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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.















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Washington Viewpoint by Roger Feldman

November 2006

RECs' Scriveners

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2008/01/05)

A. Introduction

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.

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.”

B. Background

“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.

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.

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.

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.

C. The Framework of the Master Contract

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.

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.)

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.

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.

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.

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.

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.

D. Conclusion

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.

Clearly, there are great depths in understanding to be plumbed when we deal with two vital aspects of the Master Contract:

(1) What happens in different scenarios in the event of non-performance of the Parties or changes in the legal framework; and

(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.

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.

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.

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.


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