1. Texas Electric Market Restructuring
A Customer Success Story
C. John Wilder
Chief Executive Officer
June 14, 2005

2. Today’s Agenda
From To
Market
Market Regulation A truly competitive
Restructuring
Restructuring market
Texas Power
Texas Power No customer choice Full customer control
Restructuring
Restructuring
TXU’s
TXU’s A regulated monopoly An industrial
Transformation
Transformation energy company
1

3. Over Time Restructuring Allows Customers To Capture The
Benefits Of Open Markets And Competition…
Efficiency
Increased
Increased
consumer
consumer
value
value
Investment Innovation
••Over the long term open markets allocate resources better than monopolies
Over the long term open markets allocate resources better than monopolies
and regulators
and regulators
••quot;Competition on its worst day is better than regulation on its best day.”
quot;Competition on its worst day is better than regulation on its best day.”
Pat Wood, FERC Chairman
Pat Wood, FERC Chairman
2

4. …Evidenced By The Improvements Made Across
Multiple Industries
Increased
investment... …Efficiency... ...And innovation
Percent of available airline seat
US Telecom investment miles filled New cable services
93-04; $ billions 77-00; Percent 96-04; No units
71 Access to over 300
33 44%
44% 27%
27%
56 channels (from 30)
23
HDTV technology
DSL (Internet
broadband)
Pay-per-View
93-96 97-04 77 00 Digital Video
Pre- Pre- Recorder
deregulation deregulation
Parental controls
“Markets can both price and allocate capital; not just allocate,”
“Markets can both price and allocate capital; not just allocate,”
Financial Times
Financial Times
Source: British telecom, O&D survey
3

5. These Improvements Have Led To Lower Prices For
Consumers…
Crashing prices: Airline prices Cheap calls: US long distance Trucking prices (truckload)
79-05; Index of real prices 80-05; Index of real 67-05; Index of real $/ton
(1979=100) revenue/minute (1980=100) (1967=100)
100
100 100
45% 86% 37%
45% 86% 37%
63
55
14
67
79 80 Today
Today Today
A competitive market forces the efficiency gains through to the customer in
A competitive market forces the efficiency gains through to the customer in
the form of lower prices and value added services
the form of lower prices and value added services
4

6. …And Difficult Transitions For The Former Monopolies:
Declining Financial Flexibility…
AAA AA A BBB BB B CCC D
Bankruptcies
04
90
American 04
90
04
90 04
90
Delta
96 Airlines
United 90 04
90 04
AT&T 90 04
90 04
69 Telecom Qwest 90 04
90 04
MCI 90 02
90 02
Yellow 90 04
90 04
37 Trucking
Ryder 90 04
90 04
5

7. …And Poor Returns
Poor returns: Annual total return to shareholders (CAGR)
83-03; Percent
90%
13.0
6.9 5.7
5.8
3.5 3.1
Average
-2.0
-5.1
-6.3
S&P 500 American Delta United AT&T Qwest MCI Ryder Yellow
Airlines Telecom Trucking
There is not a single industrial deregulated incumbent that has outperformed
There is not a single industrial deregulated incumbent that has outperformed
the broader market over the last 20 years
the broader market over the last 20 years
Source: Compustat
6

8. Today’s Agenda
From To
Market
Market Regulation A truly competitive
Restructuring
Restructuring market
Texas Power
Texas Power No customer choice Full customer control
Restructuring
Restructuring
TXU’s
TXU’s A regulated monopoly An industrial
Transformation
Transformation energy company
7

9. The Texas Electric Market Is One Of The Largest In The
World And Now One Of Only A Few Competitive Retail
Markets
Electricity consumption Competitive retail
02; TWh
3,660
1,457
971
780
513 510 487 415 344
352 320
267 218 196
United Japan Germany Canada Brazil Texas Spain
States
China Russia India France United South Australia
Kingdom Korea
Texas is the 11th biggest market in the world
Texas is the 11th biggest market in the world
Source: EIA 8

10. Texas Restructuring Has “Unbundled” The Electric Power
Value Chain And Restructured Many Activities
Competitive
Transmission
Generation Distribution
Restructuring
Generation Transmission Retail
Distribution
59 active retailers
67 generators 5 T&D
Examples ANP AEP Central Cirro
Calpine AEP North Constellation
Constellation CenterPoint Direct Energy
Exelon TNMP Entergy
FPL TXU Electric Delivery First Choice
Sempra GEXA
Texas Genco Green Mountain
TXU Power Reliant Energy
TXU Energy
Restructuring has brought a variety of new players into the market
Restructuring has brought a variety of new players into the market
9

11. Competition Has Led To The Formation Of Many Different
Business Models Where companies participate
…to many different models:
Participate in… Examples
All segments TXU Corp
GTDR
Texas evolved from an T&D only CenterPoint
TD
G R
integrated model… AEP Central/North
Genera- Trans- Distri-
Retail Retail only Reliant Energy
R
G T D
tion mission bution
Green Mountain
5 regulated, integrated companies
Retail and Centrica (Direct)
G R
T D
generation Calpine
Constellation
FPL/Gexa
(pending)
Generation Texas Genco
G T D R
only
••Only time will tell which business models will succeed
Only time will tell which business models will succeed
••As the market continues to mature, the winning business model may continue to change
As the market continues to mature, the winning business model may continue to change
10

12. ERCOT Was Designed So That Customers Could Capture
The Benefits Of Open Markets And Competition
What Texas Did Right How Customers Benefited
Significant investment in
Simple bilateral market
state of the art
Expedited permitting and
Wholesale
Wholesale technology (efficient
interconnection
CCGT)
Improved operational
performance
PTB provided headroom Many competitive options
and mechanism to pass Lower prices than
Retail
Retail on commodity changes under continued regulation
Low barriers for entry New products (loyalty
Immediate competitive programs, “green power”)
pricing for customers
The Texas Legislature correctly designed the retail framework to:
The Texas Legislature correctly designed the retail framework to:
•• Ensure Texans have access to reliable electricity at competitive prices and
Ensure Texans have access to reliable electricity at competitive prices and
improved customer service
improved customer service
•• Foster competitive behavior and encourage entrepreneurship, while
Foster competitive behavior and encourage entrepreneurship, while
continuing to protect consumers
continuing to protect consumers 11

13. Restructuring Spurred Massive Generation Investment In
The ERCOT Market… In rate base
Not in rate base
Capacity additions
90-04; GW1
90-97 Additions= 6 GW 98-04 Additions= 26 GW
6.6
PURA 95 SB7 5.7
5.5
(wholesale (retail
4.4
competition) competition)
2.9
1.7
1.1
1.0 0.8 0.7
0.6 0.5
0.4
0.2 0.2
Year 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Reserve
Margin (%) 27 29 27 23 23 17 16 9 8 7 12 28 35 32 33
From 98-04, more than $15 billion was invested in generation infrastructure –
From 98-04, more than $15 billion was invested in generation infrastructure –
none of which was in the rate base
none of which was in the rate base
1 GW = 1000 MW (1 MW serves approximately 1000 homes)
12
Source: Energy Velocity; NERC

14. …Bringing Efficient CCGT Capacity Into The ERCOT
Generation Portfolio Average demand
ERCOT generation portfolio: Average variable cost1
98-04; $/MWh
Internal
98
combustion
200
Gas/oil
150
••Restructuring led
Restructuring led
100 Wind to the investment
Coal
to the investment
Nuclear of over $15 billion
of over $15 billion
50 Average price ~ $80
and the addition of
and the addition of
0
the 22GW of
the 22GW of
0 20 40 60 80
efficient CCGT
efficient CCGT
capacity
04 capacity
Internal
••Overall the total
200 Overall the total
combustion
market is receiving
market is receiving
Gas/oil
150 22 GW of new less than an 8%
less than an 8%
efficient capacity
Wind Coal return on capital
100
return on capital
Nuclear CCGT
50
Average price ~ $45
0
0 20 40 60 80
Cumulative Capacity
1 Based on a $6.00/MMBtu gas price
GW 13
Source: Platt’s PowerDat

15. …Leading To A Significant Reduction In Market Heat Rates
ERCOT heat rate1 cycle
98-04; MMBtu/MWh
16
CCGT reinvestment economics
14
12
10
8
6
4
CCGT marginal heat rate
2
0
98 99 00 01 02 03 04
•• New capacity has led to a 40% increase in the efficiency of the marginal unit
New capacity has led to a 40% increase in the efficiency of the marginal unit
•• This would be similar to improving average automobile gas mileage from 20
This would be similar to improving average automobile gas mileage from 20
mpg to 35 mpg
mpg to 35 mpg
1 Heat rate is a measure of the efficiency of converting a unit of fuel (MMBtu) into a unit of electricity (MWh); lower heat rates implies higher efficiency.
Based on day ahead electricity and gas prices.
Source: MegaWatt Daily, Gas Daily 14

16. Competition Has Forced Marginal Pricing, Preventing Most
Generators From Receiving Full Compensation For Capital
Invested Capital recovery
Fixed cost
Full reinvestment economics1
Variable cost
052; $ / MWH
72
66
16
56 Today’s prices2
3
48
Forward price
54 range3
38 24
53
8
14
16
12
4
0
Wind w/o PTC Nuclear Coal CCGT
Similar to other competitive markets pricing is bid down to the variable
Similar to other competitive markets pricing is bid down to the variable
economics of the marginal unit
economics of the marginal unit
1 Wind capacity factor=40%, Nuclear=90%, Coal=90%, CCGT=60%
2 Assumes $7.50 / MMBtu natural gas prices and 7x24 Heatrate of 8 MMBtu/MWh
3 Assumes range of $4.50-$5.50 / MMBtu natural gas prices and 7x24 Heatrate of 8-9 MMBtu/MWh
15
Source: EIA, Henwood

17. ERCOT Was Designed So That Customers Could Capture
The Benefits Of Open Markets And Competition
What Texas Did Right How Customers Benefited
Significant investment in
Simple bilateral market
state of the art
Wholesale Expedited permitting and
Wholesale technology (efficient
interconnection
CCGT)
Improved operational
performance
PTB provided headroom Many competitive options
and mechanism to pass Lower prices than under
Retail
Retail on commodity changes continued regulation
Low barriers for entry New products (loyalty
Immediate competitive programs, “green power”)
pricing for customers
The Texas Legislature correctly designed the retail framework to:
The Texas Legislature correctly designed the retail framework to:
•• Ensure Texans have access to reliable electricity at competitive prices and
Ensure Texans have access to reliable electricity at competitive prices and
improved customer service
improved customer service
•• Foster competitive behavior and encourage entrepreneurship, while
Foster competitive behavior and encourage entrepreneurship, while
continuing to protect consumers
continuing to protect consumers 16

18. Customers Have Already Begun To Reap The Benefits Of
Competition…
Average residential prices1 Average large business prices1
02-04; $/MWh 02-04; $/MWh
15% 20%
15% 20%
93
79
66
53
If regulation Competitive If regulation Competitive
continued continued
••Even with historically high natural gas prices, customers have benefited
Even with historically high natural gas prices, customers have benefited
from access to lower electricity prices than they would have experienced
from access to lower electricity prices than they would have experienced
under regulation
under regulation
1 Competitive Residential price based on 15% discount to TXU Energy PTB as currently offered by market competitors, e.g., Cirro (14.6%); Competitive
large business rates include 10% wholesale gross up and 5% net margin; Regulated world assumes 9.6 GW added capacity in the rate base (as
opposed to 22GW actually built) at a cost of $600/kw, O&M costs approximately $36/kw-yr resulting in an average cost of $127/kw-yr in the rate base
Source: TXU Energy, ECOM model 17

19. … Giving Customers In Texas Access To Lower Prices Than
Before Restructuring
Change in best available price
Dec 01 – Dec 04; Percent
180
101
25.2
8.4
7.5
3.7
-1.2
-1 -3.2
-3
-6.9
North Colorado Arizona Oklahoma Arkansas Gasoline
Texas
Houston Louisiana Utah New Natural gas
Mexico
Competitive providers have used efficiency
Competitive providers have used efficiency
to combat higher purchased power costs
to combat higher purchased power costs
Source: Texas PUC, EIA
18

20. Electricity Prices Have Increased Much Slower Than Inflation
And Represent A Smaller Amount Of Disposable Income
Change in prices Change in use of disposable income
90-04; Percent 90-04; Percent change
45 32%
62%
62% 24%
4% 3%
0%
17
-10% -13%
-21%
Recreation Automobiles Gasoline Electricity
Consumer Residential
Medical Housing Food Clothing
Price electricity
Index
Efficiency in technology and operations has reduced the cost of electricity on
Efficiency in technology and operations has reduced the cost of electricity on
a real basis
a real basis
Source: EIA, Department of Commerce
19

21. Significant Switching Highlights Texas As The Only Truly
Competitive Residential Retail Electricity Market In The U.S.
Significant competition: Net incumbent switch rates
May 05; Percent of load
73
72
28 14
4
Large Small and Residential Local Long distance
Business Medium telephone 3 3 years after
Business years after restructuring
restructuring
ERCOT retail switching
The only true market: Net residential incumbent switch rates
Feb 05; Percent of load1
28
8 7
3 3
2 2 2 1 1
TX DC NY PA MD OH MA CT ME CA
1 Texas updated as of May ’05 based on ERCOT data; Ohio excludes load attributable to municipal aggregation
20
Source: KEMA, FCC, CERA

22. ERCOT Accounts for Nearly 80% of US Residential Switching
Residential switching by state2
US Residential retail sales1
2004; 100% ~ 38 TWh
2004; 100% = 1,293 TWh
All other
markets3
ERCOT
ERCOT
8% New York 9%
9%
Pennsylvania
4%
78%
92%
Rest of US
While ERCOT is only 8% of total electric sales in the US, it comprises 78% of
While ERCOT is only 8% of total electric sales in the US, it comprises 78% of
residential switching across the United States
residential switching across the United States
1 Based on data from EIA; ERCOT website
2 Based on data from KEMA – 2004 Restructuring Review; state PUC websites; excludes load in Ohio attributed to municipal aggregation
3 Includes AZ, CA, CT, DC, DE, IL, MA, MD, ME, MI, MT, NH, NJ, NV, OH, OR, RI, VA
21

23. Texas Customers Receive Superior Customer Service,
Even When Benchmarked Against More Mature Industries…
Average speed of answer
03-05; Seconds
489
280
96% 98%
96% 98%
52
12 16
12
03 Avg Q1 05 Baby Bell National
April 04 Oct 04
telephone financial
TXU Energy ERCOT Competitor
company svcs. co.
While TXU Energy took the lead in improving call center operations, a major
While TXU Energy took the lead in improving call center operations, a major
competitor soon followed – exactly what you would expect in a competitive
competitor soon followed – exactly what you would expect in a competitive
market
market
Source: TXU
22

24. …And Will Reap The Benefits Of Innovative New Products
Existing Product Offerings
Commodity Related
Price To Beat (PTB) – NTX
PTB Index Discount – STX
Care/Service Related Energy Related
TXU Energy Rewards+ Authorized Dealer Network +
HVAC Referral Program
Average Bill
Comfort Rewards Program
Choose Your Own Due Date
HVAC Financing
Automatic Bank Draft
Home Energy Advisor Online
Express Pay – Online, Phone
Home Surge Protection
E-Bill
Option 1 (outage notification)
Several new products are already available, with many others in development
Several new products are already available, with many others in development
23

25. Texas Learned From Other Flawed Market Designs,
Benefiting Customers
… And Texas
… And Texas
Other states had …But Texas
Other states had …But Texas customers
customers
problems … avoided them
problems … avoided them benefited
benefited
Poor boundaries Vibrant retail & Plant investment
between retail & wholesale market decreased energy
wholesale prices
Allowed retail price
Supply disconnected adjustments (PTB) Lower prices than
from demand response / prior to deregulation
Attractive to new
retail prices generation & Robust competition
Limited supply transmission projects High customer
development Accommodated switching
Inflexible business multiple business New products and
models models services
Limited competition Created incentive for Improved customer
new entrants service levels
The original Texas framework (SB7) has been successful, requiring only
The original Texas framework (SB7) has been successful, requiring only
minor adjustments. Recently, the Legislature concluded no substantial
minor adjustments. Recently, the Legislature concluded no substantial
changes were needed.
changes were needed.
24

26. Today’s Agenda
From To
Market
Market Regulation A truly competitive
Restructuring
Restructuring market
Texas Power
Texas Power No customer choice Full customer control
Restructuring
Restructuring
TXU’s
TXU’s A regulated monopoly An industrial
Transformation
Transformation energy company
25

27. How Will TXU Avoid The Pitfalls That Have Trapped Other
Former Monopolies?
“The brief booms that airlines occasionally enjoyed in the
“The brief booms that airlines occasionally enjoyed in the
1980s and 1990s encouraged them to believe that radical
1980s and 1990s encouraged them to believe that radical
change wasn’t necessary. Change didn’t happen fast enough
change wasn’t necessary. Change didn’t happen fast enough
because it was always a moving target,”
because it was always a moving target,”
Alfred Kahn, Chairman of Civil Aeronautics Board
Alfred Kahn, Chairman of Civil Aeronautics Board
26

28. …By Transforming From A Regulated Monopoly To An
Industrial Energy Company
Market Leadership
Operational Excellence Risk/Return Mindset
• Superior customer service/
• Top decile throughput • Strict capital allocation
brand management discipline
• World class industrial
• Customer segmentation
production costs • Risk/return restructuring
and pricing
• Industry leading reliability • Commodity risk
• Distinctive commodity management
• Lean corporate SG&A
sourcing
Performance Management
• High performance culture
• Balanced cascading scorecards
• Employee development
• Incentives linked to key value drivers
27

29. Operational Excellence Is About Bringing “Lean Principles” To
Generation…
Lignite capacity factors Nuclear capacity factors
03-05; Percent 03-05; Percent
90 Top decile 94 94
6%
6% 7%
7%
88
Top decile
86 90
85
88
Long term Long term
03 04 05E 03 04 05E
target target
1% improvement = $20MM EBIT 1% improvement = $10MM EBIT
Nuclear operating expense
Lignite fuel & O&M expense
03-05; $ / MWh generated
03-05; $/ MWh generated
9%
18%
$16.9 $16.8
$15.8 $12.4 $12.3
Top decile $12.0
$11.0
$14.5
Top decile
Long term
Long term
03 04 05E
03 04 05E target
target
$1 per MWh improvement = $18MM EBIT28
$1 per MWh improvement = $45MM EBIT

30. … And Minimizing The Corporate Center
Creating an industrial corporate center… … with lower costs
03-05; Number of employees 03-05; $ millions
1,746 370 346
87% 66%
87% 66%
125
75
296 235
Long term
03 04 05E 03 04 05E
target
TXU has focused on removing redundancies and
TXU has focused on removing redundancies and
focusing directly on value creating opportunities
focusing directly on value creating opportunities
29

31. Market Leadership Will Result In A World-Class Customer Experience
And An Optimized Supply Function…
Better power sourcing: Better customer service:
Uneconomic generation of gas fleet Average speed of answer
03-04; GWh 03-05; Seconds
280
54%
54%
3,450
1,580 115
52
30
12 16
03 Avg Q1 05 ERCOT ERCOT Baby Leading
Summer 03 Summer 04
Bell fin. svc. co.
TXU A B
Customer retention through
Reducing retail bad debt expense
innovative loyalty programs
99-05; $ millions
118 121
95
Start of 75-80
deregulation
50-60
49
24
16
99 00 01 02 03 04 05E Target 30

32. The Risk Return Mindset Is Focused On Optimizing the Risk
Return Profile For All Key Stakeholders
Retained for
Investment
TXU Business Units
Cash
Flow
Excess Excess Excess
Excess
from
“Customer” Reinvest Financial Dividend
Oper-
Capital -ment Flexibility Payout
ations
and
Asset
Yes Yes, if Yes, until Yes
Sales
Quality service 50% of cash Strong Credit Payout of Repurchases
Production returned within Coverage ratio 30-40% or Distributions
reliability 3 years Debt/EBITDA
Minimum ROI Debt/EV
Total Payout
of 15%
Cap - 75% of
Operational
Earnings
Equity
Debt
Holders Holders
31

33. The Industrial Skill Set Is Underpinned By A Strong
Performance Management Culture
Reduced number of management layers… …Implementing best in class performance
03-05; Number of layers management
38%
8 38%
6-7 6 5
• Stretch targets based on best in class
performance
Long term
03 04 05E • Monthly “performance dashboards” to
target
review financial and operational
performance
…With new managers having the right
• Balanced scorecards that cascade from
skills to compete
top-level financials to front-line
03-05; Percent of management team
operations
0 19 New
26 40
• Differentiated incentive systems that
100 81 reward performance against key value
74 Old
60
drivers
03 04 05E Long term • Succession plans aimed at developing a
target bench two-deep at every key position
32

34. Conclusion
Texas electric market restructuring has been
successful at delivering significant value to consumers
• Access to lower prices
• Better service
• Innovative new products
The “invisible hand” of the market is driving change
and improvement in all market competitors
Given this success…
• Why isn’t the market garnering more attention?
• Why haven’t other states accelerated restructuring
efforts?
33