1. Electric Reliability Organization and Issues in Texas Technical Advisory Committee January 4, 2006 Jess Totten Director, Electric Industry Oversight Division Public Utility Commission of Texas

2. Federal Reliability Responsibilities  FERC has national responsibility for electric reliability standards and authority to impose penalties  Electric Reliability Organization (ERO) must adopt and enforce reliability standards under FERC supervision ERO may delegate authority to Regional Entities (REs) to enforce standards and propose regional standards

3. ERO and RE Status FERC certified the North American Electric Reliability Council (NERC) as the ERO in July ERCOT submitted proposed delegation agreement to NERC with a functionally separate division as the RE for the ERCOT region Delegation agreement negotiated with NERC and subject to approval by FERC

4. Texas Reliability Issues  ERCOT is the independent system operator (ISO) under state law –PURA responsibilities include reliability –Market and reliability issues are intertwined  Reliability framework must comply with Federal law but should also: –Avoid conflict with existing State law –Be cost-effective –Minimize impact on market

5. Proposed Delegation Agreement  Functionally independent division of ERCOT (Texas RE) would become the Regional Entity  Texas RE would –establish stakeholder process for developing proposed reliability standards, with regional decision by Board –monitor and enforce new federal reliability standards, with PUC due process role –monitor and enforce ERCOT Protocols and Market Rules, with PUC due process role

6. Governance Requirements for RE  Governed by an independent board, balanced stakeholder board, or hybrid board  Independence from users, owners, and operators of the bulk-power system, with fair representation in selecting directors  Balanced decision-making in committees and other bodies  Reasonable notice and opportunity for public comment, due process, openness, and balance of interests  No two industry sectors can control and no one industry sector can veto any action

7. Compliance Process—Federal Reliability Standards  Texas RE or market participant identifies possible violation  Texas RE determines violation and proposes remedial action, which may include penalty  Market participant may contest violation and remedial action  PUC provides due process and recommended decision to Texas RE  Director of Texas RE makes decision, which may be appealed to NERC

8. Compliance Process—Market Rule or ERCOT Protocol  Texas RE or market participant identifies possible violation, and Texas RE notifies PUC  PUC ED issues notice of violation, which may include penalty  Market participant may contest penalty  PUC provides due process and decision, which may be appealed to courts