Public Meeting on ERCOT’s Proposed 2004 Budget September 3, 2003 Preliminary - Subject to ERCOT...

Public Meeting on ERCOT’s Public Meeting on ERCOT’s Proposed 2004 BudgetProposed 2004 Budget

September 3, 2003September 3, 2003

Preliminary - Subject to ERCOT Board Approval

AgendaAgendaBackgroundBackgroundBusiness ConsiderationsBusiness ConsiderationsAssumptionsAssumptionsProposed 2004 BudgetProposed 2004 Budget

ERCOT System Administration Fee ERCOT System Administration Fee Revenue RequirementsRevenue Requirements

Operating ExpensesOperating ExpensesCapital InvestmentCapital InvestmentDebt ServiceDebt Service

MWH ForecastMWH Forecast

Q&A DiscussionQ&A DiscussionPreliminary - Subject to ERCOT Board Approval

ScheduleScheduleJune 11June 11 Kickoff meetingKickoff meetingJuly 10July 10 Budget templates due to FinanceBudget templates due to FinanceJuly 11-17July 11-17 Internal management reviewInternal management reviewJuly 18July 18 Preliminary budget to Preliminary budget to directors/mgrsdirectors/mgrsJuly 21-31July 21-31 Budget revisionsBudget revisionsAugust 1-15August 1-15 Internal management reviewInternal management reviewAugust 26August 26 Finance & Audit Committee (F&A) Finance & Audit Committee (F&A) reviewreviewSeptember 3September 3 Public meeting on proposed Public meeting on proposed budgetbudgetSeptember 11September 11 F&A reviewF&A reviewSeptember 16September 16 F&A recommendation to BoardF&A recommendation to BoardOctober 21October 21 Board approvalBoard approvalOctober 24October 24 Preliminary PUCT fee filing reviewPreliminary PUCT fee filing reviewOctober 31 October 31 PUCT fee filingPUCT fee filing

Preliminary - Subject to ERCOT Board Approval

Business ConsiderationsBusiness ConsiderationsDynamic Market Needs

Transmission/Resource Planning

RMR/Congestion Management

NERC Reliability/Compliance

Security (Physical and Cyber)

Escalating Requirements for Implementing Approved Protocol Revision Requests (PRRs)

Preliminary - Subject to ERCOT Board Approval

Business ConsiderationsBusiness Considerations

Minimal Opportunity to Analyze & Perform Process Reviews & Improvements

Manual Workarounds – Startup

Additional Manual Workarounds (new PRRs)

Recurring Market Needs (e.g., suspension of true-ups)

Limited Resources Unlimited Requirements

Preliminary - Subject to ERCOT Board Approval

Business ConsiderationsBusiness ConsiderationsTechnology constraints

Multiple System Customizations

More Complex Upgrades

Many Systems Have Limited or No Development/Test Environments

Some Single-source Providers

Preliminary - Subject to ERCOT Board Approval

AssumptionsAssumptionsOperating ExpensesOperating Expenses

Additional FTE’s required to:Additional FTE’s required to:Satisfy existing expectations of the marketSatisfy existing expectations of the marketMeet requirements of protocol revisionsMeet requirements of protocol revisions

Support capital investmentsSupport capital investments Hardware and software support costs Hardware and software support costs increase with capital spendingincrease with capital spendingConsulting costs increased in response to Consulting costs increased in response to complexity of systems in production and new complexity of systems in production and new initiatives such as the Texas Nodal project, initiatives such as the Texas Nodal project, data warehouse project, and the SAS 70 type data warehouse project, and the SAS 70 type 2 audit2 auditPreventative maintenance on ERCOT facilities Preventative maintenance on ERCOT facilities begins in 2004begins in 2004

Preliminary - Subject to ERCOT Board Approval

AssumptionsAssumptionsCapital SpendingCapital Spending

$55 million capital program $55 million capital program Possible increase at completion of project priority Possible increase at completion of project priority processprocess

80 percent funded with proceeds from 80 percent funded with proceeds from ERCOT’s short-term credit facilityERCOT’s short-term credit facility

Debt ServiceDebt Service$13.6 million principal $13.6 million principal Interest on long-term notes and borrowing Interest on long-term notes and borrowing under short-term credit facilityunder short-term credit facility

Preliminary - Subject to ERCOT Board Approval

Administrative Fee ComparisonAdministrative Fee Comparison 2002 - 20042002 - 2004

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

2002 Fee 2003 Fee 2004 Fee

$ / M

WH

Texas Nodal Project

SAS 70 Type 2

PUC MOD Support

Cml Apps Project

New FTE's - 2004

Principal Payments

Interest Payments

Revenue-funded Capital

Baseline Operations

$0.33 / MWH

$0.22 / MWH

$0.44 / MWH

Preliminary - Subject to ERCOT Board Approval

Revenue Requirement ComparisonRevenue Requirement Comparison2002 - 20042002 - 2004

2004 Revenue 2004 Revenue Requirements - $133.7 Requirements - $133.7 millionmillion

$99.5 million operating $99.5 million operating expenseexpense

LaborLaborSW licenses & SW licenses & maintenancemaintenanceConsultants & Consultants & contractorscontractors

$55 million capital expense$55 million capital expense$44 million debt funded$44 million debt funded$11 million revenue $11 million revenue fundedfunded

$23.2 million debt service$23.2 million debt service$9.6 million interest$9.6 million interest$13.6 million principal$13.6 million principal

2% MWH growth2% MWH growth

$-

$25

$50

$75

$100

$125

$150

FY 2002 FY 2003 FY 2004

($ M

illio

ns)

O&M Debt Service Rev Funded CIP

$0.22 / MWH

$0.33 / MWH

$0.44 / MWH

Preliminary - Subject to ERCOT Board Approval

Revenue Requirement ComparisonRevenue Requirement Comparison2002 - 20082002 - 2008

$-

$25

$50

$75

$100

$125

$150

$175

$200

$225

$250

$275

$300

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

($ M

illio

ns

)

O&M Debt Service Rev Funded CIP

$0.22/

MWH

$0.33/

MWH

$0.44/

MWH

$0.58/

MWH

$0.67/

MWH

$0.74/

MWH

$0.77/

MWH

Preliminary - Subject to ERCOT Board Approval

Revenue Requirement ComparisonRevenue Requirement Comparison2009 - 20132009 - 2013

$-

$25

$50

$75

$100

$125

$150

$175

$200

$225

$250

$275

$300

FY 2009 FY 2010 FY 2011 FY 2012

($ M

illio

ns

)

O&M Debt Service Rev Funded CIP

$0.75/

MWH$0.71/

MWH

$0.72/

MWH

$0.69/

MWH

Preliminary - Subject to ERCOT Board Approval

Administrative Fee SensitivityAdministrative Fee Sensitivity

$0.01of Administrative Fee equals:

$3 million of operating expense$3 million / 294,000,000 MWH = $0.01 / MWH

$15 million of capital spending 80% leverage (20% equity funding * $15 million = $3 million)

6.8 GWH 2.3 percent deviation from MWH expected in 2004

Calculations ($3 million / $0.44 per MWH = 6.8 GWH. 6.8 GWH / 294 GWH = 2.3%)

Preliminary - Subject to ERCOT Board Approval

Operating ExpensesOperating ExpensesFY 2004 FY 2003

ERCOT Operating Expenses Budget Budget $ Var % VarLabor & Benefits 57,480,367 40,868,132 16,612,235 40.6%Labor for Capital Projects (7,367,613) (2,640,000) (4,727,613) -179.1%Material, Supplies , Tools & Equipment 1,647,370 1,107,910 539,460 48.7%Outside Services 22,337,469 13,250,120 9,087,349 68.6%Utilities , Maintenance & Facilities 7,586,798 5,742,436 1,844,362 32.1%HW Maintenance & SW Support 9,092,753 6,675,635 2,417,118 36.2%Insurance 1,750,000 1,500,000 250,000 16.7%Employee Expenses 2,812,957 1,645,500 1,167,457 70.9%Other 4,174,119 7,033,411 (2,859,292) -40.7%

Total 99,514,220 75,183,144 24,331,076 32.4%

Increase/<Decrease>

Preliminary - Subject to ERCOT Board Approval

Equity-Funded CapitalEquity-Funded CapitalPrioritized Capital Projects 40,000,000$ Building Projects 13,900,000 Minor Capital 1,100,000 Total 55,000,000$

Percent Equity Funded 20%

Equity Funded Capital 11,000,000$ Preliminary - Subject to ERCOT Board Approval

Debt ServiceDebt Service

Debt Outstanding - 12/31/2004 193,000,000$

Interest Expense 9,600,000 Principal Payments 13,600,000 Total 23,200,000$

Preliminary - Subject to ERCOT Board Approval

Revenue Requirement SummaryRevenue Requirement Summary

Operations Expense 99,514,000$ Equity-funded Capital Investment 11,000,000 Debt Service 23,200,000 Total Revenue Requirements 133,714,000$

MWH's 294,396,000

Proposed Fee per MWH 0.44$

Preliminary - Subject to ERCOT Board Approval

2004 Revenue Requirements2004 Revenue RequirementsUtilization of the System Administration FeeUtilization of the System Administration Fee

Insurance, Employee Expenses and Other

7%

Facilities and Supplies7%

Debt Service17%

SW Licenses and Maintenance

7%

Revenue Funded Capital

8%

Labor37%

Outside Services17%

Preliminary - Subject to ERCOT Board Approval

2003 Revenue Requirements2003 Revenue RequirementsUtilization of the System Administration FeeUtilization of the System Administration Fee

Insurance, Employee Expenses and Other

10%

Facilities and Supplies7%

Debt Service10%

SW Licenses and Maintenance

7%

Revenue Funded Capital

14%

Labor39%

Outside Services13%

Preliminary - Subject to ERCOT Board Approval

Monthly MWHMonthly MWH

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

GW

H's

FY 2004 Budget GWH's FY 2003 Actual & Projected GWH's

FY 2002 Actual GWH's FY 2001 Actual GWH's

FY 2000 Actual GWH's

294 million MWH budgeted for 2004294 million MWH budgeted for 20042 percent growth over 2003 budget2 percent growth over 2003 budget

2.1 percent year-to-date growth in MWH 2003 vs. 2.1 percent year-to-date growth in MWH 2003 vs. 20022002Preliminary - Subject to ERCOT Board Approval

Organizational ChartOrganizational ChartERCOT

Corporate Information Market SystemAdministration Technology Operations Operations

* Executive Organization * CIO Administration * COO Administration * CMO Administration* Finance * Technology Services Administration * Market Operations Support * Galvin PM* General Counsel * System Engineering and Administration * Operations Support * Settlement Metering* Human Resources * IT Operations * System Operations * Load Profiling and Data Aggregation* NERC Compliance * Facilities * System Planning * Settlements and Billing* Stakeholder Services * Network * Resource Planning * REP/ESI-ID Of Record* Corporate Communications * EMMS Development * Renewables and TCR* Market Rules * Project Management * Gruber PM

* Market Technology Service * Retail Documentation and Reporting * Data Warehousing * Retail Testing and Quality Control* Development & Architecture * Retail Client Services* Transaction Services * Wholesale Client Services* Corporate Applications* Web and Data Services* Settlement and Billing* Data Management* Cyber Security* Physical Security* IT Delivery* IT Operations 2* EMMS Production

Preliminary - Subject to ERCOT Board Approval

Staffing Increases - 2004Staffing Increases - 2004

0

25

50

75

100

125

150

175

200

ER

CO

T E

mp

lo

ye

es

SAS 70 Audit

Cml AppsEnhancement

Texas NodalProject

2004 BaseAddition

2003 Base

Total increase proposed for 2004 - 130 Total increase proposed for 2004 - 130 employeesemployees

Corporate Administration – 12 employeesCorporate Administration – 12 employeesInformation Technology – 35 employeesInformation Technology – 35 employeesSystem Operations – 32 employeesSystem Operations – 32 employeesMarket Operations – 51 employeesMarket Operations – 51 employeesPreliminary - Subject to ERCOT Board Approval

Corporate AdministrationCorporate AdministrationStaffing Increases - 2004Staffing Increases - 2004

0

25

50

75

100

125

150

175

200

Corporate Administration

ER

CO

T E

mpl

oyee

s

SAS 70 Audit

Cml Apps Enhancement

Texas Nodal Project

2004 Base Addition

2003 Base

Proposed increase of 12 Proposed increase of 12 employeesemployeesIncreased NERC and protocols Increased NERC and protocols compliance workcompliance workIncreased number of protocols Increased number of protocols revision requestsrevision requestsSupport provided to TAC and Support provided to TAC and other committee and other committee and subcommittee meetingssubcommittee meetingsTexas Nodal project – Texas Nodal project – program management, legal program management, legal and financial analysis and financial analysis

Preliminary - Subject to ERCOT Board Approval

Information TechnologyInformation TechnologyStaffing Increases - 2004Staffing Increases - 2004

0

25

50

75

100

125

150

175

200

Information Technology

ER

CO

T E

mpl

oyee

s

SAS 70 Audit

Cml Apps Enhancement

Texas Nodal Project

2004 Base Addition

2003 Base

Proposed increase of 35 Proposed increase of 35 employeesemployeesStrengthen support of existing Strengthen support of existing applications and hardwareapplications and hardwareProvide production support of Provide production support of new applications such as data new applications such as data warehousewarehouseEnhance cyber and physical Enhance cyber and physical securitysecurityBolster architecture, Bolster architecture, development and project development and project management staff management staff Nodal impact larger in 2005 and Nodal impact larger in 2005 and 20062006Develop and maintain Develop and maintain procedures necessary for procedures necessary for internal control (SAS 70 audit)internal control (SAS 70 audit)

Preliminary - Subject to ERCOT Board Approval

System OperationsSystem OperationsStaffing Increases - 2004Staffing Increases - 2004

0

25

50

75

100

125

150

175

200

System Operations

ER

CO

T E

mpl

oyee

s

SAS 70 Audit

Cml Apps Enhancement

Texas Nodal Project

2004 Base Addition

2003 Base

Proposed increase of 32 Proposed increase of 32 employeesemployeesAdd a system operator training Add a system operator training shift and additional training staffshift and additional training staffProvide real time evaluation of Provide real time evaluation of system operator performancesystem operator performanceIncreased responsibilities and Increased responsibilities and expectations regarding expectations regarding transmission project planning transmission project planning and approval, generation and approval, generation requirements, congestion requirements, congestion managementmanagementSupport protocol required tasks Support protocol required tasks such as performance distribution such as performance distribution reports, voltage stability studies, reports, voltage stability studies, black start studies, transient black start studies, transient studies, outage coordination studies, outage coordination support and ancillary service support and ancillary service calculationscalculations

Preliminary - Subject to ERCOT Board Approval

Market OperationsMarket OperationsStaffing Increases - 2004Staffing Increases - 2004

0

25

50

75

100

125

150

175

200

Market Operations

ER

CO

T E

mpl

oyee

s

SAS 70 Audit

Cml Apps Enhancement

Texas Nodal Project

2004 Base Addition

2003 Base

Proposed increase of 51 Proposed increase of 51 employeesemployeesValidation of retail customer Validation of retail customer switching (Replace switching (Replace contractors and consultants contractors and consultants currently performing tasks currently performing tasks relating to the ESI-ID of relating to the ESI-ID of record)record)Support direct load control Support direct load control and other new load research and other new load research workworkPerform metering site audits Perform metering site audits required by protocols and required by protocols and support introduction of support introduction of competitive meteringcompetitive meteringProvide test support for Provide test support for ERCOT projects, maintenance ERCOT projects, maintenance efforts, and more frequent efforts, and more frequent Texas Set test flightsTexas Set test flightsAdd “business” project Add “business” project management staffmanagement staffPreliminary - Subject to ERCOT Board Approval

Staffing ProjectionsStaffing Projections

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008

Actual or projected in 2000 through 2003Actual or projected in 2000 through 2003Budgeted in 2004Budgeted in 200410 percent growth in 2005 and 200610 percent growth in 2005 and 20065 percent growth in 20075 percent growth in 2007No growth in 2008 and future yearsNo growth in 2008 and future years

ER

CO

T E

mpl

oyee

s

Preliminary - Subject to ERCOT Board Approval

2004 Consulting Services2004 Consulting Services

Consulting Category $ Millions PercentTexas Nodal Project 5.781 26%Information Technology Production Consulting 4.838 22%SAS 70 Audit 1.883 8%Legal 1.712 8%Other Corporate Adminis tration Consulting 1.520 7%System Operations Consulting 1.284 6%Other Capital Projects 1.119 5%Retail Switch Notification 0.999 4%Data Warehouse Support to PUCT 0.737 3%Default QSE Retainer 0.720 3%Security Consulting 0.691 3%Financial, Operational and Other Audits 0.656 3%Market Operations Consulting 0.397 2%

Total 22.337 100%

2004 Budget

Preliminary - Subject to ERCOT Board Approval

2004 Consulting Services2004 Consulting Services

IT22%

Texas Nodal26%

SAS 708% Legal

8%

Other Corp7%

Sys Ops6%

Support Capital5%

Retail Switch4%

PUC Data Warehouse3%

Default QSE3%

Security3%

Mrkt Ops2%

Financial, Operational and Other Audit

3%

Preliminary - Subject to ERCOT Board Approval

Debt and Capital Spending AnalysisDebt and Capital Spending Analysis

$-

$50

$100

$150

$200

$250

$300

2000 2001 2002 2003 2004 2005 2006 2007 2008

$ M

illio

ns

Annual Capital Spending Debt Needed

Existing Borrowing Capacity

Debt Needed

Preliminary - Subject to ERCOT Board Approval

Revenue Requirement SummaryRevenue Requirement Summary

Operations Expense 99,514,000$ Equity-funded Capital Investment 11,000,000 Debt Service 23,200,000 Total Revenue Requirements 133,714,000$

MWH's 294,396,000

Proposed Fee per MWH 0.44$

Preliminary - Subject to ERCOT Board Approval

Questions?Questions?