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Transmission Congestion Rights – Credit Perspective

Transmission Congestion Rights – Credit Perspective. April 17, 2014. Presentation Goals. Provide a detailed flow of how credit requirements are impacted by the TCR Market Come away with an understanding of how Credit will be evaluated and assessed during the TCR Auction and TCR Award Periods.

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Transmission Congestion Rights – Credit Perspective

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  1. Transmission Congestion Rights – Credit Perspective April 17, 2014

  2. Presentation Goals • Provide a detailed flow of how credit requirements are impacted by the TCR Market • Come away with an understanding of how Credit will be evaluated and assessed during the TCR Auction and TCR Award Periods

  3. Common Acronyms • MCC – Marginal Congestion Component • MP –Market Participant • OD – Operating Day • RT – Real Time • AO – Asset Owner • ACP – Auction Clearing Price • ARR – Auction Revenue Right • CH – Credit Holder • CMS – Credit Management System • DA – Day Ahead • ENS – Estimated Not Settled (Represented as ETCRE in Tariff) • ETCRE – Estimated TCR Exposure • TCR – Transmission Congestion Rights

  4. Transmission Congestion Rights A TCR serves as a financial hedge against congestion costs

  5. Transmission Congestion Rights TCR positions can be submitted in TCR Auctions by: • Bid to buy TCR • Offer to sell existing TCR • Self-convert ARRs • Bids, Offers, and ARRs make up a TCR Portfolio during an auction period

  6. Sign Conventions • A negative TCR Hold means SPP estimates that the potential value of the TCR will result in a liability to the Credit Customer • A positive TCR Hold means SPP estimates that the potential value of the TCR will result in a asset to the Credit Customer • A positive invoice total will result in a payment by the Credit Customer • A negative invoice total will result in a payment to the Credit Customer

  7. TCR Reference Prices TCR Reference Prices are a two-tiered statistical estimate : • TCR Mean Price: Weighted average of what a given TCR might have been worth in an historical reference period • TCR Stress Test Price: Weighted percentile value based on adverse market price congestion differentials in a historical reference period

  8. TCR Reference Prices TCR Reference Prices are used in: • Assessment of TCR Bids and Offers in the various TCR Auctions • TCR valuation during the TCR Hold period • Determining credit requirements for Secondary Market Transactions A Final Reference Price will be calculated for each source/sink combination for each TCR Product and posted publicly for MP reference

  9. TCR Netting During TCR Auction period: • Exposure for each TCR is evaluated individually • There is NO netting between positively and negatively valued Bids and Offers. • Netting will take place between ARR’s During TCR Award period: • SPP DOES permit netting of positively and negatively valued TCRs Per FERC Order 741: TCR positions are not netted with other trading groups (Virtuals, DA/RT, etc.)

  10. ARR Netting During TCR Auction period: • ARRs will net on a weighted basis. 90% value for positive (positive Reference Prices) ARR’s bid into the Auction. 100% value for negative (negative Reference Prices) ARR’s bid into the Auction. • Example: Portfolio of 2 ARR’s bid into the Auction.

  11. TCR Lifecycle TCR Bid ENS, TCR Offer ENS TCR ARR ENS, and TCR Batch ENS TCR Forecast Award (Acquisition; Disposal and Hold) TCR Award Exposure Roll Off TCR Invoiced

  12. TCR Pre-Conditions • CH ABC Energy has $100,000 in secured credit • Their AO, ABC Energy 1, is participating in the TCR Auction and has been awarded a TCR in a previous auction

  13. Section 1 TCR Auction

  14. TCR – Auction Period • The CMS receives a Batch of TCR Bids/Offers/ARRs from the TCR system • CMS then determines that all Bids and ARRs contained in the Batch have available TCR Product Final Reference Prices and all Offers have either a TCR Hourly Final Reference Price or a TCR Product Final Reference Price

  15. TCR – Auction Period • TCR Reference Price calculations: • We will look at two examples of TCR Hourly Final Reference Price calculations TCR Product Final Reference Price TCR Hourly Final Reference Price TCR Hours Max (0, TCR Stress Test Price) TCR Hourly Final Reference Price Mean Price

  16. TCR – Auction Period Example #1 TCR Hourly Final Reference Price – Normal Flow • Mean Price Calculation: Mean Price Sink MCC Source MCC 75% MeanY-1 Source MCC Sink MCC 25% MeanY-2 • Calculation of Mean Price • 75% * ($6.00 - $2.00) + 25% * ($7.00 - $4.00) • 75% * $4.00 + 25% * $3.00 • $3.00 + $.75 = $3.75 Mean Price

  17. TCR – Auction Period Example #1 TCR Hourly Final Reference Price – Normal Flow • Stress Test Price calculation: 75thPercentileY-1 Stress Test Price Sink MCC Source MCC 75% 75thPercentileY-2 Source MCC Sink MCC 25% MeanY-2 Since the Mean Price is positive, the Stress Test price is stressed at the 75th percentile • Calculation of Stress Test Price • 75% * ($3.00 - $1.00) + 25% * ($4.00 - $2.00) • 75% * $2.00 + 25% * $2.00 • $1.50 + $.50 = $2.00

  18. TCR – Auction Period • Then we calculate the TCR Hourly Final Reference price using the Mean and Stress Test price TCR Hourly Final Reference Price $1.75 Stress Test Price $2.00 Mean Price $3.75 TCR Product Final Reference Price $1,386 TCR Hourly Final Reference Price $1.75 TCR Hours 792

  19. TCR – Auction Period Example #2 TCR Hourly Final Reference Price – Counter Flow • Mean Price Calculation: Mean Price Sink MCC Source MCC 75% MeanY-1 Source MCC Sink MCC 25% MeanY-2 • Calculation of Mean Price • 75% * ($4.00 - $8.00) + 25% * ($2.00 - $4.00) • 75% * $-4.00 + 25% * $-2.00 • $-3.00 + $-.50 = $ (3.50) Mean Price

  20. TCR – Auction Period Example #2 TCR Hourly Final Reference Price – Counter Flow • Next we calculate the Stress Test Price: 90thPercentileY-1 Stress Test Price Sink MCC Source MCC 75% 90thPercentileY-2 Source MCC Sink MCC 25% MeanY-2 Since the Mean Price is negative, the Stress Test price is stressed at the 90th percentile • Calculation of Stress Test Price • 75% * ($2.00 - $1.00) + 25% * ($3.00 - $2.00) • 75% * $1.00 + 25% * $1.00 • $.75 + $.25 = $1.00

  21. TCR – Auction Period • Then we calculate the TCR Hourly Final Reference price using the Mean and Stress Test price TCR Hourly Final Reference Price $ (4.50) Mean Price $-3.50 Stress Test Price $1.00 TCR Product Final Reference Price $ (3,024) TCR Hourly Final Reference Price $ (4.50) TCR Hours 672

  22. TCR – Auction Period • TCR Bids and Offers impact on Credit • TCR Bids: • CMS evaluates whether you have enough credit to buy the TCR and Hold it • A TCR Bid curve is defined by at least two and up to eleven TCR Point Numbers and CMS creates one or more segments based on the TCR Point Numbers • TCR Offers: • CMS evaluates whether you have enough credit to sell the TCR (in the event of a loss on the sale) and remove the Hold from the Portfolio (if it is an asset) • A TCR Offer curve is defined by at least two and up to eleven TCR point Numbers and CMS creates one or more segments based on the TCR Point numbers

  23. TCR – Auction Period • Next CMS will determine the Liability Maximizing quantity for each Bid Segment • ABC Energy 1 submits a Bid for a 2015 Spring, On-Peak TCR consisting of 4 segments (Bid ID 1)

  24. TCR – Auction Period • Next CMS will determine the Liability Maximizing quantity for each Offer Segment • ABC Energy 1 submits an Offer of a 2015 Spring, On-Peak TCR consisting of 4 segments. (Bid ID 2)

  25. TCR – Auction Period • Lets look at how Segment Offer Loss is calculated • First, we must calculate the Slope of the Offer Curve for Segment 2 (TCR Offer PriceSegment2 – TCR Offer PriceSegment2-1) $ (9) – $ (10) Slope 0.5 (TCR Offer MWSegment2 – TCR Offer MWSegment2-1) 7 - 5

  26. TCR – Auction Period • Then we must calculate the Intercept for Segment 2 • We use these to determine the TCR Offer Maximum Loss MW Intercept (12.50) Slope * TCR Offer MWSegment2 0.5 * 7 = 3.5 Offer PriceSegment2 $ (9) Intercept (12.50) 2* Slope 2* 0.5 TCR Offer Loss MW (12.50)

  27. TCR – Auction • TCR Offer Maximum Loss MW IF < THEN TCR Offer Loss MW (12.50) TCR Offer MWSegment2-1 5 TCR Offer Loss MW 5 TCR Offer MWSegment2-1 5

  28. TCR – Auction Period • Then we must calculate the TCR Maximum Offer Cost Offer Price for Segment 2 • Then we use these to calculate the Segment Offer Loss for Segment 2 TCR Maximum Offer Price $ (10) Intercept (12.50) TCR Offer Loss MW 5 Slope 0.50 Segment Offer Loss $ (50) TCR Offer Loss MW * TCR maximum Offer Price 5 * $ (10) Min of 0,

  29. TCR – Auction Period • Next, lets assume ABC Energy submits two ARR’s into the Auction. One positive (Asset) and one negative (Liability)

  30. TCR – Auction Period • Once TCR Bid, Offer and ARR ENS is calculated, CMS then determines the TCR Auction ENS for the Batch TCR Auction ENS $ (75,722) TCR Bid ENS $ (75,650) TCR Offer ENS $ (72) TCR ARR ENS $0 TCR Batch ENS ∑ TCR Auction ENS

  31. TCR – Auction Period • ABC Energy has Secured Credit Limit Available (CLA) of $100,000 TCR Batch ENS $75,722 Secured CLA $24,278 Secured CLA $ 100,000

  32. Section 2 TCR Award

  33. TCR – Award Period • CMS received the Auction Transaction payload from the TCR System • CMS then determines the TCR Start Date, End Date and Time of Use (TOU) for each TCR in the payload • CMS uses these dates to calculate the following: • TCR Hours • TCR Days • Count of Calendar Days from the Start Date to the End Date without consideration of the TOU. For example, a Spring On-Peak TCR would have a Start Date of 4/1/2015 and an End Date of 5/31/2015. The count of calendar days is 61

  34. TCR – Award Period • CMS will then calculate the Acquisition or Disposal Price for each TCR TCR Award Type = BUY Acquisition Price TCR Award Type = SELL Disposal Price

  35. TCR – Award Period TCR Acquisition ENS MIN 0, -1 (Sink ACP – Source ACP) TCR Days Remaining Ratio TCR Award MW TCR Disposal ENS 0, (Sink ACP – Source ACP) MIN TCR Days Remaining Ratio TCR Sale MW

  36. TCR – Award Period • So based on the Auction bid curve for ABC Energy, lets assume they are awarded the following:

  37. TCR – Award Period Bid ID 1 • Based on the Awarded numbers, CMS will now calculate ABC Energy’s Acquisition and Disposal ENSfor each Bid ID TCR Acquisition ENS $ (150.00) (Sink ACP – Source ACP) $10.00 MIN 0, -1 TCR Awarded MW 15 TCR Days Remaining Ratio 1

  38. TCR – Award Period Bid ID 2 • Based on the Awarded numbers, CMS will now calculate ABC Energy’s Acquisition and Disposal ENSfor each Bid ID TCR Disposal ENS $ (96.00) (Sink ACP – Source ACP) $ (12.00) MIN 0, TCR Sale MW 8 TCR Days Remaining Ratio 1

  39. TCR – Award Period • Now we know the Acquisition and Disposal ENS for all three Bid IDs

  40. TCR – Award Period • The next step in the Award process is CMS will calculate the TCR Hold ENS to determine how much collateral will be needed to “Hold” the TCR for the life of the product TCR Product Final Reference Price TCR Hold ENS Months Remaining Ratio TCR Current MW

  41. TCR – Award Period • The Monthly Remaining Ratio is calculated because TCR Hold is rolled off on a monthly basis at the conclusion of a full month. For example, since the product we have used in this presentation is the Spring 2015, we know that it will consist of 2 months (April and May). Therefore our Monthly Remaining Ratio will be 1 at the time of the Award

  42. TCR – Award Period Bid ID 1 • Now that we understand the TCR Hold ENS calculation, we can look at how much it will cost to Hold each of the three TCRs in our example Months Remaining Ratio 1 TCR Product Final Reference Price $ (3,024) TCR Hold ENS $ (45,360) TCR Current MW 15

  43. TCR – Award Period Bid ID 2 • Now that we understand the TCR Hold ENS calculation, we can look at how much it will cost to Hold each of the three TCRs in our example TCR Product Final Reference Price -1 * $ (3,024) Months Remaining Ratio 1 TCR Hold ENS $ 24,192 TCR Current MW 8

  44. TCR – Award Period Bid ID 3 • Now that we understand the TCR Hold ENS calculation, we can look at how much it will cost to Hold each of the three TCRs in our example TCR Product Final Reference Price $ 1,386 Months Remaining Ratio 1 TCR Hold ENS $ 13,860 TCR Current MW 10

  45. TCR – Award Period Bid ID 4 • Now that we understand the TCR Hold ENS calculation, we can look at how much it will cost to Hold each of the three TCRs in our example TCR Product Final Reference Price $ (375) Months Remaining Ratio 1 TCR Hold ENS $ (3,375) TCR Current MW 9

  46. TCR – Award Period • Now we know how much collateral will be needed for ABC Energy to Hold all 4 TCRs in their Portfolio

  47. TCR – Award Period • Now that we have the TCR Hold, Acquisition, and Disposal ENS calculated, lets look at how these roll off over the life of the product • Acquisition and Disposal ENS both roll off daily over the life of the product based on the Days Remaining Ratio • TCR Hold ENS rolls off monthly based on the Monthly Remaining Ratio

  48. TCR – Award Period • The TCRs we are using in our example are all Spring 2015 TCRs therefore they are all 4/1/2015 through 5/31/2015 • To fully understand how TCR Hold ENS Roll-off is calculated, lets assume the maximum operating day (OD) that has been settled is 4/4/2015

  49. TCR – Award Period • There are 61 days in the life of a Spring 2015 TCR

  50. TCR – Secondary Market • Calculations used for Secondary Market Transaction • TCR Award ENS for both the Buyer and the Seller • TCR Hold ENS for the AO’s proposed Secondary Market transfer for both the Buyer and the Seller • We use the Transferred MW value rather than the Awarded MW

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