ERCOT 2005 Budget Public Meeting September 1, 2004

Aug 2004 Agenda  Introductory Comments  Review Budget Schedule  Review Operating Budget Process and Assumptions  Review Project Process and Assumptions  Input, Questions and Wrap-up

Aug 2004 Budget Schedule  September 1 - Public Meeting on 2005 Budget - Input from Public  September 20 - Finance and Audit Committee meeting to review preliminary budget (Special meeting)  September 23 - Financial Briefing with PUCT Staff (Tentative)  October 7 - Finance and Audit Committee meeting to review draft budget (Special meeting)  October 12 - Public Meeting on Proposed 2005 Budget  October 14 - Meeting with PUCT staff on Proposed 2005 Budget  October 19 - Finance and Audit Committee Recommendation to Board at monthly meeting  November 16 - Board Approval of 2005 Budget  November 23 - Preliminary PUCT Filing Review (if needed)  November 30 - PUCT Filing

Aug 2004 Agenda  Introductory Comments  Review Budget Schedule  Review Operating Budget Process and Assumptions  Review Project Process and Assumptions  Input, Questions and Wrap-up

Aug 2004

Budget Process  ERCOT Revenue Requirements  Operating Expenses  Debt Service Obligations  Revenue-funded Portion of Capital Investment  Most of Revenue Requirements recovered through the ERCOT System Administrative Fee  ERCOT System Administrative Fee assessed to Qualified Scheduling Entities

Aug 2004 Major Budget Assumptions  Operating Expenses  Labor  Staff to perform long-term, base operating activity  Reevaluate staffing needs and reallocate resources across the organization as necessary  Merit pool estimated at an average of 3-5%  Adjust loading for benefits to reflect changes effective in 2004  Consultants and contractors  Review use of all consultants and contractors to ensure appropriate balance between ERCOT staff and consultants is maintained  Hire to perform highly specialized tasks and to provide short-term assistance during times of peak resource demand

Aug 2004 Major Budget Assumptions  Operating Expenses (continued)  Hardware and software support and maintenance costs  Base on actual historical spending  Rule of thumb 15% - 20% of original acquisition cost  Facilities costs  Base on actual historical spending  Protect investment in facilities  Complete TCC Phase 2 in late-2004 or early-2005  Employee expenses  Base on actual historical spending

Aug 2004 Major Budget Assumptions  Capital Expenditures  Assumed $35 million capital program  Project funding consistent with ERCOT’s Financial Policy  No Texas Nodal implementation costs  Process of project identification and prioritization described in detail later in the presentation

Aug 2004 Major Budget Assumptions  Debt Service Obligations  Favorable financial variance realized in 2004, if any, used to reduce debt obligations  Maintain investment grade credit  Principal and interest payments as contracted on  Senior Notes  Term Note  Revolving Credit Facility

Aug 2004 Major Budget Assumptions  Revenue  Approximately 98% of ERCOT revenue requirements recovered through the ERCOT System Administrative Fee  No changes to the other miscellaneous fees collected by ERCOT  Wide-area network fees  Non-ERCOT load serving entity fees  Generation interconnection study fees  Membership fees  Other

Aug 2004 Organizational Structure FTE=74FTE=231 FTE=530 FTE=225

Aug 2004 Non-project Outside Services  Non-project outside services include:  Production support  Audit fees  Legal fees  Retail Switch notifications  Security guard services  Default QSE payments  Custodial services  Independent board member fees  Project support

Aug 2004 HW & SW Maintenance & Support  Annual support and maintenance costs are approximately 15-20% of the initial purchase price of the hardware item or software license  $150 million approximate investment in software systems  $55 million approximate investment in hardware systems

Aug 2004 Outstanding Debt Senior Notes  Principal outstanding: $136,363,000  Interest rate: Coupon rate 6.17% (effective rate 6.3%)  Term: 12 years, with $ 13,637,000 payable annually beginning May 2004 (average life of 7 years)  Final payment due: May 15, 2014  Issue date: May 15, 2002

Aug 2004 Outstanding Debt Term Note  Available capacity: $50,000,000  Principal outstanding at Sept 1: $35,000,000  Interest rate: Floating at LIBOR bp or Prime - reset monthly/quarterly (curr = 2.1%)  Term: 4.5 years, with equal payments due annually beginning November 1, 2005  Final payment due: November 1, 2008  Issue date: May 7, 2004

Aug 2004 Outstanding Debt Revolving Credit Facility  Available capacity: $50,000,000  Principal outstanding at Sept 1: -0-  Interest rate: Floating at LIBOR bp or Prime reset monthly/quarterly  Term: 2 years, matures May 6, 2006  Issue date: May 7, 2004

Aug 2004 Debt Service

Aug 2004 Estimated 2005 Debt Service

Aug MWH Trends 2.5% increase in 2005 over 2004 Actual and Projected Prepared by ERCOT Planning Department Using:  Trend analysis  10-year growth rates for annual energy  Result compared to summation of individual TDSP forecasts with minor discrepancy

Aug 2004 Administrative Fee Sensitivity  $0.01of Administrative Fee equals :  $3 million of operating expense  $3 million / 297,000,000 MWH = $0.01 / MWH  $7.5 million of capital spending  60% leverage (40% equity funding * $7.5 million = $3 million)  6.8 GWH  2.3 percent deviation from MWH expected  Calculations ($3 million / $0.44 per MWH = 6.8 GWH. 6.8 GWH / 297 GWH = 2.3%)

Aug 2004 Agenda  Introductory Comments  Review Budget Schedule  Review Operating Budget Process and Assumptions  Review Project Process and Assumptions  Input, Questions and Wrap-up

Aug 2004 Agenda  Project Request Process  Project Budgeting Process  Annual Budgeting & Prioritization  Questions

Aug 2004 Process for Market Requests BoD TAC PRSWMSRMSROS CMWG QSE PM WG DS TF TF TX Set WG TTPT WG TD WG PAR SCR PRR *Subcommittee will identify if this request requires a change to protocols. If no, then submitted via SCR *Any system change that does not require a change to the protocols will be submitted via SCR Note: SCRs – need to be submitted to TAC. They have to be submitted through a sub-committee. PRRs – need to be submitted to PRS. They can be initiated from sub-committees, working committees or submitted directly to PRS (ex: from ERCOT). Sub Committee Working Committee

Aug 2004 Internal ERCOT Requests  Is it an enhancement?  Improves operations  Fulfills regulatory obligations  Supports strategic goals/objectives  Positive cost benefit  Complete a project request?  Complete a request  Obtain manager or director sponsorship  Submit to CART for prioritization and rank  Is it a fix?  Addresses a system error Submit as a SIR/SPR Submit as a project request

Aug 2004 Overview of Project Requests ERCOT PMO ERCOT PMO ERCOT PM Process ERCOT PM Process PUCT Market Participants ERCOT Program Management Office Overall Management of: Project portfolio Project budgets, priorities and approvals Project Management Process Management of: Project delivery Project resources, costs, timelines Initiation of Project Requests PUCT Rulings System Change Requests (SCRs) Protocol Revision Requests (PRRs) Project Requests (PRs)

Aug 2004 Annual Prioritization Process  Priority categories are high, medium, and low, with subcategories of high, medium, and low, which result in the following priorities:  High-High (1.1), High-Medium (1.2), High-Low (1.3), Medium-High (2.1), Medium-Medium (2.2), Medium-Low (2.3), Low-High (3.1), Low-Medium (3.2), Low-Low (3.3)  High – Critical to continued operations and reliability of the market, or in response to legal requirements. (Assumes that current services or functions provided are below acceptable level.)  Medium – Important to improve service or efficiency of operations of the market. (Assumes that the current services or functions provided are tolerable but not up to the desired state or target.)  Low – Recommended to further automate operations or improve efficiencies of services currently provided by the market. (Assumes that the current services or functions provided are acceptable but action is needed to prevent degradation of services.)  The subcategories (H/M/L) prioritized the projects within the category in terms of the value/impact to the market.

Aug Project Budget Timeline  8/19 – ERCOT completed internal prioritization process  8/27 – PRS Prioritization Meeting  September – Combined Prioritized list goes to TAC  October - Finance & Audit Committee  November Board of Directors

Aug 2004 Major Projects for 2005  EMMS Release 4A (2004 Carry Over)  PUCT Market Monitoring and EDW (2004 Carry Over)  EMMS Release 5  Texas SET 2.1

Aug 2004 Agenda  Introductory Comments  Review Budget Schedule  Review Operating Budget Process and Assumptions  Review Project Process and Assumptions  Input, Questions and Wrap-up

Aug 2004 Input, Questions, and Wrap-up