2011 Budget Presentation June 24, 2010 Texas Reliability Entity, Inc. 2011 Business Plan & Budget Overview June 30, 2010

2011 Budget Presentation June 24, 2010

Texas Reliability Entity, Inc. 2011 Business Plan & Budget

Overview

June 30, 2010

2

Key Assumptions

● Increased registration scope, granularity, maintenance ● Increased numbers of Registered Entities/Functions – Non-CIP

Audits● Increased number of violations (CIP and non-CIP)● CIP related issues

Added CIP complexities – technical rigor, evidence handling, site visits, length

Increased Auditably Compliant (AC) entities / “effective” requirements

Technical Feasibility Exceptions (TFEs) Processing Nuclear plant CIP compliance

● New MOD standards effective● Increased hearing potential / cost impacts


3

Introduction, Challenges, and Key Cost Drivers

● 72% of Texas RE’s budget is related to personnel costs (salaries, benefits, training, travel, etc.); therefore, managing productivity is essential All Texas RE employees charge time to different program areas similar to

activity-based accounting Shortage of and high industry demand for qualified compliance engineers

(wage pressure)

● ~50% of the total direct expense budget is in Compliance and Enforcement (76% is CMEP with indirect allocations)

● Reliability assessments expected to increase in technical rigor- Increased data gathering and collection to perform analyses

● Events analysis processing and reporting - Improved timeliness for triage, analysis, and reporting of system events, and publication of lessons learned and recommendations


4

Introduction, Challenges, and Key Cost Drivers

● Increasing demands: More work, greater expectations from those we serve (industry, regulators, public interests) Examples:

• More actively monitored standards and associated requirements – 20% Increase

• Increased number of Registered Functions in our region – 24% Increase

• Increased volume of enforcement activities – 126% Increase• Expansion in CIP Audits, processing of TFEs (As of May 24th,

there have been 537 TFEs submitted to Texas RE) – audits increasing from 1 to 20 in 2011

• Expanded role to provide more education to Registered Entities on meeting requirements, enhancing compliance programs, addressing key areas (ex. protection systems, CIP)


5

Budget Summary


2010 Budget 2011 Budget

Difference Increase

(Decrease)7,885,835$ Statutory Operating Expense Budget 9,517,049$ 1,631,214$

321,715 Statutory Capital Budget 290,000 (31,715) 1,308,500 Statutory Start-Up Costs - (1,308,500)

171,694 Increase in Statutory Cash Reserve 127,459 (44,235) 1,149,132 Non-Statutory Budget 265,969 (883,163)

10,836,876 Subtotal Budget Requirements 10,200,477 (636,399) (299,657) LESS: Depreciation Expense (443,085) (143,428)

10,537,219$ Funding Requirements 9,757,392$ (779,827)$

Texas RE Budget Comparison of 2010 Budget to 2011 Budget

2010 Budget* 2011 Budget

Difference Increase

(Decrease)7,885,835$ Statutory Operating Expense Budget 9,517,049$ 1,631,214$

321,715 Statutory Capital Budget 290,000 (31,715) 171,694 Increase in Statutory Cash Reserve 127,459 (44,235)

1,149,132 Non-Statutory Budget 265,969 (883,163) 9,528,376 Subtotal Budget Requirements 10,200,477 672,101 (299,657) LESS: Depreciation Expense (443,085) (143,428)

9,228,719$ Funding Requirements 9,757,392$ 528,673$

46.0 Staffing (Full-Time Equivalents) 50.0 4.0

* Adjusted downward $1,309K for start-up costs budgeted in 2010

Texas RE Budget Comparison Excluding 2010 Start-Up Costs

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Statutory & Non-Statutory Budget Comparison



Difference Increase

(Decrease)8,102,335$ Statutory Operating Expense Budget 9,517,049$ 1,414,714$ 1,413,715 Statutory Capital Budget 290,000 (1,123,715)

136,947 Increase in Statutory Cash Reserve 127,459 (9,488) 9,652,997 Subtotal Budget Requirements 9,934,508 281,511 (299,657) LESS: Depreciation Expense (443,085) (143,428)

9,353,340$ Funding Requirements 9,491,423$ 138,083$


Difference Increase

(Decrease)1,112,132$ Non-statutory Operating Expense Budget 265,969$ (846,163)$

67,000 Non-statutory Capital Budget - (67,000) 34,747 Increase in Non-statutory Cash Reserve - (34,747)

1,213,879 Subtotal Budget Requirements 265,969 (947,910) (30,000) LESS: Depreciation Expense - 30,000

1,183,879$ Funding Requirements 265,969$ (917,910)$

Texas RE Statutory Budget Comparison of 2010 Budget to 2011 Budget

Texas RE Non-statutory Budget Comparison of 2010 Budget to 2011 Budget

7

Financial Risks

● Compliance Hearings

● Unanticipated Government and/or ERO Requirements

● Staff Turnover and High Replacement Costs

● Impact of BES Definition Change

● Expanded Compliance Monitoring Requirements from Cyber Standards Under Revision

● Scope of Audit Program Expanding

● Increased Automation Costs

2011 Budget Presentation June30, 2010

8

Key Drivers: Violations, Registered Entities & Functions


-50

100 150 200 250 300 350 400 450

2009 2010 2010 Forecast 2011

31 34 70 77

196 216 221 221

284 331

411 411

Number of Possible Violations

Registered Entities

Registered Functions

9

Human Resource Considerations

● Continued (significant) pressures

Sustained / high levels of overtime – not uniform

Significant travel / nights away from home

● Develop long range staffing / resource strategy

Continue to attract and retain high quality employees

Positional depth / succession planning / re-deployable skills

Systematic staff rotations to address workload peaks

● Maintain current high morale levels


10

Staffing – Change in Full-Time Equivalents (FTEs)


26.95

5.05

32.00

39.50

6.50

46.00 49.00

1.00

50.00

-

10.00

20.00

30.00

40.00

50.00

60.00

Statutory FTEs Non-Statutory FTEs Total FTEs

Texas RE Budgeted FTEs

2009

2010

2011

11

Personnel Analysis


2.06

21.74

2.44 0.97

3.03

-1.06

2.48 3.17

0.85 1.70

6.50

1.97

29.12

3.18 1.84 2.03

0.50 1.71

2.60 3.02

1.03 2.00

1.00

-

5.00

10.00

15.00

20.00

25.00

30.00

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2010 FTEs Compared to 2011 FTEs

2010 FTEs 2011 FTEs

Program Budget 2010 FTEs 2011 FTEs

Change in FTEs

(2011 - 2010)Percent

DifferenceReliability Standards 2.06 1.97 (0.09) -4.4%Compliance Enforcement and Organization Registration 21.74 29.12 7.38 34.0%Reliability Assessments and Performance Analysis 2.44 3.18 0.74 30.3%Training, Education and Operator Certification 0.97 1.84 0.87 89.0%Situation Awareness and Infrastructure Security 3.03 2.03 (1.00) -32.9%Member Forums - 0.50 0.50 100.0%General & Administrative 1.06 1.71 0.65 61.3%Information Technology 2.48 2.60 0.12 4.8%Legal & Regulatory 3.17 3.02 (0.15) -4.7%Human Resources 0.85 1.03 0.18 21.2%Finance 1.70 2.00 0.30 17.6%Non-Statutory 6.50 1.00 (5.50) -84.6%

Total 46.00 50.00 4.00 8.70%

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Key Drivers: Compliance Audits – Non-CIP


● All audits will increase in vigor and length● Expect the number of Actively Monitored Standards to

increase in the CMEP

15 19

22 24

22

30

39 41

52

-

10

20

30

40

50

60

2009 2010 2011

On-Site Compliance Audits (At Facility)

Off-Site Compliance Audits (At Texas RE Offices)

Total Number of Compliance Audits

13

Key Drivers: CIP Audits


● Virtual 100% increase in workflow/workload● CIP audits are expected to be a longer duration audit than a

non-CIP audit CIP audit expected to be 2 weeks, 1 week off-site and 1 week on-site Non-CIP audit is estimated to be 3-5 days onsite

-1

14

- -

6

-1

20

-

5

10

15

20

25

2009 2010 2011

On-Site/Off-Site CIP Audits (At Facility)

Off-Site CIP Audits (At Texas RE Offices)

Total Number of CIP Audits

14

Comparison of Funding


Program Budget2010 Total Funding

2011 Total Funding

Change in Funding

(2011 - 2010)Percent

DifferenceReliability Standards 332,961 335,539 2,578 0.8%Compliance Enforcement and Organization Registration 4,336,577 4,741,524 404,947 9.3%Reliability Assessments and Performance Analysis 359,951 467,386 107,435 29.8%Training, Education and Operator Certification 356,608 409,654 53,046 14.9%Situation Awareness and Infrastructure Security 478,513 265,754 (212,758) -44.5%General & Administrative 2,627,656 1,386,467 (1,241,189) -47.2%Information Technology 275,401 1,081,539 806,138 292.7%Legal & Regulatory 172,564 398,705 226,141 131.0%Human Resources 146,721 9,123 (137,598) -93.8%Finance 266,388 473,858 207,470 77.9%Non-Statutory 1,183,879 187,842 (996,038) -84.1%Total 10,537,219 9,757,392 (779,827) -7.4%NOTE: G&A in 2010 reflected all Salary & Benefit expenses for G&A, Legal, IT, HR and Finance. In 2011, G&A reflects Salary & Benefit expenses for G&A, HR and Members Forums. The Legal, IT, and Finance areas are reflecting their own Salary & Benefit expenses.

15

Comparison of Funding – Excluding 2010 Start-Up


Base Program Budget (Excludes 2010 Start-Up Expenses)

2010 Total Funding

2011 Total Funding

Change in Funding (2011 -

Percent Difference

Reliability Standards 332,961 335,539 2,578 0.8%Compliance Enforcement and Organization Registration 4,336,577 4,741,524 404,947 9.3%Reliability Assessments and Performance Analysis 359,951 467,386 107,435 29.8%Training, Education and Operator Certification 356,608 409,654 53,046 14.9%Situation Awareness and Infrastructure Security 478,513 265,754 (212,758) -44.5%General & Administrative 1,319,156 1,386,467 67,311 5.1%Information Technology 275,401 1,081,539 806,138 292.7%Legal & Regulatory 172,564 398,705 226,141 131.0%Human Resources 146,721 9,123 (137,598) -93.8%Finance 266,388 473,858 207,470 77.9%Non-Statutory 1,183,879 187,842 (996,038) -84.1%Total 9,228,719 9,757,392 528,673 5.7%NOTE: G&A in 2010 reflected all Salary & Benefit expenses for G&A, Legal, IT, HR and Finance. In 2011, G&A reflects Salary & Benefit expenses for G&A, HR and Members Forums. The Legal, IT, and Finance areas are reflecting their own Salary & Benefit expenses.

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Comparison of Funding – By Program


Reliability Standards, $335,539

Compliance Enforcement and

Organization Registration, $4,741,524

Reliability Assessments and Performance

Analysis, $467,386

Training, Education and Operator Certification,

$409,654

Situation Awareness and Infrastructure Security,

$265,754

General & Administrative,

$1,386,467

Information Technology, $1,081,539

Legal & Regulatory, $398,705

Human Resources, $9,123

Finance, $473,858

Non-Statutory, $187,842

2011 Funding Requirements by Program

17

Change in Funding – By Program


$2,578

$404,947

$107,435 $53,046 $(212,758)

$(1,241,189)

$806,138

$226,141

$(137,598)

$207,470 $(996,038)

-$1,500,000

-$1,000,000

-$500,000

$0

$500,000

$1,000,000

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Change in Funding (2011 - 2010)

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Highlight of Variances


Statutory Budget increasing $138K,

or 1.5%

Non-statutory Budget decreasing -$918K, or

-77.5%

Total Budget decreasing -$780K, or

-7.4%

StatutoryNon-

Statutory Total Total Change in the Budgeted2011

Statutory2011 Non-Statutory

2011 Total

FTEs FTEs FTEs Funding $ 138,083 $ (917,910) $ (779,827) Personnel Expenses (See Next Slide for Detail)

39.5 6.5 46.0 Existing Employee Merit & Promotion Increase 327,502 10,447 337,949 9.5 (5.5) 4.0 New Employees Salary & Benefits 1,069,667 (736,804) 332,863

49.0 1.0 50.0 1,397,169 (726,357) 670,812

Meeting Expenses

Meetings 6,300 (5,600) 700 Travel (See Next Slide for Detail) 128,361 (624) 127,737 Conference Calls 12,000 - 12,000

Operating Expenses

Consultants & Contracts 3,688 (82,467) (78,779) Office Rent 135,100 (60,600) 74,500 Office Costs 175,883 (810) 175,073 Professional Services (464,246) (9,684) (473,930) Miscellaneous (44,843) (8,148) (52,991) Depreciation 143,428 (30,000) 113,428

Indirect Expense Funding (78,127) 78,127 -

Fixed Assets (1,123,715) (67,000) (1,190,715)

Depreciation Variance (143,428) 30,000 (113,428)

Increase in Cash Reserves (9,488) (34,748) (44,236)

19


2011 Budget Assumptions - Personnel

● Increase in base compensation for 2011: Merit increase of 3% and promotion increase of 1%

assumed Market adjustment pool equivalent to 2% Employee benefits estimated at 36% of salary

● Additional staffing required to: Meet all new Delegation Agreement and NERC Rules of

Procedure requirements and FERC directives Improve efficiency, consistency, transparency, and overall

performance Allow for increased staff training

● 4.0 new headcount for 2011, 3.0 are funded for 9 months, 1.0 is funded for 12 months

● Assumed a 5% vacancy rate for salary & benefits expense in 2011

20


2011 Budget Assumptions – CMEP Personnel3.0 Net New Hires–4.38 Transfers from Non-Stat

● There are 43 requirements that have multiple sub-requirements which will be addressed in each on-site CIP audit

● The number of violations resulting from audits and self-reports has increased this year and there is an expectation that this trend will also be seen in 2011 for Enforcement Texas RE will also spend additional

time processing each NERC violation than assumed in the 2010 budget

Settlement takes more Texas RE enforcement staff time than the NAVAPS process

Texas RE staff will now primarily draft and provide more assistance regarding the Notices of Penalty

● The time to perform the compliance audits will continue to increase due to an increase in depth and complexity

● Approximately 20% more requirements will be included in non-CIP compliance audits in 2011

2010 2011 DifferenceCompliance Audits 8.87 10.37 1.50 TFE/CIP 3.50 6.00 2.50 Enforcement 4.28 5.28 1.00 Registration 1.69 2.69 1.00 Compliance Other 3.40 4.78 1.38 Statutory CMEP Headcount 21.74 29.12 7.38 Non-Statutory Compliance 4.88 0.50 (4.38)

21


2011 Budget Assumptions – External Relations 1.0 New Hire in 2010

● Texas RE staff will provide limited administrative support for the Member Representatives Committee (MRC) and other membership activities Includes the scheduling and coordination of meetings

Distribution and posting of meeting materials and minutes

Maintenance of applicable areas of the Texas RE website

Facilitating of membership announcements and communications

22

2011 Travel Increases

● Travel Additional audits (CIP and new TOPs) Audits will take longer Additional required NERC training and meetings Independent Director travel


Travel Expenses 2010 2011 DifferenceAudit Related 97,534$ 103,492$ 5,958$ CIP Audit Related (New) - 63,285 63,285 Workgroup/NERC Related 89,634 107,896 18,262 Standards 7,224 9,987 2,763 Board (New) - 38,093 38,093 Total Travel 194,392$ 322,753$ 128,361$

23

Other 2011 Increases

● Rent – required for additional staff and conference space for meetings (to reduce or eliminate cost of renting external space) Rented space expected to increase from 11,000 square

feet to 15,000 square feet Additional space needed for additional staff, growth, and

meeting space Expected rent will increase year-over-year by

approximately $74K in total; however, the Statutory budget is increasing $135K ($61K due to the elimination of Non-statutory rent and the $74K increase for space)


Documents

2011 Budget Presentation June 24, 2010 Texas Reliability Entity, Inc. 2011 Business Plan & Budget Overview June 30, 2010