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Background Example

Electric Reliability Council of Texas, Inc. Late Fees and Short Payments in Bankruptcies / Payment Plans. Background Example. Texas Commercial Energy (TCE) filed for bankruptcy in March 2003 Approximately $30M owed to ERCOT Market Participants ERCOT held approximately $16M in collateral

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Background Example

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  1. Electric Reliability Councilof Texas, Inc.Late Fees and Short Payments in Bankruptcies / Payment Plans

  2. Background Example • Texas Commercial Energy (TCE) filed for bankruptcy in March 2003 • Approximately $30M owed to ERCOT Market Participants • ERCOT held approximately $16M in collateral • Still approximately $14.5M outstanding • In December 2003, the Bankruptcy Court approved a Plan of Reorganization (Plan) to become effective July 1, 2004 • Plan provided for: • quarterly payments of $549,000 beginning on 7/1/04 • no interest on pre-petition amts due between March 2003 and 7/1/04 • interest at 3% on pre-petition amts due, beginning7/1/04 • TCE made first quarterly payment under the Plan in July, in full • On October 1st, TCE failed to make the full quarterly payment (ERCOT received approximately $105,000)

  3. Background (cont’d) • Protocols provide for “late fees” when a QSE makes a late payment (Sec. 9.4.6) • Rate set per Protocols is Prime Rate + 2% (currently 6.5%) • Until recently, ERCOT’s Lodestar system did not provide for “turning off” the Protocol-mandated late fees • As of Aug., 2004, ERCOT can “turn off” late fees • Lodestar still cannot customize the late fee percentage rate by entity • ERCOT has billed TCE for late fees (each week) at prime + 2% since March 2003 (approx. $18,000/week) • ERCOT has “short-paid” Market Participants each week for the accrual of the late fees • To date, approx. $1.5M in late fees has accrued

  4. Late Fees Example • Weekly Invoices* (in 000’s) TCE QSE A QSE B Invoice** 5,000 (12,000) 7,000 Late fee 18 (13) (5) Net invoice amt 5,018 (12,013) 6,995 Short Pay amt (18) 18 - Net amount 5,000 (11,995) 6,995 * A positive number means money goes to ERCOT; negative means QSE receives money from ERCOT ** Before late fees; no other pre-petition debts

  5. Three Issues • What happens when the defaulting Invoice Recipient does not pay late fees due to a court-ordered Reorganization Plan • What to do about late fees “accrued” (through short-pays) but not paid • How to handle TCE’s recent payment of less than the full amount required by the Plan

  6. Analysis Issue (1) • Sec. 9.4.6: • “The defaulting Invoice Recipient shall pay late fees on the default amount….” (emphasis added) • “Any late payment revenues…shall be distributed to the Entities that were underpaid due to a default on a pro rata basis of monies owed to each Entity.” (emphasis added) • If the defaulting Invoice Recipient does not pay the late fees, there are no “late payment revenues” to distribute to short-paid entities

  7. AnalysisIssue (1) cont’d) • The Plan covers all of TCE’s obligations to ERCOT during the time of TCE’s defaults • It excludes late fees from ERCOT’s approved claim • it allowed 3% “interest” on the debt, beginning 7/1/04 • Because the Plan provides for three percent (3%) interest per annum and provides that all claims not awarded in the Plan are released, the Plan supersedes or “trumps” the Protocols’ late fee requirement • Section 11.L. of the standard QSE Agreement provides: “In the event of a conflict between this Agreement and an…order of any Governmental Authority…, the applicable…order of any Governmental Authority…shallprevail….” (emphasis added)

  8. Issue (2)(What to do about late fees “accrued” (through short-pays) but not paid) • ERCOT has billed late fees on TCE’s outstanding balances at Prime + 2% • Lodestar program changes were completed in August 2004 to allow ERCOT to “turn off” late fees • Lodestar still cannot customize the late fee charge by entity • ERCOT will: • “turn off” late fee calculation for TCE prospectively • Reverse the charges paid to date (and reimburse short-paid entities) • Manually track court-approved 3% interest rate from 7/1/04 forward

  9. Issue (2)Net Effect of Actions • Entities short paid when TCE did not make payments for ERCOT Balancing Energy and other Ancillary Services (i.e. March 2003) will receive no late fees/interest for the period March 2003 - June 2004 (pursuant to court-approved Plan) • Entities short paid will receive revenues from interest from July 1, 2004, forward at the court-ordered rate of 3% • Entities initially short paid (in March 2003) are “guaranteed” payment for unpaid principal because ERCOT will uplift these amounts to QSEs representing LSEs if TCE does not pay in full

  10. Issue (3)(How to handle TCE’s recent payment of less than the full amount required by the Plan) • ERCOT received only approx. 1/5th the amount due on 10/1/04 under the Plan on October 1 • Protocols Section 9.4.4 requires that, in the event a short-paying QSE fails to comply with the requirements of a payment plan, ERCOT must collect the short paid amount from QSEs based on Load Ratio Share • ERCOT will uplift the short paid amount under the Plan at any given point in time • Consequently, ERCOT will uplift approximately $440,000 to QSEs representing LSEs on a Load Ratio Share basis

  11. Questions?

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