EMPLOYMENT AGREEMENT

Exhibit 99.1

EMPLOYMENT AGREEMENT

     This Employment Agreement (“Agreement”) is entered into and effective as of the 1st day of December, 2005 (“Effective Date”) by and between COMMERCE ENERGY GROUP, INC., a Delaware corporation, on behalf of itself and any and all of its subsidiaries (together, the “Company”), and LAWRENCE CLAYTON, JR. (“Executive”).

RECITALS

     A. The Company is in the business of providing a range of diversified energy services (the “Business”).

     B. The Company wishes to employ Executive to serve as its Chief Financial Officer.

     C. Executive wishes to be employed by the Company and to serve in such capacity under the terms and conditions below.

     NOW, THEREFORE, the parties agree as follows:

      1. Position and Duties .

          (a) On December 1, 2005, (“Commencement Date”) Company will employ Executive to serve as its Chief Financial Officer, reporting to Company’s Chief Executive Officer (“CEO”). As Chief Financial Officer, Executive will be responsible for all financial reporting, accounting, finance and risk management functions of the Company, as well as supporting the CEO in implementing a new strategic business plan for the Company, to perform the duties and responsibilities customarily expected to be performed by the chief financial officer of a publicly reporting commercial business entity, and to perform such other duties and functions as are reasonably required and/or as may be prescribed by the CEO or the Company’s Board of Directors (“Board”) from time to time.

          (b) The location of Executive’s employment will be the Company’s headquarters offices in Costa Mesa, California, but Executive from time to time may be required to travel to other geographic locations in connection with the performance of his duties.

      2. Standards of Performance . Executive will at all times faithfully, industriously and to the best of his ability, experience and talents perform all of the duties required of and from him pursuant to the terms of this Agreement. Executive will devote his full business energies and abilities and all of his business time to the performance of his duties hereunder and will not, without the Company’s prior written consent, render to others any service of any kind (whether or not for compensation) that, in the Company’s sole but reasonable judgment, would or might interfere with the full performance of his duties hereunder. Notwithstanding the foregoing, Executive is permitted to spend reasonable amounts of time to manage his personal financial and legal affairs and, with the Company’s consent which will not be unreasonably withheld, to serve on civic, not-for-profit, charitable, or industry boards and advisory committees, provided that such activities, individually and collectively, do not materially interfere with the performance of Executive’s duties hereunder. In no event will Executive engage in any activities that could

reasonably create a conflict of interest or the appearance of a conflict of interest. Executive shall be subject to the Company’s policies, procedures and approval practices, as generally in effect from time to time.

      3. Term . Executive will be employed for no specific term and until terminated pursuant to the terms of this Agreement. Except as otherwise provided in the Agreement, the company and Executive shall each have a right to terminate this Agreement upon sixty (60) days written notice.

      4. Compensation, Benefits and Policies .

          (a) Base Salary . As an annual base salary (“Base Salary”) for all services rendered pursuant to this Agreement, Executive will be paid an initial Base Salary in the gross amount of Two Hundred Seventy-Five Thousand Dollars ($275,000) calculated on an annualized basis, less necessary withholdings and authorized deductions, and payable pursuant to the Company’s regular payroll practices at the time. The Base Salary is first subject to review within the first three months after the end of the fiscal year ending July 31, 2006 (“fiscal 2006”) and, thereafter, subject to periodic review not less frequently than annually within the first three months after the end of the next successive fiscal year, and to increase (but not decrease) as approved by the Compensation Committee of the Board (“Compensation Committee”), or, if the Board desires to approve increases to the Base Salary, the Board, in the sole discretion of the Compensation Committee or the Board, as applicable.

          (b) Incentive Bonus Eligibility .

          (i) For fiscal 2006, Executive is eligible for consideration for an incentive bonus (“Incentive Bonus”), which will be a percent of Base Salary. The target amount of the Incentive Bonus will be determined by the Compensation Committee in discussions with Executive within ninety (90) days after the Commencement Date, and will be tied to the Company’s achievement of financial objectives established by the Board. For the avoidance of doubt, the Incentive Bonus will be payable only if financial objectives established by the Board are achieved.

          (ii) Executive must be employed by the Company as of the last day of any fiscal year to be eligible for consideration for the Incentive Bonus for that fiscal year. The Incentive Bonus will be calculated as of the end of each fiscal year, and payable ninety (90) days thereafter or promptly following the filing of the Company’s Annual Report on Form 10-K, whichever is later.

          (iii) Incentive Bonus eligibility for the Company’s fiscal year ending July 31, 2007 and thereafter will be established as part of any overall executive incentive compensation plan, in which Executive may participate in designing and proposing to the Compensation Committee for its consideration.

     (c)  Stock Options .

          (i) Term Option . On the Commencement Date, the Company shall grant to Executive a non-qualified stock option (the “Term Option”) to purchase 120,000

shares of common stock, par value $0.001 per share, of the Company (the “Common Stock”). The Term Option shall become exercisable as follows: 40,000 shares shall become vested and fully exercisable on each of the first, second and third anniversaries of the Commencement Date. The exercise price per share shall be the greater of (A) Fair Market Value (as defined in this Agreement) or (B) the Cash Value (as defined in this Agreement) of the Common Stock on the Commencement Date, the date of grant.

          (ii) Definition of Fair Market Value . For purposes of this Agreement, “Fair Market Value,” as of any date (the “Determination Date”) means: (a) the closing price of a share of Common Stock on the New York Stock Exchange or the American Stock Exchange (collectively, the “Exchange”), on the Determination Date, or, if shares were not traded on the Determination Date, then on the nearest preceding trading day during which a sale occurred; or (b) if such stock is not traded on the Exchange but is quoted on The Nasdaq Stock Market or a successor quotation system, (1) the last sales price (if the stock is then listed on the Nasdaq National Market) or (2) the mean between the closing representative bid and asked prices (in all other cases) for the stock on the Determination Date as reported by The Nasdaq Stock Market or such successor quotation system; or (c) if such stock is not traded on the Exchange or quoted on The Nasdaq Stock Market but is otherwise traded in the over-the-counter market, the average of the closing bid and asked prices on the Determination Date; or (d) if subsections (a)-(c) do not apply, the fair market value established in good faith by the Board.

          (iii) Definition of Cash Value . For purposes of this Agreement, “Cash Value” as of any date (the “Determination Date”) means the cash value per share of the Company’s Common Stock on the Determination Date, determined by dividing (a) the sum of the Company’s cash, restricted cash and deposits by (b) the number of shares of Common Stock outstanding, in each case as reported in the Company’s most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission.

          (iv) Option Agreements Controlling . The Term Option shall be evidenced by a stock option agreement in substantially the same form as attached hereto as Exhibit A . If a conflict arises between this Agreement and any such option agreement, the option agreement will govern.

          (d) Restricted Stock Award . On the Commencement Date for past services rendered to the Company, the Company shall grant to Executive a stock bonus award in the form of 45,000 restricted shares of Common Stock (the “Restricted Shares”). Such Restricted Shares shall be subject to forfeiture (repurchase right), and shall vest (termination of the repurchase right) as follows: (i) 15,000 of the Restricted Shares shall vest as of the first anniversary of the Commencement Date; (ii) 15,000 of the Restricted Shares shall vest based on achievement of performance targets for fiscal 2007 established by the Compensation Committee for such purpose within ninety (90) days of the beginning of fiscal 2007; and (iii) 15,000 of the Restricted Shares shall vest based on achievement of performance targets for fiscal 2008 established by the Compensation Committee for such purpose within ninety (90) days of the beginning of fiscal 2008. To the extent that performance targets for any fiscal year include Company achievement of financial targets, the determination as to whether Restricted Shares have vested will be

determined by reference to the Company’s audited financial statements for the applicable fiscal year, as set forth in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission with respect to such fiscal year. Executive must be employed as of the first anniversary of the Commencement Date for 15,0000 Restricted Shares to vest as of that date, and further must be employed as of the last day of any fiscal year for Restricted Shares to vest with respect to that fiscal year. The restricted stock grant shall be evidenced by a restricted stock agreement in the form attached hereto as Exhibit B. If a conflict arises between this Agreement and the restricted stock agreement, the restricted stock agreement will govern.

          (e) Paid Time Off and Benefits . Executive will accrue paid time off for vacation at the rate of four (4) weeks for each year of employment. Except for emergencies or other unanticipated events, the days selected for Executive’s vacation must be mutually agreeable to the Company and to Executive. Executive will accrue paid time off for illness pursuant to the Company’s regular policies. In addition, Executive is entitled to participate in any plans regarding benefits of employment, including pension, profit sharing, group health, disability insurance and other employee welfare benefit plans now existing or hereafter established to the extent that Executive is eligible under the terms of such plans and if the other executive officers of the Company generally are eligible to participate in such plan. The Company may, in its sole discretion and from time to time, establish additional senior management benefit plans as it deems them appropriate. Executive understands that any such plans may be modified or eliminated in the Company’s sole discretion in accordance with applicable law.

          (f) Relocation Payment; Reimbursement of Relocation Costs . The Company will provide Executive with a relocation payment in the amount of $20,000 for incidental costs associated with his relocation, which incidental costs need not be supported by documentation. In addition, upon submission of documentation acceptable to the Company, the Company will reimburse Executive for expenses incurred in connection with Executive’s relocation to a reasonable commuting distance from the Company’s headquarters office, up to a maximum of $80,000 (for a combined total possible relocation amount of $100,000); provided, however, that if the documented relocation expense was not incurred prior to or more than twelve (12) months after the Commencement Date, and, provided further, that Executive is not related by blood or marriage to any person who is the provider or an employee of the provider of any service or facility to which the documented relocation expense relates. The documented relocation expense reimbursement under this subsection (f) shall cover such items as real estate commissions paid by Executive in connection with the sale of the Texas residence owned by Executive, and closing costs for the purchase by Executive of a primary residence within a reasonable commuting distance on the Company’s headquarters office; rent for temporary housing in Southern California; reasonable costs associated with roundtrip travel by Executive and his spouse related to house hunting and/or relocation; and reasonable costs associated with the moving and storage of Executive’s household goods.

          (g) Reimbursement of Business Expenses . The Company will promptly reimburse to Executive his reasonable, customary and documented out-of-pocket business expenses, including cellular telephone expenses, in connection with the performance of his duties under this Agreement, and in accordance with the policies and procedures established by the Company.

          (h) Sarbanes-Oxley Act Loan Prohibition. To the extent that any Company benefit, program, practice, arrangement or this Agreement would or might otherwise result in Executive’s receipt of an illegal loan (the “Loan”), the Company shall use commercially reasonable efforts to provide Executive with a substitute for the Loan that is lawful and of at least equal value to Executive. If this cannot be done, or if doing so would be significantly more expensive to the Company than making the Loan, the Company need not make the Loan to Executive or provide him a substitute for it.

      5. Termination of Employment .

          (a) By Company Without Cause . The Company may terminate Executive’s employment without Cause (as defined in this Agreement) effective on sixty (60) days’ written notice. In such event and subject to the other provisions of this Agreement, Executive will be entitled to:

          (i) continued coverage under the Company’s benefit plans through the termination date;

          (ii) payment of all earned but unpaid compensation (including accrued unpaid vacation) through the effective date of termination, payable on or before the termination date;

          (iii) reimbursement of any monies advanced or incurred by Executive in connection with his Employment for reasonable and necessary Company-related business expenses incurred on or before the termination date;

          (iv) payment of the equivalent of the Base Salary Executive would have earned over the next 12 months (less necessary withholdings and authorized deductions) at his then current Base Salary rate (“Severance Payment”), payable in six (6) equal monthly installments starting on the first business day after six (6) months from the termination date (“Severance Period”);

          (v) at Executive’s option, reimbursement of insurance premiums payable to continue his group health coverage pursuant to the provisions of COBRA for the first twelve (12) months following the termination date; and

          (vi) The number of outstanding unvested stock options and restricted stock previously granted to Executive that would have vested over the twelve (12) month period after such termination as if Executive remained employed by the Company shall vest upon such termination (“Accelerated Vesting”).

Executive shall not receive the payments and benefits under subsections (iv)-(vi), above, unless he signs the severance agreement and general release document attached as Exhibit C . In addition, if Executive accepts other employment within twelve (12) months of the termination date, the Company’s obligation to pay any unpaid portion of the Severance Payment and premiums for continuation of group health insurance coverage will be extinguished as of the date the employment offer is accepted by Executive.

          (b) By Company With Cause . The Company may terminate Executive’s employment at any time and without prior notice, written or otherwise, for Cause. As used in this Agreement, “Cause” shall mean any of the following conduct by Executive: (i) material breach of this Agreement, or of a Company policy or of a law, rule or regulation applicable to the Company or its operations; (ii) demonstrated and material neglect of duties, or failure or refusal to perform the material duties of his position following written notice from the Board and a reasonable opportunity to cure of not less than twenty (20) days, or the failure to follow a reasonable and lawful instruction of the Board following written notice from the Board and an opportunity to cure of at least ten (10) days, unless, in either case, the Board reasonably determines that notice and the opportunity to cure would be impractical or futile; (iii) misconduct, dishonesty, self-dealing, fraud or similar conduct; or (iv) conviction of a crime or plea of guilty or nolo contendere for other than a minor traffic offense. In the event of termination for Cause, Executive will be entitled only to payment of any earned but unpaid compensation (Base Salary and accrued but unpaid vacation) through the termination date, which for purposes of this subparagraph (b) will be the date on which the notice is given. The Company will have no further obligation to pay any compensation of any kind (including without limitation any bonus or portion of a bonus that otherwise may have become due and payable to Executive with respect to the year in which such termination date occurs), or severance payment of any kind nor to make any payment in lieu of notice.

          (c) Incapacity or Death .

               (i) If Executive becomes unable, due to physical or mental illness or injury, to perform the essential duties of his position for more than twelve (12) weeks in any twelve (12) month period during this Agreement with or without reasonable accommodation (“Incapacity”), the Company has the right to terminate Executive’s employment on fifteen (15) days’ written notice. In the event of termination for Incapacity, Executive will be entitled to receive: (A) payment of all earned but unpaid compensation through the effective date of termination, as specified in the notice, and (B) whatever benefits to which he may be entitled pursuant to the Company’s benefit plans; and

               (ii) Executive’s employment pursuant to this Agreement shall be immediately terminated without notice by the Company upon the death of the Executive. If Executive should die while actively employed pursuant to this Agreement, the Company will pay to his estate or designated beneficiaries within sixty (60) days: (A) payment of all earned but unpaid compensation through the date of Executive’s death, and (B) whatever benefits to which he or his estate may be entitled pursuant to the Company’s benefit plans.

          (d) Resignation for Good Reason . Executive may terminate this Agreement for Good Reason (as defined in this Agreement) by giving written notice of such termination, which termination will become effective on the thirtieth day following receipt. As used in this Agreement, “Good Reason” shall mean any one of the following, provided that with respect to (A) and (B) herein, the Company has failed to cure the occurrence within twenty (20) days of receiving written notice from Executive specifying the event or condition constituting the Good Reason and the specific reasonable cure requested by Executive: (A) reduction in Executive’s salary or participation in benefits, except as part of a general change in compensation plans or benefits for all similarly situated executives; (B) any failure by the Company to comply with a

material provision of this Agreement; or (C) within 180 days after a Change of Control (as defined in this Agreement). In the event of resignation for Good Reason, Executive will be entitled to the benefits set forth in subsection (a), above, in the event of termination by the Company without Cause, on the same conditions that apply to those benefits, specifically including, but not limited to, the signing of the severance agreement and general release document, attached as Exhibit C .

               As used in this Agreement, a “Change in Control” shall mean any of the following events:

          (i) the acquisition by any person (as such term is defined in Section 13(c) or 14(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”)), other than (i) a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company or (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities of such entity (an “Affiliate”), of any securities of the Company, immediately after which such Person has beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of more than fifty percent (50%) of (i) the outstanding shares of Common Stock or (ii) the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors;

          (ii) the Company is a party to a merger or consolidation with a person other than an Affiliate which results in the holders of voting securities of the Company outstanding immediately before such merger or consolidation failing to continue to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation; or

          (iii) all or substantially all of the assets of the Company are, in any transaction or series of transactions, sold or otherwise disposed of (other than to an Affiliate);

provided, however , that in no event shall a “Change in Control” be deemed to have occurred for purposes of this Agreement (i) solely because the Company engages in an internal reorganization, which may include a transfer of assets to, or a merger or consolidation with, one or more Affiliates, or (ii) as a result of any transaction or series of transactions that has been approved by the Board.

          (e) Resignation for other than Good Reason . In the event that the Executive resigns for other than Good Reason as defined above in subsection (d), above, Executive will be entitled only to payment of any earned but unpaid compensation (Base Salary and accrued but unpaid vacation) through the termination date. The Company will have no further obligation to pay any compensation of any kind (including without limitation any bonus or portion of a bonus that otherwise may have become due and payable to Executive with respect to the year in which such termination date occurs), or severance payment of any kind.

          (f) Reaffirmation of Confidentiality Promises . As a further condition of Executive receiving the Severance Payment and other benefits under subsections (a)(iv)-(vi), above, Executive must specifically reaffirm the provisions of Section 6 below.

          (g) IRC Section 409A . Notwithstanding anything herein to the contrary, to the extent that either party determines in good faith that any payment pursuant to this Section 5 provides for a “deferral of compensation” under Section 409A of the Internal Revenue Code, as amended (“Section 409A”), the parties will discuss in good faith and thereafter will amend the provisions of this Agreement to preserve the original intent of the Agreement to the extent possible without violating the provisions of Section 409A.

      6. Proprietary Information Obligations .

          (a) Proprietary Information and Confidentiality . Both before and during the term of Executive’s employment, Executive will have access to and become acquainted with Company confidential and proprietary information (together “Proprietary Information”), including but not limited to information or plans concerning the Company’s customer relationships; personnel; sales, marketing and financial operations and methods; trade secrets, formulae, devices; secret inventions; processes; and other compilations of information, records, and specifications. Executive will not disclose any of the Proprietary Information directly or indirectly, or use it in any way, either during the term of this Agreement or at any time thereafter, except as reasonably required or specifically requested in the course of his employment with the Company or as authorized in writing by the Company. Notwithstanding, Proprietary Information does not include information that is otherwise publicly known or available, provided it has not become public as a result of a breach of this Agreement or any other agreement to keep it confidential. It is not a breach of this Agreement for Executive to disclose Proprietary Information pursuant to order of a court or other governmental or legal body. All files, records, documents, computer-recorded or electronic information, drawings, specifications, equipment, and similar items relating to Company business, whether prepared by Executive or otherwise coming into his possession, will remain the Company’s exclusive property and will not be removed from Company premises under any circumstances whatsoever without the Company’s prior written consent, except when, and only for the period, necessary to carry out Executive’s duties hereunder, and if removed, will be immediately returned to the Company on termination of employment, and Executive will keep no copies thereof.

          (b) Inventions Agreement and Assignment .

               (i) Executive hereby agrees to disclose promptly to the Company (or any persons designated by it) all developments, designs, creations, improvements, original works of authorship, formulas, processes, know-how, techniques and/or inventions, hereinafter referred to collectively as “Inventions”) (i) which are made or conceived or reduced to practice by Executive, either alone or jointly with others, in performing his duties during the period of Executive’s employment by the Company, that relate to or are useful in the present or future business of the Company; or (ii) which result from tasks assigned to Executive by the Company, or from Executive’s use of the premises or other resources owned, leased or contracted by the Company.

               (ii) Executive agrees that all such Inventions which the Company in its discretion determines to be related to or useful in its business or its research or development, or which result from work performed by Executive for the Company, will be the sole and exclusive property of the Company and its assigns, and the Company and its assigns will have the right to use and/or to apply for patents, copyrights or other statutory or common law protections for such Inventions in any and all countries. Executive further agrees to assist the Company in every reasonable way (but at the Company’s expense) to obtain and from time to time enforce patents, copyrights and other statutory or common law protections for such Inventions in any and all countries. To that end, Executive will execute all documents for use in applying for and obtaining such patents, copyrights and other statutory or common law protections therefor and enforcing the same, as the Company may desire, together with any assignments thereof to the Company or to persons or entities designated by the Company. Should the Company be unable to secure Executive’s signature on any document necessary to apply for, prosecute, obtain, or enforce any patent, copyright or other right or protection relating to any Invention, whether due to his mental or physical incapacity or any other cause, Executive hereby irrevocably designates and appoints the Company and each of its duly authorized officers and agents as Executive’s agent and attorney-in-fact, to act for and in his behalf and stead, to execute and file any such document, and to do all other lawfully permitted acts to further the prosecution, issuance, and enforcement of patents, copyrights or other rights or protections with the same force and effect as if executed and delivered by Executive. Executive’s obligations under this subsection will continue beyond the termination of Executive’s employment with the Company, but the Company will compensate Executive at a reasonable rate after such termination for time actually spent by Executive at the Company’s request in providing such assistance.

               (iii) Executive hereby acknowledges that all original works of authorship which are made by Executive (solely or jointly with others) within the scope of Executive’s employment which are protectable by copyright are “works for hire,” as that term is defined in the United States Copyright Act (17 USCA, Section 101).

               (iv) Any provision in this Agreement requiring Executive to assign Executive’s rights in any Invention to the Company will not apply to any invention that is exempt under the provisions of California Labor Code Section 2870, which provides:

“(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (2) result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the

provision is against the public policy of this state and is unenforceable.”

          (c) Non-Solicitation, Non-Interference . While employed by the Company, and thereafter for one (1) year following expiration of the Severance Period, Executive agrees not to (i) solicit, attempt to solicit or accept business from, either directly or indirectly, any vendor, customer, client, or supplier of the Company (including affiliates) which has or could reasonably be expected to have a material adverse effect on such vendor’s, customer’s, client’s or supplier’s relationship with the Company; or (ii) induce or attempt to induce any then existing employee or contractor to leave their employment with or service to the Company (including affiliates), or to employ or seek to employ any such person who was employed by or a consultant to the Company during the preceding three (3) months, provided that the latter restriction shall not apply with respect to any person involuntarily terminated by the Company, provided further that this exception shall not release any such person from his/her obligations to the Company (including affiliates).

          (d) Non-competition . Executive agrees that during the term of employment, and for any Severance Period thereafter, he will not, without the Company’s prior written consent, directly or indirectly, be employed by, be connected with, lend his name to or have an interest of any kind in, whether as an employee, consultant, officer, director, partner, stockholder, joint venturer, or otherwise, any person or entity owning, managing, controlling, operating, or otherwise participating or assisting in a Restricted Business. For purposes of this Agreement, Restricted Business is defined as electric retail aggregation. Executive’s agreement not to engage in any Restricted Business covers (i) during his employment by the Company, any location and (ii) after Executive’s employment has ended, any county in which the Company is conducting or specifically planning to conduct business or producing, marketing, distributing or selling any of its products or services; provided, however , that the foregoing is not intended to prevent Executive from being a stockholder of less than one percent of the issued and outstanding securities of a corporation which has a class of securities publicly traded on an exchange, in The Nasdaq Stock Market or in the over-the-counter market.

          (e) Remedies for Breach . Executive acknowledges that any breach by Executive of this Section 6 would cause the Company irreparable injury and damage for which monetary damages are inadequate. Accordingly, in the event of a breach or a threatened breach of this Section 6, the Company will be entitled to seek an injunction restraining such breach. Nothing contained herein will be construed as prohibiting the Company from pursuing any other remedy available to the Company for such breach or such threatened breach. Executive has carefully read and considered these restrictions and agrees they are fair and reasonable restrictions on Executive and are reasonably required for the protection of the interests of the Company. Executive agrees not to circumvent the spirit of these restrictions by attempting to accomplish indirectly what Executive is otherwise restricted from doing directly.

          (f) Return of Materials . In the event of termination of Executive’s employment for any reason, Executive will promptly deliver to the Company all Company equipment (including, without limitation, any cellular phones, beeper/pagers, computer hardware and software, fax machines and other tools of the trade) and all originals and copies of all documents, including without limitation, all books, customer lists, forms, documents supplied by

customers, records, product lists, writings, manuals, reports, financial documents and other documents or property in Executive’s possession or control, which relate to the Company’s business in any way whatsoever, and in particular to customers of the Company, or which may be considered to constitute or contain Confidential Information as defined herein, and Executive will neither retain, reproduce, nor distribute copies thereof (other than copies of Executive’s rolodex or similar address and telephone directories).

      7. Interpretation, Governing Law and Exclusive Forum . The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of California (excluding any that mandate the use of another jurisdiction’s laws). Any arbitration (unless otherwise mutually agreed), litigation or similar proceeding with respect to such matters only may be brought within California, and all parties to this Agreement consent to California’s jurisdiction.

      8. Continuing Obligations . Immediately prior to the Commencement Date, Executive was a consultant to the Company pursuant to the terms of a consulting services agreement (“Consulting Agreement”). In connection with the Consulting Agreement, Executive signed a Confidentiality and Non-Disclosure Agreement (“Confidentiality Agreement”). Executive acknowledges that his obligations under Articles IV(C), V(F) and V(J) of the Consulting Agreement, and his obligations under the Confidentiality Agreement, survive the termination of the Consulting Agreement, which termination was effective at the close of business on November 30, 2005. Executive further acknowledges and agrees that, to the extent there is any conflict between Executive’s promises in Article IV(C) of the Consulting Agreement and/or the Confidentiality Agreement and any promise in this Agreement, the promises that provide the greatest protection to the Company shall control.

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

      10. Severability . In the event that one or more of the provisions contained in this Agreement are held to be invalid, illegal, or unenforceable in any respect by a court of competent jurisdiction, such holding shall not impair the validity, legality or enforceability of the remaining provisions herein.

      11. Successors and Assigns . This Agreement shall be binding upon, and shall inure to the benefit of, Executive and his estate, but Executive may not assign or pledge this Agreement or any rights arising under it, except to the extent permitted under the terms of the benefit plans in which he participates. The Company may not assign this Agreement to any affiliate or successor without Executive’s prior written consent.

      12. Notices . All notices, requests, demands and other communications hereunder shall be in writing and shall be given by hand delivery, facsimile, telecopy, overnight courier service, or by United States certified or registered mail, return receipt requested. Each such notice, request, demand or other communication shall be effective (i) if delivered by hand or by overnight courier service, when delivered at the address specified in this Section 12; (ii) if given

by facsimile or telecopy, when such facsimile or telecopy is transmitted to the facsimile or telecopy number specified in this Section 12 and confirmation is received if during normal business hours on a business day, otherwise, on the next business day; and (iii) if given by certified or registered mail, three days after the mailing thereof. Notices shall be addressed to the parties as follows (or at such other address or fax number as either party may from time to time specify in writing by giving notice as provided herein):

      13. Indemnification and Insurance . The Company will indemnify Executive to the fullest extent permitted by the laws of the State of Delaware, as more fully described in the Indemnification Agreement dated December 1, 2005, the form of which is attached hereto as Exhibit D . While employed by the Company, and thereafter to the extent provided to the Company’s other senior executives, the Company shall, at its cost, provide insurance coverage to Executive at least to the same extent as other senior executive of the Company with respect to (a) officers and directors liability, (b) errors and omissions and (c) general liability. The foregoing rights conferred upon Executive shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or bylaws of the Company, agreement, vote of the stockholders or directors or otherwise.

      14. Dispute Resolution . The parties hereto agree that all disputes, claims or controversies between them and between Executive and any of the Company’s affiliated entities and the successor of all such entities, and any director, shareholder or employee of the Company or its affiliated entities who agrees to the dispute resolution procedures in this Section 14, including any dispute, claim or controversy arising from or otherwise in connection with this Agreement and/or Executive’s employment with the Company, will be resolved as follows:

          (a) Prior to initiating any other proceeding, the complaining party will provide the other party with a written statement of the claim identifying any supporting witnesses or documents and the requested relief. The responding party shall within forty-five (45) days furnish a statement of the relief, if any, that it is willing to provide, and identify supporting witnesses or documents.

          (b) If the matter is not resolved by the exchange of statements of claim and statements of response as provided herein, the parties shall submit the dispute to non-binding

mediation, the cost of the mediator to be paid by the Company, before a mediator and/or service to be jointly selected by the parties. Each party will bear its own attorney’s fees and witness fees.

          (c) If the parties cannot agree on a mediator and/or if the matter is not otherwise resolved by mediation, any controversy or claim arising out of or relating to this Agreement or breach thereof shall be settled by final and binding arbitration in the county in which the Executive last worked, or elsewhere as mutually agreed by the parties, by a single arbitrator pursuant to the Employment Dispute Rules of Judicial Arbitration and Mediation Services, Inc. (“JAMS”), or such other service as the parties may mutually agree upon. The parties may conduct discovery to the extent permitted in a court of law; the arbitrator will render an award together with a written opinion indicating the bases for such opinion; and the arbitrator will have full authority to award all remedies that would be available in court. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party shall bear its own attorney’s fees and costs, unless the claim is based on a statute that provides otherwise. The Company will pay the arbitrator’s fees and any administrative expenses of the arbitration service.

          (d) EXECUTIVE AND THE COMPANY AGREE THAT THIS ARBITRATION PROCEDURE WILL BE THE EXCLUSIVE MEANS OF REDRESS FOR ANY DISPUTES BETWEEN THEM, INCLUDING ANY RELATING TO OR ARISING FROM EXECUTIVE’S EMPLOYMENT WITH THE COMPANY OR TERMINATION THEREFROM, DISPUTES OVER ALLEGEDLY UNPAID WAGES, BREACH OF CONTRACT OR TORT, VIOLATION OF PUBLIC POLICY, RIGHTS PROVIDED BY FEDERAL, STATE OR LOCAL STATUTES, REGULATIONS, ORDINANCES, AND COMMON LAW, LAWS THAT PROHIBIT DISCRIMINATION BASED ON ANY PROTECTED CLASSIFICATION, AND ANY OTHER STATUTES OR LAWS RELATING TO EXECUTIVE’S RELATIONSHIP WITH THE COMPANY. THE FOREGOING NOTWITHSTANDING, CLAIMS FOR WORKERS’ COMPENSATION BENEFITS OR UNEMPLOYMENT INSURANCE, OR ANY OTHER CLAIMS WHERE MANDATORY ARBITRATION IS PROHIBITED BY LAW, ARE NOT COVERED BY THIS ARBITRATION PROVISION. THE PARTIES EXPRESSLY WAIVE THE RIGHT TO A JURY TRIAL, AND AGREE THAT THE ARBITRATOR’S AWARD SHALL BE FINAL AND BINDING ON BOTH PARTIES. THIS ARBITRATION PROVISION IS TO BE CONSTRUED AS BROADLY AS IS PERMISSIBLE UNDER APPLICABLE LAW.

      15. Representations . Each person executing this Agreement hereby represents and warrants on behalf of himself and of the entity/individual on whose behalf he is executing the Agreement that he is authorized to represent and bind the entity/individual on whose behalf he is executing the Agreement. Executive specifically represents and warrants to the Company that: he is not now under any contractual or other obligations that are inconsistent or in conflict with this Agreement or that would prevent, limit or impair Executive’s performance of his obligations under this Agreement.

      16. Amendments and Waivers . No provisions of this Agreement may be modified, waived, or discharged except by a written document signed by Executive and a duly authorized Company officer. Thus, for example, promotions, commendations, and/or bonuses shall not, by themselves, modify, amend, or extend this Agreement. A waiver of any conditions or provisions

of this Agreement in a given instance shall not be deemed a waiver of such conditions or provisions at any other time.

      17. Golden Parachute Limitation . Executive agrees that the payments and benefits under this Agreement, and all other contracts, arrangements or programs that apply to him, shall not, in the aggregate, exceed the maximum amount that may be paid to Executive without triggering golden parachute penalties under Section 280G and related provisions of the Internal Revenue Code, as determined in good faith by the Company’s independent auditors. If any benefits must be cut back to avoid triggering such penalties, Executive’s benefits shall be cut back in the priority order reasonably designated by the Company. If an amount in excess of the limits set forth in this Section 17 is paid to Executive, Executive agrees to repay the excess amount to the Company upon demand. The Company and Executive agree to cooperate with each other in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties with respect to payments or benefits Executive receives.

      18. U.S. Citizenship and Immigration Services . Executive agrees to timely file all documents required by the Department of Homeland Security to verify his identity and lawful employment in the United States.

      19. Withholding Taxes . The Company may withhold from any salary and benefits payable under this Agreement all federal, state, city and other taxes or amounts as shall be determined by the Company to be required to be withheld pursuant to applicable laws, or governmental regulations or rulings.

      20. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute the same instrument.

[SIGNATURE PAGE FOLLOWS]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

EXHIBIT A

STOCK OPTION AGREEMENT
(Nonqualified Stock Option)

     This Stock Option Agreement (this “Agreement”), is entered into effective as of the Grant Date (as defined in paragraph 1), by and between Commerce Energy Group, Inc., a Delaware corporation (the “Company”), and the employee and officer of the Company listed in paragraph 1 (the “Optionee”).

Recitals

     WHEREAS, the Optionee has entered into an Employment Agreement (the “Employment Agreement”) dated as of December 1, 2005 with the Company;

     WHEREAS, the Employment Agreement provides that the Optionee shall be granted an option to purchase 120,000 shares of the Company’s common stock, $0.001 par value per share, upon the commencement of his employment;

     WHEREAS, the grant of stock options reflected by this Agreement is made pursuant to the terms of Section 4(c) of the Employment Agreement;

          WHEREAS, the Company maintains the Commonwealth Energy Corporation 1999 Equity Incentive Plan, as amended (the “Plan”), which is incorporated into and forms a part of this Agreement;

          WHEREAS, the Compensation Committee of the Company’s Board of Directors (the “Board”) administers the Plan with respect to option grants to officers and employees; and

          WHEREAS, the Optionee has been selected by the Committee to receive a non-qualified stock option to purchase shares of the Company’s common stock under the Plan.

Agreement

     1. Terms of Award.

          (a) The following terms used in this Agreement shall have the meanings set forth in this paragraph 1:

               (i) The “Optionee” is Lawrence Clayton, Jr.

               (ii) The “Grant Date” is December 1, 2005.

               (iii) The number of “Option Shares” shall be 120,000 shares of Common Stock.

               (iv) The “Exercise Price” is $1.68 per share.

          (b) Other terms used in this Agreement are defined pursuant to paragraph 14 or elsewhere in this Agreement.

     2.  Award and Exercise Price . This Agreement specifies the terms of the option (the “Option”) granted to the Optionee to purchase the number of Option Shares at the Exercise Price per share as set forth in paragraph 1. The Option is not intended to constitute an “incentive stock option” as that term is used in section 422 of the Code.

     3.  Date of Exercise and Vesting .

          (a) Subject to the limitations of this Agreement, the Option shall be exercisable according to the following schedule, with respect to each installment shown in the schedule on and after the Vesting Date applicable to such installment:

          (b) Upon the Optionee’s termination of employment as a result of Termination by the Company without Cause or by the Optionee for Good Reason, a number of Options shall vest equal to the Options that would have vested over the twelve (12) month period after such termination if the Optionee remained employed by the Company, as long as the Optionee signs the severance agreement and general release document attached to the Employment Agreement.

          (c) An installment shall not become exercisable on the otherwise applicable vesting date if the Optionee’s termination date occurs on or before such vesting date; provided , however , that some or all of such Option Shares may become fully vested and exercisable in the discretion of the Committee. Subject to the provisions of paragraph 4, the Option may be exercised on or after the termination date only as to that portion of the Option Shares as to which it was exercisable immediately prior to the termination date, or as to which it became exercisable on the termination date in accordance with this paragraph 3.

     4.  Expiration .

          (a) The vested portion of the Option shall not be exercisable after the Company’s close of business on the last business day that occurs prior to the Expiration Date.

          (b) The “Expiration Date” shall be earliest to occur of:

               (i) December 1, 2015;

               (ii) if the Optionee’s termination date occurs by reason of death or Incapacity, the one-year anniversary of such termination date;

               (iii) if the Optionee’s termination date occurs for reasons other than death, Incapacity, or Cause, the three month anniversary of such termination date; or

               (iv) the earliest to occur of any of the following events (each a “Corporate Event”): (A) the dissolution or liquidation of the Company or a merger, consolidation or reorganization (including the sale of substantially all of its assets) of the Company with one or more entities, corporate or otherwise, as a result of which the Company is not the surviving entity; or (B) the merger or other reorganization of the Company with one or more entities, corporate or otherwise, as a result of which the outstanding shares of the Common Stock are changed into or exchanged for shares of the capital stock or other securities of another entity or for cash or other property; provided , however , that the Company may, in its discretion, and immediately prior to any Corporate Event, cause a new option to be substituted for this Option or cause this Option to be assumed by a successor entity or a parent or subsidiary of such entity; and such new option shall apply to all shares issued in addition to or substitution, replacement or modification of the shares of Common Stock theretofore covered by this Option.

          (c) Notwithstanding subparagraphs (a) and (b) of this paragraph 4, if the Optionee ceases to be an officer or employee of the Company or a Subsidiary due to Cause, all of the Optionee’s options shall terminate immediately upon such cessation, whether or not then exercisable.

          (d) The Company shall cause written notice to be given to the Optionee of the proposed Corporate Event not less than twenty (20) days prior to the anticipated effective date thereof, for the purpose of affording the Optionee the opportunity to exercise the Option, in accordance with the provisions of this Agreement, effective immediately prior to the consummation of the Corporate Event.

     5.  Method of Option Exercise .

          (a) Subject to the terms of this Agreement and the Plan, the Option may be exercised in whole or in part by filing a written notice(s), in the form attached hereto as Exhibit A, with the Secretary of the Company at its corporate headquarters prior to the Company’s close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Common Stock which the Optionee elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Common Stock indicated by the Optionee’s election. Payment shall be by cash or by check payable to the Company or, where expressly approved for the Optionee by the Committee and where permitted by law:

               (i) by cancellation of indebtedness of the Company to the Optionee;

               (ii) by surrender of shares that either: (A) have been owned by the Optionee for more than six (6) months and have been paid for within the meaning of Rule 144 under the Securities Act of 1933, as amended; or (B) were obtained by the Optionee in the public market;

            &n