energy future holindings texas

Texas Deregulation – A Success Story The ERCOT Market Framework Has Been A Success ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],ERCOT ERCOT supply curve; Implied heat rate 04; MMBtu/MWh ERCOT’s Robust Competitive Wholesale Market Led To A Large Capital Infusion… Cumulative capacity MW Deregulation led to investment of over $15 billion and the addition of 22GW of low-cost CCGT capacity 0 3 6 9 12 15 18 21 24 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 22 GW Internal combustion Nuclear Coal CCGT Gas/oil … And A Reduction In Market Heat Rates ERCOT heat rate cycle 98-04; MMBtu/MWh CCGT marginal heat rate CCGT reinvestment economics ,[object Object],The ERCOT Regulatory Framework Has Led To Strong Retail Competition… Source: KEMA ERCOT has the most active de-regulated retail market in the US Residential Customer Switching 04; percent 1 2 3 4

Texas Deregulation – A Success Story … With Customer Switching In Line With Other Successful Deregulated Markets… Incumbent market share 1 Years since deregulation; Percent 1 Market share estimates based on customer count 2 Estimates for 2003 and 2004 Source: PUC; OFGEM Wireline South Texas residential North Texas residential UK residential 2 There Is Still Room For Improvement In ERCOT… 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 Market inefficiencies drive significant costs to market participants across the ERCOT system … As Key Milestones Approach ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],The competitive market in Texas is functioning well and TXU does not anticipate any major structural changes in the marketplace 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. … Giving End Use Customers Access To Lower Prices Competitive residential price 1 vs. regulated rate 02-04; Percent savings Competitive large business price vs. regulated rate 02-04; Percent 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 $4.07/MMBtu Henry Hub gas price, 24X7 heat rate of 7.3 MWh/MMBtu, and incumbent residential gross margins of 30% and LC&I gross margins of 5% 2 2 Send generators price signals to back down or up 70 2 Out of Merit production Wholesale market design Eliminate switching for customers with outstanding balances 250 1 Bad debt Retail market System data and reporting 120 4 Unaccounted for Energy Create a day-ahead market for energy and ancillary services 60 3 Load balancing between market participants Additional incentives or mandates for TDSPs to construct transmission 45 5 Slow build of transmission for RMR exit Delivery regulation Poor siting of generation raises transmission costs Example inefficiency 20 6 Est. annual system cost ($millions) Require plant siting approval to consider transmission costs Market design and governance Potential solution Session begins January 11, 2005 Sunset Review recommendations are considered by Texas Legislature January 1, 2005 Affiliate Retailers may offer other price structures in addition to PTB January 1, 2007 PTB is no longer a required offering Milestone Effective Date 5 6 7 8

energy future holindings texas

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