PRR 547 – Trading Hubs CMWG Presentation to WMS October 21, 2004

2 Presentation Outline Why Trading Hubs are Needed Basic Trading Hub Concepts Proposed Trading Hubs Logic Supporting Proposed Trading Hubs Hub to CM Zone Conversion Process Scheduling Issues Scheduling Example

3 Why Trading Hubs are Needed Provide longer term (1-5 year) liquidity: –within the current zonal design by minimizing the risk of changing congestion zone boundaries each year –by serving as a bridge for deals that span across the current zonal market design into the Texas Nodal market design timeline (e.g. a 2005 – 2009 deal) During the timeframe for the Texas Nodal market design, hubs will provide more stable prices than the select few Node specific points that have begin to trade (i.e. Venus, Limestone, Parish, STP 345 kV). Facilitates more effective overall Risk Management.

4 Basic Trading Hub Concepts Hubs will only consist of actual transmission buses in the ERCOT transmission system. Once created, will never change or be deleted. –if the TDSP physically retires a bus in the hub, ERCOT will submit a PRR to delete only that bus from the hub definition. New Trading Hubs may be created by amending Section through the PRR process. Transactions involving a Trading Hub will be expressed in a minimum of one (1) MW increments. Bus prices that are averaged for inclusion in Hub pricing will be: –the bus MCPE in the current zonal design –the bus LMP in the proposed Texas Nodal design.

5 Proposed Trading Hubs Four hubs based on footprint of proposed Texas Nodal load zones: –North 345 kV (simple average of 88 buses) –South 345 kV (simple average of 33 buses) –Houston 345 kV (simple average of 22 buses) –West 345 kV (simple average of 17 buses) Two ERCOT overall hubs: –ERCOT Hub Average 345 kV (simple average of the Hub prices for the North, South, Houston, & West 345 kV Hubs) –ERCOT Bus Average 345 kV (simple average of the kV bus prices that compose the North, South, Houston, & West 345 kV Hubs)

6 Logic Supporting Proposed Trading Hubs Through the TNT process, Market Participants have decided to create 4 Load Zones that mirror the footprint of the 2003 Congestion Zones. CMWG participants recognized the need for defining a set of hubs that: –can be approved in the near term. –mirror the proposed Load Zone boundaries, as well as, offer some congestion neutral ERCOT overall alternatives. –facilitate trades that span across the period of changing market design. Needed to be easy for market participants to shadow settle the hub prices posted by ERCOT (i.e. uses simple average of bus prices).

7 Logic Supporting Proposed Trading Hubs Planned transmission construction over the next 3 years provides significant congestion mitigation. Information below cited by ERCOT in their October 1 Report. The level of construction indicated above compares to approximately $560M of capital expenditures in A significant portion of these projects are directed toward the existing load pockets of DFW, Houston, Corpus, Rio Grande Valley, San Antonio, and Austin.

8 Logic Supporting Proposed Trading Hubs TXU Energy has performed UPLAN simulations of the 2007 time period to analyze the amount of congestion within each of the proposed regional hubs. –based on our best estimate of expected system conditions at that time. –reflects the most recent SSWG transmission cases, as well as, projects that we expect to be approved by the Regional Planning Groups and in-service prior to summer –Due to the significant amount of transmission upgrades being made by the TDSPs over the next 3 years as shown on the previous page, there is surprisingly little intra hub congestion present by 2007.

9 Hub to CM Zone Conversion Process While the current Zonal market design remains in effect, the following weighting of buses will be used: * The weighting of Trading Hub prices for transactions involving Resources in the North and Northeast Congestion Management Zones will be 90% North Zone (79 buses out of 88 buses) and 10% Norheast Zone (9 buses out of 88 buses). When the Texas Nodal market design is implemented, each bus LMP will be weighted using a simple average of all the bus LMP’s within the respective Hub.

10 North 345 kV Trading Hub South 345 kV Trading Hub Houston 345 kV Trading Hub West 345 kV Trading Hub ERCOT Hub Average 345 kV Hub Houston Congestion Zone South Congestion Zone Northeast Congestion Zone North Congestion Zone West Congestion Zone 40 MW Transaction 10 MW 1 MW10 MW 9 MW 25% 90% 10% 25% Hub to CM Zone Conversion Process

11 North 345 kV Trading Hub South 345 kV Trading Hub Houston 345 kV Trading Hub West 345 kV Trading Hub ERCOT Bus Average 345 kV Hub Houston Congestion Zone South Congestion Zone Northeast Congestion Zone North Congestion Zone West Congestion Zone 200 MW Transaction 42 MW28 MW 20 MW110 MW 11 MW42 MW28 MW20 MW99 MW 21% 14% 10% 90% 10% 55% Hub to CM Zone Conversion Process

12 Scheduling Issues PRR 547 does not require ERCOT to modify their Operations software to accept QSE submitted Hub schedules. The intent of PRR 547 is to: –amend the Protocols to allow the development of Hubs via the PRR process. –establish 6 initial Trading Hubs that ERCOT will post prices for on the public MIS. –illustrate how Market Participants can manually convert Hub schedules into the equivalent Congestion Zone schedule for scheduling purposes. A companion PRR will be submitted in the near future that requires ERCOT to modify their Operations software to allow QSE’s to directly enter Hub schedules, similar to how Congestion Zone schedules are entered today.

13 Scheduling Issues Until the companion PRR described previously is passed, a manual conversion process of Hub schedules to equivalent Congestion Zone schedules must be performed by QSE’s. Each of the initially proposed Trading Hubs will have to be traded in the following multiples: –North = 10 MW –South = 1 MW –Houston = 1 MW –West = 1 MW –ERCOT Average Hub = 40 MW –ERCOT Bus Average Hub = 200 MW The examples on pages 8 & 9 illustrated why.

14 Bilateral agreement to schedule the following transaction: 120 MW (3-40 MW increments) from the ERCOT Hub Average 345 kV Trading Hub to the North 345 kV Trading Hub Step 3:Allocate obligation at the North 345 kV Trading Hub to Congestion Zones: 90% or 108 MW to the North Zone 10% or 12 MW to the Northeast Zone Step 1: Allocate the 120 MW resource from the ERCOT Hub Average 345 kV Hub to the regional hubs: 25% or 30 MW to the North 345 kV Trading Hub 25% or 30 MW to the South 345 kV Trading Hub 25% or 30 MW to the Houston 345 kV Trading Hub 25% or 30 MW to the West 345 kV Trading Hub Step 2: Allocate resources in Step 1 from the regional trading hubs to congestion zones: 90% or 27 MW to the North Zone 10% or 3 MW to the Northeast Zone 100% or 30 MW to the South Zone 100% or 30 MW to the Houston Zone 100% or 30 MW to the West Zone Scheduling Example

15 Scheduling Example (steps 1 & 2) 1.Allocate the 120 MW resource from the ERCOT Hub Average 345 kV Trading Hub to the four (4) regional Hubs. 2.Allocate the resources from the four (4) regional hubs to the five (5) Congestion Zones. North 345 kV Trading Hub South 345 kV Trading Hub Houston 345 kV Trading Hub West 345 kV Trading Hub ERCOT Hub Average 345 kV Hub Houston Congestion Zone South Congestion Zone Northeast Congestion Zone North Congestion Zone West Congestion Zone 120 MW Resource 30 MW 3 MW30 MW 27 MW 25% 90%100% 25% 100% 10%

16 North 345 kV Trading Hub South 345 kV Trading Hub Houston 345 kV Trading Hub West 345 kV Trading Hub ERCOT Hub Average 345 kV Hub Houston Congestion Zone South Congestion Zone Northeast Congestion Zone North Congestion Zone West Congestion Zone 120 MW Obligation 12 MW108 MW 25% 90%100% 25% 3.Allocate obligation at the North 345 kV Trading Hub to the North and Northeast Congestion Zones: 100% 10% Scheduling Example (step 3)

17 Scheduling Example (final CM zone schedule) ResourcesZoneObligationsZone 30 MWSouth108 MWNorth 30 MWHouston12 MWNortheast 30 MWWest 27 MWNorth 3 MWNortheast Total 120 MW

Questions ???