Subject: Legal Risks - QLR
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked]
Date: Mon, 28 May 2001 03:23:00 -0700 (PDT)

Mark, as we discussed, I see one of the growing legal risks for Canada (and 
perhaps elsewhere) resulting from "retail" deregulation and the pressure to 
increase transaction flow/market scope in energy markets by transacting 
behind and through the distribution company (or at "point of delivery").  
Although generally speaking this is described as "retail", it also affects 
"wholesale" as (i) EWS will manage risk for EES, and (ii) the distinctions 
between "retail" and "wholesale" are not always clear (ex. depending on size 
and complexity, traders/originators in EWS will do "point of delivery" 
transactions).  

The risks tend to be additional to the customary commodity, price, legal and 
credit risk management in wholesale transactions, as they also involve: (i) 
volume/load balancing risk between the counterparty and the Disco, 
particularly for "all requirements", "use" or "load following" transactions 
and particularly where the balancing obligation between the counterparty and 
the Disco is "unhedged" or "mismatched" (ex. balancing with the counterparty 
for excess or unused volumes may be at daily index on the date of 
consumption, whereas balancing with the Disco may be at the monthly index for 
the next month based on actual, estimated or aggregated data); (ii) terms and 
conditions/tariff risk to the Disco (ex. the distribution terms and 
conditions/tariffs pass a number of risks on to the commodity supplier, such 
as obligations to continue delivery after counterparty default or 
termination, options to the Disco to source supply after default or 
termination, broad third party indemnifications to the Disco for conduct of 
the counterparty, allocation of force majeure risk (that may differ from the 
counterparty agreement); (iii) additional or incremental credit obligations 
to the Disco; and (iv) pressure in these markets to used more simplified 
(often government regulated) non-master contract forms - although the forms 
used tend to be more unilateral to the commodity supplier.

The mitigant is to understand clearly both the formal and practical market, 
rules, requirements, procedures, regulations and distribution terms and 
conditions applicable to delivering the commodity behind and through the 
Disco, if possible to get involved in shaping those in a proactive way 
through the deregulation process, and developing risk management procedures 
around the formal and practical requirements of the market.

For your risk memo you could briefly describe the risk as:  "Point of 
Delivery Risk (retail or wholesale) for energy commodities behind and through 
the Distribution Company, including balancing commodity use between the Disco 
and the customer, distribution tariff/terms and conditions risks, incremental 
credit obligations between wholesale markets and the Disco, and commercial 
and regulatory requirements for contracting." 

Please call if you want to discuss further.  Peter.