1. Review of Proposed Zonal Market Improvements ERCOT Board of Directors Meeting February 17, 2009 Dan L. Jones Potomac Economics Vice President Director, ERCOT IMM

2. Background Given the delay in the implementation of the nodal market, Potomac initiated in Q3 2008 a review of potential zonal market improvements More than a dozen potential improvements were identified, many of which would involve substantial system modifications Three recommendations with potentially low system impact and significant market efficiency improvements were presented to WMS  More efficient pricing during non-spinning reserve deployments (PRR 776)  More efficient pricing during system shortage conditions (PRR 791)  Improved dispatch efficiency by better ramp rate utilization (PRR 601)

3. PRRs 601, 776 and 791 Each of these PRRs will improve market efficiency  PRRs 601 and 776 will reduce the frequency of inefficient price spikes during non-shortage conditions  PRR 791 will increase the probability of efficient price spikes during shortage conditions (relative to actual market performance, but not relative to the expectations in P.U.C. Subst. R. 25.505) Each of these PRRs will enhance system reliability  PRR 601 will: reduce the frequency of portfolio ramp rate violations increase the availability of dispatchable energy during times of system stress  PRR 776 will: provide more timely access to non-spinning reserves facilitate increased participation in the NSRS market by load resources (historical load participation in NSRS has been essentially zero) provide ex ante pricing during NSRS deployments that will better facilitate supply and demand response (currently MCPEs during NSRS deployments are re-calculated and posted 1-3 days following the operating day)  PRR 791 will: reliably produce prices during shortage conditions that provide incentives for supply and demand supporting short- and long-term reliability reliably produce prices during shortage conditions as anticipated and within the bounds of the parameters established in P.U.C. Subst. R. 25.505

4. IMM Position Ideally, PRRs 601, 776 and 791 should all be implemented as soon as possible to capture the associated efficiency improvements and reliability enhancements for the duration of zonal market operations Significant effort has been devoted to PRRs 776 and 791 to minimize implementation costs and system impacts PRR 601 may be more challenging from a system impact perspective – for both ERCOT and QSE systems If a decision is made to forego implementation of PRR 601, PRRs 776 and 791 should still be implemented