Introduction to the EEI Master Agreement
The EEI Master Agreement, or Edison Electric Institute Master Agreement, is a standard physical sales contract for energy commodities. Commonly used in trading transactions, it is a joint undertaking of the Edison Electric Institute ("EEI"), which represents shareholders of investor-owned utilities, and the Wholesale Power Market Development Task Force. The EEI Master Agreement contains standard terms and conditions for physical trades and addresses credit standards as well as default.
The EEI Master Agreement is designed to provide a stable platform to facilitate the collection of statistical data necessary to understand the derivatives markets. The EEI Master Agreement, along with the ISDA Master Agreement, includes standard provisions regarding events of default and remedies to be invoked upon the occurrence of an event of default . The EEI Master Agreement provides a framework on which buyers and sellers agree to do business and resolve disputes in a been there, done that manner.
While the parties may negotiate specific details of the transaction and the structure of a deal and include custom language within a transaction confirmation of a Master Agreement such terms and conditions are not part of the EEI Master Agreement itself. The Use and Interpretation of the EEI Master Agreement suggests that a transaction confirmation incorporates the applicable details of a specific transaction and outlines the terms agreed to by the parties. This approach accepts these documents as consistent with the EEI Master Agreement.
The EEI Master Agreement is widely relied upon by a number of energy companies and entities in the energy sector and interrelated sectors including but not limited to: traditional energy companies, utilities and financial companies.
Components of the EEI Master Agreement
The EEI Master Agreement comprises several key sections and clauses that set forth the rights and obligations of the parties.
The main sections of the EEI Master Agreement include: This section of the EEI Master Agreement is the main provisions for each individual transaction. It outlines the specific terms and conditions that apply to each specific sale or purchase of electricity and related products. The sections a utility will most likely closely analyze are the "General Terms and Conditions" and "Transactions" sections. These are the principal sections outlining contractual terms such as the amount of energy supplied, delivery points, payment terms, scheduling of the delivery and invoicing. Energy Schedule. The Energy Schedule is in the form of a schedule of the Contract confirming the Commercial Operation Date as well as the quantity and price of the energy sold or purchased in the transaction. While not a necessary part of the EEI Master Agreement, most energy sales are memorialized in "Transaction Confirmation" which would include terms from the sections outlined below: General Terms and Conditions. The General Terms and Conditions subsection outlines any general terms and conditions that are applicable to the Parties before, during, and/or after the term of the agreement. This section also usually includes certain default or termination terms including remedies for breach. The General Terms and Conditions subsection is the standard terms and conditions section. This is the most heavily negotiated section to ensure adequate protections for both Utilities and to ensure the risk between Utilities is placed equably. Special Provisions. This section will usually provide any exclusions to the General Terms and Conditions. The Special Provisions are used to modify any section of the General Terms and Conditions.
How the EEI Master Agreement Simplifies Energy Trading
The EEI Master Agreement serves as a comprehensive framework for efficient and standardized trade in the energy market. By providing a set of standard terms, conditions, and templates for transactions, it eliminates the need for each party to draft individual contracts, thereby reducing the time and cost associated with negotiating complex business transactions.
One of the primary advantages of the EEI Master Agreement is its flexibility. Depending on the provisions that the parties include, it can cater to a wide range of transactions including buy/sell agreements, power purchase agreements (PPAs), and financial hedges. This adaptability allows companies to use the same agreement across different jurisdictions and market segments, thus establishing a common throughout their organization.
Furthermore, one of the hallmarks of the EEI Master Agreement is the concept of netting. Under this provision, if both parties owe each other money at the time of termination, only the amounts owed are exchanged. That is to say, the lower payment is satisfied from the higher payment. This is an important feature, particularly in the case of terminating events, as it minimizes the risk for the debtor and maximizes the protection for the creditor.
Another beneficial aspect is the credit support arrangement. Because the EEI Master Agreement can be used by counterparties with varying credit quality, it incorporates provisions for providing credit support in the form of cash collateral, letters of credit, or parent guaranties to mitigate the risk of default. As such, the agreement draws potential buyers of energy into the marketplace and boosts the number of transactions, consequently enhancing liquidity and competition in the energy industry.
Moreover, the EEI Master Agreement adheres to the principle of a provision that allows either party to amend certain provisions of the agreement, provided that notice is given to the other party. This allows for the modification of the terms of the agreement in the event of changes in law, a change in the risk profile of the generating unit or plant or an extraordinary change in market prices.
In summary, the EEI Master Agreement promotes efficiency and predictability in the energy market by facilitating energy transactions using a consistent document. This helps standardize terms and conditions across markets and geographies, while providing flexibility to tailor deal terms. Furthermore, netting and credit support features minimize credit risk, while the ability to amend term allows for adaptation to changes in the market.
Typical Modifications and Additions
Depending on industry standards, business practices, or regional requirements, parties may seek to modify various provisions of the EEI Master Agreement. For instance, parties may wish to modify the default creditworthiness thresholds set forth in the Receivables Annex to the EEI Master Agreement to suit their specific contracting needs, or may wish to revise the payment terms or calculation of Default Supply Price for Delivered Energy set forth in Annexes A-1 and A-2 of the EEI Master Agreement (or the EEI Master Agreement – Canadian Province version). Such changes may be implemented through the use of the EEI Credit Risk Management System or through the use of an annex addendum. In the case of the creditworthiness standards, for example, the parties have flexibility to either adjust the Minimum Rating and Set-By Dates expressly set forth in the Receivables Annex or make other specific adjustments by way of a credit default swap annex addendum to the EEI Master Agreement. Other customary changes to the provisions of the Annexes to the EEI Master Agreements include adjustments to index pricing provisions (other than those expressly set forth in the EEI Master Agreement) to account for specific regional index pricing conventions that may apply (particularly to Delivered Energy), and purchase price adjustments for Purchased Power to account for, among other things, participant fees, or sales tax.
Legal Implications and Controversies
Disputes arising out of or related to both the EEI Master Agreement and the underlying Schedule(s) may be subject to a point of contention between the parties. Therefore, a discussion of dispute resolution mechanisms is necessary prior to agreeing to the terms of an EEI Master Agreement.
As noted in the above section, the general jurisdiction of transactions under the EEI Master Agreement is designated as a court located in the State of New York, or New York City. New York courts have been used primarily as the forum for litigating disputes between the parties to the EEI Master Agreement. As with choice of law clauses, this designation is not entirely enforceable. However, if specific litigation terms are not included in the EEI Master Agreement, a party’s choice for the litigation forum in a jurisdiction is generally enforced.
The arbitration clause included in the EEI Master Agreement provides for arbitration of certain disputes. Specifically, Section 6.09 of the EEI Master Agreement states, in part, that functions will be performed "in accordance with law, custom, tariff or regulatory order or rule," excepting from this clause "any function which the parties have elected to perform subject to [arbitration]." Section 6.12 provides that parties must submit disputes arising under certain sub-parts of the EEI Master Agreement to binding arbitration, and section 6 . 14 limits the scope of matters subject to arbitration to those disputes enumerated in the arbitration provision (excluding disputes relating to third-party liability, bankruptcy, covenants and representations and warranties), which always presents the possibility of litigation in addition to arbitration.
Pursuant to section 6.16 of the EEI Master Agreement, these arbitration terms are governed by the rules adopted by the American Arbitration Association ("AAA"). The rights of the parties, however, are governed by state or federal law as the case may be. As litigation in state or federal court can present less risk of collusion than private arbitration, parties may wish to engage in litigation where they can influence the outcome of the proceedings.
Disputes relating to pasture agreements, sale and purchase of generation equipment and sale and purchase of telecommunication systems are specifically subject to arbitration pursuant to the terms of the EEI Master Agreement. While any other dispute may be submitted to arbitration by agreement of the parties, disputes regarding covenants and indemnities of each party are subject to litigation and do not fall within the scope of the EEI Master Agreement’s arbitration provision.
Parties to the EEI Master Agreement may also wish to consider certain alternative dispute resolutions provisions, a cautionary measure that does not imply an intention to resolve disputes through arbitration or litigation. A venue provision is also suggested in the case that litigation cannot be avoided.
EEI Agreements Around the Industry: A Comparison
The EEI Master Agreement is, in many ways, similar to the ISDA Master Agreement, the primary difference being that the ISDA Master Agreement has been used for much longer than the EEI Master Agreement and is much more widely known. The differences between the EEI Master Agreement and the ISDA Master Agreement generally lie in the representations and warranties and covenants that each agreement imposes on its parties. Another difference between the two agreements is that the ISDA Master Agreement provides for an international standard for netting of collateral, while the EEI Master Agreement does not, meaning that the collateral amount for a particular trade can be determined by netting up all transactions, including the accrued but not yet due payments, if all transactions are governed by the ISDA Master Agreement, whereas the collateral amount for a particular trade governed by the EEI Master Agreement is generally determined by the amount actually remaining to be paid under the contract (e.g., relying on Exhibit G rather than the accrual). The Master Power Purchase and Sale Agreement created by PJM and ISDA is based on the ISDA Master Agreement and is used widely in PJM. The Western Systems Coordinating Council Energy Transactions Forum ("WECF") and the Electric Power Credit Producers ("EPC") use versions of the EEI Master Agreement in the western United States.
The Future of EEI Agreements
As the landscape for energy trading continues to evolve, the EEI Master Agreement is also expected to evolve. Here are some of the trends and potential changes we may see:
Advances in Technology
As technology has advanced, so do the modes of communications between trading entities. Digital, as well as more traditional methods, are now used to execute trades. The EEI Master Agreement will likely continue to adapt to these changing modes of communication to meet the needs of its trading entities.
Blockchain
Recently, blockchain technology has gained traction in the energy trading world. Blockchain enables trading parties to execute trades directly with each other without the security and intermediary services provided by the EEI Master Agreement. However, it is important to note that under an EEI Master Agreement, a member trades with the market generally, not just one of its Members. As a result, even if trading parties engage in a trade on a blockchain, they likely will not do so through the blockchain alone. Instead those transactions are typically affected by using the EEI Master Agreement , in conjunction with a blockchain.
Increased Regulation and Compliance Monitoring
With an increase in trading activity comes increased regulation for members of the energy trading market. While members of the energy trading market already must comply with FERC, NERC, SEC and CFTC regulations, amongst many others, there is a growing need for enhanced transaction monitoring to ensure members are complying with all applicable laws and regulations. This need is not only imperative to the regulators but also to protect the members themselves. With compliance monitoring, the need for greater protection may create a demand for alternative credit enhancements.
Innovative Credit Enhancements
Because the EEI Master Agreement was designed to govern members transacting with each other, the most common credit enhancement tool is a guarantee. However, in light of the recent market volatility, alternative credit enhancements, such as letters of credit, risk management plans, and corporate net worth provisions, may become more attractive to members. These alternative credit enhancements allow for increased flexibility in the calculation of exposure and settlement amounts, as well as allow a member’s creditworthiness to be "watched" through daily movements in their stock prices, which may alleviate some risks to the trading entity.