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Wrap up Report on the APPA Wholesale Power Project

Wrap up Report on the APPA Wholesale Power Project . Robert C. McDiarmid APPA Legal Seminar Seattle, October 15, 2007 . Working Group . Dave Yaffe Tom Ingoldsby Bob McDiarmid Allen Mosher & Sue Kelly Bill Balson. Two Years Ago in San Antonio. At the APPA Legal Seminar

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Wrap up Report on the APPA Wholesale Power Project

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  1. Wrap up Report on the APPA Wholesale Power Project Robert C. McDiarmid APPA Legal Seminar Seattle, October 15, 2007

  2. Working Group • Dave Yaffe • Tom Ingoldsby • Bob McDiarmid • Allen Mosher & Sue Kelly • Bill Balson

  3. Two Years Ago in San Antonio • At the APPA Legal Seminar • Decision was made to attempt to modify EEI Form Contract • For Smaller APPA members who wanted power more than financial assurance

  4. One Year Ago • At APPA Legal in Cambridge, we presented a draft APPA proposal for optional elements of the EEI Form Contract • Got feedback at both the San Antonio and the Cambridge session, and tried to take that into account • Met several times with EEI Contract Committee and talked more on phone

  5. 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

  6. Other Concepts at Issue • State Law Applicable (and for what) • Confidentiality duty imposed • No sovereign immunity representation • Do you want new deal to cover (and govern) past deals that are still in existence? • Failure to cover penalties of any kind • Mistaken cross references

  7. Where We Stand • EEI has spent a fair amount of time on this project with us • But, EEI is not prepared to add any of our language to its form • Life is too short, and events are moving too fast, to wait • APPA proposes to post the Committee proposal on its website as an alternative

  8. In General • Alternative Schedule M offers a menu of choices • Each of the choices has been accepted at least once by counterparties • Each of the choices has been rejected at least once by counterparties • Negotiations should be assumed; there is no industry standard • Explanations below in terms of Alt. Sch. M, Alt. Cover Sheet

  9. One Way Termination • Problem: Events of default under EEI 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.

  10. 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 • See Alt. Sch. M. § M (EEI §5.3), Alt. Cover Sheet

  11. 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.

  12. Failure to Deliver as Default • Solution: Must deal both with sections 4 and 5. • See Alt. Sch. M §§ H and I (revision to EEI §§4.1, 4.2) • See Alt. Sch. M §§ J, K and L, Alt. Cover Sheet 5.1(i)

  13. 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).

  14. 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 believes itself to be 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. Alt. Sch. M, §§ C, D

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

  16. 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

  17. What is the Solution? • Tie product to specific resources, with as much flexibility around that as may be desired (not here) • Option is to specify a resource with one of several other existing products (not here) • Option (Alt. Sch. M, § U) making it clear that seller transfers capacity to buyer -- use “capacity” • Holding pattern option is Alt. Sch. M, §T

  18. 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.

  19. State Law Applicable • Solution: Revise §10.6 to identify the state whose law can lawfully be applied (or which you may prefer). Alt Sch. M, §§ F(3.5(b)) and R (10.6)

  20. 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. Alt. Sch. M § S

  21. 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: Change §3.5 to limit the warranty to things that can legally be done. Alt. Sch. M §F (3.5).

  22. Costs of not delivering • Problem: §1.51, “Replacement Price” expressly does not include penalties, and it is not clear that buyer may use its own units to cover failure. • Secondary Problem: FERC’s analysis of why Firm LD should qualify as Network Resources assumes that all damages are paid • Solution: Add some penalties and make clear that buyer may operate its own units. Alt. Sch. M, § V

  23. Retroactive Effects • Problem: EEI § 2.2 makes any change apply to all prior deals • Solution: Modify so that applies only to this transaction and transactions yet to be entered into. Alt. Sch. M, §E

  24. Mistaken Cross Reference • Problem: §1.50 cross references §2.4, which should be §2.5 • Problem: §5.2 has error of grammar • Problem: Cover sheet gives option of adding the wrong section (8.6 instead of 8.4 in Schedule M) • Solution: Change; all are acknowledged errata

  25. On to the next presenter Bill Balson will talk about the Credit Matrices

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