What’s This in My Supply Contract?

by Scott Armbruster

What the hell are these terms listed in my electricity supply contract? It lists many different cost components such as: Capacity Performance, FERC 745, Nodal Congestion, Winter Reliability, Transmission Enhancements, Line Losses, Auction Revenue Rights, Material Adverse Change and that’s just half of them. Are these included in my price? Do I need my legal team to review this?

Electricity supply agreements can get a little confusing, especially when reviewing these agreements are not your primary job responsibility. An all in fixed price consists of several cost components that can be: included, passed through, adjusted, or not even applicable. And that is just for pricing. This doesn’t include the default language, limitations of liability, material adverse change, change in law, etc.  It can be so confusing that many customers try to utilize in-house legal teams to review energy contracts.  But is that the best option?

It has been Choice Energy Services experience that utilizing customer’s internal legal team can be an ineffective process. These legal teams understand legalese and standard contract provisions, but typically do not have experience with the energy related provisions of a contract. This may significantly hinder contract review efficiency and may end with the energy related contract provisions being misinterpreted or skipped over completely. Proving to be an inefficient use of a counsel’s time, which as well all know is not inexpensive.

Unlike natural gas, there is no North American Energy Standards Board (NAESB) contract, so each retail supplier’s contract should be reviewed for non industry standard provisions.  It’s understandable that all retail suppliers strive to protect themselves from unforeseen price risk relating to FERC approvals, customer load profile changes, and other unavoidable changes. These contracts typically change annually as the retail suppliers continue to adapt to the ever changing market. Having an experienced energy consultant to help interpret the contract, quantifying risk, and recommending a path forward is a key part to any energy strategy.

Confidential: Choice Energy Services Retail, LP.