1. E x p e r i e n c e C o m m i t m e n t SM ERCOT Nodal – Fuel Cost Analysis Verifiable Cost Working Group October 6, 2008

2. Background Short-term resource adequacy is addressed through a reliability unit commitment (RUC) RUC should be based on actual costs of running resource Day-Ahead RUC is executed after Day-Ahead market clears and Hourly RUC runs every hour up to 60 minutes prior to the operating hour RUC’d resources are committed after close of Day-Ahead gas market; therefore resources receiving RUC instruction in either DA RUC process or Hourly RUC process will generally need to purchase Same-Day gas ~70% total ERCOT capacity is from Natural Gas Fired resources* and Natural Gas is almost always on the margin; therefore, natural gas fired resources have a higher % chance of being committed in a RUC process No index for Same-Day gas *Source: ERCOT’s Summer Capacity, Demand, and Reserves Report - July 2008

3. Power and Gas Market Assumptions Made by TNT during Nodal Protocol development Over an extended period of time (I.e. > 1 year) the costs for purchasing Same-Day gas will be lower than the cost for purchasing Day-Ahead gas approximately the same number of times as they will be higher than the cost of Day- Ahead gas. Over an extended period of time (I.e. > 1 yr) Resources receiving RUC instruction that requires the purchase of Same-Day gas will pay more for Same-Day gas than Day- Ahead gas approximately as many times as they will pay less for Same-Day gas than Day-Ahead gas. Since resources are reimbursed based on Day-Ahead gas prices, this will result in a relative net $0 position

4. Realities of Same-Day Gas Economics Over an extended period of time (I.e. > 1 year) the costs for purchasing Same-Day gas will be lower than the cost for purchasing Day-Ahead gas approximately the same number of times as they will be higher than the cost of Day-Ahead gas. Characteristics of the Same-Day gas market By the end of the Day-Ahead market all gas has been placed (sold or put in storage) Same Day market is created by +/-variances in production and +/- variances in consumption; therefore, the Same- Day gas market is very illiquid Gas Storage counterparties are the only counterparties who can provide significant gas quantities to the Same-Day gas markets Economics are NOT based on the same supply-and-demand economics as Day-Ahead gas purchases Economics of Same-Day gas costs: Lost Opportunity Costs – costs for purchasing from storage based on the lost opportunity cost that storage owners take for selling gas out of storage today for gas held for or sold on the forward market Imbalance and Replacement costs - costs based that the pipeline, storage owner or counterparty incurs due to delivering gas to ERCOT resource that was sold to other counterparties downstream Operational risk costs- cost to the transporter for managing non-ratable gas on the pipeline Operational penalties – penalties for carrying an imbalance during certain operating conditions (I.e. operational flow order (OFO) and hourly/daily imbalance penalties) End result is that the total cost to a resource for the procurement of Same-Day gas will almost always be higher than the cost of Day-Ahead gas; thus RUC Guarantee with the use of FIP per the current ERCOT Nodal Protocols do not provide recovery of actual fuel costs (5.6.1.2 Verifiable Minimum-Energy Costs)

5. Example of Same-Day Gas Economics on an Interstate Pipeline Two Counterparties can supply Same-Day gas: Storage owner or Counterparty with long imbalance on pipeline Intraday gas cost from storage (representing lost opportunity cost of storage owner) – highest NYMEX gas cost over the term of the storage arrangement; – plus, basis difference between pipeline hub and NYMEX (which can be negative in some instances); – plus, commodity cost of injecting and withdrawing from storage – plus, premium for their execution risk of breaking existing trades to deliver out of storage what was sold or hedged in the future – less, storage owners carrying cost of gas Same-Day gas cost from counterparty with long imbalance on pipeline – Counterparty will value gas at the greater of what they paid for the gas or the assumed value of the gas that can be sold in the next day-ahead market

6. Example of Same-Day Gas Economics on an Interstate Pipeline (cont.) Example of a FERC approved tariff for Imbalance costs for Same- Day gas Monthly Imbalance cashout fee – If monthly imbalance leaves long position on pipeline, then monthly net long imbalance is paid to shipper based on the lowest Day-Ahead gas from the days the shipper was long – If monthly imbalance leaves short position on pipeline, then shipper pays monthly net short imbalance based on highest Day-Ahead gas from the days the shipper was short Imbalance fee during OFO – Hourly Imbalance Fee –Paid on all imbalances (long or short) on an hourly basis –Imbalance between 2% and 5% = $10/Mmbtu –Imbalance between 5% and 10% = $25/Mmbtu –Imbalance > 10% = $50/Mmbtu – Daily Imbalance Fee –Paid if there are any imbalances (long or short) over the course of the day –Paid in addition to any hourly imbalance fees –200% of Daily Index Price for all Mmbtu above or below the Nominated Mmbtu (+/- x%)

7. Example of Same-Day Gas Economics on an Intrastate Pipeline Two Counterparties can supply Same-Day gas: Storage owner or Counterparty with long imbalance on pipeline Intraday gas cost from storage (representing lost opportunity cost of storage owner) – highest NYMEX gas cost over the term of the storage arrangement; – plus, basis difference between pipeline hub and NYMEX (which can be negative in some instances); – plus, commodity cost of injecting and withdrawing from storage – plus, premium for their execution risk of breaking existing trades to deliver out of storage what was sold or hedged in the future – less, storage owners carrying cost of gas Same-Day gas cost from counterparty with imbalance on pipeline – Counterparty will value gas at the greater of what they paid for the gas or the assumed value of the gas that can be sold in the next day-ahead market Scheduling Imbalance costs Imbalance costs determined by individual pipeline Fees more specific to contract between pipeline and counterparty Generally involves penalties for imbalances over a defined % Most have hourly and daily imbalance fees for shippers and many of the remaining pipelines that do not are moving in that direction

8. Alternative fuel payment due to a RUC instruction No proposed changes to ERCOT’s Day-Ahead market or use of FIP in the Day-Ahead market Separate price for RUC (RP) If resource was already on-line or expected to be on-line (based on COP), then RP will equal – FIP + X% – Since resource is already on-line, better possibility of purchasing gas from counterparty, thus price will follow general rule of thumb of greater of DA price and Expected DA price on next trading day If resource was not already on-line or was not planning on being on-line (based pm COP) then RP will equal – Average NYMEX price over next 18 withdraw months based on previous days closing prices – Since resource was not on-line nor expected to be on-line, then resource must purchase significant gas that will generally only be able to be covered by storage counterparty Plus sliding scale risk adder based on amount of time ERCOT gives resource to procure fuel – DARUC  Risk adder = A% – HRUC  If ERCOT notifies resource with more than 10hrs to RUC instruction then risk adder = B%  If ERCOT notifies resource between 4hr and 10hrs to RUC instruction then risk adder = C%  If ERCOT notifies resource between 1 and 4hrs to RUC instruction then risk adder = D%

9. Alternatives to address Fuel Cost issues during Real-Time Modify Section “4.4.9.3 (4) - Energy Offer Curve” Original language: – For any hour that is not a RUC-Committed Interval or a DAM-Committed interval for a Resource, the QSE for that Resource may submit or change Energy Offer Curves in the Adjustment Period and a a QSE may withdraw an Energy Offer Curve Proposed new language: – For any hour that is not a DAM-Committed interval for a Resource, the QSE for that Resource may submit or change Energy Offer Curves in the Adjustment Period and a a QSE may withdraw an Energy Offer Curve Day-Ahead offer curves have the ability to manage fuel procurement in the Day-Ahead fuel market, thus energy offer curve has gas-risk adjusted into offer RUC’d resources do not have ability to build in gas risk into energy offer curves after they are committed in a RUC process Allows QSE’s to adjust energy offer curve for resources struck in RUC to account for fuel procured in Same-Day gas market Modify Section “4.4.9.3 (5) (a) – Energy Offer Curves” allow RUC-Committed or Day-Ahead Committed resources to modify their Energy Offer Curves under following circumstances – Fuel Curtailment (currently in protocols) – Change fuel type (currently in protocols) – Resource De-Rating (currently in protocols) – Fuel Supply Operational Order (new addition to protocols)

10. Alternative to Fuel payment during an Exceptional Fuel Price Event Extraordinary Event Fuel Price (EFP) Separate EFP field on Three-Part Offer If QSE enters into an exceptional fuel price event prior to RUC process executing or resource being committed then; – QSE enters EFP on Three-Part offer and must represent expected actual costs to procure fuel during exceptional event If QSE is placed into exceptional fuel price event after RUC commitment then; – QSE may submit documentation to verify actual fuel costs QSE make-whole payment for RUC instruction will be based on actual cost to procure fuel during exceptional event Documentation will be required to verify – Exceptional event occurred – Actual cost to procure fuel for the RUC instruction Non-Compliance by resource results in all payments above normal RUC make-whole credit clawed back plus a “penalty” for non-compliance that will be distributed to load on a pro-rata share ERCOT will define what can be classified as an extraordinary fuel event – Examples of extraordinary fuel events –Significant Pipeline disruption (I.e. pipeline explosion) –Operational Flow Order –Pipeline shut-in