SPIEGEL &MCDIARMID

APPA EEI Contract APPA EEI Contract Project UpdateProject Update

APPA Legal Seminar

Cambridge, Massachusetts

October 10, 2006

Robert C. McDiarmid

SPIEGEL &

MCDIARMID

One Year AgoOne Year Ago

At APPA Legal, we presented a draft APPA proposal for optional elements of the EEI Form Contract

Got a fair amount of feedback

Used that feedback to create a new draft, which was presented to EEI Contract Committee

Met several times with EEI Contract Committee and talked more on phone

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MCDIARMID

Major Concepts at IssueMajor Concepts at Issue

One-way termination

Firm Product Definition

Failure to deliver as default

Representation as to Forward Contract Merchant

Credit Matrix Applicable to smaller municipals and coops

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MCDIARMID

Other Concepts at IssueOther Concepts at Issue

State Law Applicable (and for what)

Confidentiality duty imposed

No sovereign immunity representation

Mistaken cross reference in form text

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MCDIARMID

Where We StandWhere We Stand

EEI has spent a fair amount of time and returned an alternative credit matrix

EEI is willing to develop regional firm product definition in CAISO, ISO-NE and PJM markets and has invited us to participate

EEI is not prepared at this time to develop language on one-way termination or on failure to deliver as default

FCM language has not been focused on

The “other concepts” have not been focused on

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MCDIARMID

In GeneralIn General

The responses appear to be largely driven by merchant thinking and not by utilities

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MCDIARMID

Credit MatricesCredit Matrices

The responses we have are handouts this morning

Tom Ingoldsby will address in detail The language is clearly drafted by credit

people who do not understand municipal or coop operation. Does attempt to address purchased power issues

Please make certain that you have read the handout if you are attending this afternoon’s session with EEI Committee reps

SPIEGEL &

MCDIARMID

One Way TerminationOne Way Termination

Problem: Events of default are only financial. Either party may terminate without cost other than covering additional costs to counterparty, if any. Seller who is “in the money” can terminate and immediately trigger mark to market payments by non-defaulting party in potentially ruinous amounts.

SPIEGEL &

MCDIARMID

One Way TerminationOne Way Termination

Solution: Agree that no payment to defaulting party

Can be tied to failure to deliver or receive (see next point) or in general

Probably best to modify §5.3

SPIEGEL &

MCDIARMID

Failure to Deliver as DefaultFailure to Deliver as Default

Problem: Sections 4.1, 4.2 provide specific remedy (cover extra costs, if any) for failure to deliver or to take product. Section 5.1(c) provides that the exclusive remedy for failure to deliver or receive product is provided in Section 4, and thus such failure is not an event of default.

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MCDIARMID

Failure to Deliver as DefaultFailure to Deliver as Default

Solution: Must deal both with sections 4 and 5.

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MCDIARMID

Forward Contract MerchantForward Contract Merchant

Problem: Even after 2005 change in Bankruptcy Act, still a question as to whether any producer of power or LSE can qualify as an FCM. Because form contract places the statement that each party is an FCM in Section 10.2(ix), Reps and Warranties, and if a court holds that such an entity is not an FCM, the warranty is false or misleading and thus an event of default under Section 5.1(b).

SPIEGEL &

MCDIARMID

Forward Contract MerchantForward Contract Merchant

Solution: This one is easy

Strike §10.2(ix), and add the same language to §10.10, which would then read:

The Parties acknowledge and agree that each is a “forward contract merchant” within the meaning of the United States Bankruptcy Code, and that all Transactions constitute “forward contracts” within the meaning of that Code.

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MCDIARMID

ProductProduct

Problem: Most common EEI products do not qualify for capacity credit or resource adequacy.

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MCDIARMID

Where is this a Problem?Where is this a Problem?

This is not a problem in a purely energy market with no obligations to provide capacity and no deliverability test

This is a major problem under an OATT or in an ISO or RTO with capacity obligations or resource adequacy test

Even the CAISO now has resource adequacy test

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MCDIARMID

What is the Solution?What is the Solution?

Tie product to specific resources, with as much flexibility around that as may be desired

Product works in all ISO/RTOs (at least for self-dispatch approach) and as a network resource under OATT

Option is to specify a resource with one of several other existing products

SPIEGEL &

MCDIARMID

State Law ApplicableState Law Applicable

Problem: §10.6 provides for the application of New York law, and jury trials are waived. This is not legal in some states for municipals to sign.

Problem: Schedule M changes this only as to the applicability of the act establishing the municipality, which change does nothing for the primary problem.

SPIEGEL &

MCDIARMID

State Law ApplicableState Law Applicable

Solution: Revise §10.6 to identify the state whose law can lawfully be applied (or which you may prefer)

Determine whether or not to waive jury trial.

SPIEGEL &

MCDIARMID

Confidentiality DutyConfidentiality Duty

Problem: §10.11 and Public Records Acts

Solution: Change to duty to notify other party when a request is made, and put burden of defense on seller.

SPIEGEL &

MCDIARMID

No Sovereign Immunity No Sovereign Immunity RepresentationRepresentation

Problem: Schedule M, §3.5 warrants and covenants that the municipal will not claim immunity from jurisdiction of a court located outside the state, injunction, or attachment of assets. Many states would not permit such a contractual provision.

Solution: §3.5 to limit the warranty to things that can legally be done.

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MCDIARMID

Mistaken Cross ReferenceMistaken Cross Reference

Problem: §1.50 cross references §2.4, which should be §2.5

This admitted error has never been corrected by EEI, and seems to be used by EEI negotiators as in indication of whether the other side understands the form contract.

Solution: Change “2.4” to “2.5.”

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MCDIARMID

On to the next presenterOn to the next presenter

Tom Ingoldsby will talk about the Credit Matrices

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MCDIARMID

SPIEGEL &

MCDIARMID

SPIEGEL &

MCDIARMID