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News Analysis

Fortnightly Magazine - January 1 2000

hurricane lands on top of a utility and it can be proven that it affected its performance.

"The burden has shifted to the utility or market participant to prove that it was an act of God," she added. "The idea is that if there is a market and you can perform, it is not force majeure," she said.

Several utility executives countered that point. They argued that they must remain able to declare force majeure in cases of transmission curtailment to make sure they can provide for their native load. Yet others rejected that view, in effect telling the utility executives to add contract amendments in particular cases if they want additional protection. They opposed efforts aimed at "gold-plating" the contract.

"If you want to be excused from paying damages you would use a different product called 'system firm.' The gold-plated starting point does not include act of God provisions but [they] can be added," said one panelist, defending the EEI contract.

In short, the EEI contract might well force utilities to rethink their contracting strategy, according to Patricia Dondanville, an attorney at Schiff Hardin & Waite. She suggested that utilities with native load obligations may require special contract provisions in two different cases, depending on whether a utility is buying power to serve network load or selling power off-system.

First, there will be utility executives who will not want a firm product with a liquidated damages clause, defined in the EEI contract as "firm (LD)," which allows a seller either to deliver power or, in the case of a failure, to pay liquidated damages (but with no penalties).

"If utilities have to have the physical power, for example to serve native load, a cover-damages remedy may not be satisfactory," Dondanville said.

On the other hand, if a utility is selling power and needs to retain the right to recall its generation to serve native load, that utility perhaps should not be selling a "firm (LD)" product, but a "system firm" product under the EEI standard contract, which requires specific performance through a physical power delivery.

Of course, as Dondanville explained, the utility in either case needs to choose to use the EEI contract and then add amendments, as the contract is constructed to be flexible and allow the participants to define precisely the types of risks and products they wish to sell or buy. Another panelist agreed: "There will be a need, in contracts for those who serve native load, to modify the products purchased, so that the absolute need for physical power is addressed."

Would sellers or marketers balk at promising performance? Some EEI panelists guessed not. They suggested that getting counterparties to take on a system firm obligation might require nothing more than requiring utilities to pay a financial premium for their added protection and the counterparty's added risk.

According to one utility executive, utilities that serve native load might find it necessary to pursue system firm contracts only during times of anticipated market volatility, such as the peak of the summer cooling season.

Liquidated Damages: Covering Your