Unit-Specific Deployment based on Modified Generic Cost Presented at WMS December 15, 2003

Present Generic Compensation for Gas-Steam = 14.5 HR Present Generic Compensation for Combined Cycle = 9.0 HR Compensation from ERCOT 9.0 HR* $4.50 gas = $40.50 Compensation from ERCOT 14.5 HR * $4.50 gas = $65.25 Unit-Specific Deployment based on Generic Cost ($4.10 margin/revenue*) * Typical debt service on new assets See next slide ($12.65 margin) $0 debt on assets Creates incentive to operate inefficient units Combine CycleGas - Steam Marginal Cost (7.2 HR * $4.50) +$4.00VOM= $36.40 Marginal Cost (10.8 HR * $4.50) +$4.00VOM= $52.60

Investment New unit construction $4.00/kw $400,000 cost to build 1 MW 8,760 hrs/year * 7 years = 61,320 hrs $400,000/61,320 = $6.52 At a minimum, $6.52/MWh revenue needed to pay down debt on construction costs only Conservative estimate, does not include cost of borrowing money, time value of money, cost of Letters of Credit to trade power, Letters of Credit to purchase gas, transaction capturing systems, IT infrastructure, labor, etc …………………………..

10.0 HR + (Inc. HR inefficiency >7.2) = ( (10.8 – 7.2)) = 13.6 HR 9.0 Generic HR = 10.0 HR Modified Compensation by ERCOT 10.0 HR* $4.50 gas = $45.00 Previously ($40.50) Modified Compensation by ERCOT 13.6 HR * $4.50 gas = $61.20 Previously ($65.25) ($8.60 revenue/margin*) * High debt on assets ($8.60 margin) * $0 debt on assets Develop a method that compensates for increased costs, but does not reward for being inefficient Unit-Specific Deployment based on Modified Generic Cost Equalizes compensation to all Market Participants Combine Cycle Gas - Steam Marginal Cost (7.2 HR * $4.50) +$4.00VOM= $36.40 Marginal Cost (10.8 HR * $4.50) +$4.00VOM= $52.60

Up Deployments As part of the submittal of the Resource Plan, QSEs will specify bid premiums by Resource using the following formula: Gas = FIP * [10.0 HR + ( Registered HeatRate – 7.2 HR)] QSEs requesting compensation above the 10.0 HR level, must register documentation once a year, with ERCOT and the PUCT, attesting to the unit specific HR that will be used to calculate the bid premium. For Nuclear, Hydro, Coal and Lignite, Diesel, Block Load Transfer, and Renewable, the Modified Generic Price will remain the same as the present Generic Price as follows: Nuclear = $15.00/MWH Hydro = $10.00/MWh Coal and Lignite = $18.00/MWh Diesel = FIP * 16 MMBtu/MWh Block Load Transfer = FIP * MMBtu/MWh Renewable = $0/MWh

Down Deployments As part of the submittal of the Resource Plan, QSEs will specify bid premiums by Resource using the following formula: Gas = FIP * 7 MMBtu/MWh (Presently 5 to 12 HR * FIP) Diesel = FIP * 7 MMBtu/MWh (Presently 12 HR * FIP) For Nuclear, Hydro, Coal and Lignite, Block Load Transfer, and Renewable, the Modified Generic Price will remain the same as the present Generic Price as follows: Nuclear = $0.00/MWH Hydro = $0.00/MWh Coal and Lignite = $3.00/MWh Block Load Transfer = Not Applicable Renewable = $0/MWh

Level Playing Field Modified Generic Cost Method equalizes compensation, above costs, for all market participants Equalizing revenues among all units, removes the incentive to freeze efficient units below their maximum capabilities and forcing ERCOT to deploy other inefficient units in the area that provide higher revenues Modified Generic Cost Method compensates for increase costs, but does not reward inefficiency Premiums based on settlement compensation assures deployment in the most efficient manner