From: Arnie Podgorsky, WSPP Legal Counsel

MEMORANDUM

July 31, 2012

To: WSPP Contract Subcommittee

Re: Contract Subcommittee: WSPP Agreement Possible Modifications

This memorandum sets out analysis and proposed language addressing three issues we discussed at the meeting of the Contract Subcommittee in June: (1) electronic trading platform confirmations; (2) unscheduled (loop) flow and the Uncontrollable Force provisions of § 10; and (3) sale of reserves to transmission providers.

I. Proposed Modification for Electronic Trading Platform Confirmations

As discussed at the meeting, under the existing Confirmation language of the Agreement, transactions on webExchange and potentially other electronic platforms are not documented in a manner that meets the Confirmation criteria of the WSPP Agreement. Further, the transactions are not documented to be subject to the terms and conditions of the WSPP Agreement. The goal is, first, to assure that agreements made on these platforms qualify as Confirmations under WSPP Agreement § 32 and, second, if the Parties so choose, to create a mechanism for these transactions to be subject to the WSPP Agreement.

A. Making a Platform Transaction Qualify as a Confirmation. Platform transactions are entered into on computer screens through platform software. This method of communication and manifestation of agreement does not today meet the WSPP definition of Confirmation.

Section 32 is built around oral and documentary writing procedures, none of which apply to this kind of transaction. A transaction entered on a computer screen is not an Electronic Writing as defined in WSPP. Electronic Writing refers to communications by e-mail or, if agreed, other electronic means such as IM. Further, the Electronic Writing provisions would not work well for a platform transaction even if it were covered.

We propose to add a new defined term – “Trading Platform Confirmation” – and additional provisions to make a Trading Platform Confirmation a WSPP transaction if the parties so choose.

Following is a straw (language to consider) definition of a “Trading Platform Confirmation.”

Trading Platform Confirmation: terms and conditions of a transaction to which the Parties thereto have agreed, which agreement (a) was manifested by the Parties’ signification of assent in accordance with the procedures of the applicable trading platform or exchange, (b) includes the minimum terms of the identities of the Parties, price, quantity, delivery point, and period of delivery, and (c) is available for retrieval in printed or electronic form from the applicable electronic trading platform or exchange.

Having defined a Trading Platform Confirmation, we turn to making the Trading Platform Confirmation qualify as a Confirmation under the WSPP Agreement. Language follows:

32.1 General

32.1.1 A Confirmation shall include, at a minimum, terms of price, quantity, delivery points, and period of delivery. (See Exhibit C for a sample). Subject to the limitations in Section 32.2 (Standard Confirmation Provisions) and Section 32.3 (Non-Standard Confirmation Provisions), the Confirmation shall be made in writing by either a Documentary Writing or an Electronic Writing. A Confirmation includes a Trading Platform Confirmation.

32.1.2 Pursuant to the provisions of this Section 32, the Parties to a transaction under this Agreement may agree to modify any term of this Agreement (other than provisions regarding the operation of the WSPP as an organization including Sections 7 and 8) which applies to such transaction, such agreement to be stated in a Confirmation or Confirmations.

B. Making a Platform Transaction a WSPP Transaction. The above language would make a Trading Platform Confirmation qualify as a Confirmation under for the WSPP Agreement, it would not make the transaction subject to the terms and conditions of the WSPP Agreement.

We understand that at least webExchange does not provide an option (check box, etc.) for parties to designate a transaction as a WSPP transaction or under other umbrella or enabling agreements between the parties. Without such a designator there is risk that the platform transaction has no terms and conditions other than the basic transactional terms agreed to on the platform. If the Uniform Commercial Code (UCC) applies to the transaction, it may supply some additional terms. How parties transact on webExchange is not within WSPP’s purview, but some WSPP Members have asked that we look to our own documentation to facilitate making these transactions WSPP transactions.

For added background, note that designating a WSPP Service Schedule may not suffice to bring the transaction under the WSPP Agreement. Because many parties refer to Service Schedule C in non-WSPP transactions, mere reference to a WSPP Service Schedule in a Confirmation may not be sufficient to manifest an intent that the WSPP Agreement apply. Note that the WSPP Sample Form for Confirmation at Exhibit C of the Agreement expressly makes the WSPP Agreement applicable to the transaction with the following language in the opening paragraph: “The undersigned Parties agree to sell and purchase electric energy, or a Physically-Settled Option, pursuant to the WSPP Agreement as it is supplemented and modified below.” (Emphasis added.) It is this connection that we now seek to achieve for platform transactions.

The simple and least intrusive solution would be for the platform itself to call for the transaction to designate the applicable agreement that applies to the transaction, be it WSPP, EEI, ISDA, other as specified, or none. This designation option could be a blank to be completed on the screen just like other necessary transaction terms of product, price, quantity, schedule, and delivery point, or could be specified in the underlying platform participation contractual documentation. Absent the platform calling for a designation (the status quo), we suggest the following two, alternative approaches.

1. An agreement to which Members may optionally subscribe (using WSPP’s approach to netting or the MRTU Agreement), which would make all platform transactions with other WSPP Members subject to the WSPP Agreement unless otherwise stated in the transactional documents. The Contract Subcommittee has not supported this approach, but we note the option in the event that a contract amendment is not supported. No draft language is presented.

2. An automatic, default application of the WSPP Agreement only to Trading Platform Confirmations. This would be achieved by revising § 32.1.3 above as follows (added language is in bold):

32.1.3 A Trading Platform Confirmation shall be binding in accordance with its terms, and Sections 32.2 and 32.3 shall not apply thereto. Parties may amend a Trading Platform Confirmation in accordance with the procedures, if any, of the applicable trading platform or exchange, or by any means permitted under Section 32. A Trading Platform Confirmation shall be subject to this Agreement, except if: the Parties thereto are parties to a master agreement other than this Agreement (an “Other Master Agreement”) which Other Master Agreement (a) is effective at the time the Trading Platform Confirmation is made, (b) by its terms applies to the Confirmation, and (c) is not a master Confirmation applicable to the Parties’ WSPP Confirmations.

If we make these changes, consider an additional change that tracks language we included in Service Schedule R. The language is to clarify the relationship between the WSPP Agreement and the Confirmation, and that in the event of any conflicts between the two, the Confirmation controls (if we are going this far, let’s clean it up more).

5.5 Contract Documents. This Agreement and the Confirmation together comprise a contract for a transaction between Parties to this Agreement identified in the Confirmation. Any conflicts between or among these documents shall be resolved in favor of the Confirmation.

II. Unscheduled (Loop) Flow and Force Majeure

At the recent Contract Subcommittee meeting we discussed the impact of transmission cuts under the § 10 Uncontrollable Force provisions, but that we should review whether changes in industry (NERC/WECC) standards regarding Unscheduled Flow (USF) may indicate a need to revise the Agreement.

More specifically, the issue is whether cuts arising under WECC Standard IRO-006-WECC-1 (or similar NERC standard) should be treated as Uncontrollable Force (UF) under the Agreement, excusing performance regardless of whether the cuts qualify for UF treatment under the existing contract language.

The WECC Standard became effective July 1, 2011. It provides for mitigation of transmission overloads due to USF on Qualified Transfer Paths (as identified by the WECC Operating Committee). As the NERC explained in its Petition to the FERC proposing adoption of the WECC Standard (Docket No. RM09-19-000):

Because of the physical nature of the Bulk Electric System in the Western Interconnection, there are times when circulating flows, caused by schedules other than those “on-path” schedules of the Transmission Operator (“TOP”) and outside the direct control of the TOP, result in significant flows across the Qualified Paths, potentially resulting in flows that exceed System Operating Limits (“SOLs”). In those situations where the TOP has taken action to reduce the flows on a Qualified Path but, because of Contributing Schedules, the flows are still near or exceeding the SOLs, IRO-006-WECC-1 requires curtailment of Contributing Schedules or provision of comparable relief through other means, so that the TOP of the Qualified Path can keep the actual flow within the SOLs.

Also see FERC Final Rule Order No. 746, Western Electric Coordinating Council, Qualified Transfer Path Unscheduled Flow Relief Regional Reliability Standard, 134 FERC ¶ 61,199 (2011).

The WECC Standard requires that upon receipt of a request for a Step 4 or greater (see the attachment to the Standard) from the Transmission Owner, the Reliability Coordinator (RC) shall act on the request within 5 minutes and the Balancing Authority (BA) shall implement the request(s) to meet the relief requirement. The significance to WSPP appears to be that, under the WECC Standard, USF mitigation is effected by reliability entities in response to reliability driven events (in compliance with the Standard). Reliability entities bear the responsibility for meeting the standard, and neither buyers nor sellers can initiate an event.

Prior to the standard change, implementation of tag curtailments for unscheduled flow physically rested, most often, with the load serving (purchasing) entity. That fact allowed buyers to control, at least in theory, which of their selling counterparties were curtailed. Arguably, then, there was a merchant entity that had at least some control over the outcome of curtailments. With the WECC Standard, the authority is relocated into the RCs and BA control rooms.

WSPP Agreement § 10 provides for UF (performance excuse) if the transmission provider interrupted the service, provided (a) the Parties agreed to a path; (b) firm service was obtained on the path. Or, if there was no agreement on a path, if the Party arranging transmission arranged for firm transmission service and could not obtain alternate transmission service or alternate energy, exercising due diligence. These provisions may be out of synch with the new standard and at a minimum should be reviewed to determine whether they still reflect the market. Also, we should consider whether UF should be broadened to address reliability cuts arising from causes other than USF, including whether there are other applicable NERC or WECC standards that place the responsibility for cuts in reliability offices rather than purchasing/selling entities.

A minimal approach is to leave the existing language intact but include events that occur under the WECC Standard within the broad UF language. Following is straw language to be included in the first general paragraph of § 10:

So long as the requirements of the preceding sentence are met, an “Uncontrollable Force” may include and is not restricted to flood, drought, earthquake, storm, fire, lightning, epidemic, war, riot, act of terrorism, civil disturbance or disobedience, labor dispute, labor or material shortage, sabotage, restraint by court order or public authority, transmission interruptions that occur pursuant to WECC Standard IRO-006-WECC-1, and action or nonaction by, or failure to obtain the necessary authorizations or approvals from, any governmental agency or authority.

To conform the transmission specific language of § 10, the third paragraph would be modified as follows:

Except with respect for interruption of transmission service that occurs pursuant to WECC Standard IRO-006-WECC-1, Wwhere the entity providing transmission services for transactions under this Agreement and Confirmation interrupts such transmission service, the interruption in transmission service shall be considered an Uncontrollable Force under this Section 10 only in the following two sets of circumstances: …..

III. Sales of Reserves to Transmission Providers for Resale as Ancillary Services

As we have explained, the Avista restrictions apply to sales of reserves to transmission providers (other than an ISO or RTO) directly or indirectly. Sales to a non-transmission provider without an Avista tariff do not run afoul of the restrictions in theory, but concerns that such a purchaser would resell the reserves to a transmission provider are thought by some to dampen the market. A Member suggested that we provide optional language in Exhibit C, the sample Confirmation form, to preclude such resale. Straw language follows, including damages language:

Optional provision for sale of any Reserves as defined by NERC (check if applicable):

Purchaser represents and warrants that it purchases Reserves hereunder for self-supply, not for resale, directly or indirectly, to transmission customers under any open access transmission tariff (OATT). In the event Purchaser breaches this representation and warranty, notwithstanding Section 21.1 limiting the recovery of damages, Seller shall be entitled to recover from Purchaser an amount equal to the price of the Reserves sold under this Confirmation.