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News Analysis

Fortnightly Magazine - January 1 2000

was designed to clarify, she said. In addition, the value in the EEI contract is that the same terms can apply equally to both parties or the terms can be tailored during contract negotiations to the idiosyncrasies of the two counterparties, she said.

Meanwhile, one energy executive who attended the conference said he was not so concerned about wholesale portfolios as he was with the progress of competition and real choice at the retail end. In fact, he said that he hoped to use the EEI standard contract as a template to develop a standard retail contract.

Outlook

Edward Comer, vice president and general counsel at EEI, predicted that the EEI contract committee would finish sorting out the last few details on the contract by the end of 1999, at which time he thought the contract would be ready for use by the electric industry.

Comer also announced that EEI would be seeking to coordinate with the International Swaps and Derivatives Association, which has developed over-the-counter derivatives master agreements for the energy industry. EEI will look into the best way to cover the costs involved in the continuous development and refinement that standardized contracts require.

Richard Stavros is senior editor at Public Utilities Fortnightly

Fixing What's Broken

What a standard contract could achieve.

Before ¼

* Products poorly defined.

* Remedies not consistent for failure to perform.

* Uncertainty over which failures of performance (e.g., payment, delivery, meeting credit requirements) should lead to a contract default.

* Immature credit mechanisms, not reflective of market volatility.

* Uncertainty in case of bankruptcy of contracting party.

After¼

* Products defined in detail.

* Liability and damages are circumscribed, making it possible to quantify financial exposure.

* Helps parties mitigate internal credit risk. Implements external credit mechanisms.

* Provides all available (albeit untested) protection in event of bankruptcy.

Source: Harlan Murphy, assistant general counsel at Dynegy

Still Yet to Do

What the contract does not address.*

* Dispute-resolution mechanisms.

* Changes in taxation or regulatory policy.

* Significance of "book outs," "circles" or "daisy chain" transactions.

* FERC treatment of documentary conflicts.

* Training - teaching utilities what "firm" means.

* Administration of confirmations and other time-sensitive obligations.

* Contract administration - deadlines and back-office risk.

* Administration of credit rights and collateral.

* Cross-collateralization and cross defaults with financial transactions.

* Risk management, hedging, and stress testing.

* Idiosyncratic products - needs specific to a particular company.

* Transmission issues.

Source: Patricia Dondanville, attorney at Schiff Hardin & Waite

* According to Andy Katz, senior attorney at EEI's general counsel's office, the master contract does not attempt to resolve these issues because they are either (1) company-specific, (2) specific to other types of transactions, or (3) too difficult to specify in all cases.

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