Legal Risks

Mark, as we discussed, I see one of the growing legal risks for Canada (and
perhaps elsewhere) resulting from "retail" deregulation and the pressure to
increase transaction flow/market scope in energy markets by transacting
behind and through the distribution company (or at "point of delivery").
Although generally speaking this is described as "retail", it also affects
"wholesale" as (i) EWS will manage risk for EES, and (ii) the distinctions
between "retail" and "wholesale" are not always clear (ex. depending on size
and complexity, traders/originators in EWS will do "point of delivery"
transactions).

The risks tend to be additional to the customary commodity, price, legal and
credit risk management in wholesale transactions, as they also involve: (i)
volume/load balancing risk between the counterparty and the Disco,
particularly for "all requirements", "use" or "load following" transactions
and particularly where the balancing obligation between the counterparty and
the Disco is "unhedged" or "mismatched" (ex. balancing with the counterparty
for excess or unused volumes may be at daily index on the date of
consumption, whereas balancing with the Disco may be at the monthly index for
the next month based on actual, estimated or aggregated data); (ii) terms and
conditions/tariff risk to the Disco (ex. the distribution terms and
conditions/tariffs pass a number of risks on to the commodity supplier, such
as obligations to continue delivery after counterparty default or
termination, options to the Disco to source supply after default or
termination, broad third party indemnifications to the Disco for conduct of
the counterparty, allocation of force majeure risk (that may differ from the
counterparty agreement); (iii) additional or incremental credit obligations
to the Disco; and (iv) pressure in these markets to used more simplified
(often government regulated) non-master contract forms - although the forms
used tend to be more unilateral to the commodity supplier.

The mitigant is to understand clearly both the formal and practical market,
rules, requirements, procedures, regulations and distribution terms and
conditions applicable to delivering the commodity behind and through the
Disco, if possible to get involved in shaping those in a proactive way
through the deregulation process, and developing risk management procedures
around the formal and practical requirements of the market.

For your risk memo you could briefly describe the risk as: "Point of
Delivery Risk (retail or wholesale) for energy commodities behind and through
the Distribution Company, including balancing commodity use between the Disco
and the customer, distribution tariff/terms and conditions risks, incremental
credit obligations between wholesale markets and the Disco, and commercial
and regulatory requirements for contracting."

Please call if you want to discuss further. Peter.