Written by
Javan James
Associate
As states stand up their own regulators, counterparties face two rulebooks at once. Drafting considerations for supply and offtake agreements.
Discuss this matter →As states stand up their own electricity regulators, counterparties in the same transaction increasingly answer to two rulebooks at once. The drafting has not caught up, and the agreements now in circulation still assume a single regulatory centre.
What the transfer changed
Regulatory authority over intrastate electricity markets has moved, state by state, to state commissions. The consequence for contracting parties is not merely a change of address for filings. Tariff methodology, licensing categories, metering standards, and dispute forums may all differ between a state regime and the federal one, and a project that touches both is subject to both.
The three clauses that break first
Change in law. A definition drafted against federal regulation alone will not capture the establishment of a state commission or its first tariff order, which is precisely the event most likely to affect the economics. The definition needs to reach subordinate state instruments and to distinguish a change in law from a change in a regulator's discretionary practice.
Tariff and pass-through. Where a supply agreement passes regulated cost through to the offtaker, the drafting must identify which regulator's order governs, and what happens when two orders conflict. A silent contract leaves the risk with whoever is holding it when the conflict arises.
Dispute resolution. A clause naming the federal regulator as first forum may now be pointing at a body without jurisdiction over the dispute. Arbitration seated commercially, with regulatory questions carved out to the correct commission, is the more durable structure.
The question is no longer which rules apply. It is which rules apply to which part of the same project.
Licensing at the boundary
Projects that generate in one state and deliver across a boundary, or that sit within a state but connect to the national grid, need a licensing analysis done early rather than assumed. Sequencing errors here are expensive because they are discovered at financial close.
Practical drafting points
Define change in law to include state instruments and first-time regulatory establishment
Nominate the governing regulator expressly, and provide for conflict between orders
Carve regulatory determinations out of the arbitration clause rather than ignoring them
Fix metering and settlement standards by reference, not by regulator, so a transfer does not void them
Diligence the licensing position across every boundary the electrons cross
This note is a general commentary on the law as at the date of publication. It is not legal advice and should not be relied upon in place of advice on your own facts. For guidance on a specific matter, speak to one of our lawyers.
