Federal Register, Volume 78 Issue 63 (Tuesday, April 2, 2013)[Federal Register Volume 78, Number 63 (Tuesday, April 2, 2013)]
[Notices]
[Pages 19670-19689]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07633]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
RIN 3038-AE01
Order Exempting, Pursuant to Authority of the Commodity Exchange
Act, Certain Transactions Between Entities Described in the Federal
Power Act, and Other Electric Cooperatives
AGENCY: Commodity Futures Trading Commission.
ACTION: Final order.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is exempting certain transactions between entities
described in section 201(f) of the Federal Power Act (``FPA''), and/or
other electric utility cooperatives, from the provisions of the
Commodity Exchange Act (``CEA'' or ``Act'') and the Commission's
regulations, subject to certain anti-fraud, anti-manipulation, and
record inspection conditions. Authority for this exemption is found in
section 4(c) of the CEA.
DATES: Effective date: April 2, 2013.
FOR FURTHER INFORMATION CONTACT: David Van Wagner, Chief Counsel, (202)
418-5481, [email protected], or Graham McCall, Attorney-Advisor,
(202) 418-6150, [email protected], Division of Market Oversight; or
David Aron, Counsel, (202) 418-6621, [email protected], Office of General
Counsel; Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Petition for Relief
B. Summary of Proposed Order
II. Comments Received and Commission Response
A. Clarification With Respect to the Definition of ``Exempt
Entity''
[[Page 19671]]
B. Clarification With Respect to the Definition of ``Exempt Non-
Financial Energy Transaction''
C. Clarification With Respect to the Commission's Right To
Revisit the Terms of the Relief
D. Request That Relief Not Be Conditioned Upon a Reservation of
Jurisdiction Under the Commission's Authority Over Options
Transactions
E. Other Clarification and Comments
1. Clarification With Respect to the Ability of Exempt Entities
To Use Exempt Non-Financial Energy Transactions To Manage Price
Risks
2. Request That Relief Be Retroactive To the Date of Enactment
of the Dodd-Frank Act
3. Request That Relief Be Categorical
III. CEA Section 4(c) Determinations
A. Applicability of CEA Section 4(a)
B. Public Interest and the Purposes of the CEA
C. Appropriate Persons
D. Ability To Discharge Regulatory or Self-Regulatory Duties
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Consideration of Costs and Benefits
1. The Statutory Mandate To Consider the Costs and Benefits of
the Commission's Action: Section 15(a) of the CEA
2. Costs
3. Benefits
4. Consideration of Alternatives
5. Consideration of CEA Section 15(a) Factors
V. Final Order
I. Background
A. Petition for Relief
On June 8, 2012, the Commission received a petition (``Petition'')
from a group of trade associations and other organizations representing
the interests of government and/or cooperatively-owned electric
utilities \1\ requesting relief from the requirements of the CEA \2\
and Commission's regulations issued thereunder,\3\ pursuant to its
exemptive authority under CEA section 4(c),\4\ for certain ``Electric
Operations-Related Transactions'' entered into between certain ``NFP
Electric Entities.''
---------------------------------------------------------------------------
\1\ The Petition was submitted by the National Rural Electric
Cooperative Association, the American Public Power Association, the
Large Public Power Council, the Transmission Access Policy Study
Group and the Bonneville Power Administration (collectively,
``Petitioners''), and is available on the Commission's Web site at
http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nrecaetalltr060812.pdf.
\2\ 7 U.S.C. 1 et seq.
\3\ The Commission's regulations are set forth in title 17 of
the Code of Federal Regulations (``CFR'').
\4\ 7 U.S.C. 6(c).
---------------------------------------------------------------------------
Section 4(c) of the CEA provides the Commission with broad
authority to exempt certain transactions and market participants from
the requirements of the Act in order to ``provid[e] certainty and
stability to existing and emerging markets so that financial innovation
and market development can proceed in an effective and competitive
manner.'' \5\ Importantly, the legislative history notes that the
Commission need not determine whether the product for which an
exemption is sought is within the Commission's jurisdiction prior to
issuing 4(c) relief.\6\ The Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') \7\ added section 4(c)(6) to the
CEA, which builds upon the Commission's existing 4(c) exemptive
authority by providing that the Commission ``shall, in accordance with
sections 4(c)(1) and 4(c)(2), exempt from the requirements of th[e] Act
an agreement, contract, or transaction that is entered into * * *
between entities described in section 201(f) of the Federal Power Act
(16 U.S.C. 824(f)),'' but only ``[i]f the Commission determines that
the exemption would be consistent with the public interest and the
purposes of th[e] Act.'' \8\
---------------------------------------------------------------------------
\5\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213
(``4(c) Conf. Report'').
\6\ The 4(c) Conference Report provides in relevant part that
[t]he Conferees do not intend that the exercise of exemptive
authority by the Commission would require any determination
beforehand that the agreement, instrument, or transaction for which
an exemption is sought is subject to the [CEA]. Rather, this
provision provides flexibility for the Commission to provide legal
certainty to novel instruments where the determination as to
jurisdiction is not straightforward. Rather than making a finding as
to whether a product is or is not a futures contract, the Commission
in appropriate cases may proceed directly to issuing an exemption.
Id. at 3214-15.
\7\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.
\8\ 7 U.S.C. 6(c)(6)(C) (as added by section 722(f) of the Dodd-
Frank Act).
---------------------------------------------------------------------------
Petitioners represented that section 201(f) of the Federal Power
Act (``FPA''), administered by the Federal Energy Regulatory Commission
(``FERC''), provides broad-based relief from most provisions of Part II
of the FPA \9\ for certain government and cooperatively-owned electric
utility companies.\10\ According to Petitioners, Congress recognized
that the same rampant abuses which existed with investor-owned public
utilities and that the Public Utility Act of 1935 and Rural
Electrification Act of 1936 (``REA'') were enacted to combat simply did
not exist with government and consumer-owned electric utilities.\11\
Rather, Petitioners maintain that Congress understood these utilities
to exist as self-regulating, not-for-profit entities with a shared
public service mission of providing reliable, low-cost electric energy
service through the management and operational oversight of elected or
appointed government officials or
[[Page 19672]]
cooperative member/consumers, and thus excluded them from the same
degree of federal oversight as investor-owned public utilities by
promulgating FPA section 201(f).\12\
---------------------------------------------------------------------------
\9\ Per the Petition, Part II of the FPA governs the
transmission of electric energy in interstate commerce, the sale at
wholesale of electric energy in interstate commerce, and the
facilities used for such transmission or sale. See Petition at 15
(citing FPA section 201(b)); Petition Exhibit 1, at 1 (providing the
full text of 16 U.S.C. 824 et seq.). Petitioners represented that
section 201(f) does not, however, provide an exemption from FPA
parts I or III. Part I of the FPA deals with the establishment and
functioning of FERC and the regulation of hydroelectric resources.
See Petition at 15 n.31 (citing 16 U.S.C. 792 et seq.). Part III of
the FPA deals with recordkeeping and reporting requirements and
FERC's procedural rules concerning complaints, investigations, and
hearings. See id. (citing 16 U.S.C. 825 et seq.). Additionally,
section 201(f) does not provide an exemption from FERC's refund
authority, 16 U.S.C. 824e, reliability standards, 16 U.S.C.
824o(b)(1), or jurisdiction over transmission facilities and
services, 16 U.S.C. 824(i)-(j). See Petition at 16-17.
\10\ FPA section 201(f) provides in relevant part that
[n]o provision in [Part II of the FPA] shall apply to, or be
deemed to include, the United States, a State or any political
subdivision of a State, an electric cooperative that receives
financing under the Rural Electrification Act of 1936 (7 U.S.C. 901
et seq.) or that sells less than 4,000,000 megawatt hours of
electricity per year, or any agency, authority, or instrumentality
of any one or more of the foregoing, or any corporation which is
wholly owned, directly or indirectly, by any one or more of the
foregoing, or any officer, agent, or employee of any of the
foregoing acting as such in the course of his official duty, unless
such provision makes specific reference thereto.
Petition at 16 (quoting 16 U.S.C. 824(f)).
\11\ See Petition at 17-18. Petitioners explained that the FPA
was enacted originally ``to remedy rampant abuses in the investor-
owned electric utility industry.'' See Salt River Project Agric.
Improvement and Power District v. Fed. Power Comm'n, 391 F. 2d 470,
475 (D.C. Cir. 1968). Petitioners maintained that of all the major
abuses considered by Congress as the impetus for enacting the FPA,
``virtually none could be associated with the [electric] cooperative
structure where ownership and control is vested in the consumer-
owners.'' Id. at 475. Per the Petition, while FPA section 201(f), as
originally enacted, exempted only government entities, the Federal
Power Commission (``FPC''), FERC's predecessor at the time,
determined that Congress had intended also to exempt electric
cooperatives financed under the REA from the FPC's jurisdiction over
``public utilities.'' See Dairyland Power Coop. et al. v. Fed. Power
Comm'n, 37 F.P.C. 12, 27 (1967). Finally, Petitioners explained that
Congress codified the FPC's interpretation as part of the Energy
Policy Act of 2005 (``EPAct 2005''), as articulated in Dairyland and
affirmed in Salt River, 391 F.2d 470, and further expanded the scope
of FPA section 201(f) by also exempting electric cooperatives that
sell less than 4,000,000 megawatt hours of electricity per month,
regardless of financing under the REA. See Public Law 109-58, 1291,
119 Stat. 594, 985 (2005). Counsel for Petitioners represented that
while Congress did not exempt electric cooperatives that sell in
excess of 4,000,000 megawatt hours of electricity per month due to
EPAct 2005 attempting to focus on issues with large electricity
providers that had caused the 2003 blackouts in the northeast United
States, FERC nonetheless often has allowed non-FPA 201(f)
cooperatives additional regulatory flexibility, subject to ``self-
regulation'' by the cooperatives' member/owner boards.
\12\ See Petition at 17-18, 22 (FPA section 201(f) entities are
``effectively self-regulating'' (quoting Salt River, 371 F.2d at
473)).
---------------------------------------------------------------------------
While CEA section 4(c)(6) prompted the Petitioners to request
relief for FPA section 201(f) entities, Petitioners also sought to
include in their definition of NFP Electric Entities, in accordance
with CEA sections 4(c)(1) and 4(c)(2), any Federally-recognized Indian
tribe and the very small number of electric cooperatives that are not
described by FPA section 201(f). Petitioners argued that FERC has
precedent for treating Federally-recognized Indian tribes as FPA 201(f)
government entities.\13\ Additionally, Petitioners argued that
regardless of whether an electric cooperative is recognized under FPA
section 201(f) by virtue of receiving funding from the Rural Utilities
Service (``RUS'') \14\ or selling less than 4 million megawatt hours of
electricity per year, all cooperatively-owned electric utilities share
certain distinguishing features--a common not-for-profit public service
mission and self-regulating governance model--that form the underlying
rationale for the FPA section 201(f) exemption.\15\
---------------------------------------------------------------------------
\13\ See id. at 20 (citing City of Paris, KY vs. Fed. Power
Comm'n, 399 F.2d 983 (D.C. Cir. 1968); Sovereign Power Inc., 84 FERC
] 61,014 (1998); Confederated Tribes of the Warm Springs Reservation
of Or., a Federally Recognized Indian Tribe, and Warm Springs Power
Enterprises, a Chartered Enter. of the Confederated Tribes of the
Warm Springs Reservation of Or., 93 FERC ] 61,182 at 61,599 (2000)
(concluding that ``the Tribes are an instrumentality of the `United
States, a State or any political subdivision of a state''' and that
Warm Springs Power Enterprises, a Chartered Enterprise of the
Tribes, was entitled to Tribes' Section 201(f) exemption)).
\14\ Per the Petition, the REA established the RUS as the
federal agency to administer financing to rural utilities. See 7
U.S.C. 901 et seq.
\15\ Per the Petition, to be treated as a ``cooperative'' under
Federal tax law, regardless of FPA section 201(f) status, an
electric cooperative must operate on a cooperative basis. See 26
U.S.C. 501(c)(12), 1381(a)(2)(C). Petitioners explained that the
United States Tax Court, in the seminal case of Puget Sound Plywood,
Inc. v. Comm'r of Internal Revenue, held that operating on a
cooperative basis means operating according to the cooperative
principles of (i) democratic member control, (ii) operation at cost,
and (iii) subordination of capital. See 44 T.C. 305 (1965); see also
Internal Revenue Manual Sec. 4.76.20.4 (2006). Additionally, for
any electric cooperative to be exempt from Federal income taxation
pursuant to IRC 501(c)(12), it must collect annually ``85 percent or
more of [its] income * * * from members for the sole purpose of
meeting losses and expenses.'' 26 U.S.C. 501(c)(12)(A). Accordingly,
Petitioners argued that an electric cooperative, regardless of FPA
section 201(f) status, lacks incentive or motivation to manipulate
prices, disrupt market integrity, engage in fraudulent or abusive
sales practices, or misuse customer assets because it: (i) Is a
consumer cooperative; (ii) is controlled by its members; (iii) must
operate at cost and ``not operate either for profit or below cost;''
(iv) may not benefit its individual members financially; and (v) if
exempt from Federal income taxation, must collect at least 85
percent of its income from members.
---------------------------------------------------------------------------
Petitioners limited the relief requested to certain Electric
Operations-Related Transactions that meet defined criteria. The
Petition described seven specific categories of transactions that
traditionally occur between NFP Electric Entities and provided examples
of each: Electric energy delivered, generation capacity, transmission
services, fuel delivered, cross-commodity transactions, other goods and
services, and environmental rights, allowances or attributes.\16\ Under
the Petitioners' proposed definition, Electric Operations-Related
Transactions would not reference any ``commodity'' in the financial
asset class or ``Other Commodity'' asset class that is based upon or
derived from a metal, agricultural product or fuel of any grade not
used for electric energy generation.\17\ In general, Petitioners
represented that all transactions described by the seven categories fit
within their proposed definition of Electric Operations-Related
Transactions and were ``intrinsically related'' to the needs of NFP
Electric Entities ``to hedge or mitigate commercial risks'' which arise
from the entities' public service obligations.\18\ Notably, however,
Petitioners requested categorical relief for ``any other electric
operations-related agreement, contract or transaction to which the NFP
Electric Entity is a party,'' even if such transaction was not
described by one of the Petition's categories, but could be developed
as a new category in the future.\19\
---------------------------------------------------------------------------
\16\ See generally Petition at 6-12, and Exhibit 2.
\17\ See id. at 13.
\18\ See id. at 12.
\19\ See id. at 5, 13.
---------------------------------------------------------------------------
B. Summary of Proposed Order
The Commission published for comment in the Federal Register a
``Proposal To Exempt Certain Transactions Involving Not-for-Profit
Electric Utilities; Request for Comment'' (``Proposed Order'').\20\ The
Proposed Order identified (i) the entities eligible to rely on the
exemption for purposes of entering into an exempt transaction (``Exempt
Entities''); \21\ (ii) the agreement, contract, or transaction for
which the exemption could be relied upon (``Exempt Non-Financial Energy
Transactions''); \22\ and (iii) the provisions of the CEA and
Commission regulations that would continue to apply to Exempt Entities
entering into Exempt Non-Financial Energy Transactions with one
another.\23\
---------------------------------------------------------------------------
\20\ 77 FR 50998 (August 23, 2012).
\21\ Exempt Entities are defined in Section IV.A of the Proposed
Order. See id. at 51012.
\22\ Exempt Non-Financial Energy Transactions are defined in
Section IV.B of the Proposed Order. See id. at 51012-13.
\23\ The conditions the Commission proposed to impose on the
Proposed Order are described in Section IV.C thereof. See id. at
51013.
---------------------------------------------------------------------------
The Commission proposed a definition of Exempt Entities intended to
capture the same scope of entities for which relief was requested by
Petitioners. Generally, these entities included (i) electric facilities
owned by government entities described in FPA section 201(f), (ii)
electric facilities owned by Federally-recognized Indian tribes, (iii)
any cooperatively-owned electric utility treated as a cooperative under
Federal tax laws, and (iv) any other not-for-profit entity wholly-owned
by one or more of the foregoing.\24\ The Proposed Order provided the
caveat that no Exempt Entity could qualify as a ``financial entity'' as
such term is defined in CEA section 2(h)(7)(C).\25\
---------------------------------------------------------------------------
\24\ See id. at 51012.
\25\ See id.
---------------------------------------------------------------------------
The Commission's proposed definition of Exempt Non-Financial Energy
Transaction was narrower in scope than the transaction definition
proposed by Petitioners. Namely, the Commission declined to propose
categorical relief for any transaction not described by one of the
seven categories included in the Petition because the broader
transaction definition is too vague for the Commission to conduct a
considered and robust public interest and CEA purposes analysis under
CEA section 4(c).\26\ Additionally, due to overlap between certain
transaction categories for which both Petitioners requested relief and
the Commission's joint final rule and interpretation with the
Securities Exchange Commission (``SEC'') determined not to be
swaps,\27\ the Commission believed it was unnecessary to provide
additional relief pursuant to CEA section 4(c) for those
[[Page 19673]]
overlapping transaction categories.\28\ Otherwise, the Commission
proposed a definition for Exempt Non-Financial Energy Transactions that
was intended to capture a similar scope of transactions as described in
the Petition, limited in the Proposed Order to Electric Energy
Delivered, Generation Capacity, Transmission Services, Fuel Delivered,
Cross-Commodity Pricing, and Other Goods and Services.\29\
---------------------------------------------------------------------------
\26\ Id. at 51006, n.63. The Commission also declined to propose
Petitioners' secondary requests for i) an additional exempted
transaction category for ``trade options'' and/or ii) delegated
authority to Commission staff to review and approve new categories
of exempted transactions, for the reasons set forth in the Petition.
See id. Also, because the Commission has promulgated a trade option
exemption in Commission regulation 32.3, there was no need to
promulgate a separate trade option exemption for Petitioners, who,
like all other persons whose transactions satisfy the terms of the
trade option exemption, can rely thereon.
\27\ 77 FR 48208 (August 13, 2012) (``Products Release'').
\28\ See Proposed Order at 51008-09. Specifically, the
Commission noted that certain ``Fuel Delivered'' transactions, as
described in Exhibit B of the Petition, would be covered by the
forward exclusion from the swap definition. Id. at 51008 (citing
Products Release, 77 FR 48236). Additionally, the Commission noted
that agreements, contracts, and transaction involving the category
of Environmental Rights, Allowances or Attributes, as specifically
described by the Petition, would be covered by the forward exclusion
from the swap definition. Id. (citing Products Release, 77 FR 48233-
34).
\29\ See id. at 51012-13. Generally, the description of each
category mirrored the descriptions provided in the Petition.
---------------------------------------------------------------------------
Pursuant to CEA section 4(c)(1), the Commission also proposed
conditioning its relief. First, the Commission proposed to reserve its
general anti-fraud, anti-manipulation, and enforcement authority.\30\
Second, the Commission proposed to reserve its general authority to
inspect books and records of Exempt Non-Financial Energy Transactions
already kept in the normal course of business.\31\ The overarching goal
of these proposed conditions would be to allow the Commission to gain
greater visibility with respect to Exempt Non-Financial Energy
Transactions to ensure Exempt Entities' compliance with the terms of
the order, provide a means to ensure that the relief provided in the
order remains appropriate and in the public interest given the
potential that Exempt Non-Financial Energy Transactions may continue to
evolve and their usage otherwise change, and to maintain the ability to
initiate enforcement proceedings against Exempt Entities' found to be
engaged in manipulative, fraudulent, or otherwise abusive trading
schemes when executing Exempt Non-Financial Energy Transactions with
other Exempt Entities.\32\
---------------------------------------------------------------------------
\30\ Id. at 51013 (reserving authority including, but not
limited to, CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d),
6(e), 6c, 6d, 8, 9, and 13, and Commission rules 32.4 and Part 180).
\31\ Id.
\32\ Id. at 51009.
---------------------------------------------------------------------------
Given the scope of the relief contemplated by the Proposed Order as
just described, the Commission was able to make the public interest
determinations required under CEA sections 4(c)(1) and 4(c)(2). In the
Proposed Order, the Commission determined that (i) Exempt Non-Financial
Energy Transactions were innovative products necessary to meet the
unique production, distribution, and usage needs of Exempt Entities
that were constantly changing due to factors beyond their control; \33\
(ii) CEA section 4(a) should not apply to Exempt Non-Financial Energy
Transactions, which were bespoke in nature and conducted in a closed
loop between Exempt Entities, therefore making them unsuitable for
exchange trading and less likely to affect price discovery in
Commission-regulated markets; \34\ (iii) relief for Exempt Non-
Financial Energy Transactions between Exempt Entities was not
inconsistent with the public interest because the transactions were
used to ``manage'' commercial risks arising from electric operations
and facilities, and therefore were not speculative in nature; \35\ (iv)
Exempt Entities were self-regulating, not-for-profit public utilities
with no outside investors or shareholders to profit from transactions,
and as such, were less vulnerable to fraudulent or manipulative trading
activity in accordance with the purposes of the CEA; \36\ (v) Exempt
Entities were ``appropriate persons'' for purposes of 4(c) relief
either by virtue of having been identified explicitly by Congress in
CEA section 4(c)(6)(C) as being eligible for a 4(c) exemption, by being
a government-sponsored entity, and/or otherwise being appropriate due
to sufficient financial soundness and operational capabilities; \37\
and (vi) because of the foregoing, nothing would prevent the Commission
or any contract market from discharging its respective regulatory or
self-regulatory duties under the CEA.\38\
---------------------------------------------------------------------------
\33\ See id.
\34\ See id. at 51010.
\35\ See id.
\36\ See id. at 51011.
\37\ See id. at 51011-12.
\38\ See id. at 51012.
---------------------------------------------------------------------------
In addition to requesting comment on the scope of the relief and
the Commission's 4(c) determinations, the Commission posed specific
questions \39\ related to different aspects of the Proposed Order and
provided a 30-day comment period to respond.
---------------------------------------------------------------------------
\39\ See id. at 51013-14.
---------------------------------------------------------------------------
II. Comments Received and Commission Response
In response to the Proposed Order's Request for Comments, the
Commission received two responses, both of which were generally
supportive. The Electric Power Supply Association and the Edison
Electric Institute, writing together (``Joint Associations''), voiced
general support for the Proposed Order and the Commission's
determinations that the exemption would be in the public interest, and
did not request any clarification or propose any changes.\40\ The
Petitioners also submitted a comment letter which, while approving
overall of the Proposed Order and the Commission's ``appropriate[ ]
implement[ation] [of] Congressional intent,'' requested that any final
relief be clarified ``in certain minor respects to align more closely
with the Congressional intent,'' and that responded directly to the
Commission's specific questions.\41\
---------------------------------------------------------------------------
\40\ Letter from the Electric Power Supply Association and the
Edison Electric Institute, at 1-2 (September 24, 2012) (``Joint
Associations' Letter'') (``The Joint Associations support the
Commission's Proposed 201(f) Exemption and agree that the Proposed
201(f) Exemption is in the public interest.'').
\41\ Letter from the National Rural Electric Cooperative
Association, the American Public Power Association, the Large Public
Power Council, the Transmission Access Policy Study Group and the
Bonneville Power Administration, at 1-2 (September 24, 2012)
(``Petitioners' Letter''). As discussed below, the Petitioners did
not respond directly to the Commission's ``Request for Public
Comment on Costs and Benefits'' of the Proposed Order.
---------------------------------------------------------------------------
Upon careful consideration of the comments received, the Commission
has determined to finalize the Proposed Order, with certain revisions
to the ``Final Order,''\42\ the majority of which are in response to
comments discussed below and subject to the following interpretive
guidance used to clarify the Commission's intent. Unless noted below,
the Commission is finalizing the Proposed Order without change because
it continues to believe that the scope of the Proposed Order is
consistent with the public interest and purposes of the Act.\43\
---------------------------------------------------------------------------
\42\ See infra Section V.
\43\ See Proposed Order at 51006-09.
---------------------------------------------------------------------------
A. Clarification With Respect to the Definition of ``Exempt Entity''
Generally, Petitioners agreed with the scope of entities included
in the definition of Exempt Entity. In response to a question posed by
the Commission,\44\ Petitioners commented that the scope of the Exempt
Entities definition should not be limited further to include only those
electric cooperatives with tax-exempt status under Federal tax law
because ``[t]here is no operational or governance difference between
electric cooperatives
[[Page 19674]]
that are tax exempt under IRC Section 501(c)(12) and those that are
taxable under IRC Section 1381(a)(2)(C).'' \45\ Similarly, in response
to a different question,\46\ Petitioners reiterated their support for
including Federally-recognized Indian tribes within the scope of the
relief for the same reasons that they provided in the Petition.\47\
---------------------------------------------------------------------------
\44\ Specifically, the Commission asked whether it should
``limit the scope of Exempt Entities to only those electric
utilities described by FPA section 201(f),'' and even if not,
``should the Commission still limit the scope of electric
cooperatives included as Exempt Entities to only those cooperatives
with tax exempt status[?]'' Proposed Order at 51013.
\45\ Petitioners' Letter at 9.
\46\ Specifically, the Commission sought comment ``on every
aspect of the Proposed Order as it relates to Indian tribes.''
Proposed Order at 51013.
\47\ Petitioners' Letter at 10-11.
---------------------------------------------------------------------------
The Proposed Order defined Exempt Entities to include not only
those entities described in FPA section 201(f),\48\ but federally-
recognized Indian tribes and non-FPA section 201(f) electric
cooperatives. The Commission accepted Petitioners' representations that
FERC has traditionally treated federally-recognized Indian tribes as
FPA section 201(f) entities due to the similarities they share with
government entities.\49\ The Commission also accepted Petitioners'
representations that non-FPA section 201(f) electric cooperatives, so
long as they are treated as cooperatives under Federal tax law but
regardless of whether they have tax-exempt status, are owned and
operated in the same not-for-profit, self-regulated manner as FPA
section 201(f) cooperatives, and their source of financing or amount of
monthly electricity sold does not affect their sharing with FPA section
201(f) electric cooperatives the same underlying public service mission
of providing affordable, reliable electric energy service to
customers.\50\ Having received no comments challenging the Commission's
determination based upon these representations, the Commission
continues to believe that the scope of Exempt Entities included in the
Proposed Order is consistent with the public interest and purposes of
the Act, and thus is adopting the same general scope of Exempt Entities
in the Final Order.\51\
---------------------------------------------------------------------------
\48\ See Proposed Order at 51006-07.
\49\ See id. at 51007.
\50\ See id.
\51\ With regard to the Commission asking whether an Exempt
Entity should be required to notify the Commission of any change in
status under FPA section 201(f), Proposed Order at 51013, the
Commission notes that the question was only relevant to electric
cooperatives that fall in-and-out of FPA section 201(f) status based
upon the amount of electricity they sell or from whom they receive
financing. The Petitioners stated that such a change in status
``would have no effect on outstanding Exempt Non-Financial Energy
Transactions entered into with Exempt Entities prior to the change
in status.'' Petitioners' Letter at 9. Having further considered the
issue, the Commission confirms its belief that, for the reasons
stated in the adopting release to the Proposed Order, an electric
cooperative's FPA 201(f) status should not be determinative of its
inclusion in the relief provided herein as long as it continues to
meet the criteria for cooperatives as noted herein. Furthermore, the
Commission does not believe that being notified of an electric
cooperative's change in FPA 201(f) status would further any
regulatory purposes under the Act, and therefore is not imposing any
new reporting condition. The Commission is cognizant that any
incentive provided by the Final Order for electric cooperatives to
sell additional electricity and still be covered by the relief could
be negated by the consequence of becoming fully regulated by FERC.
The Commission stresses, however, that to the extent an electric
cooperative no longer meets the criteria for cooperatives provided
in the definition of an Exempt Entity, such electric cooperative may
no longer rely on the relief provided in the Final Order.
---------------------------------------------------------------------------
Petitioners suggested a number of minor revisions to the language
used in defining Exempt Entities in the Proposed Order in order ``to
clearly encompass the appropriate categories of electric entities
discussed in the Petition and elsewhere in the Proposal.'' \52\ For
example, Petitioners suggested clarifying that Exempt Entities can own
either a facility ``or utility'' that is subject to exemption under FPA
section 201(f), and that such a facility or utility should be ``wholly-
owned'' instead of partially-owned by entities that qualify under FPA
section 201(f).\53\ The Commission agrees that the proposed revisions
would help align the Final Order with the Commission's intent as
expressed in the adopting release of the Proposed Order, and has
modified the definition of ``Exempt Entity'' accordingly.\54\
---------------------------------------------------------------------------
\52\ Id. at 3.
\53\ Id.
\54\ The Commission understands that a ``facility'' refers to an
asset used in relation to the generation, transmission and/or
delivery of electricity, whereas a ``utility'' refers to the entity
that owns and/or operates the facility. Additionally, to qualify
under FPA section 201(f) and, by extension, CEA section 4(c)(6)(C),
an electric facility or utility cannot be partially-owned by an
entity not described by FPA section 201(f). Furthermore, the
Commission has clarified in the Final Order that, consistent with
FPA section 201(f), an aggregated entity such as a Joint Power
Administration can own facilities or utilities covered by the
relief, subject to the caveat that the aggregated entity must
consist solely of entities otherwise described as Exempt Entities.
While not explicitly requested, the Commission has deleted the
requirement that Federally-recognized Indian tribes must be
``otherwise subject to regulation as a `public utility' under the
FPA'' to account for the possibility that Indian tribes recognized
by the U.S. government may someday be recognized explicitly under
FPA section 201(f), at which point it could be confusing as to
whether they are covered by the Final Order due to status with FERC
as a public utility.
---------------------------------------------------------------------------
Petitioners also requested that the Commission remove the reference
to ``lowest cost possible'' from clause (iii) in the Proposed Order's
definition of electric ``cooperatives'' that qualify as Exempt Entities
in order ``to recognize that electric cooperatives have operational
objectives in addition to low cost, e.g., electric service reliability
and environmental stewardship.'' \55\ The Petitioners represented that
these are additional public service objectives that all Exempt Entities
share as part of their collective public service mission, in addition
to providing affordable electric energy service.\56\ Additionally,
Petitioners originally maintained that providing electric energy
service at the lowest cost possible may be an operational goal of a
cooperative, and that Federal tax law requires cooperatives to operate
``at cost,'' as opposed to the lowest cost possible.\57\ The Commission
agrees that this is a worthwhile clarification and, accordingly, has
revised the language in clause (iii) of the Proposed Order describing
electric cooperatives included in the definition of Exempt Entity to
make clear that such cooperatives must provide electric energy service
to their member/owner customers ``at cost,'' which the Commission
intends to reflect the lowest cost possible in light of certain
reliability and environmental standards and objectives, among others.
---------------------------------------------------------------------------
\55\ Petitioners' Letter at 4.
\56\ See id.
\57\ See Petition at 26 (defining ``at cost'' as ``return[ing]
excess operating revenues to [the cooperative's] member-patrons,''
which means the cooperative ``must not operate either for profit or
below cost'' (citing Puget Sound Plywood v. Comm'r, 44 T.C. 305,
307-308 (1965)).
---------------------------------------------------------------------------
Lastly, Petitioners requested that the Commission delete the
qualifier, ``not-for-profit,'' from clause (iv) of the Exempt Entity
definition describing entities that are wholly-owned by one or multiple
other Exempt Entities.\58\ The Petitioners noted that ``[e]ach of these
subsidiary or aggregated entities are FPA 201(f) entities because they
are wholly-owned by other FPA 201(f) entities, without regard to tax
status,'' and therefore ``their activities do not benefit entities
outside the `closed loop' of entities'' described in CEA section
4(c)(6)(C).\59\ The Commission agrees that Petitioners' interpretation
is consistent with FPA section 201(f) and CEA section 4(c)(6)(C). FPA
section 201(f) provides that ``any corporation which is wholly owned,
directly or indirectly, by any one or more of the foregoing [entities
described in FPA section 201(f)]'' is exempted under the statute as
well.\60\ Under the Proposed Order, relief is provided for transactions
entered into solely between Exempt Entities, meaning that all exempted
transactions, whether they generate profit or not, are
[[Page 19675]]
for the benefit of facilitating the closed loop's public service
mission. Because it has determined the qualifier to not be necessary,
the Commission has struck the reference to ``not-for-profit'' status in
clause iv) of the Exempt Entity definition.
---------------------------------------------------------------------------
\58\ Petitioner's Letter at 4.
\59\ Id. (noting, as an example, that some Exempt Entities may
have subsidiaries that provide their consumer-members with propane,
on top of the subsidiary's primary electric service obligations).
\60\ See FPA section 201(f), supra note 10.
---------------------------------------------------------------------------
B. Clarification With Respect to the Definition of ``Exempt Non-
Financial Energy Transaction''
Similar to their suggested revisions to the definition of Exempt
Entity, Petitioners suggested a number of minor revisions to the
definition of Exempt Non-Financial Energy Transaction in order to align
the Final Order more closely with Congressional intent. First,
Petitioners requested that the Commission substitute the words ``public
service obligations'' for ``contractual obligations'' in Section IV.B
of the proposed definition to account for the fact that ``Exempt
Entities' obligations to electric customers arise in some cases under
Federal or state law, or under local municipal ordinances or city
charters, under Tribal laws or, for electric cooperatives, under
organizational charters or by-laws, rather than under individual
customer contracts.'' \61\ Next, for the same reasons applicable to the
requested revision of the definition of Exempt Entity, Petitioners
requested that the Commission delete the phrase, ``at the lowest cost
possible,'' when referring to the purpose of engaging in Exempt Non-
Financial Energy Transactions.\62\ Finally, Petitioners requested that
the Commission delete the word ``only'' from the sentence immediately
preceding enumerated transaction categories in Section IV.B of the
proposed definition because it is industry practice to include these
transactions as part of larger commercial agreements or arrangements
that also encompass components not covered by the relief.\63\
Petitioners requested that the Commission not impose upon Exempt
Entities the new burden of having to compartmentalize their commercial
relationships in such a way as to limit certain arrangements to only
those six exempted transaction categories.\64\
---------------------------------------------------------------------------
\61\ Petitioners' Letter at 4.
\62\ Id. at 5.
\63\ Id. at 7 (citing fuel delivery contracts and environmental
commodity and other nonfinancial commodity transactions as examples
of larger agreements, and noting that some such agreements may
include governance or employee sharing provisions that have nothing
to do with operational goods and services).
\64\ Id.
---------------------------------------------------------------------------
The Commission agrees with these suggestions and has revised the
definition of Exempt Non-Financial Energy Transaction accordingly. The
Commission notes, however, that by allowing Exempt Non-Financial Energy
Transactions to be included as part of larger commercial agreements, it
is not providing relief to any other type of transaction or component
of the agreement that is not explicitly defined in the Final Order.
That is, the inclusion of an Exempt Non-Financial Energy Transaction
within a broader commercial agreement does not thereby provide relief
to every transaction included within the entire agreement.
Petitioners also requested certain other clarifications with
respect to the definition of Exempt Non-Financial Energy Transaction.
First, the Commission is confirming that any ``agricultural product or
diesel fuel or [other] grade of crude oil that is used as fuel for
electric generation may be the underlying commodity upon which an
`Exempt Non-Financial Energy Transaction' is based.'' \65\ Next, the
Commission is clarifying that there is no requirement that Exempt Non-
Financial Energy Transactions ``involve only fixed amounts of goods or
services, or fixed time frames or only fixed measures.'' \66\ Rather,
the Commission confirms that the price, duration, quantity and any
other aspect of these transactions may be variable, adjusted or
adjustable during the term of an agreement, contract or transaction, as
is customary for Exempt Non-Financial Energy Transactions.\67\ The
definition in the Final Order has been revised to reflect these two
points.
---------------------------------------------------------------------------
\65\ See Petitioners' Letter at 6-7.
\66\ See id. at 7.
\67\ The Commission notes that the definition of Exempt Non-
Financial Energy Transaction is being revised in the Final Order to
allow for price-hedging transactions, and that contrary to what was
stated in the Proposed Order, some agreements may be variable price
instead of fixed price. See infra Section II.E.1 and note 114 and
accompanying text.
---------------------------------------------------------------------------
Next, the Petitioners' requested certain changes to the proposed
definition of Exempt Non-Financial Energy Transactions regarding what
ultimate purpose the transactions must serve. First, Petitioners
requested that the Commission substitute the words ``related to'' for
``to facilitate'' in Section IV.B of the proposed definition because in
some cases, such as with an agreement to share a generation asset in
order to more cost-effectively comply with environmental standards, the
transaction may ``limit rather than facilitate electric generation,
transmission or distribution operations.'' \68\ Second, Petitioners
requested that the Commission not include the proposed requirement that
Exempt Non-Financial Energy Transactions must be ``intended for making
or taking physical delivery of the commodity upon which the agreement,
contract or transaction is based.'' \69\ Petitioners reiterated their
original request that in issuing any 4(c) relief, the Commission not
determine the regulatory status of any transaction or whether any
transaction involves a ``commodity,'' including a ``nonfinancial
commodity,'' as those terms are defined in the CEA.\70\ Specifically,
Petitioners provided examples of certain transactions that fall within
the defined ``Other Goods and Services'' transaction category in the
Proposed Order, but that ``do not always involve an identifiable,
tangible commodity intended for `delivery,' '' or where it would be
objectively impractical for counterparties, who under an agreement
jointly own and operate transmission facilities, to objectively monitor
``intent'' because there is not a ``single, comprehensive operating
agreement that embodies the relationship.'' \71\
---------------------------------------------------------------------------
\68\ Id. at 5.
\69\ Id.
\70\ See id.
\71\ See id.
---------------------------------------------------------------------------
The Commission has determined to revise the purpose language to
address Petitioners' concerns with the ``intent to physically deliver''
requirement. The amended definition no longer directly modifies an
Exempt Entity's public service obligation as ``facilitating''
generation, transmission and/or delivery of electric energy service,
and no longer includes the ``intent to physically deliver'' language.
Rather, the amended definition provides that an Exempt Non-Financial
Energy Transaction ``would not have been entered into, but for an
Exempt Entities' need to manage supply and/or price risks arising from
its existing or anticipated public service obligations to physically
generate, transmit, and/or deliver electric energy service to
customers.'' \72\
---------------------------------------------------------------------------
\72\ See supra Section IV.B.
---------------------------------------------------------------------------
The effect of the Commission's revisions to the definition should
make it clear that Exempt Non-Financial Energy Transactions do not
necessarily result in an immediate net increase in generation,
transmission, and/or delivery of electric energy for each Exempt Entity
involved. The Commission interprets the Final Order definition, as
amended, in the larger context of an Exempt Entity's public service
obligations, which can include certain reliability, conservation, and
environmental considerations related to their operations and
facilities. Thus,
[[Page 19676]]
under the examples posed in Petitioners' Letter, the need to enter into
a demand-side management agreement or generation facility-sharing
arrangement would still arise from the Exempt Entity's public service
obligations, even if one Exempt Entity is required under the terms of
the agreement to scale back its generation output to comply with
demand-side management programming criteria, or the agreement itself
does not directly result in physical generation, transmission, or
delivery of electric energy service, but instead enables the
fulfillment of physical obligations going forward.
These revisions are based on the Commission's recognition that not
all Exempt Non-Financial Energy Transactions necessarily result in
making or taking physical delivery of the ``commodity'' upon which the
transaction is based, although many will.\73\ As described in the Final
Order, all categories of Exempt Non-Financial Energy Transactions
represent agreements entered into by Exempt Entities in order to manage
price \74\ and/or supply risk resulting from the public service role
they play in physical electricity markets. The Commission stresses that
the revised definition still does not allow for Exempt Non-Financial
Energy Transactions to be purely financial arrangements lacking any
essential relationship to a physical generation, transmission, and/or
delivery obligation of electric energy service to customers.\75\ The
proposed 4(c) public interest determination was premised on Exempt Non-
Financial Energy Transactions not being speculative transactions.\76\
Without requiring more than the ``closed loop'' limitation as advocated
for by Petitioners, the Commission believes that the Exempt Non-
Financial Energy Transaction definition could be interpreted to cover
purely financial transactions capable of being used for speculative
purposes, which would not be in the public interest for the Commission
to exempt.\77\ Thus, the Commission has revised the Final Order
definition to include the ``but for'' language.
---------------------------------------------------------------------------
\73\ With respect to Petitioners' comment that they specifically
requested the Commission to not make any determination as to whether
any Exempt Non-Financial Energy Transaction involves a
``commodity,'' the Commission notes that Petitioners originally
proposed that ``Electric Operations-Related Transactions'' be
defined as ``involving a `commodity' (as such term is defined in the
CEA) * * * .'' See Petition at 4.
\74\ See supra Section II.E.1 (discussing the Commission's
determination to clarify that an Exempt Non-Financial Energy
Transaction can be used to manage the price risk of a commodity
underlying the transaction).
\75\ To emphasize the requirement that Exempt Non-Financial
Energy Transactions be tied to obligations in physical electricity
markets, the Commission has qualified the language in the Final
Order definition to state that Exempt Entities' ``public service
obligations'' are ``to physically generate, transmit, and/or deliver
electric energy service to customers.'' See supra Section IV.B
(emphasis added).
\76\ See Proposed Order at 51010. The Commission explained that
the scope of the proposed definition required that the transaction
would ``contemplate `delivery' of the underlying good or service,''
but that settlement of the transaction could occur in some
circumstances through a financial book-out transaction so long as
the transaction was not intended for speculative purposes. Id. at
51008, n.83 and accompanying text. Without the physical delivery
requirement, the Commission notes that price management transactions
under the Final Order can be financially settled, so long as the
underlying physical commodity is being procured through a
corresponding physical delivery agreement.
\77\ In response to the Commission asking whether the Proposed
Order's definitions would foreclose the possibility of exempt
speculative trading, the Petitioners responded that ``Exempt
Entities do not execute Exempt Non-Financial Energy Transactions for
speculative purposes, but only to hedge or mitigate commercial risks
arising from electric operations.'' Petitioners' Letter at 10. While
the Commission appreciates that Petitioners represent their intent
never will be to use the transactions to speculate, the Commission
also believes it is in the public interest to foreclose the
possibility of such exempt speculative trading activity through
additional limiting language in the definition of Exempt Non-
Financial Energy Transactions.
---------------------------------------------------------------------------
Lastly, while not requested by commenters, the Commission has
further revised the Exempt Non-Financial Energy Transaction definition.
The descriptions of ``Fuel Delivered'' and ``Cross-Commodity Pricing''
transactions have been modified by replacing the operative verb
``include'' with ``consist of.'' While the category description is not
necessarily closed, the Commission notes that the change is intended to
reflect that there are certain characteristics that must be present for
these types of transactions. The ``consist of'' language is consistent
with the other four Exempt Non-Financial Energy Transaction category
descriptions. Additionally, the Commission has added the qualification
that Exempt Non-Financial Energy Transactions are not entered into on
or subject to the rules of a registered entity, submitted for clearing
to a derivatives clearing organization (``DCO''), and/or reported to a
swap data repository (``SDR''). This modification is based on
Petitioners' representation that Exempt Non-Financial Energy
Transactions are not standardized instruments suitable for exchange
trading, clearing, or reporting.\78\ If persons otherwise able to claim
the relief in the Final Order choose to (i) enter into an agreement,
contract or transaction on or subject to the rules of a registered
entity, (ii) submit an agreement, contract or transaction for clearing
to a DCO or (iii) report an agreement, contract or transaction to an
SDR, such an agreement, contract or transaction will be not be an
Exempt Non-Financial Energy Transaction and will be outside the scope
of the Final Order. In such circumstances, such persons, agreements,
contracts or transactions will be subject to the applicable regulatory
regime.
---------------------------------------------------------------------------
\78\ See, e.g., Petition at 6-7 (noting that ``Electric Energy
Delivered'' contracts are not fungible and cannot be described in
electronically reportable formats); Petition at 31 (explaining that
``it is highly unlikely that any [ ] standardized derivatives
trading contracts would contain the same customized economic terms
of any particular [Exempt Non-Financial Energy Transactions]''). The
Commission notes that Petitioners' original proposed transaction
definition stated that the exempted transactions ``shall not include
agreements, contracts or transactions executed, traded, or cleared
on a registered entity * * * .'' See Petition at 5.
---------------------------------------------------------------------------
C. Clarification With Respect to the Commission's Right To Revisit the
Terms of the Relief
Regarding the condition that the Commission reserves the right to
revisit any of the terms and conditions of the exemptive relief,\79\
the Petitioners requested that the Commission clarify that any such
reconsideration would be subject to notice and comment under the
Administrative Procedure Act (``APA'').\80\ The Commission clarifies
that exemptive orders issued pursuant to section 4(c) of the CEA are
subject to ``notice and opportunity for hearing.'' \81\
---------------------------------------------------------------------------
\79\ Proposed Order at 51013.
\80\ Id. at 7-8 (citing the APA, 5 U.S.C. 500 et seq.)
\81\ CEA section 4(c)(1); 7 U.S.C. 6(c)(1) (providing that the
Commission may exempt certain transactions ``after notice and
opportunity for hearing'').
---------------------------------------------------------------------------
D. Request That Relief Not Be Conditioned Upon a Reservation of
Jurisdiction Under the Commission's Authority Over Options Transactions
Petitioners requested that the Commission remove references in the
Proposed Order to CEA section 4c(b) and Commission regulation 32.4 as
non-exclusive provisions being reserved for purposes of conditioning
the relief on the Commission's general anti-fraud, anti-manipulation,
and enforcement authority.\82\ Petitioners noted that the two
``provisions are not part of the general anti-fraud, anti-market
manipulation and enforcement authority, but instead articulate the
Commission's jurisdiction over option transactions.'' \83\
Specifically, Petitioners expressed concern that the references were an
attempt by the Commission ``to
[[Page 19677]]
reserve the right to decide later that it has jurisdiction over [a
``Generation Capacity'' transaction between ``Exempt Entities''] as an
option.'' \84\
---------------------------------------------------------------------------
\82\ Petitioners' Letter at 8.
\83\ Id.
\84\ See id.
---------------------------------------------------------------------------
The Commission has declined to remove the reference to CEA section
4c(b) and Commission regulation 32.4 from the Conditions of the Final
Order. As is standard practice with past exemptive orders issued
pursuant to CEA section 4(c), the Commission reserves its general anti-
fraud and anti-manipulation authority, as well as the ability to
revisit the terms and conditions of the relief at any time and
determine that certain transactions are jurisdictional in order to
execute the Commission's duties and advance the public interests and
purposes of the CEA. The Commission also believes it prudent to reserve
certain scienter-based prohibitions in the Act and Commission
regulations (without finding it necessary in this particular context to
preserve other enforcement authority), and has modified the language in
the Final Order to make the scope of this reservation clear. While
Petitioners are correct that the provisions in question do not
articulate the Commission's general anti-fraud, anti-manipulation and
enforcement authority directly, the provisions exemplify a possible
statutory basis for bringing an enforcement action, were a need to
arise for the Commission to do so, and notes that the inclusion of
these provisions is not intended to bring any transactions under CFTC
jurisdiction for purposes other than enforcement.
The Commission also has determined to add new CEA sections
4s(h)(1)(A) and 4s(h)(4)(A) \85\ and Commission regulations 32.410(a)
and (b) \86\ to the non-exclusive list of provisions that could provide
a possible statutory basis for an enforcement action, as it has done in
a similar proposed exemption for certain regional transmission
organizations (``RTO'') and independent system operators (``ISO'').\87\
The inclusion of CEA sections 4c(b), 4s(h)(1)(A) and 4s(h)(4)(A), and
Commission regulation 32.4, as examples of reserved authority in no way
indicates the Commission's belief that a certain Exempt Non-Financial
Energy Transaction is or could be a commodity option or other type of
swap; to the contrary, consistent with the Commission's interpretation
of the authority contained in section 4(c), the Commission has taken no
position in issuing the Final Order as to the product category or
jurisdictional or non-jurisdictional nature of any of the exempted
transactions.
---------------------------------------------------------------------------
\85\ 7 U.S.C. 6s(h)(1)(A), 6s(h)(4)(A) (as added by the Dodd-
Frank Act section 731). CEA section 4s(h)(1)(A) requires a swap
dealer (``SD'') or major swap participant (``MSP'') to comply with
all Commission rules and regulations related to fraud, manipulation,
and other abusive practices involving swaps, while CEA section
4s(h)(4)(A) makes it unlawful for any SD or MSP acting as an advisor
to employ any deceptive device or scheme to defraud a Special
Entity.
\86\ These regulations prohibit an SD or MSP from perpetrating
fraud, manipulation, or other abusive trading practices on ``Special
Entities,'' as such term is defined in Commission regulation
23.401(c), and provide an affirmative defense against charges of
perpetrating such abusive schemes. See 77 FR 9822-23 (Feb. 17,
2012).
\87\ See 77 FR 52138, 52166 (August 28, 2012) (``Proposed RTO/
ISO Order''). The Proposed RTO/ISO Order exempted certain electric
energy transactions that occur pursuant to a RTO/ISO tariff approved
by the Federal Energy Regulatory Commission, subject to the
Commission's general anti-fraud, anti-manipulation, and enforcement
authority. Similar to the FPA section 201(f) Petitioners, the RTO/
ISO petitioners requested relief pursuant to the Commission's new
authority in CEA section 4(c)(6).
---------------------------------------------------------------------------
Finally, the Commission is adding CEA section 4(d) to the non-
exclusive list of reserved enforcement authority. The Commission
believes it is important to highlight that, as with all exemptions
issued pursuant to CEA section 4(c), the exemption ``shall not affect
the authority of the Commission under any other provision of [the CEA]
to conduct investigations in order to determine compliance with the
requirements or conditions of such exemption or to take enforcement
action for any violation of any provision of [the CEA] or any rule,
regulation or order thereunder caused by the failure to comply with or
satisfy such conditions or requirements.'' \88\
---------------------------------------------------------------------------
\88\ See 7 U.S.C. 6(d).
---------------------------------------------------------------------------
E. Other Clarification and Comments
The Commission is providing further clarification with respect to
the appropriate uses of Exempt Non-Financial Energy Transactions and
responding to other comments made by the Petitioners.
1. Clarification With Respect to the Ability of Exempt Entities To Use
Exempt Non-Financial Energy Transactions To Manage Price Risks
The Commission requested comment on whether Exempt Non-Financial
Energy Transactions, as defined in the Proposed Order, could be used to
hedge price risk in an underlying commodity, and if so, whether the
Commission explicitly should exclude such price-hedging
transactions.\89\ Petitioners responded that they use Exempt Non-
Financial Energy Transactions to `` `hedg[e] or mitigat[e] commercial
risks' arising from electric operations,'' and that commercial risks
include ``both price and availability risks of the nonfinancial
commodities required as fuel for generation or the goods or services
that the entity sells or anticipates selling.'' \90\ If the Commission
explicitly were to exclude price hedging transactions from the scope of
relief, Petitioners argued they would be required to rely on the more
limited end-user exception to clearing for such transactions,\91\ which
Congress could not have intended because it added additional relief
specifically for FPA section 201(f) entities in section 4(c)(6) of the
CEA.\92\
---------------------------------------------------------------------------
\89\ Proposed Order at 51014. In making its public interest
determination in the Proposed Order, the Commission represented that
it understood Exempt Entities to use Exempt Non-Financial Energy
Transactions mainly to manage supply risk, and not price risk, of an
underlying commodity. See id. at 51010. Therefore, the Commission
declined to adopt Petitioners' proposed definition incorporating the
phrase, `` `to hedge or mitigate commercial risks' (as such phrase
is used in CEA Section 2(h)(7)(A)(ii),'' because the Commission
generally did not interpret this phrase to refer to the full scope
of transactions described in the Petition and incorporated into the
Proposed Order through enumerated categories of Exempt Non-Financial
Energy Transactions. Id. at 51007-08, n.81.
\90\ See Petitioners' Letter at 12.
\91\ CEA section 2(h)(7)(A), 7 U.S.C. 2(h)(7)(A) (providing
relief from the clearing and trade execution mandate for swap
transactions entered into where at least one counterparty is not a
financial entity and uses the swap to hedge or mitigate commercial
risk). As Petitioners note, while the end-user exception would
provide some relief for Exempt Non-Financial Energy Transactions,
the transactions ``nonetheless [would be] subject to other
regulatory requirements.'' Petitioners' Letter at 12.
\92\ See id. Petitioners argue that by providing both the
``general end-user exception'' and the ``specific 4(c)(6) public
interest waiver,'' ``Congress clearly intended that that the
Commission waive its jurisdiction over [transactions entered into
between FPA section 201(f) entities], not merely that such entities
would have the end-user exception.'' Id.
---------------------------------------------------------------------------
The Commission is persuaded that Congress intended for the
Commission to consider providing relief for transactions managing price
risk entered into between FPA section 201(f) entities that goes beyond
the relief available through the end-user exception for price hedging
transactions, if in the public interest. Therefore, the Commission has
made explicit in the Final Order definition that the scope of relief
covers transactions entered into not only to manage supply risk arising
from an Exempt Entity's public service obligation to physically
generate, transmit, and/or deliver electric energy service, but also
any price risk associated with an underlying commodity used to
facilitate the public service obligation. The Commission believes that
the overall effect of the revisions to the definition of Exempt Non-
Financial Energy Transaction
[[Page 19678]]
previously discussed \93\ also helps to clarify that the Final Order
clearly covers price-risk management transactions directly related to
an Exempt Entity's public service obligation. The Commission notes,
however, that because these transactions cannot be used for speculative
purposes,\94\ any Exempt Non-Financial Energy Transaction used to
manage the price risk of an underlying commodity must always be
associated with an obligation to make or take physical delivery of that
underlying commodity.\95\
---------------------------------------------------------------------------
\93\ See supra Section II.B.
\94\ As previously noted, the Commission's public interest
determination was premised on an Exempt Entity's inability to use
Exempt Non-Financial Energy Transactions as purely financial
transactions for speculative purposes only. See supra Section II.B.
\95\ The Commission also confirms its determination, as
expressed in the Proposed Order, that Exempt Non-Financial Energy
Transactions entered into solely between Exempt Entities do not
materially impair price discovery in Commission-regulated markets.
See supra Section III.C. In response to the Commission asking
whether there could be any circumstances where it should revisit
this determination and require reporting of swap transactions to a
swap data repository for price transparency purposes, Petitioners
responded by reiterating their argument that because Exempt Non-
Financial Energy Transactions are bespoke and occur within a
``closed loop'' of Exempt Entities, they do not affect price
discovery in Commission-regulated markets. Petitioners' Letter at 9-
10. Petitioners also argued that were FERC to require regulatory
reporting of electric energy transactions entered into by FPA
section 201(f) entities, the nature of the reporting and regulatory
purposes behind requiring such reporting would be very different
from those behind price transparency reporting of swaps as required
by the CEA and Commission regulations. See id. At this time, the
Commission agrees that any incremental regulatory benefit that might
be gained from requiring regulatory reporting of Exempt Non-
Financial Energy Transactions entered into between Exempt Entities
is not necessary for purposes of making the required public interest
determinations in issuing the Final Order, regardless of whether
FERC requires reporting for FPA 201(f) entities in the future.
---------------------------------------------------------------------------
2. Request That Relief Be Retroactive to the Date of Enactment of the
Dodd-Frank Act
The Commission sought comment on whether it should grant
Petitioners' original request for the effective date of any 4(c) relief
issued to be retroactive to the date of enactment of the Dodd-Frank
Act.\96\ Petitioners reiterated their rationale from the Petition that
certain transactions covered by the proposed definition of Exempt Non-
Financial Energy Transactions ``might otherwise require analysis as to
whether they are `historical swaps,' and might otherwise require
reporting by one or the other of the Exempt Entities, both of which are
non-SDs/MSPs under the Dodd-Frank Act.'' \97\ In order to prevent
Exempt Entities from passing along the costs of such historical swap
analysis and reporting to electric energy consumers, the Commission has
provided that the relief in the Final Order applies retroactively to
the date of enactment of the Dodd-Frank Act.\98\ The Commission is
persuaded that the representations made by Petitioners with respect to
the public service obligations of government and cooperatively-owned
not-for-profit electric utility companies and the transactions entered
into to satisfy such obligations apply equally to the period between
the enactment of the Dodd-Frank Act and the issuance of the Final Order
contained herein, and thus the same public interest determinations
support retroactive 4(c) relief.
---------------------------------------------------------------------------
\96\ Proposed Order at 51013.
\97\ Petitioners' Letter at 11.
\98\ CEA section 4(c)(1) provides that the Commission may exempt
any agreement, contract, or transaction ``either retroactively or
prospectively, or both * * *.'' 7 U.S.C. 6(c)(1).
---------------------------------------------------------------------------
3. Request That Relief Be Categorical
In response to the Commission's specific request for comments on
the topic,\99\ Petitioners reiterated their support for the Commission
issuing categorical relief that would apply to all Electric Operation-
Related Transactions, regardless of whether a transaction was described
by one of the six defined categories.\100\ Petitioners interpreted the
``public interest waiver'' codified in CEA section 4(c)(6) as a mandate
to the Commission to exempt all transactions that occur between the
``closed loop'' of FPA section 201(f) entities, and that ``[n]othing in
the statute require[d] the Commission to analyze or categorize [such]
transactions * * * .'' \101\ The Commission rejects this interpretation
of Congressional intent.
---------------------------------------------------------------------------
\99\ Proposed Order at 51013.
\100\ Id. at 11-12.
\101\ Id. Petitioners specifically noted their disagreement with
the Commission's interpretation of CEA section 4(c)(6) ``as
requiring an analysis of, or a limitation on, the transactions or
class of transactions to be exempted * * *.'' Id. at 2, n.5.
---------------------------------------------------------------------------
As acknowledged by Petitioners elsewhere in their comment letter,
Congress intended for all transactions occurring within the closed-loop
of FPA section 201(f) entities to be ``eligible for'' an
exemption,\102\ rather than automatically exempt without further
Commission consideration or action. First, the plain language of CEA
section 4(c)(6) added by the Dodd-Frank Act is unambiguous: Categorical
relief is not mandatory and any relief provided requires an analysis
of, and possible limitation to, the transactions being exempted. The
provision begins with an explicit ``if'' clause pre-conditioning any
relief upon the Commission ``determin[ing] that the exemption would be
consistent with the public interest and purposes of [the] Act.'' \103\
If this determination can be made, the provision then instructs the
Commission to issue relief ``in accordance with'' CEA sections 4(c)(1)
and 4(c)(2), implying that additional analysis and limitations may be
necessary and/or appropriate in the judgment of the Commission.\104\
Second, the Commission notes that the Dodd-Frank Act also amended CEA
section 2(a)(1)(A) to codify the Commission's exclusive jurisdiction
with respect to swap transactions.\105\ Had Congress intended for any
transaction entered into between FPA section 201(f) entities to be
exempt from this exclusive jurisdiction, it could have explicitly
carved out these entities and any transactions occurring between them
as categorically exempt.\106\ Instead, the Commission believes that
Congress explicitly recognized transactions between entities described
in FPA section 201(f) as eligible for a mandatory exemption, subject to
those pre-conditions which the Commission deems appropriate.
---------------------------------------------------------------------------
\102\ See id. at 5.
\103\ CEA section 4(c)(6), 7 U.S.C. 6(c)(6).
\104\ Id.
\105\ See 7 U.S.C. 2(a)(1)(A), as amended by the Dodd-Frank Act
section 722(a). The provision already codified the Commission's
exclusive jurisdiction with respect to commodity futures and options
transactions.
\106\ The Commission notes that such a carve-out would not be
without precedent. See, e.g., CEA section 2(c)(1), 7 U.S.C. 2(c)(1)
(providing that, subject to certain exceptions, the CEA does not
govern or apply to an agreement, contract, or transaction in foreign
currency, government securities, security warrants, security rights,
resales of installment loan contracts, repurchase transaction in an
excluded commodity, or mortgages or mortgage purchase commitments);
CEA section 2(a)(1)(C)(i), 7 U.S.C. 2(a)(1)(C)(i) (providing that
the CEA shall not apply to, and the Commission shall not have
jurisdiction with respect to, designating a contract market for any
transaction in which a party to such transaction acquires a put,
call, or other option on one or more securities).
---------------------------------------------------------------------------
Accordingly, as stated in the Proposed Order, the Commission does
not believe it can determine conclusively that it would be in the
public interest to exempt any transaction entered into between Exempt
Entities. Even if a transaction were to meet the requirements of the
Exempt Non-Financial Energy Transactions definition, but not be
described by one of the six enumerated transaction categories, the
Commission would lack the necessary information about the specific
nature of the transaction in order to make the requisite public
interest determination.
[[Page 19679]]
III. CEA Section 4(c) Determinations
The Commission is issuing the Final Order pursuant its authority in
CEA sections 4(c)(1) and 4(c)(6).\107\ As required under both sections,
the Commission must make certain determinations prior to issuing
exemptive relief.\108\ Generally, the Commission confirms the
determinations it made in the Proposed Order because it believes that
such determinations continue to support adopting the Final Order.\109\
Where substantive changes have been made to the scope of the Final
Order, the Commission is addressing such changes with additional
discussion. In some instances, the Commission is expanding upon its
proposed determinations to further support adoption of final exemptive
relief for Exempt Non-Financial Energy Transactions entered into
between Exempt Entities.
---------------------------------------------------------------------------
\107\ To the extent that the Final Order applies to entities not
explicitly described in FPA section 201(f), the Commission is using
its general exemptive authority found in CEA section 4(c)(1).
\108\ These determinations include that (i) CEA section 4(a)--
the exchange trading requirement--should not apply; (ii) the
exemption is consistent with the public interest and purposes of the
CEA; (iii) the exemption is available only for ``appropriate
persons,'' as such term is defined in CEA section 4(c)(3); and (iv)
the exemption will not have a materially adverse effect on the
ability of the Commission or any contract market to discharge its
regulatory or self-regulatory duties under the CEA. See 7 U.S.C.
6(c)(2).
\109\ See generally Proposed Order at 51009-12 (proposing the
Commission's CEA section 4(c) determinations).
---------------------------------------------------------------------------
A. Applicability of CEA Section 4(a)
Due to the bespoke nature of Exempt Non-Financial Energy
Transactions, the Commission does not believe that the exchange-trading
requirement of CEA section 4(a) should apply. Generally, the exchange-
trading requirement is meant to facilitate the price discovery and
price transparency processes. Because (i) exchange-traded contracts are
less effective at adequately performing as risk management substitutes
for Exempt Non-Financial Energy Transactions; and (ii) Exempt Non-
Financial Energy Transactions are executed within a closed-loop of
Exempt Entities, and thus are not market facing, Exempt Non-Financial
Energy Transactions do not materially impair price discovery in
Commission-regulated markets and can continue to be executed
bilaterally. For that reason, the Commission is limiting the Final
Order to Exempt Non-Financial Energy Transactions entered into between
Exempt Entities.
B. Public Interest and Purposes of the CEA
The Commission continues to believe that the scope of the Final
Order is consistent with the public interest supported by the CEA.\110\
As previously noted, Exempt Non-Financial Energy Transactions are
bespoke and not suitable for trading as standardized products on a
board of trade. Furthermore, the Final Order applies only to Exempt
Non-Financial Energy Transactions entered into between Exempt Entities,
which are transacting within a closed loop, and therefore do not
materially impair price discovery in Commission-regulated markets.\111\
Therefore, exempting these types of transactions from the Commission's
jurisdiction will not materially impair price discovery of electricity-
related commodities in Commission-regulated markets.\112\
---------------------------------------------------------------------------
\110\ These public interests include ``providing a means for
managing and assuming price risks, discovering prices, or
disseminating pricing information through trading in liquid, fair
and financially secure trading facilities.'' CEA section 3(a), 7
U.S.C. 5(a).
\111\ Given that Petitioners represented that exchange-traded
instruments are, by their nature, primarily standardized, and
therefore in many or most cases may be less effective for purposes
of hedging the risks that Exempt Non-Financial Energy Transactions
are specifically tailored to offset (e.g., due to the contract sizes
not matching the risk being hedged, inconvenient delivery points,
and/or unavailability of a contract overlying the specific
commodity, the risk of which a market participant seeks to hedge),
the Commission likewise presently considers any price link between
Exempt Non-Financial Energy Transactions and transactions executed
on exchange-traded derivative markets too attenuated to materially
impair price discovery of exchange-traded derivatives.
\112\ The Joint Associations agreed with this determination in
the Proposed Order. See Joint Associations' Letter at 3.
---------------------------------------------------------------------------
As discussed previously in response to Petitioners' comments, the
Commission has clarified in the Final Order that Exempt Non-Financial
Energy Transactions can be used to hedge prices of underlying
commodities, so long as the transaction meets the other definitional
criteria and falls into one of the delineated transaction
categories.\113\ The Commission believes that exempting price hedging
transactions is still in the public interest because of Exempt
Entities' unique public service mission and not-for-profit operational
structure. Like all public utilities, Exempt Entities have a need to
manage the risk associated with fluctuations in both the supply and
price of a commodity underlying a transaction.\114\ While managing
supply risk goes to the reliability aspect of Exempt Entities' public
service mission, hedging price risk goes to providing electric energy
service that is low-cost as well. Therefore, it is in the public
interest to allow Exempt Entities to continue engaging in price hedging
transactions with one another, such that they can continue to provide
both reliable and affordable electric energy service to customers.\115\
---------------------------------------------------------------------------
\113\ See supra Section II.E.1.
\114\ In the Proposed Order, the Commission noted that Exempt
Non-Financial Energy Transactions generally are variable-priced
transactions, as opposed to fixed-price, and therefore are entered
into for the purposes of hedging supply risk resulting from
unpredictable fluctuations in demand for electric energy. See
Proposed Order at 51010. The Commission understands this to still be
true, but also understands that in limited circumstances, fixed-
price arrangements exist such that Exempt Entities can hedge price
risk.
\115\ The Final Order, however, still does not exempt
transactions that are speculative. Unlike price and supply risk
management, speculative swap activity is not necessary to allow
Exempt Entities to carry out their public service mission.
---------------------------------------------------------------------------
The Commission also believes that the Final Order is consistent
with the purposes of the CEA.\116\ As recognized by Congress in passing
FPA section 201(f),\117\ the not-for-profit structure and governance
model--elected or appointed government officials or citizens, or
cooperative members or consumers--of all Exempt Entities reduce the
incentives and other conditions that traditionally lead to fraudulent
or manipulative trading activity, and thus should mitigate the need for
prescriptive federal oversight.\118\ As previously noted, the
Commission has clarified in the Final Order that some Exempt Entities
may have a corporate for-profit form, but must nonetheless be wholly
owned by other not-for-profit Exempt Entities. The Commission takes
notice of the petitioner's representation that a for-profit subsidiary
of an Exempt Entity, when engaged in Exempt Non-Financial Energy
Transactions with other Exempt Entities, is less likely to engage in
abusive trading practices than other entities, particularly in light of
the non-profit, public service nature of the parent Exempt Entity (or
Exempt Entities).\119\
---------------------------------------------------------------------------
\116\ In order to foster the public interests, it is the purpose
of the CEA ``to deter and prevent price manipulation or any other
disruptions to market integrity; to ensure the financial integrity
of all transactions subject to [the CEA] and the avoidance of
systemic risk; to protect all market participants from fraudulent or
other abusive sale practices and misuses of customer assets; and to
promote responsible innovation and fair competition among boards of
trade, other markets and market participants.'' CEA section 3(b), 7
U.S.C. 5(b).
\117\ See supra note 11 and accompanying text.
\118\ The Joint Associations agreed with this determination in
the Proposed Order. See Joint Associations' Letter at 2.
\119\ The Commission notes that the Final Order retains the
Commission's general anti-fraud and anti-manipulation authority, and
certain scienter-based prohibitions, in addition to all public
utilities, regardless of FPA section 201(f) status, being subject to
FERC's market manipulation authority. See FPA section 222v, 16
U.S.C. 824v.
---------------------------------------------------------------------------
[[Page 19680]]
C. Appropriate Persons
The Commission believes that Exempt Entities, as defined in the
Final Order, are all ``appropriate persons'' for purposes of satisfying
the CEA section 4(c)(2) requirement.\120\ As a starting point, the
Commission believes that there is a presumption that entities
explicitly described in FPA section 201(f) are appropriate persons
because of Congress' mandate to the Commission to exempt, in accordance
with CEA sections 4(c)(1) and 4(c)(2) (which precludes the Commission
from granting a CEA section 4(c) exemption to persons other than
appropriate persons), transactions entered into between such entities
if it is in the public interest and consistent with the purposes of the
Act.\121\ That is, the Commission infers that Congress would not have
added CEA section 4(c)(6)(C), which explicitly identifies FPA section
201(f) entities as eligible for an exemption, unless it had presumed
such entities were appropriate beneficiaries of an exemption for
purposes of the CEA section 4(c)(2) requirement, and subjected CEA
section 4(c)(6) to CEA section 4(c)(2) simply so that the Commission
would verify that presumption. For the reasons discussed throughout
this release, the Commission believes that FPA section 201(f) entities
are appropriate persons.\122\
---------------------------------------------------------------------------
\120\ CEA section 4(c)(2)(B)(i) requires that the Commission
exercise its 4(c) exemptive authority with respect to transactions
entered into solely between ``appropriate persons.'' See 7 U.S.C.
6(c)(2)(B)(i). CEA section 4(c)(3) provides various criteria an
entity can meet for purposes of qualifying as an appropriate person.
7 U.S.C. 6(c)(3). The Joint Associations supported the Commission's
proposed determination and underlying rationale that all Exempt
Entities were appropriate persons. See Joint Associations' Letter at
2.
\121\ CEA section 4(c)(6)(C), 7 U.S.C. 6(c)(6)(C). Under CEA
section 4(c)(3)(K), the Commission can determine other persons not
explicitly enumerated in section 4(c)(3) ``to be appropriate in
light of their financial or other qualifications, or the
applicability of appropriate regulatory protections.'' 7 U.S.C.
6(c)(3)(K). The Commission believes that Congress' explicit
recognition of FPA section 201(f) entities as being eligible for
exemptive relief under CEA section 4(c)(6) constitutes an ``other
qualification'' in support of such entities being appropriate
persons, regardless of whether they otherwise would qualify under
one of the enumerated appropriate person categories in CEA sections
4(c)(3)(A)-(J).
\122\ The Commission notes that many FPA section 201(f) entities
would qualify as appropriate persons under other CEA section 4(c)(3)
criteria. See, e.g., CEA section 4(c)(3)(F) (providing that a
business entity with a net worth exceeding $1,000,000 or total
assets exceeding $5,000,000 is an appropriate person); CEA section
4(c)(3)(H) (providing that a government entity or political
subdivision thereof, or any instrumentality, agency, or department
of a government entity or political subdivision thereof, is an
appropriate person).
---------------------------------------------------------------------------
The Commission believes that Exempt Entities not explicitly
described in FPA section 201(f) are also appropriate persons.\123\
First, the Commission interprets Federally-recognized Indian tribes as
appropriate persons under CEA section 4(c)(3)(H) because they are
analogous to governmental entities.
---------------------------------------------------------------------------
\123\ The Commission notes that such entities are being exempted
pursuant to the Commission's general exemptive authority in CEA
section 4(c)(1).
---------------------------------------------------------------------------
Next, some non-FPA section 201(f) electric cooperatives may qualify
as appropriate persons under the CEA section 4(c)(3)(F) criteria by
having a net worth exceeding $1,000,000 or total assets exceeding
$5,000,000. For any non-FPA section 201(f) cooperative that does not
otherwise qualify as an appropriate person under the specific
provisions of section 4(c)(3), the Commission believes that such
entities are at least as financially sophisticated and operationally
capable as FPA section 201(f) cooperatives. Such cooperatives would not
qualify as FPA section 201(f) entities because they sell in excess of
4,000,000 megawatt hours of electricity per month, and/or receive
financing from lenders other than the RUS. In either case, such
cooperatives likely would have greater assets due to the increased
sales, which could qualify them for better financing terms than those
offered by the RUS. Additionally, the Commission notes that such
cooperatives are not exempt from FERC's jurisdiction, and thus subject
to more regulatory oversight than FPA section 201(f) electric
cooperatives. The Commission interprets such FERC oversight of non-FPA
section 201(f) electric cooperatives as the type of ``appropriate
regulatory protections'' within the meaning of CEA section 4(c)(3)(K)
that Congress had in mind when promulgating new exemptive authority for
FPA 201(f) entities in CEA section 4(c)(6)(C).\124\ Therefore, under
the Commission's discretionary authority in CEA section 4(c)(3)(K) to
determine non-enumerated entities as appropriate persons based upon
financial or other qualifications, or the applicability of other
appropriate regulatory protections, the Commission believes that such
non-FPA section 201(f) cooperatives are appropriate persons.\125\
---------------------------------------------------------------------------
\124\ Compared to 201(f) cooperatives, non-201(f) electric
cooperatives are still treated as ``public utilities'' for purposes
of Part II of the FPA, and thus must receive FERC authorization
under FPA section 203 to sell, merge or consolidate their electric
facilities, or to purchase, acquire, or take any security of any
other public utility. See Petition at 16 (citing 18 CFR Parts 2 and
33, Transactions Subject to FPA Section 203). Additionally, such
cooperatives must seek approval under FPA sections 205 and 206 when
altering rates and charges to be collected in transmitting or
selling electric energy service in interstate commerce. See id.
(citing Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities, Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities, 78
FERC ] 61,315 at 62,270 (2005)).
\125\ To the extent that an electric cooperative would not
otherwise qualify as an appropriate person, regardless of whether it
qualifies as an FPA section 201(f) entity, the Commission notes that
its determination that such cooperatives are appropriate persons
applies only in the context of the Final Order, and should not be
interpreted to mean that all electric cooperatives are appropriate
for purposes of any existing or future exemptions issued by the
Commission pursuant to CEA section 4(c).
---------------------------------------------------------------------------
D. Ability to Discharge Regulatory or Self-Regulatory Duties
As stated previously, Exempt Non-Financial Energy Transactions are
bespoke and executed within the closed-loop of Exempt Entities, meaning
they do not materially affect trading or pricing of transactions
involving the same underlying commodity in Commission-regulated
markets. Additionally, the Commission has retained its anti-fraud and
anti-manipulation authority, as well as certain scienter-based
prohibitions. Accordingly, the Commission does not believe that the
exemptive relief provided in the Final Order will have a materially
adverse effect on the ability of the Commission or any contract market
to discharge their regulatory or self-regulatory duties under the CEA.
As noted above, the Commission is limiting the Final Order to Exempt
Non-Financial Energy Transactions entered into other than on or subject
to the rules of a registered entity, submitted for clearing to a DCO,
and/or reported to a SDR.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that Federal
agencies consider whether proposed rules will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\126\ The
relief provided in the Final Order may be available to some small
entities, because they may fall within standards established by the
Small Business Administration (``SBA'') defining entities with electric
energy output of less than 4,000,000 megawatt hours per year as a
``small entity.'' \127\
---------------------------------------------------------------------------
\126\ 5 U.S.C. 601 et seq.
\127\ U.S. Small Business Administration, Table of Small
Business Size Standards Matched to North American Industry
Classification System Codes, footnote 1 (effective March 26, 2012),
available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
---------------------------------------------------------------------------
[[Page 19681]]
In response to the Proposed Order, the Commission received several
comments from the Petitioners relevant to the RFA. The Petitioners
requested that the Commission conduct future analyses of the impact on
small entities the Petitioners represent if the Commission ever were to
revisit the terms and conditions of the relief, and that the Commission
provide relief retroactively to the enactment of the Dodd-Frank Act in
the Final Order. In response to the request that the Commission conduct
a future Small Business Regulatory Enforcement Fairness Act
(``SBREFA'') analysis,\128\ the Commission notes that it does not
conduct RFA analyses based upon requests; rather, all Commission
rulemaking are subject to the legal requirements of the RFA, which
provides that a RFA analysis shall not apply if the head of the agency
certifies that the rule will not, if promulgated, have a significant
economic impact on a substantial number of small entities.\129\ In
response to the request that the Commission conduct a full RFA analysis
if it were to decide not to grant the relief provided herein
retroactively to the enactment of the Dodd-Frank Act,\130\ the
Commission has addressed this comment by providing retroactive relief
in the Final Order.\131\ To the extent that these comments are
preemptive in nature or have been addressed in the Final Order, the
Commission is of the view that the Final Order would not have a
significant economic impact on a substantial number of small entities,
including any Exempt Entities that may qualify as a small entity.
---------------------------------------------------------------------------
\128\ Petitioners' Letter at 8. The SBREFA amended the RFA.
\129\ See 5 U.S.C. 605.
\130\ Petitioners' Letter at 11.
\131\ See supra Section II.E.2.
---------------------------------------------------------------------------
With regards to the Petitioners' general conclusion that the
organizations that they represent fall within the definition of ``small
entity,'' \132\ the Commission notes that it has considered carefully
the potential effect of this Final Order on small entities and has
determined that it will not have a significant economic impact on any
Exempt Entity, including any entities that may be small. Rather, the
Final Order relieves the economic impact that the Exempt Entities,
including any small entities that may opt to take advantage of the
Final Order, by exempting certain of their transactions from the
application of substantive regulatory compliance requirements of the
CEA and Commission regulations thereunder. Significantly, the Final
Order prevents new requirements for swaps, such as clearing, trade
execution and regulatory reporting, from affecting transactions that
Exempt Entities traditionally have engaged in to serve their unique
public service mission of providing reliable, affordable electric
energy service to customers. Absent such relief and to the extent
Exempt Non-Financial Energy Transactions would qualify as swaps, small
entities covered by the Final Order could be subject to compliance with
all aspects of the CEA and its implementing regulations. Accordingly,
the Chairman, on behalf of the Commission, hereby certifies pursuant to
5 U.S.C. 605(b) that the Final Order will not have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\132\ Petitioners highlighted that the majority of the entities
their respective organizations represent fall within the definition
of ``small entity'' under the SBREFA, which incorporates by
reference the SBA definition. Petitioners' Letter at 2.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
Under the Paperwork Reduction Act (``PRA''), an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number from the Office of Management and Budget (``OMB''). The
Commission determined that the Proposed Order did not contain any new
information collection requirements, and did not receive any comments
regarding this determination. As the Commission has left the conditions
that were contained in the Proposed Order unchanged, the Final Order
therefore also does not contain any new information collection
requirements that would require approval of OMB under the PRA.\133\
While the Commission reserves its authority to inspect books and
records kept in the normal course of business that relate to Exempt
Non-Financial Energy Transactions between Exempt Entities pursuant to
the Commission's regulatory inspection authorities, the Commission is
not imposing a recordkeeping burden with respect to the books and
records of Exempt Non-Financial Energy Transactions that already are
kept in the normal course of business. Moreover, any inspection of
books and records typically only will occur in the event that
circumstances warrant the need to gain greater visibility with respect
to Exempt Non-Financial Energy Transactions as they relate to Exempt
Entities' overall market positions and to ensure compliance with the
terms of this Final Order. Accordingly, each inquiry would be specific
to the facts triggering the inquiry, and thus will not involve
``answers to identical questions posed to * * * ten or more persons,''
as the term ``collection of information'' is defined in the PRA in
pertinent part.\134\
---------------------------------------------------------------------------
\133\ 44 U.S.C. 3501 et seq.
\134\ 44 U.S.C. 3502(3)(a)(1). See also 44 U.S.C.
3518(c)(1)(B)(i) and (ii) (excluding collections of information
related to administrative investigations against specific
individuals or entities, and any subsequent civil actions).
---------------------------------------------------------------------------
C. Consideration of Costs and Benefits
Prior to the passage of the Dodd-Frank Act, swap market activity
was largely unregulated. In the wake of the financial crisis of 2008,
Congress adopted the Dodd-Frank Act, in part, to address conditions
with respect to swap market activities. Among other things, the Dodd-
Frank Act amends the CEA to expand its scope beyond regulation of
``contract[s] of sale of a commodity for future delivery'' \135\
(commonly referred to as futures) and options,\136\ by establishing a
comprehensive regulatory framework for swaps as well.\137\ In amending
the CEA, however, the Dodd-Frank Act preserved the Commission's
authority under CEA section 4(c)(1) to exempt any transaction or class
of transactions, including swaps, from select provisions of the
CEA.\138\ It also added new subparagraph 4(c)(6)(C) to the CEA
specifically directing the Commission, in accordance with 4(c)(1) and
4(c)(2), to exempt agreements, contracts, or transactions entered into
between FPA 201(f) entities if doing so ``is consistent with the public
interest
[[Page 19682]]
and the purposes of'' the CEA.\139\ The Commission, through this Final
Order, is exercising its exemptive authority under CEA section 4(c)(1)
and 4(c)(6) with respect to ``Exempt Non-Financial Energy
Transactions'' \140\ entered into solely between ``Exempt Entities,''
\141\ subject to certain conditions.\142\ These conditions are, among
others, that the relief provided in the Final Order is subject to (i)
the Commission's general anti-fraud and anti-manipulation authority,
and scienter-based prohibitions under CEA sections 2(a)(1)(B), 4(d),
4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9
and 13, and Commission rules 32.4, 23.410(a) and (b), and Part 180;
and, ii) the Commission's reserved authority to inspect the books and
records related to Exempt Non-Financial Energy Transactions kept by
Exempt Entities in the normal course of business pursuant to the
Commission's regulatory inspection authorities.
---------------------------------------------------------------------------
\135\ CEA section 4(a). See also CEA sections 1a(19) (``the term
`future delivery' does not include any sale of a cash commodity for
deferred shipment or delivery''); 1a(47)(B)(ii) (excluding from the
swap definition ``any sale of a nonfinancial commodity * * * for
deferred shipment or delivery, so long as the transaction is
intended to be physically settled'').
\136\ CEA section 1a(36).
\137\ Public Law 111-203, 124 Stat. 1376 (2010). More
specifically, Title VII of the Dodd-Frank Act amended the CEA to
establish a comprehensive new regulatory framework for swaps, a term
defined by the statute. See Section 4(c)(1) of the CEA. The
legislative framework seeks to reduce risk, increase transparency,
and promote market integrity within the financial system by, among
other things: (1) Providing for the registration and comprehensive
regulation of swap dealers (``SDs'') and major swap participants
(``MSPs''); (2) imposing clearing and trade execution requirements
on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to
the Commission's oversight. Futures, options, and swaps are referred
to collectively herein as ``derivatives.''
\138\ Section 4(c)(1) of the CEA.
\139\ CEA sections 4(c)(2) and 4(c)(3) further articulate the
conditions precedent to granting an exemption under CEA section
4(c)(1), including that the exempted agreements, contracts, or
transactions be entered into between ``appropriate persons,'' as
that term is defined in CEA section 4(c)(3).
\140\ Section V.B., infra. ``Exempt Non-Financial Energy
Transactions'' consist of ``any agreement, contract, or transaction
based upon a `commodity,' as such term is defined and interpreted by
the CEA and regulations thereunder, that would not have been entered
into, but for an Exempt Entity's need to manage supply and/or price
risks arising from its existing or anticipated public service
obligations to physically generate, transmit, and/or deliver
electric energy service to customers. The term `Exempt Non-Financial
Energy Transaction' excludes agreements, contracts, and transactions
based upon, derived from, or referencing any interest rate, credit,
equity or currency asset class, or any grade of a metal, or any
agricultural product, or any grade of crude oil or gasoline that is
not used as fuel for electric energy generation. The term `Exempt
Non-Financial Energy Transaction' also excludes agreements,
contracts, or transactions entered into on or subject to the rules
of a registered entity, submitted for clearing to a derivatives
clearing organization, and/or reported to a swap data repository.
Exempt Non-Financial Energy Transactions are limited to the
following categories, which may exist as stand-alone agreements or
as components of larger agreements that combine the following
categories of transactions: [electric energy delivered, generation
capacity, transmission services, fuel delivered, cross-commodity
pricing, and other goods and services].''
\141\ Section IV.A., infra. An Exempt Entity is: (i) Any
electric facility or utility that is wholly owned by a government
entity, as described in Federal Power Act (``FPA'') section 201(f),
16 U.S.C. 824(f); (ii) any electric facility or utility that is
wholly owned by an Indian tribe recognized by the U.S. government
pursuant to section 104 of the Act of November 2, 1994, 25 U.S.C.
479a-1; (iii) any electric facility or utility that is wholly owned
by a cooperative, regardless of such cooperative's status pursuant
to FPA section 201(f), so long as the cooperative is treated as such
under Internal Revenue Code section 501(c)(12) or 1381(a)(2)(C), 26
U.S.C. 501(c)(12), 1381(a)(2)(C), and exists for the primary purpose
of providing electric energy service to its member/owner customers
at cost; or (iv) any other entity that is wholly owned, directly or
indirectly, by any one or more of the foregoing. A ``financial
entity'' as defined in CEA section 2(h)(7)(C) is not an Exempt
Entity.
\142\ Section V.C., infra.
---------------------------------------------------------------------------
1. The Statutory Mandate To Consider the Costs and Benefits of the
Commission's Action: Section 15(a) of the CEA
Section 15(a) of the CEA \143\ requires the Commission to
``consider the costs and benefits'' of its actions before promulgating
a regulation under the CEA or issuing certain orders. Section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of five broad areas of market and public concern: (1) Protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
---------------------------------------------------------------------------
\143\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission considers the costs and benefits of the Final Order
to the public and market participants, including Exempt Entities,
against the backdrop of the CEA regulatory regime for derivatives, as
amended by the Dodd-Frank Act, and absent the relief provided by the
Final Order.\144\ Under the post-Dodd-Frank Act regulatory regime,
Exempt Entities that, as represented in the Petition, are
``nonfinancial end-users of [Exempt Non-Financial Energy Transactions
entered into] only to hedge or mitigate commercial risks,'' \145\ are
subject to the Commission's general anti-fraud and anti-manipulation
authority, as well as certain scienter-based prohibitions under the
CEA.\146\ Absent the Final Order, to the extent that Exempt Non-
Financial Energy Transactions are futures transactions within the
meaning of the CEA, they would be subject to the statute's exchange-
trading requirement and a comprehensive regulatory scheme.\147\
Similarly, absent the Final Order, to the extent that Exempt Non-
Financial Energy Transactions are swaps as defined in the CEA, the
Exempt Entity counterparties to these transactions would be subject to
requirements for swap data reporting \148\ and recordkeeping; \149\ in
addition, unless both Exempt Entity counterparties to a swap
transaction are eligible contract participants (``ECPs''),\150\ CEA
section 2(e) would prohibit them from executing the swap other than on
or subject to the rules of a registered DCM.\151\
---------------------------------------------------------------------------
\144\ As discussed earlier, to exempt transactions under CEA
section 4(c), the Commission need not first determine--and is not
determining--whether the transactions subject to the exemption fall
within the CEA. However, to capture potential costs and benefits,
this consideration assumes that the transactions may now or in the
future be jurisdictional.
\145\ Petition at 33.
\146\ See, e.g., CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o,
6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4,
23.410(a) and (b), and Part 180. CEA section 2(h)(7) (the ``end-user
exception''), excepts a swap from the swap clearing requirement of
CEA section 2(h)(1)(A) (it ``shall be unlawful for any person to
engage in a swap unless that person submits such swap for clearing *
* * if the swap is required to be cleared'') and the trade execution
requirement of CEA section 2(h)(8) (transactions subject to the
clearing requirement of CEA section 2(h)(1) must be executed on
either a designated contract market (``DCM'') or a swap execution
facility (``SEF'')). The end-user exception applies if one
counterparty is ``not a financial entity; * * * is using swaps to
hedge or mitigate commercial risk; and * * * notifies the
Commission, in a manner set forth by the Commission, how it
generally meets its financial obligations associated with entering
into non-cleared swaps.''
\147\ CEA section 4(a). The same is true for options on futures.
See 17 CFR 33.3(a). The discussion of cost-benefit implications of
this Final Order with respect to futures contracts applies equally
to options on futures.
\148\ The CEA as amended by the Dodd-Frank Act contemplates two
types of reporting to SDR. First, is real-time reporting: For every
swap executed, certain transaction information, including price and
volume, is to be reported to an SDR'') ``as soon as technologically
practicable.'' CEA section 2(a)(13)(A) & (C); see also Real-Time
Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012)
(adopting 17 CFR part 43 regulations to implement real-time
reporting). For swaps executed off of a DCM or SEF and for which
neither counterparty is an SD or MSP--as the Commission expects
Exempt Non-Financial Energy Transactions engaged in between Exempt
Entities would be--the real-time reporting obligation for the
transaction falls to one of the counterparties, as agreed between
themselves. 17 CFR 43.3(a)(3) Second, for each swap, additional
information beyond that required in real-time reports must be
reported to an SDR in a ``timely manner as may be prescribed by the
Commission.'' CEA section 2(a)(13)(G); see also Swap Data
Recordkeeping and Reporting Requirements 77 FR 2136 (Jan. 13, 2012)
(adopting 17 CFR part 45); Swap Data Recordkeeping and Reporting
Requirements: Pre-enactment and Transition Swaps 77 F.R. 35200 (June
12, 2012) (adopting 17 CFR part 46).
\149\ Swap Data Recordkeeping and Reporting Requirements, 77 FR
2136 (Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data
Recordkeeping and Reporting Requirements: Pre-enactment and
Transition Swaps 77 F.R. 35200 (June 12, 2012) (adopting 17 CFR part
46).
\150\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant,'' and ``Eligible Contract Participant,'' 77
FR 30596 (May 23, 2012).
\151\ 7 U.S.C. 2(e). Additionally, absent the Final Order, in
the event that executing Exempt Non-financial Energy Transactions
required an Exempt Entity to register as an SD or MSP, additional
regulatory requirements would apply. See, e.g., Confirmation,
Portfolio Reconciliation, Portfolio Compression, and Swap Trading
Relationship Documentation Requirements for Swap Dealers and Major
Swap Participants, 77 FR 55904 (Sept. 11, 2012); Swap Dealer and
Major Swap Participant Recordkeeping, Reporting, and Duties Rules;
Futures Commission Merchant and Introducing Broker Conflicts of
Interest Rules; and Chief Compliance Officer Rules for Swap Dealers,
Major Swap Participants, and Futures Commission Merchants, 77 FR
20128 (Apr. 3, 2012); Business Conduct Standards for Swap Dealers
and Major Swap Participants With Counterparties, 77 FR 9734 (Feb.
17, 2012).
---------------------------------------------------------------------------
[[Page 19683]]
The Commission remains cognizant of the regulatory landscape as it
existed before the enactment of Dodd-Frank. As such, the Commission
notes that any Exempt Non-Financial Energy Transactions engaged in
between Exempt Entities that are swaps (excluding options) under the
statutory definition and Commission rules were not regulated prior to
Dodd-Frank. Thus, measured against a pre-Dodd-Frank Act reference
point, Exempt Entities engaging in such swaps could experience costs
attributable to the conditions placed upon the Final Order. For
example, Exempt Entities were not subject to the Commission's routine
regulatory inspection authorities with respect to records of Exempt
Non-Financial Energy Transactions transacted bilaterally away from a
trading facility prior to the enactment and effectiveness of the Dodd-
Frank Act. The same was not true to the extent Exempt Non-Financial
Energy Transactions are futures contracts, as such contracts have
always been regulated by the Commission and Dodd-Frank did not
fundamentally alter the futures regulatory scheme.
The Proposed Order expressly requested public comment on the
Commission's cost-benefit considerations, including with respect to
reasonable alternatives; the magnitude of specific costs and benefits
(including data or other information to estimate a dollar valuation);
and any impact on the public interest factors specified in CEA section
15(a).\152\ Neither of the two comments received specifically addressed
the Proposed Order's consideration of costs and benefits or otherwise
provided data or other information to enable the Commission to better
quantify the expected costs and benefits attributable to the Final
Order. While, as a general matter, the Commission endeavors to quantify
estimated costs and benefits where reasonably feasible, it considers
the costs and benefits of this Final Order in qualitative terms only
given that commenters did not provide data or information necessary for
quantification.\153\
---------------------------------------------------------------------------
\152\ 77 FR 50988, 51019 (Aug. 23, 2012).
\153\ In the Proposed Order, the Commission noted that it could
not quantify the costs and benefits of the relief provided therein
because it did not have such information available to it;
accordingly, the Commission requested commenters provide specific
figures for its consideration. See Proposed Order at 51019. Because
the core requirements of the Dodd-Frank Act are currently being
implemented, the Commission's ability to quantify the costs and
benefits of the Final Order is unchanged from when it published the
Proposed Order.
---------------------------------------------------------------------------
In the discussion that follows, the Commission considers the costs
and benefits of the Final Order to the public and market participants,
generally, and to Exempt Entities, specifically. As discussed above,
the Commission has refined the Final Order to clarify several issues
identified in the Petitioners' comment letter.\154\ To the extent these
refinements reflect a substantive choice among alternatives with
potential cost-benefit significance, they are included in the
discussion of alternatives, below. Finally, the Commission considers
the Final Order's costs and benefits relative to the public interest
factors enumerated in CEA section 15(a).
---------------------------------------------------------------------------
\154\ More specifically, as discussed above in section II, these
refinements include several modifications to clarify: The definition
of ``Exempt Entity,'' the definition of ``Exempt Non-Financial
Energy Transaction,'' the Commission's right to revisit the terms of
relief, the ability to manage price risk, retroactivity, and the
categorical nature of relief.
---------------------------------------------------------------------------
2. Costs
To Exempt Entities
The Final Order provides Exempt Entities with relief from
regulatory requirements of the CEA for the narrow category of Exempt
Non-Financial Energy Transactions engaged in between them. As with any
exemption, this order is permissive, meaning that potentially eligible
entities are not required to avail themselves of the relief it offers.
Accordingly, the Commission presumes that an entity would rely on the
Final Order only if the anticipated benefits warrant the costs. Here,
the Final Order provides for the continued application of the
Commission's general anti-fraud and anti-manipulation authority, and
certain scienter-based prohibitions, under the CEA and its implementing
regulations, and additionally reserves the Commission's inspection
authority for books and records that the Exempt Entities currently
prepare and retain.\155\ Accordingly, and to the extent Exempt Non-
Financial Energy Transactions are jurisdictional agreements, contracts
or transactions, the incorporation of these conditions within the Final
Order generates no incremental costs beyond those that currently exist
under the CEA, a point that no commenter disputed.
---------------------------------------------------------------------------
\155\ For example, Exempt Entities that receive financing from
the RUS are required to keep records of all master agreements and
term contracts for the procurement of goods and services. See 18 CFR
125.3 (Schedule of records and periods of retention); RUS Bulletin
180-2. Under the books and records inspection authority contained in
the Proposed Order, the Commission could request any of these
procurement agreements that document an Exempt Non-Financial Energy
Transaction for the purchase or sale of ``electric energy
delivered,'' as such term is defined in the Proposed Order.
---------------------------------------------------------------------------
To Market Participants and the Public
The Commission has considered whether an exemption from the CEA for
Exempt Non-Financial Energy Transactions engaged in between Exempt
Entities will expose market participants and the public to the risks
that the CEA guards against--a potential cost. For a variety of
reasons, the Commission believes that it does not. These reasons--which
were identified in the Proposed Order and not disputed by commenters--
include the following:
Exempt Non-Financial Energy Transactions are ill-suited
for exchange trading, as evidenced by their bespoke nature to manage
Exempt Entities' operational risks, and thus do not serve a material
price discovery function.\156\
---------------------------------------------------------------------------
\156\ In the Proposed Order, the Commission noted its belief
that the commercial risks that Exempt Non-Financial Energy
Transactions face generally are not related to fluctuations in the
price of a commodity, but are rather related to ensuring Exempt
Entities' ability to meet production, transmission, and/or
distribution obligations. Proposed Order at 51010. As previously
discussed, however, the Commission has determined in the Final Order
that Exempt Non-Financial Energy Transactions can also be used to
hedge price risk of an underlying commodity, but only if ``arising
from its existing or anticipated public service obligations to
physically generate, transmit, and/or deliver electric energy
service to customers.'' See supra Section II.E.1; section B of the
Final Order. The additional cost/benefit implications of this
clarification are discussed in context of the Commission's
Consideration of Alternatives, infra Section IV.C.4.
---------------------------------------------------------------------------
The incentive structure for Exempt Entities--as generally
limited to not-for-profit governmental, tribal, and IRC section
501(c)(12) or section 1381(a)(2)(c) electric cooperative entities
\157\--is different than that of investor-owned entities and, according
to Petitioners, mitigates incentives for fraud, manipulation, or other
abusive practices against which Commission oversight and trading
facility rules guard.\158\
---------------------------------------------------------------------------
\157\ As discussed in section II.A, above, to avoid confusion,
the Commission has struck the explicit ``non-profit'' modifier from
the fourth clause of the definition of Exempt Entity in the Final
Order. As explained, FPA section 201(f) utilities may include for-
profit subsidiaries that are wholly-owned by other not-for profit
FPA section 201(f) utilities. Subsequent short-hand references in
this Consideration of Costs and Benefits to ``not-for-profit
electric utility entities'' or ``not-for-profit Exempt Entities''
are intended to include all subsidiary entities captured by Final
Order, including those for-profit subsidiaries.
\158\ See Proposed Order, 77 FR 51011.
---------------------------------------------------------------------------
Exempt Non-Financial Energy Transactions are executed
bilaterally
[[Page 19684]]
within a closed-loop of non-financial, not-for-profit electric utility
entities, are not market facing, and therefore have little, if any,
ability to materially impact liquidity, fairness or financial security
of derivative products trading on regulated exchanges.\159\
---------------------------------------------------------------------------
\159\ See Proposed Order, 77 FR 51010.
---------------------------------------------------------------------------
Besides carefully defining the boundaries for Exempt Non-Financial
Energy Transactions between Exempt Entities, the Final Order
incorporates conditions designed to protect the markets subject to the
Commission's jurisdiction. Specifically, the Commission retains its
general anti-fraud and anti-manipulation authority, and certain
scienter-based prohibitions, contained in the CEA and its implementing
regulations. Additionally, the Commission retains authority to inspect
books and records kept in the normal course of business, pursuant to
its regulatory inspection authorities, in the event that circumstances
warrant greater visibility with respect to Exempt Non-Financial Energy
Transactions as they relate to Exempt Entities' overall market
positions and compliance with this Final Order. This retained authority
to inspect books and records also provides a tool for the Commission to
monitor any evolution and/or change in the usage of Exempt Non-
Financial Energy Transactions to ensure that they conform to the
expectations described in this order and that the relief provided
herein remains appropriate and in the public interest. Accordingly, for
the narrow subset of electric industry transactions covered by this
Final Order, the Commission believes that the risk potential, at most,
is remote and the prescribed conditions appropriate to contain it. The
Final Order, therefore, should not give rise to any costs attributable
to increased risk.
Next, the Commission considered the potential that price discovery
in jurisdictional, non-exempt markets could be diminished because
Exempt Entities, acting under the relief provide in this Final Order,
eschewed such markets in favor of performing production and price risk
management via Exempt Non-Financial Energy Transactions with one
another. The Commission deems the risk of this occurring to be
insignificant. While an underlying commodity may be similar or
identical to that which underlies a standardized product available for
trading in a non-exempt, jurisdictional market, the bespoke nature of
Exempt Non-Financial Energy Transactions is such that it is unlikely
that non-exempt market transactions would be an effective substitute
for Exempt Entities going forward. As such, and in addition to the
Commission's anticipation that the number of Exempt Entity transactions
will be small relative to the total number of transactions in related
non-exempt markets, any distortive impact on price discovery in
Commission-regulated markets would be immaterial.
Similarly, the Commission considered whether the Final Order would
have any impact on the efficiency, competitiveness,\160\ and financial
integrity of markets regulated under the CEA. Since Exempt Non-
Financial Energy Transactions are executed bilaterally between non-
financial entities primarily in order to satisfy existing or expected
operations-related public service obligations, and since they are
bespoke transactions, the Commission expects the exemptive relief
provided herein to have little, if any, negative effect on market
efficiency, competitiveness, or financial integrity of markets
regulated by the CFTC.
---------------------------------------------------------------------------
\160\ More specifically with respect to competition, absent the
exemptive relief provided herein, it is unclear whether Exempt
Entities otherwise would qualify as ECPs, and thus be able to
continue transacting Exempt Non-Financial Energy Transactions
bilaterally with one another at all. Because many of the
transactions exempted under the Final Order relate to longstanding
and exclusive agreements between Exempt Entities, the limited relief
provided in the exemption is not likely, in and of itself, to cause
Exempt Entities to change the nature or frequency of conducting
Exempt Non-Financial Energy Transaction with one another; rather,
they will continue to carry out their public service obligations
under standard industry practices, as was intended by Congress in
adding CEA section 4(c)(6)(c).
---------------------------------------------------------------------------
The Commission does not view the various refinements that it
incorporated in the Final Order in response to comments as altering the
continuing logic or validity of these reasons; rather, as explained
above,\161\ these refinements are mostly technical in nature and
clarify the Commission's intended scope and operation of the relief as
necessitated by certain practical issues highlighted by commenters.
Substantive changes are addressed below in the ``Consideration of
Alternatives.'' \162\
---------------------------------------------------------------------------
\161\ See supra Section II.
\162\ See supra Section IV.C.4.
---------------------------------------------------------------------------
3. Benefits
To Exempt Entities
Relative to no exemption, the Final Order will benefit Exempt
Entities by lessening the likelihood that compliance with the CEA and
Commission regulations would diminish their ability and/or incentives
to continue to engage in Exempt Non-Financial Energy Transactions that,
as described in the Petition, the Proposed Order, and above, are an
operational tool relied upon by Exempt Entities to effectively execute
their public service mission. The exemption will benefit Exempt
Entities by providing assurances that these Exempt Non-Financial Energy
Transactions upon which they rely are not subject to the CEA and
Commission regulations.\163\
---------------------------------------------------------------------------
\163\ The refinements that the Commission has made in the Final
Order to clarify its terms and application reinforce these benefits.
As discussed below with respect to benefits to market participants
and the public, Exempt Entities' members and other customers should
be the indirect beneficiaries of these avoided costs. The Commission
is aware, however, that the Final Order stops short of providing the
categorical relief requested by Petitioners, and thus does not give
Exempt Entities exact certitude that any electric energy
transactions not specifically covered under the terms of this Order
entered into between Exempt Entities will not be subject to the
requirements of the CEA.
---------------------------------------------------------------------------
To the extent Exempt Non-Financial Energy Transactions are swaps,
as a threshold matter, absent Commission action, CEA section 2(e) would
prohibit Exempt Entities from executing them away from a registered DCM
unless both Exempt Entity counterparties qualify as ECPs. The relevant
criteria for determining ECP status varies for Exempt Entities that are
governmental entities (or political subdivisions of governmental
entities) and those that are not. For the former, governmental Exempt
Entities must meet certain line of business requirements,\164\ or ``own
* * * and invest * * * on a discretionary basis $50,000,000 or more in
investments.\165\ For the latter, non-governmental Exempt Entities
either must have: (a) Assets exceeding $10,000,000; (b) a guarantee for
obligations; or, (c) greater than $1,000,000 net worth and ``enter * *
* into an agreement, contract, or transaction in connection with the
conduct of the entity's business or to manage the risk associated with
an asset or liability owned or incurred or reasonably likely to be
owned or incurred by the entity in the conduct of the entity's
business.'' \166\ While some of the larger Exempt Entities in
particular may meet the definitional requirements to be ECPs, the
Petition does not provide information evidencing that all Exempt
Entities for all types of Exempt
[[Page 19685]]
Non-Financial Energy Transaction clearly would.\167\
---------------------------------------------------------------------------
\164\ That is, have ``a demonstrable ability, directly or
through separate contractual arrangements, to make or take delivery
of the underlying commodity [or] incur * * * risks, in addition to
price risk, related to the commodity.'' CEA section 1a(17)(A)(i) &
(2) (as referenced in CEA section 1a(18)(A)(vii)(aa)). CEA section
1a(18)(A)(vii) specifies alternative criteria to qualify for
governmental-entity ECP status that do not appear relevant given
that Exempt Entities are not SDs, MSPs, or financial entities.
\165\ CEA section 1a(18)(A)(vii)(bb).
\166\ CEA section 1a(18)(A)(v).
\167\ Furthermore, a comment letter submitted by two of the
Petitioners in connection with the Commission rulemaking on the
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant,'' and ``Eligible Contract Participant,'' states that
some not-for-profit consumer-owned electric utilities ``may not meet
the financial tests listed in the definition of ECP due to the
relatively small size of their physical assets.'' Letter from NRECA,
APPA and LPPC dated February 22, 2011, RIN 3235-AK65, at 12.
---------------------------------------------------------------------------
If Exempt Entities are not ECPs, and given that Petitioners have
represented that Exempt Non-Financial Energy Transactions are bespoke
and therefore unsuitable for exchange trading, absent Commission
action, non-ECP Exempt Entities would be unable to engage bilaterally
in any Exempt Non-Financial Energy Transactions that are swaps.
Relative to a circumstance that would preclude non-ECP Exempt Entities
from continuing to engage in Exempt Non-Financial Energy Transactions
that are swaps, the Final Order allows for the continued use of
transactions that are closely related to Exempt Entities' public
service mission to provide affordable, reliable electricity--a benefit.
The Final Order also saves Exempt Entities the time and expense
necessary to determine if they are ECPs. While under the Final Order,
ECP status becomes largely irrelevant, without it, Exempt Entities may
have to concern themselves with ECP status determinations as a
threshold for engaging in certain transactions.
Even assuming, arguendo, that all Exempt Entities are ECPs, absent
this Final Order, Exempt Non-Financial Energy Transactions engaged in
by Exempt Entities in the normal course of carrying out their public
service obligations would count towards the de minimis swap dealing
threshold, and thus impact whether an Exempt Entity would need to
register with the Commission as an SD or MSP.\168\ The Final Order
eliminates this possibility and any attendant compliance costs it might
entail.\169\
---------------------------------------------------------------------------
\168\ 77 FR 30596, 30744-45 (May 23, 2012).
\169\ Further, to the extent the potential for triggering a
registration requirement might otherwise deter Exempt Entities from
engaging in Exempt Non-Financial Energy Transactions with one
another, the Final Order benefits Exempt Entities by maintaining the
current number of available counterparties for such transactions and
exempting Exempt Entities from otherwise applicable reporting and
recordkeeping requirements applicable to non-SDs/MSPs.
---------------------------------------------------------------------------
Lastly, to the extent that Exempt Non-Financial Energy Transactions
are swaps, the Final Order also avoids potential costs that Exempt
Entities might incur to comply with swap data reporting and
recordkeeping requirements as articulated in Commission
regulations.\170\
---------------------------------------------------------------------------
\170\ See Real-Time Public Reporting of Swap Transaction Data,
77 FR 1182, 1232-40 (Jan. 9, 2012) (adopting 17 CFR part 43
regulations to implement real-time reporting). Swap Data
Recordkeeping and Reporting Requirements 77 FR 2136, 2176-93 (Jan.
13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping and
Reporting Requirements: Pre-enactment and Transition Swaps 77 FR
35200, 35217-25 (June 12, 2012) (adopting 17 CFR part 46).
Swap Data Recordkeeping and Reporting Requirements 77 FR 2136
(Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping
and Reporting Requirements: Pre-enactment and Transition Swaps 77 FR
35200 (June 12, 2012) (adopting 17 CFR part 46); see also supra
Section II.E.3 (clarifying that exemptive relief is granted
retroactively to the date of Dodd-Frank Act enactment to avoid costs
associated with the reporting requirements for historical swaps).
---------------------------------------------------------------------------
Even for Exempt Non-Financial Energy Transactions that are not
swaps, if Exempt Entities perceived some potential that they could be
swaps (now or as they evolve in the future), Exempt Entities would
likely need to expend resources to monitor contemplated transactions
and make status determinations as to them. Moreover, the bespoke nature
of these transactions could complicate the ability to generalize
conclusions across transactions, potentially resulting in a need for
more frequent, individualized assessments that could multiply
determination costs. While the Commission lacks a basis to meaningfully
project any such benefit in dollar terms, qualitatively it expects that
the benefit would include the avoided costs of training staff to
differentiate between swap and non-swap transactions and, in some cases
at least, to obtain an expert legal opinion to support a determination.
Additionally, uncertainty about whether a certain transaction would or
would not be deemed a swap could prompt an Exempt Entity to forego a
beneficial transaction or to substitute a transaction that served the
operational needs less effectively. The Commission considers avoiding a
result that would diminish the use of operationally-efficient Exempt
Non-Financial Energy Transactions to be an important benefit.
To Market Participants and the Public
For reasons similar to those discussed in the Commission's analysis
of the Proposed Order under CEA sections 4(c)(1) and 4(c)(6), the
Commission asserts that this Final Order will benefit the public,
generally.\171\
---------------------------------------------------------------------------
\171\ In that the impacted transactions are undertaken
exclusively in a closed-loop environment from which financial
participants are absent, the Commission does not foresee that
derivative market participants beyond Exempt Entities will realize
either a cost (as earlier discussed) or benefit impact.
---------------------------------------------------------------------------
First, in that the Exempt Entities share the same public-service
mission of providing affordable, reliable electricity to their
customers, those aspects of the Final Order that benefit Exempt
Entities directly should benefit their customers indirectly as well.
For example, the Final Order would enable non-ECP Exempt Entities to
engage in Exempt Non-Financial Energy Transactions, to the extent they
are swaps, that would be barred to them under CEA section 2(e), or
facilitate the likelihood that they would continue to engage in Exempt
Non-Financial Energy Transactions that they might choose to forego for
regulatory uncertainty or cost reasons absent the exemption. In these
circumstances, Exempt Entity customers likely would be the ultimate
beneficiaries (via supply reliability and affordability) of the
operational risk-management and efficiencies that Exempt Non-Financial
Energy Transactions afford. Similarly, to the extent that the Final
Order enables Exempt Entities to avoid compliance and/or monitoring
costs they would otherwise incur, the non-profit structure, conformance
with requisite Internal Revenue Code guidelines, and public service
mission that Exempt Entities share means that the cost savings should
be passed through to members and other customers in the form of lower
electricity prices.
Second, the public also benefits by the promotion of economic and
financial innovation that this Final Order facilitates.\172\ The unique
environment in which these electric utilities must operate to reliably
serve their customer load in the face of constantly fluctuating
demand--compounded by the fact that many of these Exempt Entities do
not enjoy the same economies of scale as investor-owned utilities--
places a premium on innovative solutions to operational issues. Exempt
Non-Financial Energy Transactions represent one such innovation. The
Commission intends for the Final Order, as contemplated by
Congress,\173\ to provide Exempt Entities with regulatory certainty
important to their ability to continue to develop and deploy innovative
solutions through bespoke, closed-loop agreements, contracts, and
transactions.
---------------------------------------------------------------------------
\172\ See Proposed Order, 77 FR 51009-10.
\173\ See House Conf. Report No. 102-978, 1992 U.S.C.C.A.N.
3179, 3213 (``4(c) Conf. Report'').
---------------------------------------------------------------------------
Accordingly, the Final Order provides an overall benefit to the
public.
4. Consideration of Alternatives
The chief alternatives to this Final Order are for the Commission
to (i)
[[Page 19686]]
decline to exercise its exemptive authority; (ii) adopt the Proposed
Order without certain substantive changes made to the Final Order; or
(iii) exercise its exemptive authority more broadly and without
conditions as requested in the Petition or reiterated in the
Petitioners' comment letter.
With respect to the first alternative--decline to exempt--the costs
and benefit consideration is the mirror-image of that discussed above.
A decision not to provide an exemption in this circumstance would
preserve the current post-Dodd-Frank regulatory environment.
Relative to the second alternative--adopting the exemption as
proposed--the Commission has made two substantive changes to the
definition of Exempt Non-Financial Energy Transaction based upon
Petitioners' comments. These are: i) Striking the requirement that
Exempt Non-Financial Energy Transactions be ``intended for making or
taking physical delivery of the commodity upon which the agreement,
contract, or transaction is based'' (the ``physical delivery
requirement''); and ii) consistent with the first change, explicitly
clarifying that Exempt Non-Financial Energy Transactions can be used to
``manage supply and/or price risk.'' As explained above, the Commission
premised these changes on the Petitioners' representation that, absent
such changes, certain benefits sought through the exemption would be
lost, namely regulatory certainty of knowing that price management
transactions falling within one of the six defined transaction
categories would be afforded greater regulatory relief than otherwise
would be provided through the end-user exception.\174\
---------------------------------------------------------------------------
\174\ See Petitioners' Letter at 5-6, 12.
---------------------------------------------------------------------------
Eliminating the physical delivery requirement and clarifying that
Exempt Non-Financial Energy Transactions may be used to manage price
risk (as well as supply risk) arguably blurs the definitional
distinction that the Proposed Order otherwise would have expressly
provided between Exempt Non-Financial Energy Transactions and
jurisdictional futures contracts.
However, even without the physical-delivery requirement and with
the price-risk management clarification, the Commission does not expect
the Final Order to undermine the exchange trading requirement for, or
the Commission's oversight of, futures.\175\ Indeed, the Commission
intends the protection of the public interest affected through
Commission oversight of such activity to be fully preserved. As clearly
stated throughout the Final Order, a foundational basis for granting
this exemptive relief is the Commission's understanding, based on
Petitioners' representations, that Exempt Non-Financial Energy
Transaction are undertaken solely to manage supply and/or price risks
arising from Exempt Entities' public service obligation to supply
electric energy to customers and are bespoke to meet the needs of
particular Exempt Entities, and thus not suited to DCM trading (or DCO
clearing).\176\ The Commission expects this to continue to remain the
case.\177\ Accordingly, the Commission views the revised terms of the
Final Order as preserving similar protections as the Proposed Order,
while affording enhanced direct benefits for Exempt Entities.
---------------------------------------------------------------------------
\175\ See CEA sections 2(h)(1) and 2(h)(8), 7 U.S.C. 2(h)(1),
2(h)(8). The same is true for swap clearing and DCM or SEF trade
execution mandates.
\176\ For the same reasons as represented by Petitioners, a
foundational basis for exempting Exempt Non-Financial Energy
Transactions that may be swaps is that they are not suited to SEF
trading.
\177\ The Final Order's reservation of authority to revisit
terms and conditions serves as adequate protection that, over time,
transactions subject to the exemption retain their foundational
characteristics, including that they be (i) undertaken solely to
manage supply and/or price risks arising from Exempt Entities'
public service obligation to supply electric energy to customers and
(ii) bespoke and are not otherwise suitable for exchange trading as
futures. In the hypothetical event that, over time, this proves
untrue, the Commission anticipates it would use its reserved
authority to revisit the terms and conditions of this Final Order's
exemptive relief to realign it with the Commission's understanding
and expectations in this regard.
---------------------------------------------------------------------------
The Commission also has revised the Final Order from what was
proposed to accommodate Petitioners' request that final exemptive
relief apply retroactively to the enactment of the Dodd-Frank Act. As a
consequence, Exempt Entities will be saved any costs associated with
determining whether certain Exempt Non-Financial Energy Transactions
entered into prior to the effective date of the Final Order were
historical swaps or not, and reporting those historical transactions to
an SDR.\178\ Given the Commission's understanding of the nature and
volume of Exempt Non-Financial Energy Transactions between Exempt
Entities, it believes that any diminution in benefit attributable to
historical swap reporting will be de minimis, if any.
---------------------------------------------------------------------------
\178\ See supra Section II.E.3.
---------------------------------------------------------------------------
Relative to the third alternative of exercising its exemptive
authority more broadly and in a manner that would provide categorical
relief from all of the requirements of the CEA as requested by
Petitioners in their original Petition, the Commission purposefully has
defined the categories of exempt transactions more narrowly, and
preserved certain aspects of CEA jurisdiction with respect to them. As
reiterated in their comment letter,\179\ Petitioners sought categorical
relief for all Electric Operation-Related Transactions, regardless of
whether the transactions fell within a specifically-defined category.
The more open-ended categorical relief sought by Petitioners
theoretically would lessen the burden on Exempt Entities to determine
whether a transaction engaged in between them is or is not exempted
compared to the more refined and limited definition of Exempt Non-
Financial Energy Transactions that the Commission proposed. As stated
previously in this release, however, while transactions may be relief-
eligible under 4(c)(6), the Commission must ``determine that the
exemption would be consistent with the public interest and purposes of
[the] Act.'' \180\ Commenters have not provided sufficient information
for the Commission to make such a determination, or meaningfully
quantify the costs and benefits that categorical relief, as
distinguished from the relief provided in the Final Order, would confer
on market participants and the public. Given the inability to foresee
how these transactions may develop, the Commission considers it prudent
and in the public interest to ring-fence the definition within stated
parameters to restrict the potential for the transactions to evolve in
a manner incompatible with the public interest and purposes of the CEA.
---------------------------------------------------------------------------
\179\ Petitioners' Letter at 11-12; see also Petition at 4-5.
\180\ CEA section 4(c)(6), 7 U.S.C. 6(c)(6).
---------------------------------------------------------------------------
Finally, the exemption reserves the Commission's general anti-fraud
and anti-manipulation authority, and certain scienter-based
prohibitions, as well as the Commission's authority to review books and
records already kept in the ordinary course of business in the event
that circumstances warrant the need to gain greater visibility with
respect to Exempt Non-Financial Energy Transactions as they relate to
Exempt Entities' overall market positions, and to ensure compliance
with the terms of this Final Order.\181\ Petitioners'
[[Page 19687]]
comment letter did not challenge the Proposed Order's imposition of
these conditions on cost-benefit grounds, generally, though it did
request that the Commission's reserved authority not explicitly include
CEA section 4c(b) and regulation 32.4, as those provisions could be
interpreted as a Commission determination that certain Exempt Non-
Financial Energy Transactions constituted commodity options.\182\
Reserving CEA section 4c(b) and regulation 32.4 should not be so
interpreted. Furthermore, such reservations impose no additional costs
on Exempt Entities, as currently they are subject to the Commission's
authority under these provisions to the extent their transactions are
options.
---------------------------------------------------------------------------
\181\ As explained in the Proposed Order, the Commission
believes that this reservation of authority serves important
beneficial ends to ensure the integrity of commodity and commodity
derivatives markets within its jurisdiction. To the extent Exempt
Entities incur some cost to remain compliant with the CEA's anti-
fraud and anti-manipulation regime, and the specified scienter-based
prohibitions, the Commission considers such costs warranted by the
importance of maintaining commodity market integrity. The Commission
also believes that authority to inspect books and records kept in
the ordinary course of business, pursuant to its regulatory
inspection authority, as they relate to Exempt Non-Financial Energy
Transactions is important to assure visibility into activity in such
transactions on an as-needed basis. Further, as a general matter,
the Commission expects to exert its regulatory inspection authority
with respect to Exempt Non-Financial Energy Transactions
infrequently; and, such authority would involve only records that
Exempt Entities keep in the ordinary course of business, and only be
exercised in the event that circumstances warrant the need to gain
greater visibility with respect to Exempt Non-Financial Energy
Transactions as they relate to Exempt Entities' overall market
positions, and to ensure compliance with the terms of this Final
Order. The Commission believes that any costs occasioned by this
condition are de minimis.
\182\ See supra Section II.D.
---------------------------------------------------------------------------
5. Consideration of CEA Section 15(a) Factors
a. Protection of Market Participants and the Public
As explained above, the Commission does not foresee that the Final
Order will negatively affect the protection of market participants and
the public. More specifically, Exempt Non-Financial Energy
Transactions, as transacted bilaterally and in a closed loop between
Exempt Entities in the highly specialized and unique electric-industry
circumstances, do not appear to generate risks of the nature addressed
by the CEA. The Commission has delineated the definitional boundaries
for Exempt Entities and Exempt Non-Financial Energy Transactions in a
manner that appropriately ring-fences against the possibility that they
could generate such risks, either now or as they may evolve in the
future. Moreover, the exemption incorporates conditions \183\ to
counter residual risk that conceivably, though unexpectedly, might
survive notwithstanding the Final Order's definitional crafting.
---------------------------------------------------------------------------
\183\ These conditions include the reservation of the
Commission's anti-fraud and anti-manipulation authority, and certain
scienter-based prohibitions, as well as its authority to inspect
books and records already kept in the normal course of business.
Further, the Commission reserves the right to revisit the terms and
conditions of the Final Order's relief and alter or revoke them as
appropriate. See Section V.C.
---------------------------------------------------------------------------
b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The Commission foresees little, if any, negative impact from the
Final Order on the efficiency, competitiveness, and financial integrity
of markets regulated under the CEA. This is because, to the extent any
are jurisdictional, Exempt Non-Financial Energy Transactions entered
into between Exempt Entities constitute only a narrow market segment
limited to bespoke transactions, executed bilaterally between non-
financial entities primarily in order to satisfy existing or expected
operations-related public service obligations. Moreover, the Commission
anticipates the Final Order will help to maintain the competitive
landscape and efficiency of the market segment for Exempt Non-Financial
Energy Transactions entered into between Exempt Entities. As previously
discussed, the Final Order maintains the number of counterparties that
Exempt Entities will be able to face--namely, other Exempt Entities
with which they already conduct Exempt Non-Financial Energy
Transactions--by exempting Exempt Non-Financial Energy Transactions
between Exempt Entities from CEA section 2(e), and eliminates the
possibility that entering into Exempt Non-Financial Energy Transactions
will subject Exempt Entities to the full array of compliance costs
arising from the Commission's ongoing oversight regime.\184\ In
addition, the Commission expects that the Final Order will contribute
to operational efficiency in the market segment where Exempt Entities
conduct Exempt Non-Financial Energy Transactions with one another by
eliminating costs necessary to determine their regulatory status or the
status of Exempt Non-Financial Energy Transactions.
---------------------------------------------------------------------------
\184\ Exempt Entities may still incur minimal episodic
compliance costs with respect to Exempt Non-Financial Energy
Transactions if the Commission has a need to exercise its reserved
authority.
---------------------------------------------------------------------------
Further, as an exercise of the Commission's CEA section 4(c)
authority to provide legal certainty for novel instruments as Congress
intended, the Final Order affords Exempt Entities transactional
flexibility that the Commission understands to be valuable to their
ability to efficiently deploy their limited resources.
c. Price Discovery
The Commission does not believe that the Final Order will
materially impair price discovery in non-exempt, jurisdictional
markets. The Commission recognizes that a desire to avoid regulation in
theory could incentivize Exempt Entities to participate in Exempt Non-
Financial Energy Transactions to a greater extent than they otherwise
might choose to do, vis-[agrave]-vis related non-exempt markets. This
is unlikely, however, due to the requirement that Exempt Non-Financial
Energy Transactions be entered into only to manage supply and/or price
risk arising from their public service obligations to physically supply
electric energy service to customers, and only with other Exempt
Entities. The relatively small size of trading in this market segment
also renders it unlikely that the Final Order will materially impair
price discovery in jurisdictional markets even were the Final Order to
incentivize Exempt Entities to execute some of their customer-serving
transactions pursuant to the Final Order instead of on a registered
entity. Thus, against the backdrop of Congress' mandate to consider
exempting transactions between FPA 201(f) entities, the Commission
believes that the Final Order would not materially distort price
discovery in non-exempt, jurisdictional markets.
d. Sound Risk Management Practices
The Final Order will promote the ability of Exempt Entities to
manage the operational risks posed by unique electricity market
characteristics, including the non-storable nature of electricity and
demand that can and frequently does fluctuate dramatically within a
short time-span. As discussed above, the Commission understands that
Exempt Non-Financial Energy Transactions are an important tool
facilitating the ability of Exempt Entities to efficiently manage
operational risk in fulfillment of their public service mission to
provide affordable, reliable electricity.
e. Other Public Interest Considerations
In exercising its exemptive authority under CEA sections 4(c)(1)
and 4(c)(6) in the Final Order, the Commission is acting to promote the
broader public interest in facilitating the generation, transmission,
and delivery of affordable, reliable electric energy service as
Congress contemplated.
V. Final Order
Based on the Petitioners' representations, and for the reasons set
forth above, the Commission hereby
[[Page 19688]]
exempts, pursuant to Commodity Exchange Act (``CEA'') sections 4(c)(1)
and 4(c)(6), from all requirements of the CEA and Commission
regulations issued thereunder, except those specified below, all Exempt
Non-Financial Energy Transactions (as defined below) entered into
solely between Exempt Entities (as defined below), retroactive to the
date of enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, and subject to certain conditions (as detailed below):
A. Exempt Entity means (i) any electric facility or utility that is
wholly owned by a government entity, as described in Federal Power Act
(``FPA'') section 201(f), 16 U.S.C. 824(f); (ii) any electric facility
or utility that is wholly owned by an Indian tribe recognized by the
U.S. government pursuant to section 104 of the Act of November 2, 1994,
25 U.S.C. 479a-1; (iii) any electric facility or utility that is wholly
owned by a cooperative, regardless of such cooperative's status
pursuant to FPA section 201(f), so long as the cooperative is treated
as such under Internal Revenue Code section 501(c)(12) or
1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C), and exists for the
primary purpose of providing electric energy service to its member/
owner customers at cost; or (iv) any other entity that is wholly owned,
directly or indirectly, by any one or more of the foregoing. The term
``Exempt Entity'' does not include any ``financial entity,'' as defined
in CEA section 2(h)(7)(C).
B. Exempt Non-Financial Energy Transaction means any agreement,
contract, or transaction based upon a ``commodity,'' as such term is
defined in CEA section 1a(9) and Commission regulation 1.3(e), that
would not have been entered into, but for an Exempt Entity's need to
manage supply and/or price risks arising from its existing or
anticipated public service obligations to physically generate,
transmit, and/or deliver electric energy service to customers. The term
``Exempt Non-Financial Energy Transaction'' excludes agreements,
contracts, and transactions based upon, derived from, or referencing
any interest rate, credit, equity or currency asset class, or any grade
of a metal, or any agricultural product, or any grade of crude oil or
gasoline that is not used as fuel for electric energy generation. The
term ``Exempt Non-Financial Energy Transaction'' also excludes
agreements, contracts, or transactions entered into on or subject to
the rules of a registered entity, submitted for clearing to a
derivatives clearing organization, and/or reported to a swap data
repository. Exempt Non-Financial Energy Transactions are limited to the
following categories, which may exist as stand-alone agreements or as
components of larger agreements that combine the following categories
of transactions:
1. Electric Energy Delivered transactions consist of arrangements
in which a provider Exempt Entity agrees to deliver electric energy to
a recipient Exempt Entity within a geographic service territory, load,
or electric system over a period of time. Such transactions include
``full requirements'' contracts, under which one Exempt Entity becomes
obligated to provide, and the recipient Exempt Entity becomes obligated
to take, all of the electric energy the recipient needs to provide
reliable electric service to its fluctuating electric load over a
specified delivery period at one or multiple delivery points or
locations, net of any electric energy the recipient is able to produce
through generation assets that it owns.
2. Generation Capacity transactions consist of agreements in which
a recipient Exempt Entity purchases from a provider Exempt Entity the
right to call upon the provider Exempt Entity's electric energy
generation assets to supply electric energy within a geographic area,
regardless of whether such right is ever exercised for the purposes of
the recipient Exempt Entity meeting its location-specific reliability
obligations. Such transactions also may specify certain conditions that
must exist prior to exercising the right to use an Exempt Entity's
generation assets, or establish an agreement between Exempt Entities to
share pooled electric generation assets in order to satisfy regionally-
imposed demand side management program requirements.
3. Transmission Services transactions consist of arrangements in
which a provider Exempt Entity owning transmission lines sells to a
recipient Exempt Entity the right to deliver the recipient Exempt
Entity's electric energy from one designated point on the transmission
lines to another, at a price per wattage and over a period of time, in
order for the recipient Exempt Entity to provide electric energy to its
customers. Such transactions may include ancillary services related to
transmission such as congestion management and system losses.
4. Fuel Delivered transactions consist of arrangements used to buy,
sell, transport, deliver, or store fuel used in the generation of
electric energy by an Exempt Entity. Additionally, Fuel Delivered
transactions may include an agreement to manage the operational basis
or exchange (i.e., location or time of delivery) risk of an Exempt
Entity that arises from its location-specific, seasonal or otherwise
variable operational need for fuel to be delivered.
5. Cross-Commodity Pricing transactions consist of arrangements
such as heat rate transactions and tolling agreements in which the
price of electric energy delivered is based upon the price of the fuel
source used to generate the electric energy. Cross-Commodity
transactions also include fuel delivered agreements in which the price
paid for fuel used to generate electric energy is based upon the amount
of electric energy produced.
6. Other Goods and Services transactions consist of arrangements in
which the Exempt Entities enter into an agreement to share the costs
and economic benefits related to construction, operation, and
maintenance of facilities for the purposes of generation, transmission,
and delivery of electric energy to customers. In a full requirements
contract between Exempt Entities that share ownership of generation
assets, the provider Exempt Entity may determine how generation to meet
the recipient Exempt Entity's full requirements will be allocated among
the provider's independent generation assets, the jointly-owned
generation assets, and the recipient's independent generation assets.
Other Goods and Services transactions also may include agreements
between Exempt Entities to operate each other's facilities, share
equipment and employees, and interface on each other's behalf with
third parties such as suppliers, regulators and reliability
authorities, and customers, regardless of whether such agreements are
triggered as contingencies in emergency situations only or are
applicable during the normal course of operations of an Exempt Entity.
C. Conditions. The relief provided herein is subject to the
Commission's general anti-fraud and anti-manipulation authority, and
scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b,
4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and
13, and any implementing regulations promulgated under these sections
including, but not limited to, Commission regulations 23.410(a) and
(b), 32.4, and Part 180. Additionally, the Commission reserves its
authority to inspect books and records kept in the normal course of
business that relate to Exempt Non-Financial Energy Transactions
between Exempt Entities pursuant to the Commission's regulatory
inspection authorities. The relief provided herein does not affect the
jurisdiction of FERC or any other
[[Page 19689]]
government agency over the entities and transactions described herein.
Furthermore, the Commission reserves the right to revisit any of the
terms and conditions of the relief provided herein and alter or revoke
such terms and conditions as necessary in order for the Commission to
execute its duties and advance the public interests and purposes under
the CEA, including a determination that certain entities and
transactions described herein should be subject to the Commission's
full jurisdiction.
Issued in Washington, DC, on March 28, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.
Appendices to Order Exempting, Pursuant to Authority in Section 4(c) of
the Commodity Exchange Act, Certain Transactions Between Entities
Described in Section 201(f) of the Federal Power Act, and Other
Electric Cooperatives--Commission Voting Summary and Statement of the
Chairman
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final order regarding certain electricity and
electricity-related energy transactions between rural electric
cooperatives and/or federal, state, municipal, and tribal power
authorities (as defined in section 201F of the Federal Power Act).
Congress authorized that these transactions be exempt from
certain provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which is consistent with previous exemptions
Congress has granted from the Federal Power Act. For decades, these
entities have been generally recognized as performing a public
service mission to provide their customers or cooperative members
with reliable, affordable electric energy service. They have been
largely exempt from regulation by the Federal Energy Regulatory
Commission because of their government entity status or their not-
for-profit cooperative status.
This final order responds to a petition filed by a group of
these cooperatives and authorities and has benefitted from public
input.
The scope of the final order is carefully tailored to physically
backed electricity and electricity-related energy transactions that
are necessary for the generation, transmission and delivery of
electric energy services to customers.
[FR Doc. 2013-07633 Filed 4-1-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: April 2, 2013