1. 2004 CSCs & Zones

2. Goals for 2004 Increase ERCOT market efficiency Reduce out-of-merit energy and capacity deployments Reduce uplift of local congestion costs to load serving entities (LSEs)

3. Causes of Uplift? And A Comprehensive Solution Uplifted non-CSC charges associated primarily with ERCOT’s solving of local transmission congestion and reliability concerns –Out-of-Merit Capacity (OOMC) – ERCOT command and control instructions to resources used to provide reactive power to grid and to avoid certain contingencies –Out-of-Merit Energy (OOME) – ERCOT command and control instructions to resources used to redispatch generating units to solve non-CSC congestion –Local Balancing Energy Service (LBES) – ERCOT instructions issued to resources based on competitive bids from resource owners to redispatch generating units to solve non-CSC congestion –Reliability Must-Run (RMR) – ERCOT contracts with certain resources to provide reliability services where the resource owner would otherwise retire or mothball the resource. Resource owners offer the resource to ERCOT and ERCOT determines whether the unit is required for reliability purposes A Comprehensive Solution is Required –Fix the Operational Tools -- Implement already-identified system changes and PRRs to eliminate problems related to oscillatory deployments, ramp rates and the like, as well as other ERCOT computer system fixes identified on the timeline for EMMS 3.x, and in parallel, –Create Proper Incentives -- Identify a more complete set of CSCs, and related Zones, to create economic incentives that are not counter to maintaining the reliability of the ERCOT grid

4. 2004 Proposals Status Quo –4 Zones/3 CSCs Status Quo Plus –4 Zones/4 CSCs (Adds CSC between North & Houston zones) Northeast Zone –5 Zones and 5 CSCs (Adds CSC between North & Houston zones and adds Northeast Texas zone/CSC) 7 Zones and 11 CSCs –Subdivides the North zone into 3 zones and subdivides the South zone into 2 zones

5. EXISTING 2003 4 ZONE / 3 CSC S – H CSC S – N CSC W – N CSC 1 2 3 4

6. Status Quo-Type Proposals Do Not Address Known Problems Adding North-Houston CSC addresses known congestion into Houston from North Adding Farmerville-Royse CSC addresses known congestion in Northeast Texas However, adding only these two new CSCs does not give ERCOT all the tools required for managing North zone congestion None of the status quo-type proposals address congestion in the west of Marion area None of the status quo-type proposals provide incentives to reduce the increasing cost of DFW congestion

7. 2004 CSCs/Zone Selection CSC selections should decrease in the amount of uplifted congestion costs borne by load serving entities to the greatest degree possible CSC selections should not ignore the significant amount of congestion costs in the DFW area of the existing North Zone CSC selections should measurably reduce out-of- merit commitments and deployments in the DFW area that run counter to market incentives SPS/RAP may alter the number and value of TCRs per CSC, but cannot eliminate need for CSCs unless guaranteed by TDSP(s)

8. 7 Zones/11 CSCs Pros –Increases market efficiency and reduces uplift –Addresses existing and potential points of major transmission congestion –Provides ERCOT the full range of tools required for managing North zone congestion –Creates operational and market transparency in North zone –Addresses expected Zorn/Marion congestion

9. 7 Zones/11 CSCs Cons –Step change from current to multiple zones/CSCs –Would increase zonal balancing energy prices in DFW (although, experience in Houston zone has shown this not to be a problem) –Some QSEs hedging costs may be greater than their previous share of uplifted costs (i.e., subsidization of congestion costs will be reduced or eliminated in some cases)

10. 1 2 3 4 5 6 7 7 ZONE / 11 CSC

11. Why Be Concerned With Market Efficiency and Uplifted Costs? Uplifted non-CSC charges for the year-ended May 2003 were nearly $300 MM –Charges would be nearly $334 MM with annualized RMR

12. ERCOT Implementation ERCOT can implement 7 Zone/11 CSC proposal with existing resources –Added zones/CSCs do not materially affect system performance –System updates can be done by January 1, 2004 both in terms of cost and schedule

13. Conclusions The 7 Zone/11 CSC proposal reduces uplift by directly assigning the costs to those QSEs that incur them The 7 Zone/11 CSC proposal provides ERCOT with the tools required to manage existing CSCs plus the tools required (1) to manage North zone congestion (2) to manage west-of-Marion congestion and (3) to create transparency on both operational and market levels