Review of PUC Discussion on Nodal Market Adoption Technical Advisory Committee September 7, 2005

What We Know PUC Open Meeting Discussions: July 29 th & August 18 th. Discussion memos from all three commissioners. Initial procedural steps. Briefing order. New dockets established.

Overview PUC Discussions Consensus that best possible market going forward is a nodal design. Discussions focused on: Scope of issues to be (and not to be) addressed. Date certain for implementation. Procedural requirements and schedule.

PUC Discussion 7/29/05 Chairman Hudson Misgivings about imposing even more change on the market. Skeptical of CBA results. Skeptical of claims of severe disruptions. Concerned an incremental approach does not resolve market uncertainties. Rejects notion that the public interest not served by change to nodal. Therefore, agrees with the need for a Texas nodal change.

PUC Discussion 7/29/05 Chairman Hudson: Preconditions Time—not in a press to move rapidly. Need time for education of all MPs, especially smaller MPs. Need detailed implementation plans. Thorough testing and parallel operations, inc. independent certification of readiness. Emphasize ability to identify transmission bottlenecks—ERCOT to conduct a study. Want to review alternatives to allocation of CRRs or auction revenues. No longer considering single load zone. Cost based offer limitations for some period. Need to consider whether/how to improve current systems in the interim.

PUC Discussion 7/29/05 Chairman Hudson: Key Issues Need to look at elements of TNT design to determine whether in the public interest. Particularly: Thresholds for automatic mitigation. Settlement zones. Day-ahead market design. CRR/ARR allocation.

PUC Discussion 7/29/05 Commissioner Parsley Had searched for a “medium ISO” model, but now believes must have either a “min ISO” or “max ISO” model. Agree we need ERCOT in middle of scheduling and deployment. Committed to bilateral contracts and self scheduling.

PUC Discussion 7/29/05 Commissioner Parsley: Conditions Robust transmission planning & implementation. May increase involvement of PUC to assure adequate urgency. Adequate hedging mechanisms. Interested in proposals about how CRRs could be allocated to loads. Adequate credit requirements to maintain bilateral contracts and prevent leaning on market: Key Issue. Settle zonally—agree with TNT load zones and NOIE load zones, but willing to review. Energy only capital market with adequate mitigation measures. Costs of implementing nodal market born by generators. Continue zonal market improvements during the transition. Education and training must be a priority.

PUC Discussion 7/29/05 & Memo: Commissioner Smitherman There are both economic and operational reasons to move forward with all speed to implement the TNT designed Protocols. Should respect the expertise and consensus of TNT. ERCOT leadership has endorsed a nodal design. Cost-benefit analysis shows $6 billion benefit to loads. Testimony from experts in other markets supports nodal. Alternatives to nodal are not a low-cost panacea. TNT represents many compromises among the stakeholders. Compromises should be respected. Favors small load zones, even nodal settlement.

PUC Nodal Discussion: End Date Chairman Hudson: Initial recommendation October Question whether a milestone date is more appropriate. Important to have a date certain for cutover. Commissioner Parsley: Suggests it may require around 3 years. Recommends January 1, Commissioner Smitherman: 2009 recommendations too far off. Recommends January 1, months after completion of the contested case, but that’s not a date certain.

PUC Nodal Discussion: Other Issues Revision needed to PUC rules to change effective date of nodal market. Extent to which the zonal model continues to be modified during the transition period: Patton list. Reliant appeal of PRR556. Development of detailed transition plans.

PUC Nodal Discussion: Ongoing Activities Protocols filing expected Sept. 23 rd. Lists of issues to be filed Sept. 13 th. Three new dockets: Docket No —Protocol approval docket. Project No —Zonal market improvements. Project No —Transition issues. ERCOT: initiated a comprehensive study to recommend economic transmission improvements to mitigate the impact of constraints in the transition to nodal (target completion: January 31, 2006).