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 January 31,
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 March
11, 2008, 30,375,618 shares


COMMERCE
ENERGY GROUP, INC.





Form
10-Q





For
the Period Ended January 31, 2008





Index





Page
                  No.PART
      I — FINANCIAL INFORMATION
                
                
                1Item
      1. Financial Statements (Unaudited)
                
                
                1Condensed
      Consolidated Statements of Operations for the three and six months ended
      January 31, 2008 and 2007
                
                
                1Condensed
      Consolidated Balance Sheets as of January 31, 2008 and July 31,
      2007
                
                
                2Condensed
      Consolidated Statements of Cash Flows for the six months ended January 31,
      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
                
                
                22Item
      4. Controls and Procedures
                
                
                23Item
      4T. Controls and Procedures
                
                
                23PART
      II — OTHER INFORMATION
                
                
                24Item
      1. Legal Proceedings
                
                
                24Item
      1A. Risk Factors
                
                
                24Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                
                
                26Item
      3. Defaults Upon Senior Securities
                
                
                26Item
      4. Submission of Matters to a Vote of Security Holders
                
                
                26Item
      5. Other Information
                
                
                26Item
      6. Exhibits
                
                
                28Signatures
                
                
                30


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
              January 31,
            
            
            Six Months Ended
              January 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      revenue
            
            $
            108,392
            
            
            $
            92,644
            
            
            $
            213,990
            
            
            $
            163,152Direct
      energy costs
            
            
            89,126
            
            
            
            78,112
            
            
            
            178,336
            
            
            
            138,563Gross
      profit
            
            
            19,266
            
            
            
            14,532
            
            
            
            35,654
            
            
            
            24,589Selling
      and marketing expenses
            
            
            4,260
            
            
            
            2,607
            
            
            
            8,192
            
            
            
            4,845General
      and administrative expenses
            
            
            15,973
            
            
            
            9,637
            
            
            
            29,433
            
            
            
            17,484Income(loss)
      from operations
            
            
            (967
            )
            
            
            2,288
            
            
            
            (1,971
            )
            
            
            2,260Other
      income (expense):Interest
      income
            
            
            87
            
            
            
            251
            
            
            
            317
            
            
            
            662Interest
      expense
            
            
            (369
            )
            
            
            —
            
            
            
            (682
            )
            
            
            —Total
      other income and expenses
            
            
            (282
            )
            
            
            251
            
            
            
            (365
            )
            
            
            662Net
      income (loss)
            
            $
            (1,249
            )
            
            $
            2,539
            
            
            $
            (2,336
            )
            
            $
            2,922Income
      (loss) per common share:Basic
            
            $
            (0.04
            )
            
            $
            0.09
            
            
            $
            (0.08
            )
            
            $
            0.10Diluted
            
            $
            (0.04
            )
            
            $
            0.09
            
            
            $
            (0.08
            )
            
            $
            0.10







The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
 1




COMMERCE
ENERGY GROUP, INC.
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except per share amounts)


January 31, 2008
            
            
            July 31, 2007(Unaudited)ASSETSCurrent
      assets:Cash
      and equivalents
            
            $
            5,637
            
            
            $
            6,559Accounts
      receivable, net
            
            
            72,915
            
            
            
            65,231Natural
      gas inventory
            
            
            4,118
            
            
            
            5,905Prepaid
      expenses and other
            
            
            8,583
            
            
            
            7,224Total
      current assets
            
            
            91,253
            
            
            
            84,919Restricted
      cash and equivalents
            
            
            —
            
            
            
            10,457Deposits
      and other
            
            
            1,886
            
            
            
            1,906Property
      and equipment, net
            
            
            9,710
            
            
            
            8,662Goodwill
            
            
            4,247
            
            
            
            4,247Other
      intangible assets, net
            
            
            5,506
            
            
            
            6,385Total
      assets
            
            $
            112,602
            
            
            $
            116,576LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Energy
      and accounts payable
            
            $
            34,156
            
            
            $
            37,926Short-term
      borrowings
            
            
            3,000
            
            
            
            —Accrued
      liabilities
            
            
            6,095
            
            
            
            8,130Total
      current liabilities
            
            
            43,251
            
            
            
            46,056Commitments
      and contingenciesStockholders’
      equity:Common
      stock — 150,000 shares authorized with $0.001 par value;30,396
      (unaudited) issued and outstanding at January 31, 2008and
      30,383 at July 31, 2007
            
            
            60,883
            
            
            
            60,599Other
      comprehensive income (loss)
            
            
            60
            
            
            
            (823
            )Retained
      earnings
            
            
            8,408
            
            
            
            10,744Total
      stockholders’ equity
            
            
            69,351
            
            
            
            70,520Total
      liabilities and stockholders’ equity
            
            $
            112,602
            
            
            $
            116,576






The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
 2





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
Thousands)


(Unaudited)





Six
      Months Ended
              January 31,2008
            
            
            2007Cash
      Flows From Operating ActivitiesNet
      income (loss)
            
            $
            (2,336
            )
            
            $
            2,922Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
            
            
            1,167
            
            
            
            714Amortization
            
            
            880
            
            
            
            764Amortization
      of deferred loan costs
            
            
            82
            
            
            
            244Provision
      for doubtful accounts
            
            
            9,855
            
            
            
            2,200Stock-based
      compensation
            
            
            283
            
            
            
            266Changes
      in operating assets and liabilities:Accounts
      receivable, net
            
            
            (17,539
            )
            
            
            (23,918
            )Inventory
            
            
            1,787
            
            
            
            617Prepaid
      expenses and other
            
            
            (1,380
            )
            
            
            1,303Energy
      and accounts payable
            
            
            (3,771
            )
            
            
            (2,147
            )Accrued
      liabilities and other
            
            
            (1,192
            )
            
            
            630Net
      cash used in operating activities
            
            
            (12,164
            )
            
            
            (16,405
            )Cash
      Flows From Investing ActivitiesPurchase
      of property and equipment
            
            
            (2,215
            )
            
            
            (2,322
            )Purchase
      of intangible assets
            
            
            —
            
            
            
            (4,217
            )Sale
      of intangibles — customer contracts sold
            
            
            —
            
            
            
            756Net
      cash used in investing activities
            
            
            (2,215
            )
            
            
            (5,783
            )Cash
      Flows From Financing ActivitiesShort-term
      borrowings
            
            
            3,000
            
            
            
            —Credit
      line commitment fee
            
            
            —
            
            
            
            17Decrease
      in restricted cash
            
            
            10,457
            
            
            
            6,522Net
      cash provided by financing activities
            
            
            13,457
            
            
            
            6,539Decrease
      in cash and equivalents
            
            
            (922
            )
            
            
            (15,649
            )Cash
      and equivalents at beginning of period
            
            
            6,559
            
            
            
            22,941Cash
      and equivalents at end of period
            
            $
            5,637
            
            
            $
            7,292Supplemental
      Disclosure of Cash Flow InformationCash
      paid for:Interest
            
            $
            601
            
            
            $
            17Income
      taxes
            
            $
            118
            
            
            $
            5








The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
 3




COMMERCE
ENERGY GROUP, INC.





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars
In Thousands, Except Per Share Amounts)


(Unaudited)







Note
1. Summary of Significant Accounting Policies




Basis
of Presentation




The
unaudited condensed consolidated financial statements as of January 31, 2008 and
for the three and six months ended January 31, 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 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.




Reclassifications




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




Revenue
Recognition




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




Three Months Ended
              January 31,
            
            
            Six Months Ended
              January 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Retail
      electricity sales
            
            $
            68,835
            
            
            $
            50, 810
            
            
            $
            153,061
            
            
            $
            105,653Retail
      natural gas sales
            
            
            39,557
            
            
            
            41,834
            
            
            
            60,929
            
            
            
            57,499Net
      revenue
            
            $
            108,392
            
            
            $
            92,644
            
            
            $
            213,990
            
            
            $
            163,152




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


4
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except Per Share Amounts)
 (Unaudited)




its customers.




Stock-Based
Compensation




The total
compensation cost associated with stock options and restricted stock for the
three and six months ended January 31, 2008 was $94 and $283, respectively, and
for the three and six months ended January 31, 2007 were $132 and $266
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 is used as the basis for the expected
volatility.




Six
      Months Ended
              January
      31,2008
            
            
            2007Weighted-average
      risk-free interest rate
            
            
            3.67
            %
            
            
            4.8
            %Average
      expected life in years
            
            
            3.67
            
            
            
            4.44Expected
      dividends
            
            None
            
            
            NoneExpected
      volatility
            
            
            0.74
            
            
            
            0.73




A summary
of option activity under the Company’s stock option plans, during the six months
ended January 31, 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
      expired
                
                
                (757
                )
                
                $
                2.75
                
                
                $
                2.75Options
      forfeited
                
                
                (45
                )
                
                $
                2.56
                
                
                $
                2.56Options
      outstanding as of January 31, 2008 (1)
                
                
                6,181
                
                
                $
                1.00-$3.75
                
                
                $
                2.28




(1)
                Options exercisable and
      outstanding as of January 31, 2008 were6,181 with weighted average
      exercise price of $2.28 and an aggregate intrinsic valueof
      $28.




As of
January 31, 2008, there was no unrecognized compensation cost relating to
unvested outstanding stock options as all options were vested. The total
unrecognized compensation cost relating to unvested restricted stock was $235
and will be recognized over the period of February 2008 through November 2009.
For the three and six months ended January 31, 2008, 55,000 shares of restricted
stock was issued. A total of 183,334 unvested restricted shares were outstanding
as of January 31, 2008, with a total market value of $941. These restricted
shares vest in accordance with the terms of various written agreements. At
January 31, 2008, 978,334 shares of the Company’s common stock may be issued
pursuant to awards 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 January 31, 2008, the Company had net
operating loss carryforwards of approximately $10.9 million and $12.9 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 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
            2003-2006
            
            Ohio
            2003-2006California
            2002-2006
            
            Pennsylvania
            2004-2006Florida
            2005-2006
            
            Texas
            2002-2006Maryland
            2003-2006
            
            Virginia
            2003-2006Massachusetts
            2003-2006
            
            Wisconsin
            2006Michigan
            2002-2006
            
            Georgia
            2006Missouri
            2003-2006
            
            Kentucky
            2006New
      Jersey
            2002-2006
            
            City
      of Philadelphia
            2003-2006New
      York
            2003-2006





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
              January
      31,
            
            
            Six
      Months Ended
              January
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income (loss)
            
            $
            (1,249
            )
            
            $
            2,539
            
            
            $
            (2,336
            )
            
            $
            2,922Changes
      in fair value of cash flow hedges
            
            
            95
            
            
            
            (131
            )
            
            
            883
            
            
            
            (2,728
            )Comprehensive
      income (loss)
            
            $
            (1,154
            )
            
            $
            2,408
            
            
            $
            (1,453
            )
            
            $
            194




Accumulated
other comprehensive income (loss) included in stockholders’ equity totaled $60
and $(823) at January 31, 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.




Accounts
Receivable, Net




Accounts
receivable, net, is comprised of the following:


January
      31,
              2008
            
            
            July 31,
              2007Billed
            
            $
            61,355
            
            
            $
            44,693Unbilled
            
            
            25,780
            
            
            
            24,96387,135
            
            
            
            69,656Less
      allowance for doubtful accounts
            
            
            (14,220
            )
            
            
            (4,425
            )Accounts
      receivable, net
            
            $
            72,915
            
            
            $
            65,231




6
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except Per Share Amounts)
 (Unaudited)




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.




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 fiscal year 2008, and the
adoption had no impact 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
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
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.




Note
2. Liquidity




The
Company believes that it will require additional capital resources in
fiscal 2008 to: (1) meet its credit facility requirement to have $10
million in excess availability at all times on and after July 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.




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.




7
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except Per Share Amounts)
 (Unaudited)


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
              January 31,
            
            
            Six
      Months Ended
              January 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Numerator:Net
      income (loss)
            
            $
            (1,249
            )
            
            $
            2,539
            
            
            $
            (2,336
            )
            
            $
            2,922Net
      income (loss) applicable to common stock —basic and
diluted
            
            $
            (1,249
            )
            
            $
            2,539
            
            
            $
            (2,336
            )
            
            $
            2,922Denominator:Weighted-average
      outstanding common shares — basic
            
            
            30,397
            
            
            
            29,687
            
            
            
            30,391
            
            
            
            29,663Effect
      of stock options
            
            
            —
            
            
            
            34
            
            
            
            —
            
            
            
            30Weighted-average
      outstanding common shares — diluted
            
            
            30,397
            
            
            
            29,721
            
            
            
            30,391
            
            
            
            29,693




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.




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




8
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except Per Share Amounts)
 (Unaudited)


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) (“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 January 31, 2008 and July 31, 2007 related to cash flow hedges are summarized
in the following table:




January
      31,
              2008
            
            
            July
      31,
              2007Current
      assets
            
            $
            60
            
            
            $
            —Current
      liabilities
            
            
            —
            
            
            
            (671
            )Deferred
      gains/(losses)
            
            
            —
            
            
            
            (152
            )Hedge
      ineffectiveness
            
            
            —
            
            
            
            —Accumulated
      other comprehensive income (loss)
            
            $
            60
            
            
            $
            (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 three and six months
ending January 31, 2008, the impact of financial derivatives accounted for as
mark-to-market resulted in a gain of $386 and a loss of $17, respectively, and
resulted mostly from economic hedging related to the Company’s natural gas
portfolio. The notional value of all derivatives accounted for as mark-to-market
which was outstanding at January 31, 2008 was $5,821.




As of
January 31, 2008, the Company had $60 of derivative assets included in Prepaid
expenses and other, and $0 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 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 Facility is currently limited by a
calculated borrowing base consisting of the Company’s receivables and natural
gas inventories. As of January 31, 2008, letters of credit issued under the
facility totaled $12.0 million, and outstanding borrowings were $3.0
million. Fees for letters of credit issued range from 1.75 to 2.00 percent
per annum, depending on the level of excess availability, as defined in the
Facility. We also pay an unused line fee equal to 0.375 percent of the
unutilized credit line. Generally, outstanding borrowings under the Facility are
priced at a domestic bank rate plus 0.25 percent or LIBOR plus
2.75 percent.




The
Facility contains typical covenants, subject to specific exceptions, restricting
the Company from: (i) incurring additional indebtedness; (ii) granting
certain liens; (iii) disposing of certain assets; (iv) making certain
restricted payments; (v) entering into certain other agreements; and
(vi) making certain investments. The 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.


9
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except Per Share Amounts)
 (Unaudited)




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 becomes and remains $10 million. It also eliminated the eligible cash
collateral covenant which previously required keeping $10 million cash on
deposit. The amendment revised the fixed charge coverage ratio, added
minimum EBITDA requirements and extended the maturity of the Facility from June
2009 to June 2010.




The most
recent amendment (the Seventh Amendment) was executed on March 12, 2008. This
Amendment 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
Amendment also changes 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 now
range 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
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 twelve month period ending on
August 31, 2008 and for the twelve month period ending on the last day of each
month thereafter. 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 on the last day of each month thereafter. In addition, the
Capital Expenditure covenant was changed to increase from $5 million to $6
million the amount of Capital Expenditures allowed in any fiscal
year.


At
January 31, 2008, the Company had approximately $8.3 million of usable credit
availability under the 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, a 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 January 31, 2008, Tenaska
had extended approximately $11.2 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.




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


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
January 31, 2008, Pacific Summit had extended approximately
$5.7 million of trade credit to the Company under this
arrangement.




Note
9. Settlement Agreement




Lawrence
Clayton, Jr.




In
November 2007, the Company entered into a Settlement Agreement with Lawrence
Clayton, Jr., its former Senior Vice President, Chief Financial Officer and
Secretary. The Settlement Agreement provided for the Company to make a
lump-sum settlement
payment to Mr. Clayton of $400 in January 2008 and for the parties to mutually
release all claims against each other. Of the aggregate amount of the settlement
payment, all but $120 was covered by insurance. Subsequent to Mr. Clayton’s
departure from the Company, we remitted payment to Mr. Clayton for the
repurchase of his 30,000 shares of restricted stock for par value per share
pursuant to the terms of his restricted stock agreement and all shares were
forfeited.




Note
10. Subsequent Events




Resignation
of Steven S. Boss




On
February 20, 2008, Steven S. Boss resigned as Chief Executive Officer, or CEO,
an employee and as a Director of the Company, as well as an employee, an officer
and a director of all of the Company’s subsidiaries and
affiliates.  On the same date, the Company and Mr. Boss entered into a
Separation Agreement and General Release with Mr. Boss (the “Separation
Agreement”), which become effective February 28, 2008 (the “Effective Date”).
Pursuant to the Separation Agreement, as amended, Mr. Boss is entitled to (i) a
severance payment of $446 equal to thirteen (13) months of Mr. Boss’ base salary
as of the resignation date, paid in a lump sum March 11, 2008, and (ii) to
retain his group health coverage under COBRA for thirteen months at the
Company’s expense.




Under the
Separation Agreement, the Company also agreed to repurchase 75,000 shares of
unvested restricted Common Stock held by Mr. Boss, pursuant to the terms of the
Company’s 1999 Equity Incentive Plan at par value per share, with payment for
the repurchase being credited from the severance payment. The share repurchase
will reduce previously recognized compensation costs of $26 in the third quarter
of fiscal 2008. In addition, Mr. Boss agreed to sell to the Company 166,000
shares of Common Stock owned by him for a price of $1.26 per share, or $209 in
the aggregate. The stock transaction closed March 3, 2008.




Appointment
of Gregory L. Craig as Chairman and Chief Executive Officer




On
February 20, 2008, the Board of Directors of the Company appointed Gregory L.
Craig as the Company’s Chairman of the Board, Chief Executive Officer and a
Class III Director. Pursuant to an employment agreement with Mr. Craig dated
February 20, 2008 (the “Employment Agreement”), Mr. Craig will receive an annual
base salary of $450 and is eligible to participate in all executive bonus and
compensation plans of the Company, including the Bonus Program. In connection
with his employment, Mr. Craig was granted on February 20, 2008 a non-qualified
stock option to purchase 250,000 shares of Common Stock (the “Option”) at an
exercise price equal to $1.26 per share, equal to 100% of the fair market value
of a share of Common Stock on the date of grant, as defined in the Company’s
2006 Stock Incentive Plan. The Option was fully vested on the date of grant. Mr.
Craig also was awarded on February 20, 2008, 500,000 shares of restricted stock,
300,000 shares of which vested on the date of the award, with the remaining
200,000 shares vesting in two equal installments of 100,000 shares each on the
next two anniversary dates of the award. Stock-based compensation expense for
Mr. Craig’s stock option and restricted stock grants will be approximately $580
in the third quarter of fiscal 2008. The Employment Agreement has no specific
term and is subject to termination by either the Company or Mr. Craig without
cause upon 60 days written notice.




In the
event of a change in control (as defined in the Employment Agreement), Mr. Craig
will be entitled to receive a sale bonus in an amount equal to two percent (2%)
of the amount by which the Company’s market capitalization on the date of the
Change in Control exceeds $91.1 million.


11
 COMMERCE
ENERGY GROUP, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
 (Dollars
In Thousands, Except Per Share Amounts)
 (Unaudited)




Appointment
of Michael J. Fallquist as Chief Operating Officer




On March
7, 2008, the Board of Directors appointed Michael J. Fallquist as the Company’s
Chief Operating Officer, effective March 10, 2008. Pursuant to an employment
agreement dated March 10, 2008, Mr. Fallquist will receive an annual salary of
$225 and is eligible to participate in all executive bonus and compensation
plans of the Company, including the Bonus Program.
  In
connection with Mr. Fallquist's employment, the Compensation Committee of the
Company, comprised of all independent directors, intends to grant, as soon as
the application to list 375,000 additional shares of the Company's common stock
is approved by the Amex, to Mr. Fallquist, an individual not previously an
employee or director of the Company, an option to purchase 125,000 shares of the
Company's common stock at a per share price equal to the last sale price of a
share of common stock on the date of grant, and award to Mr. Fallquist 250,000
shares of restricted stock. The option will vest in full on the date of grant
and will have a term of six years and the shares of restricted stock will vest
150,000 on the date of the award with the remaining shares vesting in equal
50,000 share increments on each of the first and second anniversary dates of the
award. To the extent that Mr. Fallquist voluntarily resigns without good reason
within the first twelve months of employment, he will be obligated to return to
the Company the 150,000 restricted shares, or if he sold such shares, the
proceeds of the sale.
  The
option and the restricted shares will be issued to Fallquist as awards under an
exemption from an Amex Rule which requires that officers, directors, employees,
or consultants of companies may only acquire options or stock from option and
equity compensation plans which have been approved by the stockholders. Because
there were not a sufficient number of shares of common stock left in the
Company's 2006 Stock Incentive Plan, the Board approved a special Incentive Plan
for Mr. Fallquist with a maximum of 375,000 shares to accommodate the
above-referenced proposed option and restricted stock awards. Using this Amex
exemption, no stockholder approval is required for the Company to issue these
shares to Fallquist.





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 capital;
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 effect us;
increased competition; our ability to retain key members of management; our
ability to address changes in laws and regulations; our ability to successfully
integrate businesses or customer portfolios that we may acquire; our ability to
obtain and retain credit necessary to profitably support our operations; adverse
state or federal legislation or regulation or adverse determinations by
regulators; and other factors identified from time to time in our filings with
the Securities and Exchange Commission, 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 January
31, 2008, we delivered electricity to approximately 126,000 customers in
California, Maryland, Michigan, New Jersey, Pennsylvania and Texas; and natural
gas to approximately 49,000 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
expense was a significant expense for the Company again for the second quarter.
Bad debt expense increased as the





13
 Company
added customers in key markets and did not upgrade its back office systems
rapidly enough to make collection calls to customers within a short period of
the balance becoming delinquent, require deposits for customers with low credit
scores and strengthen electronic data interfaces (“EDI”) to efficiently process
larger transaction volumes. Bad debt expense increased as the Company’s accounts
receivable agings deteriorated reaching $3,700 and $6,200 in the first and
second quarter 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. Accordingly, we anticipate future bad debt expense
will trend toward historical levels, with the third and fourth quarters of
fiscal 2008 still projected to be generally higher than average amounts.
However, there can be no assurance that future bad debt expense will not
fluctuate due to regulatory conditions, general economic conditions, or other
unforeseen events.


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 January 31, 2008 Compared to Three Months Ended January 31,
2007




The
following table summarizes the results of our operations for the three months
ended January 31, 2008 and 2007 (dollars in thousands):




Three Months Ended January
    31,2008
            
            
            2007Dollars
            
            
            % Revenue
            
            
            Dollars
            
            
            % RevenueRetail
      electricity sales
            
            $
            68,835
            
            
            
            64
            %
            
            $
            50,810
            
            
            
            55
            %Natural
      gas sales
            
            
            39,557
            
            
            
            36
            %
            
            
            41,834
            
            
            
            45
            %Net
      revenue
            
            
            108,392
            
            
            
            100
            %
            
            
            92,644
            
            
            
            100
            %Direct
      energy costs
            
            
            89,126
            
            
            
            82
            %
            
            
            78,112
            
            
            
            84
            %Gross
      profit
            
            
            19,266
            
            
            
            18
            %
            
            
            14,532
            
            
            
            16
            %Selling
      and marketing expenses
            
            
            4,260
            
            
            
            4
            %
            
            
            2,607
            
            
            
            3
            %General
      and administrative expenses
            
            
            15,973
            
            
            
            15
            %
            
            
            9,637
            
            
            
            10
            %Income(loss)
      from operations
            
            $
            (967
            )
            
            
            (1
            %)
            
            $
            2,288
            
            
            
            3
            %




14


Net
revenue




The
following table summarizes net revenues for the three months ended January 31,
2008 and 2007 (dollars in thousands):




Three Months Ended January
      31,2008
            
            
            2007Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      RevenueRetail
      Electricity Sales:Texas
            
            $
            37,836
            
            
            
            35
            %
            
            $
            18,082
            
            
            
            19
            %Pennsylvania/New
      Jersey
            
            
            11,587
            
            
            
            11
            %
            
            
            10,762
            
            
            
            12
            %California
            
            
            10,863
            
            
            
            10
            %
            
            
            14,071
            
            
            
            15
            %Maryland
            
            
            7,194
            
            
            
            7
            %
            
            
            5,362
            
            
            
            6
            %Michigan
      and Others
            
            
            1,355
            
            
            
            1
            %
            
            
            2,533
            
            
            
            3
            %Total
      Retail Electricity Sales
            
            
            68,835
            
            
            
            64
            %
            
            
            50,810
            
            
            
            55
            %Natural
      Gas Sales:HESCO
      Customers
            
            
            16,956
            
            
            
            16
            %
            
            
            20,169
            
            
            
            22
            %Ohio
            
            
            14,089
            
            
            
            13
            %
            
            
            12,515
            
            
            
            13
            %California
            
            
            7,754
            
            
            
            7
            %
            
            
            6,613
            
            
            
            7
            %Georgia
            
            
            99
            
            
            
            —
            
            
            
            1,628
            
            
            
            2
            %All
      Others
            
            
            659
            
            
            
            —
            
            
            
            909
            
            
            
            1
            %Total
      Natural Gas Sales
            
            
            39,557
            
            
            
            36
            %
            
            
            41,834
            
            
            
            45
            %Net
      Revenue
            
            $
            108,392
            
            
            
            100
            %
            
            $
            92,644
            
            
            
            100
            %




Net
revenues increased $15.7 million, or 17.0%, to $108.4 million for the three
months ended January 31, 2008 from $92.6 million for the three months ended
January 31, 2007. The increase in net revenues was driven primarily by
a 35.5% increase in electricity sales partially offset by a 5.4% decrease
in natural gas sales. Higher retail electricity sales reflects the impact of a
174.5% increase in sales volumes in Texas, due to customer growth that 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 Georgia and to the HESCO customers.




Retail electricity sales
increased $18.0 million to $68.8 million for the three months ended January 31,
2008, from $50.8 million for the three months ended January 31, 2007, reflecting
the impact of an overall 33% increase in sales volume. For the three months
ended January 31, 2008, we sold 598 million kilowatt hours, or kWh, at an
average retail price per kWh of $0.1151, as compared to 448 million kWh sold at
an average retail price per kWh of $0.1134 for the three months ended January
31, 2007.




Natural
gas sales decreased $2.3 million to $39.6 million for the three months ended
January 31, 2008 from $41.8 million for the three months ended January 31, 2007
reflecting the impact of a 7% decrease in sales volumes, partly offset by a 2.2%
increase in average retail sales prices. For the three months ended January 31,
2008, we sold 4.5 million dekatherms, or DTH, at an average retail price per DTH
of $8.79, as compared to 4.9 million DTH, sold at an average retail price per
DTH of $8.54 during three months ended January 31, 2007. For the three months
ended January 31, 2008, sales to the commercial and industrial natural gas
customers acquired in September 2006 totaled $17.0 million on sales volume of
2.2 million DTH at an average sales price of $7.59 per DTH.




We had
approximately 175,000 electricity and natural gas customers at January 31, 2008,
an increase of 7% from 164,000 at January 31, 2007. We had approximately 126,000
electricity and 49,000 natural gas customers at January 31, 2008, as compared to
105,000 and 59,000 at January 31, 2007. A gross increase (of approximately
29,000 electricity customers in Texas and Maryland) more than offset customer
attrition in our California, Pennsylvania/New Jersey and Michigan markets.
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 January 31, 2008 totaled $55.4 million
and $33.7 million for electricity and natural gas, respectively, compared to
$40.4 million and $37.7 million, respectively, for the three months ended
January 31, 2007. Electricity


15
 costs
averaged $0.093 per kWh for the three months ended January 31, 2008 compared to
$0.090 per kWh for the three months ended January 31, 2007. Direct energy costs
for natural gas averaged $7.51 per DTH for the three months ended January 31,
2008 as compared to $7.77 per DTH for the three months ended January 31,
2007.




Gross
Profit




Gross
profit increased $4.7 million, or 32.6% to $19.3 million for the three months
ended January 31, 2008 from $14.5 million for the three months ended January 31,
2007. Gross profit from electricity increased $3.0 million to $13.5 million for
the three months ended January 31, 2008 from $10.4 million for the three months
ended January 31, 2007, reflecting the impact of customer growth in Texas. Gross
profit from natural gas increased $1.7 million to $5.8 million for the
three months ended January 31, 2008, from $4.1 million for the three months
ended January 31, 2007 primarily due to the impact of higher margins in
California and Ohio.




Selling
and Marketing Expenses




Selling
and marketing expenses increased to $4.3 million for the three months ended
January 31, 2008 from $2.6 million for the three months ended January 31,
2007,reflecting
higher third-party sales expenses, increased personnel expenses and higher
advertising costs related to the Company’s expanded customer acquisition
initiatives.




General
and Administrative Expenses




General
and administrative expenses increased to $16.0 million for the three months
ended January 31, 2008 from $9.6 million for the three months ended January 31,
2007. Of the $6.4 million increase, $4.9 million was attributable to an increase
in the bad debt provision, primarily a result of the rapid growth in electricity
revenue in Texas from $18.1 million to $37.8 million. Bad debt expense increased
as the Company added customers in key markets and did not upgrade its back
office systems rapidly enough to make collection calls to customers within a
short period of the balance becoming delinquent, require deposits for customers
with low credit scores and strengthen electronic data interfaces (“EDI”) to
efficiently process larger transaction volumes. The remaining $1.5 million
was attributable to increased personnel costs related to additional
customer service and information technology staff to support the Company’s
growing customer base, increased professional service fees and higher
depreciation and amortization expenses.


Income
Taxes




No
provision for, or benefit from, income taxes was recorded for the three months
ended January 31, 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 January 31, 2008, the Company had net
operating loss carryforwards of approximately $10.9 million and $12.9 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.




Six
Months Ended January 31, 2008 Compared to Six Months Ended January 31,
2007




The
following table summarizes the results of our operations for the six months
ended January 31, 2008 and 2007 (dollars in thousands):




Six Months Ended January
      31,2008
            
            
            2007Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      RevenueRetail
      electricity sales
            
            $
            153,061
            
            
            
            72
            %
            
            $
            105,653
            
            
            
            65
            %Natural
      gas sales
            
            
            60,929
            
            
            
            28
            %
            
            
            57,499
            
            
            
            35
            %Net
      revenue
            
            
            213,990
            
            
            
            100
            %
            
            
            163,152
            
            
            
            100
            %Direct
      energy costs
            
            
            178,336
            
            
            
            83
            %
            
            
            138,563
            
            
            
            85
            %Gross
      profit
            
            
            35,654
            
            
            
            17
            %
            
            
            24,589
            
            
            
            15
            %Selling
      and marketing expenses
            
            
            8,192
            
            
            
            4
            %
            
            
            4,845
            
            
            
            3
            %General
      and administrative expenses
            
            
            29,433
            
            
            
            14
            %
            
            
            17,484
            
            
            
            11
            %Income(loss)
      from operations
            
            $
            (1,971
            )
            
            
            (1
            %)
            
            $
            2,260
            
            
            
            1
            %






16


Net
revenue




The
following table summarizes net revenues for the six months ended January 31,
2008 and 2007 (dollars in thousands):




Six Months Ended January
      31,2008
            
            
            2007Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      RevenueRetail
      Electricity Sales:Texas
            
            $
            86,027
            
            
            
            40
            %
            
            $
            34,812
            
            
            
            21
            %Pennsylvania/New
      Jersey
            
            
            24,571
            
            
            
            12
            %
            
            
            24,976
            
            
            
            15
            %California
            
            
            24,250
            
            
            
            11
            %
            
            
            31,354
            
            
            
            19
            %Maryland
            
            
            15,159
            
            
            
            7
            %
            
            
            6,852
            
            
            
            5
            %Michigan
      and Others
            
            
            3,054
            
            
            
            2
            %
            
            
            7,659
            
            
            
            5
            %Total
      Retail Electricity Sales
            
            
            153,061
            
            
            
            72
            %
            
            
            105,653
            
            
            
            65
            %Natural
      Gas Sales:HESCO
      Customers
            
            
            31,525
            
            
            
            15
            %
            
            
            27,425
            
            
            
            15
            %Ohio
            
            
            17,367
            
            
            
            8
            %
            
            
            15,519
            
            
            
            10
            %California
            
            
            11,088
            
            
            
            5
            %
            
            
            10,635
            
            
            
            7
            %Georgia
            
            
            135
            
            
            
            —
            
            
            
            2,615
            
            
            
            2
            %All
      Others
            
            
            814
            
            
            
            —
            
            
            
            1,305
            
            
            
            1
            %Total
      Natural Gas Sales
            
            
            60,929
            
            
            
            28
            %
            
            
            57,499
            
            
            
            35
            %Net
      Revenue
            
            $
            213,990
            
            
            
            100
            %
            
            $
            163,152
            
            
            
            100
            %




Net
revenues increased $50.8 million, or 31.2%, to $214.0 million for the six months
ended January 31, 2008 from $163.2 million for the six months ended January 31,
2007. The increase in net revenues was driven primarily by a 44.9% increase in
electricity sales and a 6.0% increase in natural gas sales. Higher retail
electricity sales reflects the impact of a 199.3% and an 81.8% 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 Ohio and to the HESCO customers.




Retail
electricity sales increased $47.4 million to $153.1 million for the six months
ended January 31, 2008, from $105.7 million for the six months ended January 31,
2007, reflecting the impact of an overall 45% increase in sales volumes. For the
six months ended January 31, 2008, we sold 1,314 million kilowatt hours, or kWh,
at an average retail price per kWh of $0.1165, as compared to 906 million kWh
sold at an average retail price per kWh of $0.1166 for the six months ended
January 31, 2007.




Natural
gas sales increased $3.4 million to $60.9 million for the six months ended
January 31, 2008 from $57.5 million for the six months ended January 31, 2007
reflecting the impact of a 7.4% increase in sales volumes. For the six months
ended January 31, 2008, we sold 7.5 million dekatherms, or DTH, at an average
retail price per DTH of $8.12, as compared to 7.0 million DTH, sold at an
average retail price per DTH of $8.23 during six months ended January 31, 2007.
For the six months ended January 31, 2008, sales to the commercial and
industrial natural gas customers acquired in September 2006 totaled $31.5
million on sales volume of 4.5 million DTH at an average sales price of $7.04
per DTH.




Direct
Energy Costs




Direct
energy costs for the six months ended January 31, 2008 totaled $124.6 million
and $53.7 million for electricity and natural gas, respectively, compared to
$86.9 million and $51.7 million, respectively, for the six months ended January
31, 2007. Electricity costs averaged $0.095 per kWh for the six months ended
January 31, 2008 compared to $0.096 per kWh for the six months ended January 31,
2007. Direct energy costs for natural gas averaged $7.16 per DTH for the six
months ended January 31, 2008 as compared to $7.40 per DTH for the six months
ended January 31, 2007.




Gross
Profit




Gross
profit increased $11.1 million, or 45.0% to $35.7 million for the six months
ended January 31, 2008 from $24.6 million for the six months ended January 31,
2007. Gross profit from electricity increased $9.7 million to $28.5 million for
the six months ended January 31, 2008 from $18.8 million for the six months
ended January 31, 2007, reflecting the impact of customer growth in Texas and
Maryland. Gross profit from natural gas increased $1.4 million to $7.2 million
for the six months ended January 31, 2008, from $5.8 million for the six months
ended January 31, 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.




17




Selling
and Marketing Expenses




Selling
and marketing expenses increased to $8.2 million for the six months ended
January 31, 2008 from $4.8 million for the six months ended January 31, 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 $29.4 million for the six months ended
January 31, 2008 from $17.5 million for the six months ended January 31, 2007.
Of the $11.9 million increase, $7.6 million was attributable to an increase in
the bad debt provision, primarily a result of the rapid growth in electricity
revenue in Texas from $34.8 million to $86.0 million. In addition, regulatory
changes in Texas surrounding customer credit checking procedures, customer
disconnection processes and billing delays led to an increase in receivable
balances in the first quarter of fiscal 2008. Bad debt expense increased as the
Company added customers in key markets and did not upgrade its back office
systems rapidly enough to make collection calls to customers within a short
period of the balance becoming delinquent, require deposits for customers with
low credit scores and strengthen electronic data interfaces (“EDI”) to
efficiently process larger transaction volumes. The remaining $4.3 million was
attributable to increased personnel costs related to additional customer service
and information technology staff to support the Company’s growing customer base,
higher professional service fees resulting from the Company’s review of its
strategic alternatives, and increased depreciation and amortization
expenses.




Income
Taxes




No
provision for, or benefit from, income taxes was recorded for the six months
ended January 31, 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)January 31, 2008
              
              
              July 31, 2007Cash
      and cash equivalents
              
              $
              5,637
              
              
              $
              6,559Short-term
      borrowings
              
              $
              3,000
              
              
              $
              —Working
      capital
              
              $
              48,002
              
              
              $
              38,863Current
      ratio (current assets to current liabilities)
              
              2.1:1.0
              
              
              1.8:1.0Restricted
      cash
              
              $
              —
              
              
              $
              10,457Letters
      of credit outstanding
              
              $
              12,009
              
              
              $
              19,334




Consolidated
Cash Flows




The
following table summarizes our statements of cash flows for the six months ended
January 31, 2008 and 2007 (in thousands):


Six Months EndedJanuary 31, 2008
            
            
            January 31, 2007Operating
      activities
            
            $
            (12,164
            )
            
            $
            (16,405
            )Investing
      activities
            
            
            (2,215
            )
            
            
            (5,783
            )Financing
      activities
            
            
            13,457
            
            
            
            6,539Net
      decrease in cash and cash equivalents
            
            $
            (922
            )
            
            $
            (15,649
            )




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
2008 to: (1) meet its credit facility requirement to have $10 million in excess
availability at all times on and after July 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.


Cash used in operating
activities for the six months ended January 31, 2008 was $12.2 million, compared
to cash used in operations of $16.4 million in the six months ended January 31,
2007. For the six months ended January 31, 2008, cash used in operating
activities was comprised primarily of a net loss of $2.3 million and an increase
in accounts receivable, net of $7.7 million


18
 (including
a provision of $9.8 million for bad debts) and decreases in inventory of $1.8
million and a decrease in accounts payable of $3.8 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
six months ended January 31, 2007, cash used in operating activities was
comprised primarily of net income of $2.9 million offset by increases in
accounts receivable of $21.7 million (net of provision for bad debts of
$2.2 million) primarily due to the HESCO customer list acquisition and a 19%
increase in other customers, and by an increase of $2.1 million in accounts
payable.


Cash used
in investing activities was $2.2 million for the six months ended January
31, 2008, compared to $5.7 used in investing activities in the six months ended
January 31, 2007. The cash used in investing activities for the six months ended
January 31, 2008, was for upgrades in our key customer billing, risk management
and customer contact platforms. The cash used in the six months ended January
31, 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 six months ended January 31, 2008 was
$13.5million,
comprised of $3.0 million in short-term borrowings under ourCreditFacility, and a $10.5million reduction in restricted
cashprimarily from eliminating the formercovenant under our Credit
Facility requiring us to deposit$10.0 millionin our lender’s account as restricted
collateral. We refer to this covenant as the Restricted Cash Covenant.This compares to $6.5
million provided by financing activities for the six months ended January 31,
2007from reducing restricted cash,
primarily by substituting surety bonds as collateral. The increase in borrowings
was used to meetoperating
needs, primarily to fund accounts receivable growth as discussed
aboveinthe six months ended January 31, 2008.
During the six months ended January 31, 2007 we funded operations with available
cash.




At
January 31, 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 January 31, 2008, we have $5.6 million in deposits
pledged as collateral to our energy suppliers in connection with energy purchase
agreements.




As of
January 31, 2008, cash and cash equivalents decreased to $5.6 million
compared with $6.6 million at July 31, 2007. This decrease of
$1.0 million was used primarily to fund accounts receivable
growth.




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
January 31, 2008, letters of credit issued under the Credit Facility
totaled $12.0 million, and outstanding borrowings were $3.0 million. Fees
for letters of credit issued range from 1.75 to 2.00 percent per annum,
depending on the level of excess availability, as defined in the Credit
Facility. We also pay an unused line fee equal to 0.375 percent of the
unutilized credit line. Generally, outstanding borrowings under the Credit
Facility are priced at a domestic bank rate plus 0.25 percent or LIBOR plus
2.75 percent.




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.




TheSixth 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 becomes and remains
$10 million. It also eliminated the
eligible cash collateral covenant which previously required keeping $10 million
cash on deposit. TheSixth
Amendmentrevised the fixed charge coverage
ratio,added


19
 minimum EBITDA requirementsandextended the
maturity of theCreditFacility from June 2009 to June
2010.


The most
recent amendment (the Seventh Amendment) was executed on March 12, 2008. This
Amendment 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
Amendment also changes 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.
now range 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
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 twelve month period ending on
August 31, 2008 and for the twelve month period ending on the last day of each
month thereafter. 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 on the last day of each month thereafter. In addition, the
Capital Expenditure covenant was changed to increase from $5 million to $6
million the amount of Capital Expenditures allowed in any fiscal
year.
  The
Credit Facility contains typical covenants, subject to specific exceptions,
restricting the Company from: (i) incurring additional indebtedness;
(ii) granting certain liens; (iii) disposing of certain assets;
(iv) making certain restricted payments; (v) entering into certain
other agreements; and (vi) 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 to $3.5 million without the
consent of the Lenders.


Supply
Agreements




Tenaska
Power Services Co.




In August
2005, the Company and Commerce 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 a commercially standard
master power purchase and sale, lockbox, 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. Tenaska has agreed to provide
credit to Commerce in an amount not to exceed $22 million. At January 31,
2008, Tenaska had extended approximately $11.2 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.




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 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 January 31, 2007, Pacific Summit had extended approximately
$5.7 million of trade credit to the Company under this
arrangement.


Contractual
Obligations




As of
January 31, 2008, we had commitments of $39.4 million for energy
purchase, transportation and capacity contracts. These contracts are with
various suppliers and extend through December 2008.


20




Letters
of Credit and Surety Bonds


As of
January 31, 2008, $12.9 million of letters of credit have been issued
to energy suppliers and others under our Credit Facility and $6.0 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, 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.




21


•
            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 Oversight Committee, or
ROC, 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 ROC is comprised
of all key members of senior management and is chaired by the Vice President,
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.




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 55% of our electricity customers
and 42% 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
$5,016,000 decrease in gross profit for power, and an estimated $2,311,000
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.


22




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 January 31, 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-termand 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.




Item
4T. Controls and Procedures.




Not
applicable.




23







PART
II — OTHER INFORMATION







Item
1. Legal Proceedings.




Reference
is made to our Form 10-K for the year ended July 31, 2007, or the Form 10-K, for
a summary of our previously reported legal proceedings. Since the date of the
Form 10-K, there have been no material developments in previously reported legal
proceedings, except as set forth below.




As
previously reported in the Company’s current report on Form 8-K filed with the
SEC on December 4, 2007, the Company entered into a Settlement Agreement with
Lawrence Clayton, Jr., the former Senior Vice President, Chief Financial Officer
and Secretary of the Company on November 29, 2007, which became effective on
December 7, 2007, the eighth day after it was executed. As previously disclosed,
on July 23, 2007, the Company terminated Mr. Clayton’s employment, effective
July 25, 2007.




The
Settlement Agreement was the result of a successful mediation of an outstanding
dispute between Mr. Clayton and the Company relating to the basis for his
termination. The principal relief sought by Mr. Clayton was a lump sum payment
of approximately $1.6 million. The Settlement Agreement provided for the Company
to make a lump-sum settlement payment to Mr. Clayton of $400,000 on January
2, 2008. Of the aggregate amount of the settlement payment, all but $120,000 was
covered by insurance. Each party to the Settlement Agreement agreed to mutual
general releases of all claims that the parties may had against each
other.




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




Item
1A. Risk Factors.




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




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




Based
upon our current cash flow estimates, we have alerted our agent and lenders
under our Credit Facility that we may be out of compliance in fiscal 2008 with
certain financial covenants under our Credit Facility and, similar to other
prior concessions obtained from the lenders; seek a temporary waivers and/or
amendments to provisions of the Credit Facility. At this time, we expect that we
would request the lenders to eliminate or reduce temporarily the required excess
availability provision of $2.5 million. In addition, we also may request other
modifications. There is no assurance that if we need such a waiver or amendment,
our agent and lender will grant it, or if they do grant such a waiver or
amendment, such waiver or amendment will be on terms acceptable to us. Failure
to obtain a needed waiver or an amendment to our Credit Facility would have a
material adverse effect on our business.




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 2008 to meet
the requirement in its Credit Facility to have in excess of $10 million in
excess availability at all times on and after July 1, 2008. The Company also
believes that it will require additional funds to (i) expand its business; (ii)
add liquidity in case energy prices materially and unexpectedly increase; and
(iii) 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 financings or borrowings or curtail our growth
and reduce our assets.  Any equity or debt financing, 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.


24




In 2001,
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.




In the
course of the California Refund Proceeding, FERC has issued dozens of orders.
Most have been taken up on appeal before the United States Court of Appeals for
the Ninth Circuit or the Ninth Circuit, which has issued opinions on some issues
in the last several years. These cases are described below under Lockyer v. FERC
and CPUC v. FERC.




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. 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 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.




25




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




Purchases
of Equity Securities by the Issuer and Affiliated Purchasers




During
the six month period ended January 31, 2008, the Company repurchased 30,000
shares of restricted common stock from a former executive officer of the Company
pursuant to the terms of the Company’s 1999 Equity Incentive Plan as set forth
in the table below:




Period
            
            Total
      number
              of
      shares
              purchased(a)
            
            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 programsFY
      2008November
      1 - 30
            
            
            0
            
            
            
            N/A
            
            
            
            0December
      1 - 31
            
            
            30,000
            
            
            
            $0.001
            
            
            
            0January
      1 - 31
            
            
            0
            
            
            
            N/A
            
            
            
            0Total
            
            
            30,000
            
            
            
            $0.001
            
            
            
            0
            
            
            
            0





(a)
            On
      October 19, 2007, the Company tendered payment to a former executive
      officer to repurchase, at par value per share, all of his 30,000 shares of
      Common Stock in connection with the terms of the Company's 1999 Equity
      Incentive Plan. The repurchase transaction was consummated in December
      2007 in connection with a previously disclosed resolution of certain
      disputes between the parties.




Item
3. Defaults upon Senior Securities.




None.




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




None.






Item
5. Other Information.




On March
12, 2008, the Company, Commerce Energy, Inc., a California corporation and
wholly-owned subsidiary of the Company ("Commerce"), Wachovia Capital Finance
Corporation (Western), a California corporation, as Agent and Lender (the
"Agent"), and The CIT Group/Business Credit, Inc., as Lender, entered into a
Seventh Amendment to Loan and Security Agreement and Waiver (the "Amendment")
amending that certain Loan and Security Agreement dated June 8, 2006, as amended
(the "Credit Facility") by and among the Company, Commerce and Agent.
Capitalized terms not otherwise defined herein have the meaning set forth in the
Credit Facility.
  The
Amendment waives certain 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 Amendment also
revises several provisions of the Credit Facility, including, without
limitation, (i) certain financial covenants and (ii) the pricing of borrowings
and letters of credit.
  Currently,
outstanding borrowings under the Credit Facility are priced at a domestic bank
rate plus 0.25 percent or LIBOR plus 2.75 percent per annum. Letters of credit
fees range from 1.50 to 1.75 percent per annum, depending on the level of excess
availability. The Amendment changes these prices so that each is increased by
one-half of one percent but subject to readjustment back to the prior levels if
at the end of any twelve month period the Company's EBITDA is in excess of
$7,000,000 and its Fixed Charge Coverage Ratio is at least 1.5 to 1 for such
period.
  The Fixed
Charge Coverage Ratio was eliminated for the twelve months ending March, May,
June and July 2008 and, based on the projections delivered to Agent by Company,
the Agent shall then reasonably establish covenant levels for the Fixed Charge
Coverage Ratio for the twelve month period ending on August 31, 2008 and for the
twelve month period ending on the last day of each month
thereafter.
  The minimum EBITDA
covenant was changed and the Company is now required to have $3,500,000 of
EBITDA for the nine months ending April 30, 2008 and $3,600,000 of EBITDA for
the 12 months ending July 31, 2008, instead of $6,000,000 and


26




$7,000,000,
respectively, for such time periods. Based on the projections delivered to the
Agent by the Company, the Agent shall reasonably establish covenant levels for
minimum EBITDA for the twelve month period ending on August 31, 2008 and for the
twelve month period ending on the last day of each month
thereafter.
  In
addition, the Capital Expenditure covenant was changed to increase from
$5,000,000 to $6,000,000 the amount of Capital Expenditures allowed in any
fiscal year.
  Also,
the current Credit Facility requires the Company to deposit, and direct its
customers to deposit, into the Lockbox Account all amounts received or paid,
respectively, if the Company has outstanding Revolving Loans for more than 5
days. The Amendment changes this requirement so that the Company needs only
deposit, and directs its customers to pay, into the Lockbox Account if the
Revolving Loans have been outstanding for more than 15 days.
  The
foregoing summary of the Amendment is not complete and is qualified in its
entirety by reference to the actual Amendment, which is attached hereto as
Exhibit 10.18 and incorporated herein by reference.
  27


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
              Sixth
      Amendment to Loan and Security Agreement, dated November 16, 2007, by and
      among Commerce Energy, Inc., Commerce Energy Group, Inc., Wachovia Capital
      Finance Corporation (Western), as Agent and Lender and The CIT
      Group/Business Credit, Inc., as Lender, previously filed with the SEC on
      November 20, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current
      Report on Form 8-K and incorporated herein by
reference.10.2*
              Settlement
      Agreement and General Release, dated November 29, 2007, by and among
      Commerce Energy, Inc., Commerce Energy Group, Inc. and Lawrence Clayton,
      Jr., previously filed with the SEC on December 4, 2007 as Exhibit 99.1 to
      Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated
      herein by reference.10.3*
              Interim Executive Services Agreement re. C.
      Douglas Mitchell, dated January 14, 2008, previously filed with the SEC on
      January 30, 2008 as Exhibit 99.1 to Commerce Energy Group,
      Inc.’s  Current Report on Form 8-K and incorporated herein by
      reference.10.4*
              Indemnification Agreement dated January 23, 2008
      by and between Commerce Energy Group, Inc. and  C. Douglas
      Mitchell previously filed with the SEC on January 30, 2008 as Exhibit 99.2
      to Commerce Energy Group, Inc.’s Current Report on Form 8-K and
      incorporated herein by reference.10.5*
              Commerce Energy Group, Inc. Bonus Program, as
      Amended and Restated Effective January 25, 2008.10.6*
              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.10.7*
              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.10.8*
              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.10.9*
              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.10.10*
              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.






28




Exhibit
                Number
              Description10.12*
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Rohn 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.10.13*
              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.10.14*
              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.10.15*
              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.10.16*
              Form
      of Stock Option Award Agreement between Commerce Energy Group, Inc. and
      Michael 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.10.17*
              Form
      of Restricted Share Award Agreement between Commerce Energy Group, Inc.
      and Michael 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.10.18
              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, 2008.31.1
              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.





29





SIGNATURES





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





COMMERCE
      ENERGY GROUP, INC.Date:
      March 14, 2008
            By:          /s/GREGORY L. CRAIG
              Gregory L. Craig
              Chairman & Chief Executive
      Officer
              (Principal Executive
      Officer)Date:
      March 14, 2008
            By:           /s/C.
      DOUGLAS MITCHELL
              C. Douglas Mitchell
              Interim Chief Financial
      Officer
              (Principal Financial
      Officer)





30


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
              Sixth
      Amendment to Loan and Security Agreement, dated November 16, 2007, by and
      among Commerce Energy, Inc., Commerce Energy Group, Inc., Wachovia Capital
      Finance Corporation (Western), as Agent and Lender and The CIT
      Group/Business Credit, Inc., as Lender, previously filed with the SEC on
      November 20, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current
      Report on Form 8-K and incorporated herein by
reference.10.2*
              Settlement
      Agreement and General Release, dated November 29, 2007, by and among
      Commerce Energy, Inc., Commerce Energy Group, Inc. and Lawrence Clayton,
      Jr., previously filed with the SEC on December 4, 2007 as Exhibit 99.1 to
      Commerce Energy Group, Inc.’s Current Report on Form 8-K and incorporated
      herein by reference.10.3*
              Interim Executive Services Agreement re. C.
      Douglas Mitchell, dated January 14, 2008, previously filed with the SEC on
      January 30, 2008 as Exhibit 99.1 to Commerce Energy Group,
      Inc.’s  Current Report on Form 8-K  and incorporated
      herein by reference.10.4*
              Indemnification Agreement dated January 23, 2008
      by and between Commerce Energy Group, Inc. and  C. Douglas
      Mitchell previously filed with the SEC on January 30, 2008 as Exhibit 99.2
      to Commerce Energy Group, Inc.’s  Current Report on Form 8-K and
      incorporated herein by reference.10.5*
              Commerce Energy Group, Inc. Bonus Program, as
      Amended and Restated Effective January 25, 2008.10.6*
              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.10.7*
              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.10.8*
              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.10.9*
              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.10.10*
              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.10.11*
              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.10.12*
              Indemnification
      Agreement between Commerce Energy Group, Inc. and Rohn 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.






31


Exhibit
                Number
              Description
 10.13*
              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.10.14*
              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.10.15*
              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.10.16*
              Form
      of Stock Option Award Agreement between Commerce Energy Group, Inc. and
      Michael 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.10.17*
              Form
      of Restricted Share Award Agreement between Commerce Energy Group, Inc.
      and Michael 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.10.18
              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, 2008.31.1
              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.





32







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 January 31,
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:
      March 14, 2008
            By:    /s/GREGORY
      L. CRAIG
              Gregory L. Craig
              Chairman & Chief Executive
      Officer
              (Principal Executive
      Officer)





33


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 January 31,
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:
      March 14, 2008
            By:        /s/C.
      DOUGLAS MITCHELL
              C.
      Douglas Mitchell
              Interim Chief Financial
      Officer
              (Principal Financial
      Officer)




34


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 January 31, 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:
      March 14, 2008
            By:          /s/GREGORY L.
      CRAIG
              Gregory L. Craig
              Chairman & Chief Executive
      Officer
              (Principal Executive
      Officer)





35


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 January 31, 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:
      March 14. 2008
            By:           /s/C.
      DOUGLAS MITCHELL

                C. Douglas Mitchell
                Interim Chief Financial
      Officer
                (Principal Financial
      Officer)





36