S PIEGEL & M C D IARMID APPA EEI Contract Project Update APPA Legal Seminar Cambridge, Massachusetts October 10, 2006 Robert C. McDiarmid

S PIEGEL & M C D IARMID One 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

S PIEGEL & M C D IARMID 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 Other Concepts at Issue  State Law Applicable (and for what)  Confidentiality duty imposed  No sovereign immunity representation  Mistaken cross reference in form text

S PIEGEL & M C D IARMID Where 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

S PIEGEL & M C D IARMID In General  The responses appear to be largely driven by merchant thinking and not by utilities

S PIEGEL & M C D IARMID Credit 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

S PIEGEL & M C D IARMID One 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.

S PIEGEL & M C D IARMID 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  Probably best to modify §5.3

S PIEGEL & M C D IARMID 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 Failure to Deliver as Default  Solution: Must deal both with sections 4 and 5.

S PIEGEL & M C D IARMID 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 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 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.

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

S PIEGEL & M C D IARMID 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 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

S PIEGEL & M C D IARMID 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 State 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.

S PIEGEL & M C D IARMID 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.

S PIEGEL & M C D IARMID 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: §3.5 to limit the warranty to things that can legally be done.

S PIEGEL & M C D IARMID Mistaken 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.”

S PIEGEL & M C D IARMID On to the next presenter Tom Ingoldsby will talk about the Credit Matrices

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