Verifiable Cost Working Group (VCWG) Update

1. Verifiable Cost Working Group (VCWG) Update Presentation to the ERCOT Wholesale Market Subcommittee March 9, 2011

2. Methodology for Calculating Variable O & M Values for QSRG • As revisions in VC Manual • NPRR 319 No group consensus on the issues. • PPA’s have incremental costs to Contract when dispatched for RUC. • Verifiable Cost Process does not allow for capture of true costs associated with the Dispatch of the units for RUC. • Definition “Intraday Gas” fuel purchases. • Does it exclude previously contracted gas or do MP have to purchase Gas on Spot Market outside of their contracts. • PPA’s contracts may not allow for external purchase of fuel. VCWG Summary

3. Long Term Solution for VOX • Options for VOX • Option 1:Fuel Index Price (FIP) * 1.X, Fuel Oil Price (FOP), or $1.50 per MMBtu, as applicable), where X = $0.5/fuel price (of prior Tuesday). • Option 2:Fuel Index Price (FIP) + $.50, Fuel Oil Price (FOP), or $1.50 per MMBtu, as applicable),

4. Long-Term Solution for PHR • Use actual revenue for clawback instead of projected revenue to cap offers. • If the Generation Resource produces energy prior to or following the time period specified by the RUC Dispatch Instruction and it meets the criteria for Startup in section 5.6.2 for the RUC instruction(s), there shall be a clawback charge against the RUC Guarantee for energy produced from breaker close to LSL. This charge shall apply to the intervals preceding the first RUC committed hour where the Resource shows a status of ONTEST in its COP. • Solution will allow for DAM offer Caps to include all approved fuel for startup and will better align true costs in DAM Offers. • Improved accuracy when removing Energy Revenues from Cost Guarantee. • Continue working on Draft Language for VOX, PHR and Emissions to bring back Draft NPRR for Long-Term Solution. VCWG Summary

5. Short Term Solution to PHR • VCWG analyzed several different methodologies to calculate the proxy heat rate • We compared the results of taking the average price, the median price, and price calculated using standard deviation to eliminate outliers from the data set. • VCWG members did not reach consensus so a list of pros and cons for each methodology is included. • Methodologies • Mean • Median • Standard Dev VCWG Summary

6. Short Term Solution to PHR • Mean – uses all values • Pros – easy to calculate • Cons – sensitive to price anomalies • Median – “middle” number in a sorted list of numbers • Pros – easy to calculate , ignores outliers, less sensitive to price anomalies • Cons – relies on one number, median could be skewed one direction or the other • Standard Deviation with mean- uses the mean value after removing values outside of two standard deviations • Pros – eliminates outliers while maintaining a large data set • Cons – potential workload increase to ERCOT due to market participants questions, data may not be normally distributed, enormous price excursions could still result in high proxy heat rates • Standard Deviation with median- uses the median value after removing values outside of two standard deviations • Pros – eliminates outliers while maintaining a large data set, reduces the impact of price spikes on proxy heat rate • Cons – potential workload increase to ERCOT due to market participants questions, data may not be normally distributed, relies on one number, median could be skewed one direction or the other VCWG Summary

7. Comparison of Results for Dec and Feb VCWG Summary

8. Short Term Solution to PHR • Using the Median eliminates outlier prices as occurred on February 2-4, 2011. • Had ERCOT used the Median since December 1, 2011, it would have reduced fuel rates about 14% less than using the Arithmetic Mean as was used. • Had ERCOT used the Standard Deviation coupled with the Median since December 1, 2011, the reduction in fuel rates would have been very similar to the reduction using the Median. • Note: All the options are based on historical values that may not accurately represent the present and future. The best option will be the long term solution. VCWG Summary

9. Next meeting March 29, 2011. • ?’s VCWG Summary