Board Of Directors Review Budget Adjustments

ERCOT Board of Directors reviewed a preliminary plan of more than $7 million in budget reductions at its first meeting of the new year Tuesday. A total reduction of $8 million is needed. The recent adjustment to the ERCOT administration fee from $.44 to $.42 represents an effective cut of approximately $6 million. Another $2 million will be needed for additional responsibilities associated with the recently completed security and management audits (including new finance, security and human resources staff). The budget adjustment plan includes a cut of $4.56 million in operations and $3.08 million in projects (equity portion), which also reduced planned debt by $4.64 million, for a total $7.72 reduction in project expenditures. Another $354,000 in cuts is still to be identified.

Board Vice-Chair Bob Manning, who led the meeting in Chairman Mike Greene’s absence, praised the “refreshing transparency” of the financial report. “This is real evidence of a trend toward organizational excellence.”

The complete presentation on the budget adjustments can be found on the ERCOT Web site calendar of meetings with the board meeting attachments.

Interim Chief Financial Officer Announced

CEO Tom Schrader introduced interim CFO Roy Bowman. Bowman, who comes from the Houston office of Tatum CFO Partners, is under contract to help ERCOT fulfill its financial responsibilities and respond to the audit findings. Schrader emphasized his experience in the areas of rebuilding infrastructure, establishing and implementing policies and procedures, and developing internal controls.

In other personnel news, Schrader announced that interim Director of Security Chander Ahuja had resigned for personal reasons. ERCOT will continue its search for a permanent director of security, Schrader said, and continue to develop and implement the positive changes and security processes that have been initiated.

CEO Report Lists 2005 Priorities And 2004 Accomplishments

In his CEO report, Schrader presented an update on priorities for 2005, topped by work to be done in response to the audits. Approximately 170 recommended actions from the four audits have been entered into a tracking tool program which will allow each item to be tracked for progress and completion.

The CEO report also included a presentation on the accomplishments of 2004. “Given all the difficulties of the year, a tremendous amount was accomplished,” Schrader said. Some of the accomplishments included:

• Implemented EMMS Release 3 improving grid operations and eliminating some resource specific deployments that cost the market over $50 million in 2003
• Completed exit strategies for RMR generation which will reduce RMR uplifts by $46 million per year
• Approved additional transmission planning projects to relieve congestion resulting in $58 million per year savings to the market
• Implemented Remedial Actions Plans and Special Protection Schemes to reduce congestion costs to the market by over $70 million
• Implemented Texas SET 2.0/MIMO, the most complex business process/system improvement since the market opened, with an estimated market savings of $40 million in first three months
• Completed retail market test flight 0504 ahead of schedule, largest integrated flight to date, and certified 32 new market REPs in 3 test flights
• Hit all-time high in Market Metrics “In Protocol %” for switch transactions at 99.9% and move-in transactions at 96.4%
• Met timeliness requirement of posting Settlement Statements 99.5% on time
• Completed all settlement runs with less than 1% re-run rate
• Implemented 35 internal process improvements and 5 external transaction reports in EDIM department
• Resolved 15,535 FasTrak issues with a 99.5% completion rate
• Received 4,259 Data Extract Variances and completed 94.5% by year-end, resolving 134,437 variances
• Renegotiated communications contracts saving $1.2 million on an annual basis
• Negotiated software license and maintenance cost reductions saving $2.3 million annually
• Reduced property tax liability over the last two years by nearly $700,000
• Deployed enterprise data warehouse solution and new market monitoring system to PUC MOD, improving ability for timely market oversight
• Reduced reliance on outside services by 25% in 2004, replacing contractors with ERCOT employees, resulting in over $1.8 million savings annually.

The complete presentation of the CEO report and the 2004 goals and accomplishments can be found on the ERCOT Web site.

SAS 70 Audit Reviewed

The board’s Finance and Audit Committee presented a report on the SAS 70 audit, completed Dec. 20. ERCOT received an “unqualified” opinion in 14 of 17 sections, meaning no material deficiencies were detected. Two sections, related to IT and physical security, were qualified in the early part of the audit, but the issues were addressed while the audit was underway.

The remaining qualified section related to change management process for implementing software upgrades. Those deficiencies have been successfully remedied since the conclusion of the audit, conducted by PricewaterhouseCoopers (PwC).

Sean Barry of PWC told the board that the ERCOT staff was “extremely supportive” during the SAS 70 audit, despite the fact that it was conducted at the same time as two other extensive outside audits. “We found no lack of integrity on the part of staff or management.” Barry also noted that some ERCOT controls, such as the shadow settlement system, represent the “best practices” in the industry. “There are some really strong controls in place at ERCOT,” he said, “and a clear tone at the top about doing things right and embracing internal controls.”

Reserve Margin Update Discussed

COO Sam Jones presented a report showing how the recent TXU mothball announcements will affect ERCOT’s reserve margin. Using the existing TAC-approved calculation method for reserve margin, and with the suspension of operations on five of the eight TXU units requested for mothball status (ERCOT determined that three of the units will be required under RMR agreements), ERCOT’s reserve margin is projected to be 17.4% for 2005, 28.8% for 2006, and 25.8% for 2007. Jones noted that the TAC method assumes that all mothballed units will be brought back on line, and that the reserve margin would be lower if the units’ owners choose not to make them operational in the future (13.8% in 2006 and 11.1% in 2007). ERCOT’s current minimum reserve requirement as set by TAC is 12.5%.

Other Board Action

• Confirmed the Technical Advisory Committee chair Read Comstock of Strategic Energy and Vice-Chair Mark Dreyfus of Austin Energy
• Voted to not overturn TAC’s rejection of PRR 556, a protocol change to allocate local congestion by zone rather than on an ERCOT-wide load ratio share.

2004 Winter Peak Marked On December 23

ERCOT hit its 2004 winter peak on Thursday, Dec. 23, with a load of 44,007 megawatts. This is the unofficial number, before final settlement. The previous winter peak for last year was 42,698 MW on January 6. The all-time winter peak was 45,433 MW on Jan. 24, 2003. ERCOT’s highest all-time peak was 60,095 MW, which occurred Aug. 7, 2003.

ERCOT Meeting Calendar

January 2005