Public Meeting on ERCOT’s Proposed 2004 Budget September 3, 2003 Preliminary - Subject to ERCOT Board Approval

AgendaBackground Business Considerations Assumptions Proposed 2004 Budget ERCOT System Administration Fee Revenue Requirements Operating Expenses Capital Investment Debt Service MWH Forecast Q&A Discussion Preliminary - Subject to ERCOT Board Approval

Schedule June 11Kickoff meeting July 10Budget templates due to Finance July 11-17Internal management review July 18Preliminary budget to directors/mgrs July 21-31Budget revisions August 1-15Internal management review August 26Finance & Audit Committee (F&A) review September 3Public meeting on proposed budget September 11F&A review September 16F&A recommendation to Board October 21Board approval October 24Preliminary PUCT fee filing review October 31 PUCT fee filing Preliminary - Subject to ERCOT Board Approval

Business Considerations Dynamic Market Needs Transmission/Resource Planning RMR/Congestion Management NERC Reliability/Compliance Security (Physical and Cyber) Escalating Requirements for Implementing Approved Protocol Revision Requests (PRRs) Preliminary - Subject to ERCOT Board Approval

Business Considerations Minimal Opportunity to Analyze & Perform Process Reviews & Improvements Manual Workarounds – Startup Additional Manual Workarounds (new PRRs) Recurring Market Needs (e.g., suspension of true- ups) Limited Resources  Unlimited Requirements Preliminary - Subject to ERCOT Board Approval

Business Considerations Technology constraints Multiple System Customizations More Complex Upgrades Many Systems Have Limited or No Development/Test Environments Some Single-source Providers Preliminary - Subject to ERCOT Board Approval

Assumptions Operating Expenses Additional FTE’s required to: Satisfy existing expectations of the market Meet requirements of protocol revisions Support capital investments Hardware and software support costs increase with capital spending Consulting costs increased in response to complexity of systems in production and new initiatives such as the Texas Nodal project, data warehouse project, and the SAS 70 type 2 audit Preventative maintenance on ERCOT facilities begins in 2004 Preliminary - Subject to ERCOT Board Approval

Assumptions Capital Spending $55 million capital program Possible increase at completion of project priority process 80 percent funded with proceeds from ERCOT’s short-term credit facility Debt Service $13.6 million principal Interest on long-term notes and borrowing under short-term credit facility Preliminary - Subject to ERCOT Board Approval

Administrative Fee Comparison $0.33 / MWH $0.22 / MWH $0.44 / MWH Preliminary - Subject to ERCOT Board Approval

Revenue Requirement Comparison Revenue Requirements - $133.7 million $99.5 million operating expense Labor SW licenses & maintenance Consultants & contractors $55 million capital expense $44 million debt funded $11 million revenue funded $23.2 million debt service $9.6 million interest $13.6 million principal 2% MWH growth $0.22 / MWH $0.33 / MWH $0.44 / MWH Preliminary - Subject to ERCOT Board Approval

Revenue Requirement Comparison $0.22/ MWH $0.33/ MWH $0.44/ MWH $0.58/ MWH $0.67/ MWH $0.74/ MWH $0.77/ MWH Preliminary - Subject to ERCOT Board Approval

Revenue Requirement Comparison $0.75/ MWH $0.71/ MWH $0.72/ MWH $0.69/ MWH Preliminary - Subject to ERCOT Board Approval

Administrative Fee Sensitivity $0.01of Administrative Fee equals : $3 million of operating expense $3 million / 294,000,000 MWH = $0.01 / MWH $15 million of capital spending 80% leverage (20% equity funding * $15 million = $3 million) 6.8 GWH 2.3 percent deviation from MWH expected in 2004 Calculations ($3 million / $0.44 per MWH = 6.8 GWH. 6.8 GWH / 294 GWH = 2.3%) Preliminary - Subject to ERCOT Board Approval

Operating Expenses Preliminary - Subject to ERCOT Board Approval

Equity-Funded Capital Preliminary - Subject to ERCOT Board Approval

Debt Service Preliminary - Subject to ERCOT Board Approval

Revenue Requirement Summary Preliminary - Subject to ERCOT Board Approval

2004 Revenue Requirements Utilization of the System Administration Fee Preliminary - Subject to ERCOT Board Approval

2003 Revenue Requirements Utilization of the System Administration Fee Preliminary - Subject to ERCOT Board Approval

Monthly MWH 294 million MWH budgeted for percent growth over 2003 budget 2.1 percent year-to-date growth in MWH 2003 vs Preliminary - Subject to ERCOT Board Approval

Organizational Chart Preliminary - Subject to ERCOT Board Approval

Staffing Increases Total increase proposed for employees Corporate Administration – 12 employees Information Technology – 35 employees System Operations – 32 employees Market Operations – 51 employees Preliminary - Subject to ERCOT Board Approval

Corporate Administration Staffing Increases Proposed increase of 12 employees Increased NERC and protocols compliance work Increased number of protocols revision requests Support provided to TAC and other committee and subcommittee meetings Texas Nodal project – program management, legal and financial analysis Preliminary - Subject to ERCOT Board Approval

Information Technology Staffing Increases Proposed increase of 35 employees Strengthen support of existing applications and hardware Provide production support of new applications such as data warehouse Enhance cyber and physical security Bolster architecture, development and project management staff Nodal impact larger in 2005 and 2006 Develop and maintain procedures necessary for internal control (SAS 70 audit) Preliminary - Subject to ERCOT Board Approval

System Operations Staffing Increases Proposed increase of 32 employees Add a system operator training shift and additional training staff Provide real time evaluation of system operator performance Increased responsibilities and expectations regarding transmission project planning and approval, generation requirements, congestion management Support protocol required tasks such as performance distribution reports, voltage stability studies, black start studies, transient studies, outage coordination support and ancillary service calculations Preliminary - Subject to ERCOT Board Approval

Market Operations Staffing Increases Proposed increase of 51 employees Validation of retail customer switching (Replace contractors and consultants currently performing tasks relating to the ESI-ID of record) Support direct load control and other new load research work Perform metering site audits required by protocols and support introduction of competitive metering Provide test support for ERCOT projects, maintenance efforts, and more frequent Texas Set test flights Add “business” project management staff Preliminary - Subject to ERCOT Board Approval

Staffing Projections Actual or projected in 2000 through 2003 Budgeted in percent growth in 2005 and percent growth in 2007 No growth in 2008 and future years ERCOT Employees Preliminary - Subject to ERCOT Board Approval

2004 Consulting Services Preliminary - Subject to ERCOT Board Approval

2004 Consulting Services Preliminary - Subject to ERCOT Board Approval

Debt and Capital Spending Analysis Preliminary - Subject to ERCOT Board Approval

Revenue Requirement Summary Preliminary - Subject to ERCOT Board Approval

Questions?