Statement By ERCOT CEO Thomas F. Schrader, May 9, 2005

ERCOT cooperated fully with the Comptroller’s review and we welcome the input. As we have with our previous audits and investigations, we take the findings seriously and are working diligently to address them. We fully recognize that we have additional work to be done to correct the concerns identified in the audits ordered by the Public Utility Commission, as well as the Comptroller’s letter.

The Comptroller’s letter identifies a number of past administrative business practices that are not representative of ERCOT today. Ever since the employee misconduct was discovered, ERCOT has been focused on making sure such activity can never happen again in our organization. Today we are intensively developing and implementing a strong organization-wide internal controls program. This effort will address the concerns identified in the letter, along with the other issues identified by last year’s audits directed by the Public Utility Commission.

ERCOT has taken significant actions in four areas to improve its business practices and reduce the risk of future financial malfeasance.

First, ERCOT immediately tightened and strengthened its contracting procedures upon the discovery of employee misconduct. Today ERCOT is moving aggressively to adopt policies, procedures and controls consistent with industry best practices such as those included in the statewide Contract Management Guide.

Second, ERCOT has increased its internal audit staff and budget, including the addition of an internal audit investigator with over 10 years of fraud investigation experience. Fraud detection and prevention are being incorporated into our organization-

wide business practices, and ERCOT is committed to preventing future abuse. ERCOT continues to cooperate fully with law enforcement authorities in their investigation of the former employees.

Third, ERCOT continues to improve its business policies and procedures to incorporate strong internal controls and documentation. ERCOT is reporting monthly to the PUC in Open Meeting on its progress in addressing the findings of the three major audits ordered by the PUC in 2004.

Fourth, ERCOT continues to take steps to become more cost-effective. For example, significant savings have been realized from more rigorous competitive bidding processes, and ERCOT is examining expenditures in every aspect of the organization to reduce costs.

Pending legislation will implement the Sunset Advisory Commission recommendations to clarify and strengthen the PUC’s full oversight authority over ERCOT, including the authority to order appropriate audits at any time. ERCOT welcomes these clarifications.

The integrity of ERCOT’s core responsibilities – operating the electric grid and providing information for the Texas electricity markets – has never been compromised. These vital operations have received high marks in independent compliance reviews. ERCOT continues to provide system and market operations for the most successful restructured electric market in North America.

ERCOT will review the Comptroller’s findings and factor them into our ongoing management action plan, along with our responses to the PUC-mandated independent audits.

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Responses To Specific Comptroller Recommendations

1. The PUC should require ERCOT to fully justify its annual rate request, including detail on actual and anticipated expenditures as well as an assessment of staffing requirements.

   In April, the PUC adopted requirements for ERCOT’s fee request process that incorporates these recommendations. The legislation containing the Sunset Commission’s recommendations affirms the PUC’s authority to request this level of detail from ERCOT.

2. ERCOT should fully implement new comprehensive contracting practices and should consult and abide by the statewide Contract Management Guide.

   ERCOT is moving aggressively to adopt contracting policies, procedures and controls consistent with industry best practices such as those included in the statewide Contract Management Guide.

3. PUC should require ERCOT to provide it with continual updates on ERCOT’s anti-fraud efforts, including reports from ERCOT’s internal auditor and other allegations of misdeeds reported to management.

   Internal audit reports are currently filed regularly with the PUC. PUC Rules require ERCOT to report immediately any significant event that would impair ERCOT’s operations or cause public concern. ERCOT will continue to be responsive to all requests for information from the PUC.

4. The PUC should disallow any future ERCOT costs related to fraud or fraud examinations from being eligible to be recovered by the System Administration Fee.

   ERCOT will aggressively seek recovery of any money lost due to fraud. Resources budgeted to prevent, detect and investigate fraud and abuse are legitimate business expenses.

5. ERCOT should employ permanent security management and staff as soon as possible.

   ERCOT’s Security work plan is well underway, guided by the Ernst & Young audit findings as ordered by the PUC. In 2005 ERCOT hired a well-qualified Cyber-security Manager, and other security staff has been added particularly in the area of cyber-security. ERCOT is actively interviewing candidates for Physical Security Manager.

6. The Legislature should create a Fraud and Oversight Task Force to further examine ERCOT operations, including contractors, consultants, and expenditures, as well as potential threats to physical and cyber security.

   The joint Electric Utility Restructuring Legislative Oversight Committee has the statutory authority and responsibility to provide oversight of both ERCOT and the PUC. The PUC has stated it will order follow-up audits in 2006 to verify compliance with the 2004 audit findings by Deloitte & Touche, Ernst & Young, and CanAudit. Pending Sunset-related legislation gives the PUC the clear authority to oversee the business activities of ERCOT, including the authority to order audits at any time related to ERCOT’s revenues, expenses or other financial matters.