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24. 21. Internal combustion. 18. The ERCOT Market Framework Has Been A Success. ERCOT’s Robust Competitive Wholesale Market Led To A Large Capital Infusion…. 22 GW. 15. Gas/oil. 12. Market Objectives Leverage market solutions wherever possible and encourage competition

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texas deregulation a success story

24

21

  • Internal combustion

18

The ERCOT Market Framework Has Been A Success

ERCOT’s Robust Competitive Wholesale Market Led To A Large Capital Infusion…

22 GW

15

  • Gas/oil

12

Market Objectives

  • Leverage market solutions wherever possible and encourage competition
  • Minimize ERCOT intervention
  • Establish tools to maintain grid reliability

ERCOT supply curve; Implied heat rate

04; MMBtu/MWh

9

  • CCGT

6

  • Coal
  • Nuclear

3

0

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Implementation

  • Bilateral Contracts - Participants contract up to 100% of energy needs in lieu of a centrallymanaged market
  • Balancing Energy Market - ERCOT operates thin balancing energy pool to balance real-time supply and demand
  • Out of Merit - ERCOT can order plants on/off to maintain grid reliability
  • Retail Price to Beat (PTB) - Default service rate mandated for incumbent retailers until January 1, 2007 – may offer different prices starting in 05

ERCOT

Cumulative capacity MW

Positive impact

  • Large infusion of capital
  • Intense retail competition
  • Competitive rates for end-users
  • High system reliability
  • Deregulation led to investment of over $15 billion and the addition of 22GWof low-cost CCGT capacity

1

2

…And A Reduction In Market Heat Rates

The ERCOT Regulatory Framework Has Led To StrongRetail Competition…

ERCOT heat rate cycle

98-04; MMBtu/MWh

  • Residential Customer Switching
  • 04; percent

CCGT reinvestment economics

CCGT marginal heat rate

Lower market heat rates have mitigated the effectsof higher gas prices for consumers

  • ERCOT has the most active de-regulated retail market in the US

3

4

Source: KEMA

Texas Deregulation – A Success Story
texas deregulation a success story1

…Giving End Use Customers Access To Lower Prices

  • Competitive residential price1 vs. regulated rate
  • 02-04; Percent savings
  • Competitive large business price vs. regulated rate
  • 02-04; Percent

2

2

  • Customers have benefited from access to lower electricity prices than they would have experienced under a regulated rate regime

1 Competitive Residential price based on 15% discount to TXU PTB as currently offered by market competitors, e.g., Utility Choice (14.6%), Cirro (14.6%) and Gexa (16.6%); Regulated world assumes 7.8 GW added capacity in the rate base at a cost of $600/kw, O&M costs approximately 20/kw-yr resulting in an average cost of $93/kw-yr average cost in the rate base

2 Based on 2004 with the following assumptions: Competitive prices assume $4.07/MMBtu Henry Hub gas price, 24X7 heat rate of 7.3 MWh/MMBtu, and incumbent residential gross margins of 30% and LC&I gross margins of 5%

5

6

7

8

Texas Deregulation – A Success Story

…With Customer Switching In Line With Other Successful Deregulated Markets…

  • Incumbent market share1
  • Years since deregulation; Percent
  • Wireline
  • North Texas residential
  • South Texas residential
  • UK residential2

1 Market share estimates based on customer count

2 Estimates for 2003 and 2004

Source: PUC; OFGEM

There Is Still Room For Improvement In ERCOT…

…As Key Milestones Approach

  • Sunset Review1
    • The Sunset Advisory Commission reviews performance of The Public Utility Commission of Texas (PUC) and the Office of Public Utility Counsel (OPUC) every 12 years
    • The next review should be completed during the 2005 session
    • Key recommendations of the Sunset Advisory Commission include:
      • Changes to ERCOT/PUC governance structure
      • Extension of the PUC for 6 years
  • Market inefficiencies drive significant costs to market participantsacross the ERCOT system
  • The competitive market in Texas is functioning well andTXU does not anticipate any major structural changes in the marketplace

1 Estimated cost of bad debt for key ERCOT retailers in 2003; TXU retail bad debt in 2003 was $120 MM

2 OOME down cost to the system

3 Reduction of “ask” price to energy retailers of 0.2 cents / KWh on 300 TWh

4 Unaccounted for energy costs at 1% of load at $40 / MWh on 300 TWh (Line loss can represent an additional 5% of load cost)

5 Based on 6 month RMR costs for delay at La Palma of $15 million and 12 month RMR costs on delay at Davis of $30 MM

6 ERCOT requires approximately 2 GW of new capacity per year; better siting reduces transmission cost by $10,000 per MW

1 The Sunset process is guided by a 12-member body of legislators and public members appointed by the

Lieutenant Governor and the Speaker of the House of Representatives.