1. Grid Operations Report To ERCOT Board Of Directors December 16, 2003 Sam Jones, COO

2. Grid Operations Procedures Compliance Review Performed by the ERCOT Compliance Group October 6 – 17, 2003 Review was for control room operator compliance with the ERCOT Operating Procedures

3. Overview The 2002 Operations Audit was performed by Price, Waterhouse Coopers. ERCOT Operations management decided to utilize the ERCOT Compliance Group for the 2003 operations review to obtain a more comprehensive review and improve the training efforts The internal review performed by the ERCOT Compliance Group was far more strict than the 2003 operations audit performed by Price, Waterhouse Coopers Internal reviewers had significant electric utility experience Internal reviewers had comprehensive knowledge of the operating procedures

4. Overview (con’t) Review did not consider partial credit – any discrepancy for any reason was logged as non-compliant Review included the use of historical databases for periods when the reviewers were not in the control room The 2003 review showed significant improvement over 2002 results 2002 PWC audit resulted in a 67% full compliance finding 2003 Internal review resulted in an 87% full compliance finding despite increased strictness There was concern over the number of frequency desk non- compliance findings

5. Discussion Of Findings No significant reliability concerns were identified There were four noncompliant findings that ERCOT Operations considers to be areas of concern that will be addressed through procedure review and training –Communications requirement –CPS1 performance monitoring requirement –Two logging requirements There were four noncompliance findings that ERCOT Operations considers to be random, one time occurrences that will be addressed through training

6. Discussion Continued There were 16 noncompliant findings that ERCOT Operations considers to be the result of the procedures being too prescriptive that will be corrected by review and revision of the procedures There were three noncompliant findings associated with the DC ties that were the result of non-operator activities being included in the operating procedures. These will be corrected through revising the operating procedures to include only those activities which are performed by control room operators. The operator activities were being performed by the operators at the time of the review.

7. Review Team Conclusions Overall operator performance was good – some findings were caused by wording in procedures requiring actions that went beyond usual task requirements – tasks were performed to expectations instead of written procedures which need to be addressed through correcting procedures (in one case one finding resulted in three noncompliant findings) Still, some findings need the attention of management to ensure consistency with good operating performance The lagging performance on the frequency desk was mostly due to what appears to be excessive procedure details

8. Grid Operations Observations The original operating procedures were written with significant detail as ERCOT had no prior experience with the current market design. ERCOT Operations has now gone through a rapid learning curve and is adjusting operations as required. The current challenge is to review and revise the procedures to meet the operating needs, then provide training for the operators on the procedures. Resources to accomplish this need have been limited due to the work load The staffing increase approved by the Board in the 2004 budget will provide the resources needed –Additional shift personnel to allow for training time availability –Trainers to perform the needed training

9. Other Grid Operations Items Application to NERC for ERCOT Inc.