February 4, 2002

Hon. Steven D. Wolens
Hon. Troy Fraser
Co-Chairmen
Electric Utility Restructuring
Legislative Oversight Committee
Post Office Box 2910
Austin, Texas 78768

Re: Electric Utility Restructuring Legislative Oversight Committee Hearing, February 5, 2002 - Responses to the Chairmen's letter

Dear Chairman Wolens and Chairman Fraser:

I am pleased to report to the Legislative Oversight Committee that on January 1, 2002, the right of Texas consumers to select their electricity provider in accordance with Senate Bill 7 has been achieved. As of January 31, 2002, more than 5.5 million customers have been switched from regulated investor-owned utilities either to new retail electric providers (REPs) or to retailers who are affiliated with the formerly regulated service providers. At this time, nearly 270,000 Texas citizens have chosen the REP of their choice for their electrical service, of which approximately 105,000 chose to switch during the Pilot Program, with the remainder choosing new suppliers in January.

As the Committee fully understands, ERCOT's transition to becoming the largest competitive market for electricity in the U.S. has required an extensive effort from all participants, causing the market to experience a few "bumps in the road" in the process. Based on our experience to date, we can certainly anticipate further challenges in the future. This is, however, a dynamic market with full engagement by a variety of market participants, and mechanisms are in place to improve market operations as deficiencies are identified.

ERCOT's stakeholder processes have been very effective in reviewing and addressing the issues identified during the Pilot Program and during this year. Needed improvements in various market and operational processes, and in the original market design, have been identified, and changes are being implemented. In the case of managing zonal transmission congestion, for example, the costs have been higher than expected. In response, ERCOT will implement direct assignment of zonal congestion costs later this month. New procedures and systems have already been written and installed to accomplish this change. On other issues, such as consideration of relaxing the requirement for balanced schedules, the ERCOT market needs to gain additional operating experience before we can determine whether we should implement changes to our current approach for power scheduling.

Before addressing the specific questions in your letter of February 1, 2002, I would like to follow up on some of the issues that we have discussed in previous hearings:

• Approximately 180,000 retail customers are currently receiving power from the chosen REP, and another 40,000 will begin receiving power from their new REP upon the next meter reading. Another 50,000 are currently being processed.
• ERCOT and the market participants successfully transitioned to full implementation of Texas SET version 1.4 on December 17, 2001, adding significant advances in market performance and service.
• ERCOT and TDSPs accomplished the transfer of 97% of utility customers from the incumbent utility to the utility's affiliated REP, in compliance with utility unbundling requirements.
• ERCOT continues to operate a safe and reliable transmission system.
• ERCOT continues to manage liquid ancillary services and balancing energy markets.
• ERCOT has begun issuing final "true-up" settlement statements to the market (indicating the culmination of the six month wholesale settlement process).

The items that follow respond to the questions identified in your letter of February 1, 2002:

1. Be prepared to fully discuss move-in, move-out, and completed new construction requests.

a. Explain why customers experienced long delays for these transactions to be completed after the conversion to Texas SET version 1.4.

In the early days of Texas SET version 1.4 implementation, which began on December 17, 2001, and included full Customer Choice implementation in competitive areas on January 1, 2002, many retail customers did not understand that they needed to direct their move-in and move-out requests to a Retail Electric Provider (REP) instead of the utility. Previously, customers contacted the utilities for these functions. There was some confusion among the REP and utility call centers regarding calls from customers regarding these transactions. These issues caused the initial delays. The market participants have worked hard to address this problem, and ERCOT has seen great improvement.

In addition, the move-in/move-out process itself now takes three to four days in order to accommodate the numerous electronic transactions required. Many customers were accustomed to faster move-in/move-out service under a monopoly supplier.

In the case of a new construction service account, a customer must notify the utility that a new address has been established, and the utility must establish the address with the appropriate electronic identifier (transaction 814-20) in ERCOT's database before the customer obtains an REP. This process could also add several additional days to initiating service commencement.

In terms of market participant systems, some REPs had some difficulty in finding correct address information regarding their customers in the utility and ERCOT databases, some REPs had problems sending the correct electronic switch request transactions to ERCOT, and some utilities had problems in issuing switch acknowledgement transactions. The market participants and ERCOT are addressing these issues, and significant improvements have been made.

b. Explain the steps ERCOT and market participants have undertaken to solve this problem.

Until the electronic issues are resolved, the utilities have ceased disconnecting service related to move-outs for the time being in order that new customers moving in will have service. REPs are now contacting the utilities directly, in addition to contacting ERCOT, to request service commencement. The utilities will manually confirm the service commencement date and will contact the REPs, who in turn will notify the customers. The REPs are sending the move-in transactions to ERCOT, and ERCOT is sending them to the utilities, allowing the "paperwork" to catch up to the service initiation.

c. Discuss the process and time line for fixing the automated move-in, move-out, and new construction transactions.

ERCOT has been working very closely with each market participant to identify and resolve system processing issues. Several system improvements have already been made, and they will continue to be implemented until all move-in/move out system issues are resolved. In the meantime, the REPs know that the utilities will provide the meter readings necessary for service to commence - on the date requested by the REP or on an alternative date identified by the utility. The REP then notifies the customer of the service commencement date.

During the transition of customers from the incumbent utility to the affiliated REP, ERCOT systems were overloaded, and address verification through the ERCOT Portal was delayed. This should not be an issue once the affiliated REP conversion is completed this week.

Finally, ERCOT is working with the Retail Market Subcommittee on longer-term market policy improvements to the move-in, move-out, and new construction transactions.

2. Update the committee on retail switching activity and the success rate for switching transaction completions.

ERCOT is processing, in accordance with Protocols requirements, 99.9% of valid switch requests it receives. Of the switch requests received by ERCOT, approximately 27% are invalid due to data errors and are rejected. On average, two utilities are not meeting Protocol requirements for switch requests from ERCOT.

Also, please provide the following specific data:

a. The number of 814_03 transactions sent from ERCOT to Reliant TDSP, TXU TDSP, and AEP CP&L TDSP for the period of July 31 to December 16, 2001.

See Attachment A.

b. The number of 814_03 transactions sent from ERCOT to Reliant TDSP, TXU TDSP, and AEP CP&L TDSP for the period of December 17, 2001 to January 31, 2002.

See Attachment B.

c. The number of 814_10 transactions received by ERCOT, broken down by TDSP service territory.

See Attachment C.

3. Provide a list of all Texas SET transactions currently requiring manual workaround processes due to failure of the automated systems and the estimated additional cost incurred by ERCOT as a result of manual workarounds as well as the additional processing time incurred by market participants as a result of the manual workarounds.

There are no scheduled workarounds due to the failure of ERCOT's systems. The only manual workaround processes that ERCOT performs are due to gaps in the Texas Standard Electronic Transaction (TX SET) EDI standards or gaps in the current ERCOT Protocols. ERCOT and the market participants are working to bridge those gaps.

Texas SET Gap: When a utility rejects a switch request (due to a customer move out of the premise or for any other reason), that rejection comes back to ERCOT but there is no transaction code provided to send a notice back to the submitting REP. In order to address this situation, ERCOT creates spreadsheets both for the utility and the REP to request cancellation instructions.

ERCOT Protocols Gap: REPs are not permitted by the Protocols to cancel their own pending switch request. The only cancellation allowed is from a customer, via the automated switch cancellation process. Based on experience gained in the Pilot Project, it has become apparent that REPs need to be able to cancel a pending switch because the customer often calls the REP directly to request a cancellation. To address this issue in the interim, ERCOT now accepts e-mail cancellation requests from the REP.

4. Discuss the implementation of direct assignment of congestion clearing costs, including:

a. Will ERCOT meet the target implementation date of February 15?

ERCOT systems will begin directly assigning the costs of clearing zonal transmission congestion on February 15, 2002.

b. Will the auction systems and accounting systems necessary for successful management of Transmission Congestion Rights be in place?

ERCOT has already successfully performed the first auction for Transmission Congestion Rights (TCRs), which covered the last two weeks of February 2002, and the first annual auction will take place on February 8, 2002. The necessary accounting and settlement systems for payments to TCR holders will be in place at that time.

c. Provide data on congestion clearing costs during January 2002 and discuss the impact of these costs on the Balancing Energy Neutrality Adjustment.

For January of 2002, ERCOT's costs for resolving zonal transmission congestion was approximately $210,000. This cost will be covered by the System Congestion Fund and will have no impact on the Balancing Energy Neutrality Adjustment.

5. Review the creditworthiness requirements of ERCOT members and ERCOT market participants.

Pursuant to the ERCOT Protocols, the ERCOT stakeholders proposed and the ERCOT Board approved financial metrics (minimum debt ratings, etc.) that would support a QSE's participation without additional security. If a QSE does not meet that financial standard, the Protocols require that the QSE post another form of security - i.e., a letter of credit, a corporate guaranty, or a surety bond, and in each case, the entity providing the credit instrument must meet the credit metrics. The credit instrument must be in an amount that would cover the QSE's maximum anticipated liability to the ERCOT market, and executed using ERCOT's standard form agreements, also Board approved.

Be prepared to discuss the provisions for default Qualified Scheduling Entity services.

In the event a QSE is suspended or otherwise ceases to function, the default QSE steps in for a 72-hour period to perform QSE services for the relevant loads and resources served by the defaulting QSE. This gives those loads and resources time to arrange for permanent QSE services from the QSE of their choice. The default QSE is selected annually based on bids submitted by QSEs competing to provide the service. The Default QSE is subject to the same creditworthiness standards as are other QSEs.

Evaluate the effectiveness of these provisions in light of the recent events involving Enron Corp.

Despite the fact that Enron Power Marketing, Inc., was suspended at midnight on a Friday, the default QSE was able to step in and efficiently assume the scheduling responsibilities of EPM. The default QSE performed those functions for the required 72-hour period, during which the relevant loads and resources arranged permanent QSE service. Considering that the EPM experience was the first time the default QSE activity was invoked, and that it happened late on a Friday, we were very pleased with the results.

Was the ISO sufficiently protected from the bankruptcy of a market participant?

ERCOT is well protected from a QSE's default because ERCOT's costs are paid from the total funds collected from QSE's paying into the ancillary services market. Any shortage resulting from a QSE's default would be short-paid to the QSEs who are payment recipients on that particular payment date.

Was the ERCOT market sufficiently protected from the impact of Enron's bankruptcy?

ERCOT is participating in the bankruptcy case and is seeking the court's permission to set-off payments that are due to the ERCOT market against payments that are due to EPM. If the court approves the setoff, as expected, ERCOT anticipates that there will be no net shortfall to the market as the result of EPM's bankruptcy.

ERCOT appreciates this opportunity to report to the Committee the status of ERCOT Region's successful transition to a fully restructured electric market. We stand ready to respond to the needs of the Committee in their oversight responsibilities.

Sincerely,

Thomas E. Noel
President and CEO

Cc: Members of the Electric Utility Restructuring Legislative Oversight Committee
Ms. Barbara Henderson, Committee Clerk
Mr. Mark Bruce, Committee Policy Analyst
Hon. Brett A. Perlman, Commissioner, PUCT
Hon. Rebecca Klein, Commissioner, PUCT
Mr. Lane Lanford, PUCT
Mr. Jess Totten, PUCT
Ms. Paula Mueller, PUCT
Mr. Parviz Adib, PUCT