1. Texas Deregulation – A Success Story The ERCOT Market Framework Has Been A Success Implementation  Bilateral Contracts - Participants contract up to 100% of energy needs in lieu of a centrally managed market  Balancing Energy Market - ERCOT operates thin balancing energy pool to balance real-time supply and demand  Out of Merit - ERCOT can order plants on/off to maintain grid reliability  Retail Price to Beat (PTB) - Default service rate mandated for incumbent retailers until January 1, 2007 – may offer different prices starting in 05 Market Objectives  Leverage market solutions wherever possible and encourage competition  Minimize ERCOT intervention  Establish tools to maintain grid reliability Positive impact  Large infusion of capital  Intense retail competition  Competitive rates for end-users  High system reliability ERCOT ERCOT supply curve; Implied heat rate 04; MMBtu/MWh ERCOT’s Robust Competitive Wholesale Market Led To A Large Capital Infusion… Cumulative capacity MW Deregulation led to investment of over $15 billion and the addition of 22GW of low-cost CCGT capacity 0 3 6 9 12 15 18 21 24 010,00020,00030,00040,00050,00060,00070,00080,000 22 GW Internal combustion Nuclear Coal CCGT Gas/oil …And A Reduction In Market Heat Rates ERCOT heat rate cycle 98-04; MMBtu/MWh CCGT marginal heat rate CCGT reinvestment economics Lower market heat rates have mitigated the effects of higher gas prices for consumers The ERCOT Regulatory Framework Has Led To Strong Retail Competition… Source: KEMA ERCOT has the most active de-regulated retail market in the US Residential Customer Switching 04; percent 12 34

2. Texas Deregulation – A Success Story …With Customer Switching In Line With Other Successful Deregulated Markets… Incumbent market share 1 Years since deregulation; Percent 1 Market share estimates based on customer count 2 Estimates for 2003 and 2004 Source: PUC; OFGEM Wireline South Texas residential North Texas residential UK residential 2 …Giving End Use Customers Access To Lower Prices Competitive residential price 1 vs. regulated rate 02-04; Percent savings Competitive large business price vs. regulated rate 02-04; Percent Customers have benefited from access to lower electricity prices than they would have experienced under a regulated rate regime 1 Competitive Residential price based on 15% discount to TXU PTB as currently offered by market competitors, e.g., Utility Choice (14.6%), Cirro (14.6%) and Gexa (16.6%); Regulated world assumes 7.8 GW added capacity in the rate base at a cost of $600/kw, O&M costs approximately 20/kw-yr resulting in an average cost of $93/kw-yr average cost in the rate base 2 Based on 2004 with the following assumptions: Competitive prices assume $4.07/MMBtu Henry Hub gas price, 24X7 heat rate of 7.3 MWh/MMBtu, and incumbent residential gross margins of 30% and LC&I gross margins of 5% 22 There Is Still Room For Improvement In ERCOT… 1 Estimated cost of bad debt for key ERCOT retailers in 2003; TXU retail bad debt in 2003 was $120 MM 2 OOME down cost to the system 3 Reduction of “ask” price to energy retailers of 0.2 cents / KWh on 300 TWh 4 Unaccounted for energy costs at 1% of load at $40 / MWh on 300 TWh (Line loss can represent an additional 5% of load cost) 5 Based on 6 month RMR costs for delay at La Palma of $15 million and 12 month RMR costs on delay at Davis of $30 MM 6 ERCOT requires approximately 2 GW of new capacity per year; better siting reduces transmission cost by $10,000 per MW Market design and governanceExample inefficiency Est. annual system cost ($millions) Potential solution Retail marketBad debt250 1 Eliminate switching for customers with outstanding balances Wholesale market design Out of Merit production70 2 Send generators price signals to back down or up Load balancing between market participants60 3 Create a day-ahead market for energy and ancillary services Unaccounted for Energy120 4 System data and reporting Delivery regulation Slow build of transmission for RMR exit45 5 Additional incentives or mandates for TDSPs to construct transmission Poor siting of generation raises transmission costs20 6 Require plant siting approval to consider transmission costs Market inefficiencies drive significant costs to market participants across the ERCOT system …As Key Milestones Approach MilestoneEffective Date Affiliate Retailers may offer other price structures in addition to PTBJanuary 1, 2005 Sunset Review recommendations are considered by Texas LegislatureSession begins January 11, 2005 PTB is no longer a required offeringJanuary 1, 2007 Sunset Review 1  The Sunset Advisory Commission reviews performance of The Public Utility Commission of Texas (PUC) and the Office of Public Utility Counsel (OPUC) every 12 years  The next review should be completed during the 2005 session  Key recommendations of the Sunset Advisory Commission include: –Changes to ERCOT/PUC governance structure –Extension of the PUC for 6 years The competitive market in Texas is functioning well and TXU does not anticipate any major structural changes in the marketplace 1 The Sunset process is guided by a 12-member body of legislators and public members appointed by the Lieutenant Governor and the Speaker of the House of Representatives. 56 78