1 Draft NYISO 2003 Budget Report BS&P Report to Management Committee October 16, 2002

2 Objective of Today's Report Provide background information to MC for November 7 Budget vote Get MC feedback on BS&P recommendations Receive further input on draft 2003 budget Update MC on other BS&P Activities

3 Presentation Overview Budget Approval Process & BSP Schedule Draft 2003 Budget Proposal Review BS&P Recommendations MC Discussion of Issues Overview of Other BS&P Activities  Status 2002 Budget  Status Compensation Issues

Budget Approval Process & Schedule September 30 - BSP Detailed budget review  Detailed September 30 Budget report distributed to MC October 14 – Draft Budget Review by ISO Board Finance & Compensation Committee October 16 - Draft Budget Review by MC October 24 – Review of revised budget based on ISO Board and MC input by BS&P October 30? – Additional BSP review (if required) November 7 – MC Action on Budget November 19 – ISO Board acts on 2003 Budget

5 Draft 2003 Budget Proposal Key Assumptions Does not include NERTO Costs Total onsite manpower increase from 346 to 450  Increased headcount by 47 from 312 to 359  Increased Contractors by 57 from 34 to 91 Includes projects under consideration by PPT Contingency Removed

6 Draft 2003 Budget Proposal Breakdown by Major Category Amounts in Millions of Dollars BaselineNYISO Start-Up Strategic Projects Other Projects Total Capital$6.2$ 0.0$8.8$1.4$16.4 Expenses$85.8$13.2$31.0$9.5$139.5 Total Budget$92.0$13.2$38.8$10.9$155.9 Offset by: Non-includible charges (revenue) ($1.3)$0.0($0.3)($0.0)($1.6) Equals: Funds needed via RS#1$90.7$13.2$39.5$10.9$154.3 RS#1 Charge/ MWH$0.57$0.09$0.25$0.07$0.98

7 Draft 2003 Budget Proposal Comparison with Previous Years Amounts in Millions of Dollars 2003 Draft 2002 Budget 2001 Budget 2000 Budget Baseline$ 92.0$ 83.8$ 72.7$ 53.9 NYISO Start-Up$ 13.2 $ 14.6$ 11.8 Strategic Projects$ 39.8$ 10.9$ 0.0 Other Projects$ 10.9$ 7.3$ 10.5$ 9.3 Total Budget$155.9$ 115.2$ 97.8$ 75.0 Less: Revenue Offsets($1.6)($4.2)($2.2)($0.5) Funds Needed via RS#1 $154.3$ 111.0$ 95.6$ 74.5 RS#1 Charge/ MWH$ 0.98$ 0.68$ 0.60$ 0.44 Note: Budget amounts for each year have been restated to exclude depreciation of fixed assets. This treatment has no impact on the Funds Needed via RS#1 or on the RS#1 charge. Note: Budget amounts for each year have been restated to exclude depreciation of fixed assets. This treatment has no impact on the Funds Needed via RS#1 or on the RS#1 charge. Note: The 2001 and 2000 breakdown between Baseline & Projects are estimated amounts. These budgets were not compiled according to the current presentation. Note: The 2001 and 2000 breakdown between Baseline & Projects are estimated amounts. These budgets were not compiled according to the current presentation.

8 Draft 2003 Budget Proposal Comparison with Other ISOs Source: August 15 PJM preliminary 2003 budget report augmented with October 4 ISO-NE adopted budget material and September 30 NYISO proposed budget information

9 Draft 2003 Budget Proposal Key Cost Drivers Strategic Projects ($38.8 M)  SMD 2.0 ($26.7 M)  Open Scheduling System (OSS) – Off-system scheduling ($3.4 M)  Decision Support System (DSS) - Data warehouse system for billing and market monitoring ($6.5 M)  Enterprise Application Integration (EAI) – Integrates NYISO Software applications ($2.2 M)  Future Costs (2004-6) – Additional ($55.3 M)

10 Draft 2003 Budget Proposal Key Cost Drivers (Cont.) Other Projects ($10.9 M)  Day Ahead Demand Response Programs  Scarcity Pricing  Automated TCC Auction  Automated UCAP Auction  Station Service  Controllable Line Pricing  Other…

11 Draft 2003 Budget Proposal Key Cost Drivers (Cont.) Insurance ($4.1 M)  Increase from base of $2.4 million  Biggest increase property and liability ($1.7 M) and credit insurance ($2 M) New Building ($3.7 M)  Required for 101 new employees and on-site contractors Additional Full Time employees ($2.5 M)  Most budgeted 6 months in 2003, commitment of about $5 M in 2004  IT – = 114  Market Services – = 70  Other – = 175

12 BS&P Recommendations Consider financing all Strategic Initiatives costs  Currently finance hardware on a 3 year cycle  Consider financing software, consultant & labor costs  Other costs might include financing cost, building for employees working on projects, and other support costs  PJM and ISO-NE do so today  Consider deferring charging for costs until benefits begin to accrue to market  Potential savings of $30 M to $40 M

13 BS&P Recommendations (Cont.) Reconsider Market Services staff increases  Briefing by Market Services did not convince BS&P of the need for additional staffing  Potential savings $2 -$3 M Evaluate elimination of credit insurance  We have better policies  We have increased staff for monitoring  Potential Savings $2.6 M

14 BS&P Recommendations (Cont.) Develop budgets for various price caps  After the above recommendations, review the budget in more detail to find additional savings.  Then develop total budgets for amounts of $115 M $120 M $125 M  Identify for PPT impact on projects for each budget level  Additionally provide PPT budget impact for each major project

15 MC Discussion of Issues 1. Does the MC like financing strategic initiatives development? 2. What does MC think of elimination of credit insurance costs? 3. What process for reviewing need for Market services staffing? 4. What is a reasonable increase for ISO budget levels? 5. How does PPT get feedback from market participants as it considers benefits of various budget options developed by NYISO? 6. Other discussion?

Budget Status As of September 30, 2002 Expenses  Year to Date 15% under budget  Projected 1% over original budget (Uses about 1/3 of contingency) Revenues  Lower sales than forecasted results in $2.8 M shortfall. Offset by retention of $3.0 M 2001 budget under run. Future treatment still an issue to be resolved.

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18 Status Compensation Issues July 7, Original Motion of MC requested information October 16 - BS&P Meeting after MC meeting to discuss response with Bill Museler October 24 -Topic of discussion of BS&P November 22 - Input meeting with Bill Museler December - Bill Museler to pass BS&P Input to ISO Board.