Federal Register, Volume 78 Issue 63 (Tuesday, April 2, 2013)[Federal Register Volume 78, Number 63 (Tuesday, April 2, 2013)]
[Notices]
[Pages 19879-19915]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07634]
[[Page 19879]]
Vol. 78
Tuesday,
No. 63
April 2, 2013
Part III
Commodity Futures Trading Commission
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Final Order in Response to a Petition From Certain Independent System
Operators and Regional Transmission Organizations to Exempt Specified
Transactions Authorized by a Tariff or Protocol Approved by the Federal
Energy Regulatory Commission or the Public Utility Commission of Texas
From Certain Provisions of the Commodity Exchange Act Pursuant to the
Authority Provided in the Act; Notice
Federal Register / Vol. 78 , No. 63 / Tuesday, April 2, 2013 /
Notices
[[Page 19880]]
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COMMODITY FUTURES TRADING COMMISSION
RIN 3038-AE02
Final Order in Response to a Petition From Certain Independent
System Operators and Regional Transmission Organizations To Exempt
Specified Transactions Authorized by a Tariff or Protocol Approved by
the Federal Energy Regulatory Commission or the Public Utility
Commission of Texas From Certain Provisions of the Commodity Exchange
Act Pursuant to the Authority Provided in the Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Final order.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is issuing a final order (``Final Order'') in response
to a consolidated petition (``Petition'') \1\ from certain regional
transmission organizations (``RTOs'') and independent system operators
(``ISOs'') (collectively, ``Requesting Parties'') to exempt specified
transactions (``Covered Transactions'') from the provisions of the
Commodity Exchange Act (``CEA'' or ``Act''),\2\ and Commission
regulations. The Final Order exempts contracts, agreements, and
transactions for the purchase or sale of the limited electric energy-
related products that are specifically described within the Final Order
from the provisions of the CEA and Commission regulations, with the
exception of 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 of the Act 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. To be
eligible for the exemption contained in the Final Order, the contract,
agreement, or transaction must be offered or entered into in a market
administered by a Requesting Party pursuant to that Requesting Party's
tariff, rate schedule, or protocol (collectively, ``Tariff''), and the
relevant Tariff must have been approved or permitted to have taken
effect by either the Federal Energy Regulatory Commission (``FERC'') or
the Public Utility Commission of Texas (``PUCT''), as applicable. In
addition, the contract, agreement, or transaction must be entered into
by persons who are ``appropriate persons,'' as defined in sections
4(c)(3)(A) through (J) of the Act,\3\ ``eligible contract
participants,'' as defined in section 1a(18) of the Act and Commission
regulations,\4\ or persons who are in the business of: (i) Generating,
transmitting, or distributing electric energy, or (ii) providing
electric energy services that are necessary to support the reliable
operation of the transmission system. The Final Order also extends to
any person or class of persons offering, entering into, rendering
advice, or rendering other services with respect to the Covered
Transactions. Finally, the Final Order is subject to other conditions
set forth therein. Authority for issuing the exemption is found in
section 4(c)(6) of the Act.\5\
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\1\ In the Matter of the Petition for an Exemptive Order Under
Section 4(c) of the Commodity Exchange Act by California Independent
Service Operator Corporation; In the Matter of the Petition for an
Exemptive Order Under Section 4(c) of the Commodity Exchange Act by
the Electric Reliability Council of Texas, Inc.; In the Matter of
the Petition for an Exemptive Order Under Section 4(c) of the
Commodity Exchange Act by ISO New England Inc.; In the Matter of the
Petition for an Exemptive Order Under Section 4(c) of the Commodity
Exchange Act by Midwest Independent Transmission System Operator,
Inc.; In the Matter of the Petition for an Exemptive Order Under
Section 4(c) of the Commodity Exchange Act by New York Independent
System Operator, Inc.; and In the Matter of the Petition for an
Exemptive Order Under Section 4(c) of the Commodity Exchange Act by
PJM Interconnection, L.L.C. (Feb. 7, 2012, as amended June 11,
2012).
\2\ 7 U.S.C. 1 et seq.
\3\ 7 U.S.C. 6(c)(3)(A)-(J).
\4\ 7 U.S.C. 1a(18). ``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.
\5\ 7 U.S.C. 6(c)(6).
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A copy of the Petition is available on the Commission's Web site at
http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4capplication.pdf; the attachments to the
Petition are posted at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappattach.pdf. A chart
submitted by the Requesting Parties that sets forth the status of their
respective implementation of the standards set forth in FERC Order No.
741 (``FERC Order No. 741 Implementation Chart'') is posted at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappfercchart.pdf, and a revised version of the chart
(``Revised FERC Order No. 741 Implementation Chart'') is posted at
http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rtoisoltr011813.pdf. A copy of the ``Notice of Proposed Order
and Request for Comment on a Petition from Certain Independent System
Operators and Regional Transmission Organizations to Exempt Specified
Transactions Authorized by a Tariff or Protocol Approved by the Federal
Energy Commission or the Public Utility Commission of Texas From
Certain Provisions of the Commodity Exchange Act Pursuant to the
Authority Provided in Section 4(c)(6) of the Act'' (``Proposed Order'')
is available at 77 FR 52138, Aug. 28, 2012, and on the Commission's Web
site at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2012-20965a.pdf. A copy of the comment file is also
available on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1265.
DATES: Effective date: April 2, 2013.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel,
202-418-5092, [email protected], Laura Astrada, Associate Chief
Counsel, 202-418-7622, [email protected], Nadia Zakir, Associate
Director, 202-418-5720, [email protected], Jocelyn Partridge, Special
Counsel, 202-418-5926, [email protected], or Kirsten Robbins,
Attorney-Advisor, 202-418-5313, [email protected], Division of Clearing
and Risk; David P. Van Wagner, Chief Counsel, 202-418-5481,
[email protected], or W. Graham McCall, Attorney-Advisor, 202-418-
6150, [email protected], Division of Market Oversight; Mark Higgins,
Counsel, 202-418-5864, [email protected], or Thuy Dinh, Counsel, 202-
418-5128, [email protected], Office of the General Counsel; or Robert
Pease, 202-418-5863, [email protected], Division of Enforcement in each
case at the Commodity Futures Trading Commission, Three Lafayette
Centre, 1151 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Relevant Dodd-Frank Provisions
II. Background--Proposed Order
A. The Petition
B. The Proposal
1. Transactions Proposed To Be Exempted
2. Conditions to the Proposed Order
3. Additional Limitations
III. Summary of the Comments
IV. Determinations
A. Scope of the Final Order
1. Covered Transactions Subject to the Final Order
2. Additional Definitions and Provisions in the Final Order
3. Conditions to the Final Order
B. Section 4(c) Analysis
1. Overview of CEA Section 4(c)
2. CEA Section 4(c) Determinations
C. Issuance of a Separate or a Collective Order
[[Page 19881]]
D. Additional Limitations
E. Effectiveness of the Exemption
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Background
2. The Statutory Mandate To Consider the Costs and Benefits of
the Commission's Action: Section 15(a) of the CEA
3. Proposed Order and Request for Comment on the Commission's
Proposed Consideration of Costs and Benefits
4. Summary of Comments on the Costs and Benefits of the Proposed
Order
5. Summary of the Final Order--Determinations and Conditions
6. Costs of the Final Order
7. Benefits
8. Consideration of Alternatives
9. Consideration of CEA Section 15(a) Factors
VI. Order
I. Relevant Dodd-Frank Provisions
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\6\ Title VII
of the Dodd-Frank Act amended the CEA \7\ and altered the scope of the
Commission's exclusive jurisdiction.\8\ In particular, it expanded the
Commission's exclusive jurisdiction, which had included futures traded,
executed and cleared on CFTC-regulated exchanges and clearinghouses, to
also cover swaps traded, executed, or cleared on CFTC-regulated
exchanges or clearinghouses.\9\ As a result, the Commission's exclusive
jurisdiction now includes swaps as well as futures, and is clearly
expressed in CEA section 2(a)(1)(A), which reads:
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\6\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376
(2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.htm.
\7\ 7 U.S.C. 1 et seq.
\8\ Section 722(e) of the Dodd-Frank Act.
\9\ See 7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added
section 2(h)(1)(A), which requires swaps to be cleared if required
to be cleared and not subject to a clearing exception or exemption.
See 7 U.S.C. 2(h)(1)(A).
The Commission shall have exclusive jurisdiction, except to the
extent otherwise provided in the Wall Street Transparency and
Accountability Act of 2010 (including an amendment made by that Act)
and subparagraphs (C), (D), and (I) of this paragraph and
subsections (c) and (f), with respect to accounts, agreements
(including any transaction which is of the character of * * * an
``option''), and transactions involving swaps or contracts of sale
of a commodity for future delivery (including significant price
discovery contracts) traded or executed on a contract market * * *
or a swap execution facility * * * or any other board of trade,
exchange, or market * * *.\10\
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\10\ 7 U.S.C. 2(a)(1)(A).
The Dodd-Frank Act also added a savings clause that addresses the
roles of the Commission, FERC, and state agencies as they relate to
certain agreements, contracts, or transactions traded pursuant to the
tariff or rate schedule of an RTO or ISO.\11\ Toward that end,
paragraph (I) of CEA section 2(a)(1) repeats the Commission's exclusive
jurisdiction and clarifies that the Commission retains its authorities
over agreements, contracts or transactions traded pursuant to FERC- or
state-approved tariff or rate schedules.\12\ The same paragraph (I)
also explains that the FERC and state agencies preserve their existing
authorities over agreements, contracts, or transactions ``entered into
pursuant to a tariff or rate schedule approved by [FERC] or a State
regulatory agency,'' that are: ``(I) not executed, traded, or cleared
on'' an entity or trading facility subject to registration or ``(II)
executed, traded, or cleared on a registered entity or trading facility
owned or operated by a[n RTO] or [ISO].'' \13\
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\11\ See 7 U.S.C. 2(a)(1)(I).
\12\ See 7 U.S.C. 2(a)(1)(I)(i) and (ii).
\13\ 7 U.S.C. 2(a)(1)(I)(i)(II). The savings clause in CEA
section 2(a)(1)(I) provides that:
(I)(i) Nothing in this Act shall limit or affect any statutory
authority of the Federal Energy Regulatory Commission or a State
regulatory authority (as defined in section 3(21) of the Federal
Power Act (16 U.S.C. 796(21)) with respect to an agreement,
contract, or transaction that is entered into pursuant to a tariff
or rate schedule approved by the Federal Energy Regulatory
Commission or a State regulatory authority and is--
(I) not executed, traded, or cleared on a registered entity or
trading facility; or
(II) executed, traded, or cleared on a registered entity or
trading facility owned or operated by a regional transmission
organization or independent system operator.
(ii) In addition to the authority of the Federal Energy
Regulatory Commission or a State regulatory authority described in
clause (i), nothing in this subparagraph shall limit or affect--
(I) any statutory authority of the Commission with respect to an
agreement, contract, or transaction described in clause (i); or
(II) the jurisdiction of the Commission under subparagraph (A)
with respect to an agreement, contract, or transaction that is
executed, traded, or cleared on a registered entity or trading
facility that is not owned or operated by a regional transmission
organization or independent system operator (as defined by sections
3(27) and (28) of the Federal Power Act (16 U.S.C. 796(27),
796(28)).
In addition, Dodd-Frank Act section 722(g) (not codified in the
United States Code) expressly states that FERC's pre-existing
statutory enforcement authority is not limited or affected by
amendments to the CEA. Section 722(g) states:
(g) AUTHORITY OF FERC.--Nothing in the Wall Street Transparency
and Accountability Act of 2010 or the amendments to the Commodity
Exchange Act made by such Act shall limit or affect any statutory
enforcement authority of the Federal Energy Regulatory Commission
pursuant to section 222 of the Federal Power Act and section 4A of
the Natural Gas Act that existed prior to the date of enactment of
the Wall Street Transparency and Accountability Act of 2010.
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The Dodd-Frank Act granted the Commission specific powers to exempt
certain contracts, agreements, or transactions from duties otherwise
required by statute or Commission regulation by adding new sections to
the CEA, sections 4(c)(6)(A) and (B). Specifically, sections 4(c)(6)(A)
and (B) provide for exemptions for certain transactions entered into
(a) pursuant to a tariff or rate schedule approved or permitted to take
effect by FERC, or (b) pursuant to a tariff or rate schedule
establishing rates or charges for, or protocols governing, the sale of
electric energy approved or permitted to take effect by the regulatory
authority of the State or municipality having jurisdiction to regulate
rates and charges for the sale of electric energy within the State or
municipality.\14\
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\14\ The exemption language in section 4(c)(6) reads:
(6) If the Commission determines that the exemption would be
consistent with the public interest and the purposes of this Act,
the Commission shall, in accordance with paragraphs (1) and (2),
exempt from the requirements of this Act an agreement, contract, or
transaction that is entered into--
(A) pursuant to a tariff or rate schedule approved or permitted
to take effect by the Federal Energy Regulatory Commission;
(B) pursuant to a tariff or rate schedule establishing rates or
charges for, or protocols governing, the sale of electric energy
approved or permitted to take effect by the regulatory authority of
the State or municipality having jurisdiction to regulate rates and
charges for the sale of electric energy within the State or
municipality; or
(C) between entities described in section 201(f) of the Federal
Power Act (16 U.S.C. 824(f)).
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The Commission must act ``in accordance with'' sections 4(c)(1) and
(2) of the CEA, when issuing an exemption under section 4(c)(6).\15\
[[Page 19882]]
Section 4(c)(1) of the CEA grants the Commission the authority to
exempt any transaction or class of transactions, including swaps, from
certain provisions of the CEA, in order to ``promote responsible
economic or financial innovation and fair competition.'' \16\ Section
4(c)(2) \17\ of the Act further provides that the Commission may not
grant exemptive relief unless it determines that: (1) The exemption
would be consistent with the public interest and the purposes of the
CEA; (2) the transaction will be entered into solely between
``appropriate persons;'' \18\ and (3) the exemption will not have a
material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory
responsibilities under the CEA.\19\ In enacting section 4(c), Congress
noted that the purpose of the provision is to give the Commission a
means of providing certainty and stability to existing and emerging
markets so that financial innovation and market development can proceed
in an effective and competitive manner.\20\
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\15\ Section 4(c) was added to the CEA by the Futures Trading
Practices Act of 1992, Pub. L. 102-564. The Commission's authority
under section 4(c) was explained by the Conferees:
In granting exemptive authority to the Commission under new
section 4(c), the Conferees recognize the need to create legal
certainty for a number of existing categories of instruments which
trade today outside of the forum of a designated contract market.
The provision included in the Conference substitute is designed
to give the Commission broad flexibility in addressing these
products
*****
In this respect, the Conferees expect and strongly encourage the
Commission to use its new exemptive power promptly upon enactment of
this legislation in four areas where significant concerns of legal
uncertainty have arisen: (1) Hybrids, (2) swaps, (3) forwards, and
(4) bank deposits and accounts.
The Commission is not required to ascertain whether a particular
transaction would fall within its jurisdiction prior to exercising
its exemptive authority under section 4(c). The Conferees stated
that they did:
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 Act. Rather, this provision provides
flexibility for the Commission to provide legal certainty to novel
instruments where the determination as to jurisdiction is not
straightforward * * *
H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).
\16\ 7 U.S.C. 6(c)(1).
\17\ 7 U.S.C. 6(c)(2).
\18\ Section 4(c)(3) of the CEA further outlines who may
constitute an appropriate person for the purpose of a particular
4(c) exemption and includes, as relevant to this Final Order:
(a) Any person that qualifies for one of ten defined categories
of appropriate persons; or
(b) such other persons that the Commission determines to be
appropriate in light of their financial or other qualifications, or
the applicability of appropriate regulatory protections.
\19\ 7 U.S.C. 6(c)(2).
\20\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).
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II. Background
A. The Petition
On February 7, 2012, the Requesting Parties \21\ filed a joint
Petition \22\ with the Commission requesting that the Commission
exercise its authority under section 4(c)(6) of the CEA \23\ and
section 712(f) of the Dodd-Frank Act \24\ to exempt certain contracts,
agreements and transactions for the purchase or sale of specified
electric energy \25\ products, that are offered pursuant to a FERC- or
PUCT-approved Tariff,\26\ from most provisions of the Act.\27\ The
Requesting Parties include three RTOs (Midwest Independent Transmission
System Operator, Inc. (``MISO''); ISO New England, Inc. (``ISO NE'');
and PJM Interconnection, L.L.C. (``PJM'')), and two ISOs (California
Independent System Operator Corporation (``CAISO'') and New York
Independent System Operator, Inc. (``NYISO'')), whose central role as
transmission utilities is subject to regulation by FERC. The Requesting
Parties also include the Electric Reliability Council of Texas, Inc.
(``ERCOT''), an entity that performs the role of an ISO, but whose
central role as a transmission utility in the electric energy market is
subject to regulation by PUCT, the authority with jurisdiction to
regulate rates and charges for the sale of electric energy within the
state of Texas.\28\ The Requesting Parties represented that the roles,
responsibilities and services of ISOs and RTOs are substantially
similar.\29\ As described in the Proposed Order, the Requesting Parties
represented that FERC encouraged the formation of ISOs to consolidate
and manage the operation of electric energy transmission facilities in
order to provide open, non-discriminatory transmission service for
generators and transmission customers.\30\ The Requesting Parties also
represented that FERC encouraged the formation of RTOs to administer
the transmission grid on a regional basis.\31\
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\21\ In the preamble to the Proposed Order, the Requesting
Parties were also referred to as ``Petitioners.'' For consistency
with the Final Order, the term ``Requesting Parties'' is used
throughout the preamble to the Final Order.
\22\ Requesting Parties submitted an amended Petition on June
11, 2012. Citations herein to ``Petition'' are to the amended
Petition.
\23\ 7 U.S.C. 6(c)(6).
\24\ See section 712(f) of the Dodd-Frank Act.
\25\ In the Proposed Order, ``electric energy'' was also
referred to as ``electricity'' and ``electric power.'' For the sake
of consistency in the Final Order, the term ``electric energy'' is
used throughout the Final Order.
\26\ ``Tariff'' collectively refers to a tariff, rate schedule,
or protocol, to account for differences in terminology used by the
Requesting Parties and their respective regulators.
\27\ See 77 FR 52139. See also Petition at 2-3, 6.
\28\ See 77 FR 52139. See also Petition at 2-4; 16 Tex. Admin.
Code (``TAC'') 25.1 (1998).
\29\ See 77 FR 52139. See also Petition at 2 n.2.
\30\ See 77 FR 52139. See also FERC Order No. 888 Promoting
Wholesale Competition Through Open Access Non-Discriminatory
Transmission Facilities (``FERC Order No. 888''), 61 FR 21540, April
24, 1996.
\31\ See 77 FR 52139. See also Petition at 3.
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The Requesting Parties specifically petitioned the Commission to
exempt from most provisions of the CEA certain ``financial transmission
rights,'' ``energy transactions,'' ``forward capacity transactions,''
and ``reserve or regulation transactions,'' as defined in the Petition,
if such transactions are offered or entered into pursuant to a Tariff
under which a Requesting Party operates that has been approved by FERC
or PUCT, as applicable, as well as any persons (including the
Requesting Parties, their members and their market participants)
offering, entering into, rendering advice, or rendering other services
with respect to such transactions.\32\ The Requesting Parties asserted
that each of the transactions for which an exemption was requested is
(a) subject to a long-standing, comprehensive regulatory framework for
the offer and sale of such transactions established by FERC, or in the
case of ERCOT, PUCT, and (b) part of, and inextricably linked to, the
organized wholesale electric energy markets that are subject to the
regulation and oversight of FERC or PUCT, as applicable.\33\ The
Requesting Parties expressly excluded from the Petition a request for
relief from sections 4b, 4o, 6(c), and 9(a)(2) of the Act,\34\ and such
provisions explicitly have been carved out of the exemption set forth
in the Final Order.\35\ The Requesting Parties asked that, due to the
commonalities in the Requesting Parties' markets, the exemption apply
to all Requesting Parties and their respective market participants with
respect to each category of electric energy-related transactions
described in the Petition, regardless of whether such transactions are
offered or entered into at the current time pursuant to an individual
Requesting Party's Tariff.\36\ The Requesting Parties asserted that
this uniformity would avoid an individual Requesting Party being
required to seek future amendments to the exemption in order to offer
or enter into the same type of transactions currently offered by
another Requesting Party.\37\
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\32\ See 77 FR 52139. See also Petition at 2-3.
\33\ See 77 FR 52139. See also Petition at 11.
\34\ See 77 FR 52139. See also Petition at 3.
\35\ See discussion in section IV.D. infra.
\36\ See 77 FR 52139. See also Petition at 6.
\37\ See id.
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B. The Proposal
On August 28, 2012, the Commission issued the Proposed Order.\38\
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\38\ 77 FR 52138.
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1. Transactions Proposed to Be Exempted
The Commission proposed to exempt the purchase and sale of four
types of transactions \39\ defined within the Proposed Order: (1)
Financial Transmission Rights (``FTRs''), (2) Energy Transactions, (3)
Forward Capacity Transactions, and (4) Reserve
[[Page 19883]]
or Regulation Transactions, pursuant to section 4(c)(6) of the CEA.\40\
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\39\ In the preamble to the Proposed Order, the term
``Transactions'' was used to collectively refer to the transactions
covered by the Proposed Order. For clarity, the term ``Covered
Transactions'' is used throughout the preamble to the Final Order to
refer collectively to the transactions covered by the Final Order.
\40\ Id. at 52141, 52166-67.
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An ``FTR'' was proposed to be defined as ``a transaction, however
named, that entitles one party to receive, and obligates another party
to pay, an amount based solely on the difference between the price for
electricity, established on an electricity market administered by a
Requesting Party at a specified source (i.e., where electricity is
deemed injected into the grid of a Requesting Party) and a specified
sink (i.e., where electricity is deemed withdrawn from the grid of a
Requesting Party).'' \41\ As set forth in the Proposed Order, FTRs
would be exempt only where each FTR is linked to, and the aggregate
volume of FTRs for any period of time is limited by, the physical
capability (after accounting for counterflow) of the electric energy
transmission system operated by the Requesting Party offering the
contract for such period; a Requesting Party serves as the market
administrator for the market on which the FTR is transacted; each party
to the FTR is a member of a particular Requesting Party (or is the
Requesting Party itself); the FTR is executed on a market administered
by that Requesting Party; and the FTR does not require any party to
make or take physical delivery of electric energy.\42\
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\41\ Id. at 52166. The proposed definition of FTRs included such
rights ``in the form of options (i.e., where one party has only the
obligation to pay, and the other party only the right to receive, an
amount as described above).'' Id.
\42\ Id. at 52166. See also id. at 52141.
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``Energy Transactions'' were proposed to be defined as transactions
in a ``Day-Ahead Market'' \43\ or ``Real-Time Market'' (``RTM'') \44\
as those terms were defined in the Proposed Order, for the purchase or
sale of a specified quantity of electric energy at a specified
location, including ``Demand Response,'' \45\ as defined in the
Proposed Order, where: (1) The price of electric energy is established
at the time the Energy Transaction is executed; \46\ (2) performance
occurs in the RTM by either the physical delivery or receipt of the
specified electric energy or a cash payment or receipt at the price
established in the RTM; and (3) the aggregate cleared volume of both
physical and cash-settled Energy Transactions for any period of time is
limited by the physical capability of the electric energy transmission
system operated by a Requesting Party for that period of time.\47\
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\43\ ```Day-Ahead Market' '' was defined in the Proposed Order
as ``an electricity market administered by a Requesting Party on
which the price of electricity at a specified location is
determined, in accordance with the Requesting Party's Tariff, for
specified time periods, none of which is later than the second
operating day following the day on which the Day-Ahead Market
clears.'' Id. at 52167.
\44\ ```Real-Time Market' '' was defined in the Proposed Order
as ``an electricity market administered by a Requesting Party on
which the price of electricity at a specified location is
determined, in accordance with the Requesting Party's Tariff, for
specified time periods within the same 24-hour period.'' Id.
\45\ `` `Demand Response' '' was defined in the Proposed Order
as ``the right of a Requesting Party to require that certain sellers
of such rights curtail their consumption of electric energy from the
electric power transmission system operated by a Requesting Party
during a future period of time as specified in the Requesting
Party's Tariff.'' Id. The definition of Demand Response, as adopted
in this Order, should be read to be consistent with FERC's
definition of demand response, and thus any demand response rights
recognized under this Order must comport with the definition
provided by FERC. See 18 CFR 35.28(b)(4) (2012) (providing that
demand response means a reduction in the consumption of electric
energy by customers from their expected consumption in response to
an increase in the price of electric energy or to incentive payments
designed to induce lower consumption of electric energy).
\46\ See id. at 52141-42, 52166-67. For purposes of the Final
Order, the Commission is clarifying that Energy Transactions include
virtual and convergence bids and offers, as they are methods of
conducting such Energy Transactions. See section IV.A.1.c. infra.
\47\ See 77 FR 52167. See also id. at 52142; Petition at 7.
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``Forward Capacity Transactions'' were proposed to include
transactions in which a Requesting Party, for the benefit of load-
serving entities (``LSEs'') purchases the rights described in the
Proposed Order.\48\ The Commission proposed to limit eligibility of
Forward Capacity Transactions for the exemption by requiring that the
aggregate cleared volume of all such transactions for any period of
time must be limited to the physical capability of the electric energy
transmission system operated by the applicable Requesting Party for
that period of time.\49\
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\48\ See 77 FR at 52167.
\49\ See id.
---------------------------------------------------------------------------
``Reserve Regulation Transactions'' were defined in the Proposed
Order as transactions:
(1) In which a Requesting Party, for the benefit of [LSEs] and
resources, purchases, through auction, the right, during a period of
time specified in the Requesting Party's Tariff, to require the
seller to operate electric facilities in a physical state such that
the facilities can increase or decrease the rate of injection or
withdrawal of electricity to the electric power transmission system
operated by the Requesting Party with:
(a) Physical performance by the seller's facilities within a
response interval specified in the Requesting Party's Tariff
(Reserve Transaction); or
(b) Prompt physical performance by the seller's facilities (Area
Control Error Regulation Transaction);
(2) For which the seller receives, in consideration, one or more
of the following:
(a) Payment at the price established in the Requesting Party's
Day-Ahead or Real-Time Market, as those terms are defined in the
Proposed Order, price for electricity applicable whenever the
Requesting Party exercises its right that electric energy be
delivered (including Demand Response, as defined [in the Proposed]
Order);
(b) Compensation for the opportunity cost of not supplying or
consuming electricity or other services during any period during
which the Requesting Party requires that the seller not supply
energy or other services;
(c) An upfront payment determined through the auction
administered by the Requesting Party for this service;
(d) An additional amount indexed to the frequency, duration, or
other attributes of physical performance as specified in the
Requesting Party's Tariff; and
(3) In which the value, quantity and specifications for such
Transactions for a Requesting Party for any period of time are
limited by the physical capability of the electric transmission
system operated by Requesting Parties.\50\
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\50\ See id. See also id. at 52145.
Finally, in the Proposed Order, the Commission clarified that
financial transactions that are not tied to the allocation of the
physical capabilities of an electric energy transmission grid would not
be suitable for exemption, and were therefore not covered by the
Proposed Order, because such activity would not be inextricably linked
to the physical delivery of electric energy.\51\
---------------------------------------------------------------------------
\51\ See id. at 52143.
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The Commission proposed to limit the exemption to the transactions
described in the Proposed Order in which all parties thereto fall
within one of the appropriate persons categories in CEA sections
4(c)(3)(A) through (J), or, pursuant to CEA section 4(c)(3)(K), that
otherwise qualify as an eligible contract participant (``ECP''), as
such term is defined in section 1a(18)(A) of the Act and in Commission
regulation 1.3(m).\52\ The Proposed Order also required that the
delineated ``Transactions be offered or sold pursuant to a Requesting
Party's Tariff, which has been approved or permitted to take effect by:
(1) In the case of ERCOT, the PUCT or (2) In the
[[Page 19884]]
case of all other Requesting Parties, FERC.'' \53\
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\52\ For those ECPs engaging in the transactions delineated in
the Proposed Order in markets administered by a Requesting Party
that do not fit within the categories of ``appropriate persons'' set
forth in sections 4(c)(3)(A) through (J), the Commission proposed to
determine that they are appropriate persons pursuant to section
4(c)(3)(K), ``in light of their financial or other qualifications,
or the applicability of appropriate regulatory protections.'' The
Commission also noted that CEA section 2(e) permits all ECPs to
engage in swaps transactions other than on a designated contract
market (``DCM'') and that such entities should similarly be
appropriate persons for the purpose of the Proposed Order. See id.
at 52145-46.
\53\ See id.
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2. Conditions to the Proposed Order
a. Conditions Precedent to the Proposed Order
In the Proposed Order, the Commission proposed two conditions
precedent to the issuance of a final exemption. First, the Commission
proposed that it would not issue a final order to a specific RTO or ISO
until (i) such time as the Requesting Parties had adopted in their
Tariffs all of the requirements set forth in FERC regulation 35.47;
\54\ (ii) such Tariff provisions have been approved or have been
permitted to take effect by FERC or PUCT, as applicable; and (iii) such
Tariff provisions, have become effective and have been fully
implemented by the particular RTO or ISO.\55\ Second, as an additional
prerequisite to the issuance of a final order, the Commission proposed
to require that each Requesting Party provide a well-reasoned legal
opinion or memorandum from outside counsel that, in the Commission's
sole discretion, provides the Commission with assurance that the
netting arrangements contained in the approach selected by the
particular Requesting Party to satisfy the obligations contained in
FERC regulation 35.47(d) will, in fact, provide the Requesting Party
with enforceable rights of set off against any of its market
participants under title 11 of the United States Code \56\ in the event
of the bankruptcy of the market participant.\57\
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\54\ 18 CFR 35.47. See detailed discussion in section IV.3.a.i.
infra regarding the requirements set forth in FERC regulation 35.47.
\55\ See 77 FR 52164.
\56\ See 11 U.S.C. 553.
\57\ See 77 FR 52165.
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b. Conditions Subsequent to the Proposed Order
The Proposed Order included two information-sharing conditions
subsequent. First, the Commission proposed that, after promulgation of
the order, none of a Requesting Party's Tariffs or other governing
documents may include any requirement that the Requesting Party notify
a member prior to providing information to the Commission in response
to a subpoena or other request for information or documentation.\58\
---------------------------------------------------------------------------
\58\ See id. at 52142.
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Second, the Commission proposed that the exemption be conditioned
upon information sharing arrangements that are satisfactory to the
Commission between the Commission and FERC and between the Commission
and PUCT being in full force and effect.\59\
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\59\ See id. When the Proposed Order was published, the
Commission and FERC had already entered into a Memorandum of
Understanding, available at http://www.ferc.gov/legal/maj-ord-reg/mou/mou-33.pdf.
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3. Additional Limitations
In the Proposed Order, the Commission expressly noted that the
proposed exemption was based upon the representations made in the
Petition and in the supporting materials provided by the Requesting
Parties and their counsel, and that any material change or omission in
the facts and circumstances that alter the grounds for the Proposed
Order might require the Commission to reconsider its finding that the
exemption contained therein is appropriate and/or in the public
interest and consistent with the purposes of the CEA.\60\ The
Commission highlighted several of the Requesting Parties'
representations of particular importance, including: (1) The exemption
sought by the Requesting Parties relates to the transactions described
in the Proposed Order, which are primarily entered into by commercial
participants that are in the business of generating, transmitting, and
distributing electric energy; \61\ (2) the Requesting Parties were
established for the purpose of providing affordable, reliable electric
energy to consumers within their geographic region; \62\ (3) the
transactions described in the Proposed Order are an essential means,
designed by FERC and PUCT as an integral part of their statutory
responsibilities, to enable the reliable delivery of affordable
electric energy; \63\ (4) each of the transactions defined in the
Proposed Order taking place on the Requesting Parties' markets is
monitored by Market Monitoring Units (``MMUs'') responsible to either
FERC or, in the case of ERCOT, PUCT; \64\ and (5) each transaction
defined in the Proposed Order is directly tied to the physical
capabilities of the Requesting Parties' electric energy grids.\65\ In
the Proposed Order, the Commission explicitly reserved the authority
to, in its discretion, revisit any of the terms of the relief provided
by the Proposed Order including, but not limited to, making a
determination that certain entities should be subject to the
Commission's jurisdiction.\66\ The Commission also explicitly reserved
the authority to, in its discretion, suspend, terminate, or otherwise
modify or restrict the Proposed Order.\67\ Finally, the Commission
announced its intention to exclude from the exemptive relief its
general anti-fraud, anti-manipulation, and enforcement authority under
the CEA over the Requesting Parties and the transactions defined in the
Proposed Order, including, but not limited to, sections 2(a)(1)(B), 4b,
4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9,
and 13 of the CEA and any implementing regulations promulgated
thereunder including, but not limited to, Commission regulations
23.410(a) and (b), 32.4, and part 180.\68\
---------------------------------------------------------------------------
\60\ See id. at 52167. See also id. at 52142, 52165.
\61\ See id. at 52142. See also Petition at 20.
\62\ See 77 FR 52142.
\63\ See id. See also generally FERC Order No. 888; FERC Order
No. 2000; 18 CFR 35.34(k)(2); TAC 25.1; Petition at 11, 13-14.
\64\ See 77 FR 52142. See also Petition at 15-18.
\65\ See 77 FR 52142.
\66\ See id. at 52167. See also id. at 52142.
\67\ See id. at 52167-68. See also id. at 52142; Petition at 15-
18.
\68\ See 77 FR at 52166. See also id. at 52163.
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II. Summary of the Comments
The public comment period on the Proposed Order ended on September
27, 2012. The Commission received twenty-three (23) comment letters on
the Proposed Order,\69\ the majority of which provided general support
for the proposed exemption.\70\ The comment
[[Page 19885]]
letters addressed a variety of issues including: the scope of the
transactions set forth in the Proposed Order; the scope of the
definition of appropriate persons for purposes of the exemption; the
use of the derivatives clearing organization (``DCO'') and swap
execution facility (``SEF'') Core Principles in the public interest and
purposes of the CEA analysis; both proposed conditions precedent
(i.e.,--the requirements that the Requesting Parties fully comply with
the standards set forth in FERC regulation 35.47 and submit a legal
opinion or memorandum providing assurances regarding the netting
arrangements in their respective approach to satisfying the standard
set forth in FERC regulation 35.47(d)); the proposed information
sharing agreement between the Commission and PUCT; the proposed
condition subsequent that the Requesting Parties revise their Tariffs
to remove requirements to notify their members upon receipt of requests
for information by the Commission; whether other conditions should be
imposed; the Commission's jurisdiction; the Commission's reservation of
anti-fraud, anti-manipulation, and enforcement authority; the
effectiveness of the exemption \71\; the issuance of a separate or
collective Final Order; the extension of supplemental relief to all
Requesting Parties; and other considerations regarding the costs and
benefits of the exemptive relief. In determining the scope and content
of the Final Order, the Commission has taken into account issues raised
by commenters, including those issues with respect to the costs and
benefits associated with the exemption.
---------------------------------------------------------------------------
\69\ All comment letters are available through the Commission's
Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1265. Comments addressing the Proposed Order
were received from: AB Energy; American Public Power Association
(``APPA''); Coalition of Physical Energy Companies (``COPE''); The
Commercial Energy Working Group (``Commercial Working Group''); DC
Energy, LLC (``DC Energy''); Staff of the Federal Energy Regulatory
Commission (``FERC Staff''); Financial Institutions Energy Group
(``FIEG''); Financial Marketers Coalition; the Industrial Coalitions
(collectively referring to PJM Industrial Customer Coalition, NEPOOL
Industrial Customer Coalition, and Coalition of Midwest Transmission
Customers); Joint Trade Associations (collectively referring to
Electric Power Supply Association, Edison Electric Institute;
National Rural Electric Cooperative Association, APPA, and Large
Public Power Council); New England Power Pool Participants Committee
(``NEPOOL''); New York Public Service Commission (``NYPSC''); New
York Transmission Owners (``NYTOs'') (collectively referring to
Central Hudson Gas & Electric Corporation, Consolidated Edison
Company of New York, Inc., Long Island Power Authority, New York
Power Authority, New York State Electric & Gas Corporation, Niagara
Mohawk Power Corporation d/b/a National Grid, Orange and Rockland
Utilities, Inc., and Rochester and Electric Corporation); PUCT;
Tarachand Enterprises, Inc. (``Tarachand''); and Texas Energy
Association and Alliance for Retail Markets (collectively, ``TEAM/
ARM''). The Requesting Parties jointly submitted a comment letter,
which contained a supplement pertaining solely to NYISO (``NYISO
Supplement to Requesting Parties' Comment Letter, Attachment B'').
In addition, CAISO and ISO NE jointly submitted two supplemental
comment letters (``CAISO/ISO NE January'' and ``CAISO/ISO NE
March''), NYISO and PJM each submitted supplemental comment letters
on their own behalf, and ERCOT submitted two supplemental comment
letters (``ERCOT October'' and ``ERCOT December'').
\70\ See, e.g., APPA at 1; Commercial Working Group at 1; DC
Energy at 1; FIEG at 1; Financial Marketers Coalition at 1;
Industrial Coalitions at 1, 3; Joint Trade Associations at 1, 3, 5;
NEPOOL at 2; NYTOs at 1, 3; PUCT at 2.
\71\ See section IV.E. infra.
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IV. Determinations
A. Scope of the Final Order
1. Covered Transactions Subject to the Final Order
The Commission received multiple comments regarding the scope of
the transactions that are covered by the exemption set forth in the
Final Order, including comments requesting: (1) Clarification of the
types of transactions that the Commission intended to include within
the definitions of the transactions proposed for exemption; (2) a broad
expansion of the Covered Transactions in the Final Order to include,
for example, additional transactions that are ``logical outgrowths'' of
a Requesting Party's core function as an RTO or ISO; (3) expansion of
the exemptive relief specifically to include virtual and convergence
bids and offers; and (4) an expedited process for expanding the
exemption to include additional transactions.
a. Determinations With Respect to Types of Transactions
Some commenters requested that the Commission confirm that the
exemption is not limited to products currently traded in their
respective markets, and that modifications to existing products and new
products, however named, that fall within the definitions of the
Covered Transactions and that are offered pursuant to the Requesting
Parties' Tariffs would be covered by the Final Order.\72\ On the other
hand, one commenter requested that the Commission identify, and provide
notice and an opportunity to comment on, any specific categories of
transactions that the Commission intends to exclude from the Final
Order.\73\
---------------------------------------------------------------------------
\72\ See NYTOs at 5; Requesting Parties at 9-10.
\73\ See Joint Trade Associations at 3 n.3.
---------------------------------------------------------------------------
The Commission confirms that the definitions of the Covered
Transactions included in the Final Order do not limit the exemption to
those products that are currently traded in a Requesting Party's
markets. Any products that are offered by a Requesting Party, presently
or in the future, pursuant to a FERC- or PUCT-approved Tariff and that
fall within these definitions, as well as any modifications to existing
products that are offered by a Requesting Party pursuant to a FERC- or
PUCT-approved Tariff and that do not alter the characteristics of the
Covered Transactions in a way that would cause such products to fall
outside these definitions, are intended to be included within the Final
Order. Accordingly, with respect to the request to expressly specify
transactions that are excluded from the exemption, the Commission notes
that a Requesting Party would not be required to request or to obtain
future supplemental relief for a product that is modified as described
above or a product that it subsequently (but does not currently) offer,
if the product qualifies as one of the four types of Covered
Transactions in the Final Order.
The Commission notes that the definitions of the Covered
Transactions set forth in the Final Order are sufficiently broad to
include modifications to existing products and new products that fall
within such definitions. These definitions are substantially similar to
the specific definitions that were requested in the Petition. Moreover,
commenters have had the opportunity to identify and comment upon
instances, if any, of existing transactions that fall outside the scope
of the Proposed Order. In addition, the Commission is concerned that
providing lists of excluded transactions may limit the Requesting
Parties' flexibility, may require more frequent requests for
supplemental relief (possibly incurring inadvertent delays), and may
add market confusion. As such, consistent with the confirmation set
forth above, the Commission believes it would be inappropriate and
inefficient to set forth all transactions that would be excluded from
the scope of the Final Order.
b. Determinations With Respect to Requests to Broadly Expand the
Covered Transactions in the Final Order
Multiple commenters requested that the scope of transactions
eligible for the exemption in the Final Order be expanded to include
(a) transactions and services that are logical outgrowths of the
Requesting Parties' functions as RTOs or ISOs,\74\ (b) transactions
that are directly related to, and a natural outgrowth of, the four
categories of transactions set forth in the Proposed Order,\75\ or (c)
transactions and services that are ``economically comparable'' in
substance to the four types of transactions described in the Proposed
Order.\76\ Commenters generally argued that such expansion was
necessary to allow flexibility in the adaption and development of the
transactions and services of the RTOs and ISOs, which flexibility is
necessary for reliable and cost-effective distribution of electric
energy services.\77\ In addition, one
[[Page 19886]]
commenter specifically asked whether `logical outgrowth' ``transactions
[should] be viewed as Commission-regulated until a future exemption is
issued * * *'' \78\
---------------------------------------------------------------------------
\74\ See, e.g., FERC Staff at 5; FIEG at 2; Joint Trade
Associations at 9; NEPOOL at 5.
\75\ See, e.g., PUCT at 7-8.
\76\ See, e.g., Requesting Parties at 10-11; NYTOs at 5.
\77\ See, e.g., FERC Staff at 5 (stating that the products and
services offered by the RTOs and ISOs are an ``essential means for
carrying out FERC's statutory responsibilities'' and that the
failure to expand the scope of the exemption as requested could
``unduly inhibit or delay innovation by RTOs and ISOs''); Joint
Trade Associations at 9-10 (arguing that the product restrictions
contained in the Proposed Order ``could have a chilling effect'' on
the development of ``more efficient or innovative market structures
which, in turn, will affect the efficient operation of the
markets''); NEPOOL at 4-5 (arguing that absent an expansion, market
participants may need additional exemptions from the Commission for
relatively minor modifications regardless of whether such
modifications are designed to ensure reliability and cost-effective
electric energy services); PUCT at 7-8 (asserting that requiring
supplemental relief for products that are directly related to, and a
natural outgrowth of, the four categories of transactions specified
in the Final Order ``could have a chilling effect on innovation and
overall market efficiency.'').
\78\ COPE at 5.
---------------------------------------------------------------------------
Nonetheless, one commenter agreed that a modification to the Final
Order should be required for new products that do not logically fit
within the Final Order's specified categories, noting that the
Commission should have the opportunity to evaluate whether exempting
such products would be consistent with the public interest.\79\ The
Requesting Parties also stated that they ``have not requested a blanket
exemption and agree that they should seek to supplement the Proposed
Order if they develop new products that are potentially within the
Commission's jurisdiction and that present significantly different
economic characteristics from those products covered by the Proposed
Order.'' \80\
---------------------------------------------------------------------------
\79\ PUCT at 7.
\80\ Requesting Parties at 11.
---------------------------------------------------------------------------
As set forth above, the Commission re-affirms that the exemption
extends to any transaction that falls within the Covered Transactions
set forth in this Final Order, whether currently existing or later
included in a Requesting Party's Tariff. The Commission declines,
however, to magnify the Final Order to include the expansive terms
requested by the specified commenters. Section 4(c)(6) of the CEA, by
its terms, was not intended to permit a blanket exemption for all
transactions entered into pursuant to a FERC- or PUCT- approved Tariff.
Moreover, section 4(c)(6) expressly prohibits the Commission from
issuing an exemption for such transactions unless it affirmatively
determines that exempting them would be consistent with the public
interest and the purposes of the CEA. While the Commission has been
able to perform this evaluation for the Covered Transactions delineated
in the Final Order, phrases such as ``logical outgrowth,'' ``natural
outgrowth,'' and ``economically comparable'' are too vague and
potentially too far reaching to permit meaningful analysis under the
statutory standard of review. Commenters have not provided, by way of
explanation or example, sufficient insight as to what, if any,
boundaries an exemption would have if it were extended to the degrees
requested.
Moreover, the Commission's determination that this exemption is in
the public interest and consistent with the purposes of the CEA is
grounded, in part, on certain characteristics of the Covered
Transactions and market circumstances described by the Requesting
Parties including, for example, that the Covered Transactions are
``part of, and inextricably linked to, the organized wholesale
electricity markets that are subject to FERC or PUCT regulation and
oversight.'' \81\ Such qualities may or may not be shared by other, as
yet undefined, transactions. Additionally, it is impossible for the
Commission to determine whether unidentified transactions include novel
features or have market implications or risks that are not present in
the Covered Transactions, which could, in turn, impact the Commission's
public interest and purposes of the CEA analysis or necessitate the
inclusion of additional or differing terms and conditions in a final
order.
---------------------------------------------------------------------------
\81\ 77 FR 52144. See also Petition at 11.
---------------------------------------------------------------------------
Finally, there may be differences in opinion among the Requesting
Parties with respect to the expansion of relief beyond the Covered
Transactions. Indeed, the Requesting Parties themselves request that
future supplemental relief not be automatically granted to all
Requesting Parties and the Commission notes that it has already
received supplemental requests for relief that would apply only to
certain Requesting Parties, and might be objected to by other
Requesting Parties.\82\
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\82\ See In the Matter of the Application for an Exemptive Order
Under Section 4(c) of the Commodity Exchange Act by ISO New England
Inc. (April 30, 2012); In the Matter of the Application for an
Exemptive Order Under Section 4(c) of the Commodity Exchange Act by
California Independent System Operator Corporation (May 30, 2012).
---------------------------------------------------------------------------
In light of these considerations and the potential for adverse
consequences that may result from an exemption that includes
transactions whose qualities and effect on the broader market cannot be
fully appreciated absent further specification, a virtually unlimited
exemption would be contrary to the public interest and purposes of the
CEA. In addition, consideration of new categories of transactions could
be aided by the public notice and comment process. Furthermore, the
Commission notes that it is prepared to review requests for
supplemental relief from the Requesting Parties.\83\
---------------------------------------------------------------------------
\83\ See 77 FR 52163.
---------------------------------------------------------------------------
c. Determinations With Regards to Scope of ``Energy Transactions''
Definition
In discussing the scope of ``Energy Transactions'' included in the
Proposed Order, the Commission stated that such transactions ``are also
referred to as Virtual Bids or Convergence Bids.'' \84\ Commenters
noted,\85\ however, that, in a later discussion of the categories of
transactions to which the exemption would apply, the Commission stated
that ``virtual and convergence bids/transactions'' would be included
within the scope of the exemption only to the extent that they would
qualify under one of the four categories of transactions explicitly
defined in the Proposed Order.\86\ Multiple commenters requested that
the Commission clarify that virtual and convergence bids and offers are
explicitly included within the scope of the Covered Transactions that
qualify for an exemption under the Final Order.\87\ Specifically, the
Requesting Parties asked that the Final Order define ``Energy
Transactions'' to include ``virtual and convergence bids and offers.''
\88\
---------------------------------------------------------------------------
\84\ 77 FR 52142 (citing Petition at 6).
\85\ See, e.g., DC Energy at 2; PUCT at 5-6; Requesting Parties
at 12.
\86\ Specifically, the Proposed Order explained:
The particular categories of contracts, agreements and
transactions to which the Proposed Exemption would apply correspond
to the types of transactions for which relief was explicitly
requested in the Petition. Petitioners requested relief for four
specific types of transactions and the Proposed Exemption would
exempt those transactions. With respect to those transactions, the
Petition also included the parenthetical ``(including generation,
demand response or convergence or virtual bids/transactions).'' The
Commission notes that such transactions would be included within the
scope of the exemption if they would qualify as the financial
transmission rights, energy transactions, forward capacity
transactions or reserve or regulation transactions for which relief
is explicitly provided within the exemption.
77 FR 52163 (internal citations omitted).
\87\ Commercial Working Group at 2; DC Energy at 2; FIEG at 2;
NEPOOL at 10; Requesting Parties at 12; PUCT at 5.
\88\ Requesting Parties at 13.
---------------------------------------------------------------------------
Several commenters expressed concerns that certain statements
regarding the physical nature of transactions proposed to be exempt,
and the role of market participants as physical generators,
transmitters, and distributors of electric energy, cast further doubt
as to whether the Commission intended to include virtual and
convergence bids and offers within the scope of the Proposed Order. One
commenter noted that the Commission's statement that the transactions
proposed to be exempt are ``primarily entered into by commercial
participants that are in the business of generating, transmitting and
distributing electricity'' suggested that virtual and convergence bids
and offers may not qualify as Covered Transactions because both
traditional and non-traditional utilities engage in such transactions,
yet many do not own physical generation or wholesale
[[Page 19887]]
transmission facilities.\89\ Similarly, the Requesting Parties
requested the removal of the statement in the Proposed Order that
provided ``[t]o be eligible for the proposed exemption, the contract,
agreement, or transaction would be required to be offered or entered
into in a market administered by a Petitioner pursuant to that
Petitioner's tariff or protocol for the purposes of allocating such
Petitioner's physical resources.'' \90\ Finally, other commenters noted
concern with the Commission's qualification that ``financial
transactions that are not tied to the allocation of the physical
capabilities of an electric transmission grid would not be suitable for
exemption because such activity would not be inextricably linked to the
physical delivery of electricity,'' \91\ suggesting that the phrase
potentially excluded virtual and convergence bids and offers from the
scope of Covered Transactions, depending upon the interpretation of the
relationship between virtual transactions and the physical delivery of
electricity.\92\
---------------------------------------------------------------------------
\89\ See Financial Marketers Coalition at 3-4 (quoting 77 FR
52144). The Commission notes that the statement referenced by this
commenter was intended to summarize a representation made by the
Requesting Parties. See 77 FR 52144 (``Petitioners also explain that
the Transactions are primarily entered into by commercial
participants that are in the business of generating, transmitting,
and distributing electricity'').
\90\ Requesting Parties at 13 (citing 77 FR 52138).
\91\ 77 FR 52143.
\92\ See Financial Marketers Coalition at 7-8; FIEG at 2; NEPOOL
at 3.
---------------------------------------------------------------------------
Despite their uncertainty with respect to particular statements,
multiple commenters contended that virtual and convergence bids and
offers fell within the transactions described in the Proposed
Order.\93\ Commenters posited that virtual and convergence bids and
offers, like all other transactions described in the Proposed Order,
are entered into pursuant to FERC- or PUCT-approved Tariffs, and thus
are subject to the oversight of the Requesting Parties' MMUs. In
addition, certain commenters argued that virtual and convergence bids
and offers are inextricably linked to the physical delivery of electric
energy by being tied to the allocation of the physical capabilities of
the electric energy transmission grid.\94\
---------------------------------------------------------------------------
\93\ See, e.g., Requesting Parties at 12 (noting that virtual
transactions fall into the category of ``Energy Transactions,''
specifically, as such term was defined in the Proposed Order). The
Commercial Working Group noted that, in addition to virtual
transactions, ``financial schedules'' and ``internal bilateral
transactions'' can appropriately be placed in one of the four
enumerated categories of transactions defined in the Proposed Order,
and as such, should be explicitly included in the Final Order as
Covered Transactions. See Commercial Working Group at 2. The
Commission notes that financial schedules and internal bilateral
transactions are the subject of a separate request for supplemental
relief filed by CAISO and ISO NE and, therefore, the Commission is
taking no position in this Final Order with respect to those
products. See note 82 supra.
\94\ Requesting Parties at 14 (``On a net basis, Virtual
Transactions in the RTOs and ISOs are modeled identically to
generation and load; therefore, the net cleared amount of all bids
and offers (including virtual bids and offers) cannot exceed the
physical capability of the grid to flow electricity.''); PUCT at 6;
DC Energy at 2 (``[V]irtual energy transactions also serve to
converge the Day-Ahead and Real-Time markets as well as provide
liquidity and price discovery, all of which are inextricably linked
to the physical capabilities of an efficient electricity market and
grid.''); FIEG at 2 (``While virtual bids are indeed financial, they
do not exist in isolation from the capabilities of the electric
grid. Indeed, RTOs significantly restrict virtual bids based in
large part on their potential to tangibly impact the electric grid
itself.''); Financial Marketers Coalition at 8-9 (``Virtual
Transactions cannot be entered into unless the selected node and the
grid are capable of supporting the transaction. If the physical node
is not available, the transaction is rejected. Thus the aggregate
cleared volume of Virtual Transactions for any period is limited by
the physical capability of the electricity system operated by the
RTOs/ISOs and is based on the projected physical power needs of the
system for the specific hour, day, month or year.'').
---------------------------------------------------------------------------
Commenters represented that virtual and convergence bids and offers
were established as a means by which to improve efficiency and
competitiveness in the electric energy markets through the convergence
of Day-Ahead Market and RTM prices,\95\ and have been promoted by FERC
and PUCT.\96\ The Requesting Parties further explained that ``[a]
Virtual Transaction is a cleared offer to sell energy in the day-ahead
market (an `incremental offer' or `inc') or a cleared bid to buy energy
in the day-ahead market (a `decremental bid' or `dec'),'' and ``may be
submitted by market participants that do not have a physical position
in the ISO/RTO markets, which is to say, they do not own generation or
serve load.'' \97\ Day-Ahead Market transactions are not, however,
limited to non-generating or non-LSEs, as ``owners of physical
generating units that are capacity resources in the ISO/RTO must submit
an offer to sell the energy output of their units into the day-ahead
market,'' and ``[s]imilarly, participants that serve load in an ISO/RTO
market may additionally submit bids into the day-ahead market.'' \98\
The Requesting Parties asserted that, because the Day-Ahead Market is
cleared by modeling all bids and offers without distinction as to
whether they are virtual or physical in nature, virtual and convergence
bids and offers satisfy the proposed criteria that the aggregate
cleared volume of Energy Transactions be limited by the physical
capability of the electric energy transmission system in order for an
Energy Transaction to be subject to the exemption.\99\
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\95\ PUCT at 6 (``The [Day-Ahead Market] was instituted in the
ERCOT market to provide opportunities for increased efficiency in
the market for physical energy transactions,'' and ``would not exist
but for its direct linkage to the real-time market for energy and
ancillary services necessary to operate the electric system.'');
Financial Marketers Coalition at 8 (noting that Day-Ahead Market
modeling ``results in both price and operational efficiency because
it allows the system operator to determine which units to dispatch
based on the best price and projected demands considering all offers
and bids including virtuals.''); NEPOOL at 3 (``Virtual bidding
allows virtual traders to supply power to service areas where
physical competition is constrained due to insufficient transmission
and to increase market efficiency by making pricing less volatile as
day-ahead prices converge with real-time prices.'').
\96\ PUCT at 6; Financial Marketers Coalition at 3-4, 12 (noting
that FERC has encouraged, and in some cases even required,
unbundling of services, and promoted market entry by non-traditional
utilities lacking physical resources in order to enhance
competition).
\97\ Requesting Parties at 14. PUCT explained that, ``in the
ERCOT market, Virtual Transactions are limited to transactions in
the Day Ahead Market (DAM).'' PUCT at 6. The Financial Marketers
Coalition defined a ``virtual transaction'' as ``a purchase or sale
of energy in the day-ahead market that is settled against real-time
energy prices.'' Financial Marketers Coalition at 2 n.2.
\98\ Requesting Parties at 14.
\99\ See id.
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In response to commenters' concerns, the Commission has added
language to the Energy Transactions definition to clarify in the Final
Order that Energy Transactions ``includ[e] * * * Virtual and
Convergence Bids and Offers.'' \100\ This clarification is based on
Requesting Parties' and other regulators' representations that virtual
and convergence bids and offers are ``Energy Transactions'' in the
``Day-Ahead Market,'' as such terms are defined in the Final
Order,\101\ that enable market participants to buy and sell electric
energy without physically producing or consuming it.\102\ Although
there is an apparent financial settlement nature of virtual and
convergence bids and offers transacted in the Day-Ahead Market,
Requesting Parties represented that they are inextricably linked to the
physical delivery of electric energy due to their being subject to the
same aggregate physical capabilities of the electric energy
transmission grid as other
[[Page 19888]]
physical Energy Transactions.\103\ Requesting Parties also represented
that virtual and convergence bids and offers are integral to achieving
increased efficiency, and ultimately lower consumer costs, through the
convergence of Day-Ahead Market and RTM prices.\104\ Accordingly, based
on these representations, the Commission confirms that the inclusion of
virtual and convergence bids and offers that are Energy Transactions
within the scope of the Covered Transactions in the Final Order is
consistent with the public interest and purposes of the CEA.
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\100\ See paragraph 5(b) of the Order. Additionally, in response
to the Requesting Parties' comment, the Commission has not included
any reference in the Final Order suggesting that the purpose of a
Covered Transaction must be to allocate a Requesting Party's
physical resources.
\101\ Consistent with the Commission's understanding of industry
practice as reflected in the Requesting Parties' current Tariffs,
``the day on which the Day-Ahead Market clears'' in the Order
definition of ``Day-Ahead Market'' shall mean the same day that the
relevant transaction in the Day-Ahead Market is entered into. See
paragraph 5(e) of the Order.
\102\ Requesting Parties at 14. See also PUCT at 6.
\103\ Requesting Parties at 14.
\104\ See, e.g., NYISO at 3-4.
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Finally, CAISO and ISO NE requested that the proposed definition of
``Energy Transactions'' be amended to allow for cash settlement based
upon the Day-Ahead Market price (in addition to the Real-Time Market
price), due to the fact that for both CAISO and ISO NE., the Day-Ahead
Market may be preferable to the Real-Time Market as a source of
settlement prices for certain energy transactions.\105\ CAISO and ISO
NE requested such a change to account for certain energy transactions
in their markets that otherwise might not be included within the scope
of the Energy Transactions definition, but nonetheless are settled
``under tariff provisions which have been approved by the FERC'' and
that ``[o]nce entered into the settlement system * * *, are
operationally treated the same as any other Energy Transaction included
in the Commission's Proposed Order.'' \106\ Accordingly, the Commission
has amended the definition to provide that the requisite performance of
an energy transaction may occur in the Real-Time Market through ``[a]
cash payment or receipt at the price established in the Day-Ahead
Market or Real-Time Market (as permitted by each Requesting Party in
its Tariff).'' \107\ The Commission stresses that any Energy
Transaction settling based upon the Day-Ahead Market price must be
inextricably linked to the physical delivery of electric energy.
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\105\ See CAISO/ISO NE March at 2-3.
\106\ Id. at 3.
\107\ See paragraph 5(b) of the Order (emphasis added).
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d. Determinations With Regards to the Process for Expanding the
Transactions Covered by the Final Order
Several commenters requested a streamlined or expedited process for
Commission review of supplemental requests for related exemptions
submitted by the Requesting Parties.\108\ Specifically, some commenters
argued that Commission action is not necessary where a ``FERC- or PUCT-
approved change was made to an already exempted transaction'' \109\ and
where Tariff changes that are related to core RTO and ISO market
functions are filed and accepted by FERC.\110\
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\108\ See generally Joint Trade Associations at 10; NEPOOL at 4;
PUCT at 8; Requesting Parties at 10-11.
\109\ See generally Joint Trade Associations at 10.
\110\ See generally NEPOOL at 4.
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Another commenter generally noted that ``the Commission * * *
should provide an efficient process for Petitioners to confirm the
applicability of the exemptive relief to new or modified products in a
timely manner,'' \111\ while the Requesting Parties asked ``the
Commission [to] adopt a process whereby a Petitioner could
simultaneously provide the Commission a copy of its FERC filing (or in
the case of ERCOT, the Protocol revisions)* * * .'' \112\ The
Requesting Parties proposed that, for FERC-regulated RTOs and ISOs,
``if, during the 60-day FERC review period, the Commission informs the
Petitioners that the new or modified product is not covered by the
exemption or that the Commission needs additional time to review the
product, the Petitioner would delay offering the new product until such
time as the Commission completes its review or grants supplemental
relief.'' \113\
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\111\ PUCT at 8.
\112\ Requesting Parties at 10-11.
\113\ Id.
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As discussed above, the Commission notes that that there is no need
to review new or revised Tariffs that are limited to transactions that
fall within the definitions of the Covered Transactions set forth in
the Final Order. A supplemental exemption is not necessary in such
instances. The Commission declines to adopt a streamlined or expedited
process for the review of supplemental requests to expand the exemption
to additional transactions. As noted above, section 4(c)(6) of the CEA
mandates that the Commission, in granting any exemption thereunder,
must act in accordance with CEA sections 4(c)(1) and (2). The
Commission will strive to address any requests for supplemental relief
as expeditiously as possible.
2. Additional Definitions and Provisions in the Final Order
The Commission proposed to exempt any persons (including the
Requesting Parties, their members and their market participants)
offering, entering into,\114\ rendering advice, or rendering other
services with respect to the transactions defined in the Proposed
Order.\115\ The Commission also proposed that, in order to be eligible
for exemptive relief, ``[t]he agreement, contract or transaction must
be offered or sold pursuant to a Requesting Party's tariff and that
tariff must have been approved or permitted to take effect by: (1) [i]n
the case of [ERCOT], the [PUCT] or (2) in the case of all other
Requesting Parties, [FERC].''\116\ The Commission did not receive any
comments with respect to this requirement. In addition, this
requirement is consistent with the range of the Commission's authority
as set forth in section 4(c)(6) of the CEA and with the scope of the
relief requested,\117\ and therefore the Commission has not altered the
requirement in the Final Order.
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\114\ The Commission clarifies that the exemption is only
available to persons ``entering into'' the Covered Transactions if
such persons satisfy the criteria set forth in paragraph 2(b) of the
Order (i.e., such persons are ``appropriate persons,'' as defined in
sections 4(c)(3)(A) through (J) of the CEA; ``eligible contract
participants,'' as defined in section 1a(18)(A) of the CEA and in
Commission regulation 1.3(m); or ``persons who actively participate
in the generation, transmission, or distribution of electric
energy'' as defined in paragraph 5(g) of the Order.
\115\ 77 FR at 52166.
\116\ Id.
\117\ See id. at 52142, 521664; Petition at 2-3.
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In the Proposed Order, the term ``Requesting Party'' was defined to
include the six Requesting Parties (i.e., CAISO, ERCOT, ISO NE., MISO,
NYISO, and PJM) and any of their respective successors in
interest.\118\ The Commission has incorporated this definition into the
Final Order without alteration. In the Proposed Order, ``[r]eference to
a Requesting Party's `tariff' includes a tariff, rate schedule or
protocol,'' \119\ in order to account for differences in terminology
used by such entities and their respective regulators.\120\ The
Commission did not receive any comment on this definition and,
accordingly, has incorporated this definition into the Final Order
unchanged.
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\118\ 77 FR 52167.
\119\ Id.
\120\ See id. at 52164.
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3. Conditions to the Final Order
a. Conditions to the Effectiveness of the Exemption Set Forth in the
Final Order
i. FERC Regulation 35.47
On October 21, 2010, FERC adopted FERC regulation 35.47 \121\ to
encourage
[[Page 19889]]
clear and consistent risk and credit practices in the organized
wholesale electric energy markets to, inter alia, ``ensure that all
rates charged for the transmission or sale of electric energy in
interstate commerce are just, reasonable, and not unduly discriminatory
or preferential.'' \122\ As more fully described in the Proposed
Order,\123\ FERC regulation 35.47 directs each of the RTOs and ISOs
within its jurisdiction to adopt Tariffs that implement specified
credit practice reforms.\124\ These credit reforms include limitations
on the amount of credit an RTO or ISO may extend for each market
participant; shortened billing and settlement periods of no more than
seven days; the elimination of unsecured credit in FTR or equivalent
markets; requiring RTOs and ISOs to ensure the enforceability of their
netting arrangements in the event of the insolvency of a member by (1)
establishing a single counterparty to all market participant
transactions, (2) requiring each market participant to grant a security
interest in the receivables of its transactions to the relevant RTO or
ISO, or (3) providing another method that supports netting that is
approved by FERC and that provides a similar level of protection to the
market; adoption of a two-day grace period for curing collateral calls;
establishment of minimum market participation eligibility requirements
that apply consistently to all market participants and that require
RTOs and ISOs to engage in periodic verification of market participant
risk management policies and procedures; and Tariff clarifications
regarding the conditions under which RTOs and ISOs will request
additional collateral due to a material adverse change.\125\ In the
Proposed Order, the Commission stated that these credit requirements
appear to achieve goals that are similar to the regulatory objectives
of the Commission's DCO Core Principles,\126\ and set forth a detailed
analysis of each credit requirement and DCO Core Principle supporting
such assertion.\127\ Due, in part, to the consistency in regulatory
objectives between FERC regulation 35.47 and several of the
Commission's DCO Core Principles, the Commission proposed requiring
each Requesting Party, including ERCOT, to comply with FERC regulation
35.47 as a condition precedent to the granting of a 4(c)(6) exemption
for the transactions described in the Proposed Order.\128\ The
Commission requested comment on this proposal.\129\
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\121\ The Proposed Order referred to FERC Order 741 to
collectively describe 75 FR 65942 (``FERC Original Order 741'') and
76 FR 10492 (``FERC Revised Order 741'') (slightly amending and
clarifying FERC Original Order 741). The standards set forth in
these FERC Orders are codified as FERC regulation 35.47 and,
therefore, for clarity, reference herein is to the regulation.
\122\ 75 FR 65942, 65942, Oct. 21, 2010. These requirements were
later amended and clarified in an order on rehearing. See 76 FR
10492, Feb. 25, 2011.
\123\ See 77 FR at 52147-48.
\124\ See id.
\125\ See id. at 52147-48, 52150-53.
\126\ See id. at 52147.
\127\ See id. at 52147-48; 52150-53.
\128\ See 77 FR 52164-65. The Commission noted that, while ERCOT
is not subject to FERC regulation, the fact that these mandates were
developed specifically for RTOs and ISOs suggests that holding ERCOT
to these standards may well be appropriate. See id. at 52165.
\129\ See id. at 52172.
---------------------------------------------------------------------------
Several commenters argued against this prerequisite, citing FERC's
authority over the implementation of FERC regulation 35.47,\130\ while
others proposed that the Commission rely on FERC's determination that
the Requesting Parties have complied with FERC regulation 35.47.\131\
Further, commenters requested clarification from the Commission as to
``what will constitute a finding that an RTO or ISO is fully compliant
with'' FERC regulation 35.47,\132\ with one commenter suggesting that
the Requesting Parties' ongoing efforts to comply with FERC regulation
35.47 are a sufficient demonstration of compliance.\133\ In addition,
several commenters proposed that a final order from FERC, or, with
respect to ERCOT, PUCT, is adequate to demonstrate compliance and the
Commission need not do any further analysis upon receipt of such a
final order.\134\
---------------------------------------------------------------------------
\130\ See, e.g., Joint Trade Associations at 15; COPE at 7.
\131\ See generally Commercial Working Group at 4.
\132\ See, e.g., Joint Trade Associations at 14-15; Commercial
Working Group at 4.
\133\ See, e.g., Joint Trade Associations at 15.
\134\ See, e.g., id.
---------------------------------------------------------------------------
With respect to ERCOT, several commenters objected to the condition
precedent because ERCOT is subject to PUCT's jurisdiction and not that
of FERC,\135\ and further asserted ERCOT should be evaluated on its
compliance with PUCT regulations.\136\ One commenter cited the
successful operation of the ERCOT market over the past decade as
support for its position.\137\ In addition, commenters noted that ERCOT
has, in part, voluntarily and, in part, in conjunction with regulations
set forth by PUCT, implemented protocols that are comparable to those
identified in FERC regulation 35.47.\138\ Indeed, these commenters
argued that some of these efforts are more conservative than those
required by FERC regulation 35.47, and thus these commenters expressed
concern that the condition precedent will require ERCOT to adopt less
stringent practices.\139\
---------------------------------------------------------------------------
\135\ See, e.g., COPE at 7-8; Joint Trade Associations at 14;
PUCT at 3, 11; Requesting Parties at 19.
\136\ See, e.g., COPE at 7-8; Joint Trade Associations at 14.
\137\ See COPE at 8.
\138\ See PUCT at 11; Requesting Parties at 19.
\139\ See PUCT at 11-12; Requesting Parties at 19-22.
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ERCOT has represented that it implemented protocols that are
comparable to \140\ all of the standards set forth in FERC regulation
35.47, with the sole exception of the billing period requirement in the
RTM.\141\ FERC regulation 35.47(b) requires that RTO and ISO Tariffs
``[a]dopt a billing period of no more than seven days and allow a
settlement period of no more than seven days.'' \142\ ERCOT represented
that its rules applicable to the Day-Ahead Market are more conservative
than FERC regulation 35.47(b) obligations with respect to both the
statement issuance and payment deadlines.\143\ ERCOT's RTM settlement
rules have a longer issuance period of nine days, but a shorter payment
period of two bank business days within issuance of the statement and
invoice.\144\ ERCOT asserted that its ``RTM settlement timeline is
consistent with the goals of FERC'' regulation 35.47 because RTM
transactions are paid within eleven and thirteen days (shorter than the
fourteen-day time frame established by FERC regulation 35.47(b)) for
92% of operating days and within the fourteen-day period for 98% of
operating days.\145\ ERCOT claimed that ERCOT RTM transactions that are
paid beyond the fourteen days from the operating day are paid on the
fifteenth day.\146\ ERCOT also
[[Page 19890]]
contended that any incremental risk related to ERCOT's RTM nine-day
statement issuance period is mitigated because RTM positions in the
ERCOT market are known and fully collateralized subsequent to the
relevant operating day and prior to the FERC-required seven day
statement issuance period.\147\
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\140\ See Revised FERC Order No. 741 Implementation Chart at 1
n.1, 3. See also Requesting Parties at 19 (``ERCOT has adopted
credit standards that are either the same as or substantially
equivalent to those set forth in FERC Order No. 741.'').
\141\ See Requesting Parties at 19-22; Revised FERC Order No.
741 Implementation Chart. ERCOT indicates that it has implemented
these practices ``with the approval of PUCT,'' Requesting Parties at
19, and that all applicable changes became effective on or before
January 1, 2013, with the exception of a protocol that ``will
further reduce the [Real-Time] settlement cycle in phases by an
additional two days,'' which was in the stakeholder process'' as of
January 18, 2012. Revised FERC Order No. 741 Implementation Chart.
\142\ 18 CFR 35.47(b).
\143\ See Requesting Parties at 20.
\144\ See id.
\145\ Id.
\146\ See id. at 20-21. ERCOT represents that longer payment and
settlement timelines are ``expected to be primarily due to weekend
and holiday schedules.'' Revised FERC Order No. 741 Implementation
Chart at 3. See also Requesting Parties at 21.
\147\ See id. at 21.
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As discussed in detail below in section IV.B.2.e.ii., the
Commission believes that the DCO Core Principles provide a useful
framework to help measure the extent to which the exemption is in the
public interest and consistent with the purposes of the CEA. Because
substantial compliance with the standards set forth in FERC regulation
35.47 forms the basis for the determination that the Tariffs and
activities of the Requesting Parties are congruent with, and--in the
context of the Covered Transactions--sufficiently accomplish, the
regulatory objectives of the DCO Core Principles, such compliance is
necessary for the Commission's public interest and purposes of the CEA
determination.\148\ Nonetheless, the Commission notes that each
Requesting Party has represented to the Commission that its Tariffs
have been revised to substantially meet the standards set forth in FERC
regulation 35.47.\149\ Indeed, the Commission notes that the Requesting
Parties have represented that several of those Tariff revisions have
already been approved or permitted to take effect by FERC or PUCT, as
applicable.\150\ As such, and after careful consideration of the
comments, the Commission believes that for each Requesting Party that
is regulated by FERC, full compliance with FERC regulation 35.47, as
measured by FERC's acceptance and approval of all of that Requesting
Party's Tariffs necessary to implement the standards set forth in FERC
regulation 35.47, is a necessary prerequisite to the effectiveness of
the exemption in the Final Order with respect to that Requesting Party.
---------------------------------------------------------------------------
\148\ In the case of ERCOT, which is regulated by PUCT, what is
necessary is compliance with standards that are the same as those
set forth in FERC regulation 35.47.
\149\ See FERC Order No. 741 Implementation Chart; Revised FERC
Order No. 741 Implementation Chart.
\150\ See Revised FERC Order No. 741 Implementation Chart.
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With respect to ERCOT, the Commission has considered the comments
regarding ERCOT's efforts to reform its market protocols in a manner
that is the same as or substantially similar to the credit requirements
of FERC regulation 35.47. The Commission believes, on the basis of
ERCOT's representations, as set forth above, that ERCOT's market
protocols differ from the standards set forth in FERC regulation 35.47
in a manner that is sufficiently minor as to permit the Commission to
accept them for the purpose of determining that the requested exemption
with respect to ERCOT is in the public interest and consistent with the
purposes of the CEA. Thus, for ERCOT, adopting measures that are
substantially similar to standards that are the same as those set forth
in FERC regulation 35.47, as measured by PUCT's permitting all of the
ERCOT protocols that are discussed above and as set forth in the
Revised FERC Order No. 741 Implementation Chart to take effect, is a
necessary prerequisite to the effectiveness of the exemption in the
Final Order with respect to ERCOT.
ii. Legal Memorandum or Legal Opinion of Counsel
The Proposed Order contemplated requiring, as a condition precedent
to the issuance of a Final Order, that each Requesting Party provide a
well-reasoned legal opinion or memorandum from outside counsel that, in
the Commission's sole discretion, provides the Commission with
assurance that the netting arrangements contained in the approach
selected by the particular Requesting Party to satisfy the obligations
contained in FERC regulation 35.47(d) \151\ will provide the Requesting
Party with legally enforceable rights of set off against any of its
market participants under title 11 of the United States Bankruptcy Code
in the event of a bankruptcy of the market participant. This condition
precedent was proposed in light of diversity among the Requesting
Parties surrounding the interpretation of the single counterparty
requirement and whether a Requesting Party's adopted practices would
provide enforceable set-off rights.\152\ The Commission requested
comment on this proposal.\153\
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\151\ FERC regulation 35.47(d) was adopted as part of the
``Credit Reforms in the Wholesale Electricity Market'' established
by FERC Order No. 741. It requires an organized electric energy
market to have tariff provisions that establish a single
counterparty to all market participant transactions, or require each
market participant in an organized wholesale electric energy market
to grant a security interest to the organized wholesale electric
market in the receivables of its transactions, or provide another
method of supporting netting that provides a similar level of
protection to the market and is approved by the Commission. In the
alternative, the organized wholesale electric energy market is not
permitted to net market participants' transactions and must
establish credit based on market participants' gross obligations. 18
CFR 35.47(d).
\152\ 77 FR 52165. Requesting Parties have defined the term
``single counterparty'' differently. In addition, each Requesting
Party plans on implementing a central counterparty structure based
on its individual views. Because of these differing views, the legal
opinion or memorandum requirement is meant to provide comfort to the
Commission that the single counterparty structure chosen by each
Requesting Party provides enforceable set off rights, without having
the Commission specify what would be an acceptable central
counterparty structure, which could contrast with what FERC and PUCT
have permitted.
\153\ See id. at 52172.
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The Commission received three types of comments on this
requirement: (1) Comments that opposed the condition precedent; (2)
comments that did not opine on the propriety of the requirement, but
expressed concern with respect to the possible unintended and adverse
tax consequences the obligation may have for the Requesting Parties;
and (3) a comment that objected to the specific requirement that the
memorandum or opinion of counsel be signed by the law firm as opposed
to an individual partner of the law firm.
Commenters that opposed the condition precedent generally did so on
the basis that the Commission ``should not be the arbiter of whether a
FERC-approved RTO regime consistent with'' FERC regulation 35.47
``meets bankruptcy goals,'' \154\ and that ``the existence of FERC
regulation should be the premise upon which an exemption is granted.''
\155\
---------------------------------------------------------------------------
\154\ COPE at 8.
\155\ Id.
---------------------------------------------------------------------------
In addition, two commenters urged the Commission to avoid taking
any action that could undermine a Requesting Party's tax-exempt status
and continued ability to use tax-exempt financing to finance its
operations,\156\ while the Requesting Parties asked the Commission to
``clarify that any memorandum or opinion of counsel need not be signed
by a law firm that provides it, as opposed to any individual partner.''
\157\
---------------------------------------------------------------------------
\156\ See generally APPA at 4; Joint Trade Associations at 15.
\157\ Requesting Parties at 16-17.
---------------------------------------------------------------------------
With respect to the comments opposing the condition precedent, the
Commission reiterates that this requirement is designed to permit the
Commission to avoid being the arbiter of whether a Requesting Party has
satisfied the requirements of FERC regulation 35.47(d). The Commission
notes that no Requesting Party has asserted that it would be unable to
obtain such a document. In addition, the Commission notes that the
ambiguities discussed in the Proposed Order with respect to some
Requesting Parties' interpretations
[[Page 19891]]
of the single counterparty requirement have not been clarified.\158\
The Commission continues to believe that the legal memorandum
requirement will provide the Commission with assurance that the netting
arrangements contained in the approach selected by each Requesting
Party to satisfy the standards set forth in FERC regulation 35.47(d)
(or in the case of ERCOT, standards that are the same as those set
forth in FERC regulation 35.47(d)) will, in fact, provide the
Requesting Party with enforceable rights of set off against any of its
market participants under title 11 of the United States Bankruptcy
Code, in the event of the bankruptcy of a market participant. However,
the Commission believes that this condition may be met subsequent to
the issuance of this Final Order, provided that as a condition to the
effectiveness of the exemption set forth in this Final Order, the
Commission must receive, from each Requesting Party, a legal memorandum
or opinion of outside counsel that is satisfactory to the Commission.
In addition, the Commission clarifies that it retains discretion as to
whether the legal opinion or memorandum provides the Commission with
the assurances desired, and may elect not to require that a memorandum
or opinion be signed by the law firm if the circumstances so warrant.
Moreover, as discussed further in section IV.E. below, the Commission
is delegating its authority to review and accept the legal memoranda or
opinions to the Director of the Division of Clearing and Risk and to
his designees, in consultation with the General Counsel or the General
Counsel's designees,\159\ which will expedite the process by which the
Requesting Parties are able to satisfy this condition.
---------------------------------------------------------------------------
\158\ See 77 FR 52165.
\159\ See paragraph 7 of the Order.
---------------------------------------------------------------------------
With respect to the comment that the condition precedent requiring
a legal memorandum or opinion of outside counsel may create adverse tax
consequences, the Commission notes that such tax issues are beyond the
scope of this Final Order.
b. Conditions Subsequent to the Final Order
i. Notification of Requests for Information
The Proposed Order included a condition requiring that ``neither
the tariffs nor any other governing documents of the particular RTO or
ISO pursuant to whose tariff the agreement, contract, or transaction is
to be offered or sold, shall include any requirement that the RTO or
ISO notify its members prior to providing information to the Commission
in response to a subpoena or other request for information or
documentation.'' \160\ As noted in the Proposed Order, a ``notice
requirement could significantly compromise the Commission's enforcement
efforts as there are likely to be situations where it would be neither
prudent nor advisable for an entity under investigation by the
Commission to learn of the investigation prior to Commission
notification to the entity.'' \161\ The Commission requested comment on
this proposal and as to whether there may be an alternative condition
that the Commission might use to achieve the same result.\162\
---------------------------------------------------------------------------
\160\ Id. at 52166.
\161\ Id.
\162\ See id.
---------------------------------------------------------------------------
One commenter asked ``[d]oes the Commission's subpoena secrecy
requirement described in the Proposed Order mandate that FERC approve
tariff changes that are required by the Commission regardless of
whether FERC views them to be `just and reasonable' as required by the
Federal Power Act?'' \163\ Another commenter opposed this condition,
arguing that ``[r]eopening a tariff could result in multiple issues
arising, many of which have nothing to do with the notice of inquiry,
and may result in undue delay.'' \164\
---------------------------------------------------------------------------
\163\ COPE at 4 (internal footnote omitted).
\164\ Commercial Working Group at 3 n.4.
---------------------------------------------------------------------------
In response to the comments, the Commission recognizes that while
this condition may require a Tariff change for some Requesting Parties,
this is a necessary condition to the exemptive relief. As an initial
matter, RTOs and ISOs amend their Tariffs on a regular basis. Thus,
amending one Tariff provision would not necessarily result in opening
unrelated Tariff provisions.\165\ The Commission notes that none of the
Requesting Parties have indicated in their comment letters that they
need to revise their Tariffs to comply with this condition. Moreover,
the Commission notes that RTOs and ISOs have proposed, and FERC has
approved,\166\ similar changes to RTO and ISO Tariffs enabling FERC
Enforcement staff to issue subpoenas or requests for information
without notification to RTO or ISO members.\167\ This requirement
provides the same protections to CFTC Enforcement investigations.
Commenters have not explained why doing so would not be ``just and
reasonable.'' In addition, the Commission notes that, in their
respective comment letters, neither FERC staff nor the PUCT opposed the
inclusion of this condition. Therefore, the Commission has determined
that the removal of notice requirements from the Requesting Party's
Tariffs will remain a condition to the Final Order.
---------------------------------------------------------------------------
\165\ See e.g., 18 CFR 35.9(c), 35.10(b)-(c) (providing
procedures for amending individual tariff provisions, and requiring
that OATT and other open access documents filed by ISOs or RTOs must
be filed either as individual sheets or sections).
\166\ In the absence of evidence to the contrary, the Commission
would anticipate that PUCT would act similarly with respect to
ERCOT.
\167\ See, e.g., PJM Interconnection, L.L.C. Open Access
Transmission Tariff, Sixth Revised Volume No. 1, Attachment M,
Market Monitoring Plan (permitting the MMU to provide information to
FERC on a confidential basis without notice to any party).
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ii. Information Sharing Agreements
The Proposed Order contemplated two conditions that addressed the
Commission's ability to obtain information from the Requesting
Parties.\168\ First, with respect to ERCOT, the Proposed Order required
that an information sharing arrangement acceptable to the Commission be
executed between PUCT and the Commission and continue to be in effect.
Second, for all FERC-regulated Requesting Parties, the Proposed Order
required that information sharing arrangements between FERC and the
Commission that are acceptable to the Commission continue to be in
effect. The Commission specifically sought comment as to whether the
information sharing arrangement to be executed between PUCT and the
Commission should be a condition precedent to the effectiveness of a
final exemption for ERCOT, and whether all Requesting Parties should be
required, as a condition of any final exemption, to cooperate with the
Commission's requests for information with respect to agreements,
contracts, or transactions that are, or are related to, the agreements,
contracts, or transactions that were the subject of the Proposed
Order.\169\
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\168\ See 77 FR 52166.
\169\ See id. at 52172.
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Of those commenters that addressed the information sharing
condition precedent for ERCOT, all viewpoints received requested that
the Commission refrain from requiring that an information sharing
agreement between PUCT and the Commission be in place prior to a final
exemption becoming effective for ERCOT. The Requesting Parties and PUCT
noted that fulfillment of such a requirement is beyond the control of
ERCOT in terms of timing and terms, and therefore would be more
appropriate as a condition subsequent to the effectiveness of the
exemption in
[[Page 19892]]
order to avoid uncertainty.\170\ Similarly, another commenter suggested
that the Commission grant preliminary approval of the exemption for
ERCOT while discussions between the Commission and PUCT remained
ongoing due to ERCOT's comparable market position with respect to the
other Requesting Parties, and the lack of any specific timeline under
which the information sharing agreement must be completed.\171\ Another
commenter objected to the condition precedent, noting that ``[a] one-
way information sharing requirement acceptable to the CFTC is beyond
what is necessary and implies that the Commission does not trust PUCT
regulation.'' \172\ Finally, notwithstanding its objection to the
condition precedent, PUCT expressed full support of working with the
Commission to develop and execute an appropriate information sharing
arrangement on a timely basis.\173\
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\170\ Requesting Parties at 15; PUCT at 13.
\171\ Commercial Working Group at 4.
\172\ COPE at 8.
\173\ PUCT at 13.
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Regarding the Commission's contemplation of affirmatively requiring
all Requesting Parties to cooperate with requests for information as a
condition of the exemption, commenters did not respond directly,
although one commenter suggested that the imposition of additional
requirements upon the Requesting Parties for purposes of obtaining
information through FERC or PUCT as the Requesting Parties' primary
regulator amounts to indirect regulation.\174\
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\174\ COPE at 8.
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In response to the comments opposing an information sharing
agreement between PUCT and the Commission as a condition precedent to
the effectiveness of relief for ERCOT, the Commission has determined
not to pursue such a condition, and thus has stricken the execution of
an information-sharing agreement with PUCT as a condition of the Final
Order. Rather, with respect to ERCOT, the Final Order conditions the
exemption upon ``the Commission's ability to request, and obtain, on an
as-needed basis from ERCOT, concurrently with the provision of written
notice to PUCT and in connection with an inquiry consistent with the
CEA and Commission regulations, positional and transactional data
within ERCOT's possession for products in ERCOT's markets that are
related to markets that are subject to the Commission's jurisdiction,
including any pertinent information concerning such data, and ERCOT's
compliance with such requests by sharing the requested information.''
\175\ This revision dispels any concerns regarding potential delay to
the effectiveness of the Final Order with respect to ERCOT that could
result from the time it might take for PUCT and the Commission to
complete an acceptable information sharing arrangement. This revision
also responds to competitiveness concerns that ERCOT and the other
Requesting Parties should be treated comparably with respect to
conditions that could affect the timing of the effectiveness of the
Final Order due to their comparable market positions.
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\175\ See paragraph 4(a)(2) of the Order. The Commission is
finalizing this condition under authority in CEA section 4(c)(1) to
issue 4(c) relief conditionally with respect to those entities
requesting/benefiting from the relief. See 7 U.S.C. 6(c)(1).
---------------------------------------------------------------------------
Consistent with the revised language noted above requiring ERCOT to
comply with the Commission's requests for related market data on an as-
needed basis, the Commission has revised the information sharing
condition applicable to the FERC-regulated Requesting Parties. The
Final Order conditions the exemption with respect to FERC-regulated
Requesting Parties upon: (1) Information sharing arrangements between
the Commission and FERC that are acceptable to the Commission and that
continue to be in effect \176\ and (2) ``those Requesting Parties'
compliance with the Commission's requests through FERC to share, on an
as-needed basis and in connection with an inquiry consistent with the
CEA and Commission regulations, positional and transactional data
within the Requesting Parties' possession for products in Requesting
Parties' markets that are related to markets that are subject to the
Commission's jurisdiction, including any pertinent information
concerning such data.'' \177\ The Commission notes that the Proposed
Order only provided for information sharing arrangements. Thus, to
qualify for the exemption provided by the Final Order, the Requesting
Parties must comply with the Commission's requests for related market
data, regardless of whether the request is made directly (in the case
of ERCOT) or through FERC (in the case of all other Requesting
Parties).\178\
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\176\ As discussed in the Proposed Order, the Commission notes
that the CFTC and FERC executed a Memorandum of Understanding in
2005 pursuant to which the agencies have shared information
successfully. 77 FR 52165.
\177\ See paragraph 4(a)(1) of the Order.
\178\ The Commission has delegated to the Director of the
Division of Market Oversight and to such members of the Division's
staff acting under his or her direction as he or she may designate,
in consultation with the General Counsel or such members of the
General Counsel's staff acting under his or her direction as he or
she may designate, the authority to request information from
Requesting Parties pursuant to sections 4(a)(1) and 4(a)(2) of the
Order. See paragraph 7 of the Order.
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The Commission notes that any contemplated request for related
market data would not be an attempt to indirectly regulate the
Requesting Parties or their markets, contrary to some commenters'
suggestion. In order for the Commission to determine that the Final
Order is consistent with the public interest and the purposes of the
CEA, the terms of the Final Order cannot adversely affect the ability
of the Commission to discharge its regulatory duties under the CEA in
monitoring energy markets under its jurisdiction.\179\ Therefore,
conditioning the exemption provided in the Final Order upon the
Commission's ability to obtain related transactional and positional
data from the Requesting Parties, and the Requesting Parties'
compliance with such requests by sharing the requested information, is
meant to enable the Commission to continue discharging its regulatory
duties under the Act as set forth in CEA section 3.\180\ The Commission
notes that such requested information should already be in the
possession of the Requesting Parties.
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\179\ See 7 U.S.C. 6(c)(2)(B)(ii).
\180\ 7 U.S.C. 5.
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B. Section 4(c) Analysis
1. Overview of CEA Section 4(c)
a. Sections 4(c)(6)(A) and (B)
As discussed above in section I., the Dodd-Frank Act amended CEA
section 4(c) to add sections 4(c)(6)(A) and (B), which provide for
exemptions for certain transactions entered into (a) pursuant to a
tariff or rate schedule approved or permitted to take effect by FERC,
or (b) pursuant to a tariff or rate schedule establishing rates or
charges for, or protocols governing, the sale of electric energy
approved or permitted to take effect by the regulatory authority of the
State or municipality having jurisdiction to regulate rates and charges
for the sale of electric energy within the State or municipality, as
eligible for exemption pursuant to the Commission's 4(c) exemptive
authority.\181\ Indeed, 4(c)(6) provides
[[Page 19893]]
that ``[i]f the Commission determines that the exemption would be
consistent with the public interest and the purposes of this chapter,
the Commission shall'' issue such an exemption.\182\ However, any
exemption considered under 4(c)(6)(A) and/or (B) must be done ``in
accordance with [CEA section 4(c)(1) and (2)].'' \183\
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\181\ The exemption language in section 4(c)(6) reads:
(6) If the Commission determines that the exemption would be
consistent with the public interest and the purposes of this Act,
the Commission shall, in accordance with paragraphs (1) and (2),
exempt from the requirements of this Act an agreement, contract, or
transaction that is entered into--
(A) pursuant to a tariff or rate schedule approved or permitted
to take effect by the Federal Energy Regulatory Commission;
(B) pursuant to a tariff or rate schedule establishing rates or
charges for, or protocols governing, the sale of electric energy
approved or permitted to take effect by the regulatory authority of
the State or municipality having jurisdiction to regulate rates and
charges for the sale of electric energy within the State or
municipality; or
(C) between entities described in section 201(f) of the Federal
Power Act (16 U.S.C. 824(f)).
\182\ Id. (emphasis added).
\183\ CEA section 4(c)(6) explicitly directs the Commission to
consider any exemption proposed under 4(c)(6) ``in accordance with
[CEA sections 4(c)(1) and (2)].''
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b. Section 4(c)(1)
As described above in section I., CEA section 4(c)(1) requires that
the Commission act ``by rule, regulation or order, after notice and
opportunity for hearing.'' It also provides that the Commission may act
``either unconditionally or on stated terms or conditions or for stated
periods and either retroactively or prospectively or both'' and that
the Commission may provide an exemption from any provisions of the CEA
except subparagraphs (C)(ii) and (D) of section 2(a)(1).\184\
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\184\ Section 4(c)(1), 7 U.S.C. 6(c)(1), states:
(c)(1) In order to promote responsible economic or financial
innovation and fair competition, the Commission by rule, regulation,
or order, after notice and opportunity for hearing, may (on its own
initiative or on application of any person, including any board of
trade designated or registered as a contract market or derivatives
transaction execution facility for transactions for future delivery
in any commodity under section 5 of this Act) exempt any agreement,
contract, or transaction (or class thereof) that is otherwise
subject to subsection (a) (including any person or class of persons
offering, entering into, rendering advice or rendering other
services with respect to, the agreement, contract, or transaction),
either unconditionally or on stated terms or conditions or for
stated periods and either retroactively or prospectively, or both,
from any of the requirements of subsection (a), or from any other
provision of this Act (except subparagraphs (C)(ii) and (D) of
section 2(a)(1), except that--
(A) unless the Commission is expressly authorized by any
provision described in this subparagraph to grant exemptions, with
respect to amendments made by subtitle A of the Wall Street
Transparency and Accountability Act of 2010--
(i) with respect to--
(I) paragraphs (2), (3), (4), (5), and (7), paragraph
(18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39),
(41), (42), (46), (47), (48), and (49) of section 1a, and sections
2(a)(13), 2(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a),
5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and
(II) section 206(e) of the Gramm-Leach-Bliley Act (Public Law
106-102; 15 U.S.C. 78c note); and
(ii) in sections 721(c) and 742 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act; and
(B) the Commission and the Securities and Exchange Commission
may by rule, regulation, or order jointly exclude any agreement,
contract, or transaction from section 2(a)(1)(D)) if the Commissions
determine that the exemption would be consistent with the public
interest.
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c. Section 4(c)(2)
As set forth above in section I., CEA section 4(c)(2) requires the
Commission to determine that: to the extent an exemption provides
relief from any of the requirements of CEA section 4(a), the
requirement should not be applied to the agreement, contract or
transaction; the exempted agreement, contract, or transactions will be
entered into solely between appropriate persons; \185\ and the
exemption will not have a material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory duties under the CEA.\186\
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\185\ See CEA 4(c)(2)(B)(i) and the discussion of CEA section
4(c)(3) in sections I. supra and IV.B.1.d. infra.
\186\ CEA section 4(c)(2)(A) also requires that the exemption
would be consistent with the public interest and the purposes of the
CEA, but that requirement duplicates the requirement of section
4(c)(6).
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d. Section 4(c)(3)
As explained in section I. above, CEA section 4(c)(3) outlines who
may constitute an appropriate person for the purpose of a 4(c)
exemption, including as relevant to this Final Order: (a) Any person
that fits in one of ten defined categories of appropriate persons; or
(b) such other persons that the Commission determines to be appropriate
in light of their financial or other qualifications, or the
applicability of appropriate regulatory protections.
2. CEA Section 4(c) Determinations
a. Commission Jurisdiction
Subject to the limitations set forth in the CEA, sections
4(c)(6)(A) and (B) of the Act grant the Commission the authority to
exempt certain electric energy transactions provided that the
Commission determines, among other things, that such exemption is
consistent with the public interest and purposes of the CEA.\187\ The
Commission received several comments relating to the Commission's
interpretation of its jurisdiction pursuant to section 4(c)(6).
---------------------------------------------------------------------------
\187\ See discussion regarding CEA section 4(c)(6) in sections
I. supra and IV.B.1.a. infra.
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Two commenters argued that, the Commission should ``interpret the
Dodd-Frank Act as not applying to any contract or agreement traded in
an RTO or ISO market pursuant to a FERC-accepted or approved rate
schedule or tariff'' and that the Commission should exclude RTO or ISO
contracts or instruments from the definition of swap.\188\ One of these
commenters further argued that ``Congress did not intend for
Petitioners to be subject to such regulation under the Dodd-Frank Act.
Congress recognized the impropriety of imposing duplicative regulation
over entities such as Petitioners and instructed the Commission and
FERC to `appl[y] their respective authorities in a manner so as to
ensure the effective and efficient regulation in the public interest'
and to `[avoid], to the extent possible, conflicting or duplicative
regulation.' '' \189\
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\188\ Joint Trade Associations at 5. See also id. at 3, 8; FERC
Staff at 4.
\189\ Joint Trade Associations at 5 (alterations in original).
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A different commenter claimed that the Commission should not
regulate ``[a]ccess to physical electricity markets.'' \190\ This
commenter argued that the Proposed Order is ``more of a delegation of
authority (to FERC and the PUCT) than an exemption,'' which
``establishes a sort of joint regulation going forward with the CFTC
setting minimum RTO participation standards, approving new transactions
or `material modifications,' and, through its ability to alter or
withdraw the exemption, indirectly regulating RTOs.''\191\
---------------------------------------------------------------------------
\190\ COPE at 10.
\191\ Id. (arguing that the Commission in fact proposed to
retain jurisdiction over RTOs and ISOs because it did not propose to
issue a blanket exemption and rather proposed to: (1) Refrain from
issuing a final order until two preconditions have been met; (2)
require information sharing agreements while failing to negotiate a
Congressionally-mandated memorandum of understanding with PUCT; (3)
require Requesting Parties to change their Tariffs to remove member
notification requirements in the event of Commission requests for
information; (4) retain the authority to alter or revoke the
exemption upon a change of material facts; (5) require Requesting
Parties to submit supplemental filings; (6) reject that `logical
extensions'' of exempted transactions also be subject to the order;
and (7) impose limitations on participation the Requesting Parties'
market through the Commission's application of the appropriate
person standard).
---------------------------------------------------------------------------
Another commenter recognized the Commission's exemptive authority
under section 4(c)(6), but requested that the Commission affirmatively
state in any final order that it makes no determination as to whether
the transactions included in the final order fall within the
Commission's jurisdiction because the absence of such statement ``could
actually undermine the very regulatory certainty being requested by
Petitioners, and potentially
[[Page 19894]]
give rise to unnecessary jurisdictional disputes.'' \192\
---------------------------------------------------------------------------
\192\ PUCT at 4.
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In response to the comments, the Commission notes that the
definition of a ``swap'' set forth in Commission regulations is beyond
the scope of this Final Order. The Commission further notes that the
interpretation of the Dodd-Frank Act proffered by the commenters is
contrary to the express language of that statute. The Dodd-Frank Act
added a savings clause to the CEA that addresses the roles of the
Commission, FERC, and state agencies as they relate to transactions
traded pursuant to FERC- or state-approved tariffs or rate schedules.
Section 2(a)(1)(I) of the Act repeats the Commission's exclusive
jurisdiction and clarifies that the Commission retains its authority
over transactions that are within its jurisdiction. Moreover, while,
section 4(c)(6) of the CEA, added by the Dodd-Frank Act, empowers the
Commission to exempt contracts, agreements or transactions traded
pursuant to a Tariff or rate schedule that has been approved or
permitted to take effect by FERC or a state regulatory authority, it
does not permit the Commission to automatically or mechanically apply
the exemption. Instead, section 4(c)(6) mandates that the Commission
initially determine that the exemption would be in the public interest
and consistent with the purposes of the CEA, that the exemption would
be applied only to agreements, contracts, or transactions that are
entered into solely between appropriate persons, and that the exemption
will not have a material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory duties under the CEA.
b. Consistent With the Public Interest and the Purposes of the CEA
As required by CEA section 4(c)(2)(A), as well as section 4(c)(6),
the Commission determines that the Final Order is consistent with the
public interest and the purposes of the CEA. Section 3(a) of the CEA
provides that transactions subject to the CEA affect the national
public interest by providing a means for managing and assuming price
risk, discovering prices, or disseminating pricing information through
trading in liquid, fair and financially secure trading facilities.\193\
Section 3(b) of the CEA identifies the purposes of the CEA:
---------------------------------------------------------------------------
\193\ 7 U.S.C. 5(a).
It is the purpose of this Act to serve the public interests
described in subsection (a) through a system of effective self-
regulation of trading facilities, clearing systems, market
participants and market professionals under the oversight of the
Commission. To foster these public interests, it is further the
purpose of this Act to deter and prevent price manipulation or any
other disruptions to market integrity; to ensure the financial
integrity of all transactions subject to this Act and the avoidance
of systemic risk; to protect all market participants from fraudulent
or other abusive sales practices and misuses of customer assets; and
to promote responsible innovation and fair competition among boards
of trade, other markets and market participants.\194\
---------------------------------------------------------------------------
\194\ 7 U.S.C. 5(b).
Consistent with the proposed determinations set forth in the
Proposed Order,\195\ the Commission finds that: (a) The Covered
Transactions have been, and are, subject to a long-standing, regulatory
framework for the offer and sale of the Transactions established by
FERC or PUCT; and (b) the Covered Transactions administered by the
RTOs, ISOs, or ERCOT are part of, and inextricably linked to, the
organized wholesale electric energy markets that are subject to FERC
and PUCT regulation and oversight. For example, FERC Order No. 2000
(which, along with FERC Order No. 888, encouraged the formation of RTOs
and ISOs to operate the electronic transmission grid and to create
organized wholesale electric energy markets) requires an RTO or ISO to
demonstrate that it has four minimum characteristics: (1) Independence
from any market participant; (2) a scope and regional configuration
which enables the RTO or ISO to maintain reliability and effectively
perform its required functions; (3) operational authority for its
activities, including being the security coordinator for the facilities
that it controls; and (4) short-term reliability.\196\ In addition, the
Requesting Parties stated that an RTO or ISO must demonstrate to FERC
that it performs certain self-regulatory and/or market monitoring
functions,\197\ and analogous requirements are applicable to ERCOT
under PUCT and the Public Utility Regulatory Act \198\ (``PURA'').\199\
Requesting Parties also represented that they are responsible for
``ensur[ing] the development and operation of market mechanisms to
manage transmission congestion * * * The market mechanisms must
accommodate broad participation by all market participants, and must
provide all transmission customers with efficient price signals that
show the consequences of their transmission usage decisions.'' \200\
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\195\ See 77 FR 52144-45.
\196\ See id.
\197\ See id. (explaining that, according to the Requesting
Parties, each RTO and ISO must employ a transmission pricing system
that promotes efficient use and expansion of transmission and
generation facilities; develop and implement procedures to address
parallel path flow issues within its region and with other regions;
serve as a provider of last resort of all ancillary services
required by FERC Order No. 888 including ensuring that its
transmission customers have access to a Real-Time balancing market;
be the single OASIS (Open-Access Same-Time Information System) site
administrator for all transmission facilities under its control and
independently calculate Total Transmission Capacity and Available
Transmission Capability; provide reliable, efficient, and not unduly
discriminatory transmission service, it must provide for objective
monitoring of markets it operates or administers to identify market
design flaws, market power abuses and opportunities for efficiency
improvements; be responsible for planning, and for directing or
arranging, necessary transmission expansions, additions, and
upgrades; and ensure the integration of reliability practices within
an interconnection and market interface practices among regions).
See also Petition at 13-14.
\198\ TEX. UTIL. CODE ANN. 11.001 et seq. (Vernon 1998 & Supp.
2005).
\199\ See id.; Petition at 14-15. ERCOT represented that,
pursuant to PURA 39.151(a), its roles and duties are to provide
access to the transmission and distribution systems for all buyers
and sellers of electric energy on nondiscriminatory terms; ensure
the reliability and adequacy of the regional electric energy
network; ensure that information relating to a customer's choice of
retail electric energy provider is conveyed in a timely manner to
the persons who need that information; and ensure that electric
energy production and delivery are accurately accounted for among
the generators and wholesale buyers and sellers in the region. See
77 FR 52144-45; Petition at 14-15.
\200\ See 77 FR 52144 (quoting Petition at 14). See also 18 CFR
35.34(k)(2).
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Furthermore, as explained by the Requesting Parties and discussed
in the Proposed Order, the Commission notes that the Covered
Transactions are entered into primarily by commercial participants that
are in the business of generating, transmitting, and distributing
electric energy,\201\ and the Requesting Parties were established for
the purpose of providing affordable, reliable electric energy to
consumers within their geographic region.\202\ Additionally, the
Covered Transactions that take place on the Requesting Parties' markets
are overseen by an MMU, required by FERC for each Requesting Party
under its jurisdiction and by PUCT in the case of ERCOT, to identify
manipulation of electric energy on the Requesting Parties'
markets.\203\
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\201\ See 77 FR 52144. See also generally Petition at 20.
\202\ See 77 FR 52144. See also Petition at 3-4.
\203\ See 77 FR 52144. See also Petition at 15-18.
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Moreover, fundamental to this ``public interest'' and ``purposes of
the [Act]'' analysis is the fact that the Covered Transactions are
inextricably tied to the Requesting Parties' physical delivery of
electric energy.\204\ Another
[[Page 19895]]
important factor is that the Final Order is explicitly limited to
Covered Transactions taking place on markets that are monitored by
either an independent MMU, a market administrator (the RTO, ISO, or
ERCOT), or both, and a government regulator (FERC or PUCT). In
contrast, an exemption for transactions that are not so monitored, or
not related to the physical capacity of an electric transmission grid,
or not directly linked to the physical generation and transmission of
electric energy, or not limited to appropriate persons,\205\ is
unlikely to be in the public interest or consistent with the purposes
of the CEA, taking such transactions outside the scope of the Final
Order.
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\204\ See id. See also Petition at 6-9 (describing the
transactions for which an exemption was requested and noting that
each of them ``is part of, and inextricably linked to, the organized
wholesale electricity markets that are subject to FERC and PUCT
regulation and oversight'').
\205\ See 77 FR 52145-47.
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Finally, the extent to which the Final Order is consistent with the
public interest and the purposes of the Act can, in major part, be
assessed by the extent to which the Tariffs and activities of the
Requesting Parties, and supervision by FERC and PUCT, are congruent
with, and sufficiently accomplish, the regulatory objectives of the
relevant Core Principles set forth in the CEA for DCOs and SEFs.
Specifically, providing a means for managing or assuming price risk and
discovering prices, as well as prevention of price manipulation and
other disruptions to market integrity, are addressed by the Core
Principles for SEFs. Ensuring the financial integrity of the Covered
Transactions and the avoidance of systemic risk, as well as protection
from the misuse of participant assets, are addressed by the Core
Principles for DCOs. Deterrence of price manipulation (or other
disruptions to market integrity) and protection of market participants
from fraudulent sales practices is achieved by the Commission retaining
and exercising its jurisdiction over these matters. Therefore, the
Commission has incorporated its DCO and SEF Core Principle analyses,
set forth in the Proposed Order, into its consideration of the Final
Order's consistency with the public interest and the purposes of the
Act.\206\ In the same way, the Commission has considered how the public
interest and the purposes of the CEA are also addressed by the manner
in which the Requesting Parties comply with FERC's credit reform
policy.\207\
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\206\ See sections IV.B.2.e.ii.-iii. infra; 77 FR at 52149-62.
The Commission received several comments regarding the use of the
DCO and SEF Core Principles as a measure for the Commission's public
interest and purposes of the CEA determination. These comments are
addressed in sections IV.B.2.e.ii.-iii. infra.
\207\ See sections IV.A.3.a.i. infra and IV B.2.e.ii. infra; 77
FR at 52147-48.
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The Commission specifically requested comment on whether it used
the appropriate standard in making its section 4(c) determination. The
Commission received comments with respect to compliance with FERC's
credit reform policy as a precondition to the issuance of a Final
Order, which are discussed in sections IV.A.3.a.i. and IV.B.2.e.i., and
on the Commission's use of the DCO and SEF Core Principles, which are
discussed in sections IV.B.2.e.i.-ii. below.
The Commission received a number of comments regarding the
appropriateness of the public interest and purposes of the CEA standard
outlined above.\208\ One commenter stated that the standard set forth
in the Proposed Order, and in particular compliance with FERC
regulation 35.47, ``sufficiently demonstrates that the proposed
exemption is consistent with the public interest and the purposes of
the Act.'' \209\ However, another commenter argued that the Commission
did not use the appropriate standard in analyzing whether the exemption
is in the public interest and consistent with the purposes of the Act,
because the Requesting Parties are ``physical electricity transmission
and market operators pervasively regulated by either FERC or the
PUCT,'' and ``[t]he existence of such regulation should be the premise
upon which an exemption is granted.'' \210\
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\208\ See, e.g., COPE at 6; Commercial Working Group at 4.
\209\ Commercial Working Group at 4.
\210\ COPE at 6.
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The Commission has considered the comments, and believes that it
has used the appropriate standard in making its public interest and
purpose of the CEA determination for purposes of this Final Order. The
Commission disagrees that the existence of pervasive FERC and PUCT
regulations is, by itself, a sufficient standard to analyze that the
requested exemptive relief is consistent with the public interest and
the purposes of the CEA, because, as set forth above,\211\ section
4(c)(6) of the CEA, added by the Dodd-Frank Act, does not permit the
Commission to automatically or mechanically apply an exemption.
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\211\ See sections I. and IV.B.1.a. supra.
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After consideration of the comments received and for the reasons
set forth in this Final Order, the Commission has determined that the
exemption set forth in this Final Order is consistent with the public
interest and the purposes of the CEA.
c. CEA Section 4(a) Should Not Apply to the Transactions or Entities
Eligible for the Exemption
CEA section 4(c)(2)(A) requires, in part, that the Commission
determine that the Covered Transactions described in the Final Order
should not be subject to CEA section 4(a)--generally, the Commission's
exchange trading requirement for a contract for the purchase or sale of
a commodity for future delivery. As set forth in the Proposed Order,
the Commission has examined the Covered Transactions, the Requesting
Parties, and their markets using the CEA Core Principle requirements
applicable to a DCO and to a SEF as a framework for its public interest
and purposes of the CEA determination.\212\ As further support for this
determination, the Commission also is relying on the public interest
and the purposes of the Act analysis in subsection IV.B.2.f. below. In
so doing, the Commission has determined that, due to the FERC or PUCT
regulatory scheme and the RTO or ISO market structure already
applicable to the Covered Transactions, the linkage between the Covered
Transactions and those regulatory schemes, and the unique nature of the
market participants that would be eligible to rely on the
exemption,\213\ CEA section 4(a) should not apply to the Covered
Transactions under the Final Order.
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\212\ See sections IV.B.2.e.i.-ii. infra; 77 FR at 52149-62.
\213\ See appropriate persons analysis, section IV.B.2.d. infra;
77 FR at 52147-48.
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d. Appropriate Persons
Section 4(c)(2)(B)(i) of the CEA \214\ requires, for an exemption
to be granted, that the Commission make a determination that the
exemption is restricted to Covered Transactions entered into solely
between ``appropriate persons,'' as that term is defined in section
4(c)(3) of the Act.\215\ Section 4(c)(3) defines the term ``appropriate
person'' to include: (1) Any person that falls within one of the ten
categories of persons delineated in sections 4(c)(3)(A) through (J) of
the Act or (2) such other persons that the Commission determines to be
appropriate pursuant to the limited authority provided by section
4(c)(3)(K).\216\ The Commission may determine that persons that do not
meet the requirements of sections 4(c)(3)(A) through (J) are
``appropriate persons'' for
[[Page 19896]]
purposes of section 4(c) only if it determines that such persons ``are
appropriate in light of their financial or other qualifications, or the
applicability of regulatory protections.'' \217\
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\214\ 7 U.S.C. 6(c)(2)(B)(i).
\215\ 7 U.S.C. 6(c)(3).
\216\ Id.
\217\ Id.
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The Commission proposed to limit the exemption to transactions
where all parties thereto either (a) satisfy the appropriate persons
criteria set forth in sections 4(c)(3)(A) through (J) or, (using its
authority under section 4(c)(3)(K)) (b) qualify as ECPs, as defined in
section 1a(18)(A) of the CEA and in Commission regulation 1.3(m).\218\
The Commission requested comment as to whether ECPs should be
considered appropriate persons for purposes of the Final Order.\219\
The Commission recognized, however, that ``the market participant
eligibility standards of an individual RTO or ISO may not be
coextensive with the criteria required by sections 4(c)(3)(A) through
(J) or section 1a(18) of the Act'' \220\ and that, therefore, there may
be certain RTO or ISO market participants engaging in the transactions
proposed for exemption that would not qualify for the exemption as set
forth in the Proposed Order. Accordingly, the Commission requested
comment as to whether there are any entities currently engaging in the
transactions delineated in the Proposed Order, and in the markets
administered by the Requesting Parties that are neither appropriate
persons under sections 4(c)(3)(A)-(J) of the CEA nor ECPs, and on what
basis the Commission should exercise its authority under section
4(c)(3)(K) with respect to such entities to conclude that such parties
should be appropriate persons for purposes of the Final Order.\221\ The
Commission also requested descriptions of the additional parties that
should be included in the scope of the term appropriate persons for
these purposes,\222\ and expressed particular interest in considering
the inclusion of market participants who actively participate in the
generation, transmission, or distribution of electric energy.\223\
Finally, the Commission requested that any comments seeking to include
additional parties within the scope of the appropriate person
definition for purposes of the Final Order be accompanied by an
explanation of the financial or other qualifications of such persons or
the available regulatory protections that would render such persons
appropriate persons and the bases for determining that (1) such parties
could bear the financial risks of the transactions,\224\ (2) the
inclusion of such parties would not have any adverse effect on the
relevant RTO or ISO, and (3) failing to include such parties would have
an adverse effect on the relevant RTO or ISO.\225\
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\218\ 77 FR 52166. See also id. at 52145-46, 52163-64.
\219\ See generally id. at 52146. The Commission proposed to
deem ECPs as ``appropriate persons'' pursuant to the authority set
forth in section 4(c)(3)(K) of the CEA.
\220\ Id. at 52163-64.
\221\ See id. at 52146, 52166, 52172.
\222\ See id. at 52172.
\223\ See id. at 52164, 52172.
\224\ See id.
\225\ See id. at 52172.
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The Commission did not receive any comment objecting to its
proposed determination, pursuant to section 4(c)(3)(K) of the Act, that
ECPs be included within the definition of appropriate persons for
purposes of the Final Order. Accordingly, and pursuant to the authority
set forth in section 4(c)(3)(K) of the CEA, the Commission has
determined that ECPs, as defined in section 1a(18)(A) of the CEA and in
Commission regulation 1.3(m), are appropriate persons for purposes of
the Final Order in light of their financial or other qualifications, or
the applicability of regulatory protections. In addition, in response
to confusion regarding whether market participants are required to
establish compliance with section 4(c)(3)(F) or demonstrate their ECP
status for purposes of this Final Order through the use of audited
financial statements, the Commission also is clarifying that market
participants that qualify as appropriate persons under section
4(c)(3)(F) of the CEA or on the grounds that they are ECPs as defined
in section 1a(18)(A) of the Act and Commission regulation 1.3(m), are
not required to prove such qualification through the use of audited
financial statements.
The Commission also received several comments requesting that it
exercise its statutory authority under section 4(c)(3)(K) to expand
further the definition of appropriate person for purposes of the Final
Order. These comments generally fell into three categories: requests to
extend the definition to specific subsets of market participants;
requests to expand the definition more broadly to include, for example,
all market participants that satisfy the participant eligibility
criteria established by the Requesting Parties; and requests to clarify
that certain market participants are included in the definition of
appropriate person set forth in CEA sections 4(c)(3)(F) and (H).
Several commenters also requested that all market participants who
engage in particular types of transactions (such as virtual and demand
response transactions) be included in the definition of appropriate
person for the purpose of the Final Order.
i. Determinations Regarding the Inclusion of Specifically Identified
Market Participants as Appropriate Persons for Purposes of the Final
Order
The Commission received multiple requests to include various
categories of market participants within the scope of appropriate
person for purposes of the Final Order. One commenter urged the
Commission to expand the definition to include all persons who actively
participate in the generation, transmission, or distribution of
electric energy, noting that the proposed definition of appropriate
person could exclude traditionally active market participants whose
participation facilitates demand response activities, and reduces
costs.\226\ Other commenters requested the inclusion of specifically
identifiable groups of market participants such as electric
cooperatives,\227\ retail electric providers (``REPs''),\228\ load
serving entities (``LSEs''),\229\ curtailment service providers
(``CSPs''),\230\ and persons who engage in virtual and convergence bids
and offers.\231\
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\226\ See generally Industrial Coalitions at 4-5.
\227\ See, e.g., APPA at 3; FERC Staff at 6; Joint Trade
Associations at 11-13; PUCT at 11. The Joint Trade Associations also
requested, in the alternative, that the Commission determine that
electric cooperatives are ECPs. See generally Joint Trade
Associations at 3.
\228\ See, e.g., TEAM/ARM at 2-3; PUCT at 10.
\229\ See, e.g., Industrial Coalitions at 4; NYISO Supplement to
Requesting Parties' Comment, Attachment B at 6-7.
\230\ See, e.g., Industrial Coalitions at 4.
\231\ See, e.g., Financial Marketers Coalition at 2-13; NYISO at
2-10.
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Multiple commenters requested that electric cooperatives be deemed
appropriate persons for purposes of the Final Order.\232\ One commenter
asserted that electric cooperatives, by their nature, ``actively
participate in the generation, transmission or distribution of
electricity.'' \233\ Certain commenters asserted that electric
cooperatives may be required to obtain transmission and other services
from RTOs and ISOs and that the participation of electric cooperatives
in the RTO and ISO markets assists in ensuring the availability of
electric energy, transmission, or capacity to their consumers.\234\ One
commenter additionally noted the operational qualifications and non-
profit status of electric cooperatives in support of their
[[Page 19897]]
consideration as appropriate persons.\235\ Some commenters requested
that the Commission designate all REPs that have been certified by PUCT
as appropriate persons for purposes of the Final Order.\236\ One
commenter asserted that REP transactions ``are generally conducted for
the narrow purposes of purchasing electricity for provision to retail
customers and for hedging the dynamic risks of purchasing supply to
meet demand'' and that ``the relatively small scale'' of these
transactions makes it ``unlikely that the transactions will result in
market harm.'' \237\ This commenter also noted that REPs are subject to
certification requirements in addition to the capital requirements set
forth in applicable market protocols.\238\ Another commenter argued
that the inclusion of REPs would further the public interest in a
``vibrant, diverse market.'' \239\ Multiple commenters also requested
the inclusion of LSEs.\240\ One of the Requesting Parties stated that
at least ten percent of the LSEs in its market may not qualify as
appropriate persons under the proposed standard and maintained that the
loss of these market participants could undermine a program through
which the LSEs compete to offer end-use customers competitive energy
prices and services.\241\ Another commenter suggested that certain LSEs
and CSPs could participate in the market in a manner that facilitates
demand response and reduces costs.\242\ Certain commenters requested
that market participants who engage in virtual and convergence bids and
offers be deemed appropriate persons for purposes of the
exemption.\243\ Finally, one commenter requested confirmation that
market participants ``do not have to own physical assets, such as
transmission lines or generating facilities,'' in order to qualify for
the exemption set forth in the Proposed Order.\244\
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\232\ See, e.g., APPA at 3, FERC Staff at 6; Joint Trade
Associations at 11-13; PUCT at 11.
\233\ See generally Joint Trade Associations at 11-12.
\234\ See generally APPA at 3; Joint Trade Association at 12.
\235\ See generally Joint Trade Associations at 12.
\236\ See, e.g., TEAM/ARM at 2-3; PUCT at 10.
\237\ See, e.g., TEAM/ARM at 2-3.
\238\ Id.
\239\ PUCT at 10.
\240\ See, e.g., Industrial Coalitions at 4; NYISO Supplement to
Requesting Parties' Comment, Attachment B at 6-7.
\241\ See generally NYISO Supplement to Requesting Parties'
Comment, Attachment B at 6-7.
\242\ See generally Industrial Coalitions at 4-5.
\243\ See, e.g., Financial Marketers Coalition at 2-13; NYISO at
2-10.
\244\ See generally Financial Marketers Coalition at 2-10.
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After consideration of the comments described above, the Commission
is using the authority provided by section 4(c)(3)(K) of the CEA to
determine that a ``person who actively participates in the generation,
transmission, or distribution of electric energy,'' as defined within
the Final Order, is an appropriate person for purposes of the exemption
provided therein.\245\ The Final Order defines a ``person who actively
participates in the generation, transmission, or distribution of
electric energy'' as ``a person that is in the business of: (1)
Generating, transmitting or distributing electric energy or (2)
providing electric energy services that are necessary to support the
reliable operation of the transmission system.'' The Commission has
determined that the inclusion of transactions entered into by such
persons is proper because such persons' active participation in the
physical markets provide them with the requisite ``qualifications''
necessary to be deemed an ``appropriate person'' under section
4(c)(3)(K) for purposes of the Final Order.
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\245\ Accordingly, the exemption provided by the Final Order
will apply to agreements, contracts or transactions where (1) each
party thereto is an ``appropriate person,'' as defined in sections
4(c)(3)(A) through (J) of the CEA; an ``eligible contract
participant,'' as defined in section 1a(18)(A) of the CEA and in
Commission regulation 1.3(m); or a ``person who actively
participates in the generation, transmission, or distribution of
electric energy,'' as defined in Final Order and (2) that satisfy
the additional parameters for inclusion in the exemption set forth
in the Final Order.
---------------------------------------------------------------------------
Although the Commission expects that the definition of a ``person
who actively participates in the generation, transmission, or
distribution of electric energy'' will capture many of the market
participants referenced in the comments that the Commission
received,\246\ the Commission has chosen to define the phrase generally
by reference to the relevant person's business activities, rather than
referencing or delineating particular market participant labels or
terms that may have different meanings in different markets and that
may be subject to change over time. By way of example, however, the
Commission notes that the definition would include an entity that is in
the business of providing demand response services in the markets as
they are currently operated by the Requesting Parties. In response to
the request for clarification of this issue, the Commission confirms
that, to be eligible for the exemption set forth in this Final Order, a
transaction (including a virtual or convergence bid or offer) need not
be entered into by market participants who own physical transmission or
generation assets, as long as the transaction is entered into by
persons who satisfy the criteria set forth in the Final Order. The
Final Order would not, however, extend to agreements, contracts, or
transactions that are entered into by individuals and entities that are
engaged in the business of entering into or facilitating financial
transactions (such as virtual and convergence bids and offers), and
that (1) do not actively participate in the generation, distribution
and transmission of electric energy, (2) are not ECPs, or (3) do not
satisfy any of the criteria set forth in sections 4(c)(3)(A) through
(J) of the CEA. The Commission is concerned that a person or entity
that is engaged in purely financial transactions in the RTO or ISO
markets, but that does not meet either the ECP or the CEA sections
4(c)(3)(A) through (J) appropriate person criteria may be operating on
inadequate resources and may pose inappropriate risks to itself and
other market participants.
---------------------------------------------------------------------------
\246\ See generally CAISO/ISO NE January at 4 (noting that ``the
Petitioners' wholesale electricity markets mainly cater to Load
Serving Entities, their suppliers, and others whose primary business
is the physical generation of electricity and most transactions on
the market involve the actual supply and demand of electricity'').
See also Petition at 27.
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ii. Determinations Regarding the Inclusion of All RTO and ISO Market
Participants as Appropriate Persons for Purposes of the Final Order
Several commenters advocated that the Commission use the authority
provided by section 4(c)(3)(K) of the CEA to expand the definition of
appropriate persons for purposes of the Final Order to include all
entities that satisfy the market participant eligibility requirements
established by the RTOs and ISOs.\247\ Commenters generally supported
their positions by: (1) Citing to the capitalization, financial
security and/or other requirements that RTO and ISO market participants
must satisfy; \248\ (2) alleging potential adverse effects of the exit
from the RTO and ISO markets of current participants that would be
unable to meet the proposed appropriate person criteria; \249\ and/or
(3) asserting a perceived lack of risk to the overall
[[Page 19898]]
economy from a default in an RTO or ISO market.\250\
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\247\ See, e.g., AB Energy at 1; Commercial Working Group at 2-
4; COPE at 7; ERCOT October at 1-11; ERCOT December at 2, 10; FERC
Staff at 6; Financial Marketers Coalition at 2, 11-16; Industrial
Coalitions at 1, 3-5; Joint Trade Associations at 11-13; NEPOOL at
2-3; NYISO Supplement to Requesting Parties' Comment, Attachment B
at 1; NYTOs at 3-4; NYPSC at 2; Requesting Parties at 2-5; PJM at 1,
4; PUCT at 9; Tarachand at 1-2.
\248\ See, e.g., AB Energy at 1; ERCOT October at 2-11;
Industrial Coalitions at 5; NEPOOL at 2; NYISO Supplement to
Requesting Parties' Comment, Attachment B at 1-4; NYPSC at 2; NYTOs
at 4; PUCT at 10; Requesting Parties at 2-5; Tarachand at 1-2; TEAM/
ARM at 2.
\249\ See, e.g., Commercial Working Group at 3; ERCOT December
at 7; FERC Staff at 6; Financial Marketers Coalition at 11-12;
Industrial Coalitions at 5; NYPSC at 3; PJM at 4; PUCT at 11;
Tarachand at 2.
\250\ See, e.g., AB Energy at 1-2; FERC Staff at 6; Financial
Marketers Coalition at 15; NYTOs at 4; PUCT at 11; Requesting
Parties at 4; Tarachand at 2.
---------------------------------------------------------------------------
Multiple commenters asserted that the Commission should deem all
RTO and ISO market participants as appropriate persons for purposes of
the Final Order by referencing specific types of participation
standards established by the RTOs and ISOs.\251\ Certain of those
commenters claimed that such requirements minimize the risks in the
applicable markets \252\ and help to ensure that only sophisticated
players enter the markets.\253\ Commenters cited, for example, the RTO
and ISO market participant obligations to either satisfy a baseline
capitalization requirement and/or to post participation-based financial
security \254\ as well as credit,\255\ disclosure,\256\ training,\257\
risk management,\258\ personnel,\259\ and/or technical capability
requirements \260\ that may apply to market participants. Multiple
commenters noted that RTO- and ISO-established market participation
criteria have been approved by FERC or PUCT, as applicable.\261\ Other
commenters cited the regulatory oversight and/or market monitoring to
which the RTOs and ISOs are subject \262\ and/or certain mechanisms
employed by RTOs and ISOs to support the financial integrity of the
market.\263\ Multiple commenters also expressed concern with potential
conflicts between the appropriate persons determinations being made by
the Commission and the determinations made by an RTO or ISO and its
regulator with respect to market participation eligibility.\264\ One
commenter questioned whether, through the appropriate persons
limitations, the Commission intended to regulate minimum RTO
participation standards \265\ and another asserted that it is
``unnecessary'' and ``burdensome'' for the Commission to duplicate the
efforts of the RTOs and ISOs and their regulators in establishing
market participation requirements.\266\
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\251\ See, e.g., AB Energy at 2; CAISO/ISO NE January at 6;
ERCOT October at 4-11; ERCOT December at 7; Financial Marketers
Coalition at 13-14; Industrial Coalitions at 5; NEPOOL at 2; NYISO
Supplement to Requesting Parties' Comment, Attachment B at 1-4;
NYPSC at 2; NYTOs at 4; Requesting Parties at 3-6, 8; PJM at 4; PUCT
at 9; Tarachand at 2.
\252\ See, e.g., AB Energy at 2; CAISO/ISO NE January at 6-7;
Financial Markets Coalition at 13-15; PUCT at 10.
\253\ See generally CAISO/ISO NE January at 7.
\254\ See, e.g., ERCOT October at 2-5; Financial Marketers
Coalition at 14, 15; NYPSC at 3; PUCT at 10; Requesting Parties at
3-5, 8.
\255\ See, e.g., ERCOT October at 2-3, 6-9; ERCOT December at 7;
Financial Marketers Coalition at 15; NYISO Supplement to Requesting
Parties' Comment, Attachment B at 2-4; NYPSC at 2; PUCT at 10;
Requesting Parties at 4; TEAM/ARM at 2.
\256\ See, e.g., Financial Marketers Coalition at 15-16; NYPSC
at 2.
\257\ See, e.g., CAISO/ISO NE January at 7; Requesting Parties
at 4.
\258\ See, e.g., Commercial Working Group at 4; ERCOT October at
5-6; NYPSC at 2; Requesting Parties at 4.
\259\ See generally Requesting Parties at 4.
\260\ See generally id.
\261\ See, e.g., AB Energy at 1; CAISO/ISO NE January at 3;
Commercial Working Group at 3; Financial Marketers Coalition at 4;
COPE at 10; Joint Trade Associations at 11; NYISO Supplement to
Requesting Parties' Comment, Attachment B at 6; Tarachand at 1;
TEAM/ARM at 2.
\262\ See, e.g., CAISO/ISO NE January at 3, 8; ERCOT October at
2; Financial Marketers Coalition at 11-12; Joint Trade Associations
at 11-13; NYISO Supplement to Requesting Parties' Comment,
Attachment B at 5-6; NYPSC at 2; NYTOs at 4; Requesting Parties at
2-5.
\263\ NYISO Supplement to Requesting Parties' Comment,
Attachment B at 4-5; Requesting Parties at 5.
\264\ See, e.g., NEPOOL at 2-3; PJM at 4; PUCT at 9; Requesting
Parties at 2-5.
\265\ See generally COPE at 5.
\266\ See generally AB Energy at 2.
---------------------------------------------------------------------------
Certain commenters claimed that some entities that currently
participate in the RTO and ISO markets might not be able to satisfy the
appropriate person standard set forth in the Proposed Order and would
exit the market.\267\ While some commenters did not name the specific
types of entities that they believed would be excluded,\268\ others
identified particular groups of market participants that could be
eliminated, including municipalities and electric cooperatives,\269\
REPs,\270\ emergency load providers,\271\ LSEs,\272\ special case
resources,\273\ demand response providers,\274\ marketers,\275\ and
generators.\276\ One commenter asserted that exempting some market
participants, but not others, would create an artificial distinction
between market participants that conflicts with the Federal Power Act
and would create an unfairly discriminatory regulatory scheme.\277\
Commenters also expressed concern that market participants who fall
outside the exemption would be subject to duplicative regulation,\278\
with some questioning the efficiency or operational workability of a
dual regulatory structure.\279\
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\267\ See, e.g., AB Energy at 2; Commercial Working Group at 3-
4; Financial Marketers Coalition at 11-12, 13-16; NYPSC at 3; NYTOs
at 4.
\268\ See, e.g., Commercial Working Group at 4; NYPSC at 2.
\269\ See, e.g., FERC Staff at 6; Joint Trade Associations at
11-13; NEPOOL at 2-3; PUCT at 11. But see ERCOT December at 6 (``The
proposed `Appropriate Persons' limitation would not affect any * * *
electric cooperatives.'').
\270\ See, e.g., PUCT at 9; TEAM/ARM at 2-3.
\271\ See, e.g., PJM at 2.
\272\ See, e.g., Financial Marketers Coalition at 14; NYISO
Supplement to Requesting Parties' Comment, Attachment B at 6;
Requesting Parties at 6; PJM at 2.
\273\ See, e.g., Requesting Parties at 6; Tarachand at 2.
\274\ See, e.g., PJM at 2; Requesting Parties at 6; Tarachand at
2.
\275\ See, e.g., Financial Marketers Coalition at 14; NYISO at
2-10; NYISO Supplement to Requesting Parties' Comment, Attachment B
at 6; Requesting Parties at 6.
\276\ See, e.g., Financial Marketers Coalition at 14; NYISO
Supplement to Requesting Parties' Comment, Attachment B at 6;
Requesting Parties at 6; PJM at 2.
\277\ See, e.g., Financial Marketers Coalition at 10-11
(alleging that ``[t]he Federal Power Act states that `[n]o public
utility shall, with respect to any transmission or sale subject to
the jurisdiction of [FERC], make or grant any undue preference or
advantage of any person or subject any person to any undue prejudice
or disadvantage * * *.' '') (citing 16 U.S.C. 824d(b)); NYISO at 9-
10.
\278\ See, e.g., NYPSC at 3.
\279\ See, e.g., CAISO/ISO NE January at 3; Financial Marketers
Coalition at 3, 11, 16-18.
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Several commenters alleged that the exit of existing market
participants would have a negative impact on the functioning of the RTO
and ISO markets.\280\ Certain commenters claimed that reduced
participation would result in volatility \281\ or reduced
liquidity,\282\ including one commenter that noted the effect of
liquidity on the price discovery process.\283\ In addition, certain
commenters asserted that decreased participation would result in
increased market concentration and diminished competition,\284\
including one commenter who alleged that the increased market
concentration that could result from the forced exit of small market
participants is ``at cross-purposes to the legislative spirit'' of the
Dodd-Frank Act, which was intended to end ``too-big-to-fail.'' \285\
One commenter also noted that the high barriers to entry and high
concentration of ownership in the RTO and ISO markets make such markets
more susceptible to abuse when smaller entities are forced out,\286\
while another commenter stated that reduced competition would result in
higher electric energy prices, causing harm to rate payers.\287\ One
commenter claimed
[[Page 19899]]
that the departure of market participants would cause remaining
participants who serve the load of the withdrawing participants to face
higher prices to procure the additional electric energy and would cause
existing load forecasts to be inaccurate as new customers would not
factor into the remaining participants' forecast models and would limit
the available electric energy in instances of unplanned outages,
thereby increasing the risks posed to remaining providers, the RTOs and
ISOs, and the marketplace as a whole.\288\ Another commenter alleged
that a ``chilling effect on the development of technologies to provide
renewable energies and the systems that complement the integration of
renewable resources'' would result if certain small market participants
that are the ``vanguard of innovation'' are removed.\289\ Some
commenters also stated that reduced market participation would
eliminate jobs and reduce tax revenue.\290\ Certain commenters asserted
that the exclusion of certain market participants would create
regulatory uncertainty.\291\ Others claimed that the exclusion of
participants would violate the Congressional intent behind section
4(c)(3)(K) of the CEA \292\ or the competitive principles underlying
the administration of electric energy competition in the relevant
area.\293\
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\280\ See, e.g., CAISO/ISO NE January at 3; Commercial Working
Group at 3-4; FERC Staff at 6; Tarachand at 2.
\281\ See generally Commercial Working Group at 3.
\282\ See, e.g., CAISO/ISO NE January at 3, 6, 8; Commercial
Working Group at 3-; Financial Marketers Coalition at 11-12; NYPSC
at 2-3; Tarachand at 2. But see ERCOT December at 6 (``[I]t does not
appear that the proposed Appropriate Person limitation would have a
significant impact on market liquidity in ERCOT.'').
\283\ See generally Tarachand at 2.
\284\ See, e.g., Commercial Working Group at 4; Financial
Marketers Coalition at 11-12, 14, 16; Industrial Coalitions at 5;
NYPSC at 3; Tarachand at 2.
\285\ Tarachand at 2.
\286\ Industrial Coalitions at 4-5.
\287\ See generally Financial Marketers Coalition at 12.
\288\ See generally Commercial Working Group at 3-4.
\289\ Tarachand at 2.
\290\ See, e.g., AB Energy at 2; Tarachand at 2.
\291\ See, e.g., FERC Staff at 6; PUCT at 9; Requesting Parties
at 3, 8.
\292\ See, e.g., CAISO/ISO NE January at 7-8; Requesting Parties
at 3.
\293\ See generally ERCOT December at 8-9.
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Certain commenters supported the inclusion of all RTO and ISO
market participants in the appropriate persons definition for purposes
of the Final Order by claiming that recently increased collateral
requirements have reduced the default risks of particular RTOs \294\
and/or that the mutualized risk of market participants for participant
defaults has reduced the risk of a financial default in an RTO or ISO
market spreading to the rest of the economy.\295\ Some of those
commenters specifically noted that market participant failures have not
posed a significant threat to the health of the RTO or ISO or other
market participants.\296\
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\294\ See generally Tarachand at 2.
\295\ See, e.g., AB Energy at 2; Commercial Working Group at 3;
Tarachand at 2.
\296\ See, e.g., AB Energy at 2; Tarachand at 2; PUCT at 11.
---------------------------------------------------------------------------
However, certain commenters who contended that the Commission
should invoke the authority provide by section 4(c)(3)(K) of the CEA to
include all RTO and ISO market participants in the definition of
appropriate persons for purposes of the Final Order nonetheless
suggested that the market impact of the participation limitations
imposed by the proposed appropriate persons definition could be
minimal.\297\
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\297\ For example, one Requesting Party stated that ``past
experience has shown that many market participants, when faced with
modestly higher capitalization requirements, will meet these
requirements in order to remain active market participants.'' See
generally PJM at 3. The commenter further noted that, although the
number of entities potentially affected by the proposed appropriate
person limitations ``appear[s] to compromise a very large percentage
of the Petitioners' market participants,'' such entities ``account
for minimal transactional activity'' in comparison to the Requesting
Party's ``market transactions as a whole'' and, thus, the
appropriate persons limitation ``would likely not have a significant
impact on Petitioners' market liquidity.'' Id. Similarly, another
Requesting Party stated that, if the Commission were to add LSEs to
the definition of appropriate persons pursuant to section 4(c)(3)(K)
of the Act, only three financial traders would be excluded from its
markets when taking into account its own revised market participant
eligibility requirements, which ``is arguably insignificant when
viewed solely from the impact to the number of eligible market
participants.'' ERCOT December at 4-5. According to this Requesting
Party, the appropriate persons limitation ``would appear to have an
immaterial incremental liquidity impact'' above that associated with
the effects of its own eligibility standards and ``no impact on the
competitive retail market.'' Id. at 5.
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As set forth above, the Commission considered requests from the
commenters to categorize particular types of entities as appropriate
persons for purposes of the Final Order and, pursuant to the authority
provided by section 4(c)(3)(K) of the CEA, is expanding the definition
to include a ``person who actively participates in the generation,
transmission, or distribution of electric energy.'' \298\ The
Commission believes that this expansion, when combined with the
``appropriate persons'' definition delineated in sections 4(c)(3)(A)
through (J) of the CEA and the determination, as proposed, to include
ECPs, as defined in section 1a(18)(A) of the CEA and in Commission
regulation 1.3(m), would appear to strike the appropriate balance. It
would not exempt only those RTO and ISO market participants that can
demonstrate neither the financial wherewithal nor the requisite
business activities and congruent expertise to qualify as appropriate
persons under section 4(c)(3)(K) of the CEA.
---------------------------------------------------------------------------
\298\ Paragraph 5(g) of the Order.
---------------------------------------------------------------------------
The Commission declines to generally and broadly extend the
exemption contained in the Final Order to transactions involving all
persons that satisfy the market participant eligibility criteria
established by the RTOs and ISOs. The Commission notes that the
definition of appropriate person set forth in sections 4(c)(3)(A)
through (J) of the CEA explicitly defines the types of qualified
entities that Congress intended to be eligible for an exemption under
section 4(c).\299\ Certain of these categories reflect an intention to
limit a section 4(c) exemption to entities of reasonably significant
financial means, while others apply to entities that have regulatory
status that implies functional expertise. For example, section
4(c)(3)(F) defines ``appropriate person'' to include ``a corporation,
partnership, proprietorship, organization, trust, or other business
entity with a net worth exceeding $1,000,000 or total assets exceeding
$5,000,000 or the obligations of which under the agreement, contract or
transaction is guaranteed by or otherwise supported by a letter of
credit or keepwell, support, or other agreement by any such entity or
by an entity referred to in subparagraphs (A), (B), (C), (H), (I), or
(K) of [section 4(c)(3)].'' \300\ Moreover, section 4(c)(3)(K) of the
CEA expressly restricts the Commission's authority to expand the
definition of appropriate person beyond persons whom the Commission
determines are ``appropriate in light of [such persons'] financial or
other qualifications, or the applicability of appropriate regulatory
protections.'' As noted by one of the commenters, the RTO and ISO
``markets are complex and not geared to unsophisticated traders * * * .
[T]hey are designed as wholesale * * * markets.'' \301\ The Commission
believes that the ability of persons who fail to satisfy an RTO's or
ISO's capitalization criteria to nonetheless participate in the RTO's
or ISO's market by providing financial security in an amount below the
standard established in section 4(c)(3)(F), as indicated in the
Petition,\302\ would render the section 4(c)(3)(K) determination
difficult to make on a wholesale basis. While the Commission
understands that the Requesting Parties, with the oversight of FERC or
PUCT, as applicable, have established participation standards that they
believe are sufficient to protect their own markets, the Commission
notes that those participation standards are not directed to meeting
the language of section 4(c)(3)(K), which is focused on protecting
market participants. As set forth in the Proposed Order, the
Commission's preliminary
[[Page 19900]]
determination that the exemption would not have a material adverse
effect on the ability of the Commission or any contract market to
discharge its duties under the CEA was based on the reasoning that
``the limitation of the exemption to Transactions between certain
`appropriate persons' * * * avoids potential issues regarding financial
integrity and customer protection. That is, this approach would appear
to ensure that Transactions subject to the Final Order would be limited
to sophisticated entities that are able to, from a financial
standpoint, understand and manage the risks associated with such
Transactions.'' \303\ Notwithstanding the comments received, the
Commission has determined to limit the exemption set forth in the Final
Order to Covered Transactions in which each party to the Covered
Transaction is: (1) An ``appropriate person'' as defined in sections
4(c)(3)(A) through (J) of the CEA; (2) an ``eligible contract
participant,'' as defined in section 1a(18)(A) of the CEA and in
Commission regulation 1.3(m); or (3) a ``person who actively
participates in the generation, transmission, or distribution of
electric energy,'' as that term is defined in the Final Order.
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\299\ 7 U.S.C. 6(c)(A)-(J).
\300\ 7 U.S.C. 6(c)(F).
\301\ CAISO/ISO NE January at 7.
\302\ See, e.g., Petition at 27-28.
\303\ 77 FR 52146.
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iii. Determinations Regarding the Inclusion of Public Power Systems and
Tribal Governments as Appropriate Persons Pursuant to Section
4(c)(3)(H) of the CEA
One commenter asked that the Commission affirm that public power
systems, and that units or instrumentalities of tribal governments are
``appropriate persons'' under section 4(c)(3)(H) of the CEA.\304\ This
commenter asserted that, because public power systems are ``units of
state or local governments, or agencies or instrumentalities of the
foregoing,'' they properly are within the scope of ``appropriate
persons,'' as defined by section 4(c)(3)(H).\305\ In addition, the
commenter argued that because units or instrumentalities of tribal
governments are governmental entities, they too fall within the
definition of ``appropriate persons'' set forth in section
4(c)(3)(H).\306\
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\304\ APPA at 3.
\305\ Id. In support of this position, APPA noted that, in the
preamble to the Proposed Order, the Commission observed that
``municipal entities * * * appear to qualify as `appropriate
persons' pursuant to CEA section 4(c)(3)(H)'' and that the
definition would cover ``municipalities and other government owned
market participants.'' Id. at 2 (citing 77 FR 52145 n.99).
\306\ Id.
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The Commission interprets section 4(c)(3)(H) to include public
power systems and the units or instrumentalities of tribal governments
within the meaning of ``governmental entities.'' This interpretation is
consistent with both the Commission's approach to public power
entities, which are operated by local governments for the benefit of
its citizens \307\ and Indian tribes in the exemption for 201(f)
entities.\308\
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\307\ E.g., municipal utilities such as the Los Angeles
Department of Water and Power and the Sacramento Municipal Utility
District, or a PUD (``public utility district'') organized under
state law and operated by a city, county, state, or regional agency.
``Proposal to Exempt Certain Transactions Involving Not-For-Profit
Electric Utilities,'' 77 FR 50998 at 51004 nn.43-44, Aug. 23, 2012.
\308\ Id. at 51004-05 (Commission determination that electric
utilities owned by federally-recognized Indian tribes are no
different substantively than government-owned electric utilities for
purposes of the relief provided). The Commission's interpretation is
also informed by CEA section 4s(h)(2), which directs the Commission
(albeit in another context) to look to section 3 of ERISA (29 U.S.C.
1002) for the purposes of defining ``special entity,'' including
``any governmental plan.'' ERISA includes Indian tribes within the
meaning of ``governmental plan.'' Further, the Commission
incorporates by reference the list of Indian tribes recognized by
the Department of Interior's Bureau of Indian Affairs (BIA) as set
forth in, ``Indian Entities Recognized and Eligible To Receive
Services From the Bureau of Indian Affairs,'' 77 FR 47868, Aug. 10,
2012, or any successor to that document issued by the BIA.
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iv. Clarifications with Respect to Certain Language in Section
4(c)(3)(F) of the CEA for Purposes of the Final Order
Section 4(c)(3)(F) of the CEA defines ``appropriate person'' to
include ``[a] corporation, partnership, proprietorship, organization,
trust or other business entity with a net worth exceeding $1,000,000 or
total assets exceeding $5,000,000, or the obligations of which under
the agreement, contract or transaction are guaranteed or otherwise
supported by a letter of credit or keepwell, support, or other
agreement by any such entity or by an entity referred to [in sections
4(c)(3)(A), (B),(C), (H), (I) or (K)] of the CEA].'' \309\ One
commenter argued that the language ``or the obligations of which under
the agreement, contract or transaction are guaranteed or otherwise
supported by a letter of credit or keepwell, support, or other
agreement'' can be interpreted to mean that a market participant that
provides an RTO or ISO with a letter of credit that has been issued by
an appropriate person \310\ in the amount of the RTO or ISO-specific
credit requirements (i.e., the amount of its estimated obligations to
the RTO or ISO) satisfies the ``appropriate person'' standard set forth
in section 4(c)(3)(F) of the CEA.\311\ This commenter also interpreted
the quoted language to mean that a market participant that provides to
the RTO or ISO an unlimited guaranty that has been issued by an
appropriate person \312\ thereby supports its obligation to the RTO or
ISO and, thus, satisfies the section 4(c)(3)(F) criteria.\313\
---------------------------------------------------------------------------
\309\ 7 U.S.C. 6(c)(3)(F) (emphasis added).
\310\ As described by Requesting Parties, ``appropriate person''
in this context would include only those market participants that
are defined under the Commission's regulations as ``appropriate
persons'' or ``eligible contract participants.'' Requesting Parties
at 7-8.
\311\ Id.
\312\ As described by Requesting Parties, ``appropriate person''
in this context would include only those market participants that
are defined under the Commission's regulations as ``appropriate
persons'' or ``eligible contract participants.'' Id.
\313\ Id.
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In addition, one commenter requested that the Commission provide
guidance as to what would be acceptable as a ``keepwell, support, or
other agreement'' for purposes of section 4(c)(3)(F),\314\ and
specifically asked whether a parental guaranty would be sufficient and
whether audited financial statements would be required. This commenter
also asked how the Commission would quantify the obligations of a
business entity for purposes of this provision.\315\
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\314\ Financial Marketers Coalition at 15-16.
\315\ Id.
---------------------------------------------------------------------------
The Commission clarifies that a market participant that provides to
the RTO or ISO an unlimited guaranty or other support in the form of a
``letter of credit or keepwell, support, or other agreement,'' which
guarantee or other support has been issued by an appropriate person,
thereby supports its obligation to the RTO or ISO and, thus, satisfies
the section 4(c)(3)(F) criteria. The guaranteeing or supporting entity
will not be required by the Final Order to demonstrate its status as an
``appropriate person'' \316\ through the use of audited financial
statements.
---------------------------------------------------------------------------
\316\ As described by the Requesting Parties, ``appropriate
person'' in this context would include only those market
participants that are defined under the Commission's regulations as
``appropriate person'' or ``eligible contract participants.''
Requesting Parties at 7-8.
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e. Public Interest and Purposes of the CEA
i. FERC Credit Reform Policy
As discussed in greater detail above,\317\ the standards set forth
in FERC regulation 35.47 appear to achieve goals similar to the
regulatory objectives of the Commission's DCO Core Principles, and
substantial compliance with such requirements is key to the
Commission's determination that the Tariffs and activities of the
Requesting
[[Page 19901]]
Parties and supervision by FERC and PUCT are congruent with, and--in
the context of the Covered Transactions--sufficiently accomplish, the
regulatory objectives of each DCO Core Principle.
---------------------------------------------------------------------------
\317\ See section IV.A.3.i. infra.
---------------------------------------------------------------------------
ii. Use of the DCO Core Principles in the Public Interest and Purposes
of the CEA Analysis
In the Proposed Order, in determining whether an exemption for the
transactions defined therein was consistent with the public interest
and the purposes of CEA, the Commission preliminarily determined, based
upon the Requesting Parties' representations and in the context of the
Requesting Parties' activities with respect to the transactions within
the scope of the Proposed Order, that the Requesting Parties' practices
or Tariffs and supervision by FERC and PUCT appeared to be congruent
with, and sufficiently accomplish, the regulatory objectives of the
Core Principles set forth in the CEA for DCOs.\318\ Following the
analysis of each DCO Core Principle, the Commission expressly sought
comment with respect to its preliminary conclusions.\319\
---------------------------------------------------------------------------
\318\ See 77 FR 52148-57.
\319\ See id.
---------------------------------------------------------------------------
The Commission received several comments regarding the use of the
DCO Core Principles as part of the public interest and purposes of the
CEA analysis.\320\ One commenter expressly ``support[ed] the
Commission's determination that the Petitioners' tariffs and market
rules are consistent with the spirit of the DCO Core Principles[.]''
\321\ However, this commenter requested clarification that the
Commission's DCO Core Principle analysis ``does not equate to a finding
on Petitioners' status as a * * * DCO or the transactions executed on
or through the Petitioners' markets as swaps.'' \322\ Another commenter
stated that the DCO Core Principle analysis is not an appropriate
standard in analyzing whether the exemption is in the public interest
because ``RTOs are physical electricity transmission and market
operators pervasively regulated by either FERC or the PUCT'' and are
not DCOs,\323\ while a different commenter asserted that the Commission
``should not require RTOs and ISOs to comply with the'' DCO Core
Principles.\324\
---------------------------------------------------------------------------
\320\ See, e.g., Joint Trade Associations at 4, 6; COPE at 6, 9;
Commercial Working Group at 4.
\321\ Joint Trade Associations at 6 (noting in particular
Requesting Parties' credit-worthiness provisions and financial
integrity rules).
\322\ Id. at 4.
\323\ COPE at 6, 9.
\324\ Commercial Working Group at 4.
---------------------------------------------------------------------------
The Commission believes that the analysis drawing from the DCO Core
Principles contained in the Proposed Order should be used to determine
whether the exemption is consistent with the public interest and the
purposes of the CEA. The Commission is not using the analysis to
determine whether the Requesting Parties are DCOs. The Commission is
not holding the Requesting Parties to the same standards as DCOs, and
is not concluding that the Requesting Parties would meet the standards
set forth in section 5b(c)(2) of the CEA and part 39 of the
Commission's regulations. Nonetheless, the Commission believes that the
DCO Core Principles provide a useful framework by which to measure the
extent to which the Tariffs and activities of the Requesting Parties,
and supervision by FERC and PUCT, are congruent with, and--in the
context of the Covered Transactions--sufficiently accomplish, the
regulatory objectives of the CEA. As discussed herein, particularly in
sections IV.A.3.a.i. and IV.B.2.e.i., the Commission believes that the
standards set forth in FERC regulation 35.47 appear to achieve goals
similar to the regulatory objectives of the Commission's DCO Core
Principles. Moreover, as set forth in the Commission's DCO Core
Principle analysis in the Proposed Order,\325\ the Commission
determines that the Requesting Parties' policies and procedures appear
to be consistent with, and to accomplish sufficiently for purposes of
this Final Order, the regulatory objectives of the DCO Core Principles
in the context of the Covered Transactions.
---------------------------------------------------------------------------
\325\ See 77 FR 524149-57.
---------------------------------------------------------------------------
iii. Use of the SEF Core Principles in the Public Interest and Purposes
of the CEA Analysis
In the Proposed Order, in determining whether the proposed
exemption was consistent with the public interest and the purposes of
CEA, the Commission preliminarily determined, based upon the Requesting
Parties' representations and in the context of the Requesting Parties'
activities with respect to the transactions within the scope of the
Proposed Order, that the Requesting Parties' practices or Tariffs, and
supervision by FERC and PUCT, appeared to be congruent with, and
sufficiently accomplish, the regulatory objectives of the Core
Principles set forth in the CEA for SEFs.\326\ Following the analysis
of each SEF Core Principle, the Commission expressly sought comment
with respect to its preliminary conclusions.\327\
---------------------------------------------------------------------------
\326\ See 77 FR 52157-62.
\327\ See id.
---------------------------------------------------------------------------
One commenter implored the Commission to allow the RTO and ISO
markets to continue to exist largely as they currently do by not
requiring compliance with the SEF Core Principles.\328\ Similarly,
another commenter contended that, because the Requesting Parties are
neither DCMs nor SEFs, ``the application of [DCM or SEF] core
principles to such markets provides little value,'' and the existence
of [FERC or PUCT] regulation should be the premise upon which an
exemption is granted.\329\
---------------------------------------------------------------------------
\328\ Commercial Working Group at 4.
\329\ COPE at 6. Additionally, in response to the Commission
asking whether ``the procedures and principles in place allow the
Requesting Parties to meet the requirements of SEF core principles
10-15,'' 77 FR 52173, COPE questioned why FERC and PUCT regulation
in those areas would not be sufficient. Id. at 10.
---------------------------------------------------------------------------
Regarding the Commission's 4(c) public interest analysis, one
commenter agreed ``that rules and regulations under the Petitioners'
[Open Access Transmission Tariffs] in general satisfy the Core
Principles and regulatory requirements that would apply to entities
seeking designation as a SEF.'' \330\ Notwithstanding this agreement,
however, the commenter also requested that the Commission clarify that
its public interest analysis and determinations regarding SEF Core
Principles does not constitute a finding that the Requesting Parties
are SEFs or that the transactions executed on their markets constitute
swaps.\331\
---------------------------------------------------------------------------
\330\ Joint Trade Associations at 6.
\331\ Id. at 7.
---------------------------------------------------------------------------
Similar to its view of the DCO Core Principles analysis and comment
received thereon, the Commission believes its analysis drawing from the
SEF Core Principles contained in the Proposed Order should be used to
determine whether the exemption is consistent with the public interest
and purposes of the Act--not as a determination that the Requesting
Parties are SEFs themselves, or that the products traded in their
markets are swaps. To the contrary, and consistent with the legislative
history behind CEA section 4(c), the Commission takes no position as to
the jurisdictional status of any Requesting Party or Covered
Transaction in the Final Order. Furthermore, in making its public
interest and purposes of the CEA determination based upon, in part, the
SEF Core Principle analysis, the Commission is not holding the
Requesting Parties to the same standards as SEFs, nor is it concluding
that the
[[Page 19902]]
Requesting Parties would meet the standards set forth in section 5h(f)
of the CEA.
Nonetheless, the Commission views the SEF Core Principles as a
useful way of measuring the extent to which the Tariffs and activities
of the Requesting Parties, and supervision by FERC and PUCT, are
congruent with, and--in the context of the Covered Transactions--
sufficiently accomplish, the regulatory objectives of the CEA. As set
forth in the Commission's SEF Core Principles analysis in the Proposed
Order,\332\ the Commission has determined that the Requesting Parties'
policies and procedures appear to be consistent with, and to accomplish
sufficiently for purposes of the Final Order, the regulatory objectives
of the SEF Core Principles in the context of the Covered Transactions.
---------------------------------------------------------------------------
\332\ 77 FR 52157-62.
---------------------------------------------------------------------------
iv. Imposition of Position Limits
In the Proposed Order, the Commission requested comment as to
whether ``the lack of position limits or position accountability
thresholds for speculators in Petitioners' markets, given the nature of
their markets and market participants, and the other regulatory
protections applicable to these markets as described [in the Proposed
Exemption], would prevent the Commission from determining that the
Proposed Exemption is consistent with the public interest and the
purposes of the CEA.'' \333\ The Commission also specifically requested
comment on the basis for concluding that market participants should or
should not have to satisfy position limit requirements, particularly
with respect to FTRs or virtual bids.\334\
---------------------------------------------------------------------------
\333\ 77 FR 52159.
\334\ 77 FR 52173.
---------------------------------------------------------------------------
Generally, commenters responded that the Commission should not
impose position limits on the Covered Transactions. Several commenters
objected on the ground that, because the Commission had not determined
that the transactions subject to the Proposed Order were subject to the
jurisdiction of the Commission, the imposition of an existing
regulatory regime on such transactions would be unreasonable.\335\
Another commenter argued that the transactions set forth in the
Proposed Order are not based on any reference contract within the
Requesting Parties' markets, and that imposition of position limits
would be impractical and unnecessary because the Federal Power Act
already requires rates to be just and reasonable.\336\ Commenters also
posited that the application of position limits would be a duplication
of the currently applicable financial assurance requirements in FERC-
approved RTO and ISO Tariffs \337\ and, similarly, that FERC and PUCT
regulation should be the only factor considered in issuing the
exemption, even assuming position limits were relevant to RTO and ISO
electric energy markets.\338\
---------------------------------------------------------------------------
\335\ Requesting Parties at 17; Joint Trade Associations at 8;
FIEG at 3.
\336\ Joint Trade Associations at 8.
\337\ FIEG at 3.
\338\ COPE at 10.
---------------------------------------------------------------------------
Commenters also highlighted that the Requesting Parties' markets
are administrated so that the total amount of energy represented by
instruments created on the markets is related to the deliverable
capacity of the physical transmission systems, making them a more
effective limitation than position limits since, as currently
constructed under the Commission's rules, position limits do not cap
overall open interest.\339\ Finally, the Requesting Parties pointed out
the fact that the Commission developed speculative position limits on
cash-settled contracts to ensure that no single trader can exert enough
market power to influence the cash settlement price of that contract,
whereas generators and LSEs are required to use the Requesting Parties'
electric energy markets for the purpose of delivering electric energy,
which effectively ensures the same result.\340\
---------------------------------------------------------------------------
\339\ Requesting Parties at 17; see DC Energy at 3 (noting in
particular that FTRs and virtual bids are constrained by the natural
physical limits of RTO and ISO market design, due to the products'
relation to the deliverable capacity of each RTO and ISO system).
\340\ Requesting Parties at 17-18.
---------------------------------------------------------------------------
Without making any determinations regarding the merits of the
commenters' concerns regarding position limits, the Commission's Final
Order does not impose position limits on the Covered Transactions. The
Commission accepts the Requesting Parties' representations that the
physical capability of their transmission grids limits the size of
positions that any single market participant can take at a given time.
Moreover, based upon the representations made in the Petition, the
Proposed Order provided that each category of exempted transaction,
including FTRs, would be limited by the physical capability of the
electric energy transmission system. Accordingly, as the Final Order
continues to limit each Covered Transaction category to the physical
capability of the transmission grid,\341\ the Commission believes that
imposing position limits on the Covered Transactions is not necessary
at this time in order to make the requisite public interest and
purposes of the CEA determinations.
---------------------------------------------------------------------------
\341\ The Final Order explicitly includes ``Virtual and
Convergence Bids and Offers'' as a type of Energy Transaction.
Consistent with DC Energy's comments, such transactions are also
limited to the physical capabilities of the physical transmission
grid, as required by the definition in the Final Order. See section
IV.A.1.c. supra.
---------------------------------------------------------------------------
v. Ability To Re-Create the Day-Ahead Market and Real-Time Prices
The Proposed Exemption specifically sought public comment as to
whether the Requesting Parties ``should [be] capable of re-creating the
Day-Ahead Market and Real-Time prices.'' \342\
---------------------------------------------------------------------------
\342\ 77 FR 52173.
---------------------------------------------------------------------------
Some commenters contested the underlying utility of being able to
re-create the market. The Requesting Parties argued that it is
impossible to predict how other market participants would have reacted
to a hypothetical situation.\343\ One commenter argued that claiming an
ability to re-create market prices would ``create the misimpression
that such recreations can be done accurately,'' and thus would
negatively affect market certainty.\344\ Similarly, another commenter
opposed any requirement that the RTO and ISOs be able to ``re-create,
re-state or in any way change prices,'' believing that it would
negatively affect confidence in the integrity of markets if prices
could be altered after-the-fact.\345\ Another commenter argued that the
ability to re-create the Day-Ahead Market and Real-Time prices was
unnecessary because MMUs already have substantial tools and broad
authority to obtain and analyze market data in order ``to address
potential market flaws, as well as instances of potential fraudulent
market activity.'' \346\ Finally, one commenter questioned the
relevance of such a requirement for transactions that are being
exempted.\347\
---------------------------------------------------------------------------
\343\ Requesting Parties at 18 (citing several FERC decisions
and related RTO and ISO filings that ``unequivocally reject the
market re-run concept'').
\344\ PUCT at 13.
\345\ DC Energy at 3.
\346\ See PUCT at 13-14. PUCT also noted that its enforcement
approach, as implemented by ERCOT, ``makes remediation a matter of
enforcement rather than of disrupting markets by using post-hoc
resettlement tools.'' PUCT at 14.
\347\ COPE at 8.
---------------------------------------------------------------------------
Regardless of underlying utility, necessity, or relevance, the
Requesting Parties noted that building the capability to re-run a
market (other than a straight reproduction of what occurred) would be
extremely expensive in all cases, and in some cases, impossible to
do.\348\
---------------------------------------------------------------------------
\348\ Requesting Parties at 18-19 (listing such costs as
entailing development of a user interface to vary price inputs that
kept track of changes in market rules and data formats over time, as
well as the physical maintenance of the hardware and software
involved with all trading and clearing over time).
---------------------------------------------------------------------------
[[Page 19903]]
Generally, the Commission notes that the ability to re-create
market prices entails simulating what price outcomes in a market
auction would have occurred, but for certain bids and offers being
placed. This ability is required of Commission-regulated DCMs \349\ in
order to allow the Commission's Division of Enforcement to determine
the magnitude of loss caused by any fraudulent or manipulative trading
scheme that may have occurred, as opposed to providing an initial means
of detecting fraud or manipulation, or enabling third parties to
contest market outcomes through private rights of action. Therefore,
the Commission disagrees with the assertions that it is impossible to
retroactively predict market outcomes based upon hypothetical price
inputs, or that the ability to re-create prices would result in market
uncertainty or loss of confidence in the integrity of prices.
---------------------------------------------------------------------------
\349\ See 17 CFR 38.552(c). The SEF proposed rules contained a
similar requirement in section 37.406. See ``Core Principles and
Other Requirements for Swap Execution Facilities,'' 76 FR 1214 at
1247, Jan. 7, 2011.
---------------------------------------------------------------------------
Nevertheless, due to the potentially significant costs for the
Requesting Parties that could be associated with building the
capability to re-run their markets, the Commission is not requiring
such a capability as a condition of the Final Order. While the
Commission encourages FERC and PUCT to continue contemplating requiring
the Requesting Parties to implement the ability to re-run their
markets, the Commission does not believe that such a capability is
necessary at this time to its determination that the Final Order is
consistent with the public interest and purposes of the Act.\350\
---------------------------------------------------------------------------
\350\ See 77 FR 52158-59.
---------------------------------------------------------------------------
f. Effect on the Commission's or Any Contract Market's Ability To
Discharge Its Regulatory or Self-Regulatory Duties Under the CEA
CEA section 4(c)(2)(B)(ii) requires the Commission to make a
determination regarding whether exempting the Covered Transactions will
have a material adverse effect on the ability of the Commission or any
contract markets to perform regulatory or self-regulatory duties.\351\
In making this determination, the Commission should consider such
regulatory concerns as ``market surveillance, financial integrity of
participants, protection of customers and trade practice enforcement.''
\352\ These considerations are similar to the purposes of the CEA as
defined in section 3, initially addressed in the public interest and
purposes of the CEA discussion.
---------------------------------------------------------------------------
\351\ 7 U.S.C. 6(c)(2)(B).
\352\ See H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 79
(1992).
---------------------------------------------------------------------------
The Commission proposed to determine that the exemption would not
have a material adverse effect on the Commission's or any contract
market's ability to discharge its regulatory function. In the Proposed
Order, the Commission noted the following assertion by the Requesting
Parties as support for its determination:
Under Section 4(d) of the Act, the Commission will retain
authority to conduct investigations to determine whether Petitioners
are in compliance with any exemption granted in response to this
request. * * * [T]he requested exemptions would also preserve the
Commission's existing enforcement jurisdiction over fraud and
manipulation. This is consistent with section 722 of the Dodd-Frank
Act, the existing MOU between the FERC and the Commission and other
protocols for inter-agency cooperation. The Petitioners will
continue to retain records related to the Transactions, consistent
with existing obligations under FERC and PUCT regulations.
The regulation of exchange-traded futures contracts and
significant price discovery contracts (``SPDCs'') will be unaffected
by the requested exemptions. Futures contracts based on electricity
prices set in Petitioners' markets that are traded on a designated
contract market and SPDCs will continue to be regulated by and
subject to the requirements of the Commission. No current
requirement or practice of the ISOs/RTOs or of a contract market
will be affected by the Commission's granting the requested
exemptions.\353\
---------------------------------------------------------------------------
\353\ 77 FR at 52146 (quoting Petition at 28).
In addition, the Commission stated that the limitation of the
exemption to transactions delineated in the Proposed Order between
certain appropriate persons avoids potential issues regarding financial
integrity and customer protection.\354\
---------------------------------------------------------------------------
\354\ See id.
---------------------------------------------------------------------------
Moreover, the Commission did not propose to exempt the Requesting
Parties from certain CEA provisions, including, but not limited to,
sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c),
6(d), 6(e), 6c, 6d, 8, 9, and 13 or and any implementing regulations
promulgated thereunder including, but not limited to, Commission
regulations 23.410(a) and (b), 32.4, and part 180, to the extent that
those sections prohibit fraud or manipulation of the price of any swap,
contract for the sale of a commodity in interstate commerce, or for
future delivery on or subject to the rules of any contract market.\355\
As such, the Commission proposed to expressly retain authority to
pursue fraudulent or manipulative conduct.\356\
---------------------------------------------------------------------------
\355\ See id. at 52143.
\356\ Nor did the Requesting Parties seek an exemption from
these provisions. See 77 FR at 52146; Petition at 2-3. See section
IV.D. infra for a detailed discussion regarding the comments the
Commission received regarding this reservation of authority.
---------------------------------------------------------------------------
In addition, the Commission proposed that granting the exemption
for the transactions delineated in the Proposed Order would not have a
material adverse effect on the ability of any contract market to
discharge its self-regulatory duties under the Act.\357\ Specifically,
with respect to FTRs, Forward Capacity Transactions, and Reserve or
Regulation Transactions, the Commission found that the exemption would
not have a material adverse effect on any contract market carrying out
its self-regulatory function because these transactions did not appear
to be used for price discovery or as settlement prices for other
transactions in Commission regulated markets.\358\ With respect to
Energy Transactions, the Commission proposed that, while these
transactions did have a relationship to Commission regulated markets
because they can serve as a source of settlement prices for other
transactions within Commission jurisdiction, they should not pose
regulatory burdens on a contract market because the Requesting Parties
have market monitoring systems in place to detect and deter
manipulation that takes place on their markets.\359\ In addition, the
Commission noted that, as a condition to the exemption, the Commission
would be able to obtain data from FERC and PUCT with respect to
activity on the Requesting Parties' markets that may impact trading on
Commission regulated markets.\360\
---------------------------------------------------------------------------
\357\ See 77 FR at 52147.
\358\ See id. at 52146.
\359\ See id. at 52148, 52151, 52157-58.
\360\ See id. at 52146-47.
---------------------------------------------------------------------------
Finally, the Commission noted that if the transactions described in
the Proposed Order could ever be used in combination with trading
activity or in a position in a DCM contract to conduct market abuse,
both the Commission and DCMs have sufficient independent authority over
DCM market participants to monitor for such activity.
While the Commission did not receive any comments on its proposed
determination that the exemption would not have a material adverse
effect on the Commission's ability to discharge its
[[Page 19904]]
regulatory duties, important caveats should be made. With regard to the
SEF Core Principle 3 analysis and general statements regarding the
Requesting Parties' MMUs' ability to detect and deter
manipulation,\361\ the Commission notes that such statements were not
meant to be construed as a final and irrevocable approval of the
integrity of reference prices derived from the Requesting Parties'
markets. The Commission retains the authority to question and obtain
additional information in a timely manner regarding the underlying
prices to which FTRs and other electric energy contracts, which are
subject to the Commission's jurisdiction, settle. As previously
discussed, the Commission maintains the responsibility of ensuring that
exchange-traded and cleared financial electric energy contracts are
constructed such that the settlement mechanism produces prices that
accurately reflect the underlying supply and demand fundamentals of the
RTO and ISO markets and are not readily susceptible to manipulation.
For this reason, the Commission has conditioned the Final Order upon
access to related transactional and positional data from the Requesting
Parties' markets.\362\
---------------------------------------------------------------------------
\361\ See note 359 and accompanying text supra.
\362\ See section IV.A.3.b.ii. supra.
---------------------------------------------------------------------------
For the reasons set forth herein and in the Proposed Order, the
Commission determines that the exemption for the Covered Transactions
in this Final Order would not have a material adverse effect on the
Commission's or any contract market's ability to discharge its
regulatory function.
C. Issuance of Separate or a Collective Order
The Commission proposed to issue a single exemptive order for all
Requesting Parties in lieu of the six separate exemptive orders
requested by the Requesting Parties because, as explained in the
Proposed Order, there are `` `[congruents] in [the Petitioners']
markets and operations,' '' \363\ and ``it would appear that issuing
six separate but identical * * * [e]xemptions that raise the same
issues and questions is unnecessary, could result in needlessly
duplicative comments, and would be an inefficient use of Commission
resources.'' \364\ The Commission further ``disagree[d] with the
Requesting Parties' assertion that separate orders are necessary
because a solitary order would require each Requesting Party to submit
an individual application to obtain supplemental relief or to amend the
relief provided thereby.'' \365\
---------------------------------------------------------------------------
\363\ 77 FR 52164 (alterations in original).
\364\ Id. C.f. section IV.B.2.a. supra.
\365\ 77 FR 52164.
---------------------------------------------------------------------------
Several commenters urged the Commission to adopt separate final
orders for particular Requesting Parties because of concerns
surrounding the delays and regulatory uncertainty that may be caused by
requiring compliance by all Requesting Parties with the proposed
conditions precedent.\366\ One commenter specifically asked the
Commission to grant ERCOT's exemption pursuant to a separate order that
recognizes the differences between the ERCOT regulatory regime and the
regime applicable to the other RTOs and ISOs.\367\
---------------------------------------------------------------------------
\366\ See, e.g., Requesting Parties at 14-15; Joint Trade
Associations at 14-15.
\367\ See, e.g., PUCT at 4.
---------------------------------------------------------------------------
Another commenter requested that the Commission clarify that any
supplemental relief requested by one Requesting Party would not, if
granted, apply to any other Requesting Party, unless specifically
requested by that Requesting Party.\368\ The commenter claimed that the
Requesting Parties' respective operations are not identical and that
``[i]t is necessary for each Petitioner to have the ability to evaluate
whether any supplemental relief requested by another Petitioner should
apply to its market and whether the Petitioner is willing to be bound
by conditions, if any, set forth in such supplemental relief.'' \369\
---------------------------------------------------------------------------
\368\ See, e.g., Requesting Parties at 15.
\369\ Id. at 15-16.
---------------------------------------------------------------------------
After careful consideration of these comments, the Commission has
determined, for the same reasons set forth in the Proposed Order,\370\
to issue a single final order on the basis of administrative economy.
The Commission notes that the issuance of a single final order should
not delay any particular Requesting Party's relief as the relief will
become effective for any particular Requesting Party upon that party's
compliance with the conditions in the Final Order.\371\
---------------------------------------------------------------------------
\370\ See 77 FR 52164.
\371\ See discussion regarding effectiveness of the exemption,
section IV.E. infra.
---------------------------------------------------------------------------
The Commission also confirms that individual Requesting Parties may
file individual requests for supplemental exemptions. Future requests
for supplemental relief will be dealt with as expeditiously as
practicable based upon the petition submitted, the facts and
circumstances at the time of the submission, and the Commission's
resources at the time. The Requesting Parties have noted the importance
of quick action, and the Commission notes that certain efficiencies may
stem from coordinated action for relief.
D. Additional Limitations
As described in detail above,\372\ the Commission expressly noted
in the Proposed Order \373\ that the proposed exemption was based upon
the representations made in the Petition and in the supporting
materials provided by the Requesting Parties and their counsel, and
that any material change or omission in the facts and circumstances
that alter the grounds for the Proposed Order might require the
Commission to reconsider its finding that the exemption contained
therein is appropriate and/or in the public interest and consistent
with the purposes of the CEA. The Commission did not receive any
comments on this proposal. As such, the Final Order is based on the
representations made by the Requesting Parties and their counsel in the
Petition, the supplemental information, and supporting materials filed
with the Commission. In particular, the Commission notes that the
following representations are of particular importance and integral to
the Commission's decision to grant the exemption set forth in this
Final Order: (1) The exemption requested by the Requesting Parties
relate to Covered Transactions that are primarily entered into by
commercial participants that are in the business of generating,
transmitting and distributing electric energy; \374\ (2) the Requesting
Parties were established for the purpose of providing affordable,
reliable electric energy to consumers within their geographic region;
\375\ (3) the Covered Transactions are an essential means, designed by
FERC and PUCT as an integral part of their statutory responsibilities,
to enable the reliable delivery of affordable electric energy; \376\
(4) each of the Covered Transactions taking place on the Requesting
Parties' markets is monitored by MMUs responsible to either FERC or, in
the case of ERCOT, PUCT; \377\ and (5) each Covered Transaction is
directly tied to the physical capabilities of the Requesting Parties'
electric energy grids.\378\ Therefore, the Commission affirms that any
material change or omission in the facts and circumstances that alter
the grounds for the Final
[[Page 19905]]
Order might require the Commission to reconsider its finding that the
exemption contained therein is appropriate and consistent with the
public interest and purposes of the CEA. The Commission reiterates that
Covered Transactions must be tied to the allocation of the physical
capabilities of an electric energy transmission grid in order to be
suitable for exemption because such activity would be inextricably
linked to the physical delivery of electric energy.
---------------------------------------------------------------------------
\372\ See section II.B.3. supra.
\373\ See 77 FR at 52142, 52165.
\374\ See id. at 52142. See also Petition at 20.
\375\ See 77 FR 52142.
\376\ See id. See also generally FERC Order No. 888; FERC Order
No. 2000; 18 CFR 35.34(k)(2); TAC 25.1; Petition at 11, 13-14.
\377\ See 77 FR 52142. See also Petition at 15-18.
\378\ See 77 FR 52142.
---------------------------------------------------------------------------
In addition, the Commission proposed to exclude from the exemptive
relief its general anti-fraud, anti-manipulation, and enforcement
authority over the Requesting Parties and the transactions described in
the Proposed Order under the CEA, including, but not limited to,
sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c),
6(d), 6(e), 6c, 6d, 8, 9, and 13 of the CEA and any implementing
regulations promulgated thereunder including, but not limited to,
Commission regulations 23.410(a) and (b), 32.4, and part 180.\379\ The
Commission received several comments regarding this reservation of
authority.\380\
---------------------------------------------------------------------------
\379\ See id. at 52163, 52166.
\380\ See, e.g., Industrial Coalitions at 3; Joint Trade
Associations at 10-11; FERC Staff at 5.
---------------------------------------------------------------------------
One commenter expressed full support for this reservation of
authority because ``the Commission's continued oversight in these vital
areas protects the markets, market participants, and the customers they
serve.'' \381\ Another commenter noted that CEA section 4c(b) and
regulation 32.4 are not part of the Commission's anti-fraud and anti-
manipulation enforcement authority, but rather ``articulate the
Commission's jurisdiction over option transaction[s]'' and requested
that section 4c(b) and regulation 32.4 be removed from the carve-out in
the final order.\382\ Additionally, one commenter stated that it had no
issue with the Commission's retention of anti-manipulation jurisdiction
generally, but cautioned that the Commission cannot use an exemption
order to extend the CFTC's anti-manipulation jurisdiction beyond that
which the Dodd-Frank Act provides.\383\
---------------------------------------------------------------------------
\381\ See, e.g., Industrial Coalitions at 3.
\382\ See, e.g., Joint Trade Associations at 10-11.
\383\ See, e.g., FERC Staff at 5.
---------------------------------------------------------------------------
After consideration of the comments, the Commission believes it
prudent to reserve in the Final Order its anti-fraud and anti-
manipulation authority, as well as those scienter-based prohibitions in
the specified provisions of the Act and Commission regulations (without
finding it necessary in this particular context to preserve other
enforcement authority). The Commission notes that reservation of
enforcement authority is standard practice with exemptive orders issued
pursuant to CEA section 4(c). While the commenter is correct that
section 4c(b) and regulation 32.4 do not articulate the Commission's
general anti-fraud, anti-manipulation, and enforcement authority
directly, these provisions exemplify a possible statutory basis for
bringing an enforcement action, should there be a need 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. In addition, these carve-outs are
consistent with past exemptive orders and do not expand the
Commission's jurisdiction.
The Commission also 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.'' \384\
---------------------------------------------------------------------------
\384\ See 7 U.S.C. 6(d).
---------------------------------------------------------------------------
E. Effectiveness of the Exemption
The Commission proposed to make the exemption effective
immediately.\385\ In response to the Commission's general request for
comments, the Commission received two types of comments with respect to
the effectiveness of the exemption: (1) Comments requesting that the
Commission issue a final order rapidly, and (2) one comment asking for
clarification as to when the exemption will become effective with
respect to individual Requesting Parties in light of the conditions
precedent.
---------------------------------------------------------------------------
\385\ See 77 FR at 52167.
---------------------------------------------------------------------------
Several commenters requested that the Commission issue a final
order as quickly as possible or practical, respectively.\386\ Of these,
one commenter also requested that the Commission issue an interim or
temporary order to make it clear that the RTO and ISO transactions are
``temporarily exempt'' and not subject to the Commission's jurisdiction
until a final order is issued.\387\
---------------------------------------------------------------------------
\386\ Commercial Working Group at 2; DC Energy at 2.
\387\ DC Energy at 2.
---------------------------------------------------------------------------
Another commenter stated that, if the Commission determines not to
issue separate exemption orders, it should specify how and when a
single order will take effect for each Requesting Party.\388\ This
commenter noted that ``[e]ach Petitioner's ability to satisfy the
proposed conditions precedent depends on the terms of the final
exemption and the individual Petitioner's stakeholder process for
amending its tariff or protocol.'' \389\ As a result, each Requesting
Party is likely to satisfy the proposed conditions precedent at a
different time.\390\ This commenter also asserted that it would be
unreasonable for the Commission to delay the effectiveness of a final
order until all of the Requesting Parties have satisfied all of the
conditions precedent.\391\
---------------------------------------------------------------------------
\388\ Requesting Parties at 15.
\389\ Id.
\390\ Id.
\391\ Id.
---------------------------------------------------------------------------
The Commission notes that it is not anticipated that any individual
Requesting Party will be in need of a final order to continue its
present business until the date by which all Requesting Parties have
satisfied the conditions precedent described in the Proposed Order.
Indeed, the Commission also notes that the Commission's Divisions of
Clearing and Risk, Market Oversight, and Swap and Intermediary
Oversight issued a no-action letter preserving the regulatory status
quo of the transactions that are the subject of the Proposed Order
until the earlier of March 31, 2013, or such earlier date as the
Commission may establish in taking final action on the Proposed
Order.\392\ Nonetheless, the Commission recognizes the concerns raised
by the commenters with respect to the market uncertainty that may be
caused if publication of a final order is delayed until all Requesting
Parties have satisfied the conditions precedent. Moreover, with one
exception, all Requesting Parties have represented that all of the
necessary Tariffs and other documents have been submitted to, and have
either already been approved or permitted to take effect or are
currently being reviewed by, FERC or PUCT, as applicable.\393\
Accordingly, the Commission has decided to publish this Final Order in
advance of the full satisfaction by each Requesting Party of the
prerequisites to the exemption set forth therein, so as to provide
market participant with sufficient notice of the
[[Page 19906]]
prerequisites and conditions attendant to the Final Order. The
Commission notes, however, that the exemption provided under the Final
Order will not become effective with respect to a particular Requesting
Party until that Requesting Party has complied with all of the
specified prerequisites provided in the Final Order. That is, the
conditions precedent are now prerequisites to the effectiveness of the
exemption contained in the Final Order and not to the issuance of the
Final Order. Specifically, a Requesting Party and its participants will
not benefit from the exemption described in the Final Order unless and
until: (1) Submission and acceptance of a legal opinion or memorandum
of outside counsel that is satisfactory to the Commission, in the
Commission's sole discretion, and that provides the Commission with
assurance that the netting arrangements contained in the approach
selected by the particular Requesting Party to satisfy the standards
set forth in FERC regulation 35.47(d) (or in the case of ERCOT,
standards that are the same as those set forth in FERC regulation
35.47(d)) will, in fact, provide the Requesting Party with enforceable
rights of set off against any of its market participants under title 11
of the United States Code \394\ in the event of the bankruptcy of the
market participant,\395\ and (2) in the case of Requesting Parties that
are subject to regulation by FERC, the Requesting Party is in full
compliance with FERC regulation 35.47 \396\ or, in the case of ERCOT,
which is subject to regulation by PUCT, ERCOT is in substantial
compliance with standards that are the same as those set forth in FERC
regulation 35.47.\397\
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\392\ CFTC Staff Letter 12-11.
\393\ See Revised FERC Order No. 741 Implementation Chart.
\394\ See 11 U.S.C. 553.
\395\ See section IV.A.3.a.ii. supra.
\396\ See section IV.A.3.a.i. supra.
\397\ See id.
---------------------------------------------------------------------------
With respect to the required legal memorandum or opinion of
counsel, the Commission is delegating to the Director of the Division
of Clearing and Risk and to his designees, in consultation with the
General Counsel or the General Counsel's designees, the authority to
accept or reject the legal memorandum or opinion. The Director of
Clearing and Risk will affirmatively communicate to the Requesting
Party when the Requesting Party's legal memorandum or opinion has been
accepted or rejected.
With respect to the condition requiring compliance with the
standards set forth in FERC regulation 35.47, Requesting Parties
governed by FERC will be deemed to have satisfied this condition upon
FERC's acceptance and approval of all of the Requesting Parties'
Tariffs that are necessary to implement such standards.\398\ ERCOT will
be deemed to have satisfied this condition upon PUCT permitting all of
the necessary ERCOT protocol revisions to take effect, except that the
Commission will accept a demonstration that ERCOT has protocols in
effect that substantially meet the settlement and billing standards set
forth in FERC regulation 35.47(b).\399\
---------------------------------------------------------------------------
\398\ See sections IV.A.3.a.i. and IV.B.2.e.i. supra.
\399\ See id.
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V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the exemption set forth in the Final Order will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact.\400\ In the Proposed Order, the Commission found that the
Requesting Parties should not be considered small entities based on the
central role they play in the operation of the electronic transmission
grid and the creation of organized wholesale electric markets that are
subject to FERC and PUCT regulatory oversight,\401\ analogous to
functions performed by DCMs and DCOs, which the Commission has
previously determined not to be small entities.\402\ The Proposed Order
included entities that qualify as ``appropriate persons'' pursuant to
CEA sections 4(c)(3)(A) through (J), or 4(c)(3)(K) that otherwise
qualify as ECPs, as defined in CEA section 1a(18)(A) and Commission
regulation 1.3 (m).\403\ The Commission previously determined that ECPs
are not ``small entities'' for purposes of the RFA.\404\ As a result,
the Commission certified that the Proposed Order would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA, and requested written comments regarding this
certification.\405\ After further consideration of the comments
received, the Commission has again determined that the Final Order
would not have a significant economic impact on a substantial number of
small entities for purposes of the RFA.
---------------------------------------------------------------------------
\400\ 5 U.S.C. 601 et seq.
\401\ See RFA analysis as conducted by FERC regarding five of
the Requesting Parties, CAISO, NYISO, PJM, MISO, and ISO NE.,
https://www.federalregister.gov/articles/2011/10/26/2011-27626/enhancement-of-electricity-market-surveillance-and-analysis-through-ongoing-electronic-delivery-of#h-17.
Commission staff also performed an independent RFA analysis
based on Subsector 221 of sector 22 (utilities companies), which
defines any small utility corporation as one that does not generate
more than 4 million of megawatts of electric energy per year, and
Subsector 523 of Sector 52 (Securities Commodity Contracts, and
Other Financial Investments and Related Activities) of the SBA
standards, 13 CFR 121.201 (1-1-11 Edition), which identifies a small
business size standard of $7 million or less in annual receipts.
Staff concluded that none of the Requesting Parties is a small
entity, based on the following information:
MISO reports 594 million megawatt hours per year, https://www.midwestiso.org/Library/Repository/Communication%20Material/Corporate/Corporate%20Fact%20Sheet.pdf.
ERCOT reports 335 million megawatt hours per year, http://www.ercot.com/content/news/presentations/2012/ERCOT_Quick_Facts_June_%202012.pdf.
CAISO reports 200 million megawatts per year, http://www.caiso.com/Documents/CompanyInformation_Facts.pdf.
NYISO reports 17 million megawatts per month, which calculates
to 204 megawatts per year, http://www.nyiso.com/public/about_nyiso/nyisoataglance/index.jsp.
PJM reports $35.9 billion billed in 2011, http://pjm.com/markets-and-operations.aspx.
ISO NE reports 32,798 gigawatt hours in the first quarter of
2011, which translates into almost 33 million megawatts for the
first quarter of 2011, http://www.iso-ne.com/markets/mkt_anlys_rpts/qtrly_mktops_rpts/2012/imm_q1_2012_qmr_final.pdf.
\402\ See A New Regulatory Framework for Clearing Organizations,
66 FR 45604 at 45609, Aug. 29, 2001 (DCOs); Policy Statement and
Establishment of Definitions of ``Small Entities'' for Purposes of
the Regulatory Flexibility Act, 47 FR 18618 at 18618-19, April 30,
1982 (DCMs).
\403\ See 77 FR at 52145. Under CEA section 2(e), only ECPs are
permitted to participate in a swap, subject to the end-user clearing
exception.
\404\ See Opting Out of Segregation, 66 FR 20740 at 20743, April
25, 2001.
\405\ See 77 FR at 52168.
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In response to its request for comments on the Proposed Order, the
Commission received comment letters relevant to the RFA that primarily
focused on the scope of the term ``appropriate persons.'' \406\
Specifically, the Commission requested comments on whether to expand
the list of appropriate persons to include those entities that
``actively participate in the generation, transmission or distribution
of electricity,'' but that are not ECPs and do not fall within CEA
sections 4(c)(3)(A) through (J).\407\ Multiple commenters urged the
Commission to expand the definition to include all persons who actively
participate in the generation, transmission, or distribution of
electric energy or specified types of entities that do so, noting that
the proposed definition of an appropriate person was not sufficiently
inclusive and could exclude traditionally active market participants
whose participation facilitates demand response activities and reduces
costs.\408\ The Commission
[[Page 19907]]
has carefully considered the comments and, using the authority provided
by section 4(c)(3)(K) of the CEA, has determined that a ``person who
actively participates in the generation, transmission, or distribution
of electric energy'' as defined in the Final Order, is an appropriate
person for purposes of the exemption provided therein.\409\ The
Commission has based its determination, in part, on the view that the
Covered Transactions ``subject to the Final Order would be limited to
sophisticated entities that are able to, from a financial standpoint,
understand and manage the risks associated with such Transactions.''
\410\ The relief provided in the Final Order to a person who actively
participates in the generation, transmission, or distribution of
electric energy may impact some small entities to the extent they may
fall within standards established by the Small Business Administration
(``SBA'') regulations defining entities with electric energy output of
less than 4,000,000 megawatt hours per year as a ``small entity.''
\411\ However, based on the Commission's existing information about the
RTO and ISO markets and the comments received, market participants
consist mostly of entities exceeding the thresholds defining ``small
entities'' set out above. \412\ Therefore, based on the comments
received and industry feedback, the Commission is of the view that the
Final Order would not affect a substantial number of small
entities.\413\
---------------------------------------------------------------------------
\406\ See discussion in section IV.b.2.d. supra.
\407\ See 77 FR at 52164, 52172.
\408\ See, e.g., Industrial Coalitions at 4-5. See section
IV.B.2.d.ii. supra.
\409\ Accordingly, the exemption provided by the Final Order
will apply to agreements, contracts, and transactions where (1) each
party thereto is an ``appropriate person,'' as defined in sections
4(c)(3)(A) through (J) of the CEA; an ``eligible contract
participant,'' as defined in section 1a(18)(A) of the CEA and in
Commission regulation 1.3(m); or a ``person who actively
participates in the generation, transmission, or distribution of
electric energy,'' as defined in Final Order and (2) that satisfy
the additional parameters for inclusion in the exemption set forth
in the Final Order. See paragraph 2 of the Order.
\410\ See section IV.B.2.d.ii. supra (citing 77 FR at 52146).
\411\ See note 401 supra (citing 13 CFR 121.201).
\412\ PJM indicates that 55 of its 588 market participants may
not be appropriate persons because they might not meet the
requirements in CEA sections 4(c)(3)(A) through (J). However, PJM
states that this number accounts for less than 10% of the total
number of participants and thus is not considered significant. See
PJM at 2. Similarly, in the CAISO market, 74 participants are
authorized to purchase or hold FTRs. Of those, 13 are estimated to
be market participants that actively participate in the generation,
transmission, or distribution of electric energy, but that may not
be appropriate persons because they might not meet the requirements
in CEA sections 4(c)(3)(A) through (J) or qualify as ECPs
(``Additional Participants''). In terms of total dollar volume,
approximately 6.5% of the FTR payments and charges are with
Additional Participants. See CAISO/ISO NE January at 5. With respect
to ISO NE., as of September 20, 2012, there were 392 market
participants that actively participated in the generation,
transmission, or distribution of electric energy. However, while ISO
NE did not provide financials on which to make a determination as to
whether 169 of the 392 active market participants would be
Additional Participants, in each instance, such active market
participants are required to post sufficient collateral to cover the
risk of their positions. Among the participants that have filed
financial statements with ISO NE., 23 would be active market
participants. These active market participants constitute 3.2% of
the gross invoices billed to the 392 active market participants
across all ISO NE markets in 2011. Of these 23 participants, ten
(10) representing 2.8% of the total invoices billed to the 392
market participants in 2011 have met their participation
qualification by posting supplemental collateral. Id.
\413\ The Commission notes that to the extent that market
participants are required to meet capitalization requirement
totaling $1 million net worth or $10 million total assets and are
sophisticated entities that are able to, from a financial
standpoint, understand and manage the risks associated with the
exempted transactions, they are not considered ``small entities''
for RFA purposes. See, e.g., Industrial Coalitions at 4 n.12 (citing
FERC regulation 35.47 and stating that ``all market participants are
required to meet a baseline capitalization requirement totaling $1
million net worth or $10 million total assets'').
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The Commission is further of the view that the Final Order relieves
the economic impact that the exempt entities, including any small
entities that may opt to take advantage of the exemption set forth in
the Final Order otherwise would be subjected to by exempting certain of
their transactions from the application of substantive regulatory
compliance requirements of the CEA and Commission regulations
thereunder. Indeed, pursuant to section 4(c)(3)(K) of the CEA, the
Final Order expands the category of persons that are ``appropriate
persons'' that may avail themselves of the exemption. Accordingly, the
Commission does not expect the Final Order to have a significant impact
on a substantial number of small entities. Therefore, the Chairman, on
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that the exemption set forth in the Final Order would not have
a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501
et seq. (``PRA'') are, among other things, to minimize the paperwork
burden to the private sector, ensure that any collection of information
by a government agency is put to the greatest possible uses, and
minimize duplicative information collections across the government. The
PRA applies to all information, ``regardless of form or format,''
whenever the government is ``obtaining, causing to be obtained [or]
soliciting'' information, and includes and requires ``disclosure to
third parties or the public, of facts or opinions,'' when the
information collection calls for ``answers to identical questions posed
to, or identical reporting or recordkeeping requirements imposed on,
ten or more persons.'' The Proposed Order provided that the exemption
would be expressly conditioned upon information sharing: ``With respect
to ERCOT, information sharing arrangements between the Commission and
PUCT that are acceptable to the Commission are executed and continue to
be in effect. With respect to all other Requesting Parties, information
sharing arrangements between the Commission and FERC that are
acceptable to the Commission continue to be in effect.'' \414\ The
Commission determined that the Proposed Order did not impose any new
recordkeeping or information requirements, or other collections of
information on ten or more persons that require approval of the Office
of Management and Budget (``OMB''), and did not receive any comments
regarding this determination.
---------------------------------------------------------------------------
\414\ 77 FR at 52166.
---------------------------------------------------------------------------
The Final Order has amended the information sharing conditions to
provide that the exemption is expressly conditioned upon information
sharing:
(1) With respect to all Requesting Parties subject to the
jurisdiction of FERC, information sharing arrangements between the
Commission and FERC that are acceptable to the Commission continue
to be in effect, and those Requesting Parties' compliance with the
Commission's requests through FERC to share, on an as-needed basis
and in connection with an inquiry consistent with the CEA and
Commission regulations, positional and transactional data within the
Requesting Parties' possession for products in the Requesting
Parties' markets that are related to markets that are subject to the
Commission's jurisdiction, including any pertinent information
concerning such data.
(2) With respect to ERCOT, the Commission's ability to request,
and obtain, on an as-needed basis from ERCOT, concurrently with the
provision of written notice to PUCT and in connection with an
inquiry consistent with the CEA and Commission regulations,
positional and transactional data within ERCOT's possession for
products in ERCOT's markets that are related to markets that are
subject to the Commission's jurisdiction, including any pertinent
information concerning such data, and ERCOT's compliance with such
requests by sharing the requested information.\415\
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\415\ Paragraph 4(a) of the Order.
Nevertheless, the PRA would not apply in this case, given that the
information sharing conditions in the Final Order would not impose any
new recordkeeping or information collection requirements, or other
collections of
[[Page 19908]]
information on ten or more persons that require OMB approval.
C. Consideration of Costs and Benefits
1. Background
As discussed in section I. above, the Dodd-Frank Act amended CEA
section 4(c) to add sections 4(c)(6)(A) and (B), which permit
exemptions for certain transactions entered into (a) pursuant to a
tariff or rate schedule approved or permitted to take effect by FERC,
or (b) pursuant to a tariff or rate schedule establishing rates or
charges for, or protocols governing, the sale of electric energy
approved or permitted to take effect by the regulatory authority of the
State or municipality having jurisdiction to regulate rates and charges
for the sale of electric energy within the State or municipality
pursuant to the Commission's 4(c) exemptive authority. However, the
Commission must act ``in accordance with'' sections 4(c)(1) and (2) of
the CEA.\416\
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\416\ See more detailed discussion in section I. supra.
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On February 7, 2012, the Requesting Parties filed a joint Petition
\417\ with the Commission requesting that the Commission exercise its
authority under section 4(c)(6) of the CEA and section 712(f) of the
Dodd-Frank Act to exempt certain contracts, agreements and transactions
for the purchase or sale of specified electric energy products, that
are offered pursuant to a FERC- or PUCT-approved Tariff, from most
provisions of the Act.\418\ The Requesting Parties asserted that each
of the transactions for which an exemption is requested is (a) subject
to a long-standing, comprehensive regulatory framework for the offer
and sale of such transactions established by FERC, or in the case of
ERCOT, PUCT, and (b) part of, and inextricably linked to, the organized
wholesale electric energy markets that are subject to regulation and
oversight of FERC or PUCT, as applicable. The Requesting Parties
expressly excluded from the Petition a request for relief from sections
4b, 4o, 6(c), and 9(a)(2) of the Act,\419\ and such provisions, among
others, explicitly have been carved out of the Final Order.\420\
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\417\ As noted above, the Requesting Parties amended their
Petition on June 11, 2012 and citations to Petition herein are to
the amended Petition. See note 22 supra.
\418\ See 77 FR 52139. See also Petition at 2-3, 6.
\419\ See 77 FR 52139. See also Petition at 3.
\420\ See paragraph 1 of the Order.
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The Requesting Parties requested that, due to the commonalities in
their markets, the exemption apply to all Requesting Parties and their
respective market participants with respect to each category of
electricity energy transactions described in the Petition, regardless
of whether such transactions are offered or entered into at the current
time pursuant to an individual RTO or ISO's Tariff. The Requesting
Parties asserted that this uniformity would avoid an individual RTO or
ISO being required to seek future amendments to the exemption in order
to offer or enter into the same type of transactions currently offered
by another RTO or ISO.\421\
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\421\ See 77 FR 52139. See also Petition at 6.
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2. 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 \422\ 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.
---------------------------------------------------------------------------
\422\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
3. Proposed Order and Request for Comment on the Commission's Proposed
Consideration of Costs and Benefits
Upon consideration of the Petition, the Commission issued the
Proposed Order which proposed to exempt certain transactions pursuant
to section 4(c)(6) of the CEA.\423\ The Commission proposed to limit
the exemption set forth in the Proposed Order to entities that meet one
of the appropriate persons categories in CEA sections 4(c)(3)(A)
through (J), or, pursuant to CEA section 4(c)(3)(K), that otherwise
qualify as an ECP.\424\ Furthermore, under the Proposed Order, ``the
covered agreements, contracts or transactions must be offered or sold
pursuant to a Petitioner's tariff, which has been approved or permitted
to take effect by: (1) In the case of ERCOT, the PUCT or (2) In the
case of all other Petitioners, FERC.'' \425\
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\423\ 77 FR 52166-67. See also section II.B.1. supra.
\424\ For those ECPs engaging in the transactions delineated in
the Proposed Order in markets administered by a Requesting Party
that do not fit within the categories of ``appropriate persons'' set
forth in sections 4(c)(3)(A) through (J), the Commission proposed to
determine that they are appropriate persons pursuant to section
4(c)(3)(K), ``in light of their financial or other qualifications,
or the applicability of appropriate regulatory protections.'' The
Commission also noted that CEA section 2(e) permits all ECPs to
engage in swaps transactions other than on a DCM and that such
entities should similarly be appropriate persons for the purpose of
the Proposed Order. See 77 FR 52145-46.
\425\ Id.
---------------------------------------------------------------------------
In the Proposed Order, the Commission clarified that financial
transactions that are not tied to the allocation of the physical
capabilities of an electric energy transmission grid would not be
suitable for exemption, and were therefore not covered by the Proposed
Order because such activity would not be inextricably linked to the
physical delivery of electric energy.\426\
---------------------------------------------------------------------------
\426\ See id. at 52143.
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The Proposed Order expressly requested public comment on the
Commission's proposed cost-benefit consideration, including with
respect to reasonable alternatives; the magnitude of specific costs and
benefits, and data or other information to estimate a dollar valuation;
and any impact on the public interest factors specified in CEA section
15(a).\427\
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\427\ See id. at 52172. As a general matter, in considering the
costs and benefits of its actions, the Commission endeavors to
quantify estimated costs and benefits where reasonably feasible.
Here, however, the Commission considers the costs and benefits of
this Final Order mostly in qualitative terms because the commenters,
including the Requesting Parties, provided no such data or
information to assist the Commission in doing so despite the
Proposed Order's request.
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4. Summary of Comments on the Costs and Benefits of the Proposed Order
The Commission requested, but received no comments providing data
or other information to enable the Commission to better quantify the
expected costs and benefits attributable to the Final Order. In terms
of qualitative cost and benefit comments, COPE stated that the
Commission's Proposed Order creates confusion and inefficient,
duplicative regulation, thus, imposing unnecessary costs.\428\ COPE
also stated that the Commission should recognize the regulation of FERC
and the PUCT and limit to the degree possible any regulatory burden
imposed on RTOs, ISOs, and their members.\429\ The Joint Trade
Associations stated that any additional regulation by the Commission
would be duplicative and would lead to increased costs passed on to
consumers.\430\
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\428\ COPE at 2, 5.
\429\ Id. at 11.
\430\ Joint Trade Associations at 5.
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Another commenter, NYSIO, asserted that the benefit of Commission
[[Page 19909]]
regulation of smaller NYSIO market participants was unclear, but stated
that costs of such regulation were certain.\431\ NYSIO noted that
consequence of the Commission's possible conclusion that all authorized
participants in NYSIO's markets were not ``appropriate persons'' would
result in regulatory uncertainty and would result in potential
exclusion of significant number of market participants from the NYSIO's
markets. NYSIO also noted that, as a result, NYSIO would have to
increase its resources to respond to the new regulatory and compliance
requirements. NYSIO pointed out that this increase in their operating
costs would be passed on to New York electricity consumers. More
specifically, NYISO noted that the decision not to expand the scope of
the Final Order to encompass all current market participants that
otherwise qualify to participate in NYISO's markets would result in one
of two consequences: ``(1) NYISO would be subject to Commission
regulation by virtue of the ongoing participation by market
participants that do not qualify as Appropriate Persons; or (2) NYISO
would have to seek to amend its tariffs with FERC to change its
participation criteria to effectively exclude these market
participants.'' \432\ Under the first scenario, ``[t]he potential for
inconsistent regulatory requirements would significantly weaken the
regulatory certainty that is the intended benefit of the Exemption,''
and ``[s]uch additional and potentially conflicting regulation would be
certain to lead to increased costs to the NYISO, its market
participants, and ultimately electric ratepayers.'' \433\ Under the
second scenario, NYISO would have ``to seek approval to amend its
tariffs to make its minimum participation criteria consistent with the
Commission's definition of Appropriate Persons,'' which requires
showing ``that the proposed tariff amendments are `just and reasonable'
and do not `grant any undue preference or advantage to any person or
subject any person to any undue prejudice or disadvantage.' '' \434\
---------------------------------------------------------------------------
\431\ NYISO Supplement to Requesting Parties' Comment,
Attachment B at 7.
\432\ NYISO at 9.
\433\ Id.
\434\ Id. (citing 16 U.S.C. 824d).
---------------------------------------------------------------------------
The Financial Marketers Coalition stated that excluding one set of
market participants (i.e., those that do not own physical assets) from
the exemption delineated in the Proposed Order would cause many market
participants to exit the market because they could not operate based on
the requirements of a dual regulatory structure.\435\ Such an outcome,
according the Financial Marketers Coalition, would decrease
competition, harm liquidity in the markets and allow the continued
exercise of market power.\436\ The PUCT stated that excluding persons
currently authorized to participate in ERCOT would introduce
significant negative implications on the competitive (wholesale and
retail) electric energy markets.\437\ Similarly, Tarachand commented
that the exit of small market participants could adversely affect
liquidity and the price discovery process.\438\ The Requesting Parties
expressed similar concerns regarding the potential detrimental impact
on the robustness of their markets.\439\
---------------------------------------------------------------------------
\435\ Financial Marketers Coalition at 11-12.
\436\ Id.
\437\ PUCT at 9.
\438\ Tarachand at 2.
\439\ Requesting Parties at 8.
---------------------------------------------------------------------------
The Industrial Coalitions generally supported the Proposed Order,
stating that the Commission's continued jurisdiction over fraud and
manipulation in the ISO and RTO markets provides crucial ongoing market
oversight necessary for market transparency and customer
protection.\440\ The Commercial Working Group stated that the
Commission's Proposed Order offers legal certainty, and it commended
the Commission for eliminating an unnecessary layer of regulation in an
area that is highly complex and highly regulated.\441\ The Requesting
Parties commented that regulatory certainty is the primary benefit of
the exemption set forth in the Proposed Order.\442\
---------------------------------------------------------------------------
\440\ Industrial Coalitions at 3.
\441\ Commercial Working Group at 2.
\442\ Requesting Parties at 3.
---------------------------------------------------------------------------
Regarding whether the Commission should extend the definitions of
the transactions set forth in the Proposed Order to include ``logical
outgrowths'' of the same, NEPOOL stated that absent such an inclusion,
market participants and Requesting Parties would be required to seek
additional exemptions from the Commission for relatively minor
modifications to existing Tariffs and/or transactions, which in turn
could dramatically increase the Commission's workload.\443\
---------------------------------------------------------------------------
\443\ NEPOOL at 4.
---------------------------------------------------------------------------
Regarding the proposed requirement related to the memorandum of
counsel stating that their netting arrangements satisfy FERC regulation
35.47(d), the Requesting Parties stated that the Commission should
forego that requirement as redundant with their existing obligations to
FERC.\444\
---------------------------------------------------------------------------
\444\ Requesting Parties at 16.
---------------------------------------------------------------------------
In response to a request for comment, the Requesting Parties stated
that the Commission should not require RTOs and ISOs to have the
ability to recreate Day-Ahead and RTM prices.\445\
---------------------------------------------------------------------------
\445\ Id. at 18.
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5. Summary of Final Order--Determinations and Conditions
As discussed above, the Final Order makes certain determinations
with respect to the scope of relief, including the scope of the Covered
Transactions \446\ and the process for expanding the Covered
Transactions.\447\ The Commission determined that any products that are
offered by a Requesting Party, presently or in the future, pursuant to
a Tariff that has been approved or permitted to take effect by FERC or
PUCT and that fall within the provided definitions of the Covered
Transactions, as well as any modifications to existing products that
are offered by a Requesting Party pursuant to a Tariff that has been
approved or permitted to take effect by FERC and PUCT and that do not
alter the characteristics of the Covered Transactions in a way that
would cause such products to fall outside these definitions are
intended to be included within the Final Order. In this way, the
Commission's Final Order provides beneficial flexibility and efficiency
in that, if the product qualifies as one of the four Covered
Transactions in the Final Order, the Requesting Party would not be
required to request or to obtain future supplemental relief for a
modified product. At the same time, however, the Commission declined to
include phrases such as ``logical outgrowth,'' ``natural outgrowth,''
and ``economically comparable'' in the definitions of the Covered
Transactions because such phrases are too vague and too potentially far
reaching to permit meaningful analysis under the Commission's statutory
standard of review.
---------------------------------------------------------------------------
\446\ See sections II.A.1.a.-c. supra.
\447\ See section II.A.1.d. supra.
---------------------------------------------------------------------------
The Final Order also sets forth certain conditions subsequent and
conditions to the effectiveness of the exemption set forth therein.
More specifically, two conditions subsequent relate to information
requests by the Commission. First, the Commission must be able to
obtain, either directly from ERCOT, or through FERC with respect to the
other Requesting Parties, positional and transactional data within the
Requesting Parties' possession for products in the Requesting Parties'
markets that are related to markets subject to the Commission's
[[Page 19910]]
jurisdiction, including any pertinent information concerning such data.
Second, the exemption is expressly conditioned upon the requirement,
that with respect to each Requesting Party, neither the Tariffs nor any
other governing documents of the particular RTO or ISO pursuant to
whose Tariff the agreement, contract or transaction is to be offered or
sold, shall include any requirement that the RTO or ISO notify its
members prior to providing information to the Commission in response to
a subpoena or other request for information or documentation.\448\
---------------------------------------------------------------------------
\448\ Paragraph 4(b) of the Order.
---------------------------------------------------------------------------
There are also two conditions to the effectiveness of the exemption
set forth in the Final Order. For a Requesting Party subject to the
jurisdiction of FERC, the exemption set forth in the Final Order is
effective upon satisfaction of all of the following: (1) Submission and
acceptance of a legal opinion or memorandum of outside counsel that is
satisfactory to the Commission, in the Commission's sole discretion,
and that provides the Commission with assurance that the netting
arrangements contained in the approach selected by that Requesting
Party to satisfy the obligations contained in FERC regulation 35.47(d)
will, in fact, provide the Requesting Party with enforceable rights of
set off against any of its market participants under title 11 of the
United States Code in the event of the bankruptcy of the market
participant; and (2) demonstration that the Requesting Party has fully
complied with FERC regulation 35.47, as measured by FERC's acceptance
and approval of all of the Requesting Party's submissions that are
necessary to implement the requirements of FERC regulation 35.47.\449\
For ERCOT, which is subject to the jurisdiction of PUCT, the exemption
set forth in the Final Order is effective upon satisfaction of all of
the following: (1) submission and acceptance of a legal opinion or
memorandum of outside counsel that is satisfactory to the Commission,
in the Commission's sole discretion, and that provides the Commission
with assurance that the netting arrangements contained in the approach
selected by ERCOT to satisfy standards that are the same as those
contained in FERC regulation 35.47(d) will, in fact, provide the ERCOT
with enforceable rights of set off against any of its market
participants under title 11 of the United States Code in the event of
the bankruptcy of the market participant; and (2) demonstration that
ERCOT has fully complied with standards that are the same as those set
forth in FERC regulation 35.47, as measured by PUCT permitting all of
the necessary ERCOT protocol revisions to take effect; provided that
the Commission will accept a demonstration that ERCOT has protocols in
effect that substantially meet the settlement and billing period
standards set forth in FERC regulation 35.47(b).\450\
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\449\ Paragraph 6(a) of the Order.
\450\ Paragraph 6(b) of the 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 the Requesting Parties specifically. It also
considers the costs and benefits of the exemption described in the
Final Order, in light of the public interest factors enumerated in CEA
section 15(a).
6. Costs of the Final Order
The Final Order is exemptive and provides ``appropriate persons''
engaging in Covered Transactions relief from certain of the
requirements of the CEA and attendant Commission regulations. As with
any exemptive rule or order, the exemption in the Final Order is
permissive, meaning that the Requesting Parties were not required to
request it and are not required to rely on it. Accordingly, the
Commission assumes that the Requesting Parties would rely on the
exemption only if the anticipated benefits warrant the costs of the
exemption.
In response to the comments of NYISO and others, the Commission is
of the view that the Requesting Parties will experience minimal, if
any, ongoing costs as a result of the determinations and conditions set
forth in the Final Order because, as the Requesting Parties certify
pursuant to Commission regulation 140.99(c)(3)(ii), the attendant
conditions are substantially similar to requirements that the
Requesting Parties and their market participants already incur in
complying with FERC or PUCT regulations.
The requirement that all parties to the agreements, contracts, or
transactions that are covered by the exemption in the Final Order must
be (1) an ``appropriate person,'' as defined sections 4(c)(3)(A)
through (J) of the CEA; (2) an ``eligible contract participant,'' as
defined in section 1a(18)(A) of the CEA and in Commission regulation
1.3(m); or (3) a ``person who actively participates in the generation,
transmission, or distribution of electric energy,'' as defined in
paragraph 5(g) of the Order--is not likely to impose any significant,
incremental costs on the Requesting Parties because their existing
legal and regulatory obligations under the FPA and FERC or PUCT
regulations mandate that only eligible market participants may engage
in the Covered Transactions, as explained above.\451\ To the comments
of NYISO and others, the Commission recognizes that this requirement
will mean that certain entities that currently operate in RTOs and ISOs
but that do not satisfy the minimum financial criteria described above
will not be able to avail themselves of the exemption. Such a result
could cause those market participants wishing to avail themselves of
the exemption to incur costs to satisfy the Final Order's minimum
criteria or exit the market. The Commission considered these costs but
has determined that these market participants must be excluded because
they lack the minimum financial wherewithal the Commission believes is
necessary to make the requisite finding under CEA section 4(c)(3)(K)
that they meet the statutory requirements of CEA section 4(c)(3)(K). In
response to the comments of the Financial Marketers Coalition, the
Commission has clarified that if an entity meets the minimum criteria
set forth in the Final Order, they may continue to operate in these
markets even if they do not own or operate physical assets.
---------------------------------------------------------------------------
\451\ See section IV.B.2.d. supra. While not compelled to, if a
Requesting Party decided to amend its Tariff to conform with the
Final Order's participant criteria for purposes of securing
regulatory certainty--and assuming FERC would approve such an
amendment--the Commission believes that a minimal cost would be
imposed, mitigated to the extent that the Requesting Party already
is required to amend its Tariff to comply with other terms of the
Final Order. Alternatively, the Commission does not believe it is
likely that the Requesting Parties themselves would become dually
regulated by virtue of market participants not qualifying under the
scope of the Final Order continuing to transact in the Requesting
Parties' markets. To the extent that any Covered Transaction would
be subject to the Commission's jurisdiction, the potential dual-
regulatory requirements resulting from other Dodd-Frank rulemakings
would be most likely to affect the market participants that do not
qualify for the exemption set forth in the Final Order.
---------------------------------------------------------------------------
The requirement that the Covered Transactions must be offered or
sold pursuant to a Requesting Party's Tariff--which has been approved
or permitted to take effect by: (1) In the case of ERCOT, the PUCT or;
(2) in the case of all other Requesting Parties, FERC--is a statutory
requirement for the exemption set forth in CEA section 4(c)(6) and
therefore is not a cost attributable to an act of discretion by the
Commission.\452\ Moreover, requiring that the Requesting Parties not
operate outside their approved Tariffs derives from existing
[[Page 19911]]
legal requirements and is not a cost attributable to this Final Order.
---------------------------------------------------------------------------
\452\ See 7 U.S.C. 6(c)(6)(A), (B).
---------------------------------------------------------------------------
As described above, FERC and PUCT impose on the Requesting Parties,
and their MMUs, various information management requirements. These
existing requirements are not materially different from the condition
that none of a Requesting Party's Tariffs or other governing documents
may include any requirement that the Requesting Party notify a member
prior to providing information to the Commission in response to a
subpoena, special call, or other request for information or
documentation. While the Commission is mindful that the process of
changing Tariffs will cause the Requesting Parties to incur costs,
those costs are necessary for the Commission to find that the exemption
is in the public interest and consistent with the purposes of the CEA.
Requiring that an information sharing arrangement between the
Commission and FERC be in full force and effect is not a cost to the
Requesting Parties or to other members of the public because it has
been an inter-agency norm since 2005. The requirement that the
Requesting Parties comply with the Commission's requests on an as-
needed basis for related transactional and positional market data will
impose only minimal costs on the Requesting Parties to respond because
the Commission contemplates that any information requested will already
be in the possession of the Requesting Parties.\453\
---------------------------------------------------------------------------
\453\ See section IV.A.3.b.ii. supra.
---------------------------------------------------------------------------
The legal opinion or memorandum of counsel requirement \454\ will
require the Requesting Parties to incur costs to acquire. Based on the
Laffey Matrix for 2012, assuming the opinion or memorandum is prepared
by an experienced attorney (with 20 plus years of legal practice), his/
her hourly rate ($734 per hour) multiplied by the amount of hours taken
to prepare the opinion, will be the basic cost of such an opinion.\455\
The Commission estimates that the cost of such memoranda will range
between $15,000 and $30,000, part of which depends on the complexity of
the analysis necessary to support the conclusion that the Requesting
Party's set off rights are enforceable, and assuming that the opinion
will take 20-40 hours to prepare.\456\ While important, these costs are
mitigated by the Commission determination, in response to comments, not
to require that the opinions or memoranda be signed on behalf of the
law firm that is issuing the opinion.
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\454\ See section IV.A.3.a.ii. supra.
\455\ The Court in Laffey v. Northwest Airlines, Inc., 572
F.Supp. 354, 371 (D.D.C. 1983) ruled that hourly rates for attorneys
practicing civil law in the Washington, DC metropolitan area could
be categorized by years in practice and adjusted yearly for
inflation. For 2012 Laffey Matrix rates, see http://www.justice.gov/usao/dc/divisions/civil_Laffey_Matrix_2003-2012.pdf.
\456\ There are possibilities of economies of scale if multiple
Requesting Parties share the same counsel in preparing these
memoranda or opinions.
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7. Benefits
The Commission's comprehensive action in this Final Order benefits
the public and market participants in several substantial if
unquantifiable ways, as discussed below. First, by considering a single
application from all Requesting Parties at the same time, and deciding
to allow all provisions of the exemption set forth in the Final Order
to apply to all Requesting Parties and their respective market
participants, the Final Order provides a cost-mitigating, procedural
efficiency.
By cabining the Covered Transactions to the definitions provided in
this Final Order, the Commission limits the potential that purely
financial risk can accumulate outside the comprehensive regime for
swaps regulation established by Congress in the Dodd-Frank Act and
implemented by the Commission. The mitigation of such risk inures to
the benefit of the Requesting Parties, market participants, and the
public, especially electric energy ratepayers.
The condition that only appropriate persons may enter the Covered
Transactions benefits the public, and the excluded market participants
themselves, by ensuring that only persons with resources sufficient to
understand and manage the risks of the transactions are permitted to
engage in the same. Further, the condition requiring that the Covered
Transactions only be offered or sold pursuant to a FERC- or PUCT-
approved Tariff benefits the public by, for example, ensuring that the
Covered Transactions are subject to a regulatory regime that is focused
on the physical provision of reliable electric energy, and also has
credit requirements that are designed to achieve risk management goals
congruent with the regulatory objectives of the Commission's DCO and
SEF Core Principles. Absent these and other similar limitations on
participant- and financial-eligibility, the integrity of the markets at
issue could be compromised, and members and ratepayers left unprotected
from potentially significant losses resulting from purely financial,
speculative activity. Moreover, the Commission's requirement that the
Requesting Parties file an opinion of counsel regarding the right of
set off in bankruptcy provides a benefit in that the analytical process
necessary to formulate such an opinion would highlight risks faced by
the Requesting Parties, and permit them to adapt their structure and
procedures in a manner best calculated to mitigate such risks, and thus
helps ensure the orderly handling of financial affairs in the event a
participant defaults as a result of the Covered Transactions. Further,
ensuring that the Requesting Parties have enforceable rights of set off
against any of its market participants in the event of a bankruptcy of
a market participant also provides a benefit in reducing costs to the
Requesting Party that arise from a bankruptcy proceeding.
The Commission's retention of its authority to redress any fraud or
manipulation in connection with the Covered Transactions protects
market participants and the public generally, as well as the financial
markets for electric energy products. For example, the Final Order is
conditioned upon the Commission's ability to obtain certain positional
and transactional data within the Requesting Parties' possession from
the Requesting Parties. Through this condition, the Commission expects
that it will be able to continue discharging its regulatory duties
under the CEA. Further, the condition that the Requesting Parties
remove any Tariff provisions that would require a Requesting Party to
notify members prior to providing the Commission with information will
help maximize the effectiveness of the Commission's enforcement
program.
8. Consideration of Alternatives
The chief alternatives to this Final Order relate to the scope of
RTO and ISO market participants that are eligible for the exemption set
forth therein, and the scope of Covered Transactions.
As discussed above in section IV.B.2.d.i., the Commission received
several requests to include various subsets of market participants in
the definition of ``appropriate person'' pursuant to 4(c)(3)(K) of the
CEA for purposes of the exemption described in the Proposed Order,
including requests to extend the exemption to (1) any persons who
qualify under market participant standards set forth in FERC- or PUCT-
approved Tariffs, (2) persons who actively participate in the
generation, transmission, or distribution of electric energy, and (3)
more specific requests to include particular market participants, such
as CSPs, LSEs, and
[[Page 19912]]
REPs.\457\ The exemption set forth in the Final Order includes those
entities described in (2) and (3), but does not include other entities
who are not ``appropriate persons'' as defined in sections 4(c)(3)(A)
through (J) of the Act, are not ECPs, and are not in the business of
(i) generating, transmitting, or distributing electric energy or (ii)
providing electric energy services that are necessary to support the
reliable operation of the transmission system.\458\ For those excluded
entities, the exemption in the Final Order would impose costs relative
to a definition that would allow all current market participants to
avail themselves of the exemption. These affected market participants
are excluded because, in the Commission's opinion, they lack the
minimum financial wherewithal and therefore pose a risk to themselves
and the physical electric energy market.\459\
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\457\ See section IV.B.2.d.i. supra.
\458\ See paragraph 2(b) of the Order.
\459\ See section IV.B.2.d.i. supra.
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Regarding the scope of Covered Transactions, the Commission
considered the costs and benefits of various alternatives posed by
commenters, including whether to expand the definition of Covered
Transactions to include future products that are the ``logical
outgrowth'' of existing products.\460\ The Commission declined this
approach, in part, because of the concern that such an open-ended
definition could present risks beyond those contemplated. At the same
time, the Commission made clear that any new transactions that fall
within the Covered Transactions, which are explicitly defined in the
Final Order, and any modifications to existing transactions that do not
alter the Covered Transactions' characteristics in a way that would
cause them to fall outside those definitions, that are offered by a
Requesting Party pursuant to a FERC- or PUCT-approved Tariff, are
intended to be included within the exemption in the Final Order.\461\
This provides a benefit in that no supplemental relief for such
products would be required, which is a cost-mitigating efficiency gain
for the Requesting Parties.
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\460\ See section IV.A.1.d. supra.
\461\ See id.
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9. 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 have any negative effect on the protection of market
participants and the public. More specifically, the Covered
Transactions, in light of the representations of the Petitioners and in
the context of their regulation by FERC and PUCT, do not appear to
generate significant risks of the nature of those addressed by the CEA.
The Commission has attempted to delineate the definitional boundaries
for the Covered 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. In addition, the Commission has
limited the exemption set forth in the Final Order to persons with
resources sufficient to understand and manage the risks of the Covered
Transactions. This requirement serves to protect excluded market
participants and it minimizes the risk of potential misuse of the
exempt transactions.
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. 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
entities who partake of the exemption delineated therein 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 markets subject to the
Commission's jurisdiction. As discussed above, the Covered Transactions
are used to manage unique electric industry operational risks, which
appears to make them ill-suited for exchange trading and/or to serve a
useful price discovery function.
d. Sound Risk Management Practices
The Commission believes that the Final Order will promote the
ability of RTOs, ISOs, and their market participants to manage the
operational risks posed by unique electric energy market
characteristics, including the non-storable nature of electric energy
and demand that can and frequently does fluctuate dramatically within a
short time-span. As discussed above, the Commission understands that
the Covered Transactions are an important tool facilitating the ability
of the Requesting Parties to efficiently manage operational risk in
fulfillment of their public service mission to provide affordable,
reliable electric energy.
e. Other Public Interest Considerations
In exercising its sections 4(c)(1) and 4(c)(6)(C) exemptive
authority in the Final Order, the Commission is acting to promote the
broader public interest by facilitating the supply of affordable,
reliable electric energy, as contemplated by Congress.\462\
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\462\ See related discussion in section I. supra.
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VI. Order
Upon due consideration and consistent with the determinations set
forth above, the Commission hereby issues the following Order:
Pursuant to its authority under section 4(c)(6) of the Commodity
Exchange Act (``CEA'' or ``Act'') and in accordance with sections
4(c)(1) and (2) of the Act, the Commodity Futures Trading Commission
(``Commission'')
1. Exempts, subject to the conditions and limitations specified
herein, the execution of the electric energy-related agreements,
contracts, and transactions that are specified in paragraph 2 of this
Order and any person or class of persons offering, entering into,
rendering advice, or rendering other services with respect thereto,
from all provisions of the CEA, except, in each case, 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.
2. Scope. This exemption applies only to agreements, contracts, and
transactions that satisfy each of the following requirements:
a. The agreement, contract, or transaction is for the purchase and
sale of one of the following electric energy-related products:
(1) ``Financial Transmission Rights'' defined in paragraph 5(a) of
this Order, except that the exemption shall only apply to such
Financial Transmission Rights where:
(a) Each Financial Transmission Right is linked to, and the
aggregate volume of Financial Transmission Rights for any period of
time is limited by, the physical capability (after accounting for
counterflow) of the electric energy transmission system operated by a
Requesting Party, as defined in paragraph 5(h) of this Order, offering
the contract, for such period;
[[Page 19913]]
(b) The Requesting Party serves as the market administrator for the
market on which the Financial Transmission Rights are transacted;
(c) Each party to the transaction is a member of the Requesting
Party (or is the Requesting Party itself) and the transaction is
executed on a market administered by that Requesting Party; and
(d) The transaction does not require any party to make or take
physical delivery of electric energy.
(2) ``Energy Transactions'' as defined in paragraph 5(b) of this
Order.
(3) ``Forward Capacity Transactions,'' as defined in paragraph 5(c)
of this Order.
(4) ``Reserve or Regulation Transactions'' as defined in paragraph
5(d) of this Order.
b. Each party to the agreement, contract or transaction is:
(1) an ``appropriate person,'' as defined sections 4(c)(3)(A)
through (J) of the CEA;
(2) an ``eligible contract participant,'' as defined in section
1a(18)(A) of the CEA and in Commission regulation 1.3(m); or
(3) a ``person who actively participates in the generation,
transmission, or distribution of electric energy,'' as defined in
paragraph 5(g) of this Order.
c. The agreement, contract, or transaction is offered or sold
pursuant to a Requesting Party's Tariff and that Tariff has been
approved or permitted to take effect by:
(1) In the case of the Electricity Reliability Council of Texas
(``ERCOT''), the Public Utility Commission of Texas (``PUCT''), or
(2) In the case of all other Requesting Parties, the Federal Energy
Regulatory Commission (``FERC'').
3. Applicability to particular regional transmission organizations
(``RTOs'') and independent system operators (``ISOs). Subject to the
conditions contained in the Order, the Order applies to all Requesting
Parties with respect to the transactions described in paragraph 2 of
this Order.
4. Conditions. The exemption provided by this Order is expressly
conditioned upon the following:
a. Information sharing:
(1) With respect to all Requesting Parties subject to the
jurisdiction of FERC, information sharing arrangements between the
Commission and FERC that are acceptable to the Commission continue to
be in effect, and those Requesting Parties' compliance with the
Commission's requests through FERC to share, on an as-needed basis and
in connection with an inquiry consistent with the CEA and Commission
regulations, positional and transactional data within the Requesting
Parties' possession for products in the Requesting Parties' markets
that are related to markets that are subject to the Commission's
jurisdiction, including any pertinent information concerning such data.
(2) With respect to ERCOT, the Commission's ability to request, and
obtain, on an as-needed basis from ERCOT, concurrently with the
provision of written notice to PUCT and in connection with an inquiry
consistent with the CEA and Commission regulations, positional and
transactional data within ERCOT's possession for products in ERCOT's
markets that are related to markets that are subject to the
Commission's jurisdiction, including any pertinent information
concerning such data, and ERCOT's compliance with such requests by
sharing the requested information.
b. Notification of requests for information: With respect to each
Requesting Party, neither the Tariffs nor any other governing documents
of the particular RTO or ISO pursuant to whose Tariff the agreement,
contract or transaction is to be offered or sold, shall include any
requirement that the RTO or ISO notify its members prior to providing
information to the Commission in response to a subpoena or other
request for information or documentation.
5. Definitions. The following definitions shall apply for purposes
of this Order:
a. A ``Financial Transmission Right'' is a transaction, however
named, that entitles one party to receive, and obligates another party
to pay, an amount based solely on the difference between the price for
electric energy, established on an electric energy market administered
by a Requesting Party, at a specified source (i.e., where electric
energy is deemed injected into the grid of a Requesting Party) and a
specified sink (i.e., where electric energy is deemed withdrawn from
the grid of a Requesting Party). The term ``Financial Transmission
Rights'' includes Financial Transmission Rights and Financial
Transmission Rights in the form of options (i.e., where one party has
only the obligation to pay, and the other party only the right to
receive, an amount as described above).
b. ``Energy Transactions'' are transactions in a ``Day-Ahead
Market'' or ``Real-Time Market,'' as those terms are defined in
paragraphs 5(e) and 5(f) of this Order, for the purchase or sale of a
specified quantity of electric energy at a specified location
(including virtual and convergence bids and offers), where:
(1) The price of the electric energy is established at the time the
transaction is executed;
(2) Performance occurs in the Real-Time Market by either
(a) Delivery or receipt of the specified electric energy, or
(b) A cash payment or receipt at the price established in the Day-
Ahead Market or Real-Time Market (as permitted by each Requesting Party
in its Tariff); and
(3) The aggregate cleared volume of both physical and cash-settled
energy transactions for any period of time is limited by the physical
capability of the electric energy transmission system operated by a
Requesting Party for that period of time.
c. ``Forward Capacity Transactions'' are transactions in which a
Requesting Party, for the benefit of load-serving entities, purchases
any of the rights described in subparagraphs (1), (2), and (3) below.
In each case, to be eligible for the exemption, the aggregate cleared
volume of all such transactions for any period of time shall be limited
to the physical capability of the electric energy transmission system
operated by a Requesting Party for that period of time.
(1) ``Generation Capacity,'' meaning the right of a Requesting
Party to:
(a) Require certain sellers to maintain the interconnection of
electric generation facilities to specific physical locations in the
electric-energy transmission system during a future period of time as
specified in the Requesting Party's Tariff;
(b) Require such sellers to offer specified amounts of electric
energy into the Day-Ahead or Real-Time Markets for electric energy
transactions; and
(c) Require, subject to the terms and conditions of a Requesting
Party's Tariff, such sellers to inject electric energy into the
electric energy transmission system operated by the Requesting Party;
(2) ``Demand Response,'' meaning the right of a Requesting Party to
require that certain sellers of such rights curtail consumption of
electric energy from the electric energy transmission system operated
by a Requesting Party during a future period of time as specified in
the Requesting Party's Tariff; or
(3) ``Energy Efficiency,'' meaning the right of a Requesting Party
to require specific performance of an action or actions that will
reduce the need for Generation Capacity or Demand Response Capacity
over the duration of a future period of time as specified in the
Requesting Party's Tariff.
d. ``Reserve or Regulation Transactions'' are transactions:
[[Page 19914]]
(1) In which a Requesting Party, for the benefit of load-serving
entities and resources, purchases, through auction, the right, during a
period of time as specified in the Requesting Party's Tariff, to
require the seller of such right to operate electric facilities in a
physical state such that the facilities can increase or decrease the
rate of injection or withdrawal of a specified quantity of electric
energy into or from the electric energy transmission system operated by
the Requesting Party with:
(a) physical performance by the seller's facilities within a
response time interval specified in a Requesting Party's Tariff
(Reserve Transaction); or
(b) prompt physical performance by the seller's facilities (Area
Control Error Regulation Transaction);
(2) For which the seller receives, in consideration, one or more of
the following:
(a) Payment at the price established in the Requesting Party's Day-
Ahead or Real-Time Market, as those terms are defined in paragraphs
5(e) and 5(f) of this Order, price for electric energy applicable
whenever the Requesting Party exercises its right that electric energy
be delivered (including Demand Response,'' as defined in paragraph
5(c)(2) of this Order);
(b) Compensation for the opportunity cost of not supplying or
consuming electric energy or other services during any period during
which the Requesting Party requires that the seller not supply energy
or other services;
(c) An upfront payment determined through the auction administered
by the Requesting Party for this service;
(d) An additional amount indexed to the frequency, duration, or
other attributes of physical performance as specified in the Requesting
Party's Tariff; and
(3) In which the value, quantity, and specifications of such
transactions for a Requesting Party for any period of time shall be
limited to the physical capability of the electric energy transmission
system operated by the Requesting Party for that period of time.
e. ``Day-Ahead Market'' means an electric energy market
administered by a Requesting Party on which the price of electric
energy at a specified location is determined, in accordance with the
Requesting Party's Tariff, for specified time periods, none of which is
later than the second operating day following the day on which the Day-
Ahead Market clears.
f. ``Real-Time Market'' means an electric energy market
administered by a Requesting Party on which the price of electric
energy at a specified location is determined, in accordance with the
Requesting Party's Tariff, for specified time periods within the same
24-hour period.
g. ``Person who actively participates in the generation,
transmission, or distribution of electric energy'' means a person that
is in the business of: (1) Generating, transmitting, or distributing
electric energy or (2) providing electric energy services that are
necessary to support the reliable operation of the transmission system.
h. ``Requesting Party'' means California Independent Service
Operator Corporation (``CAISO''); ERCOT; ISO New England Inc. (``ISO
NE''); Midwest Independent Transmission System Operator, Inc.
(``MISO''); New York Independent System Operator, Inc. (``NYISO'') or
PJM Interconnection, L.L.C. (``PJM''), or any successor in interest to
any of the foregoing.
i. ``Tariff.'' Reference to a Requesting Party's ``Tariff''
includes a tariff, rate schedule or protocol.
j. ``Petition'' means the consolidated petition for an exemptive
order under 4(c)(6) of the CEA filed by CAISO, ERCOT, ISO NE, MISO,
NYISO, and PJM on February 7, 2012, as amended June 11, 2012.
6. Effectiveness of the Exemption.
a. For a Requesting Party subject to the jurisdiction of FERC, the
exemption set forth in this Order is effective upon satisfaction of all
of the following:
(1) Submission and acceptance of a legal opinion or memorandum of
outside counsel that is satisfactory to the Commission, in the
Commission's sole discretion, and that provides the Commission with
assurance that the netting arrangements contained in the approach
selected by that Requesting Party to satisfy the obligations contained
in FERC regulation 35.47(d) will, in fact, provide the Requesting Party
with enforceable rights of set off against any of its market
participants under title 11 of the United States Code in the event of
the bankruptcy of the market participant; and
(2) Demonstration that the Requesting Party has fully complied with
FERC regulation 35.47, as measured by FERC's acceptance and approval of
all of the Requesting Party's submissions that are necessary to
implement the requirements of FERC regulation 35.47.
b. For ERCOT, which is subject to the jurisdiction of PUCT, the
exemption set forth in this Order is effective upon satisfaction of all
of the following:
(1) Submission and acceptance of a legal opinion or memorandum of
outside counsel that is satisfactory to the Commission, in the
Commission's sole discretion, and that provides the Commission with
assurance that the netting arrangements contained in the approach
selected by ERCOT to satisfy standards that are the same as those
contained in FERC regulation 35.47(d) will, in fact, provide the ERCOT
with enforceable rights of set off against any of its market
participants under title 11 of the United States Code in the event of
the bankruptcy of the market participant; and
(2) Demonstration that ERCOT has fully complied with standards that
are the same as those set forth in FERC regulation 35.47, as measured
by PUCT permitting all of the necessary ERCOT protocol revisions to
take effect; provided that the Commission will accept a demonstration
that ERCOT has protocols in effect that substantially meet the
settlement and billing period standards set forth in FERC regulation
35.47(b).
7. Delegation of Authority. The Commission hereby delegates, until
such time as the Commission orders otherwise, to the Director of the
Division of Clearing and Risk and to such members of the Division's
staff acting under his or her direction as he or she may designate, in
consultation with the General Counsel or such members of the General
Counsel's staff acting under his or her direction as he or she may
designate, the authority to accept or reject any legal memorandum or
opinion that is required by sections 6(a)(1) and 6(b)(1) of this Order.
Further, The Commission hereby delegates to the Director of the
Division of Market Oversight and to such members of the Division's
staff acting under his or her direction as he or she may designate, in
consultation with the General Counsel or such members of the General
Counsel's staff acting under his or her direction as he or she may
designate, the authority to request information from Requesting Parties
pursuant to sections 4(a)(1) and 4(a)(2) of this Order.
This Order is based upon the representations made in the
consolidated petition for an exemptive order under 4(c) of the CEA
filed by the Requesting Parties \463\ and supporting
[[Page 19915]]
materials provided to the Commission by the Requesting Parties and
their counsel. Any material change or omission in the facts and
circumstances pursuant to which this Order is granted might require the
Commission to reconsider its finding that the exemption contained
therein is appropriate and/or consistent with the public interest and
purposes of the CEA. Further, the Commission reserves the right, in its
discretion, to revisit any of the terms and conditions of the relief
provided herein, including but not limited to, making a determination
that certain entities and transactions described herein should be
subject to the Commission's full jurisdiction, and to condition,
suspend, terminate or otherwise modify or restrict the exemption
granted in this Order, as appropriate, upon its own motion.
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\463\ In the Matter of the Petition for an Exemptive Order Under
Section 4(c) of the Commodity Exchange Act by California Independent
Service Operator Corporation; In the Matter of the Petition for an
Exemptive Order Under Section 4(c) of the Commodity Exchange Act by
the Electric Reliability Council of Texas, Inc.; In the Matter of
the Petition for an Exemptive Order Under Section 4(c) of the
Commodity Exchange Act by ISO New England Inc.; In the Matter of the
Petition for an Exemptive Order Under Section 4(c) of the Commodity
Exchange Act by Midwest Independent Transmission System Operator,
Inc.; In the Matter of the Petition for an Exemptive Order Under
Section 4(c) of the Commodity Exchange Act by New York Independent
System Operator, Inc.; and In the Matter of the Petition for an
Exemptive Order Under Section 4(c) of the Commodity Exchange Act by
PJM Interconnection, L.L.C. (Feb. 7, 2012, as amended June 11,
2012).
Issued in Washington, DC, on March 28, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.
Appendices to Final Order in Response to a Petition From Certain
Independent System Operators and Regional Transmission Organizations To
Exempt Specified Transactions Authorized by a Tariff or Protocol
Approved by the Federal Energy Regulatory Commission or the Public
Utility Commission of Texas From Certain Provisions of the Commodity
Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of
the Act--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 specified electric energy-
related transactions entered into on markets administered by
regional transmission organizations (RTOs) or independent system
operators (ISOs).
Congress authorized that these transactions be exempt from
certain provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act as they are subject to extensive regulatory oversight
by the Federal Energy Regulatory Commission (FERC) or, in one
instance, the Public Utility Commission of Texas (PUCT).
This final order responds to a petition filed by a group of RTOs
and ISOs and has benefitted from public input.
These entities were established for the purpose of providing
affordable, reliable electric energy to consumers within their
geographic region. In addition, these markets administered by RTOs
and ISOs are central to FERC and PUCT's regulatory missions to
oversee wholesale sales and transmission of electric energy.
The scope of the final order is carefully tailored to four
categories of transactions--financial transmission rights; energy
transactions; forward capacity transactions; and reserve or
regulation transactions, which are offered or entered into a market
administered by one of the requesting RTOs or ISOs. This exemption
is conditioned on, among other things, each of these transactions
being inextricably linked to the physical delivery of electric
energy.
[FR Doc. 2013-07634 Filed 4-1-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: April 2, 2013