Emission Update Verifiable Cost Task Force August 21, 2008

Current Activities  On July 28 th, emission experts from different companies met to discuss emission costs as it effect generating assets in ERCOT Developed summary matrix Drafted cost methodology for applicable emission costs  Today, we are requesting approval to include the emission cost methodology drafted by the team to be included in verifiable cost manual

Emissions Summary Matrix  NOx State programs- SB7-east and west; State Implementation Plan (SIP) east; Non-attainment areas (Dallas-Ft. Worth, Beaumont-Port Arthur, Houston- Galveston-Brazoria) No federal program  SO2 State Program- SB7-east (9 units) Federal program- Federal acid rain

NOx Emissions

NOx Summary ProgramApplicable Units SummaryVerifiable Cost methodology consideration NOx SB7- east, west and El Paso Grandfathered units pre 1970 that were not originally permitted State program implemented by TCEQ based on 1997 heat input & emission rate to determine the allowances (SIP east & west allowance) SIP East Texas East Texas units except non- attainment areas and units built after 1995 State program implemented by TCEQ based on rate base limit that can be converted into a ton base limit with annual cap (Discrete Emission Reduction Credits can be submitted to meet requirements, but are not currently trade liquidly)

NOx Summary ProgramApplicable Units SummaryVerifiable Cost methodology consideration Non- attainment Area for Houston- Galveston- Brazoria All units & allowance allocated to pre-2001 units State program implemented by TCEQ with has 24-hour maximum system cap, 30-day rolling average system cap & annual cap. The annual cap is traded and the 24-hr cap is not currently traded, but will be eligible for verifiable cost if a market develops. EGU NOx limit for gas-fired units is lb/mmBtu. For coal- fired units the limits are 0.05 lb/mmBtu for wall-fired units and lb/mmBtu for tangentially-fired units. DERCs can be used to meet the requirements, but MECT are more liquidly traded in the Houston- Galveston-Brazoria. MECT allowances are usable for the vintage year & following year as well. Non- attainment Area for Beaumont- Port Arthur All units & allowance allocated to pre-2001 units State program implemented by TCEQ & each unit that can emit 0.10 lbs NOx/mmBtu (daily average) or less can have unlimited operation. The system cap values are a 24-hour maximum cap and a 30-day rolling average cap.

NOx Summary ProgramApplicable Units SummaryVerifiable Cost methodology consideration Non- attainment Area for Dallas- Ft. Worth All units & allowance allocated to pre-2001 units State program implemented by TCEQ with EGU limit for a large system unit (Luminant’s or Exelon’s) of lb/mmBtu, and for a small system unit (Garland) of 0.06 lb/mmBtu. The system caps are a 24-hour maximum (lb/day), and a 30-day rolling average (lb/day). DERCs can be used to assist in meeting the system.

NOx Verifiable Cost Language  Non-attainment Area for Houston- Galveston- Brazoria ERCOT should use Argus or Platts published average of the monthly mid-point annual index for the current and previous year’s Mass Emission Cap and Trade (MECT) to determine the price for the current month. For verifying the emission rate, the QSE will submit the historic calendar annual average for the unit specific emission rates reported to TCEQ and or EPA by April 30 of the applicable year, if deemed necessary by the QSE.  Non-attainment Area for Dallas-Ft. Worth & Beaumont-Port Arthur area As a trading market develops pertaining to emissions limits at a state and or regional level, the costs associated to comply with emission restrictions may be eligible to be recovered and be part of the verifiable cost methodology. At the appropriate time, any market participant may propose a methodology to the Verifiable Cost Working Group to recuperate the emission costs in the applicable non-attainment area, which will be addressed in the Verifiable Cost manual.

SO2 Emissions

SO2 Summary ProgramApplicable Units SummaryVerifiable Cost methodology consideration SO2 SB7 East Grandfathered units pre 1970 that were not originally permitted State program implemented by TCEQ that allows cap and trade based on allowances; goal was to provide reductions for grandfathered units SO2 Federal Acid Rain All unitsFederal cap and trade program implemented by EPA based on federal legislation (new facilities, built after 1990, are not allocated allowances)

SO2 Verifiable Cost Language  SO2 Federal Acid Rain ERCOT should use Argus or Platts or other Index to determine monthly price for SO2 Each QSE that requests reimbursement for SO2 will submit lbs/mmBtu emitted per the unit’s emission monitoring system If Argus or Platts or other Index stops publishing a monthly price for SO2, the QSE shall submit emission allowance to ERCOT as described in the extraordinary event section of the VC manual.

Other Related Emission Costs  TCEQ charges an annual emission fee based on tons emitted for each generation resources. Same $/ton rate for each generation and capped at 4000 tons per year. Current rate for 2008 is $32.73 per ton. For verifying the emission rate, the QSE will submit the historic calendar annual average for the unit specific emission rates reported to TCEQ by April 30 of the applicable year, if deemed necessary by the QSE.  Potential exposure Highly Reactive Volatile Organic Compound (VOC)- Houston area Other emission fee programs as developed by regulatory authorities