TAC Report to the ERCOT Board

1. TAC Report to the ERCOT Board November 16, 2004

2. Summary • Notifications: • Operating Guide Revisions • Retail Market Guide Revisions • Annual Validation Report to the ERCOT Board • Issues Related to Late Payments Under Protocols • Closely Related Elements • PRRs 527 and 532 • TAC Rejection of PRR 546 • ERCOT Administrative Fee Allocation Methodologies Update

3. Operating Guide Revisions • OGRR 153 – Reactive Capability Testing: Revision of Operating Guide Section 3.1.4.3 and Section 6.2.3 [Biennial Unit Reactive Limits (Lead and Lag) Verification Form] to conform to ERCOT Generator Reactive Testing Procedures. This OGRR is consistent with PRR 535 – Reactive Testing. • TAC approved OGRR 153 by unanimous voice vote.

4. RMS Update • RMGRR 2004-13 – Disconnections at Premium Locations: Outlines how charges for disconnections at premium locations are being applied. • RMGRR 2004-14 – TDSP Process for Inadvertent Gain: Documents the TDSP inadvertent process. There is currently no information available in the Retail Market Guide related to the Inadvertent Gain Process. • RMGRR 2004-15 – Data Extract Variance Process: Modifies Section 7.2 documenting the process for submitting Data Extract Variances. • TAC approved RMGRR 2004-13, 2004-14, and 2004-15 by unanimous voice vote.

5. Annual Validation Report to the ERCOT Board • At September 21st meeting, Board approved partial suspension of 2004 profile ID assignment and validation process. • Board directed TAC to recommend a timeline and plan for improvements to Annual Validation process by November 2004. • RMS recommended TAC approval of near term action plans that could be effective in 2005. • The items in the “Near Term Action Plan” were as follows: • 1)Do not replace a prior year non-default assignment with a default assignment; • 2) Applying dead-bands around the specified Residential Segment trigger point; • 3) Applying a kWh minimum for Residential High Winter Ratio profile assignment; • 4) Use more than 1 month for the Residential Winter Ratio formula; • 5) Use an ERCOT administered residential survey. • Due to TAC concerns with method and accuracy of residential survey, TAC chair recommended without objection remanding the residential survey issue back to the RMS for further review.

6. Issues Related to Late Payments Under Protocols • At the October Board meeting, the Board directed the TAC to discuss the following issues related to late payments under the Protocols. • What happens when the defaulting Invoice Recipient does not pay late fees due to a court-ordered Reorganization Plan? • What to do about late fees “accrued” (through short-pays) but not paid? • How to handle market participant payment of less than the full amount required by a payment plan. • The TAC remanded these issues for discussion at the PRS as part of PRR 550 – Pace of Short Pay Uplift to LSEs.

7. Closely Related Elements • By November 1st of each year, Protocols require designation of Closely Related Elements (CREs) in the ERCOT transmission system as they relate to Commercially Significant Constraints and Congestion Zones. • ERCOT staff has performed analysis to identify appropriate CREs as part of the CSC designation process. • Most of the 2005 recommended CREs are the same as 2004. • The TAC by unanimous voice vote recommended approval of the 2005 CREs.

8. PRR 527 – Revision to Ancillary Service Performance Conditions (formerly “OOME Definition”) • This PRR modifies the Protocols to require ERCOT to issue a verbal dispatch instruction to the QSE to relieve the QSE from having to provide the Ancillary Service for the interval or retract the Resource-specific Dispatch instruction if a unit specific OOME or balancing energy dispatch instruction issued by ERCOT causes a QSE to be unable to provide Ancillary Services that it is obligated to provide.

9. PRR 527 – Revision to Ancillary Service Performance Conditions (formerly “OOME Definition”) (cont.) • Market Oversight Division (MOD) raised concerns about PRR 527. • MOD concerned that PRR 527 would create an incentive for a market participant to receive a double capacity payment. • There have been 23 occasions since September 1st where market participants have been paid for two different services when they can only deliver on one of the services. • MOD believes market participants should be paid the higher of the two capacity payments but not be paid twice. • TAC discussed that the original intent of PRR 527 was to protect QSEs that receive unit specific instructions from ERCOT that cause them to violate their Ancillary Service obligation. • In this scenario, the QSE will still receive the capacity payment for the Ancillary Service, as well as the associated energy payment. Staff agreed with this scenario. • To address the double capacity payment concerns expressed by Staff, TAC by unanimous voice vote instructed WMS to address the payment issue raise by the PUC and bring forward a proposed solution by the January 6, 2005 TAC Meeting.

10. PRR 527 – Revision to Ancillary Service Performance Conditions (formerly “OOME Definition”) (cont.) • PRS approved urgent status through an e-mail vote. • PRS unanimously approved PRR without abstentions. • No budgetary impact • No impact to ERCOT staffing; no impact to ERCOT computer systems • No impact to ERCOT business functions; no impact to grid operations • No credit monitoring or liability calculation changes required • TAC voted to approve as submitted by PRS with 23 votes in favor and 5 votes opposing (Consumer and Independent REP segment). • Proposed effective date is December 1, 2004

11. PRR 532 – Implementation of Non-Transmission Alternatives to RMR • PRR submitted on behalf of WMS by ANP, Independent Generator Segment • Protocols require ERCOT to evaluate non-transmission exit strategies to RMR situations • PRR proposes a Must-Run Alternative (MRA) agreement and selection and settlement processes to support the MRA • Relies on the Regional Planning Group process to aid in the evaluation • MRA will provide a more cost-effective alternative to an RMR agreement • Effort to reduce uplifted costs to the market

12. PRR 532 – Implementation of Non-Transmission Alternatives to RMR • On 10/19/04, the Board remanded PRR532 to TAC for consideration of legal issues and concerns about the lack of definition of the amount of benefit that must be shown to merit an MRA. • On 11/04/04, TAC recommended approval of PRR532 as revised by ERCOT comments and TAC. • TAC primarily made two changes to the PRR to address the Board’s concerns • MRA service must provide at least a projected $1 million annualized savings over RMR alternative ; and • Board delegate authority to approve MRA contract to subcommittee of the Board.

13. PRR 532 – Implementation of Non-Transmission Alternatives to RMR • Impact to staffing resources is dependent on the number and type of MRA agreements • Impact to ERCOT systems will be evaluated on a per-contract basis • Impact to grid operations will be evaluated on a per-contract basis • TAC approved the revised PRR with all segments present and one member from the Independent Power Marketers Segment abstained • Proposed effective date of December 1, 2004

14. Recommended Board Actions Approval – PRR 527 – Revision to Ancillary Service Performance Conditions PRR 532 – Implementation of Non-Transmission Alternatives to RMR

15. PRR 546 – PCR Treatment for Federal Hydropower Resources • This PRR revises Section 7.5.6 to provide that long-term power purchase agreements for federal hydropower are eligible for PCR treatment if a long-term allocation was in place prior to September 1, 1999. • The PRS approved urgent status for PRR 546 through an email vote. • PRS recommended approval of the PRR with seven abstentions from the independent power marketers, investor owned utilities, and consumer segments. • MOD raised concerns about PRR 546 and supports rejection of PRR 546. • Current protocols require that a contract be in place by September 1, 1999; but, Protocols don’t specifically address contracts with renewal clauses. • MOD believes PRR 546 is is not consistent with the intent of the PCR eligibility provisions in the current Protocols.

16. PRR 546 – PCR Treatment for Federal Hydropower Resources (cont.) • No budgetary impact; no impact to ERCOT staffing; no impacts to ERCOT computer systems, minor changes to TCR calculation spreadsheet; no impact to ERCOT business functions; no impact to grid operations. • ERCOT Credit Staff and the CWG have reviewed PRR 546 and do not believe that it requires changes to credit monitoring activity or the calculation of liability. • A motion to approve PRR 546 failed 13 to 2 with 13 abstentions. The motion failed due to lack of adequate total affirmative votes.

17. Administrative Fee Allocation Update • Board requested TAC to present Board, before March 2005, a fee allocation methodology or methodologies that would focus on the four elements set forth in Senate Bill 7. As part of that analysis, ERCOT should hire a third-party to conduct a cost-allocation study, at a cost no more than $100,000. • TAC has not hired a third party consultant at this time.

18. Administrative Fee Update (cont.) • TAC discussions have primarily focused on cost allocation, categorization and tracking. • TAC has not discussed market segment allocation in detail. • At Open Meeting on October 28th, Commission decided to initiate a Rulemaking within next few months to discuss fee allocation methodologies. • Commission Staff has indicated desire for ERCOT and TAC to continue pursuit of better cost tracking data by activity in preparation for Rulemaking. • Some TAC members are concerned that continuation of fee allocation methodology discussions at TAC would be duplicative of Commission Rulemaking.

19. Administrative Fee Update (cont.) • TAC did not vote on any specific recommendation for the Board to act upon today. • TAC decided to pursue additional information from Commission regarding upcoming Rulemaking and seek guidance from Board as to next steps. • Alternatives: 1) Direct TAC to continue development of fee allocation methodologies by March 2005 per the Board’s directive; 2) Direct TAC to cease all fee allocation methodology discussions; 3) Direct TAC to provide further guidance to ERCOT regarding cost tracking by activity; or 4) Direct TAC to provide input to the PUC Rulemaking process regarding fee allocation methodology.