ERCOT Staff Comments Regarding the Proposed Suspension of Residential 2005 Annual Validation RMS Presentation August 10, 2005

2 Residential Annual Validation History Initial Validation began in October 2001 and was completed in September Annual Validation was bypassed because of the delay with Initial Validation 2003 Annual Validation was completed on schedule with some delay in completing submission of 814_20 transactions (scheduled: November 10, 2003; actual: January 2004) 2004 Annual Validation was suspended for Residential due to large volume of migrations 2005 Annual Validation is in progress with two milestone dates having been missed thus far: –algorithm testing completescheduled: May 1; actual June 7 –TDSP change file submissionscheduled: June 30; actual: July 22

Annual Validation Changes Active & De-Energized ESIIDs Initial Validation was completed in 2002, no AV 2002 New methodology implemented for AV 2003 to standardize Winter Ratio calculation across TDSPs by using calendarized monthly usage

Annual Validation Changes Active & De-Energized ESIIDs No methodology changes implemented for AV 2004 Residential AV 2004 cancelled because of high volume of changes

Annual Validation Changes Active & De-Energized ESIIDs Implemented three algorithm changes for Residential AV 2005 Changes reported above are based on TDSP calculations and are currently unverified

6 Residential 2005 AV Algorithm Changes Three Significant Changes Implemented for 2005 Annual Validation for Residential –Do not change RESHIWR to RESLOWR by default … do not override previous assignment made with complete data because of incomplete data this year –WR numerator > 20 required for RESHIWR … less than 20 kWH/day is not indicative of electric heating –Dead-bands (1.0 – 1.8) around WR to reduce migration RESHIWR to RESLOWR if WR ≤ 1.0 RESLOWR to RESHIWR if WR > 1.8 If previous assignment was a default, then RESHIWR if WR>1.5 RESLOWR if WR≤1.5 ERCOT analysis predicted a 50% reduction in migration as a result of these changes … as shown on previous slides, this has been realized

7 ERCOT Concerns with Proposed Suspension PWG and ERCOT Staff opinion has been that the three Residential algorithm changes implemented for 2005 are likely to result in an overall improvement in assignment accuracy … changes were approved by RMS and TAC A substantial and growing volume of Residential ESIIDs have default Profile ID assignments –As of October 2004, about 933,000 (18% of total) Residential ESIIDs were being settled with a default profile assignment (749,000 defaults from AV 2003 plus 184,000 new ESIIDs from May 2003 – October 2004) –By suspending Annual Validation for 2005 these ESIIDs will continue to be settled on default assignments until October 2006 –ERCOT estimates that 123,000 new ESIIDs will be added (and on default assignment) between November 2004 – October 2005 (note: based on the current Decision Tree, ESIIDs added after October of a particular year will have default assignments based on the following year’s Annual Validation)

8 ERCOT Comments on Proposed Suspension PWG and ERCOT Staff agree that the volume of Profile ID migration is still too high … continued improvement to the assignment algorithm is needed to make it more accurate and stable An accurate algorithm will have to take into consideration: –year-to-year weather changes –weather / consumption differences across weather zones –occupancy changes at the premise level –empirically derived kWh minimums and dead-bands –these algorithm changes are being considered for AV 2006

9 ERCOT Comments on Proposed Suspension ERCOT Staff will undertake analysis to determine whether completing 2005 Annual Validation will improve or degrade assignment accuracy –Use Residential Survey Results to compare current assignment accuracy versus accuracy of new assignment based on completing AV 2005 –Run test settlements for a sample of 2004 winter days (10 days each in December 2004, January 2005 and February 2005) with current assignment and then with new assignment... compare before- and after- UFE to quantify the impact of AV 2005 The analysis is expected to be available for review at the November RMS meeting and should be the basis for the ultimate decision on AV 2005 (continued)

10 ERCOT Staff Recommendation RMS recommends short term modifications for Residential AV 2005 to TAC and the Board per Protocols –Proceed with Annual Validation for Residential ESIIDs currently having default Profile ID assignments (~311,000 changes) –Temporarily suspend AV 2005 for the remaining Residential ESIIDs pending the findings of the proposed ERCOT analysis –Assign PWG an action item to analyze the impact of a schedule change for Residential AV and draft an LPGRR if appropriate Minimize the impact of Profile ID changes between settlement runs Minimize the lag between determining the need for Profile ID changes and submission of transactions to make the changes