Although today microgrids serve a tiny fraction of the market, that share will grow as costs fall. Utilities can benefit if they plan ahead.
Mastering the Mastering Agreement
Special Series Part 5: How to find "commercially reasonable" valuation in power contract terminations.
It is clear that counterparties will differ widely in their view of "commercially reasonable valuation" with current levels of guidance. This is not beneficial to the market; markets thrive in an environment of legal certainty and well-defined standardized contracts. Termination should be a contractual right, not a litigious and confusing chore. As things now stand, the latter reigns.
A Reference: Reading the Fine Print
The murky legal language in the most heavily used power trading contracts is the source of many contentious legal battles among utilities.
I. The ISDA Master Agreement
The International Swaps and Derivatives Association Inc. (ISDA) Master Agreement governs the trading of financially settled contracts in the electricity trading industry. Section 6e of the 2002 ISDA Master Agreement provides guidance regarding the calculations of settlement amounts following an event of default and subsequent termination. Specifically, the “close-out amount” definition in Section 14 of the 2002 ISDA Master Agreement is particularly relevant (italics not in original):
• “Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. … Each Close-out Amount will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable. ”
This definition suggests the following data should be taken into account:
(a) Quotations (either firm of indicative) for replacement transactions supplied by one or more third parties (end-users, information vendors, or brokers);
(b) Information consisting of relevant market data; and
(c) Information as above but from internal sources—used in regular business.
Finally, the close-out amount definition states that commercially reasonable procedures used in determining a close-out amount may include the following:
“Application of different valuation methods to Terminated Transactions or groups of Terminated Transactions depending on the type, complexity, size of number of the Terminated Transactions or group of Terminated Transactions.”
II. The WSPPA
The Western Systems Power Pool Agreement (WSPPA) governs the trading of physically settled power contracts in the Western United States. Section 22 of the WSPPA provides guidance regarding the calculations of settlement amounts following an event of default and subsequent termination. Specifically, Section 22.3 (a) of the Feb. 1, 2005, WSPP agreement states:
• “The Gains and Losses shall be determined by comparing the value of the remaining term, transaction quantities, and transaction prices under each Terminated Transaction had it not been terminated to the equivalent quantities and relevant market prices for the remaining term either quoted by a bona-fide third-party offer or which are reasonably expected to be available in the market under a replacement contract for each Terminated Transaction.”
Section 22.3 (c) goes on to state:
• “The Non-Defaulting Party shall set off or aggregate, as appropriate, the Gains and Losses (as calculated in Section 22.3 (a)) and Costs and notify the Defaulting Party.”
Section 22.3 (g) defines the above stated gains, losses and costs as follows:
• “‘Gains’ means the economic benefit (exclusive of Costs), if any,