[BETA] Fortnightly

Utilities and marketers hash out the final details on a standardized contract for physical trades of electricity.

A standardized master contract for U.S. power trading could help wring order out of chaos in electric commodities markets by defining a common set of terms for physical transactions for both utilities and marketers, say experts.

But success likely will hinge on how well utilities and marketers can compromise on a narrow list of issues still to be settled, say those same experts.

That much became clear by some of the early morning panels at a conference in Washington, D.C. in late November, where the Edison Electric Institute released the latest draft of its proposed standard master power contract, developed jointly by EEI, the Alliance of Energy Suppliers and the National Energy Marketers Association.

According to EEI, the master agreement begins with a confirmation process that permits binding oral agreements followed by a clearly defined written confirmation process. A standardized confirmation letter establishes which party is the Buyer and which is the Seller; pricing terms; quantity; duration; delivery points; and nature of the product (e.g., financially firm).

EEI explains further that the master agreement provides a clear method to calculate damages for failure to deliver or receive a product, with a party's liability limited to actual direct damages; and guards against the credit risks inherent in today's power markets by incorporating "real time" credit terms.

Finally, says EEI, the agreement contains other standardized terms necessary to control the trading relationship, such as billing and payment procedures; representations and warranties; general obligations; governing law; and non-billing dispute resolution procedures.

Overall, the contract's debut met with impassioned debate, both from utilities and marketers, who disagreed over revised definitions of what is no longer thought to be accepted utility industry contract terminology. Key questions still unsettled include force majeure clauses, defining different degrees of "firm" service, and setting rights to specific performance or liquidated damages when a seller fails to deliver the physical product. In particular, the EEI's revised definition of force majeure and new definitions of what is "firm" drew some criticism from several utility executives in a capacity crowd that overwhelmingly supported the contract initiative.

Force Majeure: How Firm is "Firm"?

A force majeure clause - a common term in all facets of U.S. contract law practice - is generally designed to excuse performance by one or more contracting parties in cases of war, natural disaster, labor disputes, national emergencies or other extreme events deemed to be "acts of God" or otherwise unavoidable and unforeseen, under the generally accepted commercial practices of the industry in question.

In the electric industry, utilities typically have taken the definition one step further by invoking the force majeure defense when a curtailment by a transmission provider has blocked a power delivery. However, EEI's contract does not recognize an ordinary transmission curtailment by a third-party transmission provider as a force majeure event unless the contracting parties have previously agreed to do so.

As one EEI panelist put it, a grid outage will not be considered an act of God "unless a