Smart contracts for smart people and Applications in the U.S energy industry

1. Smart Contracts
for Smart People
and
Applications in
the U.S. Energy
Industry
Susan P. Altman
Molly Suda
James E. Scheuermann
March 23, 2017

2. Smart Contracts for Smart People and Applications in the
U.S. Energy Industry
March 23, 2017 1
© Copyright 2016 by K&L Gates LLP. All rights reserved.
Susan P. Altman, Molly Suda, and James E. Scheuermann
March 23, 2017
Smart Contracts for Smart People
and Applications in the U.S. Energy
Industry
Presentation for Invest Northern Ireland
SMART CONTRACT OVERVIEW
Susan P. Altman

3. Smart Contracts for Smart People and Applications in the
U.S. Energy Industry
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WHAT IS A SMART CONTRACT?
 “A set of promises, specified in digital form, including protocols within which
the parties perform on these promises” Nick Szabo, Smart Contracts:
Building Blocks for Digital Markets, 1996
 “A smart contract is neither smart nor a contract.” Brian Phillips, October
2016
 “Smart contracts should really be called automated contracts.” Oliver Oram,
December 2016
 Other synonyms: Self-executing contracts, blockchain contracts, digital
contracts
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SMART CONTRACTS HAVE TWO
COMPONENTS
 Smart Contract Code
 Code (and data) that is stored, verified and executed
on a blockchain
 Smart Legal Contracts
 Use of smart contract code that can be used as a
complement to, or substitute for, legal contracts
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WHAT’S THE NON-SMART, NON-
CONTRACT ASPECT?
 A smart contract has these elements:
 Digital form (code*, data and running programs)
 Embedded: contractual clauses are embedded as computer code in
software
 Performance Enabled by Technological Means (technology + rules-
based operations)
 Code is automatically executed by a distributed ledger system
 Irrevocable: Once initiated, the outcome the smart contract is encoded
to perform typically cannot be stopped (if x happens, then y happens
automatically)
*created by very smart coders
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WHAT DOES BLOCKCHAIN HAVE TO DO
WITH THIS?
 Blockchain enables cooperation by adverse participating computers
(“nodes”) to agree on the state of a block of transactions, which are each
linked to the preceding block to make a chain. Blockchain always involves
the sharing of facts with a consensus process designed into the sharing.
The consensus process involves advanced algorithms previously
unavailable.
 Each block includes small programs that verify or validate their part in the
transactions, so each block is a small smart contract.
 It is the consensus aspect of blockchain (parties come to consensus over a
set of immutable shared facts) that is giving rise to smart contracts.
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U.S. Energy Industry
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WHAT DO DISTRIBUTED LEDGERS HAVE
TO DO WITH SMART CONTRACTS?
 Blockchain transactions are stored on a distributed ledger (a distributed
(multiparty) database, as opposed to a central database). Blockchain
ledgers are immutable; shared databases can be changed retroactively.
 The distributed ledger could be public or private (called “permissioned” or
“permissionless”).
 The distributed ledger could also be a hybrid. For example, anyone could
inspect raw data, but only those with a required cyrptographic key could
inspect encrypted individual data.
 Most commercial transactions will be performed on a permissioned
distributed ledger. Businesses are no more likely to disclose to the world
their technology-enabled contracts in the future than they are today.
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HOW SMART CONTRACTS WORK
 1. Coding (what goes in: proper logic)
 2. Distributed Ledgers (how the smart contract goes out)
 3. Execution (How the smart contract is processed)
 Individual computers in the network of distributed ledgers receive code, individually agree on
the results of code execution, network updates the distributed ledgers. Execution is not in
the hands of any single party.
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U.S. Energy Industry
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WHAT ARE THE ADVANTAGES AND
DISADVANTAGES OF SMART
CONTRACTS?
 Advantages:
 Efficiency: Disintermediation, Speed
 Reduction of Human Error
 Reduction in Cost of Personnel
 Disadvantages:
 Immutable Software Errors
 Massive Fraud Risk
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SMART CONTRACTS WILL DEVELOP ON A
SPECTRUM
Contract entirely Contract duplicated Natural language contract
in software code in code and natural with encoded performance
language of non-human aspects (e.g.,
payment)
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ARE SMART CONTRACTS LEGALLY
BINDING?
 Probably yes, if done correctly.
 We’ve seen this before (EDI, e-commerce, shrinkwrap, clickthrough)
 Normal contract principles apply
 The contract has to be enforceable under applicable local law
 EU (incl. UK): Article 9 of Electronic Commerce Directive
 UK: common law of contracts: offer, acceptance, consideration, intention, completeness of terms
 France: consent, legal capacity of parties, object of the obligation, lawful cause of the obligation
 Germany: two corresponding declarations of intent (offer & acceptance)
 US: offer & acceptance, intent, consideration. Will likely look at what assent the
parties make, how accessible terms are, how parties control an electronic agent
acting on their behalf.
 Australia: Electronic Transactions Act 1999
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HOW COULD DISPUTES BE HANDLED?
 Distributed ledger technology may grant a central administering
authority within a permissive ledger the power to insert remedial
transactions into the ledger.
 The central administering authority would need protection from disputes arising
from its actions—similar to today’s agreement with an escrow agent.
 Or, smart contract could have a built-in dispute resolution
mechanism
 Encoded rules could delegate a dispute to an pre-selected arbitrator.
 Natural language version of contract could have arbitration provision.
 Arbitrator could be:
 Central administering authority
 Designated relevant ledger
 Third party arbitration tribunal
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ENERGY INDUSTRY APPLICATIONS
Molly Suda
U.S. ELECTRIC POWER MARKETS
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Source: FERC

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U.S. Energy Industry
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U.S. ELECTRIC POWER MARKETS
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Source: EIA
BLOCKCHAIN, SMART CONTRACTS AND
ENERGY
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 Applications in the energy industry:
 Facilitating integration of distributed energy resources
(DER), microgrids, and neighbor-to-neighbor energy
trading
 Managing electric vehicle (EV) charging
 Improving efficiency and liquidity in wholesale energy
and derivatives markets
 Monitoring critical energy infrastructure
 Verifying and managing trade in renewable attributes
 Potential U.S. legal and regulatory issues

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DERS, MICROGRIDS, P2P ENERGY
TRADING
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• Role of regulators and local utility
• Integration into wholesale energy markets
Source : Microgrid Media
ELECTRIC VEHICLE CHARGING
 Ownership models for charging stations
 Role of regulators and local utilities
 Integration with wholesale market
 California “duck curve”
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Source: California ISO

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WHOLESALE ENERGY AND DERIVATIVES
MARKETS
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• Improving back office functions
• Creating self-executing smart derivatives
SMART ENERGY INFRASTRUCTURE
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• Monitoring
infrastructure to
improve reliability
and resiliency
• New business
opportunities from
data collection
• Cybersecurity issues

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U.S. Energy Industry
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TRACKING RENEWABLE ATTRIBUTES
 Types of Renewable Attributes
 Renewable energy credits (“RECs”): Created as proof that a MW of
energy was generated from a renewable energy source.
 Renewable Identification Number (“RIN”): Identifies a volume of
renewable fuel when it is produced
 Tracked to meet state and federal renewable goals
 Traded separately from underlying MW or fuel
 Potential blockchain applications:
 Metered data ensures renewable MW or fuel is actually produced
 Distributed ledger to prevent double-spend without need for central
register
 Regulatory reporting and monitoring
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LIABILITY INSURANCE COVERAGE FOR
AI-RELATED LIABILITIES
James E. Scheuermann

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OVERVIEW
The Big Picture: Liability insurance follows tort liabilities
1) Will AI Result in a Substantial Change in the Rules of
Tort Liability or the Application of Existing Rules?
2) Will AI merely shift risk or create new risk?
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No
Current liability insurance products
can cover AI-related liabilities with no
or modest modifications
Yes
Liability insurance products may need
substantial modification, and some
types may not be needed at all
OVERVIEW (cont’d)
For example:
 An autonomous, AI-driven, automobile
 Typical fender-bender accident
 Current tort law: (1) driver at fault bears liability
and his insurance will cover the losses; (2) if that
driver alleges his brakes failed due to product
defect, he (or his insurer) can sue auto
manufacturer
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OVERVIEW (cont’d)
 A Possible AI-future: if no driver fault, then (1)
no driver liability, (2) no need for driver to have
insurance, (3) the auto manufacturer and/or its
AI-vendor is liable, and (4) it or its vendors’
insurance responds.
 Auto accident claim → product liability claim
 In the more distant AI-future, will the auto itself
bear liability for the accident, and hence be
required to have its own insurance?
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AI RISKS AND COVERAGES
 Bodily injury and property damage
 Products liability insurance, within a Commercial
General Liability (“CGL”) policy or as stand-alone
coverage
 Breach of contract, failure of product to perform,
other claims for economic loss
 Errors & Omissions insurance
 Product recalls
 Product recall insurance
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AI RISKS AND COVERAGES (cont’d)
 Related cyber risks and coverages
 Invasion of privacy (data breach, disclosure of personally
identifiable information, disclosure of third-party business
confidential information); cyber attack on insured’s
computer systems (virus, malware, Trogans, worms);
advanced persistent threats; spreading of viruses,
malware, etc. to third parties through insured’s computer
system
 Cyber insurance
 Fraud, crime, theft (against third parties)
 No insurance for damages, may be limited defense
coverage under specialty policies, e.g., D&O policies
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AI RISKS AND COVERAGES (cont’d)
 Is AI software, or an AI-algorithm, a product or
service?
 Is the salient contract one for the delivery of a
product or for design/development services? Or a
hybrid?
 See, e.g., Motorola Mobility, Inc. v. Myriad France
SAS, 890 F. Supp. 2d 1037 (ND Ill. 2012) (a
product); In re All Am. Semiconductor, Inc., 490 B.R.
418 (Bankr. S.D. Fla. 2013) (services).
 Does an AI-robot provide services or is it a product
leased or sold?
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QUESTIONS?