10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2007

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number 001-32239

COMMERCE ENERGY GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	20-0501090 (I.R.S. Employer Identification No.)
600 Anton Boulevard, Suite 2000, Costa Mesa, California (Address of principal executive offices)	92626 (Zip Code)

(714) 259-2500
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one)

Large Accelerated Filer o Accelerated filer o Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of March 9, 2007, 29,752,576 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

COMMERCE ENERGY GROUP, INC.

Form 10-Q

For the Period Ended January 31, 2007

Index

		Page
Part I —	Financial Information		1
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2007 and 2006		1
	Condensed Consolidated Balance Sheets as of January 31, 2007 and July 31, 2006		2
	Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2007 and 2006		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
Part II —	Other Information		22
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.	Defaults Upon Senior Securities		22
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 5.	Other Information		23
Item 6.	Exhibits		25
Signatures			27
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.9
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

COMMERCE ENERGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended					Six Months Ended
	January 31,					January 31,
	2007		2006			2007		2006
Net revenue	$	92,644	$	72,654		$	163,152	$	137,022
Direct energy costs		78,112		68,892			138,563		125,020
Gross profit		14,532		3,762			24,589		12,002
Selling and marketing expenses		2,607		1,228			4,845		1,926
General and administrative expenses		9,637		6,847			17,484		14,456
Income (loss) from operations		2,288		(4,313	)		2,260		(4,380	)
Other income and expenses:
Interest income, net		251		201			662		488
Net income (loss)	$	2,539	$	(4,112	)	$	2,922	$	(3,892	)
Income (loss) per common share:
Basic and diluted	$	0.09	$	(0.13	)	$	0.10	$	(0.13	)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1

COMMERCE ENERGY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

	January 31, 2007			July 31, 2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,292		$	22,941
Accounts receivable, net		52,369			30,650
Natural gas inventory		3,960			4,578
Prepaid expenses and other current		4,586			6,827
Total current assets		68,207			64,996
Restricted cash and cash equivalent		10,595			17,117
Deposits		1,365			2,506
Property and equipment, net		7,474			5,866
Goodwill		4,247			4,801
Other intangible assets, net		7,041			3,790
Total assets	$	98,929		$	99,076
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,728		$	26,876
Accrued liabilities		7,409			5,867
Total current liabilities		32,137			32,743
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock — 150,000 shares authorized with $0.001 par value; 29,632 shares issued and outstanding at July 31, 2006 and 29,762 (unaudited) at January 31, 2007		59,114			58,849
Accumulated other comprehensive income (loss)		(457	)		2,271
Retained earnings		8,135			5,213
Total stockholders’ equity		66,792			66,333
Total liabilities and stockholders’ equity	$	98,929		$	99,076

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2

COMMERCE ENERGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six Months Ended
	January 31,
	2007			2006
Cash Flows From Operating Activities
Net income (loss)	$	2,922		$	(3,892	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		714			544
Amortization		1,008			553
Provision for doubtful accounts		2,200			1,708
Stock-based compensation expense		266			340
Changes in operating assets and liabilities:
Accounts receivable, net		(23,918	)		(11,976	)
Inventory		617			482
Prepaid expenses and other current assets		1,303			(3,471	)
Accounts payable		(2,147	)		(2,395	)
Accrued liabilities and other		630			3,998
Net cash used in operating activities		(16,405	)		(14,109	)
Cash Flows From Investing Activities
Purchase of property and equipment		(2,322	)		(1,394	)
Purchase of intangible assets		(4,217	)		—
Sale of intangibles — customer contracts sold		756			—
Net cash used in investing activities		(5,783	)		(1,394	)
Cash Flows From Financing Activities
Credit line commitment fee		17			—
Repurchase of stock		—			(2,204	)
Decrease (increase) in restricted cash		6,522			(2,257	)
Net cash provided by (used in) financing activities		6,539			(4,461	)
Decrease in cash and cash equivalents		(15,649	)		(19,964	)
Cash and cash equivalents at beginning of period		22,941			33,344
Cash and cash equivalents at end of period	$	7,292		$	13,380

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

Note 1. Summary of Significant Accounting Policies

   Basis of Presentation

     The unaudited condensed consolidated financial statements as of January 31, 2007 and for the three and six months ended January 31, 2007 and 2006 of Commerce Energy Group, Inc. (the “Company”) include its two wholly-owned subsidiaries: Commerce Energy, Inc. (“Commerce”) and Skipping Stone Inc. (“Skipping Stone”). All material intercompany balances and transactions have been eliminated in consolidation.

   Preparation of Interim Condensed Consolidated Financial Statements

     These interim condensed consolidated financial statements have been prepared by the Company’s management, without audit, in accordance with accounting principles generally accepted in the United States and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in consolidated annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in these consolidated interim financial statements, although the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated results of operations, financial position, and cash flows for the interim periods presented herein are not necessarily indicative of future financial results. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the year ended July 31, 2006.

   Uses of Estimates

     The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts and timing of revenue and expenses, the reported amounts and classification of assets and liabilities, and disclosure of contingent assets and liabilities. These estimates and assumptions are based on the Company’s historical experience as well as management’s future expectations. As a result, actual results could materially differ from management’s estimates and assumptions. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in our notes to the condensed consolidated financial statements. The accounting policies relating to accounting for derivatives and hedging activities, inventory, independent system operator costs, allowance for doubtful accounts, revenue and unbilled receivables are those that we consider to be the most critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results.

   Reclassifications

     Certain amounts in the condensed consolidated financial statements for the comparative prior fiscal period have been reclassified to be consistent with the current fiscal period’s presentation.

   Revenue Recognition

     Energy revenues are recognized when the electricity and natural gas are delivered to the Company’s customers and are comprised of the following:

	Three Months Ended				Six Months Ended
	January 31,				January 31,
	2007		2006		2007		2006
Retail electricity sales	$	50,711	$	44,352	$	104,118	$	94,442
Excess electricity sales		99		1,540		1,535		6,889
Total electricity sales		50,810		45,892		105,653		101,331
Retail natural gas sales		41,834		26,762		57,499		35,691
Net revenue	$	92,644	$	72,654	$	163,152	$	137,022

     The Company purchases electricity and natural gas utilizing forward physical delivery contracts based on the projected usage of its customers.

4

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

   Stock-Based Compensation

     The total compensation cost associated with stock options and restricted stock for the three and six months ended January 31, 2007 was $132 and $266, respectively, and is included in general and administrative expenses.

     The fair value of options granted is estimated on the date of grant using the Black-Scholes model based on the weighted-average assumptions in the table below. The assumption for the expected life is based on evaluations of historical and expected future exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of the grant with maturity dates approximately equal to the expected life at the grant date. The historical volatility of the Company’s common stock is used as the basis for the expected volatility.

	Six Months Ended
	January 31,
	2007			2006
Weighted-average risk-free interest rate		4.8	%		4.1	%
Average expected life in years		4.44			5.28
Expected dividends	None			None
Expected volatility		0.73			0.78

     A summary of option activity under the Company’s 1999 Equity Incentive Plan (the “1999 Plan”) and the Company’s 2006 Stock Incentive Plan (the “SIP”) and under certain individual plans, during the quarter ended January 31, 2007 is presented below.

	Options Outstanding
					Weighted
	Number of				Average		Aggregate
	Shares		Exercise Price		Exercise		Intrinsic
	(in Thousands)		Per Share		Price		Value
Options outstanding as of October 31, 2006		7,743	$	1.00-$3.75	$	2.32
Options cancelled		100	$	2.50-$3.75	$	2.51
Options outstanding as of January 31, 2007 (1)		7,643	$	1.00-$3.75	$	2.32	$	50

(1) Options exercisable as of January 31, 2007 were 7,413 with weighted average exercise price of $2.34 and an aggregate intrinsic value of $50.

     As of January 31, 2007, there was $163 of total unrecognized compensation cost related to non-vested outstanding stock options, which is expected to be recognized over the period February 2007 through December 2008. The total unrecognized compensation cost relating to non-vested restricted stock was $497 and will be recognized over the period of February 2007 through September 2009. For the three and six months ended January 31, 2007, 100,000 and 130,000 shares, respectively, of restricted stock were issued for a total of 549,000 shares outstanding with a total market value of $785 as of January 31, 2007. These restricted shares vest in accordance with the terms of various written agreements.

   Employee Stock Purchase and Stock Incentive Plans

     The Company’s Amended and Restated 2005 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees of the Company and its designated affiliates to purchase shares of the Company’s common stock through payroll deductions, subject to an aggregate limit of 3,000,000 shares of common stock that may be purchased under the ESPP. The ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended, thereby allowing participating employees to purchase shares of the Company’s common stock at a discount on a tax-favored basis. The Company has registered the shares of common stock under the ESPP with the Securities and Exchange Commission (the “SEC”) on a Form S-8. From the commencement of the ESPP through January 2007, 27,168 shares have been purchased by Company employees under the ESPP.

     The Company’s 2006 Stock Incentive Plan (the “SIP”) allows for grants pursuant to a variety of awards, including options, share appreciation rights, restricted shares, restricted share units, deferred share units and performance-based awards in the form of stock appreciation rights, deferred shares and performance units. The Company has registered its common stock, which may be issued under the SIP, with the SEC on a Form S-8 Registration Statement and, at January 31, 2007, 1,133,334 shares of the Company’s common stock may be issued pursuant to Awards under the SIP. Awards under the SIP may be made to key employees and directors of the

5

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

Company or any of its subsidiaries whose participation in the SIP is determined to be in the best interests of the Company by the Compensation Committee of the Board of Directors.

   Income Tax

     The Company has established valuation allowances to reserve its net deferred tax assets due to the uncertainty that the Company will realize the related tax benefits in the foreseeable future. At January 31, 2007, the Company had net operating loss carryforwards of approximately $14.8 million and $20.0 million for federal and state income tax purposes, respectively.

   Comprehensive Income (Loss)

     Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“FAS 130”) establishes standards for reporting and displaying comprehensive income and its components in the Company’s consolidated financial statements. Comprehensive income is defined in FAS 130 as the change in equity (net assets) of a business enterprise during a period from certain transactions and other events and circumstances and is comprised of net income and other comprehensive income (loss).

     The components of comprehensive income (loss) are as follows:

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2007			2006			2007			2006
Net income (loss)	$	2,539		$	(4,112	)	$	2,922		$	(3,892	)
Changes in fair value of cash flow hedges		(131	)		(845	)		(2,728	)		(1,022	)
Comprehensive income (loss)	$	2,408		$	(4,957	)	$	194		$	(4,914	)

     Accumulated other comprehensive income (loss) included in stockholders’ equity totaled $(457) and $2,271 at January 31, 2007 and July 31, 2006, respectively.

   Segment Reporting

     The Company’s chief operating decision makers consist of members of senior management that work together to allocate resources to, and assess the performance of, the Company’s business. These members of senior management currently manage the Company’s business, assess its performance, and allocate its resources as the single operating segment of energy retailing. As Skipping Stone, net of intercompany eliminations, only accounts for approximately 1% of total net revenue, and geographic information is not significant, no segment information is provided.

   Accounts Receivable, Net

     Accounts receivable, net, is comprised of the following:

	January 31,			July 31,
	2007			2006
Billed	$	37,411		$	21,768
Unbilled		18,613			13,382
	$	56,024		$	35,150
Less allowance for doubtful accounts		(3,655	)		(4,500	)
Accounts receivable, net	$	52,369		$	30,650

   Inventory

     Inventory represents natural gas in storage as required by state regulatory bodies and contractual obligations under customer choice programs. Inventory is stated at the lower of weighted average cost or market.

6

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

Note 2. Basic and Diluted Income (Loss) per Common Share

     Basic income (loss) per common share was computed by dividing net income (loss) available to common stockholders, by the weighted average number of common shares outstanding during the period. Diluted income per common share reflects the potential dilution that would occur if all outstanding options or other contracts to issue common stock were exercised or converted and was computed by dividing net income (loss) by the weighted-average number of common shares plus dilutive common equivalent shares outstanding, unless they were anti-dilutive.

     The following is a reconciliation of the numerator income (loss) and the denominator (common shares in thousands) used in the computation of basic and diluted income (loss) per common share:

	Three Months Ended					Six Months Ended
	January 31,					January 31,
	2007		2006			2007		2006
Numerator:
Net income (loss)	$	2,539	$	(4,112	)	$	2,922	$	(3,892	)
Net income (loss) applicable to common stock —basic and diluted	$	2,539	$	(4,112	)	$	2,922	$	(3,892	)
Denominator:
Weighted-average outstanding common shares — basic		29,687		30,464			29,663		30,881
Effect of stock options		34		—			30		—
Weighted-average outstanding common shares — diluted		29,721		30,464			29,693		30,881

Note 3. Market and Regulatory

     The Company currently serves electricity and gas customers in ten states, operating within the jurisdictional territory of twenty—three different local distribution companies (“LDCs”). Regulatory requirements are determined at the individual state level, and administered and monitored by the Public Utility Commission (“PUC”), of each state. Operating rules and tariff filings by LDCs for changes in their allowed billing rates to their customers, among other things, can significantly impact the viability of the Company’s sales and marketing plans and its overall operating and financial results. The Company sees several significant matters or trends in our retail electricity and natural gas markets which are discussed below.

     In California, the California Public Utility Commission (“CPUC”) issued a ruling in September 2001 suspending the right of Direct Access, which allowed electricity customers to buy their power from a supplier other than the electric utilities. This suspension, permitting the Company to keep current direct access customers and to solicit direct access customers served by other Electricity Service Providers (“ESPs”), prohibits the Company from soliciting new non-direct access customers for an indefinite period of time. Additionally, the CPUC and the Federal Energy Regulatory Commission (“FERC”) have made several recent determinations which are expected to increase the cost of serving California customers; however the Company cannot predict the financial impact of these matters on the Company’s operations.

     The FERC and other regulatory and judicial bodies continue to examine the behavior of market participants during the California energy crisis of 2000 and 2001, and to recalculate what market clearing prices should or might have been under alternative scenarios of behavior by market participants. In addition, several legal proceedings arising from the California energy crisis of 2000 and 2001 are pending before the FERC and other regulatory and judicial bodies, which may have an impact on the Company. On January 5, 2007, Commerce and certain other parties (collectively, the “Settling Parties”) signed an APX Settlement and Release of Claims Agreement (the “Settlement Agreement”) relating to certain of those proceedings and filed such agreement together with a Joint Offer of Settlement and Motion for Expedited Consideration with FERC. The Settlement Agreement became effective on FERC’s approval which was received on March 1, 2007. Under the Settlement Agreement, several Settling Parties will be entitled to payments from APX, Inc. (“APX”), with Commerce expected to receive up to approximately $6.5 million. Although the precise amount and timing of the disbursements under the Settlement Agreement will depend on a number of factors, including, without limitation, verification of settlement calculations, the Company expects to receive a portion of the payment in March 2007. The monies earmarked for Commerce under the settlement are not guaranteed to be paid, and Commerce has not independently verified the amounts payable. The Settlement Agreement is subject to rehearing review at FERC, requests for which must be made no later than March 30, 2007, and possible court review. Commerce, subject to the order of a court, FERC or other body with jurisdiction, could be required to

7

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

return or redistribute some or all of the funds received under the Settlement Agreement. For a further description of settlement of the APX proceeding involving Commerce, see Note 5.

     Although the settlement of the APX matter resolves certain of the proceedings arising from the California energy crisis of 2000 and 2001, other proceedings that may affect the Company remain pending. The Company cannot at this time predict whether, or to what extent, these proceedings will have a financial impact on the Company’s financial results.

     Currently, the Company markets natural gas in fourteen LDC markets within the seven states of California, Florida, Georgia, Maryland, Nevada, Ohio and Pennsylvania. Based upon review of business growth opportunities and related market regulations, in January 2007, the Company divested approximately 7,000 of its natural gas customers in its Georgia and New York markets; the net proceeds from this divestiture was approximately $690. A number of LDCs have filed or communicated expectations of filing for approval of rate increases to their customers due to significant increases in the market price of natural gas. Although the impact of these filings cannot currently be estimated, they are not anticipated to adversely impact the Company’s financial results.

Note 4. HESCO Customer Acquisition

     On September 20, 2006, the Company entered into an Asset Purchase Agreement with HESCO to acquire certain assets consisting principally of contracts with end-use customers in California, Florida, Nevada, Kentucky and Texas consuming approximately 12 billion cubic feet of natural gas annually. The effective date of the acquisition was September 1, 2006. Commerce acquired the HESCO assets for approximately $4.1 million in cash. The purchase price has all been allocated to contracts with end-use customers and is being amortized over an estimated life of four years.

Note 5. Contingencies

   APX Settlement

     During 2000 and 2001, Commerce bought, sold and scheduled power in the California wholesale energy markets through the markets and services of APX, Inc. (“APX”). As a result of a complaint filed at the Federal Energy Regulatory Commission (“FERC”) by San Diego Gas and Electric Co. in August 2000 and a line of subsequent FERC orders, Commerce became involved in proceedings at FERC related to sales and schedules in the California Power Exchange Corporation (“PX”) and the California Independent System Operator Corporation (“CAISO”) markets, Docket No. EL00-95 (the “California Refund Case”). A part of that proceeding related to APX’s involvement in those markets.

     On January 5, 2007, APX, Commerce and certain other parties (collectively, the “Settling Parties”) signed an APX Settlement and Release of Claims Agreement (the “Settlement Agreement”) and filed such agreement along with a Joint Offer of Settlement and Motion for Expedited Consideration with FERC in the California Refund Case. The Settlement Agreement, among other things, established a mechanism for allocating refunds owed to APX and to resolve certain other matters and claims related to APX’s participation in the PX and CAISO centralized spot markets for wholesale electricity from May 1, 2000 through June 20, 2001. The effectiveness of the Settlement Agreement was subject to receipt of FERC’s approval, which was received on March 1, 2007.

     Under the Settlement Agreement, several Settling Parties will be entitled to payments from APX, with Commerce expected to receive up to approximately $6.5 million. Although the precise amount and timing of the disbursements under the Settlement Agreement will depend on a number of factors, including, without limitation, verification of settlement calculations, the Company expects to receive a portion of the payment in March 2007. The monies earmarked for Commerce under the settlement are not guaranteed to be paid, and Commerce has not independently verified the amounts payable. By entering into the Settlement Agreement, claims against Commerce by any party to the Settlement Agreement for refunds, disgorgement of profits or other monetary or non-monetary remedies for APX-related claims shall be deemed resolved with prejudice and settled insofar as APX remains a net payment recipient (as that term is defined in the Settlement Agreement) in the proceeding at FERC.

     In addition, the Settlement Agreement resolves and terminates certain disputes pending before FERC and the United States Court of Appeals for the Ninth Circuit relating to APX’s actions in the PX and CAISO centralized spot markets for wholesale electricity, as well as disputes among participants in the APX market and the appropriate allocation of monies due among the APX participants insofar as APX continues to be a net refund recipient during the settlement period.

8

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

     The Settlement Agreement is subject to rehearing review at FERC, requests for which must be made no later than March 30, 2007, and possible court review. Commerce, subject to the order of a court, FERC or other body with jurisdiction, could be required to return or redistribute some or all of the funds received under the Settlement Agreement.

   ACN Arbitration

     American Communications Network (“ACN”), the Company and Commerce entered into a Sales Agency Agreement in connection with the Company’s purchase of certain assets of ACN and certain of its subsidiaries in February 2005. This agreement, which amongst other things provided for the payment of sales commissions to ACN sales representatives, was terminated by ACN effective February 9, 2006. On February 24, 2006, ACN had delivered to the Company an arbitration demand claim, alleging that Commerce was liable for significant actual, consequential and punitive damages and restitution on a variety of causes of action including anticipatory breach of contract, unjust enrichment, tortuous interference with prospective economic advantage and prima facie tort with respect to alleged future commissions arising after ACN’s termination of the Sales Agency Agreement. This claim was delivered via mail to the Company but was not filed with the American Arbitration Association (“AAA”).

     On March 23, 2006, Commerce filed a Demand for Arbitration with the AAA in New York of this dispute with ACN asserting claims for declaratory relief, material breach of contract and breach of the implied covenant of good faith and fair dealing. This Demand for Arbitration seeks compensatory damages in an amount to be determined at the arbitration. On May 4, 2006, ACN filed with the AAA in New York its Demand for Arbitration of this dispute with Commerce. In its Demand, ACN alleges claims against Commerce for breach of contract and breach of implied duty of good faith and fair dealing, seeking damages and restitution in amounts to be determined at the hearing. On November 30, 2006, representatives of the Company and ACN met in New York City with a mediator in an effort to resolve their dispute prior to arbitration. The parties were unable to reach agreement on terms of a settlement. The parties have selected a panel of three arbitrators to hear their dispute and have set April 30, 2007 as the commencement date for the arbitration proceeding, a date which is subject to change. Although the Company cannot predict the outcome of this matter, it intends to pursue the claims vigorously and currently believes that no loss accrual is warranted related to this matter.

     The Company is currently, and from time to time may become, involved in litigation concerning claims arising out of the operations of the Company in the normal course of business. The Company is currently not involved in any legal proceeding that is expected, individually or in the aggregate, to have a material adverse effect on the Company’s results of operations or financial position.

Note 6. Derivative Financial Instruments

     The Company purchases substantially all of its power and natural gas utilizing forward physical delivery contracts. These physical delivery contracts are defined as commodity derivative contracts under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Using the exemption available for qualifying contracts under SFAS No. 133, the Company applies the normal purchase and normal sale accounting treatment to its forward physical delivery contracts. Accordingly, the Company records revenue generated from customer sales as energy is delivered to retail customers and the related energy under the forward physical delivery contracts is recorded as direct energy costs when received from suppliers. As a result of a sale in January 2005 of two significant physical delivery contracts back to the original electricity supplier, the normal purchase and normal sale exemption had not been available for the forward supply costs purchased for the PJM-ISO market for the period February 2005 through July 2006. Effective August 1, 2006, the normal purchase and normal sale exemption has been reinstated for the PJM-ISO market.

     For forward or future contracts that do not meet the qualifying criteria for normal purchase, normal sale accounting treatment, the Company elects cash flow hedge accounting, where appropriate. Under cash flow hedge accounting, the fair value of the contract is recorded as a current or long-term derivative asset or liability. Subsequent changes in the fair value of the derivative assets and liabilities are recorded on a net basis in Accumulated other comprehensive income (“OCI”), and reflected as direct energy cost in the statement of operations as the energy is delivered.

9

COMMERCE ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

     The amounts recorded in Accumulated OCI at January 31, 2007 and July 31, 2006 related to cash flow hedges are summarized in the following table:

	January 31,			July 31,
	2007			2006
Current assets	$	—		$	1,817
Current liabilities		(823	)		(362	)
Deferred gains		155			816
Hedge ineffectiveness		211			—
Accumulated other comprehensive income (loss)	$	(457	)	$	2,271

     Certain financial derivative instruments (such as swaps, options and futures), designated as fair-value hedges, economic hedges or as speculative, do not qualify or meet the requirements for normal purchase, normal sale accounting treatment or cash flow hedge accounting and are recorded currently in operating income (loss) and as a current or long-term derivative asset or liability depending on their term. The subsequent changes in the fair value of these contracts may result in operating income (loss) volatility as the fair value of the changes are recorded on a net basis in direct energy cost in the consolidated statement of operations for each fiscal period. For the three months ending January 31, 2007, the impact of financial derivatives accounted for as mark-to-market resulted in a loss of $512. The mark-to-market loss resulted largely from economic hedging related to our natural gas portfolio. The notional value of these derivatives outstanding at January 31, 2007 was $373.

     As of January 31, 2007, the Company had no derivative assets included in Prepaid expenses and other, and $913 of total derivative liabilities included in Accrued liabilities.

Note 7. Credit Facility

     In June 2006, Commerce entered into a Loan and Security Agreement (the “Credit Facility”) with Wachovia Capital Finance Corporation (Western) (the “Agent”) for up to $50 million. The three-year Credit Facility is secured by substantially all of the Company’s assets and provides for issuance of letters of credit and for revolving credit loans which we may use for working capital and general corporate purposes. The availability of letters of credit and loans under the Credit Facility is limited by a calculated borrowing base consisting of the majority of the Company’s cash on deposit with the Agent and the Company’s receivables and natural gas inventories. As of January 31, 2007, letters of credit issued under the facility totaled $22.4 million, and there were no outstanding borrowings. Basic fees for letters of credit issued range from 1.50 to 1.75 percent per annum, depending on the level of Excess Availability, as defined in the Credit Facility. The Company also pays an unused line fee equal to 0.375 percent of the unutilized credit line. Generally, outstanding borrowings under the Credit Facility are priced at a domestic bank rate plus 0.25 percent or LIBOR plus 2.75 percent.

     The Credit Facility contains covenants, subject to specific exceptions, restricting Commerce, the Company and their subsidiaries from: (a) incurring additional indebtedness; (b) granting certain liens; (c) disposing of certain assets; (d) making certain restricted payments; (e) entering into certain other agreements; and (f) making certain investments. The Credit Facility also restricts our ability to pay cash dividends on our common stock; restricts Commerce from making cash dividends to the Company; and limits the amount of our annual capital expenditures. Additionally, the Credit Facility requires Commerce to maintain at all times a minimum of $10 million of Eligible Cash Collateral, as defined in the Credit Facility.

     On March 15, 2007 the Company and Commerce entered into a Third Amendment to Loan and Security Agreement and Waiver (the “Third Amendment”) pursuant to which the Lenders waived prior or existing instances of covenant non-compliance relating to the maintenance of a minimum Fixed Charge Coverage Ratio and a minimum amount of Excess Availability. The Lenders also agreed in the Third Amendment to extend the period of time during which Commerce will be permitted to maintain a reduced level of Excess Availability in the future.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following is a discussion of the financial condition and results of operations for our fiscal quarter ended January 31, 2007. As used herein and unless the context requires otherwise, references to the “Company,” “we,” “us,” and “our” refer specifically to Commerce Energy Group, Inc. and its subsidiaries. “Commerce” refers to Commerce Energy, Inc., our principal operating subsidiary. This discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in our Annual Report on Form 10-K/A (Amendment No. 1) for the year ended July 31, 2006 (the “Form 10-K”).

     Some of the statements in this section contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events which involve risks and uncertainties. All statements other than statements of historical facts included in this section relating to expectation of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terms. The forward-looking statements contained in this section involve known and unknown risks and uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A in our most recently filed Form 10-K and elsewhere in this Form 10-Q, including, but not limited to, changes in general economic conditions in the markets in which we may compete; fluctuations in the market price of energy which may negatively impact the competitiveness of our product offerings to current and future customers; increased competition; our ability to retain key members of management; our ability to address changes in laws and regulations; our ability to successfully integrate businesses or customer portfolios that we may acquire; our ability to obtain and retain credit necessary to profitably support our operations; adverse state or federal legislation or regulation or adverse determinations by regulators; and other factors identified from time to time in our filings with the Securities and Exchange Commission (the “SEC”). We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management’s examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our expectations will be realized.

     Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Our Company

     We are an independent marketer of retail electricity and natural gas to residential, commercial, industrial and institutional end-use customers. Our principal operating subsidiary, Commerce Energy, Inc., is licensed by the Federal Energy Regulatory Commission (“FERC”) and by state regulatory agencies as an unregulated retail marketer of electricity and natural gas.

     We were founded in 1997 as a retail electricity marketer in California. As of January 31, 2007, we delivered electricity to approximately 105,000 customers in California, Maryland, Michigan, New Jersey, Pennsylvania and Texas; and natural gas to approximately 59,000 customers in California, Florida, Georgia, Maryland, Nevada, Ohio and Pennsylvania. Growth of our business has occurred organically and through acquisitions. During the quarter ending January 31, 2007, based upon our review of business growth opportunities and related market regulations, we divested approximately 7,000 retail gas customers in Georgia and New York.

     The electricity and natural gas we sell to our customers is purchased from third-party suppliers under both short and long-term contracts. We do not own electricity generation or delivery facilities, natural gas producing properties or pipelines. The electricity and natural gas we sell is generally metered and always delivered to our customers by the local utilities. The local utilities also provide billing and collection services for many of our customers on our behalf. Additionally, to facilitate load shaping and demand balancing for our customers, we buy and sell surplus electricity and natural gas from and to other market participants when necessary. We utilize third party facilities for the storage of our natural gas.

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     The growth of our business depends upon a number of factors, including the degree of deregulation in each state, our ability to acquire new and retain existing customers and our ability to acquire energy for our customers at competitive prices and on reasonable credit terms.

Significant Customer Acquisitions

   ACN Energy Acquisition

     On February 9, 2005, the Company acquired certain assets of ACN Utility Services, Inc. (“ACNU”), a subsidiary of American Communications Network, Inc. (“ACN”), and ACN’s retail electricity and natural gas sales business. The assets and operations acquired were comprised primarily of approximately 80,000 natural gas-and-electricity residential and small commercial customers, natural gas inventory associated with utility and pipeline storage and transportation agreements and natural gas and electricity supply agreements, scheduling and capacity contracts, software and other infrastructure. The aggregate cash purchase price of $6.9 million was allocated to intangible assets acquired, consisting of customer contracts, computer software and computer license agreements and goodwill.

   HESCO Acquisition

     On September 20, 2006, Commerce entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Houston Energy Services Company, L.L.C. (“HESCO”), a Texas limited liability company, pursuant to which Commerce acquired approximately 300 contracts with commercial and industrial natural gas end-users in California, Florida, Nevada, Kentucky and Texas expected to consume more than 12 million dekatherms (billion cubic feet) annually. The cost of the acquisition, effective as of September 1, 2006, was approximately $4.1 million in cash. The purchase price has been allocated to customer contracts and is being amortized over an estimated life of four years.

Market and Regulatory

     The Company currently serves electricity and gas customers in ten states, operating within the jurisdictional territory of 23 different local distribution companies (“LDCs”). Regulatory requirements are determined at the individual state level, and administered and monitored by the Public Utility Commission (“PUC”) of each state. Operating rules and tariff filings by LDCs for changes in their allowed billing rates to their customers, among other things, can significantly impact the viability of the Company’s sales and marketing plans, and its overall operating and financial results. In addition, we believe that there are several significant market or regulatory matters or trends in our retail electricity and natural gas markets, discussed below, which may have an effect on our operating and financial results.

     In California, the California Public Utility Commission (“CPUC”) issued a ruling in September 2001 suspending the right of Direct Access, which allowed electricity customers to buy their power from a supplier other than the electric utilities. This suspension, although permitting us to keep current direct access customers and to solicit direct access customers served by other ESPs, prohibits us from soliciting new non-direct access customers for an indefinite period of time. Additionally, the CPUC and the FERC have made several recent determinations which are expected to increase our cost to serve California customers; however the Company cannot at this time predict the financial impact of these matters on the Company’s operating profitability.

     The FERC and other regulatory and judicial bodies continue to examine the behavior of market participants during the California energy crisis of 2000 and 2001, and to recalculate what market clearing prices should or might have been under alternative scenarios of behavior by market participants. In addition, several legal proceedings arising from the California energy crisis of 2000 and 2001 are pending before the FERC and other regulatory and judicial bodies, which may have an impact on the Company. On January 5, 2007, Commerce and certain other parties (collectively, the “Settling Parties”) signed an APX Settlement and Release of Claims Agreement (the “Settlement Agreement”) relating to certain of those proceedings and filed such agreement together with a Joint Offer of Settlement and Motion for Expedited Consideration with FERC. The Settlement Agreement became effective on FERC’s approval which occurred on March 1, 2007. Under the Settlement Agreement, several Settling Parties will be entitled to payments from APX, Inc. (“APX”), with Commerce expected to receive up to approximately $6.5 million. Although the precise amount and timing of the disbursements under the Settlement Agreement will depend on a number of factors, including, without limitation, verification of settlement calculations, the Company expects to receive a portion of the payment in March 2007. The monies earmarked for Commerce under the settlement are not guaranteed to be paid, and Commerce has not independently verified the amounts payable. The Settlement Agreement is subject to rehearing review at FERC, requests for which must be made no later than March 30, 2007, and possible court review. Commerce, subject to the order of a court, FERC or other body with jurisdiction, could be required to

12

return or redistribute some or all of the funds received under the Settlement Agreement. For a further description of settlement of the APX proceeding involving Commerce, see Part II, Item 5. Other Information, herein.

     Although the settlement of the APX matter resolves certain of the proceedings arising from the California energy crisis of 2000 and 2001, other proceedings that may affect the Company remain pending. The Company cannot at this time predict whether, or to what extent, these proceedings will have a financial impact on the Company’s financial results.

     Currently, the Company markets natural gas in 14 LDC markets within the seven states of California, Florida, Georgia, Maryland, Nevada, Ohio and Pennsylvania. Based upon review of business growth opportunities and related market regulations, in January 2007, the Company divested approximately 7,000 natural gas customers in its Georgia and New York markets. Due to significant increases in the market price of natural gas, a number of LDCs have filed or communicated expectations of filing for approval of rate increases to their customers. Although the impact of these filings cannot currently be estimated, they are not anticipated to adversely impact the Company’s financial results.

Results of Operations

   Three Months Ended January 31, 2007 Compared to Three Months Ended January 31, 2006

     The following table summarizes the results of our operations for the three months ended January 31, 2007 and 2006 (dollars in thousands).

	Three Months Ended January 31,
	2007					2006
	Dollars		% Revenue			Dollars			% Revenue
Retail electricity sales	$	50,711		55	%	$	44,352			61	%
Natural gas sales		41,834		45	%		26,762			37	%
Excess electricity sales		99		—			1,540			2	%
Net revenue		92,644		100	%		72,654			100	%
Direct energy costs		78,112		84	%		68,892			95	%
Gross profit		14,532		16	%		3,762			5	%
Selling and marketing expenses		2,607		3	%		1,228			2	%
General and administrative expenses		9,637		10	%		6,847			9	%
Income (loss) from operations	$	2,288		3	%	$	(4,313	)		(6	)%

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   Net revenue

     The following table summarizes net revenues for the three months ended January 31, 2007 and 2006 (dollars in thousands).

	Three Months Ended January 31,
	2007					2006
	Dollars		% Revenue			Dollars		% Revenue
Retail Electricity Sales:
California	$	14,071		15	%	$	16,405		23	%
Texas		18,082		19	%		3,766		5	%
Pennsylvania/New Jersey		10,762		12	%		17,223		24	%
Maryland		5,362		6	%		—		—
Michigan and Others		2,434		3	%		6,958		9	%
Total Retail Electricity Sales		50,711		55	%		44,352		61	%
Natural Gas Sales:
California		6,613		7	%		8,568		12	%
Ohio		12,515		13	%		11,312		16	%
Georgia		1,628		2	%		3,943		5	%
HESCO Customers		20,169		22	%		—		—
All Others		909		1	%		2,939		4	%
Total Natural Gas Sales		41,834		45	%		26,762		37	%
Excess Electricity Sales		99		—			1,540		2	%
Net Revenue	$	92,644		100	%	$	72,654		100	%

     Net revenues increased $20.0 million, or 27.5%, to $92.6 million for the three months ended January 31, 2007 from $72.6 million for the comparable quarter in 2006. The increase in net revenues was driven primarily by a 14.3% increase in electricity sales and a 56.3% increase in natural gas sales. Higher electricity sales reflects the impact of a 290% increase in sales volumes in Texas due to customer growth, partly offset by lower retail sales in the Pennsylvania/New Jersey and Michigan markets resulting from customer attrition. Higher natural gas sales reflect the impact of the September 2006 acquisition of the commercial and industrial natural gas customer contracts from HESCO.

     Retail electricity sales increased $6.4 million to $50.7 million, for the three months ended January 31, 2007, from $44.3 million for the same period in 2006, reflecting the impact of higher sales prices, and a 6% increase in sales volume. For the three months ended January 31, 2007, we sold 448 million kilowatt hours, or kWh, at an average retail price per kWh of $0.113, as compared to 421 million kWh sold at an average retail price per kWh of $0.105 for the comparable prior year period. Wholesale excess electricity sales for the three months ended January 31, 2007 decreased $1.4 million compared to the same period in 2006 reflecting the impact of shorter term forward supply commitments due to higher wholesale electricity prices, increased price volatility and conversion of many customers to month-to-month variable-priced contracts.

     Natural gas sales increased $15.1 million to $41.8 million for the three months ended January 31, 2007 from $26.7 million for the same period in 2006 reflecting the impact of a 129% increase in sales volumes, partly offset by a 32% decline in average retail sales prices. For the three months ended January 31, 2007, we sold 4.9 million dekatherms, or DTH, at an average retail price per DTH of $8.62, as compared to 2.1 million DTH, sold at an average retail price per DTH of $12.60 during this same period in 2006. For the three months ended January 31, 2007, sales to the commercial and industrial customers acquired from HESCO totaled $20.2 million on sales volume of 2.7 million DTH.

     We had approximately 164,000 electricity and natural gas customers at January 31, 2007, an increase of 27% from 128,000 at January 31, 2006. We had approximately 105,000 electricity and 59,000 natural gas customers at January 31, 2007, as compared to 71,000 and 57,000 at January 31, 2006. An increase of approximately 46,000 electricity customers in Texas and Maryland more than offset high customer attrition in our Pennsylvania/New Jersey and Michigan markets; an increase of approximately 16,000 natural gas customers in our Ohio markets offset customer attrition in other natural gas markets. Attrition in our retail customer base largely reflects the impact of increased sales prices to our customers resulting from our passing on higher wholesale energy supply and transmission costs, without corresponding price increases from incumbent utilities due to the lack of market responsive ratemaking and a lagging regulatory approval process. Additionally, decline in our customer base in individual markets can be partly attributed to focus of our sales and marketing customer acquisition efforts.

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   Gross Profit

     Gross profit increased $10.8 million, or 286.3%, to $14.5 million for the second quarter of the fiscal year ending July 31, 2007 (“fiscal 2007”) from $3.7 million for the second quarter of the fiscal year ended July 31, 2006 (“fiscal 2006”). Gross profit from electricity increased $5.4 million to $10.4 million for the second quarter of fiscal 2007, from $5.0 million for the second quarter of fiscal 2006, reflecting the impact of customer growth in Texas and Maryland markets. Gross profit from natural gas increased $5.4 million to $4.1 million for the second quarter of fiscal 2007 from a loss of $1.3 million for the second quarter of fiscal 2006. The increase in gross profit for the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006, reflects the impact of (a) customer growth in Ohio markets; (b) gross profit contribution from the September 2006 HESCO customer acquisition; and (c) a mark-to-market loss of $2.7 million incurred in the second quarter of fiscal 2006 on supply contracts entered into in December 2005 which decreased in market value due to a significant decline in natural gas prices in January 2006. The decline in market value and related loss on the above-referenced supply contracts required mark-to-market accounting treatment under SFAS 133.

   Direct Energy Costs

     Direct energy costs, which are recognized concurrently with related energy sales, include the commodity cost of natural gas and electricity, electricity transmission costs from the Independent Systems Operators (“ISOs”), transportation costs from LDCs and pipelines, other fees and costs incurred from various energy-related service providers and energy-related taxes that cannot be passed directly through to the customer.

     Direct energy costs for the second quarter of fiscal 2007 totaled $40.4 million and $37.7 million for electricity and natural gas, respectively, compared to $40.9 million and $28.0 million, respectively, in the same period in fiscal 2006. Electricity costs averaged $0.090 per kWh for the second quarter 2007 compared to $0.093 per kWh for the same period in fiscal 2006. Direct energy costs for natural gas averaged $7.77 per DTH for the second quarter of fiscal 2007 as compared to $13.20 per DTH for the same period in fiscal 2006.

   Operating Expenses

     Operating expenses (comprised of both selling and marketing expenses and general and administrative expenses) increased $4.2 million, or 52%, to $12.2 million for the second quarter of fiscal 2007 from $8.1 million for the second quarter of fiscal 2006. Selling and marketing expenses increased to $2.6 million for the second quarter of fiscal 2007 from $1.2 million for the second quarter of fiscal 2006, reflecting the impact of higher advertising, telemarketing, third-party commissions and direct mail costs related to the Company’s increased customer acquisition initiatives. General and administrative expenses increased to $9.6 million for the second quarter of fiscal 2007 from $6.8 million for the comparable quarter of fiscal 2006, reflecting (a) a $1.6 million increase in personnel costs due primarily to increased incentive compensation expenses and higher customer service and information technology staff; (b) a $.5 million increase in banking costs and fees related primarily to the credit facility entered into in June 2006; and (c) higher bad debt and depreciation and amortization expenses.

   Income Taxes

     No provision for, or benefit from, income taxes was recorded for the three months ended January 31, 2007 or 2006. We provided valuation allowances equal to our calculated tax due to the amount of the Company’s net operating loss carryforwards and the related uncertainty that we would realize these tax benefits in the foreseeable future. At January 31, 2007, the Company had net operating loss carryforwards of approximately $14.8 million and $20.0 million for federal and state income tax purposes, respectively.

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   Six Months Ended January 31, 2007 Compared to Six Months Ended January 31, 2006

     The following table summarizes the results of our operations for the six months ended January 31, 2007 and 2006 (dollars in thousands).

	Six Months Ended January 31,
	2007					2006
	Dollars		% Revenue			Dollars			% Revenue
Retail electricity sales	$	104,118		64	%	$	94,442			69	%
Natural gas sales		57,499		35	%		35,691			26	%
Excess electricity sales		1,535		1	%		6,889			5	%
Net revenue		163,152		100	%		137,022			100	%
Direct energy costs		138,563		85	%		125,020			91	%
Gross profit		24,589		15	%		12,002			9	%
Selling and marketing expenses		4,845		3	%		1,926			1	%
General and administrative expenses		17,484		11	%		14,456			11	%
Income (loss) from operations	$	2,260		1	%	$	(4,380	)		(3	%)

   Net revenue

     The following table summarizes net revenues for the six months ended January 31, 2007 and 2006 (dollars in thousands).

	Six Months Ended January 31,
	2007					2006
	Dollars		% Revenue			Dollars		% Revenue
Retail Electricity Sales:
California	$	31,354		19	%	$	34,089		25	%
Texas		34,812		21	%		9,962		7	%
Pennsylvania/New Jersey		24,976		15	%		35,135		26	%
Maryland		6,852		5	%		—		—
Michigan and Others		6,124		4	%		15,256		11	%
Total Retail Electricity Sales		104,118		64	%		94,442		69	%
Natural Gas Sales:
California		10,635		7	%		12,994		9	%
Ohio		15,519		10	%		13,934		10	%
Georgia		2,615		2	%		5,107		4	%
HESCO Customers		27,425		15	%		—		—
All Others		1,305		1	%		3,656		3	%
Total Natural Gas Sales		57,499		35	%		35,691		26	%
Excess Electricity Sales		1,535		1	%		6,889		5	%
Net Revenue	$	163,152		100	%	$	137,022		100	%

     Net revenues increased $26.1 million, or 19.1%, to $163.2 million for the six months ended January 31, 2007 from $137.0 million for the six months ended January 31, 2006. The increase in net revenues was driven primarily by an 11.1% increase in electricity sales and a 61.1% increase in natural gas sales. Higher electricity sales reflects the impact of a 219.1% increase in sales volumes in Texas due to customer growth, partly offset by lower retail sales in the Pennsylvania/New Jersey and Michigan markets resulting from customer attrition. Higher natural gas sales reflect the impact of the September 2006 acquisition of the commercial and industrial natural gas customer contracts from HESCO.

     Retail electricity sales increased $9.7 million to $104.1 million for the six months ended January 31, 2007 from $94.4 million for the same period in 2006 reflecting the impact of higher sales prices, partly offset by a 7% decrease in sales volume. For the six months ended January 31, 2007, we sold 906 million kilowatt hours, or kWh, at an average retail price per kWh of $0.115, as compared to 972 million kWh sold at an average retail price per kWh of $0.097 for the comparable prior year period. Wholesale excess electricity sales for the six months ended January 31, 2007 decreased $5.4 million compared to the same period in 2006 reflecting the impact of shorter term forward supply commitments due to higher wholesale electricity prices, increased price volatility and conversion of many customers to month-to-month variable-priced contracts.

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     Natural gas sales increased $21.8 million to $57.5 million for the six months ended January 31, 2007 from $35.7 million for the same period in 2006 reflecting the impact of sales to the customers acquired in September 2006 from HESCO. For the six months ended January 31, 2007, we sold 7.0 million dekatherms, or DTH, at an average retail price per DTH of $8.23, as compared to 2.8 million DTH, sold at an average retail price per DTH of $12.57 during this same period in 2006. From the date of acquisition through January 31, 2007, natural gas sales to the commercial and industrial customers acquired in September 2006 from HESCO totaled $27.4 million on sales volume of 3.9 million DTH.

   Gross Profit

     Gross profit increased $12.6 million, to $24.6 million for the six months ended January 31, 2007 from $12.0 million for the six months ended January 31, 2006. Gross profit from electricity totaled $18.8 million for the six months ended January 31, 2007 compared to $12.1 million for the six months ended January 31, 2006, reflecting the impact of customer growth in the Texas and Maryland markets. Gross profit for natural gas totaled $5.8 million for the six months ended January 31, 2007 compared to a loss of $0.1 million for the six months ended January 31, 2006. The increase in gross profit from natural gas reflect the impact of (a) customer growth in Ohio markets; (b) gross margin contribution from customers acquired in the September 2006 HESCO Acquisition; and (c) a mark-to-market loss incurred in the second quarter of fiscal 2006 on natural gas supply contracts.

   Direct Energy Costs

     Direct energy costs for the six months ended January 31, 2007 totaled $86.9 million and $51.7 million for electricity and natural gas, respectively, compared to $89.3 million and $35.7 million, respectively, in the same period in fiscal 2006. Electricity costs averaged $0.096 per kWh for six months ended January 31, 2007 compared to $0.084 per kWh for the same period in fiscal 2006. Direct energy costs for natural gas for averaged $7.40 per DTH for the six months ended January 31, 2007 as compared to $12.60 per DTH for the same period in fiscal 2006.

   Operating Expenses

     Operating expenses (comprised of both selling and marketing expenses and general and administrative expenses) increased $5.9 million, or 36%, to $22.3 million for the six months ended January 31, 2007 from $16.4 million, for the same period as last year. Selling and marketing expenses increased to $4.8 million for the six months ended January 31, 2007 from $1.9 million for the same period last year, reflecting the impact of higher advertising, telemarketing, direct mail costs and consultants related to the Company’s increased customer acquisition initiatives. General and administrative expenses increased to $17.5 million for the six months ended January 31, 2007 from $14.5 million for the same period last year, reflecting higher customer service personnel costs, and costs related to our bank credit facility.

   Income Taxes

     No provision for, or benefit from, income taxes was recorded for the six months ended January 31, 2007 or 2006. We provided valuation allowances equal to our calculated tax due to the amount of the Company’s net operating loss carryforwards due to the uncertainty that we would realize these tax benefits in the foreseeable future.

   Liquidity and Capital Resources

	(Dollars in Thousands)
	January 31, 2007		July 31, 2006
Cash and cash equivalents	$	7,292	$	22,941
Working capital		36,070		32,253
Current ratio (current assets to current liabilities)		2.1:1.0		2.0:1.0
Restricted cash		10,595		17,117
Short term borrowings		—		—
Letters of credit outstanding		22,364		17,600

     As of January 31, 2007, unrestricted cash and cash equivalents decreased to $7.3 million from $22.9 million at July 31, 2006. The decrease in unrestricted cash and cash equivalents primarily reflect the impact of the HESCO acquisition in September 2006, and the impact of increases in accounts receivable related to the HESCO acquisition, seasonal increases in other natural gas accounts

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receivable, additions of property and equipment related to our major systems upgrades, offset by a reduction in prepaid expenses and other current resulting from substituting letters of credit for energy deposits.

     The increase in working capital of $3.8 million from $32.3 million to $36.0 million was due primarily to the reduction in restricted cash offset by the HESCO acquisition. Restricted cash decreased by $6.5 million to $10.6 million as of January 31, 2007 primarily as a result of replacing a cash secured letter of credit with a surety bond of $5.7 million to operate our retail electricity business in the State of Pennsylvania. Restricted cash includes $10 million of the Company’s cash required to be deposited as Eligible Cash Collateral pursuant to the terms of the Credit Facility described below. In addition, as of January 31, 2007, we had $2.2 million in deposits pledged as collateral in connection with energy supply and distribution energy agreements. Letters of credit outstanding at January 31, 2007 increased to $22.4 million with the $4.8 million increase relating primarily to supplier credit and performance terms required by the HESCO acquisition.

     Our principal sources of liquidity for funding our ongoing operations are our existing cash and cash equivalents, cash generated from operations, and credit extended by suppliers. Credit terms from our energy suppliers may require us to post collateral against our forward energy purchases and mark-to-market credit exposures. In June 2006, we entered into a working capital backed credit facility to be utilized primarily for the issuance of letters of credit in support of our forward energy purchases from suppliers. Based upon our current plans, our estimate of forward energy prices, level of operations and business conditions, we believe that our current restricted and unrestricted cash balances, cash generated from operations and our Credit Facility (pursuant to its existing terms) will be sufficient to meet our capital requirements and working capital needs for the foreseeable future. However, there can be no assurance that we will not be required to seek other financing in the future or that such financing, if required, will be available on terms satisfactory to us.

     Capital Expenditures for the six months ending January 31, 2007 were $2,322 compared to the six months ending January 31, 2006 of $1,394. This was due primarily to our continuing enhancement of information technology systems and software.

Credit Facility

     In June 2006, Commerce entered into a Loan and Security Agreement (the “Credit Facility”) with Wachovia Capital Finance Corporation (Western) (“Agent”) for up to $50 million. The three-year Credit Facility is secured by substantially all of the Company’s assets and provides for issuance of letters of credit and for revolving credit loans, which we may use for working capital and general corporate purposes. The availability of letters of credit and loans under the Credit Facility is limited by a calculated borrowing base consisting of the majority of the Company’s cash on deposit with the Agent and the Company’s receivables and natural gas inventories. As of January 31, 2007, letters of credit issued under the facility totaled $22.4 million and there were no outstanding borrowings. Fees for letters of credit issued range from 1.50 to 1.75 percent per annum, depending on the level of Excess Availability, as defined in the Credit Facility. We also pay an unused line fee equal to 0.375 percent of the unutilized credit line. Generally, outstanding borrowings under the Credit Facility are priced at a domestic bank rate plus 0.25 percent or LIBOR plus 2.75 percent.

     The Credit Facility contains covenants, subject to specific exceptions, restricting Commerce, the Company and its subsidiaries from: (a) incurring additional indebtedness; (b) granting certain liens; (c) disposing of certain assets; (d) making certain restricted payments; (e) entering into certain other agreements; and (f) making certain investments. The Credit Facility also restricts our ability to pay cash dividends on our common stock; restricts Commerce from making cash dividends to the Company without the consent of Agent and The CIT Group/Business Credit, Inc. (collectively, the “Lenders”); and limits the amount of our annual capital expenditures to $3.5 million without the consent of the Lenders. We must also maintain a minimum of $10 million of Eligible Cash Collateral, as defined in the Credit Facility, at all times.

     In September 2006, the Company and Commerce entered into a First Amendment to Loan and Security Agreement and Waiver (the “First Amendment”) pursuant to which the Lenders waived prior or existing instances of covenant non-compliance relating to the maintenance of Eligible Cash Collateral, as defined in the Credit Facility, capital expenditures and the notification to the Lenders of the grant of certain liens to a natural gas supplier. Pursuant to the First Amendment, the Lenders also agreed to certain prospective waivers of covenants in the Credit Facility to enable Commerce to consummate the HESCO acquisition in compliance with the Credit Facility.

     In October 2006, the Company entered into a Second Amendment to Loan and Security Agreement and Waiver (the “Second Amendment”) pursuant to which the Lenders waived prior or existing instances of covenant non-compliance relating to the maintenance of a minimum Fixed Charge Coverage Ratio and a minimum amount of Excess Availability. The Lenders also agreed in the Second Amendment to (a) defer prospective compliance with the Fixed Charge Coverage Ratio covenant and (b) reduce and restructure the amount of Excess Availability that Commerce will be required to maintain through April 2007.

     On March 15, 2007, the Company and Commerce entered into a Third Amendment to Loan and Security Agreement and Waiver (the “Third Amendment”) pursuant to which the Lenders waived prior or existing instances of covenant non-compliance relating to the

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maintenance of a minimum Fixed Charge Coverage Ratio and a minimum amount of Excess Availability. The Lenders also agreed in the Third Amendment to extend the period of time during which the minimum amount of Excess Availability that Commerce will be required to maintain established by the Second Amendment will be applicable.

   Consolidated Cash Flows

     The following table summarizes our statements of cash flows for the six months ended January 31, 2007 and 2006 (in thousands):

	Six Months Ended
	January 31, 2007			January 31, 2006
Net cash provided by (used in):
Operating activities	$	(16,405	)	$	(14,109	)
Investing activities		(5,783	)		(1,394	)
Financing activities		6,539			(4,461	)
Net decrease in cash and cash equivalents	$	(15,649	)	$	(19,964	)

     Net cash used in operating activities increased $2.3 million for the six months ending January 31, 2007 compared to the six months ending January 31, 2006 reflecting the impact of higher accounts receivable partly offset by increased net income (loss), adjusted for non-cash charges,.

     Net cash used in investing activities increased $4.4 million for the six months ended January 31, 2007 compared to the six months ended January 31, 2006 reflecting the use of cash in the HESCO Acquisition. Capital expenditures for the six months ended January 31, 2007 and 2006 were $2.3 million and $1.4 million, respectively, comprised primarily of expenditures related to the development and enhancement of information technology systems.

     Net cash of $6.5 million was provided by financing activities for the six months ended January 31, 2007 compared to net cash of $4.5 million used in the six months ended January 31, 2006, reflecting the change in restricted cash and cash equivalents used to secure a performance bond in Pennsylvania and $2.2 million of cash used in the six months ended January 31, 2006 to repurchase company stock in connection with a settlement agreement with former executive officers.

   Contractual Obligations

     As of January 31, 2007, we have forward-purchase contract commitments (entered into in the normal course of doing business) for $37.5 million in electricity and $8.1 million in gas. These contracts are for one year or less and are with various suppliers.

Critical Accounting Policies and Estimates

     The discussion and analysis of our financial condition and operating results are based on our consolidated financial statements. The preparation of this Form 10-Q requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in our notes to the consolidated financial statements. The accounting policies discussed below are those that we consider to be critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. For all of these policies, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

• Accounting for Derivative Instruments and Hedging Activities — We purchase substantially all of our power and natural gas under forward physical delivery contracts for supply to our retail customers. These forward physical delivery contracts are defined as commodity derivative contracts under Statement of Financial Accounting Standard, or SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Using the exemption available for qualifying contracts under SFAS No. 133, we apply the normal purchase and normal sale accounting treatment to a majority of our forward physical delivery contracts. Accordingly, we record revenue generated from customer sales as energy is delivered to our retail

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	customers and the related energy cost under our forward physical delivery contracts is recorded as direct energy costs when received from our suppliers. We use financial derivative instruments (such as swaps, options and futures) as an effective way of assisting in managing our price risk in energy supply procurement. For forward or future contracts that do not meet the qualifying criteria for normal purchase, normal sale accounting treatment, we elect cash flow hedge accounting, where appropriate.
	We also utilize other financial derivatives, primarily swaps, options and futures to hedge our commodity price risks. Certain derivative instruments, which are designated as economic hedges or as speculative, do not qualify for hedge accounting treatment and require current period mark to market accounting in accordance with SFAS No. 133, with fair market value being used to determine the related income or expense that is recorded each quarter in the statement of operations. As a result, the changes in fair value of derivatives that do not meet the requirements of normal purchase and normal sale accounting treatment or cash flow hedge accounting are recorded in operating income (loss) and as a current or long-term derivative asset or liability. To the extent that the hedges are not effective, for transactions qualifying as hedges, any ineffective portion of the changes in fair market value is recorded currently in direct energy costs. The subsequent changes in the fair value of these contracts could result in operating income (loss) volatility as the fair value of the changes are recorded on a net basis in direct energy costs in our consolidated statement of operations for each period.
	As a result of a sale on January 28, 2005 of two significant electricity forward physical delivery contracts (on a net cash settlement basis) back to the original supplier, the normal purchase and normal sale exemption under SFAS No. 133 was no longer available for our Pennsylvania market (PJM-ISO). Accordingly, for the period from February 2005 through July 2006, we designated forward physical delivery contracts entered into for our Pennsylvania electricity market (PJM-ISO) as cash flow hedges, whereby market to market accounting gains or losses were deferred and reported as a component of Other Comprehensive Income (Loss) until the time of physical delivery. Effective August 1, 2006, the normal purchase and normal sale exemption has been reinstated for the PJM-ISO market.
•	Utility and independent system operator — Included in direct energy costs, along with the cost of energy that we purchase, are scheduling costs, Independent System Operator, or ISO, fees, interstate pipeline costs and utility service charges. The actual charges and certain energy costs are not finalized until subsequent settlement processes are performed for all distribution system participants. Prior to the completion of settlements (which may take from one to several months), we estimate these costs based on historical trends and preliminary settlement information. The historical trends and preliminary information may differ from actual information resulting in the need to adjust previous estimates.
•	Allowance for doubtful accounts — We maintain allowances for doubtful accounts for estimated losses resulting from non-payment of customer billings. If the financial conditions of certain of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
•	Net revenue and unbilled receivables — Our customers are billed monthly at various dates throughout the month. Unbilled receivables represent the estimated sale amount for power delivered to a customer at the end of a reporting period, but not yet billed. Unbilled receivables from sales are estimated based upon the amount of power delivered, but not yet billed, multiplied by the estimated sales price per unit.
•	Inventory — Inventory consists of natural gas in storage as required by state regulators and contracted obligations under customer choice programs. Inventory is stated at the lower of cost or market.
•	Customer Acquisition Cost — The Company pays an upfront fee to certain third-party vendors upon the successful acquisition of new customer contracts. These customer acquisition costs related to specific new customers contracts acquired are deferred and amortized over the life of the initial customer contract, typically one year.
•	Legal matters — From time to time, we may be involved in litigation matters. We regularly evaluate our exposure to threatened or pending litigation and other business contingencies and accrue for estimated losses on such matters in accordance with SFAS No. 5, “Accounting for Contingencies.” As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expense relating to our contingencies. Such additional expense could potentially have a material adverse impact on our results of operations and financial position.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     There have been no material changes to information called for by this Item 3 of Part I to this Quarterly Report on Form 10-Q from the disclosures set forth in Part II, Item 7A in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the year ended July 31, 2006 (the “Form 10-K”), except as set forth below:

     As of January 31, 2007, we had 70% of our forecasted fixed-priced energy load through July 31, 2007 covered through either fixed price power purchases with counterparties, or price protected through financial hedges.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

     Our Chief Executive Officer and our Chief Financial Officer have concluded, based upon their evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that all information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, and allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

     In connection with the above-referenced evaluation, no change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     Reference is made to Form 10-K/A (Amendment No. 1) for the year ended July 31, 2006 (the “Form 10-K”) and our Quarterly Report on Form 10-Q for the period ended October 31, 2006 (the “October 2006 Form 10-Q”) for a summary of our previously reported legal proceedings. Since the date of the October 2006 Form 10-Q, there have been no material developments in previously reported legal proceedings, except as set forth below.

     Arbitration Proceeding with American Communications Network. On November 30, 2006, representatives of the Company and American Communications Network met in New York City with a mediator in an effort to resolve their dispute prior to arbitration. The parties were unable to reach agreement on terms of a settlement. The parties have selected a panel of three arbitrators to hear their dispute and have set April 30, 2007 as the commencement date of the arbitration proceeding, a date which is subject to change. Although the Company cannot predict the outcome of this matter, it intends to pursue the claims vigorously and currently believes that no loss accrual is warranted related to this matter.

     APX Settlement. Reference is made to the description of the settlement of the APX proceedings involving Commerce set forth in Part II, Item 5 in this Report. That description is incorporated by reference in this Item I of Part II of this Report.

     The Company is currently, and from time to time may become, involved in litigation concerning claims arising out of the operations of the Company in the normal course of business. The Company is currently not involved in any legal proceeding that is expected, individually or in the aggregate, to have a material adverse effect on the Company’s results of operations or financial position.

Item 1A. Risk Factors.

     There have been no significant changes to the risk factors disclosed in the Form 10-K, except as described below:

     We may need additional capital in the future and it may not be available on acceptable terms, or not at all.

     Looking ahead at long-term needs, we may need to: raise additional capital to fund the working capital requirements of our operations and growth beyond 2007; enhance or expand the range of services or products we offer to our customers; or respond to competitive pressures or perceived opportunities, such as investment, acquisition and expansion activities. If such additional capital funds are not available when required or on acceptable terms, our business and financial results could suffer.

     We may issue additional shares of common stock that may dilute the value of our common stock and adversely affect the market price of our common stock.

     In addition to the approximately 29.7 million shares of our common stock outstanding at March 9, 2007, we may issue additional shares of common stock in the following scenarios: a significant number of additional shares of our common stock my be issued if we seek to raise capital through offerings of our common stock, securities convertible into our common stock, or rights to acquire such securities or our common stock. Additionally, we may issue approximately 7.6 million shares of our common stock pursuant to outstanding stock options; and 1.1 million shares of our common stock pursuant to awards under our 2006 Stock Incentive Plan.

     A large issuance of shares of our common stock will decrease the ownership percentage of current outstanding shareholders and may result in a decrease in the market price of our common stock. Any large issuance may also result in a change in control of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     None.

Item 3. Defaults Upon Senior Securities.

     None.

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Item 4. Submission of Matters to a Vote of Security Holders.

     The following two proposals were presented to and voted on at the Company’s annual meeting of stockholders held on January 25, 2007 (the “Annual Meeting”): (a) the election of two Class III directors to the Board of Directors to hold office for a term of three years, or until their respective successors are elected and qualified; and (b) a proposal to ratify the appointment of Hein & Associates LLP as the Company’s independent registered public accounting firm for the fiscal year ending July 31, 2007.

     Proposal 1. The following nominees to the Board of Directors were elected to serve as Class III directors to hold office for a term of three years, or until their respective successors are elected and qualified: Dennis R. Leibel and Robert C. Perkins. Steven S. Boss and Gary J. Hessenauer continued in office as Class I Directors and Charles E. Bayless and Mark S. Juergensen continued in office as Class II Directors after the Annual Meeting.

     Dennis R. Leibel and Robert C. Perkins were elected as directors by a plurality vote. The tabulation of the votes cast for the election of directors was as follows:

Nominee	Votes For		Votes Withheld
Dennis R. Leibel		18,496,596		487,995
Robert C. Perkins		17,366,809		1,617,782

     Proposal 2. The proposal to ratify the appointment of Hein & Associates LLP as the Company’s independent registered public accounting firm for the fiscal year ending July 31, 2007 was approved. The affirmative vote of a majority of shares of common stock of the Company represented in person or by proxy at the Annual Meeting and actually voting on the proposal was required for approval. The tabulation of votes was as follows:

For	Against		Abstain		Broker Non-Votes
18,751,388		72,747		160,456		0

Item 5. Other Information.

APX Proceeding Settlement.

During 2000 and 2001, Commerce bought, sold and scheduled power in the California wholesale energy markets through the markets and services of APX, Inc. (“APX”). As a result of a complaint filed at the Federal Energy Regulatory Commission (“FERC”) by San Diego Gas and Electric Co. in August 2000 and a line of subsequent FERC orders, Commerce became involved in proceedings at FERC related to sales and schedules in the California Power Exchange Corporation (“PX”) and the California Independent System Operator Corporation (“CAISO”) markets, Docket No. EL00-95 (the “California Refund Case”). A part of that proceeding related to APX’s involvement in those markets.

On January 5, 2007, APX, Commerce and certain other parties (collectively, the “Settling Parties”) signed an APX Settlement and Release of Claims Agreement (the “Settlement Agreement”) and filed such agreement along with a Joint Offer of Settlement and Motion for Expedited Consideration with FERC in the California Refund Case. The Settlement Agreement, among other things, established a mechanism for allocating refunds owed to APX and to resolve certain other matters and claims related to APX’s participation in the PX and CAISO centralized spot markets for wholesale electricity from May 1, 2000 through June 20, 2001. The effectiveness of the Settlement Agreement was subject to receipt of FERC’s approval, which was received on March 1, 2007.

Under the Settlement Agreement, several Settling Parties will be entitled to payments from APX, with Commerce expected to receive up to approximately $6.5 million. Although the precise amount and timing of the disbursements under the Settlement Agreement will depend on a number of factors, including, without limitation, verification of settlement calculations, the Company expects to receive a portion of the payment in March 2007. The monies earmarked for Commerce under the settlement are not guaranteed to be paid, and Commerce has not independently verified the amounts payable. By entering into the Settlement Agreement, claims against Commerce by any party to the Settlement Agreement for refunds, disgorgement of profits or other monetary or non-monetary remedies for APX-related claims shall be deemed resolved with prejudice and settled insofar as APX remains a net payment recipient (as that term is defined in the Settlement Agreement) in the proceeding at FERC.

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In addition, the Settlement Agreement resolves and terminates certain disputes pending before FERC and the United States Court of Appeals for the Ninth Circuit relating to APX’s actions in the PX and CAISO centralized spot markets for wholesale electricity, as well as disputes among participants in the APX market and the appropriate allocation of monies due among the APX participants insofar as APX continues to be a net refund recipient during the settlement period.

The Settlement Agreement is subject to rehearing review at FERC, requests for which must be made no later than March 30, 2007, and possible court review. Commerce, subject to the order of a court, FERC or other body with jurisdiction, could be required to return or redistribute some or all of the funds received under the Settlement Agreement.

The foregoing summary of the Settlement Agreement is not complete and is qualified in its entirety by reference to the Settlement Agreement, which is attached hereto as Exhibit 10.2 and incorporated herein by reference.

Third Amendment to Loan and Security Agreement and Waiver

On March 15, 2007, the Company and Commerce entered into a Third Amendment to Loan and Security Agreement and Waiver (the “Third Amendment”) pursuant to which Wachovia Capital Finance Corporation (Western) and The CIT Group/Business Credit, Inc. (collectively, the “Lenders”) waived prior or existing instances of covenant non-compliance relating to the maintenance of a minimum Fixed Charge Coverage Ratio and a minimum amount of Excess Availability, each as defined in the Credit Facility. The Lenders also agreed in the Third Amendment to extend the period of time during which Commerce will be permitted to maintain a reduced level of Excess Availability in the future.

     The foregoing summary of the Third Amendment is not complete and is qualified in its entirety by reference to the Third Amendment, which is attached hereto as Exhibit 10.9 and incorporated herein by reference.

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Item 6. Exhibits.

     The exhibits listed below are hereby filed with the Securities and Exchange Commission (the “SEC”) as part of this Report.

Exhibit
Number	Description
3.1	Amended and Restated Certificate of Incorporation of Commerce Energy Group, Inc., previously filed with the SEC on July 6, 2004 as Exhibit 3.3 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
3.2	Certificate of Designation of Series A Junior Participating Preferred Stock of Commerce Energy Group, Inc. dated July 1, 2004 previously filed with the SEC on July 6, 2004 as Exhibit 3.4 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
3.3	Amended and Restated Bylaws of Commerce Energy Group, Inc., previously filed with the SEC on July 6, 2004 as Exhibit 3.6 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
4.1	Rights Agreement, dated as of July 1, 2004, entered into between Commerce Energy Group, Inc. and Computershare Trust Company, as rights agent, previously filed with the Commission on July 6, 2004 as Exhibit 10.1 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
4.2	Form of Rights Certificate, previously filed with the Commission on July 6, 2004 as Exhibit 10.2 to Commerce Energy Group. Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
10.1	Amendment No. 1 to Employment Agreement dated November 30, 2006 by and between Commerce Energy Group, Inc. and Lawrence Clayton, Jr.
10.2	APX Settlement and Release of Claims Agreement dated as of January 5, 2007 by and among the Settling Parties, including Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.).
10.3	Commerce Energy Group, Inc. Bonus Program, effective January 25, 2007, previously filed with the SEC on January 31, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.4	Amendment No. 1 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.2 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.5	Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.3 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.6	Amendment No. 2 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Lawrence Clayton, Jr., previously filed with the SEC on January 31, 207 as Exhibit 99.4 to Commerce Energy Group, Inc.’s Current Report on form 8-K and incorporated by reference herein.
10.7	Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Lawrence Clayton, Jr., previously filed with the SEC on January 31, 2007 as Exhibit 99.5 to Commerce energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.8	Amended and Restated Non-Employee Director Compensation Policy, Effective January 25, 2007, previously filed with the SEC on January 31, 2007 as Exhibit 99.6 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.9	Third Amendment to Loan and Security Agreement dated March 15, 2007 among Commerce Energy, Inc., Commerce Energy Group, Inc., Wachovia Capital Finance Corporation (Western) and The CIT Group/Business Credit, Inc.
31.1	Principal Executive Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

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Exhibit
Number	Description
31.2	Principal Financial Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of Act of 1934.
32.1	Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMERCE ENERGY GROUP, INC.
Date: March 19, 2007	By:	/s/ STEVEN S. BOSS
		Steven S. Boss
		Chief Executive Officer (Principal Executive Officer)

Date: March 19, 2007	By:	/s/ LAWRENCE CLAYTON, JR.
		Lawrence Clayton, Jr.
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
3.1	Amended and Restated Certificate of Incorporation of Commerce Energy Group, Inc., previously filed with the SEC on July 6, 2004 as Exhibit 3.3 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
3.2	Certificate of Designation of Series A Junior Participating Preferred Stock of Commerce Energy Group, Inc. dated July 1, 2004 previously filed with the SEC on July 6, 2004 as Exhibit 3.4 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
3.3	Amended and Restated Bylaws of Commerce Energy Group, Inc., previously filed with the SEC on July 6, 2004 as Exhibit 3.6 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
4.1	Rights Agreement, dated as of July 1, 2004, entered into between Commerce Energy Group, Inc. and Computershare Trust Company, as rights agent, previously filed with the Commission on July 6, 2004 as Exhibit 10.1 to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
4.2	Form of Rights Certificate, previously filed with the Commission on July 6, 2004 as Exhibit 10.2 to Commerce Energy Group. Inc.’s Registration Statement on Form 8-A and incorporated herein by reference.
10.1	Amendment No. 1 to Employment Agreement dated November 30, 2006, by and between Commerce Energy Group, Inc. and Lawrence Clayton, Jr.
10.2	APX Settlement and Release of Claims Agreement dated as of January 5, 2007 by and among the Settling Parties, including Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.).
10.3	Commerce Energy Group, Inc. Bonus Program, effective January 25, 2007, previously filed with the SEC on January 31, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.4	Amendment No. 1 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.2 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.5	Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.3 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.6	Amendment No. 2 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Lawrence Clayton, Jr., previously filed with the SEC on January 31, 207 as Exhibit 99.4 to Commerce Energy Group, Inc.’s Current Report on form 8-K and incorporated by reference herein.
10.7	Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and Lawrence Clayton, Jr., previously filed with the SEC on January 31, 2007 as Exhibit 99.5 to Commerce energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.8	Amended and Restated Non-Employee Director Compensation Policy, Effective January 25, 2007, previously filed with the SEC on January 31, 2007 as Exhibit 99.6 to Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated by reference herein.
10.9	Third Amendment to Loan and Security Agreement dated March 15, 2007 among Commerce Energy, Inc., Commerce Energy Group, Inc., Wachovia Capital Finance Corporation (Western) and The CIT Group/Business Credit, Inc.
31.1	Principal Executive Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

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Exhibit
Number	Description
31.2	Principal Financial Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of Act of 1934.
32.1	Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

Exhibit 10.1

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

     AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this “Amendment”), dated as of November 30, 2006, to the Employment Agreement (the “Agreement”), dated as of December 1, 2005 by and between COMMERCE ENERGY GROUP, INC., a Delaware corporation, on behalf of itself and any and all of its subsidiaries (together, the “Company”), and LAWRENCE CLAYTON, JR. (“Executive”).

WITNESSETH:

     WHEREAS, the parties have entered into the Agreement;

     WHEREAS, Section 4(f) of the Agreement provides for the payment of up to $100,000 by the Company to Executive for expenses and incidental costs associated with his relocation; provided, however, that $80,000 of such expenses are required to have been incurred by Executive prior to December 1, 2006;

     WHEREAS, Executive will not have incurred all expenses and incidental costs expected to be associated with his relocation prior to December 1, 2006;

     WHEREAS, the parties desire to extend the period of time during which Executive may incur expenses associated with his relocation and continue to qualify for reimbursement thereof by the Company; and

     WHEREAS, pursuant to and in accordance with Section 16 of the Agreement, the parties wish to amend the Agreement as set forth in this Amendment;

     NOW, THEREFORE, in consideration of the rights and obligations contained herein, and for other good and valuable consideration, the adequacy of which is hereby acknowledged, the parties agree as follows:

     Section 1. Relocation Payment; Reimbursement of Relocation Costs. Section 4(f) of the Agreement is hereby amended and restated in its entirety to read:

     “(f) Relocation Payment; Reimbursement of Relocation Costs. The Company will provide Executive with a relocation payment in the amount of $20,000 for incidental costs associated with his relocation, which incidental costs need not be supported by documentation. In addition, upon submission of documentation acceptable to the Company, the Company will reimburse Executive for expenses incurred in connection with Executive’s relocation to a reasonable commuting distance from the Company’s headquarters office, up to a maximum of $80,000 (for a combined total possible relocation amount of $100,000), provided that (i) the documented relocation expense shall have been incurred on or prior to July 1, 2007, and (ii) Executive shall not be related by blood or marriage to any person who is the provider or an employee of the provider of any service or facility to which the documented relocation expense relates. The documented relocation expense reimbursement under this subsection (f) shall cover such items as real estate commissions paid by Executive in connection with the sale of

the Texas residence owned by Executive, and closing costs for the purchase by Executive of a primary residence within a reasonable commuting distance on the Company’s headquarters office; rent for temporary housing in Southern California; reasonable costs associated with roundtrip travel by Executive and his spouse related to house hunting and/or relocation; and reasonable costs associated with the moving and storage of Executive’s household goods. Any living expenses (including reasonable travel expenses) incurred by Executive in Southern California on or after January 1, 2007 shall be deemed relocation expenses, and Executive shall be entitled to reimbursement therefor under the above-referenced $80,000 documented relocation expense provision.”

     Section 2. Effect of Amendment. Upon effectiveness of this amendment, each reference in the Agreement to “this Agreement”, “hereunder,” “hereof” or words of like import referring to the Agreement shall mean and be a reference to the Agreement as amended hereby. Except as specifically amended hereby, the Agreement is and shall continue to be in full force and effect and is in all respects ratified and confirmed. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any party under the Agreement.

     Section 3. Incorporation by Reference. The provisions of Sections 7 (Interpretation, Governing Law and Exclusive Forum), 10 (Severability), 11 (Successors and Assigns), 12 (Notices), 14 (Dispute Resolution), 15 (Representations), 16 (Amendments and Waivers) and 20 (Counterparts) of the Agreement shall be incorporated into this Amendment, mutatis mutandis, as if references to “this Agreement” in the Agreement were references to “this Amendment” in this Amendment.

     Section 4. Entire Agreement. Except for Executive’s Stock Option and Restricted Stock Agreements and his Indemnification Agreement (the form of each agreement as set forth as an exhibit to this Agreement), all oral or written agreements or representations, express or implied, with respect to the subject matter of the Agreement, as amended hereby, are set forth in the Agreement, as amended hereby.

[remainder of page intentionally left blank; signatures appear on following page(s)]

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     IN WITNESS WHEREOF, the Company and Executive have caused this Amendment to be executed by as of the date first written above by their respective officers thereunto duly authorized.

“Company” COMMERCE ENERGY GROUP, INC.
By:	/s/ STEVEN S. BOSS
	Name:	Steven S. Boss
	Title:	Chief Executive Officer
“Executive”
/s/ LAWRENCE CLAYTON, JR.
LAWRENCE CLAYTON, JR.

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EX-10.2

EXHIBIT 10.2

APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

     This Agreement is entered into, as of January 5, 2007, by and among each of the following:

APX Inc.
Allegheny Energy Supply Company, LLC
American Electric Power Service Corp.
Aquila Merchant Services, Inc.
Avista Energy, Inc.
BP Energy Company
Calpine Energy Services, L.P.
Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.)
Constellation NewEnergy, Inc.
El Paso Marketing, LP (f/k/a El Paso Merchant Energy, LP)
Enron Energy Services, Inc.
Enron Power Marketing, Inc.
Sacramento Municipal Utility District
Salt River Project Agricultural Improvement and Power District
Merrill Lynch Capital Services, Inc.
Morgan Stanley Capital Group Inc.
Tractebel Energy Marketing, Inc. (n/k/a Suez Energy Marketing NA, Inc.)
TransAlta Energy Marketing (US) Inc.
Sempra Energy Solutions LLC
UC Davis Medical Center (The Regents of the University of California)
Sierra Pacific Industries

     Each of the above-described entities is a Sponsoring Party, and collectively are Sponsoring Parties to this Agreement and, together with the Subject Parties, are “Parties” to this Agreement. Unless otherwise expressly provided for herein, each capitalized term used in this Agreement shall have the meaning set forth for such term in Section 1 or as defined elsewhere in this Agreement.

RECITALS

     Whereas, various of the Parties are engaged in or have an interest in complex and disputed proceedings including but not limited to proceedings before FERC and related appeals pending before the United States Court of Appeals for the Ninth Circuit, Enron Bankruptcy Proceedings, Calpine Bankruptcy Cases, appellate proceedings, litigation, and investigations regarding numerous issues and allegations arising from events in the Western electricity markets in 2000 and 2001, including but not limited to transactions facilitated by the APX.

     Whereas, the Sponsoring Parties collectively represent approximately 95% of the value attributable to the APX Transactions during the Settlement Period;

     Whereas, EESI and EPMI, both participants in the APX, are debtors in the Enron Bankruptcy Cases;

     Whereas, Calpine Energy Services, L.P. (successor in interest to Calpine Power Services Company) (“Calpine”), a participant in the APX, is a debtor in the Calpine Bankruptcy Cases;

     Whereas, the Parties have determined that it is preferable to settle the disputes addressed herein, rather than engage in costly, protracted and uncertain litigation and to facilitate distribution of funds claimed to be owed and owing by and to the Parties;

     Whereas, this Agreement contemplates a comprehensive resolution of all disputes and other matters between the Parties with respect to the APX Related Claims, except as expressly reserved in Section 6.7 below, (i) through the settlement of the regulatory proceedings, bankruptcy proceedings, appellate proceedings, litigation, proofs of claim, and claims identified herein, solely as to the portions thereof pertaining to the APX Related Claims between the Parties, and (ii) by effectuating the transactions, granting of rights and benefits, and assumption of obligations specified and provided for herein; and

     Whereas, the Parties believe that the implementation of this Agreement will simplify and expedite the overall re-settlement of the California centralized markets during the Settlement Period, avoid potential future issues with respect to cash clearing and liability arising from the APX Related Claims, and, therefore, serves the public interest.

     Now, Therefore, in consideration of the mutual covenants and agreements, and other good and valuable consideration provided for herein, the sufficiency of which is hereby acknowledged, intending to be legally bound, and to resolve definitively and for all time, any and all present, past and potential differences and disputes between them related to the APX Related Claims, except as expressly reserved in Section 6.7, and subject to and upon the terms and conditions hereof, the Parties agree as follows:

AGREEMENT

1. DEFINITIONS

     The following capitalized terms, which are in addition to other terms with initial capital letters defined in the body of this Agreement or by the context in which they appear in this Agreement, when used in this Agreement shall have the meanings specified in this Section when used herein.

1.1.	“Affiliate” means, with respect to any person, any other person (other than an individual) that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such person. For this purpose, “control” means the direct or indirect ownership of fifty percent (50%) or more of the outstanding capital stock or other equity interests having ordinary voting power.
1.2.	“Agreement” means this APX Settlement and Release of Claims Agreement as the same may be amended, modified, supplemented, or replaced from time to time by written agreement of the Parties.
1.3.	“APX” means APX Inc. also having done business as the Automated Power Exchange.

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1.4.	“APX Escrow Account” shall have the meaning provided in Section 4.5.
1.5.	“APX Holding Account” means the account that APX uses to cash clear PX and ISO amounts for APX Participants.
1.6.	“APX Monetary Reserve” means one or more APX accessible accounts maintained with Comerica Bank – California, or a successor entity appointed by APX, that contains cash to secure all or a portion of the obligations of certain APX Participants.
1.7.	“APX Participant” means the entities identified on Exhibit A attached hereto and their respective Guarantors.
1.8.	“APX Payment Recipients” mean all APX Participants entitled to receive a net payment pursuant to this Agreement, as indicated in Exhibit B attached hereto.
1.9.	“APX Related Claims” means all claims, demands, causes of action, offsets or setoffs and any resulting losses, damages, expenses, attorneys’ fees and court costs that the Parties and their Affiliates or Guarantors have or may have against each other and their Affiliates or Guarantors in the FERC Proceedings during the Settlement Period arising out of the APX’s participation in the PX and ISO centralized markets for wholesale electricity including, but not limited to (a) ISO Amendment 51 and/or ISO GFN Adjustments involving APX and included in the cash clearing for APX Transactions and (b) FERC refunds for APX Transactions during the Settlement Period.
1.10.	“APX Transactions” means energy and ancillary services bids, offers, purchases, sales and related transmission schedules submitted and/or completed by APX in the ISO and PX centralized markets and all APX Participant bids and offers, and resulting transactions, that APX cleared among APX Participants.
1.11.	“Authorized Person” means a representative of a Party with authority to bind the Party to the terms of this Agreement.
1.12.	“Bankruptcy Code” means Title 11 of the United States Code, as the same may be amended from time to time.
1.13.	“Bankruptcy Rule 9019 Motion” has the meaning set forth in Section 7.5.
1.14.	“Business Day” means a calendar day falling within Monday through Friday except for Federal holidays.
1.15.	“California Parties” means collectively, Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, the People of the State of California, ex rel. Bill Lockyer, Attorney General, the California Department of Water Resources acting solely under authority and powers created by California Assembly Bill 1 from the First Extraordinary Session of 2000-2001, codified in Sections 80000 through 80270 of the California Water Code (“CERS”), the California Electricity Oversight Board, and the California Public Utilities Commission.

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1.16.	“Calpine Bankruptcy Cases” means collectively, the cases commenced under Chapter 11 of the Bankruptcy Code by Calpine Corporation and certain affiliates on or after the initial petition date of December 20, 2005, styled In re Calpine Corporation, et al., Chapter 11 Case Nos. 05-60200 (BRL), et al., Jointly Administered, pending before the United States Bankruptcy Court for the Southern District of New York.
1.17.	“Calpine Bankruptcy Court” means the court before which the Calpine Bankruptcy Cases are pending: United States Bankruptcy Court, Southern District of New York.
1.18.	“Calpine Bankruptcy Court Order” means the Calpine Bankruptcy Court order granting the Required Calpine Bankruptcy Court Approval regardless of whether such order or orders are subject to appeal; provided that such order or orders have not been stayed pending such appeal.
1.19.	“Contributing Seller” has the meaning given in Section 4.4.
1.20.	“EESI” means Enron Energy Services, Inc.
1.21.	“Enron” or the “Enron Parties” means EPMI and EESI.
1.22.	“Enron Bankruptcy Cases” means, collectively, the cases commenced under Chapter 11 of the Bankruptcy Code by the Enron Debtors and certain affiliates on or after the Initial Petition Date, styled In re Enron Corp. et al., Chapter 11 Case No. 01-16034 (AJG) Jointly Administered, pending before the Enron Bankruptcy Court.
1.23.	“Enron Bankruptcy Court” means the court before which the Enron Bankruptcy Cases are pending: United States Bankruptcy Court, Southern District of New York.
1.24.	“Enron Bankruptcy Court Order” means the Enron Bankruptcy Court order granting the Required Approval with respect to the Enron Bankruptcy Proceedings, in accordance with Sections 7.1 and 7.3 of this Agreement.
1.25.	“Enron Bankruptcy Proceedings” means, collectively, the Enron Bankruptcy Cases and all related adversary proceedings, claims objection proceedings, and appeals pending before the Enron Bankruptcy Court and the United States District Court for the Southern District of New York, and any proceedings on remand.
1.26.	“Enron-California Parties Settlement Agreement” means that certain settlement between Enron, the California Parties, and the FERC’s Office of Market Oversight and Investigations (“OMOI”) approved by FERC in an order dated November 15, 2005.
1.27.	“Enron Debtors” means EPMI and EESI, together with their Affiliates, all as debtors in possession (or reorganized debtors) on behalf of themselves and their respective estates.
1.28.	“Enron Non-Settling Parties” has the meaning given in Section 2.2.1.

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1.29.	“Enron Plan” means the Supplemental Modified Fifth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the Bankruptcy Code confirmed by the Enron Bankruptcy Court on or about July 15, 2004, in the Enron Bankruptcy Cases as it may be amended, modified, or supplemented from time to time in accordance with the terms thereof.
1.30.	“Enron PX Collateral” means the cash collateral and letter of credit proceeds held in the Enron PX Collateral Account totaling one hundred forty five million four hundred fifty two thousand nine hundred forty seven dollars and no cents ($145,452,947) as of November 30, 2006 and including any additional accrued interest prior to distribution as required herein.
1.31.	“Enron PX Collateral Account” means the Bank of New York Trust company, N.A. segregated escrow sub-accounts Number 028269 identified to EPMI.
1.32.	“Enron Settlement Amount” means eleven million dollars and no cents ($11,000,000).
1.33.	“Enron Settlement Reserve” has the meaning given in Section 2.2.1.
1.34.	“EPMI” means Enron Power Marketing, Inc.
1.35.	“Execution Date” means, with respect to a Sponsoring Party, the date upon which this Agreement has been executed by such Party, including execution by any Party in accordance with Section 9.2 of this Agreement.
1.36.	“Existing Global Settlements” are those listed on Exhibit F.
1.37.	“FERC” means the Federal Energy Regulatory Commission.
1.38.	“FERC Proceedings” means the Refund Proceeding and any related appeals and/or petitions for review and any proceedings on remand relating to the foregoing proceeding insofar and only to the extent that such proceedings are related to the APX Transactions.
1.39.	“FERC Settlement Order” means a FERC order meeting the requirements for a Required FERC Approval in accordance with Section 7 of this Agreement, regardless of whether such order is subject to requests for rehearing or appeals and regardless of whether such order is subsequently modified or reversed by FERC or a court subsequent to the Settlement Effective Date; provided that on the Settlement Effective Date, such order has not been stayed by FERC or a reviewing court pending such rehearing or appeal.
1.40.	“Final and Non-Appealable” with respect to an order of the Enron Bankruptcy Court, shall mean such order has not been reversed, stayed, modified, amended or vacated and as to which (a) any appeal taken, petition for certiorari or motion for rehearing or reconsideration that has been filed, has been finally determined or dismissed or (b) the time to appeal, seek certiorari or move for reconsideration or rehearing has expired and

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	no appeal, petition for certiorari or motion for reconsideration or rehearing has been timely filed.
1.41.	“Final Staff Report” means the final report entitled “Final Report on Price Manipulation in Western Markets — Fact-Finding Investigation of Potential Market Manipulation of Electric and Natural Gas Prices” issued by FERC staff on March 26, 2003 in FERC Docket No. PA02-2.
1.42.	“FPA” means the Federal Power Act, as codified at 16 U.S.C. §791a et. seq., as the same may be amended from time to time.
1.43.	“Governmental Authority” means any “governmental unit” as defined in Section 101 of the Bankruptcy Code.
1.44.	“Guarantor” means with respect to a Party, one who guarantees the payment obligations of the Party pursuant to the applicable ISO tariff, the PX tariff or the APX Participant agreement.
1.45.	“Initial Distribution” has the meaning given in Section 4.5.
1.46.	“Initial Petition Date” means December 2, 2001, the date certain that the Enron Debtors, including EPMI and EESI, filed petitions for relief under Chapter 11 of the Bankruptcy Code and commenced the Enron Bankruptcy Cases in the Enron Bankruptcy Court.
1.47.	“Initial Staff Report” means the Initial Report released by FERC staff on August 13, 2002 in connection with the FERC investigation in FERC Docket No. PA02-2.
1.48.	“ISO” means the California Independent System Operator Corporation, a California public benefit corporation, and any successor thereto.
1.49.	“ISO Amendment 51” means the system recalculation performed by the ISO pursuant to procedures described by the ISO in filings made in FERC Docket No. ER03-746, the purpose of which was to establish the appropriate baseline against which to apply the mitigated market price methodology to applicable APX Transactions during the Refund Period.
1.50.	“ISO GFN Adjustments” means ISO adjustments for the April 1998 to June 20, 2001 timeframe made pursuant to an approved good faith negotiation that are to be cash cleared in connection with the Refund Proceeding.
1.51.	“Material Change Notice” has the meaning given in Section 7.4.
1.52.	“Net Buyers” mean all APX Participants that, on a net basis and without regard to Short Payments owed to them, are entitled to refunds for APX Transactions during the Refund Period, as indicated in Exhibit B by the designation “NB”.

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1.53.	“Net Sellers” mean all APX Participants that, on a net basis and without regard to Short Payments owed to them, are identified as potential refund payers for APX Transactions during the Refund Period, as indicated in Exhibit B by the designation “NS”.
1.54.	“Party” and “Parties” have the meanings set forth in the preamble to this Agreement and is inclusive of their Affiliates and Guarantors.
1.55.	“Pre-Refund Period” means the period from May 1, 2000 through October 1, 2000.
1.56.	“PX” means the California Power Exchange Corporation, a California public benefit corporation.
1.57.	“Refund Period” means the period from October 2, 2000 through June 20, 2001.
1.58.	“Refund Interest Reserve” has the meaning set forth in Section 4.1.3.
1.59.	“Refund Proceeding” means San Diego Gas & Electric Co., et al., FERC Docket No. EL00-95, et al.
1.60.	“Required Approvals” means the Required FERC Approval and Required Enron Bankruptcy Court Approval.
1.61.	“Required Calpine Bankruptcy Court Approval” means an order issued by the Calpine Bankruptcy Court approving this Agreement, as described in Section 7.4, authorizing the Calpine to grant releases in Section 6 below and authorizing the allocation of the Calpine Short Payments and associated interest and the release of collateral as set forth in Section 4.3.
1.62.	“Required Enron Bankruptcy Court Approval” means issuance of an Enron Bankruptcy Court Order that is Final and Non-Appealable.
1.63.	“Required FERC Approval” means an order issued by FERC approving this Agreement as required herein in Section 7.
1.64.	“Retained Enron PX Collateral” has the meaning given in Section 4.2.
1.65.	“Scheduled Liabilities” means the liability schedules prepared and filed by the Enron Debtors with the Enron Bankruptcy Court at or about the time the Enron Debtors filed the Enron Bankruptcy Cases, reflecting sums owed to various third parties.
1.66.	“Seller Contribution Funding Agreement” has the meaning given in Section 4.4.
1.67.	“Seller Funding Amount” has the meaning given in Section 4.4.
1.68.	“Settlement Effective Date” has the meaning set forth in Section 2.3.
1.69.	“Settlement Period” means the combined Pre-Refund Period and Refund Period.

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1.70.	“Shortpay Interest Reserve” has the meaning set forth in Section 4.1.3.
1.71.	“Short Payments” means all funds owed to any APX Participant by the ISO or PX in connection with its APX Transactions during the Settlement Period, inclusive of unpaid soft cap reversals and PX default payment funds held in escrow by the PX as well as $234,799 of CAISO Short Payments due APX Participants for the period July-August 2001.
1.72.	“Sponsoring Party” means all signatories to this Agreement, including those Parties first identified above together with those Parties that elect to become a Sponsoring Party pursuant to Section 9.2.
1.73.	“Subject Parties” means those entities identified in Exhibit A that are not Sponsoring Parties.
1.74.	“Supporting Parties” means Puget Sound Energy, Inc. (“Puget”), Avista Energy, Inc. (“Avista”), and Coral Power, L.L.C. (“Coral”). Avista is both a Sponsoring Party and a Supporting Party. Puget and Coral are signatories to this Agreement as Supporting Parties for the sole purpose of acknowledging and supporting its provisions as a means to resolve such parties’ objections to EPMI’s July 20, 2006 motion for release the Enron PX Collateral in FERC Docket Nos. EL00-95-000 and EL00-98-000.

2. CONDITIONS TO EFFECTIVENESS; SETTLEMENT EFFECTIVE DATE; TERMINATION

2.1.

Agreement Binding as of the Execution Date. Except as provided in Section 2.4 and Section 4.1.1.2, this Agreement shall be a binding obligation of each Party immediately upon the Execution Date.

2.2.

Conditions Precedent to Certain Obligations. The occurrence of the Settlement Effective Date is a condition precedent to: the obligation of a Party to make payments or to allow or release claims or defenses under Sections 4, 5 and 6 hereof, and the effectiveness of all such obligations, allowances, or releases specified hereunder. It shall also be a condition to the effectiveness of this Agreement that Enron and the California Parties reach agreement in accordance with Section 13.6 of the Enron-California Parties Settlement Agreement to modify the Enron-California Parties Settlement Agreement with respect to APX refunds and associated interest from CERS set forth in Section 4.1.4, 4.1.5 and 4.3.3 such that the Enron–California Parties Settlement Agreement is consistent with Section 4.1.1.1 of this Agreement with respect to the rights of Enron Non Settling Parties; provided this condition may be waived by Enron subject to Enron’s full and complete performance of the Enron-California Parties Settlement Agreement including sections 4.1.4, 4.1.5, and 4.3.3 thereof. It shall be a further condition to the effectiveness of this Agreement, unless expressly waived by Enron, that, in accordance with Section 7 and unless the FERC Settlement Order makes an express, specific finding to the contrary, the FERC Settlement Order shall be deemed and construed as an order finding and concluding:

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2.2.1.	The following funds are sufficient and adequate to protect the interests of Enron Non-Settling Parties: (a) the Enron Settlement Amount, plus (b) the Retained Enron PX Collateral, to create a total fund of fourteen million five hundred thousand dollars and no cents ($14,500,000.00) in the Enron PX Collateral Account (the “Enron Settlement Reserve”), plus (c) the funds already set aside in escrow (approximately $2.8 million) pursuant to the Enron-California Parties Settlement Agreement for “Non-Settling Participants” (as that term is defined in the Enron-California Parties Settlement Agreement) so long as they remain “Non-Settling Participants” (the “Enron Non-Settling Parties”), such funds totaling approximately $17.3 million, provided, however, that the Enron Settlement Reserve shall be used, if and only if, any refund amounts due to the Enron Non-Settling Parties from Enron (as determined by FERC) resulting from participation in the ISO and PX markets are unpaid directly as a result of EPMI’s bankruptcy or otherwise.
2.2.2.	The allocation of the Enron Settlement Reserve for the Enron Non-Settling Parties set forth in Exhibit D is appropriate to protect the interests of the Supporting Parties, as well as the other Enron Non-Settling Parties, as described in Exhibit D, if and only if, any refund amounts due to the Enron Non-Settling Parties from Enron (as determined by FERC) resulting from participation in the ISO and PX markets are unpaid directly as a result of EPMI’s bankruptcy or otherwise.
2.2.3.	Subject to the terms and conditions of this Agreement, EPMI’s motion for release of the Enron PX Collateral is reasonable and the PX is ordered to immediately release from the Enron PX Collateral Account to EPMI, for payment to its creditors under the Enron Plan, the balance of EPMI’s assets held by the PX in excess of the Enron Settlement Reserve, plus applicable interest, in the amount of one hundred forty one million nine hundred fifty two thousand nine hundred forty seven dollars and no cents ($141,952,947.00) (which amount reflects the balance in the Enron PX Collateral account as of November 30, 2006 plus the Enron Settlement Amount less the Enron Settlement Reserve), plus interest accrued on the Enron PX Collateral after November 30, 2006.

2.3. Settlement Effective Date. The “Settlement Effective Date” shall occur on the beginning of the third Business Day following the latest of the following dates: (i) the date when the Required FERC Approval (as defined in Section 7) has been issued, provided that a Material Change Notice has not been timely and properly given by a Sponsoring Party as to such approval in accordance with Section 7.4 (unless the other Sponsoring Parties agree in writing, on or before March 1, 2007, that the Settlement Effective Date has occurred notwithstanding any such Material Change Notice), and (ii) the date when the Required Enron Bankruptcy Court Approval has been received provided that no Material Change Notice has been timely and properly given by a Sponsoring Party as to such approval in accordance with Section 7.4 (unless the other Sponsoring Parties agree in writing, on or before March 1, 2007, that the Settlement Effective Date has occurred notwithstanding any such Material Change Notice). On

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	the Settlement Effective Date, Enron shall provide the Sponsoring Parties and the PX with written notice of the occurrence of the Settlement Effective Date.
2.4.	Termination. This Agreement shall terminate in the event any of the following occurs, and not otherwise: (a) unless waived by Enron, if a fully-executed Agreement constituting part of an offer of settlement pursuant to Rule 602 of FERC’s Rules of Practice and Procedure, along with a motion for expedited approval, is not filed with FERC on or before January 5, 2007; (b) unless waived by Enron, if FERC has not issued an order approving the Agreement by March 1, 2007; (c) as to the FERC Settlement Order, FERC issues an order denying approval of this Agreement, or a Sponsoring Party provides to the other Sponsoring Parties with a Material Change Notice and the other Sponsoring Parties do not agree in writing on or before March 1, 2007 that the Settlement Effective Date has occurred notwithstanding the Material Change Notice; (d) as to the Enron Bankruptcy Court Order, the Enron Bankruptcy Court issues an order denying approval of this Agreement, or a Sponsoring Party provides to the other Sponsoring Parties with a Material Change Notice and the other Sponsoring Parties do not agree in writing on or before March 1, 2007 that the Settlement Effective Date has occurred notwithstanding the Material Change Notice; or (e) the Settlement Effective Date has not occurred by the third Business Day after March 1, 2007, unless all Sponsoring Parties consent voluntarily in writing to an extension of such date. Upon the occurrence of the Settlement Effective Date, this Agreement shall not thereafter terminate for any reason. The Sponsoring Parties agree that from and after the Settlement Effective Date (i) they shall be bound by the terms of this Agreement notwithstanding any order or ruling reversing, remanding or otherwise modifying this Agreement on rehearing, reconsideration, appeal or remand of the Enron Bankruptcy Court Order and/or the FERC Settlement Order, and (ii) they shall use reasonable efforts to defend and preserve the terms of this Agreement against any such order or ruling.
2.5.	Effect of Termination. In the event of termination pursuant to Section 2.4, this Agreement shall be of no further force or effect, with all rights, claims, defenses, duties, and obligations of the Parties thereafter restored as if this Agreement had never been executed.

3. SETTLEMENT AND ACKNOWLEDGMENT

3.1. Acknowledgement of Compromise. The payments and other consideration agreed to in this Agreement, along with the covenants and obligations herein, settle and compromise the APX Related Claims and/or defenses of the Parties against each other in the various proceedings described in Exhibit C attached hereto and avoid costly, protracted and uncertain litigation and ensure expedient release of payments under the Agreement.

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4. MONETARY CONSIDERATION PROVIDED BY THE PARTIES

4.1. Monetary Consideration. The monetary settlement consideration exchanged by the Parties shall be comprised of the following terms pursuant to the FERC Settlement Order:

4.1.1. The Parties shall pay and be paid the amounts set forth on Exhibit B attached hereto, subject to the following adjustments:

4.1.1.1.	Enron shall be paid the Enron Settlement Amount ($11,000,000.00) from the APX Escrow Account within ten (10) Business Days of the Settlement Effective Date, which funds shall be used to establish the Enron Settlement Reserve as described in Section 4.2 below. Notwithstanding any other provision in this Agreement and subject to Section 2.2 of this Agreement with regard to Sections 4.1.4, 4.1.5 and 4.3.3 of the Enron-California Parties Settlement Agreement, the Enron Settlement Amount is not subject to any adjustment for any reason as of the Settlement Effective Date.
4.1.1.2.	Calpine’s rights and obligations under this Agreement shall be null and void unless the Required Calpine Bankruptcy Court Approval is received on or before February 28, 2007. Calpine shall provide written notice to the Sponsoring Parties immediately upon the receipt of the Required Calpine Bankruptcy Court Approval. In the event that Calpine does not obtain the Required Calpine Bankruptcy Court Approval by February 28, 2007, then Calpine shall be excluded from this Agreement and the amounts to be paid to Net Buyers, as reflected in Exhibit B shall be reduced on a pro rata basis, by the amount of Calpine’s contribution to the settlement, as reflected in Exhibit B and APX shall proceed to make proportional assignment of its rights, title and interest in Proof of Claim No. 3655 in the Calpine Bankruptcy Cases to the Net Buyers reflected on Exhibit B. In this event, the Parties retain all rights and claims otherwise available to them against Calpine, including but not limited to, in the FERC Proceedings and the Calpine Bankruptcy Case, and this Agreement shall have no effect on those rights and claims.
4.1.1.3.	In the event that any Party is excluded from this Agreement pursuant to Section 9.3, then the amounts to be paid to Net Buyers, as reflected in Exhibit B shall be increased or decreased on a pro rata basis by the amounts allocated to such Party as reflected in Exhibit B.
4.1.1.4.	In the event that amounts due and owing to the APX from the ISO and/or PX are reduced or not paid for any reason, the amounts to be paid to Net Buyers, as reflected in Exhibit B, shall be decreased on a

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	pro rata basis by the amount the ISO and/or PX fail to pay APX. Tractebel will waive its cost recovery filing as moot upon the Settlement Effective Date and will file to withdraw its filing with prejudice as of the date the FERC Settlement Order becomes final and non-appealable. The ISO and PX shall not reduce the refunds to be paid to APX on account of Tractebel’s cost recovery filing.
4.1.1.5.	Within five (5) Business Days following the Settlement Effective Date, APX shall initiate the necessary actions to opt-in to the Existing Global Settlements set forth on Exhibit F, and thereafter use its best efforts to successfully complete such opt-ins. APX shall provide status reports of its efforts in this respect to the Net Buyers at no less than monthly intervals. Within two (2) Business Days following the filing of this Agreement with FERC, APX will supply a copy of this Agreement and all Exhibits to each of the named sellers in the Global Settlement Agreements listed in Exhibit F of this Agreement, and specifically advise each such seller of the existence of this Section 4.1.1.5. To the extent that the California Parties and the named sellers under the Existing Global Settlements agree to waive the deadline provisions for opting into those Global Settlements, APX will opt-in to the Existing Global Settlements within five (5) Business Days of the Settlement Effective Date, or as soon thereafter as any such waivers are provided. All amounts, including interest, paid to APX as a result of it opting into the Existing Global Settlements will be paid to APX in accordance with the terms of those Settlements, and will be flowed through to the Net Buyers listed on Exhibit B on a pro rata basis in accordance with the terms of Section 4.5.
4.1.1.6.	Within two (2) Business Days following the Settlement Effective Date, APX shall pay or debit, as appropriate, to the APX Participants the net collateral listed on Exhibit J, provided however, the collateral shown for EESI on Exhibit J shall be paid as directed in Section 4.5.

4.1.2. Subject to any adjustments pursuant to Section 4.1.1, and pursuant to the procedures set out in Section 4.5, APX shall be ordered to pay and distribute to APX Payment Recipients, in accordance with the amounts shown on Exhibit B (a) all refunds owed to and received by APX from the ISO and PX, including such refunds resulting from APX’s successful opt-in efforts pursuant to Section 4.1.1.5 of this Agreement, plus interest; plus (b) all Short Payments, including those arising from payment defaults, owed to APX from the ISO and PX, to the extent received from the ISO and PX, including interest subject to Sections 4.1.3 and Section 4.3; plus (c) five million one hundred sixty one thousand one hundred seventy eight dollars and ninety six cents ($5,161,178.96) held in the APX Holding Account; plus (d) two million forty five thousand eight hundred twenty two dollars and no cents

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	($2,045,822.00) held as collateral for EESI, which amount shall be released by APX from the APX Monetary Reserve to the APX Escrow Account; plus (e) the Seller Funding Amount under Section 4.4.
4.1.3.	The ISO and PX will include interest on the refunds and Short Payments that they will provide APX pursuant to Section 4.5(a) of this Settlement Agreement. The interest will be determined in accordance with the Commission’s applicable rulings in this proceeding. To the extent that either the ISO or PX has an interest short-fall below the interest rates otherwise required by the Commission’s regulations and rulings in this proceeding related to either the refunds and Short Payments owed APX for APX Transactions in the PX and ISO centralized markets during the Refund Period, they will be permitted to hold-back, as necessary, 25 percent of the interest otherwise owed to APX on the refunds (“Refund Interest Reserve”) and Short Payments (“Shortpay Interest Reserve”), and subject to Section 4.3 pertaining to Calpine. APX shall distribute all of the interest that it receives from the ISO and PX to the Net Buyers on Exhibit B on a pro rata basis in accordance with the provisions of Section 4.5. At the conclusion of the FERC Proceedings, to the extent that FERC does not require the ISO or PX to utilize any or all of the Shortpay Interest Reserve and/or the Refund Interest Reserve to cover interest short-falls related to APX Transactions, the ISO and PX shall distribute such amounts (inclusive of any actual additional interest that may accumulate thereon) to APX, and APX shall distribute any such amounts within five (5) Business Days of receipt to the Net Buyers listed on Exhibit B on a pro rata basis.
4.1.4.	To the extent any net refunds, including interest related thereto, are paid by the ISO and/or PX to the APX for APX Transactions during the Pre-Refund Period, those amounts shall be paid and distributed to the Net Buyers on Exhibit B in proportion to their pro rata share of APX Transactions during the Pre-Refund Period. This Agreement does not address who is responsible for any refunds (if any) that FERC may hereafter direct be paid to the ISO and/or PX in respect of APX Transactions for the Pre-Refund Period; provided, however, that in no event will EPMI/EESI or APX itself have any responsibility for paying any such refunds. All Parties reserve their rights to contest any proposal that refunds are owed in respect of APX Transactions refunds for the Pre-Refund Period and to appeal any finding by FERC that such refunds are owed for the Pre-Refund Period; provided, however, that with respect to the Settlement Period in its entirety, no claim for intra-APX market refunds will be advanced by any Party. Under no circumstances will the operation of this Section 4.1.4 alter, decrease, increase or otherwise change the fixed amounts due Enron pursuant to Section 4.1.1.1 hereof.

4.2. Enron Settlement Reserve. The Enron Settlement Amount shall be transferred from the APX Escrow Account to the Enron PX Collateral account. In addition, Enron hereby agrees to set aside an additional three million five hundred thousand dollars and no cents ($3,500,000.00) in funds from the Enron PX Collateral (the “Retained Enron

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	PX Collateral”) to establish the Enron Settlement Reserve in the total amount of fourteen million five hundred thousand dollars and no cents ($14,500,000.00) to be held in the Enron PX Collateral Account as described in Section 2.2.1. The Enron Settlement Reserve is available to settle the claims of the Enron Non-Settling Parties, if and only if, any refund amounts due to the Enron Non-Settling Parties from EPMI (as determined by FERC) resulting from Enron’s participation in the PX and ISO markets are unpaid for any reason directly as result of EPMI’s bankruptcy or otherwise. In the event that the Enron Settlement Reserve for Enron Non-Settling Parties is not needed for the Enron Non-Settling Parties and/or Supporting Parties for the purpose stated, then the balance plus accrued interest shall be paid to EPMI by the PX at the earliest possible date without further action by EPMI.
4.3.	Calpine Monetary Consideration. Of the Short Payments plus interest owed to Calpine, Calpine hereby agrees, subject to receipt of the Required Calpine Bankruptcy Court Approval on or before February 28, 2007, to release and contribute on the Settlement Effective Date two million five hundred eighty nine thousand two hundred fifty one dollars and no cents ($2,589,251.00) plus interest accrued on this amount to the APX Escrow Account. So long as the Required Calpine Bankruptcy Court Approval has been received on or before February 28, 2007, upon receipt of amounts owed to it by the PX and ISO the APX shall, within ten (10) days of the Settlement Effective Date, pay to Calpine the sum of (a) the remaining two million five hundred eighty nine thousand two hundred fifty one dollars and no cents ($2,589,251.00) of Short Payments, plus (b) interest accrued on this amount, plus (c) the Calpine collateral shown on Exhibit J. Subject to receipt of the Required Calpine Bankruptcy Court Approval on or before February 28, 2007, APX, the Enron Parties, and Constellation NewEnergy, Inc. agree to withdraw with prejudice their proofs of claims against Calpine in the Calpine Bankruptcy Cases, in the form and substance of the notices of withdrawal attached as Exhibit E hereto including without limitation, Proof of Claim Nos. 3655 filed by APX, 2998 filed by Constellation NewEnergy, Inc., and 4079 and 4087 filed by the Enron Parties. Calpine, APX, Constellation NewEnergy, Inc. and the Enron Parties agree that each shall act reasonably and in good faith to cooperate and to take all reasonable steps to secure satisfaction of the terms specified in this Section 4.3. Upon the Settlement Effective Date and subject to the Required Calpine Bankruptcy Court Approval being received no later than February 28, 2007, that part of Proof of Claim No. 5285 filed by FERC concerning APX Transactions and APX Related Claims and the claims of the Subject Parties in the Calpine Bankruptcy Cases concerning APX Transactions and APX Related Claims, if any, shall be deemed to have been satisfied. Other than the claims identified in this Section 4.3, the Sponsoring Parties represent that no other claims have been filed by the Sponsoring Parties in the Calpine Bankruptcy Cases for APX Related Claims. No claim filed in the Calpine Bankruptcy Cases by any of the Parties for non-APX Related Claims shall be affected in any way by this Agreement.
4.4.	Seller Contributions. As part of the aggregate consideration paid for the settlement, certain Net Sellers (each a “Contributing Seller” and together the “Contributing Sellers”) have entered into a written payment agreement with APX (the “Seller Contribution Funding Agreement”) that (a) directs APX to function as agent for the net

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payees under the settlement and (b) prohibits disclosure of the identity of any of the Contributing Sellers or their respective payment amounts. Pursuant to the terms of the Seller Contribution Funding Agreement, the Contributing Sellers will forward to APX fixed dollar amounts totaling in the aggregate of one million two hundred fifty thousand dollars and no cents ($1,250,000.00) (the “Seller Funding Amount”), with such payments to be made by each such Contributing Seller via wire transfer to APX within five (5) Business Days of the date of the Settlement Effective Date in compliance with the terms of Section 4.5 of this Agreement. APX shall provide all Sponsoring Parties with written confirmation that the APX has received the aggregate Seller Funding Amount within seven (7) Business Days of the date of the Settlement Effective Date. In the event that a Contributing Seller does not comply with its obligation under the Seller Contribution Funding Agreement to make a required payment, APX shall disclose, to any APX Payment Recipient hereunder requesting such disclosure, the identity of such noncompliant Contributing Seller and the amount of such Contributing Seller’s required payment under the Seller Contribution Funding Agreement, and any such APX Payment Recipient hereunder has standing to and may seek to enforce such payment obligation directly against any such noncompliant Contributing Seller.

4.5.

Payments. Within five (5) Business Days of the Settlement Effective Date, in order to facilitate the distribution of funds by APX to the APX Payment Recipients, (a) the ISO and PX shall release to APX all funds owed to APX, including refunds and Short Payments for APX Transactions during the Refund Period, plus interest thereon, subject to the provisions of Section 4.1.3 regarding interest, (b) the Parties required to release receivables reflected in Exhibit B shall provide such releases to APX; (c) APX shall release five million one hundred sixty one thousand one hundred seventy eight dollars and ninety six cents ($5,161,178.96) in the APX Holding Account; (d) APX shall release from the APX Monetary Reserve two million forty five thousand eight hundred twenty two dollars and no cents ($2,045,822.00) held as collateral for Enron; and (e) the Contributing Sellers shall pay the Seller Funding Amount. All amounts referred to in the preceding sentence shall be placed in a segregated account to be established by the APX at its expense for purposes of effectuating this Agreement (the “APX Escrow Account”). Within ten (10) Business Days of the Settlement Effective Date, APX shall distribute all of the monies contained in the APX Escrow Account to the APX Payment Recipients shown on Exhibit B on a pro rata basis in accordance with Exhibit B, as may be adjusted pursuant to Section 4.1.1 (the “Initial Distribution”). All funds, if any, owed to APX related to APX’s opt-in to the Existing Global Settlements in accordance with Section 4.1.1.5, shall be placed in the APX Escrow Fund immediately upon receipt. APX shall thereafter provide notice to the Parties of the amount and source of such funds received, and shall distribute all such funds to Net Buyers shown on Exhibit B on a pro rata basis within five (5) Business Days of receipt. Any failure or delay in receipt of payments, or the timing of the receipt of any funds related to APX’s opt-in to the Existing Global Settlements, shall not alter or prevent in any manner the immediate release of the balance of the Enron PX Collateral, as contemplated in Section 2.2.3 and the FERC Settlement Order. To the extent that APX receives additional funds covered by this Agreement from the ISO and/or the PX after the Initial Distribution, APX shall immediately notify

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the Parties of such receipt and distribute such additional funds within two (2) Business Days of receipt to the APX Payment Recipients shown on Exhibit B on a pro rata basis in accordance with Exhibit B.

5. NON-MONETARY CONSIDERATION

5.1.

Additional Consideration Exchanged. Simultaneous with the Settlement Effective Date, additional non-monetary consideration shall be, and shall be deemed to have been, exchanged in the form and substance of the mutual releases set forth in Section 6.

5.2.

UC Davis Medical Center. The UC Davis Medical center represents that the generation unit at the University of California Davis Medical Center only sold ancillary services to the ISO during the Refund Period. APX submitted unit-specific bids and schedules on behalf of the Regents of the University of California (“Regents”) to the ISO and APX received unit-specific dispatch instructions and ancillary service awards from the ISO. Settlement statements from the ISO clearly identify all UC Davis Medical Center schedules and transactions by unit designation for instructed energy, deviations and ancillary service award. If the Regents and the California Parties reach a settlement of refund issues related to APX Transactions prior to the Settlement Effective Date, the Regents shall be excluded from this Agreement. The APX Participants will not impede the Regents from settling issues directly related to the APX Transactions with the California Parties.

6. SCOPE OF SETTLEMENT AND RELEASES; RELEASES AND WAIVERS

6.1.

Settlements of Proceedings by the Parties. Subject to the Required Approvals under this Agreement, all claims by any Party against any other Party for refunds, disgorgement of profits, or other monetary or non-monetary remedies for the APX Related Claims, including without limitation those claims described in Section 6.2 through 6.6, shall be deemed resolved with prejudice and settled simultaneously with the Settlement Effective Date.

6.2.

Releases by Enron Under the Bankruptcy Code. Effective on the Settlement Effective Date, each of the Enron Debtors, acting on behalf of themselves and on behalf of each of their respective estates and on behalf of any party (or parties) purporting to act on behalf of the estates of each of the Enron Debtors, and on behalf of the Reorganized Debtors (as defined in the Enron Plan), release the Parties from any and all claims, obligations, causes of action and liabilities arising from the APX Related Claims including but not limited to, any and all such claims, obligations, causes of action and/or liabilities arising from APX Related Claims (a) under any of Sections 542, 543, 544, 545, 547, 548, 549, or 553 of the Bankruptcy Code to avoid any alleged transfer to or seek turnover from the Parties, (b) under Section 550 of the Bankruptcy Code to recover any such alleged transfer, (c) under Section 510(c) of the Bankruptcy Code to subordinate any claim of the Parties, or (d) under Sections 502(d) or 502(j) of the Bankruptcy Code and/or any claims arising under or in connection with contract(s) and/or transactions for the purchase and sale of electric power and related products and services.

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6.3.	Releases by Calpine Under the Bankruptcy Code. Subject to receipt of the Required Calpine Bankruptcy Court Approval on or before February 28, 2007, effective on the Settlement Effective Date, Calpine, acting on its own behalf on behalf of its estate and on behalf of any party (or parties) purporting to act on behalf of its estate, releases the Parties from any and all claims, obligations, causes of action and liabilities arising from the APX Related Claims including but not limited to, any and all such claims, obligations, causes of action and/or liabilities arising from APX Related Claims (a) under any of Sections 542, 543, 544, 545, 547, 548, 549, or 553 of the Bankruptcy Code to avoid any alleged transfer to or seek turnover from the Parties, (b) under Section 550 of the Bankruptcy Code to recover any such alleged transfer, (c) under Section 510(c) of the Bankruptcy Code to subordinate any claim of the Parties, or (d) under Sections 502(d) or 502(j) of the Bankruptcy Code and/or any claims arising under or in connection with contract(s) and/or transactions for the purchase and sale of electric power and related products and services.
6.4.	Impact of Settlement on Enron PX Collateral. As a condition of Agreement, the Parties agree that EPMI shall be paid the Enron PX Collateral in accordance with Section 2.2.3. The Supporting Parties agree that any objections to EPMI’s July 20, 2006 motion for release of the Enron PX Collateral in FERC Docket Nos. EL00-95-000 and EL00-98-000 are resolved by the terms of this Agreement, including Section 2.2, and hereby agree to withdraw such objections upon the establishment of the Enron Settlement Reserve in accordance with Exhibit D, without material modification, and the occurrence of the Settlement Effective Date. No further action shall be required of the Supporting Parties to implement the provisions of this Section 6.4.
6.5.	FERC and Federal Power Act Releases. Subject to Section 6.7 below, the Parties shall, as of the Settlement Effective Date, forever release, acquit and discharge each other Party, and their respective present and former agents, attorneys, accountants, employees, representatives, officers, managers, directors, Affiliates, subsidiaries, Guarantors, successors and assigns, from all existing and future claims before the FERC and/or under the FPA, and any amendments to the FPA pursuant to the Energy Policy Act of 2005, for the Settlement Period, if and to the extent applicable, relating to the APX Related Claims that the Parties:

6.5.1.	Charged, collected or were paid unjust, unreasonable or otherwise unlawful rates, terms or conditions for energy, ancillary services, transmission or congestion in the Western electricity markets;
6.5.2.	Manipulated the Western electricity markets in any fashion (including, but not limited to, claims of economic or physical withholding, gaming, fraud or misrepresentation or alleged forms of market manipulation discussed in the Initial Staff Report or Final Staff Report, or any other forms of wrongful conduct, electricity market manipulation, violation of any applicable tariff, regulation, law, rule or order relating to the Western electricity markets; or
6.5.3.	Entered into the APX Transactions when the Western electricity markets were non-competitive.

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6.6. Civil Claims Releases. Subject to Section 6.7 below, the Parties shall, as of the Settlement Effective Date, forever release, acquit and discharge the other Party and their respective present and former agents, attorneys, accountants, employees, representatives, officers, managers, directors, Affiliates, subsidiaries, Guarantors, successors and assigns from all past, existing and future claims, actions or causes of action for civil damages, equitable relief and/or attorneys fees, for the Settlement Period, concerning, pertaining to, arising from or relating to, in whole or in part, directly or indirectly, the APX Related Claims that the Parties:

6.6.1.	Charged, collected or were paid unjust, unreasonable or otherwise unlawful rates, terms or conditions for energy, ancillary services, transmission congestion in the Western electricity markets;
6.6.2.	Manipulated the Western electricity market in any fashion (including, but not limited to, claims of economic or physical withholding, gaming, fraud or misrepresentation or other alleged forms of market manipulation discussed in the Initial Staff Report or Final Staff Report, or any other forms of wrongful conduct);
6.6.3.	Were unjustly enriched by the foregoing released claims or otherwise violated any applicable tariff, regulation, law, rule or order relating to transactions in the Western electricity markets;
6.6.4.	Claimed, charged, collected or retained profits associated with transactions made while the seller was in violation of orders, directives or regulations of FERC, including orders granting market-based rate authority or placing express or implied obligations or conditions on behavior relating to such authority;
6.6.5.	Breached, defaulted or failed to perform any obligation under any contract, or any guarantee of payment or performance, for the purchase or sale of electricity (physical or financial) or related transactions, or engaged in fraud or misrepresentation in connection therewith; or
6.6.6.	Entered into the APX Transactions when the Western electricity markets were non-competitive.

6.7. Reservations and Limitations on Releases.

6.7.1.	Claims Reservation. Nothing within, nor any provision of, this Agreement shall in any way or manner be construed as constituting a waiver or release of any claims or defenses, positions, grounds, arguments or theories of relief, which are expressly reserved, as to any of the Non-Settling Participants.
6.7.2.	Existing or Future Proceedings. Subject to the provisions of Section 3.1, the Parties shall remain free to participate in any existing or future proceeding, or to initiate any proceeding, addressing matters not settled in

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	this Agreement, including, but not limited to, generic issues concerning market structure, scheduling rules, generally applicable market rules, and generally applicable price mitigation.
6.7.3.	No Waiver as to Non-APX Related Claims. The releases set forth herein apply solely to APX Related Claims and the Parties hereto and do not constitute a waiver by any of the Parties of existing or future non-APX Related Claims.
6.7.4.	No Third Party Beneficiaries or Admissions. This Agreement is not intended to confer upon any person or entity that is not a Party any rights or remedies hereunder, and no one, other than a Party, is entitled to rely on any representation, warranty, covenant, release, waiver or agreement contained herein. Moreover, except for the purpose of enforcing the terms and conditions of this Agreement as between and among the Parties, nothing herein shall establish any facts or precedents as between the Parties and any third parties as to any dispute. Each Party expressly denies any breach, liability, wrongdoing or culpability with respect to the claims against it released in this Agreement, or any other matter addressed in this Agreement, and does not, by execution of this Agreement, admit or concede any actual or potential breach, fault, wrongdoing or liability in connection with any facts or claims that have been or could have been alleged against it with respect thereto. Neither this Agreement, nor any act performed or document executed pursuant to or in furtherance of this Agreement:

6.7.4.1.	Is or may be deemed to be, or may be used as, an admission of, or evidence of, the validity of any released claim, or of any wrongdoing or liability of any of the Parties;
6.7.4.2.	Is or may be deemed to be, or may be used as, an admission of, or evidence of, any fault or omission of any of the Parties in any civil, criminal, regulatory or administrative proceeding in any court, administrative agency, regulatory authority, or other tribunal; or
6.7.4.3.	Shall be offered or accepted in evidence or alleged in any pleading, except to obtain the Required Approvals, or to enforce the terms of and obtain the benefits of this Agreement. In no event shall this Agreement, any of its provisions or any negotiations, statements or court proceedings relating to them or the settlement contemplated by this Agreement in any way be construed as, offered as, received as, used as or deemed to be evidence of any kind in any action, or in any judicial, administrative, regulatory or other proceeding, except in a proceeding to enforce the terms or obtain the benefits of this Agreement or to obtain the Required Approvals. The Parties may file this Agreement in any other action that may be brought against them in order to support a defense or counterclaim based on principles of res judicata, collateral estoppel, release, good-faith

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settlement, judgment bar or reduction or any theory of claim preclusion or issue preclusion or similar defense or counterclaim.

6.8. Effectiveness of Releases; Waiver of Unknown Claims. The Parties acknowledge and agree that, except as expressly reserved in Section 6.7, it is their intention that the releases granted pursuant to this Section 6 shall be effective on the Settlement Effective Date to bar all causes of action, demands and claims for monetary relief, including costs, expenses, attorneys’ fees, damages, losses and liabilities of every kind, known or unknown, suspected or unsuspected, with respect to the APX Related Claims specified in this Section 6. In furtherance of this intention, the Parties with respect to the specific matters released herein, each knowingly, voluntarily, intentionally and expressly waive, as against each other, any and all rights and benefits conferred by California Civil Code Section 1542 and any law of the United States and any state or territory of the United States or principle of common law that is similar to Section 1542 or otherwise provides, in sum or substance, that a release does not extend to claims which the party does not know or suspect to exist in its favor at the time of executing the release, which if known by it, would have materially affected its settlement with the other party. Section 1542 provides:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

In connection with such waiver and relinquishment, the Parties each acknowledge they are aware they may hereafter discover facts in addition to or different from those which they know or believe to be true and with respect to the subject matter of this Agreement, but it is their intention hereby, except as expressly reserved in Section 6.7, to fully, finally and forever settle and release all matters, disputes, differences, known or unknown, suspected or unsuspected, asserted or unasserted that are set forth in this Section without regard to the subsequent discovery or existence of such additional or different facts. This Agreement is intended to include in its effect all claims encompassed within this Agreement and releases set forth in this Section 6, including those which the Parties may not know or suspect to exist at the time of execution of this Agreement, and this Agreement contemplates the extinguishment of all such claims arising from the APX Related Claims, except as expressly reserved in Section 6.7. The releases set forth in this Section 6 shall be, and remain in effect as, full and complete releases, notwithstanding the discovery or existence of any such additional or different facts relating to the subject matter of this Agreement.

6.9

Binding Effect. This Agreement, including the releases contained in Sections 6.2 and 6.3, shall be binding and inure to the benefit of the Sponsoring Parties, and their respective successors and assigns, and shall remain in full force and effect, notwithstanding the entry of an order confirming any Chapter 11 plan in the Enron and/or Calpine Bankruptcy Cases, an order converting the Enron and/or Calpine

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Bankruptcy Cases to Chapter 7, or an order dismissing the Enron and/or Calpine Bankruptcy Cases.

7. REQUIRED APPROVALS; OBTAINING REQUIRED APPROVALS

7.1.	Required Approvals. This Agreement shall be subject to approval as set forth in this Section 7 by the Enron Bankruptcy Court and the FERC.
7.2.	Required FERC Approval. The FERC, by issuance of the FERC Settlement Order(s), shall approve the terms of this Agreement without material change or condition unacceptable to any Party (in the exercise of its reasonable discretion) (if so approved, then such approval shall be a “Required FERC Approval”). Unless the FERC Settlement Order makes an express, specific finding to the contrary, or unless expressly waived by Enron, the FERC Settlement Order shall be deemed and construed, as an order finding and concluding that: (a) the Enron Settlement Reserve to be retained in the Enron PX Collateral Account is sufficient and adequate to protect the interests of Non-Settling Participants in the Enron-California Parties Settlement Agreement for any and all liabilities of any of the Enron Parties to those Non-Settling Participants with respect to the FERC Proceedings; and (b) the remainder of the Enron PX Collateral should be and is hereby ordered to be immediately released to EPMI for payment to its creditors under the Enron Plan.
7.3.	Required Enron Bankruptcy Court Approval. The Enron Bankruptcy Court, by entry of the Enron Bankruptcy Court Order that is Final and Non-Appealable, shall grant the relief sought in the Bankruptcy Rule 9019 Motion and approve this Agreement without material change or condition unacceptable to any Party in the exercise of its reasonable discretion (if so approved, then such approval shall be a “Required Enron Bankruptcy Court Approval”).
7.4.	Notice of Material Unacceptable Change or Condition. If any approval described in Section 7.1 and 7.2 and 7.3 includes a change or condition to the terms of this Agreement that materially and adversely affects any Sponsoring Party, then the affected Sponsoring Party shall provide to the other Sponsoring Parties written notice of such material change or condition (and its lack of consent thereto) within three (3) Business Days of the date of the issuance of such approval (the “Material Change Notice”). If such Sponsoring Party gives notice of its lack of consent in the manner described above, then the applicable approval shall not be deemed to be a “Required FERC Approval” or a “Required Enron Bankruptcy Court Approval” (as the case may be), and shall not fulfill the condition that such Required Approval has been obtained for the purpose of the definition of the Settlement Effective Date unless the other Sponsoring Parties agree in writing on or before March 1, 2007 that the Settlement Effective Date has occurred notwithstanding the existence of such unacceptable material change or condition.
7.5.	Enron Bankruptcy Court Motion. On or about the same day when this Agreement is filed at FERC, the Enron Debtors and the Reorganized Debtors (as defined in the Enron Plan) shall file a motion requesting Enron Bankruptcy Court approval of this

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	Agreement pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rule 9019 Motion”), together with a form of order approving the Bankruptcy Rule 9019 Motion.
7.6.	Calpine Bankruptcy Court Motion. On or after the day this Agreement is filed at FERC, after obtaining necessary corporate approvals, and after discussing the terms of the Agreement with key constituencies in the Calpine Bankruptcy Cases, Calpine shall file a Bankruptcy Rule 9019 Motion requesting Calpine Bankruptcy Court approval of the releases to be granted by Calpine in Section 6 above and approval of the allocation of the Calpine Short Payments and associated interest and release of collateral as set forth in Section 4.3 above pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure, together with a form of order approving such Bankruptcy Rule 9019 Motion.
7.7.	Requests for Approval. This Agreement shall be reviewed by the FERC without prior certification by an Administrative Law Judge. The Sponsoring Parties will cooperate in obtaining the Required FERC Approval, Required Enron Bankruptcy Court Approval, and Required Calpine Bankruptcy Court Approval, in preparing motions requesting such approvals, and, in the case of the Required Enron Bankruptcy Court Approval and Required Calpine Bankruptcy Court Approval, in preparing proposed orders approving this Agreement in a form acceptable to the Sponsoring Parties. The Bankruptcy Rule 9019 Motions shall include a request that the Enron Bankruptcy Court’s and Calpine Bankruptcy Court’s approvals and findings become effective immediately upon entry notwithstanding the ten (10) day stay provided for in Bankruptcy Rule 6004(g).

8. ISO AND PX ACCOUNTING AND IMPLEMENTATION

8.1. FERC-Directed Compliance. The FERC Settlement Order shall constitute authorization and direction to the APX, ISO and PX to implement the terms of this Agreement. Upon and as a result of the FERC’s approval of this Agreement in the FERC Settlement Order, the APX, ISO and/or PX shall be required to do the following:

8.1.1.	General Accounting Treatment. APX, ISO and PX shall conform their books and records to reflect the distributions, payments, offsets, transfers, deemed resolution of claims, and status of accounts that were made pursuant to this Agreement.
8.1.2.	Accounting Treatment of Distributions to Parties. APX, ISO and PX shall reflect on their books and records that the Parties have, through this Agreement, been paid in full their share of all amounts that were made pursuant to this Agreement.
8.1.3.	Termination of Interest Accrual. PX and ISO shall reflect in their books and records, with respect to Parties, that the accrual of interest at the FERC-established rate on principal amounts ceases upon the distribution of funds from the PX and/or the ISO to the APX for purposes of the accounts of the PX and the ISO.

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8.2. FTR Payments. Morgan Stanley Capital Group, Inc. (“MSCG”) asserts that, upon issuance of the FERC Settlement Order, it has resolved all claims by or against it arising from the FERC Proceedings. No Party to this Agreement shall object to a request by MSCG to the ISO to disburse amounts owing to MSCG for ISO Firm Transmission Rights held by MSCG during the 2000-2001 period.

9. OPT-IN RIGHTS AND EXCLUSIONS

9.1.	Notice. Those APX Participants listed on Exhibit A who have not executed this Agreement by January 5, 2007 (i.e., Subject Parties) shall be served (or service shall be attempted) by APX with the Notice attached as Exhibit G on or before January 8, 2007 providing them with written notice of this Agreement and their rights hereunder.
9.2.	Right to Become a Sponsoring Party. A Subject Party may become a Sponsoring Party by providing notice from an Authorized Representative to the other Parties on or before the Settlement Effective Date, which notice shall serve as evidence of such Party’s execution of this Agreement. A Subject Party that becomes a Sponsoring Party pursuant to this Section 9.2 shall be entitled to any benefits of this Agreement as of the Execution Date.
9.3.	Rights to Exclusion.

9.3.1.	Show Cause. A Subject Party may assert and show cause, in accordance with the settlement comment procedures established by FERC for this Agreement, as to why such Party should be excluded from this Agreement by the FERC Settlement Order, and any such Subject Party that is specifically excluded from this Agreement by the FERC Settlement Order shall not be or be deemed a Party to this Agreement; provided that all other Subject Parties shall be and be deemed by the FERC Settlement Order to be bound by this Agreement. The amounts set forth on Exhibit B shall be adjusted by APX as appropriate to reflect the deletion of any Subject Party specifically excluded from this Agreement by the FERC Settlement Order.
9.3.2.	Calpine. Calpine shall obtain entry of the Calpine Bankruptcy Court Order by February 28, 2007 or shall be excluded from this Agreement.
9.3.3.	Parties Seeking Approvals. The Parties identified on Exhibit H represent they cannot obtain the necessary approvals by January 5, 2007 and shall have until January 15, 2007 to obtain such approvals and provide written notice to the other Parties that such approval has been obtained. Upon the receipt of the notice contemplated in the preceding sentence, such Party shall become a Sponsoring Party. If notice is not received by January 15, 2007, such Party shall be excluded from this Agreement.
9.3.4.	Releases. Any Party excluded from this Agreement pursuant Sections 9.3.1, 9.3.2 and/or 9.3.3 shall not be deemed to have provided or received any of the waivers, releases, or other benefits set forth in this Agreement.

23

9.4. Other Parties. All Subject Parties that do not elect to become a Sponsoring Party pursuant to Section 9.2 and who are not excluded from this Agreement pursuant to Section 9.3 shall be deemed to have consented to this Agreement and shall be bound by its terms.

10. REPRESENTATIONS, WARRANTIES, AND COVENANTS

10.1. Representations of Parties. Representations and warranties of Enron Debtors are not made herein as such matters are to be addressed by the Enron Bankruptcy Court in the Enron Bankruptcy Court Order. The participation of Calpine in this Agreement and the representations of Calpine contained herein are conditioned on entry of the Calpine Bankruptcy Court Order; and Calpine upon the entry of the Calpine Bankruptcy Court Order and each of the other Parties makes the following representations and warranties, for itself only, to each other Party, to be effective from and after the Execution Date:

10.1.1.	Organizational Status, Power and Authority. The Parties possess all necessary power and authority to execute, deliver and perform its obligations under this Agreement.
10.1.2.	Authority to Execute. The execution, delivery, election to participate in and performance of this Agreement (a) are within its powers, (b) have been duly authorized by all necessary action on its behalf and all necessary consents or approvals have been obtained and are in full force and effect, and (c) do not violate any of the terms and conditions of any applicable law, or materially violate any contracts to which it is a party. Each counsel or other Authorized Person executing this Agreement or any of its Exhibits on behalf of any Party hereto hereby warrants that such Authorized Person has the full authority to do so.
10.1.3.	Binding Obligation. This Agreement constitutes a legal, valid and binding obligation, enforceable against it in accordance with its terms.
10.1.4.	Ownership of Claims. Except as set forth in this Agreement, it is the sole owner of the bankruptcy, civil, FERC and any and all other claims and rights that are being addressed, resolved and compromised by it pursuant to this Agreement and, except as provided in this Agreement, there has been no sale, assignment, transfer, pledge or hypothecation, or attempted sale, assignment, transfer, pledge or hypothecation, by it of any such rights or claims, whether directly, indirectly, by operation of law or otherwise.
10.1.5.	No Insiders. None of the representatives of the Parties who have acted as negotiators or decision-makers for a Party (other than EPMI and EESI) in connection with this Agreement is a current or former insider or current or former affiliate of EPMI or EESI. For purposes of the immediately preceding sentence, the terms “insider” and “affiliate” shall have the meanings given to them in Section 101 of the Bankruptcy Code.

24

10.2.	Further Assurances. The Parties covenant among themselves that at all times from and after the Settlement Effective Date, they will, upon the reasonable request of the other Parties, their successors and assigns, execute and/or deliver such further documents, agreements, instruments, and accounts and other books of record, and shall cooperate and do such other and further acts, as may be reasonably necessary to effectuate the terms and provisions of this Agreement.
10.3.	Mistakes of Fact or Law. In entering and making this Agreement, the Parties assume the risk of any mistake of fact or law. If the Parties, or any of them, should later discover that any fact they relied upon in entering this Agreement is not true, or that their understanding of the facts or law was incorrect, then the Parties shall not be entitled to seek rescission of this Agreement by reason thereof. This Agreement is intended to be final and binding upon the Parties regardless of any mistake of fact or law.
10.4.	Calpine Successor In Interest. Calpine represents that it is the successor in interest to Calpine Power Services Company by operation of law pursuant to the merger of Calpine Power Services Company into Calpine.
10.5.	Constellation Successor In Interest. Constellation NewEnergy, Inc. represents that it is the successor in interest to AES New Energy and NewEnergy Ventures.

11. GOVERNING LAW; INTERPRETATION

11.1.	Governing Law. To the extent not governed by federal law, this Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to its conflict of laws principles. Each Party irrevocably waives its right to a jury trial with respect to any litigation arising under or in connection with this Agreement to the fullest extent permitted by law.
11.2.	Entire Agreement. This Agreement contains the entire agreement among the Parties with respect to the subject matter hereof and there are no agreements, understandings, representations, or warranties among the Parties other than those set forth or referred to herein. Each of the Parties expressly disclaims any reliance upon any representations or warranties not stated herein.
11.3.	Headings. The headings or titles of Sections and Exhibits used in this Agreement (in bold typeface) are for convenience only and shall be disregarded in interpreting this Agreement.
11.4.	Parties Represented by Counsel. The Parties acknowledge that they have sought the advice of, and have been advised by, legal counsel of their choice in connection with the negotiation of this Agreement, and that the Parties have willingly entered into this Agreement with a full understanding of the legal and financial consequences of this Agreement.
11.5.	Drafting of Agreement. The Parties acknowledge that (i) this Agreement is the result of negotiations among, and has been reviewed by, each Party and its respective counsel,

25

	and (ii) all Parties contributed to the drafting of this Agreement. Accordingly, this Agreement shall be deemed to be the product of all Parties, and no ambiguity shall be construed in favor of or against any Party on the basis that it drafted the ambiguous provision.
11.6.	Rules of Interpretation. The following rules of interpretation shall apply to this Agreement, including all Exhibits:

11.6.1.	Singular; Plural. Unless the context otherwise requires, words used in this Agreement shall include in the singular number the plural and in the plural number the singular.
11.6.2.	Self Reference; Incorporation by Reference; Cross Reference. Except as otherwise specified herein, all references in this Agreement to a “Section” or “Exhibit” shall mean a Section or Exhibit of this Agreement. The words “hereof,” “herein,” and “hereunder,” and words of similar import when used in this Agreement, including the Exhibits, shall, unless otherwise specified, refer to this Agreement as a whole and not to any particular Section, Exhibit or provision of this Agreement, and all references to Section, Sections or Exhibits shall be to all subparts of such Sections or Exhibits. All Exhibits or Appendices shall be deemed to be incorporated by reference and made a part of this Agreement.
11.6.3.	Inclusive of Permitted Successors. Unless otherwise stated, any reference in this Agreement to any person or entity shall include its permitted successors and assigns and, in the case of any Governmental Authority, any entity succeeding to its functions and capabilities.
11.6.4.	Inclusive References. When used herein, the words “include,” “includes,” and “including” shall not be limiting and shall be deemed in all instances to be followed by the phrase “without limitation.”

12. MISCELLANEOUS

12.1.

Notices. All notices, demands and other communications between or among any of the Parties hereunder shall be in writing and shall be deemed to have been duly given: (i) when personally delivered; (ii) upon actual receipt (as established by confirmation of receipt or otherwise) during normal business hours, otherwise on the first (1st) Business Day thereafter, if transmitted by facsimile or telecopier with confirmation of receipt; (iii) on the date of receipt when mailed by certified mail, return receipt requested, postage prepaid; or (iv) on the date of receipt when sent by overnight courier; in each case, to the addresses set forth in Section 12.2, or to such other addresses as a Party may from time to time specify by notice to the other Parties given pursuant to this Section 12.1. Email addresses are provided for convenience only and do not constitute notice.

12.2.

Parties’ Addresses. Notices required under this Agreement shall be delivered pursuant to the notice information provided under Exhibit I of this Agreement.

26

12.3.	Successors and Assigns. Subject to Section 12.8, this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective permitted successors and assigns. Nothing in this Agreement shall be construed or interpreted to impart any rights or obligations to any third party (other than a permitted successor or assignee bound to this Settlement Agreement).
12.4.	Costs. Except as provided in this Agreement, each of the Parties shall pay its own costs and expenses, including attorneys’ fees, incurred in connection with the disputes that are settled herein and the negotiation, preparation and implementation of this Agreement including costs and expenses incurred in preparing stipulations, making motions and seeking and obtaining the Required Approvals.
12.5.	Modifications. This Agreement may be modified only if in writing and signed by each of the Sponsoring Parties affected by the proposed modification. No waiver of any provision of this Agreement or departure from any term of this Agreement shall be effective unless in writing and signed by the Sponsoring Party giving the waiver. No modification will be effective unless any approval of the FERC or the Enron Bankruptcy Court that may be required with respect to such modification, if any, has been received. Absent agreement of all Sponsoring Parties to the proposed change, the standard of review for any changes to this Agreement proposed by a Party, a non-party or FERC acting sua sponte shall be the “public interest” standard of review set forth in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956) (the “Mobile-Sierra” doctrine). The Sponsoring Parties further stipulate that: (a) the terms of this Agreement were negotiated at arms-length and were reached voluntarily and in good faith; and (b) the terms of this Agreement have no adverse impact on retail rates.
12.6.	Waiver. The failure of any Party hereto to enforce any condition or provision in this Agreement at any time shall not be construed as a waiver of that condition or provision unless such waiver is in writing and signed by the waiving Party; nor shall it forfeit any rights to future enforcement thereof.
12.7.	Illegality. Should any provision of this Agreement be held illegal, such illegality shall not invalidate the whole of this Agreement; instead, the Parties shall, subject to applicable law, use their best efforts to meet and confer within thirty (30) days of such determination to reform the Agreement and shall work in good faith to reach agreement within ninety (90) days in order to give effect to the original intention of the Parties in all material respects.
12.8.	Assignments. No rights or obligations herein may be assigned by any Party without the prior written consent of the other Parties, which consent shall not be unreasonably withheld.
12.9.	Joint and Several Liability. Nothing in this Agreement shall be deemed to create any joint and several liability among the Parties with respect to the APX Related Claims in the FERC Proceedings to create a “Joint Liability Claim” as that term is defined in the Enron Plan and the Bankruptcy Code.

27

12.10.	Consents; Acceptance. Unless otherwise expressly provided herein, any consent, acceptance, satisfaction, cooperation, or approval required of a Party under this Agreement shall not be unreasonably withheld or delayed.
12.11.	Choice of Forum. Nothing in this Agreement is intended to effect a choice of forum, as between the FERC, Enron Bankruptcy Court, and Calpine Bankruptcy Court for the resolution of any dispute, if any, that may arise under this Agreement.
12.12.	Expediency. Time shall be of the essence for purposes of construing and enforcing this Agreement.

     IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized officers or representatives. This Agreement may be executed in any number of counterparts, each of which, when executed, will be deemed to be an original and all of which taken together will be deemed to be one and the same instrument. This Agreement may be executed by signature via facsimile or .pdf (portable document format) transmission, which shall be deemed to be the same as an original signature.

[SIGNATURES APPEAR ON THE PAGES THAT FOLLOW]

28

COMMERCE ENERGY, INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

COMMERCE ENERGY, INC.
By:	/s/ R. NICK CIOLL
Name:	R. Nick Cioll
Title:	Chief Risk Officer
Date:	January 4, 2007

MORGAN STANLEY CAPITAL GROUP INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

MORGAN STANLEY CAPITAL GROUP INC.
By: Name:	/s/ DEBORAH L. HART Deborah L. Hart
Title:	Vice President
Date:	January 3, 2007

MERRILL LYNCH CAPITAL SERVICES, INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

MERRILL LYNCH CAPITAL SERVICES, INC.
By:	/s/ KEITH BAILEY
Name:	Keith Bailey
Title:	Managing Director
Date:	January 4, 2007

APX INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

APX INC.
By:	/s/ THOMAS K. LEWIS, JR.
Name:	Thomas K. Lewis, Jr.
Title:	Chairman and Chief Executive Officer
Date:	January 5, 2007

EL PASO MARKETING, LP (f/k/a EL PASO MERCHANT ENERGY, LP)
SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

EL PASO MARKETING, LP
By:	/s/ BRYAN NESKORA
Name:	Bryan Neskora
Title:	Vice President
Date:	January 4, 2007

SIERRA PACIFIC INDUSTRIES
SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

SIERRA PACIFIC INDUSTRIES
By:	/s/ MARK D. EMMERSON
Name:	Mark D. Emmerson
Title:	Chief Financial Officer
Date:	January 4, 2007

ENRON SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

ENRON POWER MARKETING, INC.
By:	/s/ L. DON MILLER
Name:	L. Don Miller
Title:	President and Chief Executive Officer
Date:	January 4, 2007
ENRON ENERGY SERVICES, INC
By:	/s/ K. WADE CLINE
Name:	K. Wade Cline
Title:	Chief Executive Officer
Date:	January 4, 2007

CONSTELLATION NEWENERGY, INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

CONSTELLATION NEWENERGY, INC
By:	/s/ JORDAN P. KARP
Name:	Jordan P. Karp
Title:	Division General Counsel, Constellation NewEnergy, Inc.
Date:	January 4, 2007

AEP SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

American Electric Power Service Corporation, as agent for Appalachian Power Company, AEP Texas Central Company, AEP Texas North Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company, Ohio Power Company, Public Service Company of Oklahoma, and Southwestern Electric Power Company

By:	/s/ BRIAN X. TIERNEY
Name:	Brian X. Tierney
Title:	Senior Vice President
Date:	January 4, 2007

SEMPRA ENERGY SOLUTIONS LLC SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

SEMPRA ENERGY SOLUTIONS LLC
By:	/s/ WILLIAM B. GODDARD
Name:	William B. Goddard
Title:	Vice President Commodity Supply & Operations
Date:	January 4, 2007

CALPINE ENERGY SERVICES, L.P. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

CALPINE ENERGY SERVICES, L.P.
By:	/s/ ALEXANDRE B. MAKLER
Name:	Alexandre B. Makler
Title:	Counsel for Calpine Energy Services, L.P.
Date:	January 4, 2007

AQUILA MERCHANT SERVICES, INC SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

AQUILA MERCHANT SERVICES, INC.
By:	/s/ JODI CULP
Name:	Jodi Culp
Title:	President
Date:	January 4, 2007

AVISTA ENERGY, INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

AVISTA ENERGY, INC.
By:	/s/ DENNIS VERMILLION
Name:	Dennis Vermillion
Title:	President
Date:	January 3, 2007

ALLEGHENY ENERGY SUPPLY COMPANY, LLC
SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

ALLEGHENY ENERGY SUPPLY COMPANY, LLC
By:	/s/ THOMAS J. KALUP
Name:	Thomas J. Kalup
Title:	Vice President-Market Optimization & Dispatch
Date:	January 4, 2007

TRANSALTA SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

TRANSALTA ENERGY MARKETING (US) INC.
By:	/s/ STERLING KOCH
Name:	Sterling Koch
Title:	Director of Regulatory and Legal Affairs and General Counsel
Date:	January 4, 2007

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT

AND POWER DISTRICT

SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

By:	/s/ ROBERT S. NICHOLS
Name:	Robert S. Nichols
Title:	Assistant Treasurer
Date:	January 5, 2007

BP AND TRACTEBEL SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

BP ENERGY COMPANY
By:	/s/ MARK R. HASKELL
Name:	Mark R. Haskell
Title:	Partner, Morgan, Lewis & Bockius LLP as Counsel to and Authorized Representative of BP Energy Company
Date:	January 4, 2007
TRACTEBEL ENERGY MARKETING, INC. (n/k/a SUEZ ENERGY MARKETING, N.A.)
By:	/s/ MARK R. HASKELL
Name:	Mark R Haskell
Title:	Partner, Morgan, Lewis & Bockius LLP as Counsel to and Authorized Representative of Tractebel Energy Marketing, Inc. (n/k/a Suez Energy Marketing, N.A.)
Date:	January 4, 2007

PUGET SOUND ENERGY, INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT¹

PUGET SOUND ENERGY, INC.
By:	/s/ GARY D. BACHMAN
Name:	Gary D. Bachman
Title:	Member, Van Ness Feldman, P.C.
Date:	January 4, 2007

District of Columbia : 58
Subscribed and Sworn to before me, in my presence,
this 4th day of January, 2007

/s/ Melessa Y. Watkins

Notary Public, D.C.

My commission expires 11-30-2008

¹ As a Supporting Party, Puget Sound Energy, Inc. is a signatory to this Agreement for the sole purpose described in Section 1.74.

CORAL POWER, L.L.C., INC. SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

CORAL POWER, L.L.C.1
By:	/s/ ROBERT R. REILLEY
Name:	Robert R. Reilley
Title:	Vice President, Regulatory Affairs
Date:	January 4, 2007

¹ As a Supporting Party, Coral Power, L.L.C, is a signatory to this Agreement for the sole purpose described in Section 1.74.

SACRAMENTO MUNICIPAL UTILITY DISTRICT SIGNATURE PAGE
TO
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

SACRAMENTO MUNICIPAL UTILITY DISTRICT
By:	/s/ JAN SCHORI
Name.	Jan Schori
Title:	General Manager
Date:	January 4, 2007

EXHIBIT A
APX and APX Participants
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

APX Inc.
Abacus Energy Services, LLC
ACN Power, Inc.
Allegheny Energy Supply Company, LLC
American Electric Power Service Corp.
Ancor L.L.C.
Aquila Merchant Services, Inc.
Avista Energy, Inc.
BBOSS, LLC
Big Creek Water Works, Ltd.
BP Energy Company
Calpine Energy Services, L.P.
Cinergy Services, Inc.
City of Sunnyvale Power Gen. Facility
Clean Earth Energy Incorporated
Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.)
Constellation NewEnergy, Inc.
CSW Power Marketing
DukeSolutions, Inc.
Eagle Power LLC
East Bay Municipal Utility District
Eastern Pacific Energy
El Paso Marketing, LP (f/k/a El Paso Merchant Energy, LP)
Energy 2001 Inc.
Enron Energy Services, Inc.
Enron Power Marketing, Inc.
Entergy-Koch Energy Trading, L.P.
FPL Energy Power Marketing, Inc.
Friendly Power Company, LLC
Gas Recovery System, Inc.
Go Green
Imperial Valley Resource Recovery Co.
Keystone Energy Services
Los Alamos Energy, LLC
Merrill Lynch Capital Services, Inc.
Midway Sunset Cogeneration Company
Morgan Stanley Capital Group Inc.
NRG Power Marketing Inc.
Powercom
PowerSource Corp.
QST Energy Trading Inc.
Sacramento Municipal Utility District
Salt River Project Agricultural Improvement and Power District

Page 1 of 2

Exhibit A
APX and APX Participants
APX SETTLEMENT AND RELEASE OF CLAIMS AGREEMENT

Sempra Energy Solutions LLC
Sierra Pacific Industries
TenderLand Power Company, Inc.
Torch Operating Company Brea
Tractebel Energy Marketing, Inc. (n/k/a Suez Energy Marketing NA, Inc.)
TransAlta Energy Marketing (US) Inc.
Turlock Irrigation District
UC Davis Medical Center (The Regents of the University of California)
Utility.com
Wellhead Electric, L.P.

Page 2 of 2

Exhibit B

Market Participant	Status	Short Pay		Totals (in Millions $)
Calpine Power Services Co./Calpine Energy Services, L.P.	NS		5.1710615663
American Electric Power Service Corp.	NS		0.0000000000
Avista Energy	NS		1.6704801967
El Paso Merchant Energy	NS		3.1265354284
UC Davis Medical Center	NS		2.7323337900
Merrill Lynch Capital Services, Inc.	NS		11.6240400841		0.8000000000
BP Energy Company	NS		0.3060349465
East Bay Municipal Utility District	NS		0.4430855020
Sierra Pacific Industries	NS		0.4148900771
Cinergy Services, Inc.	NS		-0.0103940000
Tractebel Energy Marketing, Inc.	NS		0.2303306562
FPL Energy Power Marketing, Inc.	NS		0.0000000000
Big Creek Water Works, Ltd.	NS		0.0000236738
Aquila Merchant Services	NS		0.0000000000
Turlock Irrigation District	NS		0.0019752787
Los Alamos Energy, LLC	NS		0.0000000000
Wellhead Electric, L.P.	NS		0.0000000000
QST Energy Trading Inc.	NS		0.0000000000
Powercom	NS		0.0056563965
Energy 2001 Inc.	NS		0.0030260912
CSW Power Marketing	NS		0.0000000000
Ancor L.L.C.	NS		0.0000000000
City of Sunnyvale Power Gen. Facility	NS		0.0000000000
Keystone Energy Services	NS		0.0000000000
Entergy-Koch Energy Trading, Inc.	NS		0.0940335925		0.0141743585
ACN Power, Inc.	NS		1.1560805954		0.3221481700
Gas Recovery System, Inc.	NS		1.4329228338		0.3875597038
Commonwealth Energy Corporation (Commerce Energy, Inc.)	NS		8.6688164078		6.5245444853
Eagle Power LLC	NB		0.0000000000		0.0000000533
BBOSS,LLC	NB		-0.0000001621		0.0000159615
Friendly Power Company, LLC	NB		0.0000000000		0.0003526773
Abacus Energy Services, LLC	NB		0.0000358872		0.0003700606
Eastern Pacific Energy	NB		0.0000000000		0.0004700997
DukeSolutions, Inc.	NB		-0.0000007835		0.0118698687
TenderLand Power Company, Inc.	NB		0.0208016526		0.0137417665
Imperial Valley Resource Recovery Co.	NB		0.0000000000		0.0177499572
NRG Power Marketing Inc.	NB		0.0000000000		0.0342440065
Allegheny Energy Supply Company, LLC	NB		0.0000000000		0.0415818550
Salt River Project	NB		0.0000000000		0.0461264899
Torch Operating Company Brea	NB		0.0285314726		0.1041900972
Clean Earth Energy Incorporated	NB		0.0000000000		0.1531065034
Midway Sunset Cogeneration Company	NB		0.0000000000		0.1993041378
Unidentified	NB		0.0000000000		0.0000000000
Go Green	NB		0.0002881000		0.2539719439
PowerSource Corp.	NB		0.0000000000		0.3697237985
Sacramento Municipal Utility District (APX1)	NB		-1.4512428856		0.8143465260
Utility.com	NB		0.0000000000		1.1009637664
TransAlta Energy Marketing US, Inc.	NB		0.0000000000		1.3083069977
Sempra Energy Solutions LLC	NB		0.1842385691		2.7731574801
Constellation New Energy	NB		0.6796295600		4.5137957764
Sacramento Municipal Utility District (APX3)	NB		0.0000000000		9.0377340329
Morgan Stanley Capital Group Inc.	NB		2.6442452766		23.8639853833
Enron Energy Services	Other				11.0000000000
Total					62.9075359574

EXHIBIT C

Cases and Proceedings Resolved By Settlement Agreement (only insofar and to the extent they
relate to refund liabilities and payments to and through APX Inc.).

FERC PROCEEDINGS

San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Services, F.E.R.C. Docket Nos. EL00-95-000, et al. and EL00-98-000, et al. (only insofar and to the extent this proceeding relates to refund liabilities and payments to and through APX Inc.).

CASES FILED BY APX PENDING IN THE 9th CIRCUIT

Case No.	Filed	Orders on Review	APX Issue
02-72528	8/17/01 (DC)1 8/9/02 (9th)	April 26, 2001, and June 19, 2001, orders initiating investigation and imposing mitigation (must-offer requirements, price controls, etc.). 95 FERC ¶ 61,115 (2001), reh’g, 95 FERC ¶ 61,418 (2001)	whether the scope of FERC’s investigation should include APX
03-74629 04-73423	12/19/03 7/9/042	October 16, 2003, and May 12, 2004, orders on refund liability. 105 FERC ¶ 61,066 (2003), reh’g, 107 FERC ¶ 61,165 (2004)	allocation of refund liability as between APX and the APX Participants (“joint and several” liability issue)
05-73309	5/23/05	November 23, 2004, and March 24, 2005, orders describing APX as a “jurisdictional Scheduling Coordinator.” 109 FERC ¶ 61,218 (2004), reh’g, 110 FERC ¶ 61,336 (2005).	jurisdictional status of APX, i.e., whether APX is a “jurisdictional Scheduling Coordinator”

OTHER RELEVANT 9th CIRCUIT CASES

Case No.	Petitioner	Filed	Orders on Review	APX Issue
05-70419	Allegheny	1/25/05	October 16, 2003, November 23, 2004, and May 12, 2004, orders on refund liability and initially denying Allegheny’s motion to intervene out of time, but later granting rehearing and addressing APX/Participants liability issues. 105 FERC 61,066 (2003), 107 FERC ¶ 61,165 (2004), reh’g, 109 FERC ¶ 61,218 (2004)	allocation of refund liability as between APX and the APX Participants (“joint and several” liability issue)
04-73502	MSCG	7/12/04	October 16, 2003, and May 12, 2004, orders on refund liability. 105 FERC ¶ 61,066 (2003), reh’g, 107 FERC ¶ 61,165 (2004)
04-73406	El Paso Merchant	7/8/04
04-74703	Calpine	9/13/043
04-73517	Avista4	7/12/04

1	Transferred to 9th Circuit on May 15, 2002.
2	APX filed an Opening Brief in these dockets on December 23, 2004. However, the cases were subsequently held in abeyance and briefs were withdrawn.
3	Transferred from D.C. Circuit.
4	Avista filed its rehearing request as part of the “APX Market Participants” group, which also included BP and Tractebel.

EXHIBIT D
Enron Settlement Reserve

Allocation of Enron Settlement Reserve Set Aside Specifically for Supporting Parties:¹

Avista Energy, Inc.	$	257,749
Coral Power, LLC	$	548,641
Puget Sound Energy	$	401,580
Total For Supporting Parties	$	1,207,970

Allocation of Enron Settlement Reserve Set Aside for Enron Non-Settling Parties and Supporting Parties:

Enron Non-Settling Parties	$	13,292,030
Including Supporting Parties
Total Enron Settlement Reserve	$	14,500,000

¹ Capitalized terms have the meaning set forth in the APX Settlement And Release Of Claims Agreement.

EXHIBIT E

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

	)
In re:	)
)	Chapter 11
Calpine Corporation, et al.,	)
)	Case No. 05-60200 (BRL)
Debtors.	)          Jointly Administered
	)

NOTICE OF WITHDRAWAL OF CLAIMS WITH PREJUDICE

NAME OF CLAIMANT:

CLAIM Nos.:

     Pursuant to Fed. R. Bankr. P. 3006, Claimant                                          hereby withdraws with prejudice the above-described claims (the “Claims”). Claimant warrants that it has not sold, assigned, factored or otherwise transferred any interest in the Claims. Claimant further warrants that it will not file any further amendments to the Claims. Claimant hereby releases each of the above-referenced Debtors and their respective successors, affiliates, assigns and estates, from any and all claims, liabilities, debts, causes of action or other obligations arising from, related to or in connection with the Claims.

[COMPANY NAME]

[Insert Address]

By:

          (print name)

Its: [Insert title]

Date:

EXHIBIT F
Existing Global Settlements

1  Williams Settlement Agreement and Release of Claims, Docket Nos. EL00-95, et al., filed April 27, 2004, approved, San Diego Gas & Electric Co. v. Sellers, 108 FERC ¶ 61,002 (2004), reh’g denied 111 FERC ¶ 61,186 (2005).

2.	Dynergy Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed June 28, 2004, approved, San Diego Gas & Electric Co. v. Sellers, 109 FERC 161,071 (2004), reh’g denied 111 FERC ¶ 61,186 (2005).
3.	Duke Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed October 1, 2004, approved San Diego Gas & Electric Co. v. Sellers, 109 FERC ¶ 61,257 (2004), reh’g denied 111 FERC ¶ 61,186 (2005).
4.	Mirant Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed January 31, 2005, approved, San Diego Gas & Electric Co. v. Sellers, 111 FERC ¶ 61,017 (2005), reh’g denied, 111 FERC ¶ 61,354 (2005).
5.	Public Service Company of Colorado Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed September 14, 2005, approved, San Diego Gas & Electric Co. v. Sellers, 113 FERC ¶ 61,235 (2005).
6.	Idaho Power Company Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed February 17, 2006, approved, San Diego Gas & Electric Co. v. Sellers, 115 FERC ¶ 61,230 (2006), reh’g denied 117 FERC ¶ 61,020 (2006).
7.	Reliant Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed November 3, 2005, approved, San Diego Gas & Electric Co. v. Sellers, 113 FERC ¶ 61,308 (2005), reh’g denied, 115 FERC 61,257 (2006).
8.	Eugene Water and Electric Board Settlement and Release of Claims Agreement, Docket Nos. EL00-95, et al., filed August 6, 2006.

EXHIBIT G

Pro Forma
NOTICE OF SETTLEMENT AND RIGHTS

To: Addressee

From: APX Inc.

Subject: Settlement of Claims and Liabilities Relating to APX Transactions

Date: January 5, 2007

     You are receiving this Notice of Settlement and Rights because you are an entity, or successor to an entity, that contracted and received services from APX Inc (formerly Automated Power Exchange) with respect to markets overseen by the California Independent System Operator (ISO) and/or California Power Exchange (PX) during the periods May 1, 2000 through October 1, 2000 (“Pre-Refund Period”) and/or October 2, 2000 through June 20,2001 (“Refund Period”) and/or the ISO Amendment 51 and Good Faith Negotiations resulting in settlement adjustments dating back to April 1, 1998.

     As you may be aware, extensive regulatory proceedings have been ongoing for several years before the Federal Energy Regulatory Commission (“FERC”) and the United States Court of Appeals for the Ninth Circuit to determine whether and to what extent prices charged and collected for wholesale sales of electricity in these markets during the Pre-Refund and Refund Periods were unlawful and subject to refund. Much of this litigation has already been resolved through a series of complex settlements.

     The purpose of this Notice is to advise you that a comprehensive settlement agreement has been reached between and among many of the entities receiving service from the APX Inc. during these periods. Collectively, these entities represent over 95% of the amounts in issue (whether measured in terms of liabilities for refunds or entitlements to refunds) among all APX Participants receiving such APX services. A copy of that settlement agreement has been filed today with the FERC in Docket Nos. EL00-95, et al, and is enclosed with this Notice.

     Approval of the enclosed settlement by the FERC will finally resolve all “APX-Related Claims” as defined in the settlement. This will include any claims or liabilities that your company may have with respect to the subject services.

     Your company’s rights are set forth in Section 9 of the settlement. Briefly summarized, you have the right (i) to elect to become a “Sponsoring Party” to the settlement, (ii) to take action to demonstrate to the FERC why you should be excluded from the settlement, or (iii) to take no action, in which case you will, by default, become a “Subject Party.” It is important for you to understand that, if you take no action to be excluded from this settlement, your rights with respect to the matters addressed in this settlement will be determined by the terms of this settlement.

     The parties sponsoring this settlement are requesting that the FERC establish a deadline of January 19, 2007 for comments on this settlement. If the FERC establishes a different date for comments, APX will so notify you. If your company determines that it wants to be excluded from the settlement, you should, on or before the comment date, file with the FERC a petition for leave to intervene in the EL00-95 proceedings (if you are not presently a party to those proceedings), along with a statement and any supporting information you choose to submit as to why your company should not be bound by the settlement.

     APX Participants electing to become Sponsoring Parties may do so at any time up until the “Settlement Effective Date,” as described in the settlement.

     APX Inc. believes approval of this settlement will be in the best interests of all affected APX Participants.

     The FERC’s rules governing settlement are found at 18 C.F.R. ’ 385.602, and can be accessed via the FERC web site at http://ferc.gov. APX stands prepared to assist any APX Participant interested in knowing more about how to participate in the FERC process. You may contact APX Inc. at the following address:

Roger Yang
V.P., Hosted Solutions
APX, Inc.
5201 Great America Parkway
Suite 522
Santa Clara, CA 95054
Voice: 408-517-2146
E-Mail: RYang@apx.com

2

EXHIBIT H
APX Participants Who Need Approval

1. UC Davis Medical Center (The Regents of the University of California).

EXHIBIT I
Notice Addresses

SPONSORING PARTIES

If to APX Inc., to:		With a copy to:
	APX, Inc.		John & Hengerer
	5201 Great America Parkway		1200 17th Street, N.W.
	Suite 522		Suite 600
	Santa Clara, CA 95054		Washington, D.C. 20036-3013
	Attention: Roger Yang		Attention: Douglas John
	Facsimile: (408) 517-2985		Facsimile: (202) 429-8805
If to Allegheny Energy Supply Company, LLC, to:		With a copy to:
	Allegheny Energy Supply Company, LLC		Allegheny Energy, Inc.
	800 Cabin Hill Dr.		800 Cabin Hill Dr.
	Greensburg, PA 15601		Greensburg, PA 15601
	Attention: Vice President, Market		Attention: General Counsel
	Optimization & Dispatch		Facsimile: (724) 830-5151
	Facsimile: (724) 838-6892
If to American Electric Power Service Corp., to:		With a copy to:
	American Electric Power		Jones Day
	155 W. Nationwide Blvd., Suite 500		51 Louisiana Avenue, N.W.
	Columbus, OH 43215		Washington, D.C. 20001-2113
	Attention: John C. Crespo, Esq.		Attention: Kevin J. McIntyre
	Facsimile: (614) 583-1603		Facsimile: (202) 626-1700
If to Aquila Merchant Services, Inc., to:
	Aquila, Inc.
	20 West Ninth Street
	Kansas City, MO 64105-1711
	Attention: Christopher Reitz
	Facsimile: (816) 467-3611

If to Avista Energy, Inc., to:		With a copy to:
	Van Ness Feldman, P.C.		Avista Energy, Inc.
	1050 Thomas Jefferson Street, N.W.		201 West North River Drive
	Washington, D.C. 20007		Spokane, WA 99201
	Attention: Cheryl Feik Ryan		Attention: Derrick Coder
	Facsimile: (202) 338-2416		Facsimile: (509) 688-6154
If to BP Energy Company, to:		With a copy to:
	BP Energy Company		Morgan Lewis
	501 Westlake Park Blvd.		1111 Pennsylvania Avenue, N.W.
	Houston, TX 77253		Washington, D.C. 20004
	Attention: Gary N. Brown, Esq.		Attention: Mark R. Haskell
	Facsimile: (281) 366-7503		Facsimile: (202) 739-3001
If to Calpine, to:		With a copy to:
	Calpine Energy Services, L.P.		Calpine Corporation
	717 Texas Avenue, Suite 1000		3875 Hopyard Road, Suite 345
	Houston, TX 77002		Pleasanton, CA 94588
	Attention: General Counsel		Attention: Legal Department
	Telecopier No: (713) 830-2001		Telecopier No.: (925) 479-7303
If to Calpine Energy Services, L.P, to:		With a copy to:
	Sutherland Asbill & Brennan LLP		Sutherland Asbill & Brennan LLP
	1275 Pennsylvania Avenue, N.W.		1275 Pennsylvania Avenue, N.W.
	Washington, D.C. 20004		Washington, D.C. 20004
	Attention: Keith R. McCrea		Attention: Keith R. McCrea
	Facsimile: (202) 637-3593		Facsimile: (202) 637-3593
If to Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.), to:		With copies to:
	Commerce Energy, Inc.		Commerce Energy, Inc.
	600 Anton Boulevard, Suite 2000		600 Anton Boulevard, Suite 2000
	Costa Mesa, CA 92626		Costa Mesa, CA 92626
	Attention: President		Attention: Legal Department
	Facsimile: (714) 481-6589		Facsimile: (714) 481-6589
			McDermott Will & Emery LLP
			600 Thirteenth Street, N.W.
			Washington, D.C. 20005-3096
			Attention: Catherine Krupka
			Erin M. Murphy
			Facsimile: (202) 756-8087

If to Constellation NewEnergy, Inc., to:		With a copy to:
	Constellation NewEnergy, Inc.		Foley & Lardner, LLP
	750 East Pratt Street		Washington Harbour
	17th Floor		3000 K Street, N.W., Suite 500
	Baltimore, MD 21202		Washington, D.C. 20007
	Attention: Jordan Karp		Attention: Ronald N. Carroll
	Facsimile: (410) 783-3009		Facsimile: (202) 672-5399
If to El Paso Marketing, LP (f/k/a El Paso Merchant Energy, LP), to:		With a copy to:
	El Paso Corporation		McDermott Will & Emery LLP
	1001 Louisiana, Room 3034B		600 Thirteenth St., NW
	Houston, TX 77002		Washington, DC 20005
	Attention: Robert Baker		Attention: Kenneth W. Irvin
			Facsimile: (202) 756-8087
			Email: Kirvin@mwe.com
If to the Enron Parties, to:		With a copy to:
	Enron Power Marketing, Inc.		Enron Power Marketing, Inc.
	Enron Energy Services, Inc.		Enron Energy Services, Inc.
	1221 Lamar, Suite 1600		1221 Lamar, Suite 1600
	Houston, TX 77010		Houston, TX 77010
	Attention: President		Attention: Legal Department
	Facsimile: (713) 646-2555		Facsimile: (713) 646-3490
If to Merrill Lynch Capital Services, Inc., to:		With copies to:
	Merrill Lynch Capital Services, Inc. 4 World Financial Center Floor 7 New York, NY 10080 Attention: Keith A. Bailey Facsimile: (212) 449-9576		Merrill Lynch Capital Services, Inc. Office of General Counsel Debt Markets Counsel 4 World Financial Center New York, NY 10080 Attention: Chris Haas           Michelle Kershaw Facsimile: (212) 449-6993
			Merrill Lynch Capital Services, Inc.
			Office of General Counsel
			GMI Litigation
			4 World Financial Center
			New York, NY 10080
			Attention: Jonathan Schorr
			Facsimile: (212) 669-0799

			McDermott Will & Emery LLP
			600 Thirteenth Street, N.W.
			Washington, D.C. 20005-3096
			Attention: Catherine Krupka
			Erin M. Murphy
			Facsimile:
If to Morgan Stanley Capital Group Inc., to:		With copies to:
	Morgan Stanley Capital Group Inc.		Morgan Stanley Capital Group Inc.
	2000 Westchester Avenue		2000 Westchester Avenue
	Purchase, NY 10577		Purchase, NY 10577
	Attention: Deborah L. Hart		Attention: Legal Department
	Facsimile: (212) 507-8843		Facsimile: (914) 225-5717
			McDermott Will & Emery LLP
			600 Thirteenth Street, N.W.
			Washington, D.C. 20005-3096
			Attention: Catherine Krupka
			Erin M. Murphy
			Facsimile: (202) 756-8087
If to Sacramento Municipal Utility District, to:		With a copy to:
	Sacramento Municipal Utility District		Stinson Morrison Hecker LLP
	General Counsel’s Office		1150 18th Street, N.W.
	6201 S Street, M.S. B406		Suite 800
	Sacramento, CA 95817		Washington, D.C. 20036
	Attention: Laura Lewis		Attention: Glen Ortman
	Facsimile: (916) 732-6581		Facsimile: (202) 785-9163
If to Salt River Project Agricultural Improvement and Power District, to:		With a copy to:
	Salt River Project Agricultural		Salt River Project Agricultural
	Improvement and Power District		Improvement and Power District
	1521 N. Project Drive		1521 N. Project Drive
	Mail Station ISB336		Mail Station PAB207
	Tempe, AZ 85281		Tempe, AZ 85281
	Attention: Robert S. Nichols,		Attention: Jessica J. Youle,
	Assistant Treasurer		Legal Department
	Facsimile: (602) 683-0993		Facsimile: (602) 236-5370

If to Sempra Energy Solutions LLC, to:		With a copy to:
	Sempra Energy Solutions LLC		Sempra Commodities
	101 Ash Street		58 Commerce Road
	San Diego, CA 92101		Stamford, CT 06902
	Attention: William Goddard		Attention: Daniel M. Hecht, Legal
			Department
If to Sierra Pacific Industries, to:
	Sierra Pacific Industries
	19794 Riverside Avenue
	Anderson, California 96007
	Attention: Bob Ellery
If to Tractebel Energy Marketing, Inc. (n/k/a Suez Energy Marketing NA, Inc.), to:
	Suez Energy Marketing NA, Inc.
	1990 Post Oak Blvd.
	Suite 1900
	Houston, TX 77056
	Attention: Ray Cunningham, Esq.
	Facsimile: (713) 636-1980
If to TransAlta Energy Marketing (US) Inc., to:		With a copy to:
	TransAlta Energy Marketing (US) Inc.		Vinson & Elkins, LLP
	110 - 12th Avenue, S.W.		The Willard Office Building
	Calgary, Alberta		1455 Pennsylvania Avenue, N.W.
	T2P 2MI		Washington, D.C. 20004-1008
	Attention: Sterling Koch		Attention: Stephen Angle
	Facsimile: (403) 267-2575		Facsimile: (202) 879-8965
If to UC Davis Medical Center (The Regents of the University of California), to:
	The Regents of the University of California
	(UC Davis Medical Center)
	1111 Franklin Street
	8th Floor
	Oakland, CA 94607-5200
	Attention: Eric K. Behrens, Esq.
	Facsimile: (510) 987-9757

SUPPORTING PARTIES

If to Coral Power, L.L.C., to:		With a copy to:
	Shell Trading and Power Company		Foley & Lardner, LLP
	909 Fannin Street, Plaza Level 1		Washington Harbour
	Houston, TX 77010		3000 K Street, N.W., Suite 500
	Attention: Robert H. Reilley		Washington, D.C. 20007
	Facsimile: (713) 265-5632		Attention: Ronald N. Carroll
			Facsimile: (202) 672-5399
If to Puget Sound Energy, Inc., to:		With a copy to:
	Van Ness Feldman, P.C.		Puget Sound Energy
	1050 Thomas Jefferson Street, N.W.		PSE-12
	Washington, D.C. 20007		P.O. Box 97034
	Attention: Gary Bachman		Bellevue, WA 98009-9734
	Facsimile: (202) 338-2416		Attention: Jennifer O’Connor
			Facsimile: (425) 462-3300

SUBJECT PARTIES

If to Abacus Energy Services, LLC, to:*

Abacus Energy Services, LLC
438 West Cypress St.
Glendale, CA 91204
Attention: Cinta Putra
Telephone: (818) 409-0510

If to ACN Power, Inc., to:

ACN
13620 Reese Blvd. E.
Suite 400, Bldg. XII
Huntersville, NC 28078
Attention: Colleen R. Jones
Telephone: (704) 370-4967

If to Ancor L.L.C., to:*

Ancor L.L.C.
12839 Daisy Court
Yucaipa, CA 92399
Attention: Andrew Wardenski
Telephone: (909) 795-7902

If to BBOSS, LLC, to:*

BBOSS
P.O. Box 226818
Los Angeles, CA 90022
Attention: Jim Baca
Telephone: (562) 693-6934

If to Big Creek Water Works, Ltd., to:*

Big Creek Water Works, Ltd.
224 Kingsbury Grade
Stateline, NV 89449
Attention: Brian Ring
Telephone: (775) 588-7300

If to Cinergy Services, Inc., to:

Cinergy Services, Inc.
139 East Fourth Street, EF 401
Cincinnati, OH 45201
Attention: Kevin Carter
Telephone: (513) 419-5120

If to City of Sunnyvale Power Gen. Facility, to:

City of Sunnyvale Power Gen. Facility
456 West Olive Ave.
Sunnyvale, CA 94088
Attention: Mark Bowers
Telephone: (408) 730-7421

If to Clean Earth Energy Inc., to:*

Clean Earth Energy Inc.
200 West 17th Street, Suite 80
Cheyenne, WY 82001
Attention: Ronald Radmer
Telephone: (307) 638-7188

If to CSW Power Marketing, to:*

CSW Power Marketing
2 West 2nd Street
Tulsa, OK 74103
Attention: Woody Lally
Telephone: (918) 594-4026

If to DukeSolutions, Inc., to:*

DukeSolutions, Inc.
526 S. Church Street
Charlotte, NC 28202-1904
Attention: Legal Department
Telephone: (704) 594-6200

If to Eagle Power LLC, to:*

Eagle Power LLC
2221 Ocean Ave., Suite 307
Santa Monica, CA 90405
Attention: Robert Mariani
Telephone: (310) 366-5240

If to East Bay Municipal Utility District, to:

East Bay Municipal Utility District
375 11th Street
Oakland, CA 94607-4240
Attention: Saji Pierce
Telephone: (510) 287-2013

If to Eastern Pacific Energy, to:*

Eastern Pacific Energy
21913 Saturn Street, Suite G
Brea, CA 92821
Attention: Martin Sielen

If to Energy 2001 Inc., to:

Disbursing Agent for Energy 2001 Inc.
13542 W. Spring Meadow Drive
Sun City West, AZ 85375-3709
Attention: David Fitzpatrick
Telephone: (623) 388-4614

If to Energy-Koch Trading, Inc., to:

Energy-Koch Trading, Inc.
P.O. Box 3327
Houston, TX 77253-3327
Attention: Melissa Beckett
Telephone: (713) 544-5618

If to FPL Energy Power Marketing, Inc., to:

FPL Energy Power Marketing, Inc.
700 Universe Blvd.
Juno Beach, FL 33408
Attention: West Power Desk
Telephone: (561) 691-7171

If to Friendly Power Company, LLC, to:*

Friendly Power Company, LLC
4275 Executive Square, Suite 250
La Jolla, CA 92037
Attention: Scott Levine
Telephone: (888) 576-9375

If to Gas Recovery System, Inc., to:

Gas Recovery System, Inc.
5717 Brisa Street
Livermore, CA 94550
Attention: Alan J. Purves/Tom Halter
Telephone: (925) 606-3700

If to Go Green, to:

Go Green
167 Alice Ave.
Campbell, CA 95008
Attention: Rick Kohl
Telephone: (408) 370-2525

If to Imperial Valley Resource Recovery Co., to:*

Imperial Valley Resource Recovery Co.
3505 Hwy 111
Imperial, CA 92251
Attention: Rolf Peterson
Telephone: (760) 344-8943

If to Keystone Energy Services, to:*

Keystone Energy Services
9200 Sunset Blvd., Suite 1020
Los Angeles, CA 90069
Attention: L. Michael Caldewell
Telephone: (310) 275-9008

If to Los Alamos Energy, LLC, to:*

Los Alamos Energy, LLC
P.O. Box 676
Los Alamos, CA 93440
Attention: Hannes Faul
Telephone: (805) 377-2004

If to Midway Sunset Cogeneration Company, to:

Midway Sunset Cogeneration Company
3466 W. Crocker Springs Road
Fellows, CA 93224
Attention: Janie Alvidres
Telephone: (661) 768-3017

If to NRG Power Marketing Inc., to:

NRG Power Marketing Inc.
211 Carnegie Center
Princeton, NJ 08540
Attention: Legal Department
Telephone: (609) 524-4500

If to Powercom, to:*

Powercom
1055 West 7th Street, Suite 100
Los Angeles, CA 90017
Attention: Christopher Leisgang
Telephone: (213) 622-9226

If to PowerSource Corp., to:

PowerSource Corp.
8306 Wilshire Blvd., #301
Beverly Hills, CA 90211
Attention: Roman Gordon
Telephone: (310) 854-4343

EXHIBIT J

OMITTED

CONTAINS MATERIAL
SUBJECT TO
PROTECTIVE ORDER

     The amount set forth on Exhibit J for Commerce Energy, Inc. is $ 95,378.

EX-10.9

Exhibit 10.9

THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER

     THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER (this “Amendment”), dated March 15, 2007, is entered into among COMMERCE ENERGY, INC., a California corporation (“Borrower”), COMMERCE ENERGY GROUP, INC., a Delaware corporation (“Parent”), WACHOVIA CAPITAL FINANCE CORPORATION (WESTERN), a California corporation, as Agent and Lender (“Agent”), and THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, as co-Lender (“Co-Lender”).

RECITALS

     A. Borrower, Parent and Agent have previously entered into that certain Loan and Security Agreement dated June 8, 2006 (the “Loan Agreement”) as amended by the First Amendment to Loan and Security Agreement and Waiver dated September 20, 2006 (the “First Amendment”) and the Second Amendment to Loan and Security Agreement and Waiver dated October 26, 2006 (the “Second Amendment”), pursuant to which Agent and Co-Lender, as assignee of a portion of Agent’s original rights and obligations under the Loan Agreement, have made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Loan Agreement.

     B. The following Events of Default have occurred and are continuing under the Loan Agreement: (i) Parent and its Subsidiaries failed to maintain a Fixed Charge Coverage Ratio of not less than 1.1 to one for the period of nine (9) consecutive months ended November 30, 2006, as required by Section 9.17 of the Loan Agreement (as amended by the Second Amendment); and (ii) during the period from January 25, 2007 through January 31, 2007 (inclusive), Borrowers failed to maintain Excess Availability of not less than $5,000,000 as required by Section 9.17.1 of the Loan Agreement (as added by the Second Amendment). The foregoing Events of Default will collectively be referred to herein as the “Known Existing Defaults”.

     C. Borrower has requested that Agent and Co-Lender waive the Known Existing Defaults and amend the Loan Agreement on the terms and conditions set forth herein.

     D. Borrower and Parent are entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Agent’s and Co-Lender’s rights or remedies as set forth in the Loan Agreement is being waived or modified by the terms of this Amendment.

AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

     1. Amendment to Loan Agreement. Section 9.17.1 of the Loan Agreement (as added by the Second Amendment) is hereby amended and restated to read in its entirety as follows:

“9.17.1 Excess Availability. Borrowers shall, at all times during each of the periods set forth below, maintain Excess Availability of not less than the amount set forth opposite such period:

Periods	Amounts
2/1/07 through 7/31/07	$5,000,000
On and after 8/1/07	$10,000,000”

     2. Consents.

          (a) Sale/Leaseback Transaction. Borrower now desires to enter into a sale/leaseback transaction for certain Equipment with a value of approximately $1,000,000 (the “Sale/Leaseback”), which would be prohibited by Section 9.7(b) of the Loan Agreement (the Borrower having already sold assets during the current fiscal year with a value of approximately $900,000, which when added to the value of the Equipment in the Sale/Leaseback, would exceed the maximum aggregate sum permitted in clause (vi) of Section 9.7(b) of the Loan Agreement). Agent and Co-Lender hereby consent to the Sale/Leaseback and agree that the Sale/Leaseback will not constitute a Default or Event of Default under the Loan Agreement.

          (b) Bond Indemnity. Parent now desires to enter into an Agreement of Indemnity in favor of International Fidelity Insurance Company (“Surety”), in the form previously supplied to Agent, with respect to a certain bond to be issued by Surety in the amount of $300,000 (the “Indemnity Agreement”) and to grant Surety a security interest in the personal property and fixtures of Parent as provided in the Indemnity Agreement, which would be prohibited by Sections 9.8 and 9.9 of the Loan Agreement. Agent and Co-Lender hereby consent to the Indemnity Agreement (including such security interest) and agree that the Indemnity Agreement (including such security interest) will not constitute a Default or Event of Default under the Loan Agreement, provided that Surety duly executes and delivers a subordination agreement in form and substance satisfactory to Agent with respect to such security interest.

          (c) Limitations on Consents. The foregoing consents shall apply only to the Sale/Leaseback and the Indemnity Agreement as specifically described above, and in all other respects, Agent and Co-Lender reserve and preserve their rights to require the strict compliance by Borrower and Parent with Sections 9.7, 9.8, and 9.9 of the Loan Agreement and all of the other terms and provisions of the Financing Agreements.

     3. Waiver of Known Existing Defaults. Each of Agent and Co-Lender hereby waives the Known Existing Defaults and waives enforcement of its rights against Borrower and Parent arising from the Known Existing Defaults; provided, however, nothing herein shall be deemed a waiver with respect to any failure of Borrower or Parent to comply fully with Section 9.17 of the Loan Agreement as to periods ending after November 30, 2007 and Section 9.17.1 of the Loan Agreement as modified by this Amendment. Subject to this Amendment becoming

2

effective as set forth in Section 4 below, this waiver shall be deemed effective, as to each Known Existing Default, on the date of the first occurrence of such Known Existing Default. This waiver shall be effective only for the specific defaults comprising the Known Existing Defaults, and in no event shall this waiver be deemed to be a waiver of enforcement of Agent’s or Co-Lender’s rights with respect to any other Defaults or Events of Default now existing or hereafter arising. Nothing contained in this Amendment nor any communications between Borrower or Parent and Agent or Co-Lender shall be a waiver of any rights or remedies Agent or Co-Lender has or may have against Borrower or Parent, except as specifically provided herein. Except as specifically provided herein, Agent and Co-Lender hereby reserve and preserve all of their rights and remedies against Borrower and Parent under the Loan Agreement and the other Financing Agreements.

     4. Effectiveness of this Amendment. The effectiveness of this Amendment, and the waivers provided herein, are conditioned upon the occurrence of each of the following:

          (a) Amendment. Agent shall have received this Amendment, fully executed in a sufficient number of counterparts for distribution to all parties.

          (b) Amendment Fee. Agent shall have received an amendment fee in the amount of Thirty-Five Thousand Dollars ($35,000) for the benefit of Agent and Co-Lender based upon their respective Pro Rata Shares, which fee is fully earned as of and due and payable on the date hereof.

          (c) Representations and Warranties. The representations and warranties set forth herein and in the Loan Agreement shall be true and correct.

          (d) Other Required Documentation. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Agent.

     5. Representations and Warranties. Each of Borrower and Parent represents and warrants as follows:

          (a) Authority. Such party has the requisite corporate power and authority to execute and deliver this Amendment, and to perform its obligations hereunder and under the Financing Agreements (as amended or modified hereby) to which it is a party. The execution, delivery and performance by such party of this Amendment have been duly approved by all necessary corporate action and no other corporate proceedings are necessary to consummate such transactions.

          (b) Enforceability. This Amendment has been duly executed and delivered such party. This Amendment and each Financing Agreement (as amended or modified hereby) is the legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, and is in full force and effect.

          (c) Representations and Warranties. The representations and warranties contained in each Financing Agreement (other than any such representations or warranties that,

3

by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof.

          (d) Due Execution. The execution, delivery and performance of this Amendment are within the power of such party, have been duly authorized by all necessary corporate action, have received all necessary governmental approval, if any, and do not contravene any law or any material contractual restrictions binding on such party.

          (e) No Default. After giving effect to the waivers contained in this Amendment, no event has occurred and is continuing that constitutes a Default or Event of Default.

     6. Governing Law. The validity, interpretation and enforcement of this Amendment and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California but excluding any principles of conflicts of law or other rule of law that would cause the application of the law of any jurisdiction other than the laws of the State of California.

     7. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile or other electronic method of transmission shall have the same force and effect as the delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile or other electronic method of transmission shall also deliver an original executed counterpart, but the failure to do so shall not affect the validity, enforceability or binding effect of this Amendment.

     8. Reference to and Effect on the Financing Agreements.

          (a) Upon and after the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Loan Agreement, and each reference in the other Financing Agreements to “the Loan Agreement”, “thereof” or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as modified and amended hereby.

          (b) Except as specifically amended above, the Loan Agreement and all other Financing Agreements, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower or Parent (as applicable) to Agent and Co-Lender.

          (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Agent or Co-Lender under any of the Financing Agreements, nor constitute a waiver of any provision of any of the Financing Agreements.

          (d) To the extent that any terms and conditions in any of the Financing Agreements shall contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed

4

modified or amended accordingly to reflect the terms and conditions of the Loan Agreement as modified or amended hereby.

     9. Estoppel. To induce Agent and Co-Lender to enter into this Amendment and to continue to make advances to Borrower under the Loan Agreement, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against Agent or Co-Lender with respect to the Obligations.

     10. Integration. This Amendment, together with the other Financing Agreements (including the First Amendment), incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof.

     11. Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

     12. Submission of Amendment. The submission of this Amendment to the parties or their agents or attorneys for review or signature does not constitute a commitment by Agent or Co-Lender to waive any of their rights and remedies under the Financing Agreements, and this Amendment shall have no binding force or effect until all of the conditions to the effectiveness of this Amendment have been satisfied as set forth herein.

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     IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

COMMERCE ENERGY, INC., a California corporation
By:	/s/ LAWRENCE CLAYTON, JR.
Name:	Lawrence Clayton, Jr.
Title:	Chief Financial Officer

COMMERCE ENERGY GROUP, INC., a Delaware corporation
By:	/s/ LAWRENCE CLAYTON, JR.
Name:	Lawrence Clayton, Jr.
Title:	Senior Vice President, Chief Financial Officer

WACHOVIA CAPITAL FINANCE CORPORATION (WESTERN), a California corporation, as Agent and Lender
By:	/s/ CARLOS VALLES
Name:	Carlos Valles
Title:	Director

THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, as Lender
By:	/s/ STEVEN SCHUIT
Name:	Steven Schuit
Title:	Vice President

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO 17 CFR 240.13a-14(a)
PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven S. Boss, Chief Executive Officer of Commerce Energy Group, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended January 31, 2007 of Commerce Energy Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 19, 2007	By:	/s/ STEVEN S. BOSS
		Steven S. Boss
		Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO 17 CFR 240.13a-14(a)
PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lawrence Clayton, Jr., Senior Vice President and Chief Financial Officer of Commerce Energy Group, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended January 31, 2007 of Commerce Energy Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 19, 2007	By:	/s/ LAWRENCE CLAYTON, JR.
		Lawrence Clayton, Jr.
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
RULE 13(a)-14(b) AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Commerce Energy Group, Inc. (the “Company”) on Form 10-Q for the quarterly period ended January 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven S. Boss, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 19, 2007	By:	/s/ STEVEN S. BOSS
		Steven S. Boss
		Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
RULE 13(a)-14(b) AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Commerce Energy Group, Inc. (the “Company”) on Form 10-Q for the quarterly period ended January 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence Clayton, Jr., Senior Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 19, 2007	By:	/s/ LAWRENCE CLAYTON, JR.
		Lawrence Clayton, Jr.
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)