may actually increase net losses in situations
      where collateral is reduced with no net reduction in forward risk




                                                                                                January 26, 2011
                                                       Example
Simplified example of impact of tightening settlement,
billing and payment cycles


                                                               Current



Calculated TPE                       Avg Inv Amts # of days
  Outstanding Invoices                    100,000                100,000
  Highest ADTE extrapolation                80,000      40     3,200,000
  DALE extrapolation                       (60,000)     16      (960,000)
        Calculated exposure using
     invoice values (for collateral)                           2,340,000


                          Price      Volume        # of days
Historical Risk
  Outstanding invoices                                           100,000
  Unbilled RT and DAM (est)                                      370,000
Forward risk
 Volume escalation      $     50          10,000          9    4,500,000
    Total risk                                                 4,970,000

Potential net loss                                             (2,630,000)




                                                                             January 26, 2011
                                                                    Example
Simplified example of impact of tightening settlement,
billing and payment cycles
                                                                                             With
                                                                                          tightened
                                                               Current                      cycles         Net

                                                                             Improved
Calculated TPE                       Avg Inv Amts # of days                   netting
  Outstanding Invoices                    100,000                100,000                      50,000
  Highest ADTE extrapolation                80,000      40     3,200,000       (70,000)      400,000
  DALE extrapolation                       (60,000)     16      (960,000)       70,000       160,000
        Calculated exposure using
     invoice values (for collateral)                           2,340,000                     610,000     1,730,000 Reduced collateral


                          Price      Volume        # of days
Historical Risk
  Outstanding invoices                                           100,000                      30,000       70,000 Reduced historical risk
  Unbilled RT and DAM (est)                                      370,000                      55,000      315,000 Reduced historical risk
Forward risk
 Volume escalation      $     50          10,000          9    4,500,000                    4,500,000         -   No change to forward risk
    Total risk                                                 4,970,000                    4,585,000     385,000

Potential net loss                                             (2,630,000)                 (3,975,000)   1,345,000 Potential increase in loss




                                                                                                                             January 26, 2011
                                Summary
• As we move forward with tightening settlement, invoicing and/or payment
  cycles, we will want to
    – define how much forward risk to collateralized
    – ensure that we maintain adequate collateral for forward risk.




                                                                      January 26, 2011
Appendix



           January 26, 2011
          Benchmark Report - background
• Section 16 - total potential exposure (TPE) covers both historical risk and
  forward risk
    – Historical exposure may be invoiced or estimated
    – Forward risk is, in large part, estimated based on historical activity in CMM
         • Underlying assumption - history is a reasonable predictor of the future (e.g. if an entity has
           been in the ERCOT market at 20% of its load, it is appropriate to assume they will be in the
           ERCOT market at 20% of load in the future)
         • Key drivers of forward risk include volume escalation and price volatility


• However, situations may arise when historical trends may not be the best
  predictor of forward risk
    – Market wide - dramatic price changes – forward prices may be higher (or
      lower) than those used to calculate collateral in the TPE
    – Entity specific - when an entity is at the point of default, volume from the
      ERCOT market may increase substantially from historical trends
         • The physical nature of the electric market has a significant impact on forward risk (e.g. mass
           transition risk for Counter-Parties that represent load, DAM activity may impact real time
           market, etc)
                                                                                               January 26, 2011
          Benchmark Report - background
• Ensuring the adequacy of collateral held for forward risk is a key goal that
  the CWG / MCWG took on for 2011

• The Benchmark Report provides context for how much forward risk is
  provided for in the TPE calculation at a point in time




                                                                     January 26, 2011
         Benchmark Report as of December 31,
                       2010
                                                                                               %        %
                                         # of Ave Gen           Ave Load             %        Gen      Load                            Low       High
                                         CPs    Vol               Vol                CPs      Vol       Vol           CP TPE        Benchmark Benchmark
                                                   (in MWh)        (in MWh)                                            (in 000's)       (in 000's)       (in 000's)
Above High
w/ No Load and No Generation               12             0               0                                         $ 27,709        $       3,975    $       5,184
w/ Load and/or Generation                  29       153,075          47,447                                           78,909               20,669           41,201
   Subtotal                                41       153,075          47,447           21%      20%        6%         106,617               24,644           46,384

Below Low
w/ No Load and No Generation                 3            0               0                                                (743)                 2               6
w/ Load and/or Generation                    5       42,895          91,314                                               2,766              5,923          52,845
   Subtotal                                  8       42,895          91,314             4%       6%      12%              2,024              5,924          52,851

Between High and Low
w/ No Load and No Generation               82             0               0                                            10,663               4,412          14,876
w/ Load and/or Generation                  66       575,800         637,956                                           212,129              85,027         350,847
   Subtotal                               148       575,800         637,956           75%      75%       82%        $ 222,793       $      89,438    $    365,724

Total                                     197       771,769         776,717          100% 100%          100%        $ 331,434       $    120,007     $    464,959


Notes:
1) 75% of Generation volume and 82% of Load volume have TPEs that fall between the Low and the High Benchmark.
2) There are 41 CPs that have TPEs that are above the High Benchmark - primarily entities that have no load or generation or have primarily generation. We will
review the reasons for this and provide input to CWG/MCWG as they review exposure calculations.
3) There are some entities (generally those that have minimal net activity in the ERCOT market), where the calculated TPE is less than the Low Benchmark. ERCOT
will review the reasons for this and provide input to CWG/MCWG as they review exposure calculations.


                                                                                                                                                January 26, 2011
                                 Benchmark Assumptions
                                                                                         Forward Risk Estimate
                                                                            Volume Component                           Price Component
                                                                                                                                          Price
                                                                                                                                        volatility
                                 Historical Risk                      Basis              # of days   Factor            Basis             factor
Low Benchmark

Counter-Parties - Load   Outstanding receivable/payable      30-day average total                             Avg real time price -
only                     - invoiced and estimated            load volume                    2         1.0     floor - $25, cap - $100      1.0

Counter-Parties -        Outstanding receivable/payable      30-day average total                             Avg real time price -
Generation only          - invoiced and estimated            generation volume              2         0.2     floor - $25, cap - $100      1.0
Counter-Parties -                                            30-day average
neither Load or          Outstanding receivable/payable      imbalance volume (real                           Avg real time price -
Generation               - invoiced and estimated            time activity)                 2         1.0     floor - $25, cap - $100      1.0

High Benchmark
                                                             Highest total load
Counter-Parties - Load   Outstanding receivable/payable      volume over past 30-                             Avg real time price -
only                     - invoiced and estimated            days                           9         1.0     floor - $25, cap - $100      1.5
                                                             Highest total
Counter-Parties -        Outstanding receivable/payable      generation volume                                Avg real time price -
Generation only          - invoiced and estimated            over past 30-days              9         0.2     floor - $25, cap - $100      1.5

Counter-Parties -                                            Highest imbalance
neither Load or          Outstanding receivable/payable      volume over past 30-                             Avg real time price -
Generation               - invoiced and estimated            days (real time activity)      6         1.0     floor - $25, cap - $100      1.5



Note: If an entity has both load and generation volume, the greater of the two estimates is used in the Benchmark
                                                                                                                                  January 26, 2011

				
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