Message-ID: <30326080.1075859535348.JavaMail.evans@thyme> Date: Wed, 13 Dec 2000 07:51:00 -0800 (PST) From: shari.stack@enron.com To: greg.wolfe@enron.com, holli.krebs@enron.com Subject: EEI/WSPP comparison Cc: elizabeth.sager@enron.com, tim.belden@enron.com, tracy.ngo@enron.com, christian.yoder@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: elizabeth.sager@enron.com, tim.belden@enron.com, tracy.ngo@enron.com, christian.yoder@enron.com X-From: Shari Stack X-To: Greg Wolfe, Holli Krebs X-cc: Elizabeth Sager, Tim Belden, Tracy Ngo, Christian Yoder X-bcc: X-Folder: \Elizabeth_Sager_Dec2000\Notes Folders\All documents X-Origin: Sager-E X-FileName: esager.nsf 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.