Subject: EEI/WSPP comparison
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked]
Date: Wed, 13 Dec 2000 07:51:00 -0800 (PST)

Further to my email of Nov. 29th, Tim has now signed off on the usage of this 
list. Chris Foster ok'd it several weeks ago. 

Tim has asked that both of you let me know of any objections/comments to this 
list by the close of business today. Otherwise,  it will be used from 
tomorrow onwards. As indicated previously, we only plan to send it to 
counterparties who request to have something in writing which details the key 
distinctions between the EEI and the WSPP.  

Thanks, 

Shari and Christian 

___________

1. WSPP Section 10 - Definition of "Uncontrollable Force": This definition is 
too broad.   It sets out a litany of events, any one of which may be 
considered an Uncontrollable Force  by a Party seeking to avoid having to pay 
liquidated damages in respect of a Firm Transaction under which it  has 
committed to sell or deliver "firm" energy. For instance, it is hard to 
imagine that a "drought" is a legitimate excuse to relieve a Party of its 
obligation to deliver Firm Power. How can a drought cause power not to flow? 
What is a "material shortage"? etc...  In contrast, EEI's definition of Force 
Majeure does not include a lengthy list from which a party could pick and 
choose to its advantage; rather the key to the EEI definition is that it 
characterizes FM as an event that "prevents one Party from performing its 
obligations".  

Related to this critically important concept of firm deliverability, where 
precise wording is very important,  is the puzzling existence of Section 25 
of the WSPP Agreement:   

"25. JUDGMENTS AND DETERMINATIONS: 
Whenever it is provided in this Agreement that a Party shall be the sole 
judge of whether, to what extent, or under what conditions it will provide a 
given service, its exercise of its judgment shall be final and not subject to 
challenge.  Whenever it is provided that (i) a service under a given 
transaction may be curtailed under certain conditions or circumstances, the 
existence of which are determined by or in the judgment of a Party, or ... 
that Party's or the Executive Committee's determination or exercise of 
judgment shall be final and not subject to challenge if it is made in good 
faith and not made arbitrarily or capriciously." 
 
Whatever the intent  of this wording may have been,   what is clear is that 
it could only cause problems  in resolving a deliverability issue.   
  
2.  WSPP Section 27- "Creditworthiness".  This clause is too subjective.  It 
would allow one party, for potentially wrong reasons,  to unilaterally 
question the other's financial viability and require it to post collateral in 
an amount which is a "reasonable estimate of the damages" to the requesting 
party.  If such collateral is not provided within the allotted time frame, an 
Event of Default occurs. In contrast, the EEI provides for an objective test 
in Section 8.1/8.2 (c) which is based on a set collateral threshold expressed 
in $ and which is likely to be commensurate with the amount of unsecured 
exposure that a party feels comfortable with.  In addition, Enron routinely 
includes an objectively determinable  bilateral "material adverse change" 
clause in the EEI Cover Sheet  as a Collateral Posting Event /additional 
Event of Default which would be  triggered by a party's credit rating not 
meeting investment grade criteria or certain financial covenants/ratios.  We 
believe that this combination provides an objectively determinable level of 
credit protection which both Parties can understand and agree to before 
entering into any transactions under the agreement.       

3. All of the following points related to early termination of an agreement 
are very  important to any Non-Defaulting party in the precarious 
circumstances surrounding the termination of a complex trading relationship.  
This is the area where the Agreement is going to have the most potential 
legal significance  to the Parties, and this is an area where the WSPP comes 
up short of the EEI in some fairly substantial ways. 

 Events of Default and Early Termination.   The list of events which can 
become Events of Default is too short.  The absence of important events  
creates significant legal risk.  For instance, Section 22.1(b) speaks to a 
failure by a party to have made accurate representations and warranties as 
required by Section 36.  Section 36 is the Trade Option Exemption. This begs 
the question as to what happens in the event of a breach of Section 37?  
Section 37 is where the parties represent that they have the authority to 
enter into these types of transactions, have all necessary regulatory 
authorizations, etc..  With no Event of Default relating to a breach of these 
Section 37  rep's and warranties, what would one's remedy be in the event of 
a breach of Section 37?  In contrast, the EEI has a clear Event of Default 
based on a breach of rep's and warranties.  And, consider this example:    
the WSPP Agreement does not make it an Event of Default if a Party breaches a 
material covenant of the Agreement.   This basic legal point which appears in 
the EEI agreement is entirely missing.   

In addition to those listed in the WSPP Agreement, the EEI contains the 
following additional Events of Default : Merger without Assumption, Cross 
Default, Default by a Party's Guarantor (breach of rep., failure to pay, 
bankruptcy, expiry of guarantee while transactions are outstanding, 
repudiation of guaranty).  

 Calculation of Early Termination Payment: In order to calculate the value of 
any prematurely terminated transactions occasioned by an Early Termination 
Event, the WSPP requires a party to use a "market quotation comparison" 
method and go out into the market and obtain the present value of the 
affected transactions. Any related hedges that the Non-Defaulting Party has 
in place and now no longer needs cannot be included in the calculations. In 
contrast, the EEI,  as supplemented in our proposed Cover Sheet,  would allow 
the Non-Defaulting Party the flexibility to calculate a good faith estimate 
of its Loss by using quotes or internal calculations. The NDP would also be 
allowed to take into account any hedges or breakage costs associated with 
having had to terminate the transactions early as a result of the other 
party's default.  

Another problematic point in the WSPP is in Section 22.2 where it requires 
the Non-Defaulting Party to exercise its right of termination within 30 days 
of learning about an Event of Default. (An event does not become an "Event of 
Default" until notice and failure to cure has occurred.) Where  an event has 
been established as an Event of Default,   if the Non-Defaulting Party does 
not call a termination within this timeframe (and, if no extension is granted 
by mutual agreement ), the Non-Defaulting Party forfeits its right to 
terminate.  This unnecessary time restriction can only cause trouble in the 
already difficult circumstances that will exist in a potential termination 
situation.   In contrast, under the EEI, at any time so long as an Event of 
Default has occurred and is continuing, the Non-Defaulting Party has the 
right to designate an Early Termination Date and terminate all transactions. 

4. Governing Law- The WSPP provides for Utah law to govern the agreement in 
most situations. Most physical power counterparties are not located in Utah 
and so are not familiar with this law. We would prefer to have a more 
developed state law govern a power trading contract. The EEI provides for NY 
law which is well suited to handling trading related disputes.  It is 
generally recognized that New York commercial law, expecially in the 
important trading related areas of oral trading and bankruptcy is superior to 
the law of most other states.  The ISDA, for example, uses New York law for 
these reasons.   

5. Dispute Resolution.   The WSPP Agreement invokes arbitration and the EEI 
agreement does not.  We prefer arbitration, however, the WSPP version of it 
is unnecessarily complex.   First, it is not clear under the WSPP Agreement 
that all claims or disputes arising under it are able to be arbitrated.  Some 
disputes can be arbitrated, some cannot.    Our preferred approach would be 
to use arbitration for all claims or disputes.  Then, assuming that a 
permissible dispute is being arbitrated, the WSPP has a complicated mandatory 
"informal" and then "formal" dispute resolution procedure which requires the 
constant involvement of the WSPP Chair and the Chair's pre-chosen list of 
mediators.  We think it would be better to have each party select an 
arbitrator, and then have these two arbitrators select a third independent 
arbitrator with at least 8 years experience in the electricity markets. We 
also think it would be fairer for the dispute to be settled using the 
arbitration methods set forth by the American Arbitration Association. 

6. Payment Netting and Closeout  Netting/Set-off.    A good master trading 
agreement should clearly address both  payment netting and close out netting 
and set-off in separate, explicit paragraphs of the agreement.  They are 
separate topics.    The EEI does this.  Section 6.4 deals with payment 
netting  and  Sections 5.3 and  5.6 deal with settlement netting and closeout 
setoffs.     These unambiguous paragraphs provide very explicit terms under 
which these important concepts are addressed and thus provide  a valuable 
credit management tool on which the parties can rely.   The WSPP Agreement, 
on the other hand, fails to clearly distinguish between payment netting and 
closeout netting/setoff.  Section 28.1 seems to be dealing with payment 
netting and the reference to set off is incomplete and ambiguous as to 
whether or not it applies to closeout setoff.  Furthermore, Section 28.2 
provides that a party that elects to use payment netting must post this 
information on the WSPP homepage "(once the WSPP Homepage possesses the 
necessary capability)."   What can be posted can be unposted.  This whole 
system of confirming netting seems unnecessarily complicated.   

7. Invoicing- Section 9.5 of the WSPP allows a party to send an invoice 
within two (2) years from the date on which the invoice should have been 
delivered.   In contrast, Section 6.1 of the EEI has no such time frame and 
the parties are encouraged to send out invoices as soon as possible after the 
end of each month.

9. Contested Amounts: Section 6.2 of the EEI provides that in the event of a 
dispute, the owing party pays only the uncontested amount and then tries to 
resolve the discrepancy. On the other hand, Section 9.4 of the WSPP requires 
the contesting party to pay the entire disputed amount upfront and then try 
to resolve the discrepancy. 

10. Breadth of Agreement: The EEI  is  a nationwide document, drafted 
recently, by participants from all parts of the country,  during the most 
recent phase of wholesale deregulation, when a number of typically difficult 
legal issues had already been painfully experienced by companies.        It  
includes definitions for East power products as well as West power products 
(including products transacted for a California Delivery Point as well as any 
other Delivery Point in the WSCC).   The WSPP Agreement on the other hand 
began in the west during the regulated era, and   still contains many 
vestiges of  its origins that are no longer necessary, and, therefore, it 
cannot yet claim the same national scope as the EEI.  For example,  it still 
contemplates the regional  notion of "Membership," in the Western System 
Power Pool.  What does this mean?  Why is this kind of membership necessary?  
What legal value does it have?  Why should a power trading master agreement 
need to have sections such as sections 8  dealing with Organization and 
Administration of various committees?   No other master agreement dealing 
with any other commodity, including the ISDA agreement, contains these 
notions of membership and committee structures and duties in their texts.