Developers of independent power projects in foreign countries often try to set up the local-owner company to qualify as a partnership for U.S. tax purposes, even if the company is a corporation in...
The Standard Power Contract: A Hedge Against Price Spikes?
with FERC staff to discuss the documentation of transactions that would be executed under the master agreement. This is primarily a concern of the utilities because utilities, under current FERC policy, have a heavier reporting burden than the marketers do under their policies. This was a critical step in gaining utility acceptance of the contract because if there was going to be an overly burdensome process, [then] it would be difficult for the utilities to transition from their existing tariffs over to the type of tariff that would be compatible with using the EEI master. There would have been a lot of resistance to it being used by the utilities.
What developed in your meeting with the FERC?
Katz: The purpose of the meeting was to try and iron out those concerns. There were also concerns from all corners with termination [when] the counterpart has gone bankrupt, and FERC has definite rules on how you end a jurisdictional transaction. There are time periods involved. There is a lot of concern about two summers ago, with the Power Company of America bankruptcy. You had counterparts that wanted to stop their trading relationship with PCA, and FERC was saying there is a 60-day filing and notice period. Meanwhile, you are under contractual obligation to keep dealing with this party that you know probably won't be paying you. So there was a lot of concern about that.
How have you resolved that conflict?
Katz: The contract has real-time credit protections and protections in the case of a bankruptcy or other type of event [that] would obviously prevent the counterparty from performing its obligations with you. The remedy under the contract is you can just call a halt to every transaction that is on your book, and you calculate the termination amount and cash out and end your trading relationship. There was concern that FERC's requirements would somehow prevent those provisions from operating in the way that they were intended to operate, another very important protection. The meetings we have had with the FERC staff were very positive. On the documentation side, FERC has said that it will be very flexible with how the contract gets documented. They are going to require minimal documentation for what they call short-term transactions. Those are transactions that are for a year or less.
Will the contract conform to utility tariffs? Is that important? Why is that important?
Katz: The reason that is important is that under FERC law the terms of the tariff, to the extent that they conflict with the terms of a contract, will trump. Therefore it is very important that the tariff be consistent with the terms of any service agreements or contracts that people operate under.
So on the utility side, the staff was very receptive to using streamlined documentation. The contract for transaction of a year or less does not have to be on file. That is a critical point because under the FERC ruling in the PCA case, you don't even have a problem with terminations under their 60-day notice requirements for documents