- Credit Finance Sub-Group Update to the Technical Advisory Committee
- July 31, 2023, the Credit Finance Sub-Group provided an update to the Technical Advisory Committee with discussions on voting matters, operational NPRRs, revisions to credit qualification requirements for banks and insurance companies, and more. NPRR1205 introduced changes related to LC issuing banks' rating thresholds and requirements. Approved by PUC in July 2024, the revisions doubled the letter of credit limits by rating tranche, impacting several market participants. Market notices will be sent out, affecting up to seven market CPs.
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Credit Finance Sub Group Update to the Technical Advisory Committee Brenden Sager, Austin Energy, Chair Loretto Martin, NRG, Vice Chair 31 July 2023 1
General Update General Update July 24 CFSG meeting Voting matters Operational NPRR s without credit impacts Discussion items EAL Change Proposals from DC Energy and ERCOT NPRR1205, Revisions to Credit Qualification Requirements of Banks and Insurance Companies For awareness, brief mention of PCM proposal and next steps Regular credit exposure updates
NPRR1205, Revisions to Credit Qualification NPRR1205, Revisions to Credit Qualification Requirements of Banks and Insurance Companies Requirements of Banks and Insurance Companies NPRR1205 introduces the following changes as it relates to LC issuing banks: Establish minimum rating threshold of A-/A3 rating from all available rating agencies (instead of at least one) Use the lower of rule to different ratings within the same rating agency and amongst rating agencies Define the bank ratings as follows (if available): Long term issuer rating, long term senior unsecured or Long Term Counterparty Risk Assessment (for Moody s). Require US Branch/office to have an acceptable rating on its own by at least one of the rating agencies. Use US Branch rating as the issuing bank rating, if the ratings are available. 3
NPRR1205, Revisions to Credit Qualification NPRR1205, Revisions to Credit Qualification Requirements of Banks and Insurance Companies Requirements of Banks and Insurance Companies Approved by PUC in July 2024 Letter of Credit limits doubled by rating tranche There will be six banks as of November will not meet updated requirements ERCOT Credit will be sending out market notices in September Up to seven market CP s affected Question from Beverly Loew on whether changes were too stringent relative to standards of the derivatives industry Members noted these terms are market standard in negotiated ISDA s and other bilateral energy trading contracts 4
NPRR1205, Revisions to Credit Qualification NPRR1205, Revisions to Credit Qualification Requirements of Banks and Insurance Companies Requirements of Banks and Insurance Companies Issuer Limits based on Tangible Net Worth(US$) 750,000,000 $ 705,252,749 $ 750,000,000 $ 750,000,000 $ 501,278,861 $ 190,281,000 $ 308,924,582 $ 259,246,116 $ 750,000,000 $ 434,725,666 $ 16,468,770,969 $ 21,868,479,943 $ Unused Capacity based on Tangible Net Worth(US$) 116,767,993 $ 134,781,610 $ 276,471,435 $ 388,715,445 $ 273,369,462 $ 103,881,000 $ 171,484,581 $ 167,165,851 $ 483,999,998 $ 292,075,663 $ 14,234,142,968 $ 16,642,856,006 $ Total LC Amounts Per Issuer(US$) 633,232,007 $ $ $ $ $ $ $ $ $ $ 2,234,628,001 $ 5,225,623,937 $ Tangible Net Worth(US$) 126,186,026,400 $ 44,078,296,800 $ 132,055,000,000 $ 63,578,169,600 $ 31,329,928,800 $ 11,193,000,000 $ 22,066,041,600 $ 17,283,074,400 $ 69,399,812,666 $ 25,572,097,989 $ 1,451,289,985,763 $ 1,994,031,434,018 $ Over CL 84% 81% 63% 48% 45% 45% 44% 36% 35% 33% 14% 24% BNP Paribas (FI) Lloyds Bank Corporate Markets PLC (FI) Wells Fargo (FI) Societe Generale (FI) Credit Agricole Corporate & Investment Bank SA (FI) CoBank ACB (FI) Unicredit Bank AG (FI) Natixis (FI) Royal Bank of Canada (FI) DNB Bank ASA (FI) Others (29 banks) Totals 570,471,139 473,528,565 361,284,555 227,909,399 86,400,000 137,440,001 92,080,265 266,000,002 142,650,003 5
Estimate Aggregate Liability / Collateral reqt Current: EAL q = Max [IEL during the first 40-day period only beginning on the date that the Counter-Party commences activity in ERCOT markets, RFAF * Max {RTLE during the previous lrq days}, RTLF] + DFAF * DALE + Max [RTLCNS, Max {URTA during the previous lrq days}] + OUT q + ILE q Weighted ratio of forward North Hub prices over Settlement prices That is, higher forwards over lower settlements results in a FAF > 1.0 Simplified formula: RFAF x Max 40-day RT invoice history RT/DA invoices not netted and there are separate RFAF and DFAF RFAF more prominent in EAL calculation, applied to max value of Real Time daily history (lookback)
DC Energy Proposal on Estimate Aggregate Liability changes for ERCOT credit postings DC Energy is concerned that substantially larger double top spikes than have been shown in the backtests can be reasonably expected to occur The sequence of events driving such an outcome are an extreme volatility event (e.g., heat wave or cold snap) followed by a period of normalcy and then even just the forecast of a second extreme volatility event that drives futures (ICE) prices up in anticipation This could result in EAL requirements for the market that are many multiples above what has been modeled (and importantly, well above what is needed) We propose including a hypothetical stress test in ERCOT EAL backtests that include two winter storms over a short period Example: running the EAL calculations as if February 2021 (Uri) was followed by January 2024
Sample CP TPEA comparison S5a resolves the double top issue discussed in prior meetings. It provides more stable or less volatile measurement of exposures tracking actual invoice exposures more closely. RFAF in the existing framework is more volatile and is applied against MaxRTLE while S5a is applying FAF against NLE with a cap and a floor. Overall, S5a provides slightly higher coverage relative to the existing methodology. One of the main advantages of S5a is capturing DAM exposures and having a look back period (Scenarios #4 and #5 are further refinements of Scenario #1). 9
Negative and Positive Gaps: Market Market Compared to Current # of occurences -28% 13% 9% -7% 13% -57% -28% -31% Compared to Current Compared to Current Negative Gap Current S1 S1a S1b S2 S3 S4 S5 S5A Sum total Average (1,516,269) $ (1,359,900) $ (1,641,805) $ (1,580,436) $ (1,446,297) $ (1,644,850) $ (994,077) $ (1,324,672) $ (1,287,597) $ (22,013,195,356) $ (15,944,829,074) $ (24,912,749,573) $ (23,921,484,254) $ (20,417,378,660) $ (24,861,908,304) $ (9,465,597,738) $ (15,858,975,876) $ (15,229,695,664) $ 14,518 11,725 15,174 15,136 14,117 15,115 9,522 11,972 11,828 -19% 5% 4% -3% 4% -34% -18% -19% -10% 8% 4% -5% 8% -34% -13% -15% Compared to Current # of occurences 13% 3% 3% -1% -17% 59% 14% 20% Compared to Current Compared to Current Positive Gap Current S1 S1a S1b S2 S3 S4 S5 S5A Sum total Average 3,508,069 3,929,314 3,620,204 3,628,921 3,467,366 2,939,079 5,466,362 3,964,519 4,150,290 988,991,265,830 $ 1,118,942,758,180 $ 1,018,254,801,581 $ 1,020,996,871,586 $ 978,303,410,704 $ 825,434,361,645 $ 1,575,148,675,224 $ 1,128,627,087,621 $ 1,182,363,786,079 $ 281,919 284,768 281,270 281,350 282,146 280,848 288,153 284,682 284,887 $ $ $ $ $ $ $ $ $ 1% 0% 0% 0% 0% 2% 1% 1% 12% 3% 3% -1% -16% 56% 13% 18% S5a significantly decreases the negative gap events while increasing positive gaps. However, it is noted that the extent of the increase in positive gap $s and occurrences is not as much as in S4. 10
min max N 0.01 10.61 2254 2/7/2018 4/9/2024 FAF Data Summary FAF Data Summary FAF Distribution 2500 700 2000 600 500 1500 400 300 1000 200 500 100 0 0 0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25 8.75 9.25 9.75 10.25 10.5 10.75 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 12 FAF 2 2.5 3.25 5.25 obs > 117 45 11 4 N-tile 0.90 0.95 0.97 0.99 Wgt Avg > FAF level 4.215 5.425 5.819 8.119
PCM Next Steps PCM Next Steps Stakeholders provided feedback over the last 2 months, which concluded in a PUCT public workshop last Thursday (after CFSG). Now ERCOT is working with E3 to draft the white paper with the evaluation of the different potential design decisions, which should inform what PUCT Commissioners and Staff decide on in terms of the PCM design that will be utilized for the cost-benefit analysis that ERCOT and the IMM have until the end of the year to perform. From David Delgado at E3 Consultants 12
NPRRs Reviewed NPRR s Reviewed NPRR1221, Related to NOGRR262, Provisions for Operator-Controlled Manual Load Shed. NPRR1231, FFSS Program Communication Improvements and Additional Clarifications. NPRR1233, Modification of Weatherization Inspection Fees on the ERCOT Fee Schedule. NPRR1236, RTC+B Modifications to RUC Capacity Short Calculations. NPRR1219, Methodology Revisions and New Definitions for the Report on Capacity, Demand and Reserves in the ERCOT Region (CDR). NPRR1217, Remove VDI Requirement for Deployment and Recall of Load Resources and ERS Resources. NPRR1224, ECRS Manual Deployment Triggers. NPRR1227, Related to RMGRR181, Alignment of Defined Term Usage and Resolution of Inconsistencies.
Monthly Highlights May 2024 - June 2024 Market-wide average Total Potential Exposure (TPE) increased from $1.82 billion in May 2024 to $2.18 billion in June 2024. TPE increased due to higher forward adjustment factors Discretionary Collateral is defined as Secured Collateral in excess of TPE,CRR Locked ACL and DAM Exposure Average Discretionary Collateral increased from $3.88 billion in May 2024 to $4.23 billion in June 2024 No unusual collateral call activity
Available Credit by Type Compared to Total Available Credit by Type Compared to Total Potential Exposure (TPE) YTD June 2024 Potential Exposure (TPE) YTD June 2024
