UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





R           QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF
1934





For the
      quarterly period ended April 30,
2008





OR





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


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




Large
      accelerated filer 
            Accelerated
      filer Non-accelerated
      filer  
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  R




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




Yes   No R


As of
June 10, 2008, 30,874,618 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 April 30, 2008





Index





Page
                No.PART
      I — FINANCIAL INFORMATION
              1Item
      1. Financial Statements (Unaudited)
              1Condensed
      Consolidated Statements of Operations for the three and nine months ended
      April 30, 2008 and 2007
              1Condensed
      Consolidated Balance Sheets as of April 30, 2008 and July 31,
      2007
              2Condensed
      Consolidated Statements of Cash Flows for the nine months ended April 30,
      2008 and 2007
              3Notes
      to Condensed Consolidated Financial Statements
              4Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              13Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              23Item
      4. Controls and Procedures
              24Item
      4T. Controls and Procedures
              25PART
      II — OTHER INFORMATION
              26Item
      1. Legal Proceedings
              26Item
      1A. Risk Factors
              26Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              28Item
      3. Defaults Upon Senior Securities
              28Item
      4. Submission of Matters to a Vote of  Security
    Holders
              28Item
      5. Other Information
              29Item
      6. Exhibits
              34SIGNATURES
              36













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
              April
      30,
            
            
            Nine Months Ended
              April
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            105,495
            
            
            $
            95,518
            
            
            $
            319,485
            
            
            $
            258,670APX
      settlement
            
            
            —
            
            
            
            5,057
            
            
            
            —
            
            
            
            5,057Net
      revenue
            
            
            105,495
            
            
            
            100,575
            
            
            
            319,485
            
            
            
            263,727Direct
      energy costs
            
            
            91,362
            
            
            
            82,946
            
            
            
            269,698
            
            
            
            221,509Gross
      profit
            
            
            14,133
            
            
            
            17,629
            
            
            
            49,787
            
            
            
            42,218Selling
      and marketing expenses
            
            
            3,254
            
            
            
            2,568
            
            
            
            11,446
            
            
            
            7,317General
      and administrative expenses
            
            
            18,744
            
            
            
            9,803
            
            
            
            48,177
            
            
            
            27,382Impairment
      of intangibles
            
            
            1,426
            
            
            
            —
            
            
            
            1,426
            
            
            
            —Income(loss)
      from operations
            
            
            (9,291
            )
            
            
            5,258
            
            
            
            (11,262
            )
            
            
            7,519Other
      income (expense):Interest
      income
            
            
            28
            
            
            
            191
            
            
            
            345
            
            
            
            873Interest
      expense
            
            
            (230
            )
            
            
            (6
            )
            
            
            (912
            )
            
            
            (27
            )ACN
      arbitration settlement
            
            
            —
            
            
            
            (3,900
            )
            
            
            —
            
            
            
            (3,900
            )Total
      other income and expenses
            
            
            (202
            )
            
            
            (3,715
            )
            
            
            (567
            )
            
            
            (3,054
            )Net
      income (loss)
            
            $
            (9,493
            )
            
            $
            1,543
            
            
            $
            (11,829
            )
            
            $
            4,465Income
      (loss) per common share:Basic
      and diluted
            
            $
            (0.31
            )
            
            $
            0.05
            
            
            $
            (0.39
            )
            
            $
            0.15













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)





April 30, 2008
            
            
            July 31, 2007(Unaudited)ASSETSCurrent
      assets:Cash
      and equivalents
            
            $
            10,370
            
            
            $
            6,559Accounts
      receivable, net
            
            
            56,350
            
            
            
            65,231Natural
      gas inventory
            
            
            2,561
            
            
            
            5,905Prepaid
      expenses and other
            
            
            10,391
            
            
            
            7,224Total
      current assets
            
            
            79,672
            
            
            
            84,919Restricted
      cash and equivalents
            
            
            —
            
            
            
            10,457Deposits
      and other
            
            
            1,795
            
            
            
            1,906Property
      and equipment, net
            
            
            10,755
            
            
            
            8,662Goodwill
            
            
            3,659
            
            
            
            4,247Other
      intangible assets, net
            
            
            4,303
            
            
            
            6,385Total
      assets
            
            $
            100,184
            
            
            $
            116,576LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Energy
      and accounts payable
            
            $
            32,880
            
            
            $
            37,926Accrued
      liabilities
            
            
            6,815
            
            
            
            8,130Total
      current liabilities
            
            
            39,695
            
            
            
            46,056Commitments
      and contingenciesStockholders’
      equity:Common
      stock — 150,000 shares authorized with $0.001 par value;
              30,875
      (unaudited) issued and outstanding at April 30, 2008
              and
      30,383 at July 31, 2007
            
            
            61,376
            
            
            
            60,599Other
      comprehensive income (loss)
            
            
            198
            
            
            
            (823
            )Retained
      earnings
            
            
            (1,085
            )
            
            
            10,744Total
      stockholders’ equity
            
            
            60,489
            
            
            
            70,520Total
      liabilities and stockholders’ equity
            
            $
            100,184
            
            
            $
            116,576







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)





Nine
      Months Ended
              April
      30,2008
            
            
            2007Cash
      Flows From Operating ActivitiesNet
      income (loss)
            
            $
            (11,829
            )
            
            $
            4,465Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
            
            
            1,947
            
            
            
            1,215Amortization
            
            
            1,244
            
            
            
            1,550Amortization
      of deferred loan costs
            
            
            122
            
            
            
            —Impairment
      of intangible assets
            
            
            1,426
            
            
            
            —Provision
      for doubtful accounts
            
            
            17,709
            
            
            
            2,793Stock-based
      compensation
            
            
            986
            
            
            
            421Changes
      in operating assets and liabilities:Accounts
      receivable, net
            
            
            (8,828
            )
            
            
            (22,387
            )Inventory
            
            
            3,344
            
            
            
            3,584Prepaid
      expenses and other
            
            
            (2,259
            )
            
            
            (367
            )Energy
      and accounts payable
            
            
            (5,047
            )
            
            
            1,587Accrued
      liabilities and other
            
            
            (1,212
            )
            
            
            4,401Net
      cash used in operating activities
            
            
            (2,397
            )
            
            
            (2,738
            )Cash
      Flows From Investing ActivitiesPurchase
      of property and equipment
            
            
            (4,040
            )
            
            
            (3,470
            )Purchase
      of intangible assets
            
            
            —
            
            
            
            (4,236
            )Sale
      of intangibles — customer contracts sold
            
            
            —
            
            
            
            756Net
      cash used in investing activities
            
            
            (4,040
            )
            
            
            (6,950
            )Cash
      Flows From Financing ActivitiesCredit
      line commitment fee
            
            
            —
            
            
            
            18Proceeds
      from exercise of stock options
            
            
            —
            
            
            
            1,196Repurchase
      of common stock
            
            
            (209
            )
            
            
            —Increase
      in restricted cash
            
            
            10,457
            
            
            
            6,666Net
      cash provided by financing activities
            
            
            10,248
            
            
            
            7,880Increase
      (decrease) in cash and equivalents
            
            
            3,811
            
            
            
            (1,808
            )Cash
      and equivalents at beginning of period
            
            
            6,559
            
            
            
            22,941Cash
      and equivalents at end of period
            
            $
            10,370
            
            
            $
            21,133Supplemental
      Disclosure of Cash Flow InformationCash
      paid for:Interest
            
            $
            790
            
            
            $
            19Income
      taxes
            
            $
            130
            
            
            $
            9











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 for Share and Per Share Amounts)


(Unaudited)







Note
1. Summary of Significant Accounting Policies






Basis
of Presentation






The
unaudited condensed consolidated financial statements as of April 30, 2008 and
for the three and nine months ended April 30, 2008 and 2007 of Commerce Energy
Group, Inc., or the Company, include its two wholly-owned subsidiaries: Commerce
Energy, Inc., or Commerce, and Skipping Stone Inc. All material inter-company
balances and transactions have been eliminated in consolidation. As used herein
and unless the context requires otherwise, the reference to the Company refers
to Commerce Energy Group, Inc. and its subsidiaries.






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 annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted in these condensed
consolidated interim financial statements, although the Company believes that
the disclosures are adequate to make the information presented not misleading.
The condensed consolidated statements of operations, balance sheets, and
statements of 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 for the year ended July 31,
2007.






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 the financial statements and accounting for the
underlying transactions and balances, the Company applies accounting policies as
disclosed in the 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, and customer acquisition costs are
those that are considered to be the most critical to an understanding of the
Company’s financial statements because their application places the most
significant demands on management’s ability to assess the effect of inherently
uncertain matters on financial results.






Revenue
Recognition






Energy
revenues are recognized as the electricity and natural gas are delivered to the
Company’s customers.




Three Months Ended
              April
      30,
            
            
            Nine Months Ended
              April
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Retail
      electricity sales
            
            $
            63,854
            
            
            $
            52,654
            
            
            $
            216,915
            
            
            $
            156,776Excess
      electricity sales
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,535Total
      electricity sales
            
            
            63,854
            
            
            
            52,654
            
            
            
            216,915
            
            
            
            158,311Retail
      natural gas sales
            
            
            41,641
            
            
            
            42,864
            
            
            
            102,570
            
            
            
            100,359APX
      settlement
            
            
            —
            
            
            
            5,057
            
            
            
            —
            
            
            
            5,057Net
      revenue
            
            $
            105,495
            
            
            $
            100,575
            
            
            $
            319,485
            
            
            $
            263,727




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 for Share and Per Share Amounts)
 (Unaudited)




Stock-Based
Compensation






The total
compensation cost associated with stock options and restricted stock for the
three and nine months ended April 30, 2008 was $703 and $986, respectively, and
for the three and nine months ended April 30, 2007 were $155 and $421
respectively. These costs are included in general and administrative expenses.
In October 2007, the Company’s Senior Vice President and General Counsel
resigned. His separation agreement provided for the forfeiture of 10,000 shares
of his 60,000 unvested, restricted stock. The remaining 50,000 unvested shares
were accelerated to vest on January 2, 2008, which incurred additional
compensation cost of $93 through October 31, 2007.






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 assumptions for the expected lives are 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
approximating the expected life at the grant date. The historical volatility of
the Company’s common stock, par value $0.001 per share, or the common stock, is
used as the basis for the expected volatility.




Nine
      Months Ended
              April
      30,2008
            
            
            2007Weighted-average
      risk-free interest rate
            
            
            3.77
            %
            
            
            4.60
            %Average
      expected life in years
            
            
            3.23
            
            
            
            4.32Expected
      dividends
            
            None
            
            
            NoneExpected
      volatility
            
            
            0.76
            
            
            
            0.73




A summary
of option activity under the Company’s stock option plans, during the nine
months ended April 30, 2008 is presented below.




Options OutstandingNumber of
              Shares
              (in Thousands)
            
            
            Exercise
      Price
              Per Share
            
            
            Weighted
              Average
              Exercise
              PriceOptions
      outstanding as of July 31, 2007
            
            
            6,983
            
            
            $
            1.00-$3.75
            
            
            $
            2.33Options
      granted (1)
            
            
            375
            
            
            $
            1.05-$1.26
            
            
            $
            1.19Options
      expired
            
            
            (757
            )
            
            $
            2.75
            
            
            $
            2.75Options
      forfeited
            
            
            (45
            )
            
            $
            2.56
            
            
            $
            2.56Options
      outstanding as of April 30, 2008 (2)
            
            
            6,556
            
            
            $
            1.00-$3.75
            
            
            $
            2.21


____________


(1)
            Options
      were granted with exercise price equal to the fair value of the common
      stock at the date of grant.


(2)
            Options
      exercisable and outstanding as of April 30, 2008 were 6,556 with weighted
      average exercise price of $2.21 and an aggregate intrinsic value of
      $4.




As of
April 30, 2008, there was no unrecognized compensation cost relating to unvested
outstanding stock options because all options were vested. The total
unrecognized compensation cost relating to unvested restricted stock was $527
and will be recognized over the period of May 2008 through March 2010. For the
three and nine months ended April 30, 2008, 750,000 and 805,000 shares of
restricted stock were issued, respectively. A total of 368,334 unvested
restricted shares were outstanding as of April 30, 2008, with a total market
value of $527. These restricted shares vest in accordance with the terms of
various written agreements. At April 30, 2008, 268,334 shares of common stock
were eligible to be issued or transferred under the Company’s 2006 Stock
Incentive Plan.






Income
Taxes






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 April 30, 2008, the Company had net
operating loss carryforwards of approximately $12.6 million and $14.6 million
for federal and state income tax purposes, respectively.






The
Company adopted the provisions of FIN 48 in August 2007. As of the date of
adoption, the Company had no unrecognized income tax benefits. Accordingly, the
annual effective tax rate will not be affected by the adoption of FIN 48.
Unrecognized tax benefits are not expected to increase or decrease within the
next 12 months as a result of the anticipated lapse of an applicable statue of
limitations. Interest and penalties related to unrecognized income tax benefits
will be accrued in interest expense and operating






5
 
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except for Share and Per Share Amounts)
 (Unaudited)
 expense,
respectively. The Company has not accrued interest or penalties as of the date
of adoption because they are not applicable.






The
Company may be audited by applicable federal and various state taxing
authorities in which the Company previously filed tax returns beginning with
fiscal 2002:






Jurisdictions
            Tax
      Years
            
            Jurisdictions
            Tax
      YearsFederal
            2004-2006
            
            Ohio
            2004-2006California
            2003-2006
            
            Pennsylvania
            2004-2006Florida
            2005-2006
            
            Texas
            2003-2006Maryland
            2004-2006
            
            Virginia
            2004-2006Massachusetts
            2004-2006
            
            Wisconsin
            2006Michigan
            2003-2006
            
            Georgia
            2006Missouri
            2004-2006
            
            Kentucky
            2006New
      Jersey
            2003-2006
            
            City
      of Philadelphia
            2004-2006New
      York
            2004-2006






However,
because the Company had net operating losses and credits carried forward in
several of the jurisdictions including federal and California, certain items
attributable to closed tax years are still subject to adjustment by applicable
taxing authorities through an adjustment to tax attributes carried forward to
open years.






Comprehensive
Income (Loss)






Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” or
SFAS 130, establishes standards for reporting and displaying comprehensive
income and its components in the Company’s consolidated financial statements.
Comprehensive income is defined in SFAS 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 (loss) and other
comprehensive income (loss).






The
components of comprehensive income are as follows:




Three
      Months Ended
              April
      30,
            
            
            Nine
      Months Ended
              April
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income (loss)
            
            $
            (9,493
            )
            
            $
            1,543
            
            
            $
            (11,829
            )
            
            $
            4,465Changes
      in fair value of cash flow hedges
            
            
            138
            
            
            
            454
            
            
            
            1,021
            
            
            
            (2,234
            )Comprehensive
      income (loss)
            
            $
            (9,355
            )
            
            $
            1,997
            
            
            $
            (10,808
            )
            
            $
            2,231




Accumulated
other comprehensive income (loss) included in stockholders’ equity totaled $198
and $(823) at April 30, 2008 and July 31, 2007, 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.







6





COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except for Share and Per Share Amounts)
 (Unaudited)


Accounts
Receivable, Net




Accounts
receivable, net, is comprised of the following:


April 30,
              2008
            
            
            July 31,
              2007Billed
            
            $
            59,875
            
            
            $
            44,693Unbilled
            
            
            18,521
            
            
            
            24,96378,396
            
            
            
            69,656Less
      allowance for doubtful accounts
            
            
            (22,046
            )
            
            
            (4,425
            )Accounts
      receivable, net
            
            $
            56,350
            
            
            $
            65,231




Inventory






Inventory
consists of natural gas in storage as required by obligations under customer
choice programs. Inventory is stated at the lower of weighted-average cost or
market.






Impairment
of Intangibles






During
the third quarter of fiscal 2008, the Company completed an assessment of the
fair value of individual assets and liabilities to assess goodwill and other
intangible assets as of April 30, 2008. As a result of this assessment, it was
determined that certain intangible assets and goodwill related to the Company’s
Skipping Stone Inc., or Skipping Stone, subsidiary were impaired. The Company
recognized a long-lived asset impairment of $0.84 million and a goodwill asset
impairment of $0.56 million. Both of these charges, in the aggregate amount of
$1.4 million are included in “Impairment of intangibles” in the Company’s
unaudited condensed consolidated statements of operations.






New
Accounting Standards






In July
2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” an
interpretation of SFAS No. 109, “Accounting for Income Taxes.” The
interpretation contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109. The
Company adopted FIN 48 during the first quarter of the fiscal year ending July
31, 2008, or fiscal 2008, and the adoption had no impact on its financial
statements.






In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements,” which provides guidance for using fair value to measure assets
and liabilities. The pronouncement clarifies (1) the extent to which
companies measure assets and liabilities at fair value; (2) the information
used to measure fair value; and (3) the effect that fair value measurements
have on earnings. SFAS No. 157 will apply whenever another standard
requires (or permits) assets or liabilities to be measured at fair value.
SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is evaluating the impact this statement may
have on its financial statements.






In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. This statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is evaluating
the impact this statement may have on its financial statements.






In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141R, Business Combinations, and
Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.
These new standards significantly change the accounting for and reporting of
business combination transactions and noncontrolling interests (previously
referred to as minority interests) in consolidated financial statements. Both
standards are effective for fiscal years beginning on or after December 15,
2008. The Company is currently evaluating the provisions of FAS 141(R) and FAS
160.






In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of
FASB No. 133.This statement requires enhanced




7


COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except for Share and Per Share Amounts)
 (Unaudited)
  disclosures
about (1) how and why an entity uses derivative instruments, (2) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (3) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. This Standard is effective for fiscal years and interim periods
beginning after November 15, 2008.   The Company is currently
evaluating these provisions.






Note
2. Liquidity






The
Company believes that it will require additional capital resources during
the fiscal year ending July 31, 2009, or fiscal 2009, to: (1) meet its credit
facility requirement to have $10 million in excess availability at all times on
and after November 1, 2008; (2) fund expansion of the Company’s business,
either from internal growth or acquisition, (3) add liquidity if energy prices
increase materially, and (4) respond to increased energy industry volatility
and/or uncertainty that create additional funding requirements.  We
have begun discussions with several global banks, with expertise in financing
commodity businesses, and expect to replace our existing Credit Facility on or
before November 1, 2008.






Note
3. 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
              April 30,
            
            
            Nine
      Months Ended
              April 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Numerator:Net
      income (loss)
            
            $
            (9,493
            )
            
            $
            1,543
            
            
            $
            (11,829
            )
            
            $
            4,465Net
      income (loss) applicable to common stock —basic and
diluted
            
            $
            (9,493
            )
            
            $
            1,543
            
            
            $
            (11,829
            )
            
            $
            4,465Denominator:Weighted-average
      outstanding common shares — basic
            
            
            30,758
            
            
            
            29,938
            
            
            
            30,537
            
            
            
            29,763Effect
      of stock options
            
            
            —
            
            
            
            254
            
            
            
            —
            
            
            
            119Weighted-average
      outstanding common shares — diluted
            
            
            30,758
            
            
            
            30,192
            
            
            
            30,537
            
            
            
            29,882







Note
4. Market and Regulatory






The
Company currently serves electricity customers in six states across 12 utility
markets and gas customers in seven states across 13 utility markets and
collectively operates in ten states with authority to operate in an additional
four states. Regulatory requirements are determined at the individual state
level and administered and monitored by the Public Utility Commission, or PUC,
of each state. Operating rules and tariff filings by states and by utility
markets can significantly impact the viability of the Company’s sales and
marketing plans and its overall operating and financial results.






Note
5. HESCO Customer Acquisition






Effective
September 1, 2006, the Company acquired from Houston Energy Services
Company, L.L.C., or HESCO 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
acquisition price of approximately $4.1 million in cash and
$0.2 million in assumption of liabilities was allocated to customer
contracts and is being amortized over an estimated life of four
years.







8


COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except for Share and Per Share Amounts)
 (Unaudited)


Note
6. Contingencies






APX
Settlement






During
2000 and 2001, we bought, sold and scheduled power in the California wholesale
energy markets through the markets and services of APX, Inc., or APX. As a
result of a complaint filed at the Federal Energy Regulatory Commission, or
FERC, by San Diego Gas & Electric Co. in August 2000 and a line of
subsequent FERC orders, we became involved in proceedings at FERC related to
sales and schedules in the California Power Exchange, or CPX, and the California
Independent System Operator, or CAISO, markets. We refer to these proceedings as
the California Refund Cases. The APX Settlement, described below, is a part of
that proceeding relating to APX’s involvement in those markets.






On
January 5, 2007, APX, we and certain other parties signed an APX Settlement
and Release of Claims Agreement, or the APX Settlement Agreement, which among
other things, established a mechanism for allocating refunds owed to APX and
resolved 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. Under the APX Settlement Agreement, Commerce
and certain other parties were entitled to receive payments from APX, with
Commerce expected to receive up to approximately $6.5 million. In April
2007, we received a payment of $5.1 million and in August 2007 we received
the remaining settlement payment of $1.4 million.






Certain
other aspects of the California Refund Case which may affect the Company remain
pending. The Company cannot at this time predict whether, or to what extent,
these proceedings will have an impact on its financial results.






Note
7. 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 Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”). 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.






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 (loss), or OCI, and reflected as direct energy cost in the statement of
operations as the related energy is delivered.






The amounts recorded in Accumulated OCI
at April 30, 2008 and July 31, 2007 related to cash flow hedges are summarized
in the following table:




April
      30,
              2008
            
            
            July
      31,
              2007Current
      assets
            
            $
            217
            
            
            $
            —Current
      liabilities
            
            
            (19
            )
            
            
            (671
            )Deferred
      gains/(losses)
            
            
            —
            
            
            
            (152
            )Hedge
      ineffectiveness
            
            
            —
            
            
            
            —Accumulated
      other comprehensive income (loss)
            
            $
            198
            
            
            $
            (823
            )




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 is recorded on a net basis in direct energy cost in the consolidated
statement of operations for each fiscal period. For the nine months ending April
30, 2008, the impact of financial derivatives accounted for as mark-to-market
resulted in a gain of $517 and resulted mostly from economic hedging related to
the Company’s natural gas portfolio. The notional value of all derivatives




9


COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except for Share and Per Share Amounts)
 (Unaudited)
  accounted
for as mark-to-market which was outstanding at April 30, 2008 was
$637.






As of
April 30, 2008, the Company had $217 of derivative assets included in Prepaid
expenses and other, and $19 of total derivative liabilities included in Accrued
liabilities.






Note
8. Credit Facility and Supply Agreements






Wachovia
Capital Finance




In June
2006, Commerce entered into a Loan and Security Agreement, or the Credit
Facility, with Wachovia Capital Finance, or Wachovia, for up to
$50 million. The three-year 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 currently limited by a calculated borrowing base consisting
of the Company’s receivables and natural gas inventories. As of April 30, 2008,
letters of credit issued under the facility totaled $20.6 million, with no
outstanding borrowings. Currently, in accordance with the Eighth Amendment, fees
for letters of credit issued range from 3.50 to 3.75 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 2.25 percent or LIBOR plus 4.75
percent.






The
Credit Facility contains typical covenants, subject to specific exceptions,
restricting the Company from: (1) incurring additional indebtedness;
(2) granting certain liens; (3) disposing of certain assets;
(4) making certain restricted payments; (5) entering into certain
other agreements; and (6) making certain investments. The Credit Facility
also restricts the Company’s ability to pay cash dividends on its common stock;
restricts Commerce from making cash dividends to the Company without the consent
of the Agent and the Lenders and limits the amount of the Company’s annual
capital expenditures.






From
September 2006 through September 2007, the Company and Commerce have entered
into five amendments and a modification to the Loan and Security Agreement with
the Agent and Lenders, several of which involved waivers of prior or existing
instances of covenant non-compliance relating to the maintenance of Eligible
Cash Collateral, capital expenditures and notification requirements (First
Amendment), maintenance and deferral of prospective compliance, of minimum Fixed
Charge Coverage Rates and maintenance of the minimum Excess Availability Ratio
(Second and Third Amendments). In addition, in the First Amendment, the Agent
and Lender agreed to certain prospective waivers of covenants in the Credit
Facility to enable Commerce Energy to consummate the HESCO acquisition of
customers. In the Fourth Amendment, the amount allowable under the Credit
Facility’s capital expenditures covenant was increased to $6.0 million for
fiscal 2007 and $5.0 million for subsequent fiscal years. In the Second, Third
and Fifth Amendment and in the Modification Agreement, each addressed reducing
and/or restructuring the Excess Availability covenant in the Credit Facility to
accommodate Commerce’s business. In the Modification Agreement, the Agent and
the Lenders also permitted Commerce for a period from September 20, 2007 to
October 5, 2007 to exceed its Gross Borrowing Base, as defined in the
Agreement.






The Sixth
Amendment executed on November 16, 2007, adjusted the required excess
availability required at all times to $2.5 million until July 1, 2008 at which
time it became $10 million. It also eliminated the eligible cash collateral
covenant which previously required keeping $10 million cash on deposit. The
Sixth Amendment revised the fixed charge coverage ratio, added minimum EBITDA
requirements and extended the maturity of the Credit Facility from June 2009 to
June 2010.






The
Seventh Amendment executed on March 12, 2008, waived certain covenant defaults
relating to the failure of the Company to comply with the minimum EBITDA
covenant for the six months ending January 31, 2008 as well as the requirement
to transfer funds in the Company's lockbox to a blocked account to be used to
pay down the Credit Facility. The Seventh Amendment also changed the pricing
terms of the Credit Facility so that borrowings under the Credit Facility are
priced at a domestic bank rate plus 0.75 percent or LIBOR plus 3.25 percent per
annum. Letters of credit fees then ranged from 2.00 to 2.25 percent per annum,
depending on the level of excess availability. Each of these pricing terms is
subject to a one-half of one percent reduction if at the end of any twelve month
period the Company's EBITDA is in excess of $7 million and its Fixed Charge
Coverage Ratio is at least 1.5 to 1 for such period.






The
Seventh Amendment also eliminated the Fixed Charge Coverage Ratio for the twelve
months ending March, May, June and July 2008 and, based on the projections
delivered to the Agent by the Company, the Agent will reasonably establish
covenant levels for the Fixed Charge Coverage Ratio for the periods in the
fiscal year. The Amendment also lowered the minimum EBITDA covenant so that
the Company is required to have $3.5 million of EBITDA for the nine months
ending April 30, 2008 and $3.6 million of EBITDA for the 12 months ending July
31, 2008. Based on the projections delivered to the Agent by the Company, the
Agent will then reasonably establish covenant levels for the minimum EBITDA
needed for the twelve month period ending on August 31, 2008 and for the twelve
month period ending




10
 
  COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except for Share and Per Share Amounts)
 (Unaudited)






On May
23, 2008, Commerce entered into an Assignment and Acceptance Agreement whereby
the CIT Group/Business Credit, Inc. or CIT assigned all of its rights and
obligations of the loan agreement to Wells Fargo Foothill, LLC or Wells Fargo
subject to the terms and conditions set forth in the Credit
Facility.




The most
recent amendment, the Eighth Amendment, was executed on June 11,
2008.  The Eighth Amendment amended certain terms of the Credit
Facility and waived certain covenant defaults relating to the minimum EBITDA
covenant for the nine months ending April 30, 2008 and the Fixed Charge Coverage
Ratio covenant for the twelve months ending April 30, 2008.  Pursuant
to the Eighth Amendment, the Company and the Lenders also agreed that the
Company would terminate the Credit Facility on or before November 1,
2008.
   The
Eighth Amendment increased the pricing terms of the Credit Facility so that
borrowings under it are priced at a domestic bank rate plus 2.25 percent or
LIBOR plus 4.75 percent per annum.  Letters of credit fees now range
from 3.50 to 3.75 percent per annum, depending on the level of excess
availability.  In addition, the Eighth Amendment eliminated the EBITDA
covenant for the twelve months ending July 31, 2008 and, based on projections
delivered to the Agent by the Company, the Agent will reasonably establish
levels for the EBITDA and Fixed Charge Coverage Ratio covenants for each period
beginning on August 1, 2008 and ending on the last date of each October,
January, April and July during each fiscal year, of not less than $500,000 per
month and 1:1, respectively.  The definition of Excess Availability
also was amended to reflect any other subordinated loans or lines of credit
arranged by the Company which are approved by the Agent and the increase in
excess availability from $2.5 million to $10 million was deferred until November
1, 2008.  Further, the definition of the borrowing base was amended to
tie the amount of the borrowing base to the sum of all collections received
during a 30-day period and the percentage of eligible unbilled accounts to be
included in the borrowing base was capped at 65%.  Additionally, the
Eighth Amendment requires weekly measurements of liquidity and eliminated the
early termination fee while replacing it with a service fee that will be no less
than $140,000 for the term.




At April
30, 2008, the Company had approximately $8.3 million of usable credit
availability under the Credit Facility. As it is industry practice to pay energy
bills towards the end of the month; the remaining availability at the end of a
month is typically lower than most other times during a month.






Tenaska
Power Services Co.






In August
2005, the Company entered into several agreements with Tenaska Power Services
Co., or Tenaska, for the supply of the majority of Commerce’s wholesale
electricity supply needs in Texas, utilizing commercially standard master
purchase and sale, lockbox control, security and guaranty agreements. The
Company’s Texas customers pay into a designated account that is used to pay
Tenaska for the electricity. Tenaska also extends credit to the Company to buy
wholesale electricity supply previously secured by funds pledged by the Company
in the lockbox, its related accounts receivables and customers contracts. The
Company entered into a guaranty agreement, pursuant to which it, as the parent
company of Commerce, unconditionally guaranteed to Tenaska full and prompt
payment of all indebtedness and obligations owed to Tenaska. At April 30, 2008,
Tenaska had extended approximately $7.4 million of trade credit to the Company.
Tenaska also serves as the Company’s exclusive provider of qualified scheduling
services and marketing services in the region of Texas administered by the
Electric Reliability Council of Texas.






On April
16, 2008, Commerce entered into a Release Agreement with Tenaska and Wachovia,
or the Release Agreement, pursuant to which Tenaska released and terminated (1)
any and all of its security interests in the assets and property of Commerce
including without limitation the collateral provided under a security agreement
in place between Commerce and Tenaska and (2) all of its rights, remedies and
interests with respect to a lockbox account established for the deposit of
revenues received from Commerce’s electricity end-use customers in Texas.
Tenaska’s release and termination of these rights and interests was conditioned
upon the receipt of a standby letter of credit issued by Wachovia in favor of
Tenaska in the amount of $7 million as well as $3 million collateral, both given
in substitution of the collateral previously provided under the security
agreement between Commerce and Tenaska. On April 18, 2008 Tenaska agreed to
accept a letter of credit in the amount of $10 million in lieu of the
above.






11






Pacific
Summit Energy LLC






In
September 2006, the Company entered into several agreements with Pacific Summit
LLC, or Pacific Summit, for the supply of natural gas to serve end-use customers
that we acquired in connection with the HESCO acquisition, utilizing operating,
lockbox control and security agreements. Under these agreements, these customers
remit payments into the lockbox used to pay Pacific Summit for natural gas
supplies. Pacific Summit also extends credit to the Company to buy wholesale
natural gas supplies, secured by funds pledged by the Company in the lockbox,
its related accounts receivable and a $3.5 million letter of credit. At
April 30, 2008, Pacific Summit had extended approximately $13.8 million of
trade credit to the Company under this arrangement.






Note
9. Subsequent Events.




Restructuring




In June
2008, the Company announced that as part of a Company-wide restructuring plan,
it will eliminate approximately 31% of its workforce throughout the
organization, exit its energy consulting business, Skipping Stone, close its
Boston, Massachusetts and Houston, Texas offices, previously utilized primarily
by Skipping Stone and significantly downsize its Irving, Texas office. Pre-tax
cash and non-cash restructuring charges are estimated to range from $0.58
million to $0.65 million, all such charges being recorded in







12







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






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 for the year
ended July 31, 2007, or the Form 10-K.






Some
of the statements in this quarterly report on Form 10-Q are 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 Item 2
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 quarterly
report on Form 10-Q 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 the Form 10-K and
elsewhere in this Form 10-Q, including, without limitation, 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; decisions by our energy
suppliers requiring us to post additional collateral for our energy purchases;
uncertainties in the capital markets should we seek to raise additional equity
or debt financing; uncertainties relating to federal and state proceedings
regarding issues emanating from the 2000-2001 California energy crisis,
including any resulting federal, state, or administrative legal proceedings
which could affect us; increased competition; 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 U.S. Securities and
Exchange Commission, or 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. Commerce is licensed
by the Federal Energy Regulatory Commission, or 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 April 30,
2008, we delivered electricity to approximately 119,000 customers in California,
Maryland, Michigan, New Jersey, Pennsylvania and Texas; and natural gas to
approximately 46,000 customers in California, Florida, Georgia, Maryland,
Nevada, Ohio and Pennsylvania.






The
electricity and natural gas we sell to our customers is purchased from
third-party suppliers under both short-term 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 to and from
other market participants. We utilize third-party facilities for the storage of
natural gas.






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, our ability to access additional capital, and our ability to acquire
energy for our customers at competitive prices and on reasonable credit
terms.






Bad debt
was a significant expense for the Company again in the third quarter. Since
August 2007, there has been an increase of






13
 
  approximately
22,000 non-active customers resulting in over $16 million of additional
delinquent balances over 90 days old.  Over 90 day balances have
increased $3.5 million, $7.1 million and $6.3 million in the first, second and
third quarters of the fiscal year ending July 31, 2008, or fiscal 2008,
respectively. The attrition of customers combined with non payment of
outstanding balances has resulted in bad debt expense of $3.7 million, $6.2
million and $7.9 million in the first three quarters of fiscal 2008,
respectively.






The
Company’s new senior management team is focused on implementing solutions to
reduce bad debt expense and believes that a number of remedies were implemented
in the 2008 second quarter. We anticipate that the new procedures installed in
the second quarter of fiscal 2008 will begin reducing expense in future quarters
as the influx of customers which occurred in early fiscal 2008 is either settled
or written off. We anticipate that bad debt expense in the fourth quarter of
fiscal 2008 will again be higher than our average expense. We expect further
reduction in bad debt expense during the fiscal year ending July 31, 2009, or
fiscal 2009, trending towards our historical levels.






We began
a strategic review of all the Company’s markets during the third quarter of
fiscal 2008 which should be completed in the fourth quarter. As part of the
strategic review, we will consider divestment opportunities of customer groups
not consistent with our long-term growth plans.






During
the third quarter of fiscal 2008, the Company completed an assessment of the
fair value of individual assets and liabilities to assess goodwill and other
intangible assets as of April 30, 2008. As a result of this assessment, it was
determined that certain intangible assets and goodwill related to the Company’s
Skipping Stone Inc. , or Skipping Stone, subsidiary were impaired. The Company
recognized a long-lived asset impairment of $0.84 million and a goodwill asset
impairment of $0.56 million. Both of these charges, in the aggregate amount of
$1.4 million are included in “Impairment of intangibles” in the Company’s
unaudited condensed consolidated statements of operations. These impairment
charges are material, but will not result in future cash expenditures and will
not result in any significant changes to the Company’s operations other than
those communicated as part of its restructuring plans.






In June
2008, the Company announced that as part of a Company-wide restructuring plan,
it will eliminate approximately 31% of its workforce throughout the
organization, exit its energy consulting business, Skipping Stone, close its
Boston, Massachusetts and Houston, Texas offices, previously utilized primarily
by Skipping Stone and significantly downsize its Irving, Texas office. The
workforce reductions are expected to generate more than $5.0 million in
annualized pre-tax cost savings. Pre-tax cash and non-cash restructuring charges
are estimated to range from $0.58 million to $0.65 million, all such charges
being recorded in the fourth quarter of fiscal 2008. One of the principal
elements of the restructuring plan is to centralize all core functions at the
Company’s Orange County, California headquarters.






Significant
Customer Acquisition






HESCO
Acquisition






In
September 2006, the Company acquired from Houston Energy Services Company,
L.L.C., or HESCO 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
acquisition price of approximately $4.3 million consisted primarily of cash
and was allocated to customer contracts and is being amortized over an estimated
life of four years.






Market
and Regulatory






The
Company currently serves electricity customers in six states across 12 utility
markets and gas customers in seven states across 13 utility markets and
collectively operates in ten states with authority to operate in an additional
four states. Regulatory requirements are determined at the individual state
level and administered and monitored by the Public Utility Commission, or PUC,
of each state. Operating rules and tariff filings by states and by utility
markets vary and can significantly impact the viability of the Company’s sales
and marketing plans and its overall operating and financial
results.






Results
of Operations






Three
Months Ended April 30, 2008 Compared to Three Months Ended April 30,
2007






The
following table summarizes the results of our operations for the three months
ended April 30, 2008 and 2007 (dollars in thousands):






14




Three Months Ended April
30,2008
            
            
            2007Dollars
            
            
            % Revenue
            
            
            Dollars
            
            
            % RevenueRetail
      electricity sales
            
            $
            63,854
            
            
            
            61
            %
            
            $
            52,654
            
            
            
            52
            %APX
      settlement
            
            
            —
            
            
            
            —
            
            
            
            5,057
            
            
            
            5
            %Natural
      gas sales
            
            
            41,641
            
            
            
            39
            %
            
            
            42,864
            
            
            
            43
            %Net
      revenue
            
            
            105,495
            
            
            
            100
            %
            
            
            100,575
            
            
            
            100
            %Direct
      energy costs
            
            
            91,362
            
            
            
            87
            %
            
            
            82,946
            
            
            
            82
            %Gross
      profit
            
            
            14,133
            
            
            
            13
            %
            
            
            17,629
            
            
            
            18
            %Selling
      and marketing expenses
            
            
            3,254
            
            
            
            3
            %
            
            
            2,568
            
            
            
            3
            %General
      and administrative expenses
            
            
            18,744
            
            
            
            18
            %
            
            
            9,803
            
            
            
            10
            %Impairment
      of intangibles
            
            
            1,426
            
            
            
            1
            %
            
            
            —
            
            
            
            —Income(loss)
      from operations
            
            $
            (9,291
            )
            
            
            (9
            %)
            
            $
            5,258
            
            
            
            5
            %




Net
revenue






The
following table summarizes net revenues for the three months ended April 30,
2008 and 2007 (dollars in thousands):




Three Months Ended April
      30,2008
            
            
            2007Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      RevenueRetail
      Electricity Sales:Texas
            
            $
            30,792
            
            
            
            29
            %
            
            $
            22,312
            
            
            
            22
            %Pennsylvania/New
      Jersey
            
            
            12,815
            
            
            
            12
            %
            
            
            9,329
            
            
            
            9
            %California
            
            
            12,287
            
            
            
            12
            %
            
            
            13,374
            
            
            
            13
            %Maryland
            
            
            6,291
            
            
            
            6
            %
            
            
            5,942
            
            
            
            6
            %Michigan
      and Others
            
            
            1,669
            
            
            
            2
            %
            
            
            1,697
            
            
            
            2
            %Total
      Retail Electricity Sales
            
            
            63,854
            
            
            
            61
            %
            
            
            52,654
            
            
            
            52
            %Natural
      Gas Sales:HESCO
      Customers
            
            
            20,134
            
            
            
            19
            %
            
            
            19,756
            
            
            
            20
            %Ohio
            
            
            13,927
            
            
            
            13
            %
            
            
            14,880
            
            
            
            15
            %California
            
            
            6,812
            
            
            
            6
            %
            
            
            7,543
            
            
            
            7
            %Georgia
            
            
            89
            
            
            
            —
            
            
            
            61
            
            
            
            —All
      Others
            
            
            679
            
            
            
            1
            %
            
            
            624
            
            
            
            1
            %Total
      Natural Gas Sales
            
            
            41,641
            
            
            
            39
            %
            
            
            42,864
            
            
            
            43
            %APX
      Settlement
            
            
            —
            
            
            
            —
            
            
            
            5,057
            
            
            
            5
            %Net
      Revenue
            
            $
            105,495
            
            
            
            100
            %
            
            $
            100,575
            
            
            
            100
            %







Net
revenues increased $4.9 million, or 4.9%, to $105.5 million for the three months
ended April 30, 2008 from $100.6 million for the three months ended April 30,
2007. The increase in net revenues was driven primarily by a 21.3% increase in
electricity sales partially offset by a 2.8% decrease in natural gas sales.
Higher retail electricity sales reflect the impact of higher retail prices and a
52.7% increase in sales volumes in Texas, due to customer growth. This was
partly offset by lower retail sales volumes in the California, Pennsylvania and
Michigan markets resulting from customer attrition. Pennsylvania/New Jersey net
revenues were higher due to increased retail prices which more than offset lower
sales volumes. Lower natural gas sales reflect the impact of lower sales volumes
in Ohio and to the HESCO customers which were substantially offset by higher
natural gas prices.






Retail
electricity sales increased $11.2 million to $63.9 million for the three months
ended April 30, 2008, from $52.7 million for the three months ended April 30,
2007, reflecting the impact of increased retail prices and an overall 5%
increase in sales volume. For the three months ended April 30, 2008, we sold 510
million kilowatt hours, or kWh, at an average retail price per kWh of $0.1252,
as compared to 485 million kWh sold at an average retail price per kWh of
$0.1085 for the three months ended April 30, 2007.






Natural
gas sales decreased $1.2 million to $41.6 million for the three months ended
April 30, 2008 from $42.8 million for the three months ended April 30, 2007
reflecting the impact of a 13.1% decrease in sales volumes, substantially offset
by an 11.8% increase in average retail sales prices. For the three months ended
April 30, 2008, we sold 4.0 million dekatherms, or DTH, at an average retail
price per DTH of $10.39, as compared to 4.6 million DTH, sold at an average
retail price per DTH of $9.29 during three months ended April 30, 2007. For the
three months ended April 30, 2008, sales to the commercial and industrial
natural gas customers acquired in September 2006 totaled $20.1 million on sales
volume of 2.24 million DTH at an average sales price of $8.97 per
DTH.






We had
approximately 165,000 electricity and natural gas customers at April 30, 2008, a
decrease of 10% from 185,000 at April 30, 2007. We had approximately
119,000 electricity and 46,000 natural gas customers at April 30, 2008, as
compared to 126,000






15
 
  electricity
customers and 59,000 natural gas customers at April 30, 2007. Attrition in our
retail customer base largely results from the impact of increased sales prices
to our customers resulting from our passing on higher wholesale energy and
transmission costs to our customers without the incumbent utility passing on
corresponding price increases to their customers. This competitive imbalance is
created as a result of a lack of market responsive ratemaking and a lagging
regulatory approval process.






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, or ISOs,
transportation costs from local distribution companies, or 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 three months ended April 30, 2008 totaled $54.9 million and
$36.4 million for electricity and natural gas, respectively, compared to $43.6
million and $39.3 million, respectively, for the three months ended April 30,
2007. Electricity costs averaged $0.1077 per kWh for the three months ended
April 30, 2008 compared to $0.0900 per kWh for the three months ended April 30,
2007. Direct energy costs for natural gas averaged $9.09 per DTH for the three
months ended April 30, 2008 as compared to $8.53 per DTH for the three months
ended April 30, 2007.






Gross
Profit






Gross
profit decreased $3.5 million, or 19.9% to $14.1 million for the three
months ended April 30, 2008 from $17.6 million for the three months ended April
30, 2007. Gross profit from electricity decreased $0.1 million to $8.9 million
for the three months ended April 30, 2008 from $9.0 million for the three months
ended April 30, 2007, as higher margins in the Pennsylvania and Maryland markets
were substantially offset by lower margins in California and unfavorable
adjustments for final settlements on energy purchases. Gross profit from natural
gas increased $1.7 million to $5.2 million for the three months ended April
30, 2008, from $3.5 million for the three months ended April 30, 2007 primarily
due to the impact of higher margins in California and Ohio. The decrease is
particularly significant because the comparative period, the three months ended
April 30, 2007, included the Company’s receipt of the $5.1 million APX
settlement proceeds.






Selling
and Marketing Expenses






Selling
and marketing expenses increased to $3.3 million for the three months ended
April 30, 2008 from $2.6 million for the three months ended April 30, 2007,reflecting higher
third-party sales expenses related to the Company’s expanded customer
acquisition initiatives.






General
and Administrative Expenses






General
and administrative expenses increased to $18.7 million for the three months
ended April 30, 2008 from $9.8 million for the three months ended April 30,
2007. Bad debt was a significant expense for the Company again in the third
quarter. Since August 2007, there has been an increase of approximately 22,000
non-active customers resulting in over $16 million of additional delinquent
balances over 90 days old. In the third quarter of fiscal 2008, over 90 day
balances increased $6.3 million and the attrition of customers combined with non
payment of outstanding balances resulted in bad debt expense of $7.9
million.  This results in a $7.3 million increase in bad debt for the
three months ending April 30, 2008 versus the three months ending April 30,
2007.






The
remaining $1.6 million was attributable to increased personnel costs related
to additional customer service and information technology staff to support
the Company’s growing customer base, severance for former officers, increased
professional service fees and higher depreciation and amortization
expenses.






Impairment
of Intangibles






During the third
quarter of fiscal 2008, the Company completed its annual review of its
intangibles and goodwill according to FASB Statement No. 142 “Goodwill and Other
Intangible Assets”. In conjunction with the new management team’s review of
Commerce Energy’s operations, it was concluded that the services provided by
Skipping Stone Inc. were either not required or could be obtained at a much
lower costs from third party vendors.






As of
April 30, 2008, Skipping Stone Inc. intangibles consisted of Customer List and a
Website with a carrying value of $.84 million. The Goodwill allocated from the
purchase of Skipping Stone Inc. was $.56 million which, when added to the
intangibles, accounts for the total impairment loss recorded in the third
quarter of fiscal 2008 $1.4 million.






16




Income
Taxes






No
provision for, or benefit from, income taxes was recorded for the three months
ended April 30, 2008 or 2007. 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 April 30, 2008, the Company had net
operating loss carryforwards of approximately $12.6 million and $14.6 million
for federal and state income tax purposes, respectively.






The
Company adopted the provisions of FIN 48 in August 2007; however, this
implementation had no impact on the Company’s financial statements.






Nine
Months Ended April 30, 2008 Compared to Nine Months Ended April 30,
2007






The
following table summarizes the results of our operations for the nine months
ended April 30, 2008 and 2007 (dollars in thousands):






Nine Months Ended April
      30,2008
            
            
            2007Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      RevenueRetail
      electricity sales
            
            $
            216,915
            
            
            
            68
            %
            
            $
            156,776
            
            
            
            59
            %APX
      settlement
            
            
            —
            
            
            
            —
            
            
            
            5,057
            
            
            
            2
            %Natural
      gas sales
            
            
            102,570
            
            
            
            32
            %
            
            
            100,359
            
            
            
            38
            %Excess
      electricity sales
            
            
            —
            
            
            
            —
            
            
            
            1,535
            
            
            
            1
            %Net
      revenue
            
            
            319,485
            
            
            
            100
            %
            
            
            263,727
            
            
            
            100
            %Direct
      energy costs
            
            
            269,698
            
            
            
            84
            %
            
            
            221,509
            
            
            
            84
            %Gross
      profit
            
            
            49,787
            
            
            
            16
            %
            
            
            42,218
            
            
            
            16
            %Selling
      and marketing expenses
            
            
            11,446
            
            
            
            4
            %
            
            
            7,317
            
            
            
            3
            %General
      and administrative expenses
            
            
            48,177
            
            
            
            15
            %
            
            
            27,382
            
            
            
            10
            %Impairment
      of intangibles
            
            
            1,426
            
            
            
            1
            %
            
            
            —
            
            
            
            —Income(loss)
      from operations
            
            $
            (11,262
            )
            
            
            (4
            %)
            
            $
            7,519
            
            
            
            3
            %






Net
revenue






The
following table summarizes net revenues for the nine months ended April 30, 2008
and 2007 (dollars in thousands):




Nine Months Ended April
      30,2008
            
            
            2007Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      RevenueRetail
      Electricity Sales:Texas
            
            $
            116,820
            
            
            
            37
            %
            
            $
            57,124
            
            
            
            22
            %Pennsylvania/New
      Jersey
            
            
            37,386
            
            
            
            12
            %
            
            
            34,305
            
            
            
            13
            %California
            
            
            36,537
            
            
            
            11
            %
            
            
            44,729
            
            
            
            17
            %Maryland
            
            
            21,450
            
            
            
            7
            %
            
            
            12,794
            
            
            
            5
            %Michigan
      and Others
            
            
            4,722
            
            
            
            1
            %
            
            
            7,824
            
            
            
            2
            %Total
      Retail Electricity Sales
            
            
            216,915
            
            
            
            68
            %
            
            
            156,776
            
            
            
            59
            %Natural
      Gas Sales:HESCO
      Customers
            
            
            51,659
            
            
            
            16
            %
            
            
            47,181
            
            
            
            18
            %Ohio
            
            
            31,294
            
            
            
            10
            %
            
            
            30,398
            
            
            
            11
            %California
            
            
            17,900
            
            
            
            6
            %
            
            
            18,178
            
            
            
            7
            %Georgia
            
            
            224
            
            
            
            —
            
            
            
            2,676
            
            
            
            1
            %All
      Others
            
            
            1,493
            
            
            
            —
            
            
            
            1,926
            
            
            
            1
            %Total
      Natural Gas Sales
            
            
            102,570
            
            
            
            32
            %
            
            
            100,359
            
            
            
            38
            %Excess
      Electricity Sales
            
            
            —
            
            
            
            —
            
            
            
            1,535
            
            
            
            1
            %APX
      Settlement
            
            
            —
            
            
            
            —
            
            
            
            5,057
            
            
            
            2
            %Net
      Revenue
            
            $
            319,485
            
            
            
            100
            %
            
            $
            263,727
            
            
            
            100
            %




Net
revenues increased $55.8 million, or 21.2%, to $319.5 million for the nine
months ended April 30, 2008 from $263.7 million for the nine months ended April
30, 2007. The increase in net revenues was driven primarily by a 38.4% increase
in electricity sales and a 2.2% increase in natural gas sales. Higher retail
electricity sales reflects the impact of a 138.4% and an 28.4% increase in sales
volumes in Texas and Maryland, respectively, due to customer growth that was
partly offset by lower retail sales in the California, Pennsylvania and Michigan
markets resulting from customer attrition. Higher natural gas sales reflect
increased sales volumes in






17
 
  California
and to the HESCO customers.






Retail
electricity sales increased $60.1 million to $216.9 million for the nine months
ended April 30, 2008, from $156.8 million for the nine months ended April 30,
2007, reflecting the impact of an overall 31.2% increase in sales volumes. For
the nine months ended April 30, 2008, we sold 1,825 million kilowatt hours, or
kWh, at an average retail price per kWh of $0.1189, as compared to 1,391 million
kWh sold at an average retail price per kWh of $0.1127 for the nine months ended
April 30, 2007.






Natural
gas sales increased $2.2 million to $102.6 million for the nine months ended
April 30, 2008 from $100.4 million for the nine months ended April 30, 2007
reflecting the impact of higher natural gas prices. For the nine months ended
April 30, 2008, we sold 11.5 million dekatherms, or DTH, at an average retail
price per DTH of $8.91, as compared to 11.6 million DTH, sold at an average
retail price per DTH of $8.65 during nine months ended April 30, 2007. For the
nine months ended April 30, 2008, sales to the commercial and industrial natural
gas customers acquired in September 2006 totaled $51.7 million on sales volume
of 6.7 million DTH at an average sales price of $7.69 per DTH.






Direct
Energy Costs






Direct
energy costs for the nine months ended April 30, 2008 totaled $179.6 million and
$90.1 million for electricity and natural gas, respectively, compared to $130.5
million and $91.0 million, respectively, for the nine months ended April 30,
2007. Electricity costs averaged $0.0984 per kWh for the nine months ended April
30, 2008 compared to $0.0938 per kWh for the nine months ended April 30, 2007.
Direct energy costs for natural gas averaged $7.83 per DTH for the nine months
ended April 30, 2008 as compared to $7.85 per DTH for the nine months ended
April 30, 2007.






Gross
Profit






Gross
profit increased $7.6 million, or 18.0% to $49.8 million for the nine months
ended April 30, 2008 from $42.2 million for the nine months ended April 30,
2007. Gross profit from electricity increased $9.6 million to $37.4 million for
the nine months ended April 30, 2008 from $27.8 million for the nine months
ended April 30, 2007, reflecting the impact of customer growth in Texas and
Maryland. Gross profit from natural gas increased $3.0 million to $12.4 million
for the nine months ended April 30, 2008, from $9.4 million for the nine months
ended April 30, 2007 primarily due to the impact of higher margins in California
and Ohio. These higher margins were partially offset by lower margins to the
HESCO customers. The increase is particularly significant because the comparison
period, the nine months ended April 30, 2007, included the Company’s receipt of
the $5.1 million APX settlement proceeds.






Selling
and Marketing Expenses






Selling
and marketing expenses increased to $11.4 million for the nine months ended
April 30, 2008 from $7.3 million for the nine months ended April 30, 2007,
reflecting higher third-party sales expenses, personnel costs and advertising
related to the company’s expanded customer acquisition initiatives.






General
and Administrative Expenses






General
and administrative expenses increased to $48.2 million for the nine months ended
April 30, 2008 from $27.4 million for the nine months ended April 30, 2007. Bad
debt was a significant expense for the Company again in the third quarter. Since
August 2007, there has been an increase of approximately 22,000 non-active
customers resulting in over $16 million of additional delinquent balances over
90 days old. The attrition of customers combined with non payment of outstanding
balances has resulted in bad debt expense of $17.7 million for the nine months
ended April 30, 2008. This results in a $14.9 million increase in bad debt for
the nine months ending April 30, 2008 versus the nine months ending April 30,
2007.






The
remaining $5.9 million was attributable to increased personnel costs related to
additional customer service, information technology staff and consultants to
support the Company’s growing customer base, higher professional service fees
resulting from the Company’s review of its strategic alternatives, increased
depreciation and amortization expenses and severance for former
officers.






Impairment
of Intangibles






During the third
quarter of fiscal 2008, the Company completed its annual review of its
intangibles and goodwill according to FASB Statement No. 142 “Goodwill and Other
Intangible Assets”. In conjunction with the new management team’s review of
Commerce Energy’s operations, it was concluded that the services provided by
Skipping Stone Inc. were either not required or could be obtained at a much
lower costs from third-party vendors.






18






As of
April 30, 2008, Skipping Stone Inc. intangibles consisted of Customer List and a
Website with a carrying value of $.84 million. The Goodwill allocated from the
purchase of Skipping Stone Inc. was $.56 million which, when added to the
intangibles, accounts for the total impairment loss recorded in the third
quarter of fiscal 2008 $1.4 million.






Income
Taxes






No
provision for, or benefit from, income taxes was recorded for the nine months
ended April 30, 2008 or 2007. 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.






Liquidity
and Capital Resources






The
following table summarizes our liquidity measures:




(Dollars in Thousands)April 30, 2008
            
            
            July 31, 2007Cash
      and cash equivalents
            
            $
            10,370
            
            
            $
            6,559Working
      capital
            
            $
            39,977
            
            
            $
            38,863Current
      ratio (current assets to current liabilities)
            
            2.0:1.0
            
            
            1.8:1.0Restricted
      cash
            
            
            —
            
            
            $
            10,457Letters
      of credit outstanding
            
            $
            20,627
            
            
            $
            19,334




Consolidated
Cash Flows




The
following table summarizes our statements of cash flows for the nine months
ended April 30, 2008 and 2007 (in thousands):




Nine Months
      EndedApril 30, 2008
            
            
            April 30, 2007Net
      cash provided by (used in):Operating
      activities
            
            $
            (2,397
            )
            
            $
            (2,738
            )Investing
      activities
            
            
            (4,040
            )
            
            
            (6,950
            )Financing
      activities
            
            
            10,248
            
            
            
            7,880Net
      increase (decrease) in cash and cash equivalents
            
            $
            3,811
            
            
            $
            (1,808
            )




Our
principal sources of liquidity to fund ongoing operations have been existing
cash and cash equivalents on hand, cash generated from operations, our credit
facility and credit extended by our suppliers (both secured and unsecured). The
Company believes that it will require additional capital resources in fiscal
2009 to: (1) meet its credit facility requirement to have $10 million in excess
availability at all times on and after November 1, 2008; (2) fund possible
expansion of the Company’s business, either from internal growth or acquisition;
(3) add liquidity if energy prices increase materially; and (4) respond to
increased energy industry volatility and/or uncertainty that create additional
funding requirements.  We have begun discussions with several global
banks, with expertise in financing commodity businesses, and expect to replace
our existing Credit Facility on or before November 1, 2008.






Cash used
in operating activities for the nine months ended April 30, 2008 was $2.4
million, compared to cash used in operations of $2.7 million in the nine months
ended April 30, 2007. For the nine months ended April 30, 2008, cash used in
operating activities was comprised primarily of a net loss of $11.8 million and
a decrease in accounts receivable, net of $8.9 million (including a
provision of $17.7 million for bad debts) and decreases in inventory of $3.3
million and an increase in accounts payable of $5.0 million. The increase in
accounts receivable was primarily due to slowing turnover of receivables
resulting from regulatory changes surrounding credit checking, disconnection
procedures and billing delays, primarily in Texas. We believe the national
credit tightening and increasing delinquency in many credit categories also
contributed, but its specific impact on us cannot be easily quantified. For the
nine months ended April 30, 2007, cash used in operating activities was
comprised primarily of net income of $4.5 million offset by increases in
accounts receivable of $19.3 million (net of provision for bad debts of
$2.8 million) primarily due to the HESCO customer list acquisition and seasonal
increases in other natural gas customers, by a decrease of $3.6 million in
accounts payable and by a decrease of $4.4 million in accrued
liability.






Cash used
in investing activities was $4.4 million for the nine months ended April 30,
2008, compared to $7.0 used in investing activities in the nine months ended
April 30, 2007. The cash used in investing activities for the nine months ended
April 30, 2008, was for upgrades in our key customer billing, risk management
and customer contact platforms. The cash used in the nine months ended April 30,
2007 was primarily for upgrades in the previously discussed platforms and for
the purchase of the HESCO customer list for $4.2 million.




Cash
provided by financing activities for the nine months ended April 30, 2008 was
$10.2 million, comprised of a $10.5 million reduction in restricted cash
primarily from eliminating the former covenant under our Credit Facility
requiring us to deposit $10.0






19
 
  million
in our lender’s account as restricted collateral. We refer to this covenant as
the Restricted Cash Covenant. This compares to $7.9 million provided by
financing activities for the nine months ended April 30, 2007 from reducing
restricted cash, primarily by substituting surety bonds as
collateral.




At April
30, 2008, the Company had approximately $8.3 million of remaining availability
under our Credit Facility. As it is industry practice to pay energy bills toward
the end of the month, the remaining availability at the end of a month is lower
than most other times during a month.






Credit
terms from our suppliers may require us to post collateral against our energy
purchases and against our mark-to-market exposure with them. In the November
2007 Sixth Amendment to the Credit Facility, the Restricted Cash Covenant was
eliminated. As of April 30, 2008, we have $5.7 million in deposits pledged
as collateral to our energy suppliers in connection with energy purchase
agreements.






As of
April 30, 2008, cash and cash equivalents increased to $10.4 million
compared with $6.6 million at July 31, 2007. This increase of
$3.8 million was primarily due to eliminating the $10.5 million in
restricted cash requirement under the former covenant with our Credit
Facility.






Credit
Facility




In June
2006, Commerce entered into a Loan and Security Agreement, or the Credit
Facility, with Wachovia Capital Finance, or Wachovia, 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 currently limited by a calculated borrowing base consisting
of certain of the Company’s receivables and natural gas inventories. As of April
30, 2008, letters of credit issued under the Credit Facility totaled
$20.6 million, with no outstanding borrowings. Currently, in accordance
with the Eighth Amendment, fees for letters of credit issued range from 3.50 to
3.75 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 2.25 percent or
LIBOR plus 4.75 percent.






The
Credit Facility contains typical covenants, subject to specific exceptions,
restricting the Company from: (1) incurring additional indebtedness; (2)
granting certain liens; (3) disposing of certain assets; (4) making certain
restricted payments; (5) entering into certain other agreements; and (6) 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 the Agent and the Lenders and limits the
amount of our annual capital expenditures without the consent of the
Lenders.






From
September 2006 through November 2007, the Company and Commerce have entered into
five amendments and a modification to the Credit Facility with the Agent and
Lenders, several of which involved waivers of prior or existing instances of
covenant non-compliance relating to the maintenance of Eligible Cash Collateral,
capital expenditures and notification requirements (First Amendment),
maintenance and deferral of prospective compliance, of minimum Fixed Charge
Coverage Rates and maintenance of the minimum Excess Availability Ratio (Second
and Third Amendments). In addition, in the First Amendment, the Agent and Lender
agreed to certain prospective waivers of covenants in the Credit Facility to
enable Commerce to consummate the HESCO acquisition of customers. In the Fourth
Amendment, the amount allowable under the Credit Facility’s capital expenditures
covenant was increased to $6.0 million. In the Second, Third and Fifth
Amendment and in the Modification Agreement, each addressed reducing and/or
restructuring the Excess Availability covenant in the Credit Facility to
accommodate Commerce’s business. In the Modification Agreement, the Agent and
the Lenders also permitted Commerce for a period from September 20, 2007 to
October 5, 2007 to exceed its Gross Borrowing Base, as defined in the
Agreement.






The Sixth
Amendment, executed on November 16, 2007, adjusted the required excess
availability required at all times to $2.5 million until July 1, 2008 at which
time it became $10 million. It also eliminated the eligible cash collateral
covenant which previously required keeping $10 million cash on deposit. The
Sixth Amendment revised the fixed charge coverage ratio, added minimum EBITDA
requirements and extended the maturity of the Credit Facility from June 2009 to
June 2010.




The
Seventh Amendment executed on March 12, 2008, waived certain covenant defaults
relating to the failure of the Company to comply with the minimum EBITDA
covenant for the six months ending January 31, 2008 as well as the requirement
to transfer funds in the Company's lockbox to a blocked account to be used to
pay down the Credit Facility. The Seventh Amendment also changed the pricing
terms of the Credit Facility so that borrowings under the Credit Facility are
priced at a domestic bank rate plus 0.75 percent or LIBOR plus 3.25 percent per
annum. Letters of credit fees. then
ranged from 2.00 to 2.25 percent per annum, depending on the level of excess
availability. Each of these pricing terms is subject to a one-half of one
percent reduction if at the end of any twelve month period the Company's EBITDA
is in excess of $7.0 million and its Fixed Charge Coverage Ratio is at least 1.5
to 1 for such period.




20




The
Seventh Amendment eliminated the Fixed Charge Coverage Ratio for the twelve
months ending March, May, June and July 2008 and, based on the projections
delivered to the Agent by the Company, the Agent will then reasonably establish
covenant levels for the Fixed Charge Coverage Ratio for the periods in the
fiscal year. The Seventh Amendment also lowered the minimum EBITDA covenant so
that the Company is required to have $3.5 million of EBITDA for the nine months
ending April 30, 2008 and $3.6 million of EBITDA for the 12 months ending July
31, 2008. Based on the projections delivered to the Agent by the Company, the
Agent will then reasonably establish covenant levels for the minimum EBITDA
needed for the periods in the fiscal year. In addition, the Capital Expenditure
covenant was changed to increase from $5.0 million to $6.0 million the amount of
Capital Expenditures allowed in any fiscal year.






On May
23, 2008, Commerce entered into an Assignment and Acceptance Agreement whereby
the CIT Group/Business Credit, Inc., or CIT, assigned all of its rights and
obligations of the loan agreement to Wells Fargo Foothill, LLC, or Wells Fargo,
subject to the terms and conditions set forth in the Credit Facility.


The most
recent amendment, the Eighth Amendment, was executed on June 11,
2008.  The Eighth Amendment amended certain terms of the Credit
Facility and waived certain covenant defaults relating to the minimum EBITDA
covenant for the nine months ending April 30, 2008 and the Fixed Charge Coverage
Ratio covenant for the twelve months ending April 30, 2008.  Pursuant
to the Eighth Amendment, the Company and the Lenders also agreed that the
Company would terminate the Credit Facility on or before November 1,
2008.
   The
Eighth Amendment increased the pricing terms of the Credit Facility so that
borrowings under it are priced at a domestic bank rate plus 2.25 percent or
LIBOR plus 4.75 percent per annum.  Letters of credit fees now range
from 3.50 to 3.75 percent per annum, depending on the level of excess
availability.  In addition, the Eighth Amendment eliminated the EBITDA
covenant for the twelve months ending July 31, 2008 and, based on projections
delivered to the Agent by the Company, the Agent will reasonably establish
levels for the EBITDA and Fixed Charge Coverage Ratio covenants for each period
beginning on August 1, 2008 and ending on the last date of each October,
January, April and July during each fiscal year, of not less than $500,000 per
month and 1:1, respectively.  The definition of Excess Availability
also was amended to reflect any other subordinated loans or lines of credit
arranged by the Company which are approved by the Agent and the increase in
excess availability from $2.5 million to $10 million was deferred until November
1, 2008.  Further, the definition of the borrowing base was amended to
tie the amount of the borrowing base to the sum of all collections received
during a 30-day period and the percentage of eligible unbilled accounts to be
included in the borrowing base was capped at 65%.  Additionally, the
Eighth Amendment requires weekly measurements of liquidity and eliminated the
early termination fee while replacing it with a service fee that will be no less
than $140,000 for the term.


Supply
Agreements






Tenaska
Power Services Co.






In August
2005, the Company entered into several agreements with Tenaska Power Services
Co., or Tenaska, for the supply of the majority of Commerce’s wholesale
electricity supply needs in Texas, utilizing commercially standard master
purchase and sale, lockbox control, security and guaranty agreements. The
Company’s Texas customers pay into a designated account that is used to pay
Tenaska for the electricity. Tenaska also extends credit to the Company to buy
wholesale electricity supply secured by funds pledged by the Company in the
lockbox, its related accounts receivables and customers contracts. The Company
entered into a guaranty agreement, pursuant to which it, as the parent company
of Commerce, unconditionally guaranteed to Tenaska full and prompt payment of
all indebtedness and obligations owed to Tenaska. At April 30, 2008, Tenaska had
extended approximately $7.4 million of trade credit to the Company. Tenaska also
serves as the Company’s exclusive provider of qualified scheduling services and
marketing services in the region of Texas administered by the Electric
Reliability Council of Texas.






On April
16, 2008, Commerce entered into a Release Agreement with Tenaska and Wachovia,
or the Release Agreement, pursuant to which Tenaska released and terminated (1)
any and all of its security interests in the assets and property of Commerce
including without limitation the collateral provided under a security agreement
in place between Commerce and Tenaska and (2) all of its rights, remedies and
interests with respect to a lockbox account established for the deposit of
revenues received from Commerce’s electricity end-use customers in Texas.
Tenaska’s release and termination of these rights and interests was conditioned
upon the receipt of a standby letter of credit issued to Wachovia in favor of
Tenaska in the amount of $7.0 million as well as 3.0 million cash collateral,
both given in substitution of the collateral previously provided under the
security agreement between Commerce and Tenaska. On April 18, 2008 Tenaska
agreed to accept a letter of credit in the amount of $10 million in lieu of the
above.






Pacific
Summit Energy LLC






In
September 2006, the Company and Commerce entered into several agreements with
Pacific Summit LLC, or Pacific Summit, for the supply of natural gas to serve
end-use customers that we acquired in connection with the HESCO acquisition,
utilizing a base contract for the purchase and sale of natural gas, an
operating, lockbox control and security agreements. Under the agreements, these
customers remit their payments into the lockbox used to pay Pacific Summit for
natural gas supplies. Pacific Summit also extends credit to the Company to buy
wholesale natural gas supplies, secured by funds pledged by the Company in the
lockbox, its related accounts receivable and a $3.5 million letter of
credit. Under the security agreement, Commerce agreed to maintain a minimum
deposit amount in the lockbox account. The security agreement also provided for
monthly withdrawals from the lockbox account, with




21
 
  payments
to be made first to Pacific Summit for amounts due and payable, and second to
Commerce for amounts exceeding the adjusted minimum deposit amount, as defined
in the security agreement. At April 30, 2007, Pacific Summit had extended
approximately $13.8 million of trade credit to the Company under this
arrangement.






Contractual
Obligations






As of
April 30, 2008, we had commitments of $50.4 million for energy purchase,
transportation and capacity contracts. These contracts are with various
suppliers and extend through December 2008.








Letters
of Credit and Surety Bonds






As of
April 30, 2008, $20.6 million of letters of credit have been issued to
energy suppliers and others under our Credit Facility and $5.5 million in
surety bonds have been issued to satisfy various credit and/or collateral
requirements.






Critical
Accounting Policies and Estimates






The
preparation of this Quarterly Report on 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
      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. 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.






•
            Utility and
      independent system operator costs— 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,






22




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 obligations under
      customer choice programs. Inventory is stated at the lower of
      weighted-average cost or
market.






•
            Customer
      Acquisition Cost— Direct Customer
      acquisition costs paid to third parties and directly related to specific new customers 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.






Item
3. Quantitative and Qualitative Disclosures about Market Risk.






Our
activities expose us to a variety of market risks principally from the change in
and volatility of commodity prices. We have established risk management policies
and procedures designed to manage these risks with a strong focus on the retail
nature of our business and to reduce the potentially adverse effects these risks
may have on our operating results. Our Board of Directors and the Audit
Committee of the Board oversee the risk management program, including the
approval of risk management policies and procedures. This program is predicated
on a strong risk management focus combined with the establishment of an
effective system of internal controls. We have a Risk Management Committee, or
RMC, that is responsible for establishing risk management policies, reviewing
procedures for the identification, assessment, measurement and management of
risks, and the monitoring and reporting of risk exposures. The RMC is comprised
of all key members of senior management and is chaired by the Chief Risk
Officer.






Commodity
Risk Management






Commodity
price and volume risk arise from the potential for changes in the price of, and
transportation costs for, electricity and natural gas, the volatility of
commodity prices, and customer usage fluctuations due to changes in weather
and/or customer usage patterns. A number of factors associated with the
structure and operation of the energy markets significantly influence the level
and volatility of prices for energy commodities. These factors include seasonal
daily and hourly changes in demand, extreme peak demands due to weather
conditions, available supply resources, transportation availability and
reliability within and between geographic regions, procedures used to maintain
the integrity of the physical electricity system during extreme conditions, and
changes in the nature and extent of federal and state regulations. These factors
can affect energy commodity and derivative prices in different ways and to
different degrees.






Supplying
electricity and natural gas to our retail customers requires us to match the
projected demand of our customers with contractual purchase commitments from our
suppliers at fixed or indexed prices. We primarily use forward physical energy
purchases and derivative instruments to minimize significant, unanticipated
earnings fluctuations caused by commodity price volatility. Derivative
instruments are used to limit the unfavorable effect that price increases will
have on electricity and natural gas purchases, effectively fixing the future
purchase price of electricity or natural gas for the applicable forecasted usage
and protecting the Company from significant price volatility. Derivative
instruments measured at fair market value are recorded on the balance sheet as
an asset or liability. Changes in fair market value are recognized currently in
earnings unless the instrument has met specific hedge accounting criteria.
Subsequent changes in the fair value of the derivative assets and liabilities
designated as a cash flow hedge are recorded on a net basis in Other
Comprehensive Income (Loss) and subsequently reclassified as direct energy cost
in the statement of operations as the energy is delivered. While some of the
contracts we use to manage risk represent commodities or instruments for which
prices are available from external sources, other commodities and certain
contracts are not actively traded and are valued using other pricing sources and
modeling techniques to determine expected future market prices, contract
quantities, or both. We use our best estimates to determine the fair value of
commodity and derivative contracts we hold and sell. These estimates consider
various factors including closing exchange and over-the-counter price
quotations, time value, volatility factors and credit exposure. We do not engage
in trading activities in the wholesale energy market other than to manage our
direct energy cost in an attempt to improve the profit margin associated with
the requirements of our retail customers.






23


With many
of our customers, we have the ability to change prices with short notice; and,
therefore, the impact on gross profits from increases in energy prices is not
material for these customers. However, sharp and sustained price increases could
result in customer attrition without corresponding price increases by local
utilities and other competitors. Approximately 48% of our electricity customers
and 32% of our natural gas customers are subject to multi-month fixed priced
unhedged contracts and, accordingly a $10 per megawatt hour increase in the cost
of purchased power and a $1.00 per mmbtu, or Million British Thermal Units,
increase in the cost of purchased natural gas could result in an estimated $4.3
million decrease in gross profit for power, and an estimated $1.1 million
decrease in gross profit for natural gas, respectively, for fiscal
2008.
   Credit
Risk
   Our
primary credit risks are exposure to our retail customers for default on their
contractual obligations. Given the high credit quality
of the majority of our energy suppliers, credit risk resulting from failure of
our suppliers to deliver or perform on their contracted energy commitments is
not considered significant.




The
retail credit default or nonpayment risk is managed through established credit
policies which actively require screening of customer credit prior to
contracting with a customer, potentially requiring deposits from customers
and/or actively discontinuing business with customers that do not pay as
contractually obligated. At times, the Company is limited in the types of
credit policies which it may implement by applicable state rules and regulation
in a market in which we sell energy. Retail credit quality is dependent on
the economy and the ability of our customers to manage through unfavorable
economic cycles and other market changes. If the business environment were to be
negatively affected by changes in economic or other market conditions, our
retail credit risk may be adversely impacted.






Counterparty
credit risks result primarily from credit extended to us for our purchases of
energy from our suppliers. Favorable credit terms from our suppliers facilitated
our ability to procure wholesale energy to service our customers; however,
adverse market conditions or poor financial performance by us may result in a
reduction or elimination of available unsecured counterparty credit lines.
Additionally, we have significant amounts of energy commitments to our
contracted term customers that we have hedged forward, often for several months.
A significant decrease in energy prices could adversely impact our cash
collateral requirements due to counter-party margin calls. These margin calls
protect the counter party against our not purchasing energy at above market
prices.






Interest
Rate Risk






As we had
no long-term debt outstanding at April 30, 2008, our only exposure to interest
rate risks is limited to short-term borrowings and our investment of excess cash
balances in interest-bearing instruments. As our borrowings are only short-term
and are adjusted to market rates on a recurring basis, we do not believe we have
interest rate risk on these borrowings. We generally invest cash equivalents in
short-term credit instruments consisting primarily of high credit quality,
short-term money market funds and insured, re-marketable government agency
securities with interest rate reset maturities of 90 days or less. We do
not expect any material loss from our investments and we believe that our
potential interest rate exposure is not material. As our practice has been, and
currently continues to be, to only invest in high-quality debt instruments with
maturities or remarketing dates of 90 days or less, we currently are not
materially susceptible to interest rate risk on our investments.






Item
4. Controls and Procedures.






Evaluation
of Disclosure Controls and Procedures






Our Chief
Executive Officer and our Interim 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) or
15d-15(e) under the Securities Exchange Act of 1934, as amended, or 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 Interim Chief Financial Officer, as appropriate, and
allow timely decisions regarding required disclosure.






Changes
in Internal Control Over Financial Reporting






No change
in the our internal control over financial reporting occurred during the
Company’s last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.








24


Item
4T. Controls and Procedures.
  Not
applicable.
   25


PART
II — OTHER INFORMATION







Item
1. Legal Proceedings.






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 material changes to the risk factors disclosed in the Form 10-K,
except as described below:






Based
upon current estimates, we may not be in compliance with certain covenants of
our Credit Facility in fiscal 2008 or fiscal 2009. If current estimates continue
unchanged and we are unable to obtain a waiver or consent of the agent and the
lenders to our Credit Facility we will be in default under the Credit Facility,
which will have a material adverse effect on our business.






Based
upon our current cash flow estimates, including our need to post collateral
against our energy purchases and against our mark-to-market exposure with
suppliers, we have notified our agent and lenders under the Credit Facility that
we may be out of compliance in fiscal 2008 and fiscal 2009 with certain
covenants under the Credit Facility.  In the event that we are out of
compliance, the Lenders are entitled to accelerate the obligations under the
Credit Facility or exercise other remedies provided
thereunder.  Although we have received temporary waivers, amendments
and modifications to the Credit Facility in the past, there is no assurance that
if we need such a waiver, amendment or modification, the agent and lenders will
grant it, or if they do grant such a waiver, amendment or modification, such
waiver, amendment or modification will be on terms acceptable to us.




We
will require additional capital in the future, which may not be available on
favorable terms, if at all.






The
Company believes that it will require additional capital in fiscal 2009 to
(1) meet the requirement in its Credit Facility to have in excess of $10 million
in excess availability at all times on and after November 1, 2008; (2)
expand its business; (3) add liquidity in case energy prices materially and
unexpectedly increase; and (4) meet unexpected funding requirements caused by
industry volatility and/or uncertainty. To the extent that our existing capital
and borrowing capabilities are insufficient to meet these requirements and cover
any losses, we will need to raise additional funds through debt or equity
financings or borrowings or curtail our growth and reduce our assets. Any equity
or debt financing, or additional borrowings, if available at all, may be on
terms that are not favorable to us. Equity financings could result in dilution
to our stockholders, and the securities issued in future financings may have
rights, preferences and privileges that are senior to those of our common stock.
If our need for capital arises because of significant losses, the occurrence of
these losses may make it more difficult for us to raise the necessary capital.
If we cannot raise funds on acceptable terms, if and when needed, we may not be
able to take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements.






We
may be subject to claims or liabilities in connection with certain regulatory
and refund proceedings which could have a material adverse effect on our
business and our stock price.






In 2001,
the Federal Energy Regulatory Commission, or FERC, ordered an evidentiary
hearing (Docket No. EL00-95) to determine the amount of refunds due to
California energy buyers for purchases made in the spot markets operated by the
California Independent System Operator Corporation, or CAISO, and the California
Power Exchange or CPX, during the period October 2, 2000 through June 20, 2001,
or the Refund Period. Among other holdings in the case, FERC determined that the
Automated Power Exchange or the APX, and its market participants could be
responsible for, or entitled to, refunds for transactions completed in the CAISO
and the CPS spot markets through APX. FERC has not issued a final order
determining “who owes how much to whom” in the California Refund Proceeding, and
it is not clear when such an order will be issued. As previously disclosed, APX
and its market participants have entered into a settlement that resolves how
refunds owed to APX will be allocated among its market participants, including
to the Company. Under the APX Settlement and Release of Claims dated January 5,
2007, we received $6.5 million, $5.1 million in April 2007 and $1.4 million in
August 2007.








26
 
  In the
course of the California Refund Proceeding, FERC has issued dozens of orders.
Most have been taken up on appeal before






Lockyer v.
FERC.  On September 9, 2004, the Ninth Circuit issued a
decision on the California Attorney General’s challenge to the validity of
FERC’s market-based rate system. This case was originally presented to FERC upon
complaint that the adoption and implementation of market based rate authority
was flawed. FERC dismissed the complaint after sellers refilled reports of sales
in the CAISO and the CPX spot markets and bilateral sales to the California
Department of Water Resources during 2000 and 2001. The Ninth Circuit upheld
FERC’s authority to authorize sales of electric energy at market-based rates,
but found that the requirement that sales at market-based rates be reported
quarterly to FERC for individual transactions is integral to a market-based rate
regime. The State of California, among others, has publicly interpreted the
decision as providing authority to FERC to order refunds for different time
frames and based on different rationales than are currently pending in the
California Refund Proceedings, discussed above in “California Refund
Proceeding.” The decision remands to FERC the question of whether, and in what
circumstances, to impose refunds or other remedies for any alleged failure to
report sales transactions to FERC. On December 28, 2006, several energy sellers
filed a petition for a writ of certiorari to the U.S Supreme Court. The U.S.
Supreme Court denied the petition.  On March 20, 2008, FERC established
settlement and remand procedures for the case, which are currently
underway.  We cannot predict the scope or nature of, or ultimate resolution
of this case.






CPUC v.
FERC.  On August 2, 2006, after reviewing certain FERC
decisions in the California Refund Proceedings, the Ninth Circuit decided that
FERC erred in excluding potential relief for alleged tariff violations related
to transactions in the CAISO and the CPX markets for periods that pre-dated
October 2, 2000 and additionally ruled that FERC should consider remedies for
certain bilateral transactions with the California Department of Water Resources
previously considered outside the scope of the proceedings. To allow parties the
opportunity to consider ways to settle disputes, the Ninth Circuit extended the
deadline for seeking rehearing of the California Public Utilities Commission, or
CPUC and Lockyer decisions to November 16, 2007 and delayed issuing the order
remanding the CPUC and Lockyer cases back to FERC. We are studying the court’s
decision, but are unable to predict either the outcome of the proceedings or the
ultimate financial effect to us.






Following
the 9th Circuit's remand of the Lockyer proceeding back to FERC, the People of
the State of California, ex rel. Edmund G. Brown Jr., Attorney General, the
California Electricity Oversight Board, the Public Utilities Commission of the
State of California, Pacific Gas and Electric Company, and Southern California
Edison, (collectively, the “California Parties”) had requested the Commission
hold the Lockyer remand proceeding in abeyance. The California Parties have
requested the FERC to hold in abeyance its remand proceeding in Lockyer, pending
the remands in CPUC and Port of Seattle; two cases which are before the 9th
Circuit.






Although
we have not been named as a defendant in any of the foregoing proceedings, it is
possible that we will be named as a defendant in these or other related
proceedings in the future and may, as a consequence, be exposed to claims or
liabilities for transactions outside the Refund Period. At this time, the
ultimate financial outcome is unclear. If our past or present operations are
found to be in violation of applicable laws or governmental regulations, we may
be subject to curtailment or restructuring of our operations, and penalties,
damages and fines, some of which may not be covered by insurance. We may also be
subject to adverse publicity. Similarly, if our power suppliers are found to be
non-compliant with applicable laws, they may be subject to penalties, sanctions
or curtailing or restructuring of their operations, which could also have a
negative impact on us. The risk of our being found in violation of certain
applicable laws is increased by the fact that many applicable laws and
regulations have not been fully interpreted by the regulatory authorities or the
courts, and their provisions may be open to a variety of interpretations. Any
action against us for violation of applicable laws and regulations, even if we
successfully defend against it, could cause us to incur significant legal
expenses and divert our management’s attention from the operation of our
business. In addition to adversely impacting our business and prospects, adverse
publicity could materially adversely affect our stock price.




27




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






Purchases
of Equity Securities by the Issuer and Affiliated Purchasers






The
following table contains information for shares of the Company’s common stock,
par value $0.001 per share, or common stock, purchased during the third quarter
of fiscal 2008.




Period
      – FY 2008
            
            Total
      number
              of
      shares
              purchased
            
            Average
              price
      paid
              per
      share
            
            Total
      number of
              shares
      purchased as
              part
      of publicly announced plans or programs
            
            Maximum
      number of shares that may yet be purchased
              under
      the plans or programsFebruary
      1-29
            
            
            0
            
            
            
            N/A
            
            
            
            0March
      1 – 31 (a)
            
            
            75,000
            
            
            $
            0.001
            
            
            
            0166,000
            
            
            $
            1.26
            
            
            
            0April
      1 - 30
            
            
            0
            
            
            
            N/A
            
            
            
            0Total
            
            
            241,000
            
            
            $
            0.87
            
            
            
            0
            
            
            
            0





(a)
            In
      connection with the execution of a separation agreement and general
      release with a former executive officer, the company purchased (1) 75,000
      shares of restricted common stock at par value per share in connection
      with the terms of the Company’s 1999 Equity Incentive Plan; and (2)
      166,000 shares of common stock at $1.26 per share, the closing price of a
      share of common stock on the date of purchase.




Item
3. Defaults upon Senior Securities.






None.




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 March 27, 2008 (the “Annual Meeting”): (1) the
election of two Class I 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 (2) 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, 2008.






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






Rohn
Crabtree and Gary J. Hessenauer 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
      WithheldRohn
      Crabtree
            
            
            19,993,838
            
            
            
            926,886Gary
      J. Hessenauer
            
            
            19,268,283
            
            
            
            1,652,441




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, 2008 was approved. The affirmative vote of the votes cast by holders of the
shares of common stock present in person or represented by proxy at the Annual
Meeting and entitled to vote on the proposal was required for approval. The
tabulation of votes was as follows:




For
            
            
            Against
            
            
            Abstain
            
            
            BrokerNon-Votes20,529,137
            
            
            
            297,007
            
            
            
            94,580
            
            
            
            0








28




Item
5. Other Information.


Eighth
Amendment to the Credit Facility




On June
11, 2008, the Company, Commerce Energy, Inc., a California corporation and
wholly-owned subsidiary of the Company, or Commerce, Wachovia Capital Finance
Corporation (Western), a California corporation, as Agent and Lender, or Agent,
and Wells Fargo Foothill, LLC, as Lender, entered into an Eighth Amendment to
Loan and Security Agreement, or the Eighth Amendment, amending that certain Loan
and Security Agreement dated June 8, 2006, as amended, or the Credit Facility by
and among the Company, Commerce, the Agent and the Lenders thereto from time to
time. Capitalized terms, not otherwise defined have the meaning set forth in the
Credit Facility.
   The
Eighth Amendment revises several provisions of the Credit Facility, including,
without limitation, (1) the maturity date; (2) the interest rates; (3) certain
financial covenants; (4) the excess availability requirement; (5) the definition
of Borrowing Base; and (6) the early termination fee.  The Eighth
Amendment also requires compliance with a liquidity
forecast.  Pursuant to the Eighth Amendment, Commerce agreed with the
Lenders to terminate the Credit Facility on or before November 1,
2008.  Previously, the Credit Facility matured on June 8,
2010.
   Commerce
also agreed to deliver to the Agent, on the last business day of each week
beginning June 6, 2008, a projected daily liquidity forecast for the succeeding
eight weeks.  For purposes of the Credit Facility, liquidity means the
sum of unencumbered available cash plus cash equivalents plus Excess
Availability.  Beginning on June 13, 2008, Commerce must maintain an
aggregate liquidity, measured weekly for the next week, of no less than 65% of
the projected aggregate liquidity as calculated in the most recent liquidity
forecast delivered by Commerce.  The Credit Facility did not
previously require delivery of, or compliance with, a liquidity
forecast.
   The
Eighth Amendment also increased the interest rates under the Credit Facility by
1.50%.  The borrowings under the Credit Facility are now priced at a
domestic bank rate plus 2.25 percent or LIBOR plus 4.75 percent per annum.
Letters of credit fees now range from 3.50 to 3.75 percent per annum, depending
on the level of excess availability.
   Prior to
the Eighth Amendment, based on the projections delivered to the Agent by the
Company, the Agent would reasonably establish covenant levels for the Fixed
Charge Coverage Ratio for periods in the fiscal year, which would be no less
than 1.5:1.  Pursuant to the Amendment, the Agent reasonably will
establish a Fixed Charge Coverage Ratio for each period beginning on August 1,
2008 and ending on the last date of  each October, January, April and
July during each fiscal year, which will be no less than stringent than
1:1.  The Eighth Amendment also modified the minimum EBITDA
covenant.  Previously, Commerce was required to have $3.6 million of
EBITDA for the 12 months ending July 31, 2008.  Based on the
projections delivered to the Agent by the Company, the Agent would then
reasonably establish covenant levels for the minimum EBITDA needed for the
specified periods ending during the fiscal year.  The Eighth Amendment
eliminated the test for the period ending July 31, 2008 and the Agent will now
reasonably establish a minimum EBITDA level for each period beginning on August
1, 2008 and ending on the last date of each October, January, April and July
during each fiscal year, which will be no less than $500,000 per
month.
   Additionally,
under the Eighth Amendment, Commerce is required to maintain an amount of Excess
Availability equal to $2,500,000 at all times prior to November 1, 2008 and
$10,000,000 at all times on or after November 1, 2008. Prior to the Eighth
Amendment, Commerce was required to maintain an amount of Excess Availability
equal to $2,500,000 prior to July 1, 2008 and $10,000,000 at all times on or
after July 1, 2008.  The definition of Excess Availability was also
amended to reflect any subordinated loans or lines of credit arranged by
Commerce which are approved by the Agent.
   Also, the
definition of the Borrowing Base was amended. Previously, the Borrowing Base
equaled amount equal to (1) the lesser of (a) the sum of all collections
received on the accounts of borrowers during the immediately preceding 45 days,
and (b) 85% of the Eligible Billed Accounts, plus (d) the lesser of $12,000,000
or 65% of the Eligible Unbilled  Accounts, plus (c) the lesser of the
$8,000,000 or 70% multiplied by the value of Eligible Inventory, plus (e) the
lesser of $35,000,000 or 95% of Eligible Cash Collateral, minus (2) any
Reserves.  Previously, the percentage of Eligible Unbilled Accounts
could be increased from 65% to 75% two times each year for a period of 60 days
as specified in a written request by Commerce to the Agent.  Pursuant
to the Eighth Amendment, the percentage of Eligible Unbilled Accounts must
remain at 65% at all times and the time period of collections on accounts
referred to in subclause (a)(i) above is now 30 days instead of 45
days.
   In
connection with the Eighth Amendment, the Lenders agreed to eliminate the
prepayment penalty.  Previously, the prepayment penalty of 0.25% of
the revolving loan limit was previously payable from and after the first
anniversary of the date of the Credit Facility but not including the thirtieth
day preceding the fourth anniversary of the date of the Credit
Facility.  However, Commerce agreed to pay to the Lenders a servicing
fee in an amount equal to $35,000 per month, which shall be no less than
$140,000 in the aggregate for the term of the Credit Facility.
   The
foregoing summary of the Eighth Amendment is not complete and is qualified in
its entirety by reference to the actual Amendment, which is attached hereto as
Exhibit 10.20 and incorporated herein by reference.
   29




Tenaska
Release Agreement






On
April 16, 2008, Commerce Energy, Inc., or Commerce, Tenaska Power Services
Co., or Tenaska, and Wachovia Capital Finance Corporation (Western), or
Wachovia, as agent for the lenders and party to a Loan and Security Agreement
dated June 8, 2006, as amended, entered into a release agreement, or the
Release Agreement. Tenaska supplies Commerce with a majority of its wholesale
electricity supply needs in Texas and extends it credit to buy wholesale
electricity. Wachovia provides various credit facilities to
Commerce.






Pursuant
to the Release Agreement, Tenaska agreed to release and terminate all of its
security interests in the assets and property of Commerce, including the
collateral provided under a security agreement between Commerce and Tenaska
dated August 1, 2006, as amended March 7, 2006 and June 22, 2006,
referred to herein as the Security Agreement. Such collateral included
Commerce’s contracts with certain retail electricity customers and the revenues
and accounts receivable from such contracts. Under the Release Agreement,
Tenaska also agreed to release and terminate all of Tenaska’s rights, remedies
and interests with respect to a deposit account and related lockbox into which
revenues received from Commerce’s electricity end-use customers in Texas were
deposited pursuant to a blocked account control agreement with lockbox services
dated August 1, 2005 by and among Commerce, Tenaska and U.S. Bank National
Association, referred to herein as the Tenaska Lockbox Agreement. The foregoing
agreements were conditioned upon the receipt by Tenaska of a standby letter of
credit issued by Wachovia at the request of Commerce in the amount of $7.0
million and $3.0 million cash collateral, both in substitution of the collateral
previously provided under the Security Agreement. On April 18, 2008 Tenaska
agreed to accept a letter of credit in the amount of $10 million in lieu of the
above. The foregoing summary of the Release Agreement is not complete and is
qualified in its entirety by reference to the actual agreement, which is
attached hereto as Exhibit 10.19 and incorporated herein by
reference.






In
connection with the Release Agreement, Tenaska terminated all of its rights and
interests with respect to the Tenaska Lockbox Agreement and the related deposit
account and lockbox, effective as of April 17 2008. On April 15, 2008,
Commerce entered into a new blocked account control agreement with lockbox
services with Wachovia and U.S. Bank, or the Wachovia Lockbox Agreement,
acknowledging Wachovia’s security interest in the lockbox and related deposit
account maintained at U.S. Bank for deposit of revenues received from
electricity end-use customers in Texas and providing that Commerce may direct
the transfer of funds in the account unless and until Wachovia provides written
notice to U.S. Bank to the contrary. The foregoing summary of the Wachovia
Lockbox Agreement is not complete and is qualified in its entirety by reference
to the actual agreement, which is attached hereto as Exhibit 10.18 and
incorporated herein by reference.









30


Annual
Meeting Date Announced – January 8, 2009
   The
Company has set Thursday, January 8, 2009 as the date for its upcoming annual
meeting of stockholders relating to its fiscal year ending July 31,
2008.
   Set forth
below are important dates relating to nominations for Directors and Stockholder
Proposals for that upcoming annual meeting.
   Nominations
for Directors for the Annual Meeting for the Fiscal Year Ending July 31,
2008
   The
Second Amended and Restated Bylaws of the Company, or the Bylaws, set forth
specific procedures relating to the nomination of the Company’s
directors.  We refer to these procedures in the Bylaws as the
Nomination Bylaw.  No person will be eligible for election as a
director unless nominated in accordance with the provisions of the Nomination
Bylaw.  Nominations of persons for election to the Board of Directors
may be made by (1) the Board of Directors or a committee appointed by the Board
of Directors; or (2) any stockholder who (a) is a stockholder of record at the
time of giving the notice provided for in the Nomination Bylaw, (b) will be
entitled to vote for the election of directors at the annual meeting and (c)
complies with the notice procedures set forth in the Nomination
Bylaw.
   Nominations
by stockholders must be made in written form to the Secretary of the
Company.  Under the Nomination Bylaw, to be timely for an annual
meeting, a stockholder’s notice must be delivered to or mailed and received at
our principal executive offices not more than 120 days nor less than 90 days
prior to the first anniversary of the preceding year’s annual meeting; provided,
however, that in the event that the date of an annual meeting is changed by more
than 30 days before or 70 days after such anniversary date, then for the notice
by the stockholder to be timely, it must be received by us no earlier than 120
days prior to such annual meeting nor later than the later of 90 days prior to
such annual meeting or the 10th day following the day on which public
announcement of the date of the meeting was first made.
   Therefore,
in order to be timely for the annual meeting for the fiscal year ending July 31,
2008, a stockholder’s notice must be delivered to or mailed and received at our
principal executive offices not earlier than September 10, 2008 and not later
than
   31
 
  October
10, 2008. To be effective, the written notice must include (1) the name, age,
business address and residence address of the person being nominated by the
stockholder; (2) the principal occupation or employment of the stockholder’s
nominee; (3) the class or series and number of shares of capital stock of the
Company that are owned beneficially or of record by the stockholder’s nominee;
(4) any other information relating to the stockholder’s nominee that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder; (5) the written consent of
each proposed nominee to being named as a nominee and to serve as a director of
the Company if elected; (6) the name and record address of the stockholder
making the nomination; (7) the class or series and number of shares of capital
stock of the Company that are owned beneficially or of record by such
stockholder; (8) a description of all arrangements or understandings between
such stockholder and each proposed nominee and any other persons (including
their names) pursuant to which the nominations are to be made by such
stockholder; (9) a representation that such stockholder is a stockholder of
record entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the persons described in the notice; and (10) a
representation of whether such stockholder or any such beneficial owner intends
or is part of a group which intends (a) to deliver a proxy statement and/or form
of proxy to holders of at least the percentage of the Company’s outstanding
capital stock required to elect the nominee, and/or (b) otherwise to solicit
proxies from stockholders in support of such nomination. The Company may require
any proposed nominee to furnish such other information as it may reasonably
require to determine the eligibility of such proposed nominee to serve as a
director of the Company.
   Stockholder
Proposals for the Annual Meeting for the Fiscal Year Ending July 31,
2008
   The
Bylaws also set forth specific procedures to enable stockholders to properly
bring business before an annual meeting of the stockholders.  We refer
to these procedures in the Bylaws as the Stockholder Proposal
Bylaw.  Under the terms of the Stockholder Proposal Bylaw, to be
properly brought before an annual meeting, business must be (1) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors; (2) otherwise properly brought before the meeting by or
at the direction of the Board of Directors; (3) otherwise properly brought
before an annual meeting by a stockholder.  For business (other than
the nomination of directors, which is governed by the Nomination Bylaw) to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the
Company.
   To be
timely, a stockholder’s notice must be delivered to or mailed and received at
our principal executive offices not less than 90 days nor more than 120 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that if the annual meeting is not held within
30 days before or 70 days after such anniversary date, then for the notice by
the stockholder to be timely, it must be so received no earlier than 120 days
before such annual meeting nor later than the later of 90 days prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of the meeting was first made. Under the Stockholder Proposal Bylaw, in
order to be timely for the annual meeting for the fiscal year ending July 31,
2008, a stockholder’s notice regarding a proposal must be delivered to or mailed
and received at our principal executive offices not earlier than September 10,
2008 and not later than October 10, 2008.
   To be
effective, the written notice must include, as to each matter the stockholder
proposes to bring before the annual meeting (1) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting; (2) the text of the proposal;
(3) the reasons for the proposal; (4) the name and address, as they appear on
the Company’s books, of the stockholder proposing such business; (5) the class
and number of shares of the Company which are beneficially owned by the
stockholder; (6) any material interest of the stockholder in such business; (7)
the name and record address of the stockholder making the proposal; (8) the
class or series and number of shares of capital stock of the Company that are
owned beneficially or of record by such stockholder; (9) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other persons (including their names) pursuant to which the
proposals are to be made by such stockholder; (10) a representation that such
stockholder is a stockholder of record entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to conduct the business
being proposed as described in the notice; and (11) a representation of whether
such stockholder or any such beneficial owner intends or is part of a group
which intends (a) to deliver a proxy statement and/or form of proxy to holders
of at least the percentage of the Company’s outstanding capital stock required
to approve or adopt the proposal, and/or (b) otherwise to solicit proxies from
stockholders in support of such proposal.
   Stockholder
Proposals for Inclusion in Proxy Statement for the Annual Meeting for the Fiscal
Year Ending July 31, 2008
   If you
want us to consider including a proposal in the Company’s proxy materials
relating to the annual meeting of stockholders to be held for the fiscal year
ending July 31, 2008 in accordance with SEC Rule 14a-8, you must submit such
proposal to the Company no later than August 25, 2008. If such proposal is in
compliance with all of the requirements of Rule 14a-8, and not otherwise
excludable under Rule 14a-8, we will include it in the proxy statement and set
it forth on the form of proxy issued for such annual meeting of stockholders. As
the rules of the SEC make clear, simply submitting a proposal does not guarantee
that it will be included. You should direct any such stockholder proposal to the
attention of the Secretary of the Company at our address set forth on the first
page of this proxy statement.
   32
  Departure
of Thomas L. Ulry
   In
connection with an organizational review of the Company which resulted in
significant changes to the business, on June 6, 2008, the Board of Directors of
the Company terminated, without cause, Thomas L. Ulry, Senior Vice President,
Sales and Marketing, effective Friday, June 13, 2008.  On June 12,
2008, the Company presented to Mr. Ulry a Severance Agreement and General
Release, or the Severance Agreement, which will become effective on the eighth
day after he signs the Severance Agreement, unless it is revoked by Mr. Ulry
before that date.  Such date shall be referred to herein as the
effective date.  Mr. Ulry has 21 days from June 12, 2008 to decide
whether to execute the Severance Agreement.  Pursuant to the Severance
Agreement, Mr. Ulry would be entitled to a severance payment of $84,330 payable
as follows: $42,165 on the first business day after the effective date; $21,082
on August 29, 2008; and $21,082 on October 31, 2008, in each case, less
customary payroll deductions required by law.  The aggregate severance
payment to be paid under the Severance Agreement is referred to herein as the
Severance Benefit.
   If Mr.
Ulry decides to execute the Severance Agreement and it becomes effective, Mr.
Ulry would agree not to solicit the Company’s employees, contractors or
customers for a period of twelve (12) months after the date of the Severance
Agreement is signed.  The Severance Agreement includes provisions
which would require Mr. Ulry to protect the Company’s proprietary information
and contains a general release by Mr. Ulry of all of the claims against the
Company and its affiliates and representatives.  The Severance
Agreement also contains other customary provisions including Mr. Ulry’s
statutory rights under the Older Workers Benefit Protection Act which permits
him to revoke portions of the Severance Agreement within a seven day period
after he signs it.
   If Mr.
Ulry elected to revoke portions of the Severance Agreement, he would not be
entitled to the Severance Benefit.  Mr. Ulry would then be entitled to
the severance benefits set forth in a letter agreement dated May 31, 2005
between the Company and Mr. Ulry.  Pursuant to that agreement, the
Company would be obligated to pay Mr. Ulry his monthly salary, less customary
payroll deductions required by law, for a period of up to six months or until
Mr. Ulry finds alternative employment.  The aggregate amount of six
months of Mr. Ulry’s salary, prior to applicable payroll deductions, equals
$126,495.  We refer to the letter agreement as the May 2005 Ulry
Letter Agreement.
   The
foregoing descriptions of the Severance Agreement, and the May 2005 Ulry Letter
Agreement are only summaries, are not complete and are qualified in their
entirety to the actual agreements, which are attached as Exhibits 10.13
and 10.14, respectively, and are each incorporated herein by
reference.
   Compensation
Increase for Michael J. Fallquist
   On June
11, 2008, the Compensation Committee of the Board of Directors of the Company
increased the annual base salary of Mr. Michael J. Fallquist, the Chief
Operating Officer of the Company, from $225,000 to $275,000, effective as of the
Company’s  next regularly scheduled pay period.  The
Compensation Committee viewed the increase as a correction so as to bring Mr.
Fallquist’s base salary more in line with comparable senior executive positions
in the market in which the Company competes for talent.
   33


Item 6.
Exhibits.







The
exhibits listed below are hereby filed with the SEC as part of this
Report.


Exhibit
                Number
              
              Description3.1
              
              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
              
              Second
      Amended and Restated Bylaws of Commerce Energy Group, Inc., previously
      filed with the SEC on December 17, 2007 as Exhibit 3.3 to Commerce
      Energy Group, Inc.’s Quarterly Report on Form 10-Q for the Quarterly
      Period Ended October 31, 2007 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
              *
              Separation
      Agreement and General Release between Commerce Energy Group, Inc. and
      Steven S. Boss dated February 20, 2008, previously filed with the SEC
      on February 26, 2008 as Exhibit 99.1 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.2
              *
              Voting
      and Standstill Agreement between Commerce Energy Group, Inc. and Steven S.
      Boss dated February 20, 2008, previously filed with the SEC on
      February 26, 2008 as Exhibit 99.2 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.3
              *
              Employment
      Agreement between Commerce Energy Group, Inc. and Gregory L.
      Craig  dated February 20, 2008, previously filed with the
      SEC on February 26, 2008 as Exhibit 99.3 to Commerce Energy Group,
      Inc.’s Current Report on Form 8-K and incorporated herein by
      reference.10.4
              *
              Stock
      Option Award Agreement between Commerce Energy Group, Inc. and Gregory L.
      Craig, dated February 20, 2008, previously filed with the SEC on
      February 26, 2008 as Exhibit 99.4 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.5
              *
              Restricted
      Share Award Agreement between Commerce Energy Group, Inc. and Gregory L.
      Craig, dated February 20, 2008, previously filed with the SEC on
      February 26, 2008 as Exhibit 99.5 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.6
              *
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Gregory L. Craig, dated
      February 20, 2008, previously filed with the SEC on February 26,
      2008 as Exhibit 99.6 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.7
              *
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Rohn E. Crabtree, dated
      February 21, 2008, previously filed with the SEC on February 26,
      2008 as Exhibit 99.8 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.8
              *
              Employment
      Agreement between Commerce Energy Group, Inc. and Michael J. Fallquist
      dated March 10, 2008, previously filed with the SEC on March 13,
      2008 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.9
              *
              Form
      of Stock Option Award Agreement between Commerce Energy Group, Inc. and
      Michael J. Fallquist, previously filed with the SEC on March 13, 2008
      as Exhibit  99.2 to Commerce Energy Group, Inc.’s Current Report
      on Form 8-K and incorporated herein by reference.10.10
              *
              Form
      of Restricted Share Award Agreement between Commerce Energy Group, Inc.
      and Michael J. Fallquist, previously filed with the SEC on March 13,
      2008 as Exhibit 99.3 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by
reference.
   34
   Exhibit
                Number
              
              Description10.11
              *
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Michael J. Fallquist
      dated March 10, 2008, previously filed with the SEC on March 13,
      2008 as Exhibit 99.4 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.12
              *
              Commerce
      Energy Group, Inc. Fallquist Incentive Plan, previously filed with the SEC
      on March 13, 2008 as Exhibit 99.5 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.13
              *
              Confidential
      Severance Agreement and General Release by and between Commerce Energy
      Group, Inc. and Thomas L. Ulry.10.14
              *
              Employment
      Offer Letter Agreement between Commerce Energy Group, Inc. and Thomas L.
      Ulry dated May 31, 2005, previously filed with the SEC on October 31, 2005
      as Exhibit 10.30  to Commerce Energy Group, Inc.’s Annual Report
      on Form 10-K and incorporated herein by reference.10.15
              
              Letter
      from Thomas Ulry to Commerce Energy Group, Inc. dated October 28, 2005
      regarding the May 31, 2005 Employment Offer Letter Agreement, previously
      filed with the SEC on October 31, 2005 as Exhibit 10.31 to Commerce Energy
      Group, Inc.’s Annual Report on Form 10-K and incorporated herein by
      reference.10.16
              
              Seventh
      Amendment to Loan and Security Agreement and Waiver by and among Commerce
      Energy Group, Inc., Commerce Energy, Inc., Wachovia Capital Finance
      Corporation (Western), as Agent and Lender, and The CIT Group/Business
      Credit, Inc., dated March 12, 2008, previously filed with the SEC on
      March 14, 2008 as Exhibit 10.18 to Commerce Energy Group, Inc.’s Quarterly
      Report on Form 10-Q for the Quarterly Period Ended January 31, 2008 and
      incorporated herein by reference.10.17
              
              Confidential
      Severance Agreement and General Release between Commerce Energy Group,
      Inc. and Rubin N. Cioll dated April 28, 2008, previously filed with
      the SEC on May 12, 2008 as Exhibit  99.1 to Commerce Energy
      Group, Inc.’s Current Report on Form 8-K and incorporated herein by
      reference.10.18
              
              Blocked
      Account Control Agreement with Lockbox Services dated April 15, 2008 by
      and among Commerce Energy, Inc., Wachovia Capital Finance Corporation
      (Western) and U.S. Bank, N.A.10.19
              
              Release
      Agreement dated April 16, 2008 by and among Commerce Energy, Inc., Tenaska
      Power Services Co. and Wachovia Capital Finance Corporation (Western) as
      agent for the lenders party to the Credit Facility.10.20
              
              Eighth
      Amendment to Loan and Security Agreement and Waiver by and among Commerce
      Energy Group, Inc., Commerce Energy, Inc., Wachovia Capital Finance
      Corporation (Western), as Agent and Lender, and Wells Fargo Foothill LLC,
      dated June 11, 2008.31.1
              
              Principal
      Executive Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Principal
      Financial Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Principal
      Executive Officer Certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
              
              Principal
      Financial Officer Certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


________


*      Indicates
management contract or compensatory plan.








35








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:
      June 12, 2008
            By:          /s/GREGORY L.
      CRAIG
              Gregory L.
      Craig
              Chairman & Chief Executive
      Officer
              (Principal Executive
      Officer)Date: June
      12,  2008
            By:          /s/C. DOUGLAS
      MITCHELL
              C. Douglas Mitchell
              Interim Chief Financial
      Officer
              (Principal Financialand AccountingOfficer)








36





EXHIBIT
INDEX






Exhibit
                Number
              
              Description3.1
              
              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
              
              Second
      Amended and Restated Bylaws of Commerce Energy Group, Inc., previously
      filed with the SEC on December 17, 2007 as Exhibit 3.3 to Commerce
      Energy Group, Inc.’s Quarterly Report on Form 10-Q for the Quarterly
      Period Ended October 31, 2007 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
              *
              Separation
      Agreement and General Release between Commerce Energy Group, Inc. and
      Steven S. Boss dated February 20, 2008, previously filed with the SEC
      on February 26, 2008 as Exhibit 99.1 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.2
              *
              Voting
      and Standstill Agreement between Commerce Energy Group, Inc. and Steven S.
      Boss dated February 20, 2008, previously filed with the SEC on
      February 26, 2008 as Exhibit 99.2 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.3
              *
              Employment
      Agreement between Commerce Energy Group, Inc. and Gregory L.
      Craig  dated February 20, 2008, previously filed with the
      SEC on February 26, 2008 as Exhibit 99.3 to Commerce Energy Group,
      Inc.’s Current Report on Form 8-K and incorporated herein by
      reference.10.4
              *
              Stock
      Option Award Agreement between Commerce Energy Group, Inc. and Gregory L.
      Craig, dated February 20, 2008, previously filed with the SEC on
      February 26, 2008 as Exhibit 99.4 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.5
              *
              Restricted
      Share Award Agreement between Commerce Energy Group, Inc. and Gregory L.
      Craig, dated February 20, 2008, previously filed with the SEC on
      February 26, 2008 as Exhibit 99.5 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.6
              *
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Gregory L. Craig, dated
      February 20, 2008, previously filed with the SEC on February 26,
      2008 as Exhibit 99.6 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.7
              *
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Rohn E. Crabtree, dated
      February 21, 2008, previously filed with the SEC on February 26,
      2008 as Exhibit 99.8 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.8
              *
              Employment
      Agreement between Commerce Energy Group, Inc. and Michael J. Fallquist
      dated March 10, 2008, previously filed with the SEC on March 13,
      2008 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.9
              *
              Form
      of Stock Option Award Agreement between Commerce Energy Group, Inc. and
      Michael J. Fallquist, previously filed with the SEC on March 13, 2008
      as Exhibit  99.2 to Commerce Energy Group, Inc.’s Current Report
      on Form 8-K and incorporated herein by reference.10.10
              *
              Form
      of Restricted Share Award Agreement between Commerce Energy Group, Inc.
      and Michael J. Fallquist, previously filed with the SEC on March 13,
      2008 as Exhibit 99.3 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by
reference.


37




Exhibit
                Number
              
              Description10.11
              *
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Michael J. Fallquist
      dated March 10, 2008, previously filed with the SEC on March 13,
      2008 as Exhibit 99.4 to Commerce Energy Group, Inc.’s Current Report on
      Form 8-K and incorporated herein by reference.10.12
              *
              Commerce
      Energy Group, Inc. Fallquist Incentive Plan, previously filed with the SEC
      on March 13, 2008 as Exhibit 99.5 to Commerce Energy Group, Inc.’s
      Current Report on Form 8-K and incorporated herein by
      reference.10.13
              *
              Confidential
      Severance Agreement and General Release by and between Commerce Energy
      Group, Inc. and Thomas L. Ulry.10.14
              *
              Employment
      Offer Letter Agreement between Commerce Energy Group, Inc. and Thomas L.
      Ulry dated May 31, 2005, previously filed with the SEC on October 31, 2005
      as Exhibit 10.30  to Commerce Energy Group, Inc.’s Annual Report
      on Form 10-K and incorporated herein by reference.10.15
              
              Letter
      from Thomas Ulry to Commerce Energy Group, Inc. dated October 28, 2005
      regarding the May 31, 2005 Employment Offer Letter Agreement, previously
      filed with the SEC on October 31, 2005 as Exhibit 10.31 to Commerce Energy
      Group, Inc.’s Annual Report on Form 10-K and incorporated herein by
      reference.10.16
              
              Seventh
      Amendment to Loan and Security Agreement and Waiver by and among Commerce
      Energy Group, Inc., Commerce Energy, Inc., Wachovia Capital Finance
      Corporation (Western), as Agent and Lender, and The CIT Group/Business
      Credit, Inc., dated March 12, 2008, previously filed with the SEC on
      March 14, 2008 as Exhibit 10.18 to Commerce Energy Group, Inc.’s Quarterly
      Report on Form 10-Q for the Quarterly Period Ended January 31, 2008 and
      incorporated herein by reference.10.17
              
              Confidential
      Severance Agreement and General Release between Commerce Energy Group,
      Inc. and Rubin N. Cioll dated April 28, 2008, previously filed with
      the SEC on May 12, 2008 as Exhibit  99.1 to Commerce Energy
      Group, Inc.’s Current Report on Form 8-K and incorporated herein by
      reference.10.18
              
              Blocked
      Account Control Agreement with Lockbox Services dated April 15, 2008 by
      and among Commerce Energy, Inc., Wachovia Capital Finance Corporation
      (Western) and U.S. Bank, N.A.10.19
              
              Release
      Agreement dated April 16, 2008 by and among Commerce Energy, Inc., Tenaska
      Power Services Co. and Wachovia Capital Finance Corporation (Western) as
      agent for the lenders party to the Credit Facility.10.20
              
              Eighth
      Amendment to Loan and Security Agreement and Waiver by and among Commerce
      Energy Group, Inc., Commerce Energy, Inc., Wachovia Capital Finance
      Corporation (Western), as Agent and Lender, and Wells Fargo Foothill LLC,
      dated June 11, 2008.31.1
              
              Principal
      Executive Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Principal
      Financial Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Principal
      Executive Officer Certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
              
              Principal
      Financial Officer Certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 ________




*      Indicates
management contract or compensatory plan.











38







Exhibit
31.1





CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14(a)


PROMULGATED
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002





I,
Gregory L. Craig, Chairman and 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 April 30, 2008
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 officer(s) and I are 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 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 officer(s) 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.





COMMERCE
      ENERGY GROUP, INC.Date:
      June 12, 2008
            By:         /s/GREGORY L.
      CRAIG
              Gregory L. Craig
              Chairman & Chief Executive
      Officer
              (Principal Executive
      Officer)








39





Exhibit
31.2





CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14(a)


PROMULGATED
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002





I, C.
Douglas Mitchell, Interim 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 April 30, 2008
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 officer(s) and I are 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 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 officer(s) 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.





COMMERCE
      ENERGY GROUP, INC.Date:
      June 12, 2008
            By:          /s/C. DOUGLAS
      MITCHELL
              C. Douglas Mitchell
              Interim Chief Financial
      Officer
              (Principal Financialand AccountingOfficer)





40





Exhibit
32.1





CERTIFICATION
OF CHIEF EXECUTIVE OFFICER


PURSUANT
TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002





I,
Gregory L. Craig, Chairman and Chief Executive Officer of Commerce
Energy Group, Inc. (the “Company”), certify pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350, that, to my knowledge:





1.
            The Quarterly Report on Form 10-Q
      of the Company for the period ended April 30, 2008 (the “Report”) fully
      complies with the requirements of Section 13(a) or 15(d) of the Securities
      Exchange Act of 1934, as amended;
and





2.
            The information contained in the
      Report fairly presents, in all material respects, the financial condition
      and results of operations of the Company for the period covered by the
      Report.





COMMERCE
      ENERGY GROUP, INC.Date:
      June 12, 2008
            By:           /s/GREGORY
      L. CRAIG
              Gregory L.
      Craig
              Chairman & Chief Executive
      Officer
              (Principal Executive
      Officer)








41





Exhibit
32.2





CERTIFICATION
OF INTERIM CHIEF FINANCIAL OFFICER


PURSUANT
TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002








I,
C. Douglas Mitchell, Interim Chief Financial Officer of Commerce
Energy Group, Inc. (the “Company”), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350, that to my knowledge:





1.
            The Quarterly Report on Form 10-Q
      of the Company for the period ended April 30, 2008 (the “Report”) fully
      complies with the requirements of Section 13(a) or 15(d) of the Securities
      Exchange Act of 1934, as amended;
and





2.
            The information contained in the
      Report fairly presents, in all material respects, the financial condition
      and results of operations of the Company for the period covered by the
      Report.





COMMERCE
      ENERGY GROUP, INC.Date: June
      12, 2008
            By:          /s/C. Douglas Mitchell
              C. Douglas Mitchell
              Interim Chief Financial
      Officer
              (Principal Financialand AccountingOfficer)








42