APPA EEI Contract Project Update

1
APPA EEI Contract Project Update

• APPA Legal Seminar
• Cambridge, Massachusetts
• October 10, 2006
• Robert C. McDiarmid

2
One Year Ago

• At APPA Legal, we presented a draft APPA proposal
  for optional elements of the EEI Form Contract
• Got a fair amount of feedback
• Used that feedback to create a new draft, which
  was presented to EEI Contract Committee
• Met several times with EEI Contract Committee and
  talked more on phone

3
Major Concepts at Issue

• One-way termination
• Firm Product Definition
• Failure to deliver as default
• Representation as to Forward Contract Merchant
• Credit Matrix Applicable to smaller municipals
  and coops

4
Other Concepts at Issue

• State Law Applicable (and for what)
• Confidentiality duty imposed
• No sovereign immunity representation
• Mistaken cross reference in form text

5
Where We Stand

• EEI has spent a fair amount of time and returned
  an alternative credit matrix
• EEI is willing to develop regional firm product
  definition in CAISO, ISO-NE and PJM markets and
  has invited us to participate
• EEI is not prepared at this time to develop
  language on one-way termination or on failure to
  deliver as default
• FCM language has not been focused on
• The other concepts have not been focused on

6
In General

• The responses appear to be largely driven by
  merchant thinking and not by utilities

7
Credit Matrices

• The responses we have are handouts this morning
• Tom Ingoldsby will address in detail
• The language is clearly drafted by credit people
  who do not understand municipal or coop
  operation. Does attempt to address purchased
  power issues
• Please make certain that you have read the
  handout if you are attending this afternoons
  session with EEI Committee reps

8
One Way Termination

• Problem Events of default are only financial.
  Either party may terminate without cost other
  than covering additional costs to counterparty,
  if any. Seller who is in the money can
  terminate and immediately trigger mark to market
  payments by non-defaulting party in potentially
  ruinous amounts.

9
One Way Termination

• Solution Agree that no payment to defaulting
  party
• Can be tied to failure to deliver or receive (see
  next point) or in general
• Probably best to modify 5.3

10
Failure to Deliver as Default

• Problem Sections 4.1, 4.2 provide specific
  remedy (cover extra costs, if any) for failure to
  deliver or to take product. Section 5.1(c)
  provides that the exclusive remedy for failure to
  deliver or receive product is provided in Section
  4, and thus such failure is not an event of
  default.

11
Failure to Deliver as Default

• Solution Must deal both with sections 4 and 5.
  

12
Forward Contract Merchant

• Problem Even after 2005 change in Bankruptcy
  Act, still a question as to whether any producer
  of power or LSE can qualify as an FCM. Because
  form contract places the statement that each
  party is an FCM in Section 10.2(ix), Reps and
  Warranties, and if a court holds that such an
  entity is not an FCM, the warranty is false or
  misleading and thus an event of default under
  Section 5.1(b).

13
Forward Contract Merchant

• Solution This one is easy
• Strike 10.2(ix), and add the same language to
  10.10, which would then read
• The Parties acknowledge and agree that each is a
  forward contract merchant within the meaning of
  the United States Bankruptcy Code, and that all
  Transactions constitute forward contracts
  within the meaning of that Code.

14
Product

• Problem Most common EEI products do not qualify
  for capacity credit or resource adequacy.

15
Where is this a Problem?

• This is not a problem in a purely energy market
  with no obligations to provide capacity and no
  deliverability test
• This is a major problem under an OATT or in an
  ISO or RTO with capacity obligations or resource
  adequacy test
• Even the CAISO now has resource adequacy test

16
What is the Solution?

• Tie product to specific resources, with as much
  flexibility around that as may be desired
• Product works in all ISO/RTOs (at least for
  self-dispatch approach) and as a network resource
  under OATT
• Option is to specify a resource with one of
  several other existing products

17
State Law Applicable

• Problem 10.6 provides for the application of
  New York law, and jury trials are waived. This
  is not legal in some states for municipals to
  sign.
• Problem Schedule M changes this only as to the
  applicability of the act establishing the
  municipality, which change does nothing for the
  primary problem.

18
State Law Applicable

• Solution Revise 10.6 to identify the state
  whose law can lawfully be applied (or which you
  may prefer)
• Determine whether or not to waive jury trial.

19
Confidentiality Duty

• Problem 10.11 and Public Records Acts
• Solution Change to duty to notify other party
  when a request is made, and put burden of defense
  on seller.

20
No Sovereign Immunity Representation

• Problem Schedule M, 3.5 warrants and covenants
  that the municipal will not claim immunity from
  jurisdiction of a court located outside the
  state, injunction, or attachment of assets. Many
  states would not permit such a contractual
  provision.
• Solution 3.5 to limit the warranty to things
  that can legally be done.

21
Mistaken Cross Reference

• Problem 1.50 cross references 2.4, which
  should be 2.5
• This admitted error has never been corrected by
  EEI, and seems to be used by EEI negotiators as
  in indication of whether the other side
  understands the form contract.
• Solution Change 2.4 to 2.5.

22
On to the next presenter

• Tom Ingoldsby will talk about the Credit Matrices