Table of Contents

I. INTRODUCTION

II. GOALS

III. PROCEDURES USED

IV. ANALYSIS OF THE PRESENT LAW

V. SYSTEM FEATURES AND LESSONS LEARNED FROM THE DEVELOPMENT

VI. EVALUATION OF SOFTWARE

VII. CONCLUSIONSI. INTRODUCTIONDuring the week of June 22 - June 26, 1998, many states in the East and Midwest experienced unusually hot temperatures, and electricity prices skyrocketed. Temperatures were in the upper 90s to 100s from Nevada to South Carolina. In the Southeast, hourly and next day electricity prices rose to more than $5,000/MWh during certain hours. These prices were an order

of magnitude 100 - 200 times greater than the $30-$50/MWh average price in previous summers. (2) Prices exceeded $7,500/MWh in the Midwest, which experienced an acute shortage of supply due to transmission line unavailability. (3) Utilities in the Midwest asked residential and industrial consumers to conserve power. (4) At one point during the heat wave and power supply crisis, it seemed that Wisconsin and Ohio would experience black outs or brown outs. (5) Some power marketers defaulted on their power sales contracts. (6) Those who defaulted will either have to pay contractual damages or seek bankruptcy protection. (7) The high volatility of electricity prices and scarce supplies during peak consumption periods has focused attention on utilities' contingent plans to curtail power when required. Hot temperatures and high demand are not the only reasons utilities curtail power. Electric utilities sometimes interrupt or curtail power on a sales contract due to an unforeseen loss of generating capacity or transmission lines. But in these circumstances, the utilities' marketing and trading staff will attempt to mitigate disruptions and continue with the electricity sale. (8) For example, suppose the transaction involved the sale of a 100 MW flow of power during the 21 business days of a given month, and the supplier was unable to meet its obligation under the contract on two business days. The transaction could be restructured in several different ways. First, the parties might agree to make up the difference by extending the contract beyond the end of the month and into the first two business days of the next month. Second, the supplier might agree to sell the supplier some larger quantity of weekend or off-peak power that would equal the value of 100 MW during the two business days. Third, if the purchaser was able to buy the electricity on the open market at a price equal to or less than the contract price, the parties might agree to adjust the total amount due under the contract but otherwise leave its provisions in tact. The deal could be restructured in many other ways, limited only by the parties' creativity. In order to mitigate damages and restructure the transaction, the business staff must understand the legal consequences of various terms concerning power disruptions in their sales contracts. Legally, utilities may curtail so-called nonfirm power without incurring liability for damages. In contrast, sales of firm power imply the seller will pay liquidated damages in the event of an inability to supply. Usually the liquidated damages will cover the cost of purchasing electricity, or reselling it in the event of a buyer's default, on the open market. The U. S. Supreme Court described the distinction between firm and nonfirm power as follows:Because the amount of power generated by BPA [the Bonneville Power Administration] depends on streamflow in the Columbia River system, BPA cannot predict with accuracy the amount of power that it can generate. Accordingly, BPA historically has sold two types of power. "Firm power" is energy that BPA expects to produce under predictable streamflow conditions. "Nonfirm" power is energy in excess of firm power, and is provided only when such excess exists. (9)At present, utilities purchase both firm and nonfirm power from each other. The utilities plan for possible interruptions in supply of the nonfirm product by having one or more of their generating plants on standby status. But even with the best of plans, supplies of firm power will sometimes become unavailable and lead to a breach of a power sales contract. In principle, the rules used to determine liability for breaches in electricity sales contracts could be programmed into an expert system,(10) which would advise end users about possible consequences of a power disruption. This article describes the development of such a system. The expert system takes the user through approximately twenty provisions pertaining to energy curtailment drawn from electricity sales contracts. Each of these provisions comprises either an actual breach or a potential breach of a power sales contract. The expert system offers some insights into both the buyer's and the seller's rights and responsibilities. II. GOALSThe expert system was designed to answer business staff questions about electricity curtailment and thereby may reduce the volume of inquiries directed to a utility's in-house counsel. The expert system's knowledge base contained sufficient rules to permit the system to analyze conditions and draw a legal conclusion. The system then conveyed this conclusion in an easily understood format to end users who typically have years of industry experience but no legal training. Another goal of this research was to examine the suitability of this subject matter as a domain for expert systems. (11) Unlike other areas of the law where the knowledge base could draw upon statutes, regulations, and case law for its rules and fact patterns, the business transactions conducted by electric utilities have practically no case law and no statutory law for guidance. The lack of case law stems in part from the utilities' former role as heavily regulated monopolies in their respective geographic areas. The utilities' transactions were subject to review by state and federal regulators, who ensured that electricity was continuously supplied to the public despite curtailments, disruptions, or other outages that the utilities experienced. If a contract breach forced a utility to purchase electricity at a higher price from another vendor, these costs could generally be passed on to rate payers as part of the ordinary costs of doing business. Few disputes concerning the terms of electricity sales contracts and the effect of a breach ever rose to the point of litigation. The lack of litigation on power sales in the formerly regulated power industry can be seen in the results of an on-line legal database search of all state and federal cases using the keywords "electric util!", "sale!", and "breach" in the same paragraph. From 1945 to 1975, no cases turned up in the search. In 1976, one case turned up. (12) The next case occurred thirteen years later in 1989. In all, this search yielded approximately 12 power sales cases out of scores of thousands of power transactions over the period 1945 - 1997. (13) Admittedly, this search might have failed to pick up all cases relating to power sales disputes due to the keywords used in the search,(14) but it does reflect the reality that regulated electricity sales were seldom the object of litigation. In the absence of statutory and case law guidelines,(15) utilities apply standard principles of contract law to formulate terms for their power sales contracts. Their transactions also follow utility industry norms and practices, which meant an expert system developer (also known as a knowledge engineer) had to learn these unwritten norms and standards before he could understand the physical and legal consequences of a curtailment. III. PROCEDURES USEDThe expert system was designed to function as a stand-alone system or as a subroutine of a large system. The system was encoded in the expert system shell Natural Language Expert System Builder (NLESB),(16) which was chosen for the following reasons:The program files are sufficiently small to load onto a laptop or other computer with limited memory. The compiled, executable code requires no supporting software or licensing agreements. Multiple databases can be easily accessed, manipulated, and maintained. The program would accept propositions, rules, and notes written in ordinary English, and even accept verbatim excerpts from the contracts when desired. Unlike other expert system shells, NLESB requires that propositions entered into the system be written in a "normalized" form. (17) Therefore, the first step in the expert system development was to recast the contract excerpts into the appropriate form. The normalized form places ordinary text into an outline in which the causal relationships between propositions are highlighted and clarified through the use of logical operators such as IF/THEN, OR, AND, NOT, and IFF (If and only if). To transform ordinary text this way, first the Boolean algebra operators (AND, OR, NOT) and logical expressions (IF, THEN, IFF) should be capitalized as they appear in the text, and propositions that attach to those expressions should be set apart using some convenient notation. Highlighting key terms this way will aid the knowledge engineer in finding the causal relationships between propositions. For example, the contract excerpt,Each arrangement, if any, that seller makes to resell energy during a Breach Period may not exceed 48 hours in duration, unless buyer indicates that it will not resume taking energy after the 48 hour period has expired. Would be initially edited as follows:IF | [strikeout: Each arrangement, if any, that] [the] seller [arranges] to resell energy during a Breach Period [caused by the buyer] | AND | [strikeout: may not exceed 48 hours in duration, unless] [the] buyer [has NOT] indicate[d] that [the buyer] will NOT resume taking energy after the 48 hour period has expired | THEN | [the seller's arrangement to resell energy may NOT exceed 48 hours in duration. ]This edited excerpt is then placed into outline form using particular spacing, indentation, and numerical conventions(18) of normalization as follows:RULE 15IF(1) the seller arranges to resell energy during a Breach Period caused by the buyer, AND(2) the buyer has NOT indicated that the buyer will NOT resume taking energy after the 48 hour period has expired,THEN(3) the seller's arrangement to resell energy may NOT exceed 48 hours in duration. This rule is listed as Rule 15 in the Appendix. Several comments are now required about Rule 15. Scholars in the artificial intelligence and law field have found that normalization often eliminates certain logical ambiguities in the wording of statutes or legal documents that the parties never intended. (19) For example, what happens under Rule 15 if the buyer does indeed indicate that it will not resume taking electricity after the 48-hour Breach Period? The contract is silent on this condition. However, industry norms and practices say that the seller may arrange, obviously, to resell the electricity for more than 48-hours duration. To clarify the consequence of the buyer's decision not to resume purchasing after 48-hours, an additional rule was added to the knowledge base:Rule 17IF(1) the seller arranges to resell energy during a Breach Period caused by the buyer, AND(2) the buyer has indicated that the buyer will NOT resume taking energy after the 48 hour period has expired,THEN(3) the seller's arrangement to resell energy may exceed 48 hours in duration. A rule added by the knowledge engineer, but not contained in the original source material, is called a supplemental rule. Humans with years of industry experience would know how to interpret the contract clause relating to the 48-hour limitations on resale arrangements, but the expert system had no way of knowing the consequence of the buyer's decision not to accept delivery until Rule 17 was added. Furthermore, the contract terms and Rule 15 only applied to a breach caused by the buyer. An ambiguity remained as to the buyer's rights and responsibilities for a breach caused by the seller. It turns out the buyer would not face a 48-hour limitation on his alternative arrangements, as explained in supplementary Rule 16. VII. CONCLUSIONSExpert systems can assist with legal analysis of power curtailment decisions. Theese systems offer various advantages and disadvantages depending on the types of contracts being analyzed. The more an utility or power marketing firm uses the same wording in its power sales transactions, the more an expert system can save time and money in eliminating routine calls to in-house counsel. Changing terms in power sales contracts requires updating an expert system knowledge base. At present, traded products in the electricity markets are evolving rapidly. Products types that used to be thinly traded (illiquid), such as options on electricity forward contracts, are becoming more actively traded (liquid) as more firms learn about using derivatives to hedge operational and price risks. The knowledge base of an expert system would have to be updated to reflect the terms associated with a new product type. If the expert system knowledge base contains rules that apply to nonfirm energy, firm energy, and capacity, then the expert system should be able to analyze the effects of curtailing one of these products. However, a problem with ambiguity remains for expert systems, in general, and those applied to the law, in particular. This article has discussed at least two separate forms of ambiguity. The first is logical ambiguity and deals with the causal relationship between premises and consequences. In Section 3, we explained how the process of placing ordinary legal text into the normalized form often highlights latent ambiguities or implied logical relations in the original text. "Logical ambiguity is present when it is unclear how the concepts are to be combined to form complex propositions and arguments. "(26)The second major source of ambiguity is the choice of words or legal terminology. As mentioned in Section 3, some contracts may contain the phrase "the buyer causes a breach," while others use the phrase "Breach Period" or "a breach has occurred. " Even if the logical ambiguity could be eliminated, some residual ambiguity in diction would remain. "An expert system employing such terms may still operate, but judgment will be required on the part of the user in answering the questions put by the computer. "(27) Experts systems can be used as a tool to educate business staff and other non-lawyers about the legal consequences of curtailing power, but they are no substitute for lawyers and human judgment. For that reason, end users would need to confirm the conclusions they draw from an expert system with the utility's in-house counsel. Otherwise, they risk the possibility that they failed to notice a key term in the contract or perhaps answered one of the expert system questions incorrectly. Having confirmed the legal consequences with a lawyer, a business staff member could then proceed under the same type of contract to analyze the legal consequences of curtailing power and recommend strategies without consulting the lawyer each time. Expert systems will never replace lawyers or allow companies to operate without a full-time legal staff. An expert system can make a mistake if the knowledge engineer has encoded erroneous legal deductions or left in too much logical ambiguity. If a manager relies on the expert system conclusion and it turns out to be wrong, then his or her firm will suffer the same consequences that one might anticipate when a lawyer gives wrong advice. But the simple fact remains that a person does not need a law degree or a license to practice law in order to know that nonfirm power may generally be curtailed without legal consequences or that a supplier may have to pay liquidated damages if it curtails firm energy. An expert system can help educate the nonlawyer into understanding how legal conclusions are drawn and what key terms in a contract affect liability for curtailment. In the same manner that a lawyer needs to study recent developments to keep abreast of changes in the law, so does the knowledge base of the expert system need periodic updating. Many lawyers have no idea that expert systems have been applied to the law, yet these applications have existed for many years. A professional society has been formed to study the impact of artificial intelligence methods on the law, and their journal, Artificial Intelligence and Law, presents state-of-the-art modeling designs and descriptions of working expert systems. I am happy to report that the law of power sales contracts appears to be a suitable domain for expert system development, and hopefully this news will encourage others, both in and out of the power industry, to build similar systems for their own transactions. Cite As: Michael Guth, An Expert System for Curtailing Electric Power, 3 W. Va. J. L. & Tech. 2. 4 (March 15, 1999) - An Expert System for Curtailing Electric PowerDr. Michael A. S. Guth, Ph. D. , J. D. , has been a risk management consultant to the power and gas industry for five years. In this capacity he directed Middle Office (financial risk control) operations for two trading floors. His favorite part of risk management is "risk advising" with traders and marketers, in which he assists the front office staff to develop profitable trading and long-term marketing strategies. He is a financial quant and derivatives specialist, particularly for options on power and gas. For more information see http://riskmgmt. biz/ - An Expert System for Curtailing Electric Power. htm and http://riskmgmt. biz/power. htm

Author:
Dr. Michael A. S. Guth