1. Grid Operations Report To ERCOT Board Of Directors December 16, 2003 Sam Jones, COO

2. Grid Operations Procedures Compliance Review Performed by the ERCOT Compliance Group October 6 – 17, 2003 Review was for control room operator compliance with the ERCOT Operating Procedures

3. Overview The 2002 Operations Audit was performed by Price, Waterhouse Coopers. ERCOT Operations management decided to utilize the ERCOT Compliance Group for the 2003 operations review to obtain a more comprehensive review and improve the training efforts The internal review performed by the ERCOT Compliance Group was far more strict than the 2003 operations audit performed by Price, Waterhouse Coopers Internal reviewers had significant electric utility experience Internal reviewers had comprehensive knowledge of the operating procedures

4. Overview (con’t) Review did not consider partial credit – any discrepancy for any reason was logged as non-compliant Review included the use of historical databases for periods when the reviewers were not in the control room The 2003 review showed significant improvement over 2002 results 2002 PWC audit resulted in a 67% full compliance finding 2003 Internal review resulted in an 87% full compliance finding despite increased strictness There was concern over the number of frequency desk non- compliance findings

5. Discussion Of Findings No significant reliability concerns were identified There were four noncompliant findings that ERCOT Operations considers to be areas of concern that will be addressed through procedure review and training –Communications requirement –CPS1 performance monitoring requirement –Two logging requirements There were four noncompliance findings that ERCOT Operations considers to be random, one time occurrences that will be addressed through training

6. Discussion Continued There were 16 noncompliant findings that ERCOT Operations considers to be the result of the procedures being too prescriptive that will be corrected by review and revision of the procedures There were three noncompliant findings associated with the DC ties that were the result of non-operator activities being included in the operating procedures. These will be corrected through revising the operating procedures to include only those activities which are performed by control room operators. The operator activities were being performed by the operators at the time of the review.

7. Review Team Conclusions Overall operator performance was good – some findings were caused by wording in procedures requiring actions that went beyond usual task requirements – tasks were performed to expectations instead of written procedures which need to be addressed through correcting procedures (in one case one finding resulted in three noncompliant findings) Still, some findings need the attention of management to ensure consistency with good operating performance The lagging performance on the frequency desk was mostly due to what appears to be excessive procedure details

8. Grid Operations Observations The original operating procedures were written with significant detail as ERCOT had no prior experience with the current market design. ERCOT Operations has now gone through a rapid learning curve and is adjusting operations as required. The current challenge is to review and revise the procedures to meet the operating needs, then provide training for the operators on the procedures. Resources to accomplish this need have been limited due to the work load The staffing increase approved by the Board in the 2004 budget will provide the resources needed –Additional shift personnel to allow for training time availability –Trainers to perform the needed training

9. Other Grid Operations Items There have been no unusual operational incidents regarding reliability or settlement financial impact to date since the last Board meeting.

10. 2004 RMR Contracts

11. Observations ERCOT staff is nearing finalization of the RMR contracts currently needed for 2004 in accordance with the revised RMR Protocols Many stakeholders believe that the revised RMR protocols will result in reduced costs for the RMR services The current estimate of the RMR costs for 2004 do not support the expectation of reduced costs 2004 RMR costs may equal or exceed the 2003 costs –2004 operating costs are based on the actual steam turbine generation unit costs and not industry average combustion turbine costs –Major and minor repair projects are permitted and are needed at units to ensure reliable operations and suitable availability –Actual costs and repair project needs will be monitored by ERCOT

12. NERC Standards Development Process Update

13. Status Of NERC Standards Development There are currently 16 proposed standards under development by NERC Seven are in the Standards Authorization Request (SAR) phase, where the need for the standard and its requirements are developed Eight are in the drafting and public comment phase One, Operate Within Limits, is in the ballot phase There needs to be more attention from the stakeholders. Only a few entities are active in the process. More companies need to join the ballot pool and participate A NERC Standards Development Bulletin will be handed out for the Board’s information. It is published monthly.

14. Transmission Services

15. Transmission Services has been very active: Supported the 2004 RMR determination Developed RMR exit strategies – at least two existing RMR units will not be needed after 2004 Worked on determining congestion relief solutions for the Northeast and DFW areas Held a workshop on the Phase 2 Voltage Stability Study Held a job fair for over 30 engineering students – will fill some of the new Transmission Services positions from these entry level applicants

16. RMR Exit Strategy Projects ERCOT Transmission Services is requesting Board Approval of the RMR Exit Strategy for the B. M. Davis generating units