Topics:

• Congestion Costs, RMR Show Significant Reductions
• Capacity, Demand And Reserves Report Posted To Web Site
• ERCOT's Raish Designated Load Researcher Of The Year
• Appellate Court Affirms Dismissal Of TCE Lawsuit
• ERCOT, PUC Working To Implement New Oversight Law
• Oversight, Cost Effectiveness And Accountability
• Governance
• Independent Market Monitor (IMM)
• Management Positions Filled In Market Services And Security
• ERCOT Meeting Calendar

Congestion Costs, RMR Show Significant Reductions

Local congestion costs for the year to date are 61% lower than last year, representing a savings of $28.1 million, Chief of Market Operations Ray Giuliani reported at the ERCOT Board of Directors meeting Tuesday.

The most significant factor in the reduction is the use of real-time dynamic line ratings, implemented early this year. The capacity of a dynamically rated transmission line is updated every hour, based on ambient temperatures. The application had a more significant impact on congestion costs in the first part of the year because it allows for increased line capacity in certain circumstances when temperatures are cooler. The real-time ratings application is estimated to save $33 million per year in congestion costs to the market.

In addition, ERCOT staff and transmission owners have worked aggressively on numerous transmission upgrades initiatives to reduce Out-of-Merit (OOM) congestion costs.

Reliability-must-run (RMR) costs also decreased — by 18%, from $34.4 million to $28.3 million as of May 1. Factors contributing to the reduction include the ongoing release of RMR units, ongoing transmission construction, ongoing refinements in operating procedures, and increased reliance on automated procedures, such as Special Protection Systems (SPS).

This Market Operations Update is available on the ERCOT Web site under Key Documents for the June 2005 Board of Directors Meeting.

The annual Capacity, Demand and Reserves (CDR) report has been posted to the ERCOT Web site.

The data tables include:

• ERCOT's load forecast, generation resources and reserve margin for summer and winter from 2005 to 2011
• Generation fuel types by megawatt for summer and winter through 2011
• Generation and load by congestion zone for summer 2003 and winter 2004
• Estimated load by county through 2011
• Estimated generation by county through 2011
• Units and their capacities as used in calculating generation resources.

ERCOT announced a revised peak demand forecast and projected reserve margin in early June, based on a revised methodology for calculating generation resources and a new econometric load forecast, using a refined temperature profile and forecasted economic variables from an economic forecasting service. The changes to the reserve margin formula, as recommended by the ERCOT Generation Adequacy Task Force and approved by the ERCOT Board of Directors, allows for more accurate assumptions regarding mothballed generation and switchable capacity. In addition, wind units are now calculated at 2.9% of capacity instead of the previous 10%, and Direct Current ties are calculated at 50% of capacity. The report also includes alternative reserve margins based on alternative assumptions about the return of the mothballed units.

The new 2005 peak demand forecast is 60,475 megawatts (MW), slightly higher than the previous forecast of 59,701 MW. The 2005 capacity reserve margin changed from a prior 14.7% level to 16.9%.

This Report on the Capacity, Demand, and Reserves in the ERCOT Region is posted on the ERCOT Web site under Reports and Presentations 2005.

ERCOT's Raish Designated Load Researcher Of The Year

Carl Raish, Lead Analyst, Load Profiling, has been chosen as "Load Researcher of the Year" by the Association of Edison Illuminating Companies' (AEIC) Load Research Committee. Raish was recognized for more than 25 years of experience in load research and "the enthusiasm that he continues to bring to the profession." He was also cited for his effectiveness in stakeholder settings in earning the trust and respect of market participants.

Betty Day, manager of energy analysis and aggregation, said Raish consistently looks for opportunities to improve operations at ERCOT.

"Carl has improved the process for the annual validation of load profile assignments for all ESI IDs (an identifier given to each premise in competitive areas) each year," she said. "Carl led the ERCOT staff in the analysis of impact and benefits of changing the Interval Data Recorder meter requirement. Through extensive analysis, Carl was able to identify more appropriate thresholds for both installation and removal of IDRs. His analysis and the subsequent protocol changes will result in more accurate settlements within ERCOT as well as provide cost savings within the market for the situations where an IDR is not cost-effective." IDR meters record energy consumption for each 15-minute interval of every day.

ERCOT performs market-wide load research for each profile type and weather zone, which involves developing and managing load research samples across various transmission and distribution service provider (TDSP) territories. Raish led the sample design efforts and worked with each TDSP to ensure that the sample meters were installed and data sent to ERCOT. He implemented staggered samples to facilitate the start of the project and to leverage data collected to enhance the ongoing sample design. An additional effort in sample design was to incorporate existing TDSP load research samples to minimize costs to the market. This is the first and only effort in the United States to develop and manage load research for an entire ISO region.

Wholesale settlement in ERCOT is performed daily for each 15-minute interval. Approximately 50% of ERCOT's load is settled using load profiles (includes all customers in competitive choice areas of the state with non-IDR meters).

Raish has also published numerous technical papers relating to applications of load research data to solve complex problems, including ERCOT UFE analysis and IDR threshold analysis.

The award will be presented to Raish at the AEIC Annual Load Research Conference, July 11-13, in Myrtle Beach, SC.

Appellate Court Affirms Dismissal Of TCE Lawsuit

The Fifth Circuit U.S. Court of Appeals issued an opinion June 17 affirming the trial court's dismissal of Texas Commercial Energy's (TCE) lawsuit against TXU Energy and others, including ERCOT, Senior Corporate Counsel Andrew Gallo said.

TCE filed suit against 24 market participants, including TXU and its subsidiaries, and ERCOT, alleging (among other things) manipulation of prices for Balancing Energy Service in late 2002 and early 2003. Because the Public Utility Regulatory Act gives the PUCT the authority to prevent anticompetitive behavior, the trial court dismissed the case based on the "filed rate doctrine" (which, essentially, precludes lawsuits when an agency has oversight authority over prices). The appellate court affirmed the trial court's ruling.

ERCOT, PUC Working To Implement New Oversight Law

ERCOT is actively working with the Public Utility Commission to implement the new oversight law passed by the Texas Legislature ahead of the legal schedule. Senate Bill 408 approved by the 79th Texas Legislature contains the Sunset Advisory Commission's recommendations codifying the PUC's oversight authority over ERCOT's operations and finances, modifying the structure of the ERCOT Board, and requiring ERCOT to fund and support an independent market monitor selected by the PUC. The bill also reauthorized the PUC for six years. With the signature by Gov. Rick Perry last Friday, SB 408 will take effect beginning Sept. 1, with a phase-in of requirements after that.

"ERCOT welcomes the new law," CEO Tom Schrader said. "It clarifies the framework for PUC oversight of ERCOT and lays the groundwork for a more productive long-term working relationship."

PUC Chairman Paul Hudson said of ERCOT: "We've seen substantial and tangible progress over the last 12 months. Senate Bill 408 continues to build on themes of cooperation, mutual understanding and trust which ultimately strengthen Texas's underlying electric infrastructure."

Schrader said ERCOT has already taken significant actions to improve its working relationship with the PUC in its oversight role, and has been reporting its progress in monthly detailed reports.

"We have dramatically strengthened our contracting procedures and are putting strong internal controls in place throughout our business processes," he said. "We are also aggressively looking for opportunities to cut costs and improve our overall financial efficiency."

Schrader said ERCOT is committed to working with PUC Commissioners and staff to adopt rules or bylaws to achieve full compliance with SB 408 requirements. Actions are being planned in the following three major areas:

Oversight, Cost Effectiveness And Accountability

• Affirm requirements for materials needed by the PUC to review ERCOT finances and Administration Fee.
• Begin developing the scope of follow-up audits or reviews of ERCOT, to be conducted in 2006, to confirm that ERCOT's internal controls and business practices have been successfully implemented.

Governance

• Identify and propose two additional unaffiliated (independent) board members by year-end 2005 for PUC approval;
• Install an independent director as Board Chair by Sept. 1, 2006;
• Clarify public meeting policy, and affirm Board members' disclosure and recusal requirements.

Independent Market Monitor (IMM)

Work together to:

• Define the roles of the PUC, ERCOT, and the IMM;
• Set budgets for the IMM for the balance of 2005 and all of 2006;
• Determine the selection process and criteria for the IMM;
• Establish confidentiality and other ethics requirements.

Begin implementation of the new IMM structure by September 1, 2005.

Management Positions Filled In Market Services And Security

Ron Berry has joined ERCOT as the manager of physical security. He has more than 30 years of experience in corporate security and law enforcement, and for the past six years was with LCRA, where he was responsible for the physical security of dams, office complexes, power plants, pumping stations and water/waste water facilities. Before that, he served as the corporate security coordinator for Houston Light and Power for approximately 12 years.

Adam Martinez has been promoted to manager of Retail and Services Platform Development, previously held by Karen Farley, who has moved to manager of ESI ID Data Integrity Management. He will be responsible for leading the team focused on projects to improve the self-service capabilities for all market participant segments and to better enable ERCOT staff to effectively service market participants, in addition to retail market business process and system enhancements. Prior to ERCOT, Martinez was with Keene Consulting and started his career the Texas Parks and Wildlife Department. Adam is holds an undergraduate degree in MIS from the University of Texas, Austin and M.B.A. from Our Lady of the Lake University, San Antonio.

ERCOT Meeting Calendar

June 2005