What is a NAESB Agreement?
NAESB agreement is an agreement that invokes the standards established by the North American Energy Standards Board (NAESB) in certain defined standards. The purpose of the NAESB agreement is to promote consistency and standardization of agreements among industry participants throughout the relevant natural gas and electric markets. NAESB is a membership-based nonprofit organization committed to standards development for the US natural gas and electric industries as well as global electronic business practice standards. Membership includes more than 2,500 industry companies and individuals as well as associations.
The Natural Gas and Electric Markets Organizations are together known as the Federal Energy Regulatory Commission (FERC) Approved Industry Standards Organizations (ISOs) under Parts 38 and 284 of the FERC regulations . The NAESB model forms are prepared by the authorized NAESB committees, become "nonbinding, unconsolidated standards" upon board approval, and serve primarily as guides or documentation in the drafting of contracts by market participants. The NAESB standards have traditionally been relied upon by industry participants and found acceptable to the FERC. The NAESB standards also are approved by the Organization of Arab Petroleum Exporting Countries (OAPEC).
The NAESB has approved NAESB agreements for a number of activities, including: Some transmission executives of RTOs and ISOs refer to the agreements as "tariff protocols," referring to their incorporation in the tariffs or market rules of the RTO or ISO. Because of this incorporation, the tariffs or market rules will refer to the NAESB agreements as the "standard agreements." Under FERC Order No. 676-H designating NAESB as an ISO, the FERC does not require it to seek approval of its standards or agreements but encourages voluntary compliance by RTOs and ISOs.
Elements of NAESB Agreements
The fundamental parts of NAESB agreements include provisions and clauses that address areas such as pricing, delivery conditions, and creditworthiness, which promote goals of uniformity and efficiency in the energy trading market.
The vast majority of NAESB agreements include similar key provisions and clauses, while also containing specific elements intended to address industry-specific concerns. The Sales Agreement, for example, is the most frequently used NAESB agreement. Its terms and conditions provide for specific procedures regarding offer and acceptance, as well as details about pricing and delivery. The QF-Only Terms and Conditions provide contract specific provisions for transactions involving qualifying facilities under the Public Utility Regulatory Policies Act ("PURPA"). The Scheduling Coordinator Tariff Terms and Conditions contain technical terms tailored to the role of the scheduling coordinator for power or gas services. The imbalance solution provisions contained in many NAESB agreements are another frequently used aspect, and deal with the reconciliation of imbalance allocations.
In an effort to maintain uniformity within the industry, NAESB members frequently schedule sessions where contract users can propose changes and revisions to aspects of NAESB agreements. Although these revisions require extensive reviews in order to maintain the standardization and consistency that are the hallmark of NAESB agreements, NAESB members have become comfortable with amending and modifying the agreements.
Why is NAESB Important in Energy Markets?
NAESB agreements are instrumental in achieving a key objective of each industry segment to promote transparency, efficiency, and reliability in energy markets. The documents constituting the NAESB Standards provide an invaluable body of work that assists NAESB partners in discussing and coming to consensus on a wide variety of issues, including technical, functional, and operational issues. NAESB’s resulting Standards provide significant advantages. Whether located in North America, South America, Europe, Africa, or the Asian Rim, NAESB Standards and Member companies have positioned themselves as a model for other industries to adopt similar organizational structures and Standard development processes.
Energy companies operating both domestically and internationally and often across multiple commodity sectors have consistency and harmonization of contracts as a common interest. These companies can rely on standard NAESB templates under discussion by members of the various NAESB groups. NAESB agreements and the "QO" qualification of operational quality standards is voluntary for the NAESB member companies that act as counterparties to a contract. However, updated member contracts should include the NAESB contracts as part of the evolving technology in which both hedging and physical power delivery must satisfy trading counterparties, customers, local regulators, and federal transmission entities. In the absence of mandatory NAESB Standards, for purposes of consistency and uniformity of interrelated requirements, the goal for NAESB was to allow companies to use the same or similar agreements for both physical and financial transactions.
The Impact of NAESB Agreements on Stakeholders
To start with the obvious, but often overlooked, NAESB agreements are not the same as FERC-approved tariffs. While NAESB agreements may be incorporated by reference in tariffs and actually "’become" tariff provisions, the NAESB agreements are not themselves FERC-approved and on file with the Commission. The content of NAESB agreements is entirely within the control of the NAESB and its members, subject disapproval by the participating regulators. Market participants should be aware that NAESB standards or agreements can be used as independent evidence of conduct. NAESB agreements are not just aspirational and can result in sanctions or penalties for violation.
Importantly, NAESB standards do not have force of law and their adoption and implementation is voluntary (even if successive iterations are sometimes automatic). Neither statutes nor regulations require electric public utilities to adopt the NAESB agreements. Power marketers and non-jurisdictional entities do not have to be a member of and incorporate NAESB agreements.
Yet, the effect of NAESB agreements is nonetheless pervasive. In order to transact business in the energy industry, market participants, including electric "public utilities," are required to comply with an extensive array of voluntary industry agreements, including NAESB standards.
Generally, members of the four NAESB membership sectors include a broad range of companies involved in the wholesale and retail sale of energy, including electric public utilities and merchant plants, power marketers and brokers, energy marketers and intermediaries, alternative energy producers, transmission and distribution service providers, generators, and end-use customers.
Because FERC views NAESB standards as generally applicable to all market participants, they are widely used in states that have restructured their energy industries. Even in traditional regulated states, the model agreements serve as templates for jurisdictional public utility tariffs.
Some argue that NAESB agreements are "voluntary" and therefore not binding. However, generally NAESB members have adopted standard agreements as part of their standard forms of service or standard rate schedules for which they have received Commission approval. For example, Standard 1.12.3 requires that transactions be executed using the WEQ Business Practices and procedures, which include the pro forma OASIS agreements. Therefore, parties operating in a structured market, where a market participant has received tariff or other regulatory approval of its use of NAESB standards, are unlikely to find any solace in the "voluntary" nature of NAESB standards.
For example, NAESB members have adopted WEQ standards like the pro forma Open Access Same-Time Information System (OASIS) agreement, which is made mandatory on covered transmission providers through FERC Order No. 889. Also, we note that Standard 1.3.5 of the WEQ Business Practices requires the Commission to be the final arbiter concerning any dispute regarding the interpretation of a WEQ business practice standard.
Updates and Observances –Ensuring Compliance with NAESB
Energy companies must remain up-to-date with the current NAESB standards in force for the upstream/downstream transaction (these documents can be found on the NAESB website). NAESB provides a list of currently active NAESB Standards and documents. When viewing this document one must keep in mind that as set out above, there are three versions of the NAESB standards: the NAESB Wholesale Gas Quadrant Standards, the NAESB Wholesale Electric Quadrant Standards and the NAESB Retail Gas and Electric Quadrant Standards. Energy companies are therefore advised to become familiar with the document naming conventions assigned by NAESB to each of the quadrants.
While industry standards set out by NAESB are not mandatory for the parties to a transaction, compliance with NAESB standards is a FERC policy established in Order No. 587-I on May 19 , 2000 and it is expected that FERC will issue future policy guidance on the conformance with "best industry practices" including NAESB standards. FERC also expects NAESB standards to be incorporated into appropriate tariffs or contracts governing the sale of energy. FERC stated in Order No. 587-I that the industry has expressed interest in conformance to NAESB standards and policies that "encourage conformance through voluntary compliance will serve the public interest."
In addition, FERC Order No. 888 on Open Access Non-discriminatory Transmission Service (Order No. 888) encourages transmission providers to follow generally accepted industry standards such as NAESB. FERC stated in Order No. 888 that "it is the Commission’s hope that adherence to a generic set of standards will benefit market participants by improving system reliability, promoting consistency in transmission systems, and enhancing the use of new technologies." Though Order No. 888 did not specifically direct the adoption of NAESB standards, FERC did mandate that Regional Transmission Organizations or Independent System Operators adopt business practice standards.
Challenges and Criticism
The challenges associated with NAESB agreements tend to be similar across its various model agreements. For example, the model agreements are subject to constant change as the industry continuously evolves and the rules are frequently updated. The revisions may not necessarily be consistent, making it challenging to determine which version of a model agreement is applicable or appropriate for a particular transaction. Additionally, NAESB offers no assistance for companies trying to decide whether to use the old or the new version of a model agreement or best practices document. While there appears to be a trend toward using the most recent version of a model agreement, NAESB does not expressly require its members to do so.
Another challenge is the broad, sweeping nature of these agreements as they tend to cover a variety of topics in great detail. These agreements are lengthy and complex, making it difficult for users to become adequately familiar with their requirements. It can also be confusing to the uninitiated to find yourself having to make cross-references throughout these agreements to other documents. Because these agreements are intended for general international use, the terms and conditions are often vague with regard to local law. Therefore, using a NAESB model document may require more negotiation to ensure that all regional concerns are addressed.
The length and complexity of these agreements can also leave parties dissatisfied with loopholes that permit a party to escape liability in certain circumstances. There are also common gaps, such as failure to consider insurance, force majeure rights, limitations on liability, and disaster relief assistance. Other common criticisms include the failure to verify that the necessary parties (shippers, transporters/distributors) have the technical expertise to execute the proposed transactions. NAESB has not accounted for issues involving international companies doing business in the United States. In some cases, common law jurisdiction questions remain, as NAESB does not address the issue of venue. Because NAESB model agreements do not contemplate the Foreign Corrupt Practices Act, much more attention should be given to the FCPA as NAESB model agreements become increasingly used in international contexts.
The Future of NAESB Agreements in an Evolving Energy Market
The future of NAESB agreements
As energy transactions continue to evolve at a rapid pace, so too does the need for NAESB agreements such that transactions are not disruptive to grid reliability. These changes require more flexibility and interoperability, which NAESB standards and agreements are well-equipped to address. As renewable generation and microgrids become more prevalent and market-responsive, the use of wholesale market energy hedges will require adaptation to support the full value of new clean technologies.
The application of NAESB agreements in the coming years will see the following developments:
Standards Facilitate Development of Innovative Technologies: As markets increasingly look to promote distributed energy resources as a means of achieving decarbonization goals, NAESB has been at the leading edge of formulating contractual frameworks that support and streamline this innovative technology, while also promoting the development of infrastructure that supports such technology.
Power Purchase Agreement (PPA) Standardization: As increasing levels of renewable generation enters the marketplace, PPAs that are procured through competitive RFP processes (or in some cases, state-mandated competitive solicitations) become ever more important . By incorporating and adopting NAESB standards, such agreements can both streamline contracting processes and promote the reliability of the systems to which renewable resources are interconnected.
Wholesale Market-Retail Market Integration: As the country’s electric grid becomes integrated across multiple regions, the structure of electricity sales contracts will need to evolve to support transactions across wide geography, from regional power markets to local distribution system operations. NAESB will continue to formulate appropriate standards and agreements to support the full spectrum of transactions across the grid.
Hedge Agreements for Energy Storage: Energy storage has the potential to radically transform electricity markets and grid reliability. In a future market where energy storage is widely deployed, energy storage providers will rely on transactions with traditional entities to maintain the utility properties of their services while the full range of the operational characteristics of those services is monetized in innovative ways. NAESB will continue to develop standards and agreements to support these transactions as they emerge.
NAESB agreements have historically been long-range plans, and it will be interesting to see how these developments manifest in the future.