Table of Contents for NPRR357/430: Frequently Asked Questions

Table of Contents for NPRR357/430: Frequently Asked Questions

V1.1 Updated 8/30/2012– added a mix of negatively priced OBL Sell Offers to better demonstrate OBL type buys and sells, table demonstrating aggregated MW and min/max correction, and clarified no 24-hour sell offer type.

When will NPRR357/430 be implemented and part of the CRR auction process?

Exactly how does NPRR357/430 benefit the CRR auctions and the Market Participants?

Will A and M still be part of the pre-screening calculations?

Are OBL sell's part of the potential estimated exposure calculations?

Are OPT sell's part of the potential estimated exposure calculations?

How do I calculate my potential credit exposure under NPRR357/430?

How is my counterparty's potential exposure calculated?

What are the pre-screening scenarios for creating budget records to the central engine between Account Holders and Counterpartys?

How does the pre-screening differ between the Monthly auctions and the Annual type auctions?

When is the pre-screening performed?

What is the credit lock period?

If my exposure is less than what I locked, will you send the new estimated exposure amount to CMM instead of the locked amount?

What's the difference between the way credit is used by the central engine now and after NPRR357/430 is implemented?

What does it mean that no credit is sent to the central engine for an Account Holder after the pre-screening?

Will we still have budget binding constraints?

How is the pre-screening performed for a Counterparty that has more than one Account Holder?

Can an Account Holder have a budget constraint but not his Counterparty?

Can a Counterparty have a budget constraint but not his Account Holders?

If my Counterparty did not lock credit, do my portfolios still get analyzed and pre-screened?

If my Counterparty locks less credit than the potential exposure of my submitted portfolios, what will get sent to the central engine?

What happens if I don't lock credit?

When will NPRR357/430 be implemented and part of the CRR auction process?

NPRR357/430 will be placed into service in mid-September 2012, commencing with the 2012.OCT.Monthly.Auction.

No action or changes in submissions to the CRR auctions are required by the Counter-Party and CRR Account Holders unless they desire reducing the amount of credit they currently post for the CRR Auctions. Below is an extensive explanation of the mechanics for these calculations to help demonstrate how to understand and calculate the potential reduction in credit exposure from submitted CRR portfolios.

Exactly how does NPRR357/430 benefit the CRR auctions and the Market Participants?

This NPRR was designed to correct deficiencies in the collateral requirements for the CRR auctions where too much collateral was required for locking credit. In the example where too much collateral was required would be where there are bids on an identical product where only the MW requested and/or bid price differed. Based on the clearing price for that product at the end of the optimization, some or all of the MW requested would have been awarded at one clearing price. The pre-screening takes that into consideration and ‘stacks’ the segmented bid curve in order to evaluate the proper credit requirement for the maximal exposure from the combination of potential awards. Please note that the central engine does not work with path-specific credit allocation; the pre-screening simply right sizes the total amount of credit to be used by the central engine for each Market Participant and each Counterparty based on the bid prices in the portfolios submitted to the auction.

Will A and M still be part of the pre-screening calculations?

Yes, they will. Currently A = .75 and M = 0, however, this may change as per the Board of Director's annual review once per year. The current value will be published in each Auction Notice.

Are OBL sell's part of the potential estimated exposure calculations?

Yes. OBL/Buy, OBL/Sell, and OPT/Buy are all part of the NPRR357/430 pre-screening process.

Are OPT sell's part of the potential estimated exposure calculations?

No. OPT/Sell's incur no risk, and hence, are not part of the NPRR357/430 pre-screening process

How do I calculate my potential credit exposure under NPRR357/430?

1. Group the CRR bids/offers submitted to the particular monthly auction or submitted to the particular TOU and annual auction by

• Bid type (PTP Obligation bids, PTP Obligation offers and PTP Option bids)
• Source/sink settlement point combination
• TOU

For monthly auctions: PeakWE, PeakWD, Off-peak, or 24-hour

 For annual auctions: PeakWE, PeakWD, Off-peak

• Period (month or multi-month)
• Ignore PTP Option Offers because they incur zero credit exposure.
• Sort the obligation bids in descending order of bid prices. Create a multiple segment bid curve in such a way that each segment has MW quantity and bid price as:

, where i = segment number, MWi ≥ MWi-1and Pricei≤ Pricei-1

Calculate credit exposure of each segment in the multiple segment bid curve by using the following equation:

, where i = segment number,

Hour = number of effective hours of bid (every bid in the group has the same number of effective hours),

A = $0.75/MWh and M = 0

1. Sort the option bids in descending order of bid prices. Create a multiple segment bid curve in such a way that each segment has MW quantity and bid price as:

, where i = segment number, MWi ≥ MWi-1and Pricei≤ Pricei-1

Calculate credit exposure of each segment in the multiple segment bid curve by using the following equation:

, where i = segment number,

Hour = number of effective hours of bid (every bid in the group has the same number of effective hours)

1. Sort the obligation offers in ascending order of bid prices. Create a multiple segment bid curve in such a way that each segment has MW quantity and bid price as:

, where i = segment number, MWi ≥ MWi-1and Pricei≥ Pricei-1

Calculate credit exposure of each segment in the multiple segment bid curve by using the following equation:

, where i = segment number,

Hour = number of effective hours of bid (every bid in the group has the same number of effective hours)

1. The maximum potential exposure of CRR bids/offers in the same group is the highest exposure among the segment exposures:

, where I is the total number of segments in the multiple segment bid curve built in steps iii, iv or v.

1. The total maximum potential exposure of an account holder is the sum of exposures from all groups (i.e. obligation bids, option bids and obligation offers).

Example: Given the following bids/offers in a portfolio

Total Bid Exposure Calculated by the Pre-screening logic

Note the “Aggregated MW” calculation column. For each segmented bid, there will be a ‘running total’ of MW (highlighted in green). In the example below, bids 102 and 104 are grouped together, sorted by descending order on bid price for the Buy bids (and ascending order on bid price for the Sell Offers), and then *each* segment’s MW is totaled together in order. Hence, segment 102 is 3 MW and segment 104 is 8 MW (3 + 5). The exposure calculation for the segment will be the following equations from above:

How is my counterparty's potential exposure calculated?

For the pre-screening logic, the first step is to group all of the Account Holders’ portfolio bids and offers into a single portfolio for the Counterparty. This is not saved anywhere or submitted to the auction; this is purely for pre-screening. Once that is performed, the pre-screening logic is the same as for each Account Holder. Note that the Counterparty’s exposure may or may not be the sum of its Account Holders’ exposures, depending on how the bids are aggregated across all of the Account Holders’ portfolios.

What are the pre-screening scenarios for creating budget records to the central engine between Account Holders and Counterpartys?

How does the pre-screening differ between the Monthly auctions and the Annual type auctions?

When a monthly auction is executed, all bids and offers for all TOUs (i.e. PeakWE, PeakWD, Off-peak and 24-hour) are included in the credit exposure calculation. When an annual auction for a TOU is executed, only bids and offers for the particular TOU are included in the credit exposure calculation and the total exposure amount is compared with the self-imposed credit limit for the particular TOU. Note that 24-hour TOU bids and offers are currently not allowed to be submitted to the annual auction.

When is the pre-screening performed?

The pre-screening for NPRR357/430 is performed as soon as the last bid window closes, prior to the data being sent to the central engine for the optimization.

What is the credit lock period?

There are no changes in the Credit Lock period.

If my exposure is less than what I locked, will you send the new estimated exposure amount to CMM instead of the locked amount?

No. What is locked for the auction is what is sent to Credit during the lock period (from 5:00pm on Lock date until 8:00am the day after the auction results have been posted).

What's the difference between the way credit is used by the central engine now and after NPRR357/430 is implemented?

None - the central engine will still see budget constraints and handle them exactly the same way they do now. The core logic of the NPRR357 implementation is in pre-processing what gets sent to the central engine with respect to budget constraints. In the current implementation, all Counterpartys and Account Holders who lock credit limit for an auction get a record sent to the central engine. In the new implementation, only Counterpartys and Account Holders whose potential exposure is greater than or equal to their locked credit will get a record sent to the central engine. This reduces the computation time to solve the auction. The biggest benefit, however, is that this allows a Counterparty to lock less credit for an auction, but still be potentially capable of receiving the same awards as today, depending on network capacity and other binding constraints.

What does it mean that no credit is sent to the central engine for an Account Holder after the pre-screening?

As per NPRR357/430, if the locked credit is greater than the calculated potential maximum credit exposure for the value of the Account Holder's portfolios, then no record will be created for the Account Holder for a potential binding credit constraint in the engine. The central engine will ignore the Account Holder's credit limit be a constraint in the solution for that Account Holder.

Will we still have budget binding constraints?

Yes. The central engine did not change how it optimizes the auction. What did change was the information regarding the Account Holders' and Counterpartys' credit limits. If a budget record is sent to the central engine, then the Account Holder and/or Counterparty will still be subject to a budget binding constraint.

How is the pre-screening performed for a Counterparty that has more than one Account Holder?

All of the portfolios submitted by the Account Holders of a Counterparty are combined into one portfolio for purposes of the pre-screening. From that point, the pre-screening logic remains the same. At the end of the calculation, the Counterparty will have its own potential credit exposure for the auction which may or may not be the sum of the separate Account Holders under that Counterparty.

Can an Account Holder have a budget constraint but not his Counterparty?

Yes, this will occur when an Account Holder has a position in the auction, and successfully submits a portfolio, but the Counterparty did not lock any credit. Even though only sell offers that result in a payment to the Account Holder will be awarded, a budget constraint record will still be created for that Account Holder.

Can a Counterparty have a budget constraint but not his Account Holders?

Yes, this may occur when the aggregated portfolio of all of the Counterparty’s Account Holders exceeds the credit locked by the Counterparty.

If my Counterparty did not lock credit, do my portfolios still get analyzed and pre-screened?

Yes, the pre-screening will still create a potential exposure amount for whatever portfolios are submitted to the auction. NPRR357/430 does not change how this is currently implemented. An Account Holder must be "Participating" in the auction - that is, either the Counterparty locked credit for the auction or the Account Holder owns a position in the auction. In the event that the Counterparty does not lock credit, the Account Holder can only sell existing positions in the auction that will result in a payment to the Account Holder. Therefore, the pre-screening will still be applied as per NPRR357/430.

If my Counterparty locks less credit than the potential exposure of my submitted portfolios, what will get sent to the central engine?

No changes with this NPRR and will be exactly as it is today - a budget constraint record will be sent to the central engine for the Counterparty in the amount of the locked credit, and no budget constraint record will be sent for the Account Holder(s). The central engine will apply the Counterparty's maximum credit limit to the awards and use the tie-breaking logic once the budget constraint is met for the final clearing of the awards auction wide.

What happens if I don't lock credit?

No changes with this NPRR. In order to successfully submit bids or offers in a CRR auction, an Account Holder must be "Participating". A Participating Account Holder has credit locked for the auction by the Counterparty, or owns a position in the auction, or both. In order to be awarded CRR's for bids, your Counterparty must have locked credit for the auction. In order to be awarded CRR's for offers that will result in a payment to you, you must be a Participating Account Holder in good standing (i.e., Creditworthy). NPRR357/430 will pre-screen all portfolios successfully submitted to the auction and assign the appropriate budget constraint for the Account Holder whether or not credit was locked for the auction.

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