Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 1 Verifiable Costs Process Settlement and Data Aggregation Working Group Meeting October 12 and 15, 2007 ERCOT

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 2 Verifiable Cost Manual Presentation Objectives:  Describe how Verifiable Costs will be used in the Nodal Market  Provide background of how the Verifiable Cost process was developed  Describe what is included in the Verifiable Cost Manual  Describe what is not yet included in the Verifiable Cost Manual  Describe costs included in the Verifiable Cost Manual that are not specifically provided for in the Nodal Protocols  Bring attention to issues requiring clarification or additional discussion  Review the Verifiable Cost Manual  Address Market Participants’ questions and concerns

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 3 Purpose of Verifiable Costs ZonalNodal Actual Cost Recovery  Corrects initial payments that were based on generic costs Offer Capping / Price Mitigation Actual Cost Recovery – limited situations

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 4 Purpose of Verifiable Costs in Nodal Offer Cap/Price Mitigation:  DAM  Start Up Offer Cap  Minimum Energy Offer Cap  NOT used to cap Energy Offer Curve - SWCAP  RUC  Start Up Offer Cap  Minimum Energy Offer Cap  Start Up Offer Proxy (if no DAM offer was submitted and resource selected for RUC)  Minimum Energy Offer Proxy (if no offer submitted and resource selected for RUC)  Real-Time  Energy Offer Curve Mitigation  Mitigated Offer Cap

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 5 Purpose of Verifiable Costs in Nodal Actual Cost Recovery: Strategy for Nodal Design of Verifiable Costs:  A couple of situations mentioned in Nodal Protocols which imply actual cost recovery  RUC-Committed resources which have forced outages  Learn from Zonal frustration  Work through issues and towards consensus  Document in detail

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 6 Verifiable Cost Manual Background: 1. Why did ERCOT develop the Manual?  Comply with the Nodal Protocols which require that ERCOT develop a process for submitting Verifiable Costs  Establish rules for submitting Verifiable Costs

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 7 Verifiable Cost Manual Background: 2. What inputs were used by ERCOT to develop the Manual?  Nodal Protocols  Discussions with Market Participants  Input from ERCOT’s Independent Market Monitor  Input from PUCT staff  Discussion with PJM and CA ISO staff  Research and market reports

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 8 Verifiable Cost Manual Manual: 3. What is included in the Manual? Section 1: An Introduction to Verifiable Costs Section 2: General Rules of Verifiable Costs Section 3: Verifiable Startup and Shutdown Costs Section 4: Verifiable Minimum Energy Costs Section 5: Mitigated Offers and Verifiable Costs Section 6: Verifiable Heat Rates Section 7: Forced Outages of a RUC-Committed Resource Section 8: Recovery of SPS Actuation Costs Section 9: Delayed Outage Costs Section 10: Operating and Maintenance Cost Guidelines Section 11: Timelines Applicable to the Submission and Review of Verifiable Costs Section 12: Timeline for Rescinding Approval of Verifiable Costs Section 13: Appealing Rejected Verifiable Costs Appendix 1A: Methodology for Determining Maintenance Costs of Nuclear and Fossil Steam Units Appendix 1B: Methodology for Determining Maintenance the Costs of CT and CCP Units Appendix 2: Typical Variable O&M Values Appendix 3: Operating and Maintenance Cost Categories Appendix 4: Generic, Non-Fuel O&M Costs

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 9 Verifiable Cost Manual Manual: 4. What is not included in the Manual?  Processes and rules for appealing ERCOT’s rejection of a Verifiable Cost submission  Detailed information about any systems, interfaces, and templates that ERCOT and market participants will use to communicate Verifiable Cost information

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 10 Verifiable Cost Manual Manual: 5.What costs are included in the Manual but are not specified within the Protocols?  Shutdown costs  Recovery of SPS Actuation costs  Delayed outage costs

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 11 Verifiable Cost Manual Questions: 6.Issues that require additional clarification (keep these in mind; they will be discussed at the time their associated sections in the Manual are presented)  Should the additional fuel costs incurred while ramping up from breaker close to LSL be accounted for (e.g., by increasing startup fuel consumption)?  Should the decreased fuel costs incurred while ramping down from LSL to breaker open be accounted for (e.g., by reducing startup fuel consumption)?  Should shutdown costs be paid? If so, should they be paid in all circumstances and without regard to when a commitment terminates?  How should ERCOT address the possibility that RUC instructions will will be canceled prior to breaker close?

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 12 Verifiable Cost Manual 6. Issues that require additional clarification (cont.)  Should ERCOT pay for a resource’s actual fuel costs when they exceed FIP/FOP? Should such price disparities be addressed upfront through the use of a multiplier/buffer in SUO cap and MEO cap calculations (as is done when calculating Mitigated Offer Caps)?  Should ERCOT calculate a clawback charge when a resource’s actual fuel cost is less than FIP/FOP?  Should Verifiable Costs become effective on the day they are submitted (applied retroactively in resettlement)?  Should Verifiable Costs for startup and minimum energy be individually approved?  If a RUC committed resource alters its fuel type of fuel consumption ratios, should any associated changes to fuel costs be accounted for in resettlement?

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 13 Verifiable Cost Manual 6. Issues that require additional clarification (cont.)  What dispute process should be available to QSEs wanting to appeal ERCOT’s rejection of their Verifiable Costs? What rules should govern this process?  Is it appropriate to apply the logic of RUC-decommitments to SPS actuation events? Specifically: 1. Should cost recovery be capped at startup costs? 2. Should recovery be unavailable to resources that planned to be offline during the operating day? 3. Would it be more appropriate to allow recovery of all costs incurred as a direct result of the SPS actuation and then uplift those costs on the basis of Load Ratio Share?

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 14 Verifiable Cost Manual Format of Presentation: 7. This presentation is intended to proceed as follows:  Sections of the Verifiable Cost Manual will be reviewed one at a time and in order.  Time permitting, there will be a general discussion at the end of this presentation. This time will be used to address any remaining concerns and to answer questions that concern any area of the Manual.  Please feel free to interrupt the presentation if you cannot hear or do not understand something.

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 15 Verifiable Cost Manual Review: 8. Next steps needed to complete the Manual:  Review the entire Manual with SDAWG October 12 and 15, 2007  Agree on answers to remaining questions October 16- October 31, 2007  Create an Excel Template to submit Verifiable Costs November 2007  Review updated Manual and Template with SDAWG November 2007  Review updated Manual and Template with COPS December 2007  Submit Manual to WMS for approval January 2008

Texas Nodal © Electric Reliability Council of Texas, Inc. All rights reserved. 16 Verifiable Cost Manual Review: 9. Proposed timeline for completing the Manual: MonthReview Group OctoberSDAWG NovemberSDAWG DecemberCOPS JanuaryWMS FebruaryWMS/TAC - approve