1

Mod_24_10Introducing Loss of Profits

as a Relevant Damage within the Limitation of Liability Provisions

2

By default as the primary central party in the SEM, SEMO and its activities have being used both in the illustration of Modification Proposal Mod_24_10 and in this presentation to the Modifications Committee.

This by no means attributes any actions or inactions to SEMO.

Neither does it serve as any statement to indicate a Dispute Process to which SEMO is, or may be, a Disputing Party.

The illustrations have simply being to enable greater understanding of the proposed modification.

Disclaimer

3

Mismatch of ResponsibilityLiability rests on market participants for actions/processes that are under the full control of central parties

Insufficiency of Dispute ProcessThe dispute process essentially provides no remedy and potentially could exacerbate rather than resolve disputes

Materiality of Action/InactionIn a centralised, gross mandatory pool an act or omission of a central party can affect a market participant’s entire revenue stream

Loss of profitEasily calculable financial loss

Mitigating ActionCentral parties can seek and obtain liability insurance

Why?

4

“Responsibility and authority (control) should be equal…”

Barrels of Oil SpilledBP Share Price

5…but they often are not

6

In SEM

7

Multiple Opportunities in Settlement

Data Query

Settlement Query

Resettlement

Re-pricing

Single point of failure

One Opportunity in Scheduling

Single Gate Closure

8

T&SC provides for dispute resolution…

…but liability is limited to physical damage to property or personnel

Dispute Resolution process is insufficient…

9

In a electronic, financially-settled market…

…the potential for physical damage is remote

…because it ignores the nature of the SEM

10

→ Court Proceedings

→ Amicable Dispute Settlement

→ DRB

Good Faith Negotiations

early intervention best…

…without a reasonable remedy early in the process, the chances for frustration increase

Stages in Dispute Resolution Process

11

In BETTA?

12

• SECTION H: GENERAL• 6.2 Limitation of liability• 6.2.1 For the purposes of this paragraph 6.2, references to a Party includes any

of its officers,• employees or agents.• 6.2.2 Subject to the succeeding provisions of this paragraph 6.2, each Party

agrees and• acknowledges that:• (a) no Party shall be liable to any other Party for loss arising from any breach of

the• Code other than for loss directly resulting from such breach and which at the• Code Effective Date was reasonably foreseeable as not unlikely to occur in the• ordinary course of events from such breach in respect of:• (i) physical damage to the property of any other Party, and/or• (ii) the liability (in law) of any other such Party to any other person for• loss in respect of physical damage to the property of such person;• (b) no Party shall in any circumstances be liable in respect of any breach of the• Code to any other Party for:• (i) any loss of profit, loss of revenue, loss of use, loss of contract, loss• of goodwill, or increased cost of working; or• (ii) any indirect or consequential loss; or• (iii) except as provided in paragraphs 6.2.2(a)(ii) and 6.2.4, loss resulting• from the liability of any other Party to any other person howsoever• and whensoever arising.

BETTA provisions essentially word-for-word…

T&SC s.2.317 – 2.318

…no Party shall be liable to any other Party for loss arising from any breach of the Code other than for loss directly resulting from such breach…in respect of:

(i) physical damage to the property of any other Party,

and/or(b) no Party shall in any

circumstances be liable in respect of any breach of theCode to any other Party for:(i) any loss of profit, loss of revenue…

…but appearances can be deceiving

13In BETTA Materiality is minimal

Bilateral Contract Volume

Accepted BM bid or offer volume

Imbalance volume

metered

contractedUK

Electricity Volume (MWh)

2-3%

1-2% BETTAc.5%

c.95%

Sources: National Grid, Association of Electricity Producers

14

Variable Price Maker wind unit

COD is economic and meets all requirements

However nomination does not make it to Market Schedule…

Revenue =

energy payments +

capacity payments +

REFIT support (assume not constrained on)

= 0

In SEM Materiality is all-encompassing – up to 100% of Revenue

15

Loss of Profits……balances remedy against degree of injury

…simple…easily calculable….relatively inexpensive

Loss of Profits vs. other financial loss

Loss of…

…income, contract, anticipated savings, investment return, goodwill, use, reputation

…not easily determined…subjective…excessive

16

Central Parties can obtain liability insurance

Mitigating action

17

Mismatch of ResponsibilityLiability rests on market participants for actions/processes that are under the full control of central parties

Insufficiency of Dispute ProcessThe dispute process essentially provides no remedy and potentially could exacerbate rather than resolve disputes

Materiality of Action/InactionIn a centralised, gross mandatory pool an act or omission of a central party can affect a market participant’s entire revenue stream

Loss of profitEasily calculable financial loss

Mitigating ActionCentral parties can seek and obtain liability insurance

Summary