Erin Packwooderin.packwood@mercer.com

2005 Competitive Compensation ReviewElectric Reliability Council of Texas (ERCOT)

January 17, 2006

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Background

ERCOT and the Public Utilities Commission of Texas (PUCT) asked Mercer to conduct a review of a benchmark sample of jobs to determine the competitive market position of ERCOT’s:

– Base pay (annualized hourly wage or salary)

– Total cash compensation (base pay plus cash bonus awards)

Based on the results of the competitive review, Mercer was also asked to recommend changes to ERCOT’s pay program(s), where appropriate

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Process and Methodology

To complete the study, Mercer performed the following:

Met with ERCOT and PUCT representatives to develop an understanding of ERCOT’s business operations, compensation philosophy and the jobs included in the study

Assessed value of ERCOT’s benefits relative to other Texas employers

Reviewed ERCOT job documentation to understand job content

Obtained data from 22 published survey sources, the Texas State Auditor’s Office, Austin Energy, LCRA, and CPS

Adjusted data, as appropriate, to reflect differences in job scope, responsibilities, reporting levels, skill requirements, and a 9/15/05 effective date

Researched geographic differential practices for Austin, Texas

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Process and Methodology (continued)

Additional project steps included:

Developed 25th, 50th, and 75th percentile market composite statistics for base pay and total cash compensation for 135 ERCOT benchmark jobs, representing 336 employees or 66% of ERCOT’s workforce

Assessed ERCOT’s base pay and total cash compensation relative to the market 50th percentile (median)

Combined benefits and compensation competitive assessment findings to develop relative market position for ERCOT’s total remuneration

Met with ERCOT and PUCT to review draft findings and discuss warranted revisions and additional reviews

Prepared final summary of findings and recommendations

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Base Pay Analysis

Our assessment of ERCOT’s base pay for the benchmark sample relative to aggregate market practices indicated the following:

On average, base pay is approximately 2% above the median of the market

In general, base pay tends to exceed the market median for lower level positions and fall below the market median for higher level positions

Individual pay levels are widely dispersed – market variances range from 28% below to 49% above the market median, indicating salaries are not administered according to a consistent, market-aligned standard

Salary ranges for many jobs are not aligned with market practices

32% of the benchmark employees fall outside a typical market competitive range (+/-15%)

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Base Pay Analysis (continued)

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Total Cash Compensation Analysis

Our assessment of ERCOT’s target total cash compensation (TCC) for the benchmark sample relative to aggregate market practices indicated the following: On average, TCC (actual base pay plus target bonus award, where

eligible) is approximately 1% below the median of the market

Bonus eligible employees average target TCC that is 1% above the market median

Target TCC is generally less competitive for higher level roles than for lower level roles

As with base pay, individual target total cash compensation competitiveness varies widely

The absence of bonus awards to lower level employees creates a short-fall when compared to market bonus practices; however, above market base salaries have helped ERCOT remain competitive with regard to TCC

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Total Cash Compensation Analysis (continued)

The use of variable pay is at all organizational levels is becoming common among employers in all industries:

Utilities Industry - Short Term Incentives

Executives ManagementProfessional/

TechnicalNon-Exempt Clerical/Tech

Non-Union Hourly

% of companies w/ program 93% 93% 93% 85% 74%

Avg Target % (as % of base pay) 35% 15% 8% 6% 6%

Avg Actual 2004 Payout 40% 15% 10% 6% 5%Avg Expected 2005 Payout 32% 12% 8% 6% 6%

ERCOT Target % 25%15% (Directors)10% (Managers)

not eligible not eligible not eligible

All Industries - Short Term Incentives

Executives ManagementProfessional/

TechnicalNon-Exempt Clerical/Tech

Non-Union Hourly

% of companies w/ program 86% 82% 67% 53% 47%

Avg Target % (as % of base pay) 35% 15% 10% 5% 5%

Avg Actual 2004 Payout 38% 17% 10% 5% 5%Avg Expected 2005 Payout 35% 16% 10% 5% 5%

ERCOT Target % 25%15% (Directors)10% (Managers)

not eligible not eligible not eligible

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Total Remuneration Analysis

The combined results of our benefits and compensation assessments indicated the following: ERCOT’s benefit programs are valued at approximately 113% of the

market median

Total remuneration for the average ERCOT employee is 4% above the market median

Employee Profile

Base Pay Level Average Employee

$25,000 $50,000 $75,000

ERCOT Target Total Cash Compensation Market Position

97% 99% 99% 99%

ERCOT Benefits Value Market Position2 114% 117% 118% 113%

Market Benefits Value as a % of Base Pay 71% 60% 56% 60%

ERCOT Total Remuneration Value $45,698 $88,560 $134,948 $87,360

Market Total Remuneration Value $44,000 $84,000 $128,250 $84,000

ERCOT Total Remuneration Market Position 104% 105% 105% 104%

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Recommendations

To the extent ERCOT desires to keep base pay and target total cash compensation in line with the median of the market, Mercer recommends the following:

Add additional pay ranges to the existing ERCOT structure to ensure market alignment for all jobs

Review grade assignments to ensure base pay ranges for all jobs are aligned with market practices

Manage individual pay levels consistently within market-based ranges

Recognize multiple career levels where consistent with market distinctions

Retain existing bonus targets for roles that are currently bonus eligible and consider expanding bonus eligibility (assuming changes are made to ensure market alignment in base pay)