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The Master Wholesale Electric Contract

The Master Wholesale Electric Contract. Patricia Dondanville Schiff Hardin & Waite David M. Perlman Constellation Power Source Capital Hilton Hotel November 17, 1999. Process Initiated – Fall 1998 EEI Legal Committee Kick-off meeting – January 29

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The Master Wholesale Electric Contract

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  1. The MasterWholesaleElectricContract Patricia Dondanville Schiff Hardin & Waite David M. Perlman Constellation Power Source Capital Hilton Hotel November 17, 1999

  2. Process Initiated –Fall 1998 EEI Legal Committee • Kick-off meeting – January 29 • Group effort defined nDrafting Group established • Drafting Group Product • Issues identified nProposed Standardized Terms

  3. Group Progress • Follow-up meetings – March, May, June 1999 • Summer 1999 – intense Drafting Group meetings and calls • Presentation to larger group – September 24 • Input from expanded participation • Discussion of Drafting Group efforts • Distribution of Consensus Draft – mid-October • EEI/NEMA Seminar – November 17, 1999 in Washington D.C.

  4. Participants in Developing StandardizedMaster Wholesale Electric Contract DRAFTING COMMITTEE • Constellation Power Source • Schiff Hardin & Waite • American Electric Power • Entergy Power Marketing • Enron North America • Jones Day Reavis & Pogue • Statoil Energy • Leboeuf Lamb Greene & Macrae • Edison Electric Institute

  5. Steering Committee Participants Northern Indiana Public Service Company Commonwealth Edison Company Ameren Energy Williams Company Duke Energy Trading Enserch Energy Services Virginia Power Dynegy/Electric Clearinghouse PG&E Energy Trading Prebon Yamane Southern Company Energy Marketing PSE&G Pepco Consumers Energy Detroit Edison Reliant Energy DTE Energy Trading Arizona Public Service Consolidated Edison Niagara Mohawk Energy Ontario Power Generation TXU Energy Midamerican Energy Company GPU Energy First Energy Corp Western Resources GPU Service, Inc. New Century Energies New England Electric System Superior Water, Light & Power Rochester Gas & Electric Kansas City Power & Light TECO Energy Inc. Conectiv Illinova Energy Marketing PECO Energy Power Team Minnesota Power Aquila Midland Cogeneration Venture Citizens Power Cinergy Energy Trading Northern States Power Indiana Power & Light Company Steel Manufacturers’ Association Northeast Utilities

  6. Why WholesaleElectric Contract Standardization? • Each transaction has common commercial terms, e.g. 50MW on-peak, into Cinergy, for July-August • Business people treat transactions as identical, as “hedges” for one another • Traders presume “infrastructure” exists, as in other markets • Lack of or differences in legal terms, “infra-structure,” only become critical in times of market stress • 1998 June price spikes and market defaults focused discussion on lack of documents and credit concerns • 1999 market events focused discussion on tariff/ contract inconsistencies

  7. Let’s Make a Deal: Transactions Under A Standardized Master Power Contract • Products • Prices • Delivery points • Oral trading • Confirmation process

  8. Master Agreement ProcessASSUMPTIONS • Both parties have version of model tariff without substantive terms and conditions • Parties have negotiated no changes to master agreement • Parties have negotiated options and cover sheet • notices • applicable tariffs, if any • acceleration of liquidated damages payment • cross defaults • guarantee amounts • choice of credit mechanisms

  9. COVER SHEET FORM

  10. LETTER OF CONFIRMATION FORM

  11. Formation of a Trade Party A Party B Oral TransactionBinding -Product -Writing not required -Price unless stated -Delivery -Time Phone Phone 3 Days 3 Days Seller Sends Confirm Buyer Sends Confirm No Seller & Buyer Sends Confirm Confirm No Confirm Sent or Received 2 Days 2 Days Recipient Signs Confirm Seller Doesn’t Object Seller Objects Buyer Objects Buyer Doesn’t Objects Binding Confirmation

  12. Non-firm Unit firm System reliability firm Firm with liquidated damages Into delivery point Firm with noforce majeure Increasing performance obligations on both parties Products

  13. Non-Firm Product Deliver and receive Fail to deliver or receive forany reason or no reason Non-performance for anyreason or no reason excused Payment Failure to pay

  14. Unit Firm Product Generating unitnot operating Generating unit operating Liquidated damages Deliver and receive Force majeure event Full or partial generating unit outage Failure to pay Payment Performance excused

  15. System Reliability Firm Product Identified System’s Generation and Purchased Power Seller’sforce majeure event Pre-existingsystem reliabilityand reserve requirements Identified system’s integrity orstability Deliver/receiveat identified system’ssource Deliver & receive Other party’s default Native load/firm service obligation Performance excused without liability Payment Failure to pay Failure to pay Payment

  16. Firm with Liquidated Damages Product Claimed Force Majeure Event Deliver & Receive Transmission to Seller’s Point of Delivery Performance Excused Not Timely Scheduled Non-firm Transmission Curtailed Firm Transmission Curtailed Due to Force Majeure Event Liquidated Damages Failure To pay Payment Plus other Factors

  17. Into Delivery Point Product FIRM WITH LIQUIDATED DAMAGES PRODUCT PLUS SELLER DESIGNATED SELLER PAYS ADDED INTERFACE DAILY CHOICE TRANSMISSION COST NEXT DAY FIRM TRANSMISSION TO ALTERNATE OR DELIVERY POINT GENERATION DESIGNATED INTERFACE SELLER FAILS TO BUYER UNTIMELY BUYER TIMELY DESIGNATE OR EITHER TRANSMISSION FIRM TRANSMISSION REQUEST REQUEST PARTY’S NON-FIRM TRANSMISSION CURTAILED FIRM FIRM TRANSMISSION TRANSMISSION REQUEST REQUEST DENIED GRANTED SELLER TIMELY NOTIFIED FORCE MAJEURE EVENT FIRM TRANSMISSION CURTAILMENT SELLER UNTIMELY NOTIFIED BUYER’S TRANSMISSION CURTAILED BUYER'S NON-FIRM TRANSMISSION FLOWS LIQUIDATED DAMAGES DELIVERY & RECEIPT PAYMENT

  18. Firm with No Force Majeure Product Delivered and received Liquidated damages Failure to pay Payment

  19. Transaction Netting Bilateral outstanding transactions between same parties, by subsequent agreement, may be offset Amount of energy owed a party offset by energy owed to counterparty Single transaction contract for net energy delivered and received Offsetting transactions terminated Payment netting

  20. When the Deal Does Not Go Down • Remedies for failure to deliver and receive the product • Force majeure events

  21. Performance of a Transaction Option Exercised Option Expires Transaction Netting/Bookout Physical Transaction Potential Event of Default (during cure periods) Suspend Performance of “anyor all” transactions (for up to 10 days) notice Scheduling Delivery & Receipt Resume Performance Credit -Exposure Amount -Downgrade Event -Security Interest Delivered & Received Failure to Perform notice Liquidated Damages Event of Default Claimed Force Majeure Event Other Party’s Failure to Perform Payment Made Unexcused Failure to Perform Payment Process notice Failure to Pay

  22. Liquidated Damages Seller’s Unexcused Failure to Perform Buyer’s Unexcused Failure to Perform Replacement Price - Contract Price if positive Contract Price - Sales Price if positive Option for payment in 5 days • Sales Price • Commercially reasonable manner • Resale of product at delivery point • Option: market price at delivery point • Book out upstream considered resale of product • Reduced by additional, incidental and transmission costs • Excludes penalties • Not required to utilize seller’s generation or market positions/options • Contract Price • US $ Amount • Specified in Transaction • Replacement Price • Commercially reasonable manner • Purchase of replacement product at delivery point • Option: market price at delivery point • Book out downstream considered as replacement product • Includes additional costs, including transmission costs to delivery point • Excludes penalties • Not required to utilize buyer’s generation or market positions/options Payment Process

  23. Claimed Force Majeure Events Event that prevents performance and cannot be avoided or overcome, not anticipated, not within reasonable control or result of negligence Excludes loss of Buyer’s markets, uneconomic resale, loss of Seller’s supply, ability to sell at higher price Transmission Provider Interruption Contracted For Non-Firm Transmission Product Definition can Alter Affect of Event Contracted for Firm Transmission Unexcused Failure To Perform Force Majeure Event Excusing Performance Interruption due to Force Majeure Other Factors and circumstancesestablish performance was prevented

  24. Show Me the Money • Payment • Payment netting • Billing disputes • Audit rights/confidentiality

  25. Payment Process Calendar Monthly Invoice Due on the later of 20th day or 10 days after invoice; exceptions: accelerated LDs (if selected) and option premium due 2 days after invoice receipt; 12 months to challenge accuracy Dispute of Invoice Amount Failure to Pay Pay by Electronic Funds Transfer Pay Undisputed Amount Notice of Dispute & Reasons Accrue Interest at Interest Rate Event of Default Litigation Adjusted Invoice

  26. Payment Netting Mutual debts and payments due on same date Summation of mutual payments, liquidated damages, option premiums, interest, credits due--exclude performance assurance and guaranty amounts No mutual obligations-- Pay when due If event of default or notice given in writing, include in netting the amount of performance assurance Party owing greater amount pays net amount when due

  27. Audit Rights • Normal business hours, at requesting party’s expense, solely for verifying statements, charges or computations. • Waiver of objection and right to audit 12 months after rendering statement or payment.

  28. Major Meltdowns • Events of default • Winding down trading relationships • Termination payments • Netout • Closeout setoff

  29. Other Provisions of Legal Importance • Limitation of Remedies/Liability/Damages • Taxes — Seller liable before delivery point, buyer liable at and after • Representations and warranties • duly organized • regulatory authorizations • corporate authority • legally enforceable obligations • no pending bankruptcy or materially adverse legal proceeding • no event of default or potential event of default has occurred • using own business judgment, no reliance on other party • forward contract merchant status • ability to make or take delivery • for an option, party is merchant for business-related purposes

  30. Other Provisions of Legal Importance • Title, risk of loss and indemnity —seller liable before delivery point, buyer at and after • Assignment prohibited without consent, except to creditworthy affiliate or to successor of assets • Governing law is New York; waiver of jury trial • Tariff amendment shall not effect outstanding transactions • Inconsistent tariff language not assertable as defense • No intended third party beneficiaries

  31. Why a Master Agreement at All? • Why not just do business under two one-way tariffs or one tariff and one agreement? • Payment netting, creditworthiness and other bilateral issues • Inconsistencies in rights/obligations are not priced into transactions • Choice of different laws • Is an oral transaction binding? • Does the UCC apply? • Dueling damages calculations • Imprecise and inconsistent product definitions

  32. Why a Master Agreement at All? • Most tariffs do not contain • Remedies which reflect bilateral nature of counterparties’ relationship (“can I stop delivery to X if X doesn’t deliver to me?”) • Reliance waivers • Recording consents • Force majeure language which recognizes the existence of a market for electric power • Closeout netting under master agreement - bankruptcy law issues • If don’t ask for authority reps, nonreliance reps, don’t assume

  33. Why the EEI Master Agreement? • Each market participant has own preferences • Bilateral negotiation can take months – while traders continue to trade and create risk • Consensus document – flexible, workable, even-handed, reciprocal framework • Industry/market development = liquidity • More consistent power products and hedging possibilities = certainty and reliability

  34. What the EEI StandardizedAgreement Does Not Address • Dispute resolution mechanism • Provisions re tax or regulatory changes • Significance of bookouts, circles or daisy chain transactions • FERC treatment of documentary conflicts • Education – what does “firm” mean? What does “into” mean • Administration of confirmations and other time sensitive obligations • Back office operational risk - Contract Administration deadlines • Credit and collateral administration • Cross-collateralization and cross defaults with financial transactions • Risk management, hedging decisions and stress testing • Idiosyncratic products/needs – “But I need the power!?!” • Transmission issues

  35. ADVANTAGES Product Consistency =Hedging Certainty DISADVANTAGES Don’t need to deal with lawyers as often Risk Managers

  36. ADVANTAGES Consistent payment and netting terms Consistent counterparty evaluation and monitoring process Clear events of default and unwind mechanisms DISADVANTAGES Don’t need to deal with lawyers as often Chief Financial Officers/Credit Managers

  37. ADVANTAGES Liquidity = Reliability Self-Regulating Market Education Consensus DISADVANTAGES None Regulators

  38. ADVANTAGES Focus on price, product, quantity, delivery point, duration Liquidity DISADVANTAGES Don’t need to deal with lawyers as often Traders

  39. ADVANTAGES Uniformity in obligations and responsibilities Balance of negotiating power Shorter time negotiating masters, if widely adopted Review confirmations on exception basis DISADVANTAGES Confirmation administration – standardizes time sensitive performance obligations If always seller or buyer, different provisions and/or product definitions may be required Party with greater bargaining leverage loses ability to “impose” favorable provisions Contract Administrators/Lawyers

  40. Next Steps?

  41. The MasterWholesaleElectricContract Patricia Dondanville Schiff Hardin & Waite David M. Perlman Constellation Power Source Capital Hilton Hotel November 17, 1999

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