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<title>November 2006: RECs' Scriveners</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p align="left"><b><u><br>
November 2006</u></b></p>
<p align="center"><font SIZE="6"><b>RECs' Scriveners</p></b></font>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/01/05</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
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<p ALIGN="LEFT"><b>A. Introduction</b></p>
<p ALIGN="LEFT">Inspired by the multiple authorship of the King James Bible
and just recently published hand-calligraphed and illuminated, but computer
line measured copy of same, a committee was convened by (but not exclusively
comprised of representatives of) the Emissions Marketing Association, the
American Bar Association Renewable Energy Resources Committee, and the
American Council on Renewable Energy. It produced a “Master Renewable Energy
Certificate Purchase and Sale Agreement.” Like its lineal ancestor it is
founded on a “new truth,” draws upon text written in several original
languages, and seeks to be universal in its application. Fortunately, it
only relates to the buying and selling of (more or less) specific goods, and
so it can be comprehended mostly with reason and with a little faith. I was
a co-chair of that committee.</p>
<p ALIGN="LEFT">As a mere introduction to the Master Contract’s
complexities, what follows is meant only to provide an overview of its
certain key concepts. As the King James folks may have ruminated, but never
stated, in Revelations, “the devil is in the details.”</p>
<p ALIGN="LEFT"><b>B. Background</b></p>
<p ALIGN="LEFT">“Renewable Energy Credits” (“green tags”) are non-energy
attributes that are determined to reside in electric power produced by
essentially non-fossil based generating sources. They were divined through
the intellectual process of “unbundling” (a legal term derived from viewing
all conceptualization of matter as a bundle of legal property rights
“sticks” which different parties may own), by proponents of the broad
hypothesis that one MW of “green power” has a variety of desirable
public-policy-type characteristics, besides running electric shavers, not
found in a corresponding MW of “non-green power.” Therefore, producers of
“green power” should be able legally to sell Renewable Energy Credits (a
generic term sweeping in state authored “renewable energy credits”.) The
validation of this presence of these valuable green power characteristics
may derive from state authorities acting pursuant to legislation (generally
styled “compliance”) or privately established (generally styled “voluntary”)
sources pursuant to protocols which have been developed voluntarily.
Acquisition by electric utilities of compliance credits assists their
meeting state and local statutory requirements; acquisition of Voluntary
credits helps meet the perceived present or future commercial needs, or
policy values, of those voluntarily wishing to support the principles on
which the concept of RECs has been established. Whether a REC of either type
may be sold separate from its MW is a subject of contract.</p>
<p ALIGN="LEFT">In principle, RECs, in turn, may be further fragmented to
reflect the fact that green power may reduce production of pollution
attendant on non-green power production. Such pollution may fall into
clearly defined statutory categories (i.e., subject to compliance “cap and
trade” regimens, like NOX and SOX, or subject to more fragmented pollution
regimens still assuming final legal form (e.g., green house gases, notable
CO2). Whether a REC atom may be so smashed by its owner in order to afford
legal pollution rights to multiple parties is a matter of contractual
agreement. </p>
<p ALIGN="LEFT">So many angels; such a crowded pin. Compliance and
Voluntary, legal and presumptively future legal characteristics, many
states’ programs, several RTO transfer regimes, non-profit voluntary
organizations, voluntary compacts, varying definitions. And in this temple
of values, willing buyers and sellers and merchants eager to make this
bazaar the greatest of an economist’s dream market, while avoiding making it
a lawyer’s dream — a legal framework subject to interpretation, dispute, and
negotiation. </p>
<p ALIGN="LEFT">To have such a market, its legal framework requires
“fungibility” of RECs and of RECs’ components. Per the ancient wisdom long
preceding King James, this requires a form of contract, so that the new
green rights might be bought and sold bilaterally, within a framework where
the laws of many jurisdictions and procedures of many voluntary
organizations can coexist. In short, the need was perceived for a “Master”
contract which parties could adapt to their needs. </p>
<p ALIGN="LEFT"><b>C. The Framework of the Master Contract</b></p>
<p ALIGN="LEFT">With this background, the terminology surrounding the humble
trade of buying and selling RECs under the “Master Contract” can be
comprehended. To buy and sell a REC one uses a “Product Order.” It may be
either a “Confirmation” (a simple sales document supported by the Master
Contract’s terms), or a Disclosure Document (a record traveling downstream
with the REC, describing in more detail the origin and taxonomy of the REC,
the procedures for its verification and the like) or a combination of both,
i.e. the firm sale of a specifically identified bundle of rights, some of
which have statutory foundation and some of which do not. Whereas State
Compliance trades today are simply “registered” on the applicable
governmental generation information systems for Voluntary market trades, the
transfer of a Voluntary attribute of a REC is validated by an “attestation”
which is provided for in the Schedule P Disclosure Document developed for
Voluntary sellers.</p>
<p ALIGN="LEFT">The ecumenical cornerstone of the Master Contract is the
seemingly blank non-denominational concept of the “Product”: that
which is to be traded, logically enough, pursuant to “Product Order,”
“Products,” are all RECs. The RECs may include “Environmental Attributes,
Verifications, Certifications, or other characteristics specified in the
Product Order using the Schedule P “Disclosure Document.” The drafters
had in mind the all-embracing definition of a “REC” used in California,
(which is defined in the Master Contract as “standard REC,”) but this
definition is not controlling. Specifically, the Guidance to the Master
Contract warns all parties to “review the statutory and regulatory language
of the Applicable Program,” and to satisfy themselves that the Product they
are buying and selling, and their manner of transacting, meet the
requirements of the Applicable Program.(The “Applicable Program” pursuant to
which a Product may be sold is a very broadly defined term, not limited to
“Governmental Authorities,” but applicable also to any persons providing a
market registry or reporting for a particular Environmental Attribute.) </p>
<p ALIGN="LEFT">The Master Contract contains a form of Certification
of Delivery or other compliance by the “Administrator” o fthe
Applicable Program; it can be supplemented by the Exhibit P “Disclosure
Statement” which “attests” to the appropriate application of a particular
voluntary “verification methodology” to assure that the REC attributes
described are present. Double counting is prevented by the exclusivity of
Schedule P definitions. </p>
<p ALIGN="LEFT">The Drafting Committee considered, but rejected, the concept
of adding to the Master Contract the REC definition of each state as a
Product descriptor to be checked off. They chose instead to let the Parties
to each bilateral contract represent that their particular Product complies
with the requirements of an Applicable Program — continuing state law, or
voluntarily promulgated program, as the case may be — and complies with the
particular “delivery requirements” of the Applicable Program, e.g.,NEPOOL,
PJM- GATS. The Parties must stick with their deal even if the applicable law
changes or the market for the Product radically shifts. If the Parties
choose to “unlock” the value of the RECs they are trading, they must do so
through the Schedule P Disclosure Document, which requires a specified
“Verification Provider” using a specified “Verification Methodology” to
measure REC-worthy activity and emissions avoidance, and to provide
“Verification” as well as “certification” of the verified RECs. </p>
<p ALIGN="LEFT">While a general matter, it is the Seller who is obligated to
represent and assume responsibility that the Certification is in compliance
with the Applicable Program; if Seller does not do so, Buyer is at risk. The
Verification Provider retains responsibility, however, for the accuracy and
efficiency of it work. That is not Seller’s or Buyer’s responsibility. Buyer
is essentially not at risk as to the character of the Product until after
the trade date where force majeure intervenes and precludes Seller
performance, or under circumstances where no Seller attraction is available.</p>
<p ALIGN="LEFT">The Master Contract offers different options with respect to
several contract clause provisions which the Parties may choose, and
which may be more or less suitable to different types of deals, credit
terms, choice of law and, critically — alternative types of dispute
resolution. Court (by election without jury trial), non-binding mediation,
or binding arbitration (which incorporates a California judicial reference)
are among alternative options which may be elected in particular
contracts. There is no meeting of the minds on a specific deal unless all of
these matters are agreed upon. Further room for extemporaneous, tailored,
bilateral change is also offered. Presumably, over time, common patterns of
dealings will emerge in this regard as well. The house of RECs has many
mansions and a Master Contract is not a Book of Common Prayer but of common
law. </p>
<p ALIGN="LEFT">The practicality of the use of the Master Contract rests
with the extent to which it can be applied in deeper and deeper rutted
channels of commerce and the extent to which private parties are comfortable
having recourse to private remedies. </p>
<p ALIGN="LEFT"><b>D. Conclusion</b></p>
<p ALIGN="LEFT">Clearly, preparation of the Master Contract has required a
massive amount of ingenuity to accommodate, using one broad
contractual framework, two kinds of basic definitional regimens (with
different types of validation and transfer mechanisms), numerous state RPS
laws with variances in their respective definitions, RTOs with different
tracking approaches, the commercial preferences and values of different
parties, and the need to fall within the framework of preexisting commercial
law for trading of other commodities and derivatives. Moreover, the drafters
have done so at a time when the prospects for new trading requirements
and regimes for arguably-unbundable, previously-unregulated pollutants such
as CO2, are just coming into focus. The Master Contract has tried to use
current definitions and terminology while preserving flexibility to change.
</p>
<p ALIGN="LEFT">Clearly, there are great depths in understanding to be
plumbed when we deal with two vital aspects of the Master Contract: </p>
<p ALIGN="LEFT">(1) What happens in different scenarios in the event of
non-performance of the Parties or changes in the legal framework; and </p>
<p ALIGN="LEFT">(2) How and by whom the “Disclosure Document” is adapted to
the numerous variables in bilateral transactions and shifting governance in
which those transactions take place. </p>
<p ALIGN="LEFT">The question, ultimately, is whether those who do deals can
meld together the various artifacts of those who write rules, because there
is enough popular demand to do deals and to engage in the kinds of
derivative transactions which accompany other commodity markets. It remains
to be seen if “REC’s Scriveners” have been wise enough to encompass all the
vagaries of the customs of commerce, the unpredictability of lawmakers, and
the virtually endless ability of data bases to accommodate both. </p>
<p ALIGN="LEFT">The King James Bible had the backing of a REX, and clergy
which acknowledged his right to promulgate it; the Master Contract does not.
With the changes now transpiring, it is not too much to suggest that a
single set of national definitions and their enforcement would obviate many
of the issues which seem likely to become case law and commentary on the
Uniform Commercial Code of the RECs Master Contract. In the meantime, the
Master Contract represents a major forward step toward that goal, and should
be welcomed by us all.</p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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