Topics:

• Board Approves New Reserve Margin Calculation
• CEO Reports On REP Default And Management Initiatives Underway
• Texas Genco To Substitute Smaller Unit For RMR
• Management Positions Filled
• Legislation Update
• ERCOT Meeting Calendar

Board Approves New Reserve Margin Calculation

The ERCOT Board of Directors unanimously approved a new methodology for calculating the reserve margin at its monthly meeting Tuesday. The new formula was developed by a joint task force of three stakeholder committees and approved earlier this month by the Technical Advisory Committee.

Differences in the new formula include:

• Load forecast will be based on an econometric model using economic and weather variables, developed by ERCOT’s resource planning staff. (The current model is based on simple trending of historic peak demand growth.)
• Generating capacity will be based on ERCOT’s determination of net summer dependable capacity rather than registered capacity.
• Wind generation resources will be calculated at 2.9% of installed capacity, rather than the current 10% amount. This is based on a probability factor of wind output being available at peak usage intervals, derived from actual historical wind production data.
• Switchable capacity (units that can be switched to provide energy outside the ERCOT region) will be based on whether the unit is committed to another grid that would make it unavailable during the summer months. A new protocol revision requiring switchable unit declaration was also approved by the board and will be effective June 1.
• “Mothballed” unit capacity will incorporate annual projections to be provided by generation owners regarding expected return to service of suspended units (current methodology assumes 100% return after the first year following announcement of suspense of operations). A new protocol revision, approved by the board and effective June 1, will require owners of mothballed generation resources annually to provide to ERCOT projections of the generation they expect to return over the next five years.
• Direct Current Tie capacity (currently 856 MW) will be calculated at 50% instead of the current 100%.

The 2005 summer peak demand forecast, unadjusted for weather or economic conditions, is 59,701 MW, resulting in a 17.7 percent generation reserve under the current methodology. Chief Operating Officer Sam Jones expects to have an updated reserve margin forecast based on the econometric model ready by June 1.

CEO Reports On REP Default And Management Initiatives Underway

Tom Schrader’s monthly report included updates on the default of a retail electric provider (REP) and a summary of management initiatives underway. Concerning the REP default, Schrader said ERCOT is working with the REP to ensure an efficient and effective transfer of customers. Fewer than 3,000 customers (meters) are involved.

Schrader discussed five initiatives in progress to address concerns of the past year and position ERCOT to become a top-tier operating organization:

• The Internal Control Management (ICM) Project, underway since late February, responds to the Deloitte & Touche findings from last fall. The first track will review administrative business processes (primarily financial and human resources functions) and then develop, document, and implement the necessary policies and procedures with the appropriate controls and documentation. The second ICM track will help ERCOT develop and implement an ongoing and sustainable ICM process for maintaining and updating policies, procedures, and controls for all business processes.
• The Process Improvement (PI) Project will review operating business processes, looking for process improvement opportunities, standardizing documentation formats across the organization, and developing employee activity/task matrices for each process. The process reviews will evaluate and document internal controls consistent with the ICM process requirements.
• The Activity-Based Costing (ABC) Project will map use of resources, both people and equipment, to ERCOT objectives. The information will be used to improve use of resources and budget more effectively.
• The Enterprise Risk Management (ERM) Project will develop a framework for actively managing risk and establishing an ERM function at ERCOT. By May 31, the ERM Project is expected to complete an inventory of risks and prioritize them, develop an implementation work plan, and provide input to the ICM Project on risks that may require internal controls.
• The Workforce Analysis (WA) Project will use an independent party to review ERCOT business processes, activities/tasks, and staffing. The WA Project will draw on the ICM, PI, and ABC work to identify further opportunities to improve use of resources. The WA Project is required as part of ERCOT’s 2006 fee filing package and will help the Public Utility Commission and public to better understand the work done at ERCOT. The CEO report, TAC report (including the revised reserve margin calculation) and other board presentations are posted each month on the ERCOT Web site Meeting Calendar by date of the board meeting.

Texas Genco To Substitute Smaller Unit For RMR

ERCOT and Texas Genco have agreed to substitute P.H. Robison Unit 2 for Unit 4 for reliabilitymust- run (RMR) services required to maintain reliable service in Houston, starting this summer. Last April 15, ERCOT staff concluded that one unit at the PH Robinson plant would be needed to maintain adequate voltage support in the Houston area to comply with ERCOT reliability criteria. The largest unit, Unit 4 (737 MW) was originally identified in the studies as the preferred choice. However, it was later determined that Unit 4 could not be brought back on-line and made available to ERCOT until late July, but Unit 2 (461 MW) could be made available in six weeks. ERCOT reviewed the impact of substituting Unit 2 for Unit 4, and concluded Unit 2 would be adequate and preferable due to the earlier availability date.

Management Positions Filled

Karen Farley has accepted the position of manager of ESI ID Data Integrity Management in Market Operations, formerly held by James Cohea, who passed away recently. Farley, currently a manager in the Retail Market and Retail Systems, will assume her new role on June 1. Todd Baxter was promoted from supervisor to manager of System Engineering and Administration. Also, Chad Seely has joined ERCOT as Associate Corporate Counsel - Litigation. Chad comes from the Texas Department of Insurance.

Legislation Update

With 11 days left in the 79th Texas Legislature’s regular session, no bills related to electricity policy have yet been passed and sent to the Governor for signature. The PUC Sunset bill (SB 408), which clarifies the PUC’s oversight of ERCOT and reauthorizes the agency for six years, was dealt a parliamentary setback on the House floor Wednesday and was returned to the House Regulated Industries Committee. The committee re-approved the bill Thursday morning and a second attempt at House passage could occur this weekend.

Two other bills with ERCOT impacts — SB 533 (renewable energy standards) and SB 711 (metering policy) — are also awaiting action by the full House. Bill texts and status can be viewed at Texas Legislature Online (link below) by entering the bill number in the “Quick Bill Status” search block.

Texas Legislature Online

ERCOT Meeting Calendar

May 2005