S PIEGEL & M C D IARMID LLP Wrap up Report on the APPA Wholesale Power Project Robert C. McDiarmid APPA Legal Seminar Seattle, October 15, 2007

S PIEGEL & M C D IARMID LLP Working Group Dave Yaffe Tom Ingoldsby Bob McDiarmid Allen Mosher & Sue Kelly Bill Balson

S PIEGEL & M C D IARMID LLP Two Years Ago in San Antonio At the APPA Legal Seminar Decision was made to attempt to modify EEI Form Contract For Smaller APPA members who wanted power more than financial assurance

S PIEGEL & M C D IARMID LLP One Year Ago At APPA Legal in Cambridge, we presented a draft APPA proposal for optional elements of the EEI Form Contract Got feedback at both the San Antonio and the Cambridge session, and tried to take that into account Met several times with EEI Contract Committee and talked more on phone

S PIEGEL & M C D IARMID LLP Major 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

S PIEGEL & M C D IARMID LLP Other Concepts at Issue State Law Applicable (and for what) Confidentiality duty imposed No sovereign immunity representation Do you want new deal to cover (and govern) past deals that are still in existence? Failure to cover penalties of any kind Mistaken cross references

S PIEGEL & M C D IARMID LLP Where We Stand EEI has spent a fair amount of time on this project with us But, EEI is not prepared to add any of our language to its form Life is too short, and events are moving too fast, to wait APPA proposes to post the Committee proposal on its website as an alternative

S PIEGEL & M C D IARMID LLP In General Alternative Schedule M offers a menu of choices Each of the choices has been accepted at least once by counterparties Each of the choices has been rejected at least once by counterparties Negotiations should be assumed; there is no industry standard Explanations below in terms of Alt. Sch. M, Alt. Cover Sheet

S PIEGEL & M C D IARMID LLP One Way Termination Problem: Events of default under EEI 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.

S PIEGEL & M C D IARMID LLP One 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 See Alt. Sch. M. § M (EEI §5.3), Alt. Cover Sheet

S PIEGEL & M C D IARMID LLP Failure 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.

S PIEGEL & M C D IARMID LLP Failure to Deliver as Default Solution: Must deal both with sections 4 and 5. See Alt. Sch. M §§ H and I (revision to EEI §§4.1, 4.2) See Alt. Sch. M §§ J, K and L, Alt. Cover Sheet 5.1(i)

S PIEGEL & M C D IARMID LLP Forward 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).

S PIEGEL & M C D IARMID LLP Forward 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 believes itself to be 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. Alt. Sch. M, §§ C, D

S PIEGEL & M C D IARMID LLP Product Problem: Most common EEI products do not qualify for capacity credit or resource adequacy.

S PIEGEL & M C D IARMID LLP 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

S PIEGEL & M C D IARMID LLP What is the Solution? Tie product to specific resources, with as much flexibility around that as may be desired (not here) Option is to specify a resource with one of several other existing products (not here) Option (Alt. Sch. M, § U) making it clear that seller transfers capacity to buyer -- use “capacity” Holding pattern option is Alt. Sch. M, §T

S PIEGEL & M C D IARMID LLP State 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.

S PIEGEL & M C D IARMID LLP State Law Applicable Solution: Revise §10.6 to identify the state whose law can lawfully be applied (or which you may prefer). Alt Sch. M, §§ F(3.5(b)) and R (10.6)

S PIEGEL & M C D IARMID LLP Confidentiality 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. Alt. Sch. M § S

S PIEGEL & M C D IARMID LLP No Sovereign Immunity Representation 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: Change §3.5 to limit the warranty to things that can legally be done. Alt. Sch. M §F (3.5).

S PIEGEL & M C D IARMID LLP Costs of not delivering Problem: §1.51, “Replacement Price” expressly does not include penalties, and it is not clear that buyer may use its own units to cover failure. Secondary Problem: FERC’s analysis of why Firm LD should qualify as Network Resources assumes that all damages are paid Solution: Add some penalties and make clear that buyer may operate its own units. Alt. Sch. M, § V

S PIEGEL & M C D IARMID LLP Retroactive Effects Problem: EEI § 2.2 makes any change apply to all prior deals Solution: Modify so that applies only to this transaction and transactions yet to be entered into. Alt. Sch. M, §E

S PIEGEL & M C D IARMID LLP Mistaken Cross Reference Problem: §1.50 cross references §2.4, which should be §2.5 Problem: §5.2 has error of grammar Problem: Cover sheet gives option of adding the wrong section (8.6 instead of 8.4 in Schedule M) Solution: Change; all are acknowledged errata

S PIEGEL & M C D IARMID LLP On to the next presenter Bill Balson will talk about the Credit Matrices