1 Appeal to ERCOT Board Regarding Use of Fuel Oil Index Price (FOIP) Larry Gurley TXU Wholesale June 19, 2007

2 Background During June, July and August of 2006, TXU Wholesale burned fuel oil at 9 of its gas/oil plants to provide RPRS and OOM services. TXU burned fuel oil instead of natural gas due to gas supply and delivery problems. ERCOT Protocols allow for recovery of “verifiable costs”. -If natural gas is used, a Fuel Index Price (FIP) based on natural gas prices may be used to “verify” costs in lieu of providing supporting documentation. -However, the Protocols are silent regarding the use of a fuel oil index price (FOIP) to “verify” costs in lieu of supporting documentation.

3 Background (Continued) In early 2007 (consistent with the settlement timeline in the ERCOT Protocols), TXU Wholesale submitted 3 requests for reimbursement of “verifiable costs” (one for each month) for a total of $1,136,294 (based on a fuel oil index price) to recover the cost of fuel oil burned during the summer of ERCOT denied the requests on the grounds that the Protocols do not specifically allow use of a fuel oil index price for “verifiable costs”. Subsequently, ERCOT agreed to allow recovery of $488,802 based on a natural gas index price. Thus, the remaining $647,492 is subject to review by the ERCOT Board pursuant to Protocol Section (4)(c).

4 Applicable Protocol Language Section (3)(b) … Fuel costs, including transportation and storage costs directly related to this RPRS event for use in calculating the costs in Section (3)(b) (i), (iii) and (v), will require supporting documentation of sufficient detail to allow for the verification of the cost of fuel consumed by the Resource receiving the RPRS Instruction. Documentation may include contracts, invoices or other documents. For gas fired Resources, such documentation will not be required if the requested incremental fuel cost is less than one hundred ten percent (110%) of the Fuel Index Price.

5 Applicable Protocol Language (cont.) Section (3)(c) … The requesting QSE may request that this review be conducted at an Executive Session of the ERCOT Board of Directors. Requests must be presented in person by a representative of the company submitting the request and must also include language suitable to be included in the Protocols to define the documentation requirements for future requests of a similar nature. Subsequent to the approval of such costs, the requesting company shall submit a Protocol Revision Request, in accordance with Section 21, Process for Protocol Revision, incorporating the necessary documentation standards provided to the ERCOT Board. Once approved by the ERCOT Board, ERCOT will process the request for payments as described in Section 9.2.5, Resettlement Statement.

6 TXU’s Request of the Board Consistent with Protocols Section (3)(c) and (5)(c), TXU requests that the Board approve TXU’s remaining verifiable costs ($647,492) using the Fuel Oil Index Price (FOIP) for fuel oil burned during the summer of 2006 and approve the concept of allowing use of a Fuel Oil Index Price (FOIP) in lieu of documentation when fuel oil is part of a Market Participant’s request for “verifiable costs”.

7 Why Use an Index? TXU seeks Board approval of the use of a Fuel Oil Index Price (FOIP) because: -fuel oil is typically replaced as quickly as possible in order to ensure a ready supply for reliability, -an index price (not at average inventory price) best reflects market price paid for oil, -minimizes administrative costs for both the Market Participant and ERCOT when dealing with “verifiable costs”, and -use of index price is consistent with the approach approved in the Nodal Protocols.

8 Protocol Revision Request Consistent with Protocol Section (4)(c), TXU will submit a Protocol Revision Request (PRR) through the normal PRR review process to define use of a FOIP in lieu of documentation for recovery of “verifiable costs” when fuel oil is used to produce the energy required to supply RPRS or OOME services.

9 Proposed Protocol Revision Natural gas costs, including transportation and storage costs directly related to this RPRS event for use in calculating the costs in Section (3)(b) (i), (iii) and (v), will require supporting documentation of sufficient detail to allow for the verification of the cost of natural gas consumed by the Resource receiving the RPRS Instruction. Fuel oil costs submitted for verification shall be based on replacement costs directly related to this RPRS event for use in calculating the costs in Section (3)(b) (i), (iii) and (v). Documentation of fuel oil costs shall be in sufficient detail to allow for the verification of the replacement cost of fuel oil consumed by the Resource receiving the RPRS Instruction. Documentation may include contracts, invoices or other documents. For gas fired Resources, such documentation will not be required if the requested incremental fuel cost is less than one hundred ten percent (110%) of the Fuel Index Price. For oil fired Resources, such documentation will not be required if the requested incremental fuel cost is less than one hundred ten percent (110%) of the Fuel Oil Index Price.

10 Questions?