Collateral and Setoff Issues in a Nodal World

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Collateral and Setoff Issuesin a Nodal World

• Andrew Gallo
• Senior Corporate Counsel
• ERCOT, Inc. Legal Dept.

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Questions/Issues

• Several questions/issues have been raised
  regarding CRRs, setoff and collateral issues
• Must ERCOT keep CRR collateral separate from A/S
  collateral
• Can ERCOT net CRR debits/credits against A/S
  debits/credits
• Can ERCOT setoff CRR credits against money owed
  to ERCOT if the MP goes bankrupt
• Can/should ERCOT obtain a security interest in
  money due and payable to the MP

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Question 1

• Must ERCOT keep CRR collateral separate from A/S
  collateral?
• No ERCOT can either have one central repository
  for collateral or keep separate accounts
• In either event, MPs should ensure the Protocols
  contain language providing for the
  cross-collateralization of all security among all
  agreements between the MPs and ERCOT
• The language should clearly state that any
  collateral from any agreement can be used to
  satisfy all obligations to ERCOT under any
  agreement between the parties

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Question 2

• Under non-bankruptcy law, can ERCOT net CRR
  debits/credits against A/S debits/credits?
• Yes so long as there is mutuality of agreements,
  parties can setoff/net obligations

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Question 3

• If a MP files bankruptcy, can ERCOT setoff CRR
  credits against A/S obligations owed to ERCOT?
• This is a gray area in the law
• New Protocols must provide cross-collateralization
  
• Also, either
• the language of the new Protocols must clearly
  state that ERCOT has a security interest in this
  payment stream or
• The MP must grant ERCOT a security interest in
  the payment stream

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Question 4

• Can/should ERCOT obtain a security interest in
  all money due and payable to the MP?
• It is not a violation of the automatic stay for a
  party to hold to preserve a right to setoff,
  but ERCOT would have to get relief from the
  automatic stay to apply the money against MP
  obligations to ERCOT
• If MPs want to have their collateral requirements
  reduced by the amount of credits calculated, the
  new Protocols should grant ERCOT (or provide a
  way for a QSE to grant) a security interest in
  all money due from ERCOT to the MP
• otherwise, the collateral requirement should not
  be reduced

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Caveats

• We can never know for sure what a bankruptcy
  Judge will do
• All assumptions could change if Congress enacts
  the newly proposed bankruptcy law
• No way to know what Congress will do

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Questions?