ERCOT Submits NPRR To Base Credit Exposure Calculations on Futures Prices

ERCOT has submitted Nodal Protocol Revision Request (NPRR 800), Revisions to Credit Exposure Calculations to Use Electricity Futures Market Prices, which would use futures prices in certain credit exposure calculations

More specifically, NPRR 800 would revise the Real-Time Liability Extrapolated (RTLE) and Day-Ahead Liability Extrapolated (DALE) factors used in the Counter-Party Estimated Aggregate Liability (EAL) and Minimum Current Exposure (MCE) calculations to use electricity futures mark-to-market prices for estimating forward risk.

In a description included in the NPRR, ERCOT said, "Forward adjustment factors for Real-Time Market (RTM) exposure and Day-Ahead Market (DAM) exposure are calculated using a ratio of futures average price to historic average price of a reference hub. Limits can be set so that forward adjustment factors would fall in a specified range by using a set of parameters. The parameters could be updated through stakeholder review and approval process."

"Exchange-based electricity futures market prices are assumed to be a better indicator of forward risk than historic ERCOT market prices," ERCOT says in the NPRR. "Based on the past analysis in light of NPRR638, Revisions to Certain Price Components of EAL, it was observed that separation of volume and prices for forward exposure estimation could result in extreme exposure consequences as that approach may not be able to predict or consider Market Participants’ future hedging behavior under various price levels. This NPRR continues to consider the built-in relationship of volume to prices by considering Market Participants’ historic portfolio exposure as a whole and transforms anticipated forward exposure based on publicly traded electricity futures mark-to-market prices."

"Based on ERCOT’s analysis presented at the April 20, 2016 Credit Work Group (Credit WG) meeting, there is a market-wide reduction in collateral requirements of approximately $20 million to $70 million under certain assumptions and limitations," ERCOT said in the NPRR

Link to NPRR