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The Standard Power Contract: A Hedge Against Price Spikes?

The Fine Print: Who Won, Who Lost
Fortnightly Magazine - June 1 2000

power does not come, don't call HoustonStreet.Com," one executive cried. Because online trading systems do not take title to the power, he added, a standard contract is the only hope of seeking damages when a counterpart fails to deliver power.

But will utilities embrace the new contract?

Shivery recalls how difficult it was for energy traders to persuade utilities to sign on to new commercial contracts prior to electric deregulation. yet he is confident they will come around."The commercial aspect of the business from a contractual standpoint is not very consistent. It has to change."

And it will change, he says, because of people who are "as sophisticated as the largest power marketers and truly understand these deals."

The Fine Print: Who Won, Who Lost

Could you describe the various firm power products?

Katz: We have firm [power] with liquidated damages (LD), the most iron-clad product without almost any out. There is a firm product without LD. There is an "into" product, which has very limited outs involved. Beyond these, [there are products] that are really not firm. You have unit firm vs. system firm.

Who got what they wanted - the utilities or the marketers?

Katz: What the marketers wanted was very tight provisions, a very definite and final transaction-execution process where the deal is cut on the phone and a written confirm memorializes the deal. Once that process is finished, the deal becomes a binding obligation.

On the utility side, you have more concern about the physical things that utilities have to be worried about as sellers, which sort of created the desire to have more outs for performance based on transmission-related events. The utilities really drove the unit firm and system firm products. From a marketer's perspective, the "into" and the firm product with liquidated damages may be the product that they want to be trading 90 percent of the time.

How does the contract define ?

Katz: It is considered an unanticipated unforeseen event beyond the control of any party. It cannot be financially based; in other words, it cannot be based on the price of the product and the market. A transmission outage in and of itself, like a TLR [transmission loading relief] - it does not excuse performance in order to have the right to be excused from performance under the gold-plated definition. There has to be other facts and circumstances demonstrated. The level of event has to be where anyone would have been prevented, that there is no way that you would have been able to perform.

Who won the debate over the clause?

Katz: There has been a lot of interest in the fact that the EEI contract has a very tight definition. What has been changed in the latest release of the contracts is a new option that can be selected in a particular transaction to add a transmission contingency out as another feature of the trade. So [if] people are doing a delivery in an area where there might be a known transmission-related problem, they can hedge their obligation. They can add