Message-ID: <28947985.1075853272154.JavaMail.evans@thyme> Date: Wed, 21 Feb 2001 09:46:00 -0800 (PST) From: richard.sanders@enron.com To: andrew.edison@enron.com Subject: MPLP PPA Dispute Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Richard B Sanders X-To: Andrew Edison X-cc: X-bcc: X-Folder: \Richard_Sanders_Oct2001\Notes Folders\Sent X-Origin: Sanders-R X-FileName: rsanders.nsf ----- Forwarded by Richard B Sanders/HOU/ECT on 02/21/2001 05:45 PM ----- Elizabeth Sager 02/20/2001 02:21 PM To: Marcus Nettelton/NA/Enron@ENRON, Richard B Sanders/HOU/ECT@ECT cc: Subject: MPLP PPA Dispute fyi ----- Forwarded by Elizabeth Sager/HOU/ECT on 02/20/2001 02:20 PM ----- "JOHN G KLAUBERG" 02/18/2001 05:46 PM To: Elizabeth.Sager@enron.com cc: Subject: MPLP PPA Dispute PRIVILEGED AND CONFIDENTIAL: ATTORNEY WORK PRODUCT DO NOT DISTRIBUTE Elizabeth: I looked through the CMS PPA on my return flight to NY. While I think we should walk through the various contractual provisions over the phone, I nonetheless thought it might be of some help to set forth a few preliminary focal points for those discussions, particularly if you don't get to this for a few days. I thought it made sense to contemporaneously record some comments as I was thinking through some of the issues/positions. Also, I'll have to run down the conflict issue when I get back into the office, but I thought I could generally review the PPA in any event. In addition, I did not know whether it was ENA's or Dynegy's obligation to work on a response to CMS, but I thought it made some sense to see what one might look like on paper. (See attached). At this point, however, I'm not sure whether MPLP should furnish any specific contract-based rationale in writing to CMS as to MPLP's position that the capacity charges should be adjusted on a calendar year basis. You will note that the draft letter focuses on the language dealing with the adjustment formula to the Contract Capacity Factor (which clearly is done on a calendar year basis), rather than the scheduled changes to the stated capacity charges set forth on Exhibit D. As noted below, there are some issues underlying this position. Preliminary Overall Assessment The PPA essentially is inconsistent on the capacity charge adjustment issue. While many of the relevant computations are done on a calendar year basis--which generally supports MPLP's position--the effect of adjusting the stated capacity charges on a calendar year basis results in two anomalies: namely, the stated capacity charge (on Exhibit D) for "Year 1" only would apply for 3 months, but even more importantly, the capacity charge (on Exhibit D) for "Year 35" would apply for the last 21 months of the Contract Term. The anomaly "running in the other direction" is that, under CMS's interpretation, various computations would be made on a calendar year basis (e.g., Contract Capacity Factor), and adjustments resulting therefrom would be applied "mid-stream" (i.e., after 3 months of the alleged "contract year" ). My overall concern is that an arbitrator may focus on the anomaly (described above) that results by applying Exhibit D using a calendar year concept (i.e., the 21 month "Year 35" issue) since that is a fairly easy concept to get your arms around.. More Information/Diligence/Research Before a definitive conclusion on the issue can be made, we likely would want to review or undertake, as the case may be, some additional information/diligence/research, such as (which I assume we could generally obtain from the Michigan regulatory counsel referenced in the e-mail you forwarded): --The Michigan PUC presumably approved the PPA (prior to the first amendment) in a published Order. Was there anything in that Order or the submissions (or exhibits thereto, including financial projections) that might provide some guidance? --My guess is that there must be other CMS QF PPAs with the same type of pricing structure since this issue essentially would arise in every instance where the COD was not a Jan.1. Do we (or local counsel) know whether this may be a "global" attack by CMS on these types of PPAs? --While not directly relevant to the contract interpretation question, confirm with local counsel that CMS would have recovered the "excess" capacity payments from its customers--so that it presumably would have to issue a customer refund if it were to prevail on its claims. --CMS "self bills" itself under the PPA. Has the statute of limitations run on any of its claims for refunds for prior years? Can CMS's prior course of dealing be used to support MPLP's contractual interpretation, or is there otherwise an equitable argument that CMS should not be able to recover prior "overpayments" (as opposed to prospectively adjusting the capacity payments)? (This could be particularly helpful to try to settle out the dispute on the basis that MPLP would concede the issue on a prospective basis only). --The cover letter from CMS suggests that the alleged payment error resulted in payments in excess of the avoided cost rate authorized by the PUC. Isn't this determination to be made over the life of the PPA, rather than for any particular period? Assuming CMS's statement is correct, I assume it does not affect the validity of the PPA, but only whether CMS can recover the "excess" amount in rates? --Do we have any leverage in the event we were to raise this dispute with the PUC? If so, can this be used in the context of trying to work out an overall restructuring of the PPA? Certain Points in Support of MPLP's Position --The definition of "Contract Capacity Factor" provides for a calendar year determination and, most importantly, provides for a partial year calculation for the year in which the COD occurs that ends at the end of that calendar year. If the capacity charge should be adjusted as of the anniversary of the COD date, it arguably would not make sense to have a partial year calculation. --Sec. 10(a) provides that if in any calendar year the Contract Capacity Factor is less than 60%, then the capacity charges set forth on Exhibit D "shall be adjusted for the next calendar year as follows.... The capacity charges for the following calendar year shall then be determined.... (Emphasis added). This section makes specific reference to Exhibit D and makes the adjustment effective for the next calendar year, not on the next anniversary of the COD. It arguably would not appear to make any sense to apply the Contract Capacity Factor adjustment on a calendar basis, but determine the capacity charges on a COD anniversary basis if no adjustments thereto are required because the Contract Capacity Factor levels do not require an adjustment. --NOTE: The counter-argument, however, is that the foregoing language only pertains to the computation of a percentage "haircut" or adjustment that is applied to the stated capacity charges on Exhibit D, whatever those may be, rather than to when the annual stated capacity charges are effective. That is, making this adjustment on a calendar year basis, even though the scheduled capacity rates change each October 1, is not necessarily in conflict with the rest of the PPA. --Sec. 2(b) (Effective Date and Term) provides that the Agreement runs for 35 years "and thereafter from year to year," unless a party gives at least one year's notice to terminate which termination shall be effective "at the end of the 35 years or any calendar year thereafter." (Emphasis added). Thus, for example, if one month after the end of the 35 year term--i.e., October 31, 2030--a party gave notice to terminate, such termination would be effective December 31, 2031, not September 30, 2031 or September 30, 2032 (i.e., not on the anniversary dates of the COD). Thus, the PPA contemplates in certain respects certain "stub" years and certain "long" years, a contractual scheme that is at least analogous to MPLP's position on the stub and long years for the timing of the scheduled changes in the stated capacity charges on Exhibit D. --There are other calendar year based obligations--for e.g., Sec. 13 (and Exhibit B) reflect termination payments that, again, are calculated on a calendar year basis. (We should discuss with the commercial people the economic rationale underlying the termination payments to see if there may be additional support in that respect). (Note that some other calendar year based calculations were eliminated by the First Amendment to the PPA, but can still be used to reflect the underlying "calendar year" flavor of the PPA since the issue at hand existed even prior to the First Amendment). A Few Additional Points to Note --The PPA is devoid of default language, LDs, etc.; however, MPLP could bring a claim against CMS to arbitration (Sec. 18) for what it believes it is owed when CMS does not pay the full capacity charges in 2001 (plus interest as provided at Sec. 20) and keep performing under the PPA. --Although I do not see a significant issue here, let's briefly discuss the potential for CMS to try to affirmatively use an "indication" of a regulatory disallowance pursuant to Sec. 10(c) as a way to attempt to force its "contract year" interpretation of Exhibit D. While Sec. 10(c) is one of those "old school" one way regulatory outs, MPLP would undoubtedly use Sec. 10(e) [requiring CMS to defend the PPA) to prevent CMS's affirmatively use of the PUC to support its contract claim. (In Pennsylvania, PECO, in an analogous circumstance, attempted to use a PUC determination as justification to attempt to break a PPA with a QF). Let me know when you wish to follow up. John "This e-mail, including attachments, contains information that is confidential and it may be protected by the attorney/client or other privileges. This e-mail, including attachments, constitutes non-public information intended to be conveyed only to the designated recipient(s). If you are not an intended recipient, please delete this e-mail, including attachments and notify me by return mail, e-mail or by phone at 212 424-8125. The unauthorized use, dissemination, distribution or reproduction of the e-mail, including attachments, is prohibited and may be unlawful. John Klauberg LeBoeuf, Lamb, Greene & MacRae, L.L.P. 212 424-8125 jklauber@llgm.com - sager-2.doc