North American Power Annex Added to the ISDA Master Agreement
August 28, 2003
On August 7, 2003, the International Swaps and Derivatives Association (ISDA) and Edison Electric Institute (EEI) published the North American Power Annex (Power Annex) to the ISDA Master Agreement. This publication is a result of the continuing effort by the ISDA and the EEI to restore confidence in energy trading markets through more efficient documentation of energy trades. To accomplish this goal, the ISDA has already published the European Gas Annex, the 2002 Energy Agreement Bridge (Energy Bridge) and several commentaries to these publications. The ISDA is also currently working on the North American Gas Annex.
The efficiencies are accomplished when parties who have already executed the ISDA Master Agreement (and the Schedule and the Credit Support Annex thereto) also enter into energy trades. For example, the Energy Bridge can be used by parties to cross-net multiple energy products under various industry standard agreements that they had previously executed, regardless of whether these standard agreements are used in the energy markets. Upon the occurrence of termination events specified in any of these various industry master agreements, all transactions documented under these master agreements can be terminated by using the closeout provisions of the ISDA Master Agreement. However, due to uncertainty in the U.S. bankruptcy law, there remains an open issue whether financial and physical transactions can be cross-netted against each other.
The Power Annex is a 10-page document amending the ISDA Schedule and can be used with the 1992 and the 2002 version of the ISDA Master Agreement. It was specifically drafted to facilitate the purchase, sale or transfer (on a spot or forward basis, or as an option) of physical power products and was developed to enable energy market participants to enter into deliverable power transactions although the Power Annex also allows subsequent settlement of power transactions without physical delivery. Thus, power transactions, as well as financial derivatives transactions, remain under the ISDA Master Agreement, which the counterparties had previously executed.
The Power Annex incorporates the standard terms and provisions in the power industry found in the EEI Master Power Purchase and Sale Agreement (EEI Master Agreement), although the specifics of each counterparties’ Power Annex are left for individual negotiation. For example, the parties may elect that outstanding power transactions and the credit support for such transactions will be covered by the Power Annex and the outstanding credit support provided for the outstanding power transactions will be covered by the already existing ISDA credit support. Further, the parties may elect to apply accelerated damages, choose different provisions regarding timeliness of payment, specify wholesale power tariffs, and apply or disapply the U.S. Federal Energy Regulatory Commission (FERC) standard of review (the Mobile-Sierra doctrine) of power transactions.
In addition, the Power Annex incorporates several new definitions unique to transactions involving physical commodities, such as power, and amends the ISDA Master Agreement to apply to physically settled trades. Also, the Power Annex incorporates power product definitions from the EEI Master Agreement (Schedule P).
The adoption of the Power Annex promotes continuity and standardization of industry terms, provides efficiencies for managing the collateral of counterparties and reduces documentation basis risk by utilizing an already executed ISDA Master Agreement between the parties without the need to negotiate additional agreements. Please refer to www.isda.org for the complete text of the Power Annex.
