Presentation to WMS Regarding PRR 731- Fuel Oil Index Price (FOIP) Larry Gurley July 18, 2007

Background During June, July and August of 2006, TXU Wholesale (now Luminant) burned fuel oil at 9 of its gas/oil plants to provide RPRS and OOM services. Luminant burned fuel oil instead of natural gas due to gas supply and delivery problems. ERCOT Protocols allow for recovery of “verifiable costs”.  If natural gas is used, a Fuel Index Price (FIP) based on natural gas prices may be used to “verify” costs in lieu of providing supporting documentation.  However, the Protocols are silent regarding the use of a fuel oil index price (FOIP) to “verify” costs in lieu of supporting documentation.

Background (Continued) In early 2007 (consistent with the settlement timeline in the ERCOT Protocols), Luminant submitted 3 requests for reimbursement of “verifiable costs” (one for each month) for a total of $1,136,294 (based on a fuel oil index price) to recover the cost of fuel oil burned during the summer of ERCOT denied the requests on the grounds that the Protocols do not specifically allow use of a fuel oil index price for “verifiable costs”. Subsequently, ERCOT agreed to allow recovery of $488,802 based on a natural gas index price. Thus, the remaining $647,492 is subject to review by the ERCOT Board pursuant to Protocol Section (4)(c). On June 19, the ERCOT Board rejected (without prejudice) Luminant’s appeal of ERCOT’s denial, stating that they wanted stakeholder input on this issue. PRR 731 is the result of that Board action.

Why Use an Index? Luminant seeks WMS endorsement of the use of a Fuel Oil Index Price (FOIP) because:  fuel oil is typically replaced as quickly as possible in order to ensure a ready supply for reliability,  an index price (not at average inventory price) best reflects market price paid for oil,  minimizes administrative costs for both the Market Participant and ERCOT when dealing with “verifiable costs”, and  use of index price is consistent with the approach approved in the Nodal Protocols.

Proposed Protocol Revision Fuel oil costs submitted for verification shall be based on replacement costs directly related to this RPRS event for use in calculating the costs in Section (3)(b) (i), (iii) and (v). Documentation of fuel oil costs shall be in sufficient detail to allow for the verification of the replacement cost of fuel oil consumed by the Resource receiving the RPRS Instruction. Documentation may include contracts, invoices or other documents. For gas fired Resources, such documentation will not be required if the requested incremental fuel cost is less than one hundred ten percent (110%) of the Fuel Index Price. For oil fired Resources, such documentation will not be required if the requested incremental fuel cost is less than one hundred ten percent (110%) of the Fuel Oil Index Price. Applies to Protocol Sections  – Local Congestion Replacement Reserve Payment to QSE)  – Capacity and Minimum Energy Payments  – Energy Payments

Questions?