Southwest Power Pool CREDIT PRACTICES WORKING GROUP

April 18, 2019 Teleconference

Minutes

Agenda Item 1 – Call to Order Mark Holler called the meeting to order at 1:30 p.m. The following members were in attendance: Mark Holler (Tenaska); Terri Wendlandt (Westar); Tom Hestermann (Sunflower); Mary Meier (OPPD); Cassandra Strange (OG&E); and Matthew Simon (Basin). Also in attendance were: Justin Riddell and Coty Sage (TEA); Evan Truitt, Carrie Dixon, and Mark Breese (Xcel); Jamie Johnson (MEAN); Jason Mazigian (Basin); Jason Regehr and Jeffrey Parkinson (Springfield); Jeff Bieker (Sunflower); Nick Becvar (ACES); and Scott Smith; Jared Barker; Erin Brown; Phil McCraw; Will Vestal; Patti Kelly; and Luke Hill (SPP).

Agenda Item 2 – Approval of Minutes from March Meeting Mark Holler presented the February meeting minutes (CPWG Minutes 03212019 - DRAFT). Tom Hestermann made a motion to accept the minutes and Mark Holler seconded. The minutes were unanimously accepted without amendment.

Agenda Item 3 – Update on GreenHat Loss at PJM Mark Holler updated the group that March showed GreenHat losses of $6.8MM and the total loss was still in line with earlier estimates totaling around $165MM. Recent events include the FERC denial of a PJM waiver request and PJM has appealed that decision and is waiting on the FERC response.

Agenda Item 4 – PJM Independent Review Discussion Scott Smith presenting to the group SPP’s assessment of the recent release of a Report of the Independent Consultants on the GreenHat Default by PJM. Scott advised the group that SPP staff will be conducting a comparison between SPP’s current TCR approach and the complications and recommendations found in this report. It was also decided by the group that SPP’s assessment of the seven recommendations found in the repot should be sent out to the group and allow CPWG participants to submit their thoughts. This email was sent to the group on 4/22 with a requested return data by EOB 5/3.

Agenda Item 5 – 2019 Q1 Credit Metrics Erin Brown presented the Q1 2019 Credit Metrics to the group. There were no short pays within the reported period. SPP appreciates the group’s attentiveness to their timely payments.

Agenda Item 6 – CPWG Face to Face Meeting Jared Barker advised the group that we will have a CPWG face to face meeting onsite at SPP on Wednesday, October 30th. Reservation information will be sent to the group shortly.

Agenda Item 7 – New/Old Business RR354 (Acceptable Credit for Sponsored Upgrades) has been approved through the BPWG and will next be discussed at the RTWG. SPP will proved an updated at our next CPWG meeting in May.

Jared Barker also advised the group that the Annual TCR Auction takes place May 8th – May 13th. Financial Security for this auction is due to SPP by Wednesday, May 1st to allow time for SPP processing.

Agenda Item 8 – Next Meeting May 15th Our next scheduled meeting is May 15th. Please note, this will be on a WEDNESDAY rather than our normal Thursday. SPP staff will be participating in a companywide training conference on Thursday, May 16th. Agenda Item 9 – Adjournment There being no further business, the meeting was adjourned at 2:52p.m. Respectfully submitted,

Jared Barker, Secretary

Antitrust: SPP strictly prohibits use of participation in SPP activities as a forum for engaging in practices or communications that violate the antitrust laws. Please avoid discussion of topics or behavior that would result in anti-competitive behavior, including but not limited to, agreements between or among competitors regarding prices, bid and offer practices, availability of service, product design, terms of sale, division of markets, allocation of customers or any other activity that might unreasonably restrain competition.

Southwest Power Pool, Inc. CREDIT PRACTICES WORKING GROUP MEETING

April 18, 2019 Teleconference

• A G E N D A •

1:30 – 3:30pm

1. Call to Order ........................................................................................................................... Mark Holler

2. Approval of Minutes from March Meeting ............................................................................... Mark Holler

3. Update on GreenHat Loss at PJM .......................................................................................... Mark Holler

4. PJM Independent Review Discussion .................................................................................... Scott Smith

5. Q1 Credit Metrics .................................................................................................................... Erin Brown

6. CPWG Face to Face Meeting .............................................................................................. Jared Barker

7. New/Old Business .................................................................................................................. Mark Holler

8. Next Meeting May 15th ........................................................................................................... Mark Holler

9. Adjournment ........................................................................................................................... Mark Holler

Southwest Power Pool CREDIT PRACTICES WORKING GROUP

March 21, 2019 Teleconference

Minutes

Agenda Item 1 – Call to Order Mark Holler called the meeting to order at 1:30 p.m. The following members were in attendance: Mark Holler (Tenaska); Terri Wendlandt (Westar); Tom Hestermann (Sunflower); Mary Meier (OPPD); Malcolm Booker (OMPA); and Caleb Head (NTEC)). Also in attendance were: Nathan Case (ACES); Justin Riddell and Coty Sage (TEA); Jarrod Bantam (LES); Evan Truitt (Xcel); and Ryan Johnson (AEP); Matt Holstein (Duke); and Scott Smith; Erin Brown; Phil McCraw, Dendy Collier; Will Vestal; Patti Kelly; and Luke Hill (SPP).

Agenda Item 2 – Approval of Minutes from February Meeting Mark Holler presented the February meeting minutes (CPWG Minutes 02212019 - DRAFT). Malcolm Booker made a motion to accept the minutes and Tom Hesterman seconded. The minutes were unanimously accepted without amendment.

Agenda Item 3 – Update on GreenHat Loss at PJM Mark Holler updated the group that the GreenHat loss was now estimated to total around $165MM. It was as high as $190MM but there had been better results than expected in the last month. There has not been much movement since the last meeting.

Agenda Item 4 – Discussion and Vote on Attachments J and Z1 with Z1 Business Practice Scott Smith reviewed the changes to the documents. After discussion there were no proposed changes to the documents. Malcolm Booker made a motion to approve the language changes to Attachments J and Z1 along with the Z1 business practice as presented. Terri Wendlandt seconded. The motion was unanimously approved.

Agenda Item 5 – Organizational Chairs and Staff Secretaries Conference Terri Wendlandt gave an update concerning her attendance at the conference earlier this month.

Agenda Item 6 – New/Old Business Brett DeBenedictis brought up an issue with virtual transaction exposure. SPP uses reference prices through the cleared but not settled period. He suggested that the cleared but not settled price should be used during this time. The group requested a determination of how often these prices change and how accurate they are and the magnitude difference of the DA and RT reference prices. The group will need to discuss a date to have a face to face meeting. The Group will discuss transmission models, upgrades, and topology changes at next month’s meeting. The Group also wishes to discuss registration requirements related to pre-screening officers of registering entities for previous punishments at a future meeting.

Agenda Item 7 – Next Meeting April 18th Our next scheduled CPWG meeting will be April 18, 2019. Agenda Item 8 – Adjournment There being no further business, the meeting was adjourned at 3:15 p.m. Respectfully submitted,

Jared Barker, Secretary

Recent RTO Credit DefaultApril 18, 2019

2SouthwestPowerPool SPPorg southwest-power-pool

PJM Credit Default

• Since 2015, GH acquired a 890 million MWh FTR (TCR) long-term portfolio Portfolio initially indicated as highly profitable

• PJM transmission upgrades changed congestion flows eroding Green Hat portfolio value

• PJM declared GreenHat Energy, LLC in default of credit policy on June 21, 2018 Failed to pay invoice and cure a collateral call

3Slides 3-8 were presented to the Oversight Committee on April 15

PJM Credit Default• GreenHat’s Andrew Kittell & John

Bartholomew (formerly JPMorgan) were involved in a FERC market manipulation settlement of $410MM in 2013 SPP has no exposure to these two individuals

• Estimated loss: $400MM

4

SPP Differences with PJM

• SPP does not have true long-term TCRs SPP’s TCRs extend to one plan-year

• SPP’s system is not as congested as PJM’s

• SPP’s valuation of historically negative TCRs is more conservative

• SPP only allocates a portion of the transmission system during annual auction

5

Independent PJM Assessment

• PJM Board hired 3 experts to perform assessment of default Credit policies Internal practices Specific actions taken with GreenHat

• Consultants identified 10 “Complications”

• Consultants made 7 recommendations

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SPP Assessment of Complications

7

Identified ComplicationsMeets or Exceeds Standard

Needs Improve

mentN/A SPP Assessment

1The PJM Credit Policy Failed to Address Critical Risks No "forward information" in exposure

calculations

2PJM Did Not Take Robust Policy Actions Following Precedent Experience PJM: Tower Companies default of

$52MM in 2007

3PJM Failed to Perform Adequate “Know Your Customer” Procedures

No background checks in registration processThinly capitalized financial only market participants

4PJM Management Failed to Develop Robust Credit Risk Management Tools & Procedures

Reviewing existing processes and capabilities to identify enhancements

5PJM Surrendered an Early Opportunity to Stop or Restrain GreenHat Push FERC to approve broad authority

for RTOs as regulators of their markets

6PJM’s Management Mistakenly Relied on a GreenHat Pledge Agreement

7PJM Incorrectly Believed That GreenHat Would Not Worsen the Situation

8Qualifications and Training of PJM Staff Were Insufficient Senior credit staff performs registration

approval and credit management

9PJM FTR Market Design Flaws Gave GreenHat Room to Develop Does SPP have opportunity to adjust

TCR market for safer environment?

10An Unwarranted Air of Confidence Facilitated GreenHat’s Ability to Grow Weaknesses in credit policy,

capitalization, and indemnifications

SPP Assessment of Recommendations

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Identified ComplicationsPossibly Effective for SPP

Not Applicable

for SPPSPP Assessment

1 Advance Credit/Collateral Best Practices into the Tariff

1. Address capitalization of financial only MPs

2. Forward information in exposure calculations

2 Clarify the Role of PJM as Manager of Risk in Financial Markets Push FERC to approve broad

authority for SPP as regulator

3 Build a Customer Awareness Beyond Market Procedures & Rules Build criteria for background checks

and spot audits

4 Implement Technical Practices for Participant Risk Management Possibility of position limits based

upon MP capitalization

5 Bring On-board and Develop New Expertise in Risk Management Identify financial market training

applicable to SPP markets

6 Increase the Frequency of Long-term Auctions Market may benefit from certain TCR

changes but likely not these

7 Make Critical Organizational Changes

Next Steps for CPWG:

• Develop educated suggestions and recommendations to enhance security of market

• Prioritize potential recommendations for further research/justification

• Package and communicate recommendations to appropriate stakeholder groups

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2019 Q1 Credit Metrics

1

SPP 2019 Q1 Collection Metrics

2

SPP 2019 Q1 Exposure Metrics

3

SPP Exposure Metrics Comparison

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