Accumyn’s Stephen Traicoff Performs Analysis of Multi-Year, Fixed Price Gas Sales Contract

Accumyn’s Stephen Traicoff Performs Analysis of Multi-Year, Fixed Price Gas Sales Contract

The deregulation of the California energy markets, intended to provide consumers with competitive energy prices, had the unintentional result of allowing market manipulation and inducing significant volatility in power and gas prices. During this time, several regulated power and gas utilities became active, via unregulated affiliates, in the commercial trading and retail marketing of power and gas to small-scale commercial customers. Following a dramatic run-up in prices in late 2000 and early 2001, these unregulated affiliates attempted to lock in multi-year term, fixed price gas sales with the strategic view that gas prices were set to precipitously collapse; indeed, this price collapse was being realized by May of 2001.

One customer, a non-profit Catholic charity hospital system, engaged Accumyn’s Stephen Traicoff to assist in an arbitration proceeding with an unregulated gas retail marketing and trading arm of a gas utility. As a natural gas, energy, and commodities trading consultant, Mr. Traicoff analyzed the existing evidence concerning the alleged agreement between the hospital system and the retail affiliate, comparing the execution of the alleged agreement to standard industry practice.

In its overriding haste to lock in the two-year fixed price natural gas supply contract with the hospital system, the retail affiliate neglected to send out a written confirmation of the alleged sale in a timely manner and in accordance with standard industry practice. It is necessary to send out a written confirmation promptly, usually within three business days, so that the parties bound by the contract have time, usually within three to five business days of receipt, to review the contract and dispute its content. The hospital system had always maintained that it never agreed to a deal, which was supported by the fact that written confirmation of the deal did not occur within the standard time frame and in accordance with state law. In fact, a written contract was sent to the hospital system some two months after the alleged agreement took place and the retail affiliate began billing the hospital system at the inflated two-year fixed price. Had the affiliate sent the confirmation within the prescribed window, it would have allowed the hospital system to dispute the confirmation or begin action to mitigate possible damages to either party.

Moreover, a review of the transcripts of the recorded conversations between representatives of the retail affiliate and the hospital system revealed that the natural gas buyer did not actively accept or agree to the proposal offered by the affiliate.

In addition to opining on commercial standards regarding natural gas transactions, Stephen Traicoff critiqued the plaintiff’s damage calculations and provided alternative estimation of damages based on natural gas forward price curves. Assistance provided to the defendant’s counsel also included responding to and propounding discovery, reviewing documentation, and preparing the arbitration plan, the result of which forced a favorable settlement for the client, the hospital system, and avoided nearly $4.5 million in potential payments.