Ontario Standard Contract

Yesterday I attended the initial Ontario Standard Physical Bilateral Contract
(OSPBC) drafting committee meeting. A summary of the meeting follows:

The main debate in the meeting was with respect to whether "physical"
transactions were possible in Ontario given the market rules. Ontario Power
Generation Inc. (OPG) put forth the premise that all transactions involving
the pool are financial. I led the charge that the pool was simply a
settlement mechanism yet the underlying transactions are physical in nature.
OPG supported a form of master which essentially a much boiled down ISDA. I
supported the Canadianized EEI form that Greg has put together.
Jack Lubec of the IMO made a powerpoint presentation on how transactions are
settled and his interpretation of the physical/financial issue. A copy of
the presentation is attached hereto.
The group (which included TransCanada, TransAlta, AMPCO (industrials), Hydro
One (transco), the IMO, several consultants and lawyers) seemed unable to
agree with either position and decided that the market in Ontario was a
hybrid market (a position that in practice may be correct but in terms of
legal obligations is nonsensical).
The IMO advised that Revenue Canada does not take title to power, does not
take possession of power and the pool transactions are deemed not
"derivatives". Notwithstanding this direction, some in the group seemed to
accept the OPG assertion that as a generator can choose not to generate (in
which case the pool will supply on the generator's behalf and charge the
generator) and/or a would be load can choose not to receive (in which case
the pool treats this as a resale to the pool and pays the load for energy not
consumed) and that a supplier has no ability to guarantee physical delivery
that the market is financial. I refuted this premise but only found support
from TransAlta.
Notwithstanding the lack of consensus on the physical/financial issue the
group did agree with my position that many market participants did not have
the requisite corporate authority to do derivative or financial transactions
and those that did may not be comfortable with or even understand a financial
trading document. All in the group supported this position. Thus,it is
likely that the starting point, if not the Enron Canada EEI form, will be the
base EEI form. Many supported an Ontario only document but accepted the
position if possible a multi-jurisdictional standard base agreement would be
preferred.
The group tentatively accepted me and Dan Pastoric of Hydro One as the
co-chairs of the drafting committee. This is subject to confirmation at the
next meeting which is scheduled for December 6th.

Elizabeth - I suggest that you and I may want to prepare some sort of memo
setting out why the market is physical and not financial. I think that to
the extent that you (or someone in your group) can provide a commentary why
others pools (California, NEPOOL,...) are still physical markets, I may be
better equipped to convince the group.

Greg - I suggest that until we are closer to market opening in Ontario that
the form of power master that we circulate in Alberta not include the Ontario
Firm (LD) product definition as this will likely be modified through the
OSPBC process.

Regards
CJG