Update On The ERO Transition Activities To Comply With The 2005 EPAC ERCOT TAC Meeting March 9, 2006 Sam Jones, COO

Draft 2 of the proposed NERC proposed ERO filing was posted on January 26 –More “Regional friendly” –Membership Committee restored –More realistic time schedule included Regional Managers met with senior NERC staff on February 7, to develop a better understanding of the draft and negotiate further revisions for draft three of the filing Another meeting was held on March 6 to further discuss the issues The NERC Board is scheduled to vote on the final filing documents at a special March 28 meeting

Delegation Agreement Regional Entities (RE) will be created through delegation of ERO authority in a Delegation Agreement – it will be a pro-forma agreement with individualized, FERC approved, Regional attachments and will incorporate the “Rules of Procedure” –Draft filing 2 appeared to allow unilateral change of rules by NERC –Regional Managers negotiated different wording at the 2/7 meeting Attachments will be negotiated by the Regions and will include: –Governance and Rules – the final FERC ERO/RE certification rule and related discussion, issued February 6, and discussions with FERC staff strongly indicate it will be in ERCOT’s interest to create a separate, independent entity to perform the RE function – ERRO Strong independence required FERC review of “entire annual budget for statutory and non-statutory activities of each Regional Entity—including the RE’s business plan” ERCOT Protocols kept separate from FERC approved and enforced NERC Standards

Delegation Agreement - Cont Attachments (continued) –Compliance Process – must be acceptable to ERO and FERC – ERCOT staff will meet with the NERC Board of Trustees Compliance Committee on March 15 th to describe the current ERCOT compliance program –Enforcement/Penalty Process – will be developed to administer the final ERO/FERC adopted matrix – currently, penalty basis being discussed –Regional Standards Development Process – it appears that ERCOT can duplicate its current PRS process under ERCOT RE leadership to meet the requirements for such process to be open and fair Not many Regional Standards are expected in ERCOT Most will be variances from ERO standards as needed by ERCOT –Funding – ERO and RE budget approved by FERC All ERO and ERCOT RE funding from ERCOT will be sent to the ERO from the ERCOT ISO fee The ERCOT RE will then be funded from that submittal by the ERO

Compliance and Penalty Process Compliance review activity remains the same In the event of a compliance violation finding the following steps will be followed in descending order: –The entity involved will be notified of the potential violation –The ERO is notified of the potential violation –ERCOT compliance and the entity involved make their presentations to the RE Compliance Officer –The Compliance Officer makes the initial determination and determines a standard penalty if applicable –The ERO is notified of the results and reviews any confirmed violation –The entity involved can appeal a violation finding or penalty to the ERO –FERC is notified of the results of the process and reviews the findings –FERC makes the final determination and imposes the penalty, if applicable – it is a federal penalty

Regional Standard Development Process The regional process must be open, inclusive, balanced, etc Anyone can submit a regional standard request The current ERCOT PRS process can be used under RE staff ownership and facilitation Once a proposed regional variance or standard is recommended by the process, it is submitted to the RE Board for approval as a proposal An approved proposal is submitted to the ERO for recommendation to FERC –The ERO staff reviews the proposal for acceptability –The proposal is posted by the ERO for comment –If the ERO staff concurs with the proposal it will be forwarded to the ERO Board for approval The ERO forwards an approved proposed Regional Standard or variance to FERC for review and final approval or remand A FERC approved regional standard is federally enforceable

Regional Entity Funding The RE submits its proposed annual budget and business plan for the next year to the ERO by 6/1 – includes non-statutory activities The ERO reviews the proposed budget and business plan for adequacy The ERO submits its proposed budget and business plan along with those of all REs to FERC in August FERC reviews the entire package for adequacy and approves or remands Once approved, the ERO sends the load serving entities in the Region an invoice for its share of the ERO budget, bases on NEL, and all of that Region’s RE budget (quarterly?) –In ERCOT’s case the bill will be sent to ERCOT and included in the settlement process – where those expenses are billed today The ERO then sends the RE its share of the funds independent of the ISO or stakeholders

Time Schedule NERC will file for ERO certification about 4/4/06 REs should be in the process of preparing to file and comply – a decision on ERCOT’s RE structure and governance should be made at the March ERCOT Board meeting NERC anticipates certification in the June – July time period REs should be prepared to file when the ERO is certified, but not necessarily be in compliance at the time of its filing Regional reorganization should be completed by 11/01/06 REs begin calculating penalties based on final sanction outline and send letters to the entities – there may be a faze-in period – this compliance time line is not clear at this point The ERO/RE structure should be completed and fully operational on 1/1/07