2015-12346
Federal Register, Volume 80 Issue 98 (Thursday, May 21, 2015)
[Federal Register Volume 80, Number 98 (Thursday, May 21, 2015)]
[Notices]
[Pages 29489-29522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12346]
[[Page 29489]]
Vol. 80
Thursday,
No. 98
May 21, 2015
Part V
Commodity Futures Trading Commission
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Notice of Proposed Order and Request for Comment on an Application for
an Exemptive Order From Southwest Power Pool, Inc. From Certain
Provisions of the Commodity Exchange Act Pursuant to the Authority
Provided in Section 4(c)(6) of the Act; Notice
Federal Register / Vol. 80 , No. 98 / Thursday, May 21, 2015 /
Notices
[[Page 29490]]
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COMMODITY FUTURES TRADING COMMISSION
Notice of Proposed Order and Request for Comment on an
Application for an Exemptive Order From Southwest Power Pool, Inc. From
Certain Provisions of the Commodity Exchange Act Pursuant to the
Authority Provided in Section 4(c)(6) of the Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed order and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is requesting comment on a proposed exemption issued in
response to an application from Southwest Power Pool, Inc. to exempt
certain Transmission Congestion Rights, Energy Transactions, and
Operating Reserve Transactions from the provisions of the Commodity
Exchange Act and Commission regulations.
DATES: Comments must be received on or before June 22, 2015.
ADDRESSES: You may submit comments by any of the following methods:
CFTC Web site: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one of these methods.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the established
procedures in 145.9 of the Commission's regulations, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of this action will be retained in the public comment file
and will be considered as required under the Administrative Procedure
Act and other applicable laws, and may be accessible under the Freedom
of Information Act.
FOR FURTHER INFORMATION CONTACT: Robert Wasserman, Chief Counsel, 202-
418-5092, [email protected], or Alicia Lewis, Special Counsel, 202-
418-5862, [email protected], Division of Clearing and Risk; David P. Van
Wagner, Chief Counsel, 202-418-5481, [email protected], or Riva Spear
Adriance, Senior Special Counsel, 201-418-5494, [email protected],
Division of Market Oversight, in each case at the Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Overview
The Commission is requesting comment on a proposed exemption (the
``Proposed Exemption'') issued in response to an application
(``Exemption Application'') \1\ from Southwest Power Pool, Inc.
(``SPP'' or ``Applicant'') to exempt certain Transmission Congestion
Rights, Energy Transactions, and Operating Reserve Transactions
(collectively, the ``Covered Transactions'') from the provisions of the
Commodity Exchange Act (``CEA'' or ``Act'') \2\ and Commission
regulations. The Proposed Exemption would exempt contracts, agreements
and transactions for the purchase or sale of the limited electric
energy-related products that are specifically described within the
Proposed Exemption 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
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 Proposed Exemption, the contract, agreement or
transaction would be required to be offered or entered into in a market
administered by SPP, pursuant to SPP's tariff (``Tariff''), for the
purposes of allocating SPP's physical resources, and the Tariff would
be required to have been approved or permitted to have taken effect by
the Federal Energy Regulatory Commission (``FERC''). The exemption as
proposed would extend to any person or class of persons entering into
the Covered Transactions or rendering services with respect to the
Covered Transactions, including offering the Covered Transactions or
rendering advice with respect to the Covered Transactions. The
contract, agreement or transaction would be required to be offered or
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
regulation 1.3(m),\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. Finally, the exemption
would be 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 Application for an Exemptive Order
Under Section 4(c) of the Commodity Exchange Act by Southwest Power
Pool, Inc., Oct. 17, 2013, as amended Aug. 1, 2014.
\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); 17 CFR 1.3(m). See also, ``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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The Commission seeks comment on the Exemption Application, the
Proposed Exemption and related questions. A copy of the Exemption
Application is available on the Commission's Web site at: http://sirt.cftc.gov/sirt/sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=29485.
Table of Contents
I. The Exemption Application
II. Statutory Background
III. Background
A. Introduction
B. FERC
C. Prior Commission Order
IV. Scope of the Exemption
A. Transactions Subject to the Exemption
B. Conditions
C. Additional Limitations
V. Section 4(c) Analysis
A. Overview of CEA Section 4(c)
B. Proposed CEA Section 4(c) Determinations
C. FERC Credit Reform Policy
D. DCO Core Principle Analysis
E. SEF Core Principle Analysis
VI. Proposed Exemption
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A. Discussion of Proposed Exemption
B. Proposed Exemption
VII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
VIII. Request for Comment
I. The Exemption Application
On October 17, 2013, SPP filed an Exemption Application \6\ with
the Commission requesting that the Commission exercise its authority
under section 4(c)(6) of the CEA \7\ and section 712(f) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act'') \8\ to exempt certain contracts, agreements and transactions for
the purchase or sale of specified electric energy products, that are
offered pursuant to a FERC-approved Tariff, from most provisions of the
Act.\9\ SPP is a Regional Transmission Organization (``RTO'') subject
to regulation by FERC. As described in greater detail below, FERC
encouraged the formation of RTOs to administer the electric energy
transmission grid on a regional basis.\10\
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\6\ SPP filed an amended Exemption Application on August 1,
2014. Citations herein to ``Exemption Application'' are to the
amended Exemption Application.
\7\ 7 U.S.C. 6(c)(6).
\8\ 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./LawRegulation/OTCDERIVATIVES/index.htm.
\9\ See Exemption Application at 1.
\10\ See id. at 2 n. 7.
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SPP specifically requests that the Commission exempt from most
provisions of the CEA certain ``transmission congestion rights,''
``energy transactions,'' and ``operating reserve transactions,'' as
those terms are defined in the Exemption Application, if such
transactions are offered or entered into pursuant to a Tariff under
which SPP operates that has been approved by FERC, as well as any
persons (including SPP, its members and its market participants)
offering, entering into, rendering advice, or rendering other services
with respect to such transactions.\11\ SPP asserts 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, and (b) part of, and
inextricably linked to, SPP's delivery of electric energy and the
organized wholesale electric energy markets that are subject to
regulation and oversight by FERC.\12\ SPP expressly excludes from the
Exemption Application any request for relief from the Commission's
general anti-fraud and anti-manipulation authority, and scienter-based
prohibitions, under 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,\13\ and such provisions explicitly have been
carved out of the Proposed Exemption. SPP asserts that it is seeking
the requested exemption in order to provide greater legal certainty
with respect to the regulatory requirements that apply to the
transactions that are the subject of the Exemption Application.\14\
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\11\ See id. at 11-15.
\12\ See id. at 17.
\13\ See id. at 1.
\14\ See id. at 11.
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As discussed further below, the relief that SPP is requesting is
substantially similar to the relief the Commission granted other RTOs
and Independent System Operators (``ISOs'') in April of 2013.\15\
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\15\ 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, 78 FR
19880, April 2, 2013 (``RTO-ISO Order''); see also infra section
III.C.
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II. Statutory Background \16\
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\16\ For a fuller discussion, see 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
Regulatory Commission or the Public Utility Commission of Texas From
Certain Provisions of the Commodity Exchange Act, 77 FR 52138,
52139-52140, Aug. 28, 2012.
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On July 21, 2010, President Obama signed the Dodd-Frank Act. Title
VII of the Dodd-Frank Act amended the CEA \17\ and altered the scope of
the Commission's exclusive jurisdiction.\18\ 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.\19\ As a result, the
Commission's exclusive jurisdiction now includes swaps as well as
futures.\20\
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\17\ 7 U.S.C. 1 et seq.
\18\ Section 722(e) of the Dodd Frank Act.
\19\ 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).
\20\ See id.
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The Dodd-Frank Act also added a savings clause that addresses the
roles of the Commission, FERC, and state regulatory authorities as they
relate to certain agreements, contracts, or transactions traded
pursuant to the tariff or rate schedule of an RTO that has been
approved by FERC or the state regulatory authority.\21\ Toward that
end, paragraph (I) of CEA section 2(a)(1) repeats the Commission's
exclusive jurisdiction, clarifies that the Commission retains its
authorities over agreements, contracts or transactions traded pursuant
to FERC- or state-approved tariff or rate schedules,\22\ and 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'' an RTO.\23\
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\21\ See 7 U.S.C. 2(a)(1)(I).
\22\ See 7 U.S.C. 2(a)(1)(I)(i) and (ii).
\23\ 7 U.S.C. 2(a)(1)(I)(i)(II).
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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, as relevant
here, new section 4(c)(6)(A) to the CEA, providing for exemptions for
certain transactions entered into pursuant to a tariff or rate schedule
approved or permitted to take effect by FERC.
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).
Section 4(c)(1) grants the Commission the authority to exempt any
agreement, contract, or 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.''
\24\ Section 4(c)(2) \25\ 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,'' as that term is defined in section
4(c); \26\ and (3) the exemption
[[Page 29492]]
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.\27\ 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.\28\
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\24\ 7 U.S.C. 6(c)(1).
\25\ 7 U.S.C. 6(c)(2).
\26\ 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 Proposed Exemption:
(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. 7 U.S.C. 6(c)(3).
\27\ 7 U.S.C. 6(c)(2).
\28\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).
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III. Background
A. Introduction
SPP is subject to regulation by FERC.\29\ SPP asserts that the
regulatory framework administered by FERC, as applicable to its RTO
market, would apply to the transactions for which an exemption has been
requested.\30\
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\29\ See Exemption Application at 2-3.
\30\ See id. at 17.
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B. FERC
In 1920, Congress established the Federal Power Commission
(``FPC'').\31\ The FPC was reorganized into FERC in 1977.\32\ FERC is
an independent agency that regulates the interstate transmission of
electric energy, natural gas and oil.\33\ FERC's mission is to ``assist
consumers in obtaining reliable, efficient and sustainable energy
services at a reasonable cost through appropriate regulatory and market
means.'' \34\ This mission is accomplished by pursuing two primary
goals. First, FERC seeks to ensure that rates, terms and conditions for
wholesale transactions and transmission of electric energy and natural
gas are just, reasonable and not unduly discriminatory or
preferential.\35\ Second, FERC seeks to promote the development of
safe, reliable and efficient energy infrastructure that serves the
public interest.\36\ Both Congress and FERC, through a series of
legislative acts and FERC orders, have sought to establish a system
whereby wholesale electric energy generation and transmission in the
United States is governed by two guiding principles: Regulation with
respect to wholesale electric energy transmission,\37\ and competition
when dealing with wholesale generation.\38\
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\31\ Federal Power Act, 16 U.S.C. 791a et se.
\32\ The Department of Energy Organization Act, Public Law 95-
91, section 401, 91 Stat. 565, 582 (1977) (codified as amended at 42
U.S.C. 7171 (1988)).
\33\ See 42 U.S.C. 7172.
\34\ See FERC Strategic Plan for Fiscal Years 2009-2014, 3 (Feb.
2012), available at http://www.ferc.gov/about/strat-docs/FY-09-14-strat-plan-print.pdf.
\35\ Id.
\36\ Id.
\37\ See 16 U.S.C. 796(24) (stating that `` `wholesale
transmission services' means the transmission of electric energy
sold, or to be sold, at wholesale in interstate commerce.'').
\38\ See generally, Promoting Wholesale Competition Through Open
Access Non-Discriminatory Transmission Services by Public Utilities;
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, 61 FR 21540, Apr. 24, 1996 (``FERC Order 888''). See also
FERC's discussion of electric competition, available at http://www.ferc.gov/industries/electric/indus-act/competition.asp (stating
that ``[FERC]'s core responsibility is to `guard the consumer from
exploitation by non-competitive electric power companies.' '').
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In 1996, FERC issued FERC Order 888, which promoted competition in
the generation market by ensuring fair access and market treatment by
transmission customers.\39\ Specifically, FERC Order 888 sought to
``remedy both existing and future undue discrimination in the industry
and realize the significant customer benefits that will come with open
access.'' \40\ FERC Order 888 encouraged the formation of ISOs as a
potentially effective means for accomplishing non-discriminatory open
access to the transmission of electric energy.\41\
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\39\ See FERC Order 888.
\40\ FERC Order 888 at 21541.
\41\ FERC Order 888 at 21594. Under the old system, one party
could own both generation and transmission resources, giving
preferential treatment to its own and affiliated entities. See
generally, FERC Order 888.
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In addition, FERC has issued orders that address areas such as
increased RTO participation by transmission utilities, increased use of
long-term firm transmission rights, increased investment in
transmission infrastructure, reduced transmission congestion, and the
use of demand-response.\42\ According to SPP, the roles,
responsibilities, and services of ISOs and RTOs under FERC's Order 888,
Order 2000, and other applicable FERC orders and requirements, are
substantially similar.\43\ The end result of this series of FERC orders
is that a regulatory system has been established that requires RTOs and
ISOs to comply with numerous FERC rules designed to improve both the
reliability of the physical operations of electric transmission systems
as well as the competitiveness of electric energy markets. The
requirements imposed by the various FERC orders seek to ensure that
FERC is able to accomplish its two main goals; ensuring that rates,
terms and conditions are just, reasonable and not unduly discriminatory
or preferential, while promoting the development of safe, reliable and
efficient energy infrastructure that serves the public interest.
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\42\ See, e.g., FERC Order No. 2000, 65 FR 809 (2000) (``FERC
Order 2000'') (encouraging transmission utilities to join RTOs);
FERC Order No. 681, 71 FR 43294 (2006), FERC Stats. & Regs. ] 31,222
(2006), order on reh'g, Order No. 679-A, 72 FR 1152, Jan. 10, 2007,
FERC Stats. & Regs. ] 31,236, order on reh'g, 119 FERC ] 61,062
(2007) (finalizing guidelines for ISOs to follow in developing
proposals to provide long-term firm transmission rights in organized
electric energy markets); FERC Order No. 679, 71 FR 43294 (2006)
(finalizing rules to increase investment in the nation's aging
transmission infrastructure, and to promote electric energy
reliability and lower costs for consumers, by reducing transmission
congestion); FERC Order No. 890, 72 FR 12266 (2007) (modifying
existing rules to promote the nondiscriminatory and just operation
of transmission systems); FERC Order No. 719-A, 74 FR 37776 (2009)
(``FERC Order 719'') (implementing the use of demand-response (the
process of requiring electric energy consumers to reduce their
electric energy use during times of heightened demand), and
encouraging the use of long-term electric energy contracts and
strengthening the role of market monitors).
\43\ See Exemption Application at 2-3 n. 7.
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C. Prior Commission Order
On April 2, 2013, the Commission issued the RTO-ISO Order which
exempts specified transactions of particular RTOs and ISOs from certain
provisions of the CEA and Commission regulations.\44\ Under the RTO-ISO
Order, a transaction may be covered by the scope of the RTO-ISO Order
so long as the transaction falls within the definitions of ``Financial
Transmission Rights,'' ``Energy Transactions,'' ``Forward Capacity
Transactions,'' or ``Reserve or Regulation Transactions,'' \45\ is
offered or sold in a market administered by one of the petitioning RTOs
or ISOs \46\ pursuant to a tariff, rate schedule, or protocol that has
been approved or permitted to take effect by FERC or the Public Utility
Commission of Texas, and complies with all other
[[Page 29493]]
enumerated terms and conditions in the RTO-ISO Order.\47\
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\44\ See RTO-ISO Order. The RTO-ISO Order does not, however,
provide an exemption from 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.
\45\ While the RTO-ISO Order included ``Forward Capacity
Transactions'' in the scope of transactions for which the exemption
was granted, the Commission notes that SPP's markets do not include
such transactions. See Exemption Application at 11 n. 50.
\46\ SPP was not one of the RTOs or ISOs that petitioned for the
RTO-ISO Order.
\47\ Such terms and conditions include a requirement that, to be
eligible for the exemption, the transactions must be entered into by
persons who are: (1) ``appropriate persons,'' as defined in section
4(c)(3)(A) through (J) of the CEA; (2) ``eligible contract
participants,'' as defined in section 1a(18) of the CEA and in
Commission regulation 1.3(m); or (3) 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 (collectively,
``Appropriate Persons Requirement''). RTO-ISO Order at 19913.
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In the RTO-ISO Order, the Commission excepted certain CEA
provisions pertaining to fraud and manipulation, and scienter-based
prohibitions, from the exemption.\48\ Neither the proposed nor the
final RTO-ISO Order discussed, referred to, or mentioned CEA section
22,\49\ which provides for private rights of action for damages against
persons who violate the CEA, or persons who willfully aid, abet,
counsel, induce, or procure the commission of a violation of the Act.
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\48\ See supra note 44.
\49\ See 7 U.S.C. 25.
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By enacting CEA section 22, Congress provided private rights of
action as a means for addressing violations of the Act alternative to
Commission enforcement action. It would be highly unusual for the
Commission to reserve to itself the power to pursue claims for fraud
and manipulation--a power that includes the option of seeking
restitution for persons who have sustained losses from such violations
or a disgorgement of gains received in connection with such violations
\50\--while at the same time denying private rights of action and
damages remedies for the same violations. Moreover, if the Commission
intended to take such a differentiated approach (i.e., to limit the
rights of private persons to bring such claims while reserving to
itself the right to bring the same claims), the RTO-ISO Order would
have included a discussion or analysis of the reasons therefore. Thus,
the Commission did not intend to create such a limitation, and believes
that the RTO-ISO Order does not prevent private claims for fraud or
manipulation under the Act. For the avoidance of doubt, the Commission
notes that this view equally applies to SPP's Proposed Exemption.
Therefore, the Proposed Exemption also would not preclude such private
claims.
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\50\ See 7 U.S.C. 13a-1(d)(3).
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IV. Scope of the Exemption
A. Transactions Subject to the Exemption
After due consideration, the Commission proposes to exempt certain
Transmission Congestion Rights (``TCRs''), Energy Transactions, and
Operating Reserve Transactions, each as defined below, pursuant to
section 4(c)(6) of the Act.\51\
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\51\ SPP represents that the terms ``Transmission Congestion
Right,'' ``Energy Transactions,'' and ``Operating Reserve
Transactions'' are SPP's equivalent of the following terms set forth
in the RTO-ISO Order: ``Financial Transmission Right,'' ``Energy
Transactions,'' and ``Reserve or Regulation Transactions,''
respectively. SPP also avers that its transactions are defined in a
manner consistent with the terms set forth in the RTO-ISO Order.
Exemption Application at 12-15. In addition, SPP states that these
classes of contracts, agreements, and transactions for the purchase
and sale of a product or service that is directly related to, and a
logical outgrowth of, any of SPP's core functions as an RTO and all
services related thereto comprise the Covered Transactions. Id. at
15.
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A TCR \52\ 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 SPP, at a specified source
(i.e., where electric energy is deemed injected into SPP's grid) and a
specified sink (i.e., where electric energy is deemed withdrawn from
SPP's grid).\53\ As more fully described below, the Proposed Exemption
applies only to TCRs where each TCR is linked to, and the aggregate
volume of TCRs for any period of time is limited by, the physical
capability (after accounting for counterflow) of SPP's electric energy
transmission system for such period; SPP serves as the market
administrator for the market on which the TCRs are transacted; each
party to the transaction is a market participant of SPP (or is SPP
itself) and the transaction is executed on a market administered by
SPP; and the transaction does not require any party to make or take
physical delivery of electric energy.\54\
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\52\ SPP's markets will also include Auction Revenue Rights
(``ARRs''). ARRs are allocated to transmission customers based on
historical network load or transmission service reservations (or
equivalent service taken under a grandfathered agreement between a
SPP transmission owner and a customer). ARRs are granted exclusively
to transmission service customers (i.e., not to other market
participants or speculators) based on their transmission service (or
grandfathered service) and are subject to SPP's simultaneous
feasibility analysis of the capability of the SPP Transmission
System. ARRs are not traded in SPP's market; instead, ARRs entitle
the holder to a share of revenues from SPP-administered transmission
congestion right auctions or may be ``self-converted'' at the
customer's election into a transmission congestion right. Exemption
Application at 12 n. 54.
\53\ Exemption Application at 12. SPP represents that the
definition of TCR is similar to the definition of financial
transmission right (``FTR'') in the RTO-ISO Order. However, the
Commission notes that the definition of TCR does not include TCR
options whereas the RTO-ISO Order's definition of FTR includes such
rights in the form of options. Id.; cf. RTO-ISO Order at 19913
(defining the term FTR to include FTRs and FTRs in the form of
options).
\54\ See Exemption Application at 12-13. As noted above, the
definition of TCR is similar to the FTR definition used by the
Commission in the RTO-ISO Order. See RTO-ISO Order at 19912.
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``Energy Transactions'' are transactions in the SPP ``Day-Ahead
Market'' or ``Real-Time Balancing Market,'' as those terms are defined
in the Proposed Exemption, for the purchase or sale of a specified
quantity of electric energy at a specified location (including virtual
bids and offers) where the price of electric energy is established at
the time the transaction is executed.\55\ Performance occurs in the
Real-Time Balancing Market by either the physical delivery or receipt
of the specified electric energy or a cash payment or receipt at the
price established in the Day-Ahead Market or Real-Time Balancing
Market; and 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 SPP for that period of time.\56\
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\55\ See Exemption Application at 13. The definition of Energy
Transactions is similar to the definition used by the Commission in
the RTO-ISO Order. See RTO-ISO Order at 19913; see also infra
section VI.
\56\ See Exemption Application at 13-14; see also infra section
VI.
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``Operating Reserve Transactions'' allow SPP to purchase through
auction or otherwise as permitted in its Tariff, for the benefit of
load serving entities (``LSEs'') and resources, the right, during a
period of time specified in SPP'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 a specified quantity of electric energy into or from the electric
energy transmission system operated by SPP with a Reserve Transaction
(meaning physical performance by the seller's facilities within a
response interval specified in SPP's Tariff) or an Area Control Error
Regulation Transaction (meaning prompt physical performance by the
seller's facilities as specified in SPP's Tariff).\57\ In
[[Page 29494]]
consideration for such delivery, or withholding of delivery, the seller
receives compensation of the type specified in section VI below.\58\ In
all cases, the value, quantity and specifications of such Transactions
for SPP for any period of time are limited to the physical capability
of the electric transmission system operated by SPP for that period of
time.\59\ These Transactions are typically used to address unforeseen
fluctuations in the level of electric energy demand experienced on the
electric transmission system.
---------------------------------------------------------------------------
\57\ See Exemption Application at 14-15. The RTO-ISO Order
refers to ``Reserve or Regulation Transactions.'' SPP's markets
refer to such transactions collectively as ``Operating Reserve.''
See RTO-ISO Order at 19913-14. See also infra section VI.
\58\ See Exemption Application at 14-15; see also infra section
VI.
\59\ See id.; see also RTO-ISO Order at 19914.
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B. Conditions
The Proposed Exemption would be subject to certain conditions that
are consistent with the RTO-ISO Order. First, all parties to the
agreements, contracts or transactions that are covered by the Proposed
Exemption must be ``appropriate persons,'' as such term is defined in
sections 4(c)(3)(A) through (J) of the Act, ``eligible contract
participants,'' as such term is defined in section 1a(18)(A) of the Act
and in Commission regulation 1.3(m),\60\ 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.\61\
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\60\ That is, the Commission is proposing to use its authority
pursuant to CEA section 4(c)(3)(K) to include eligible contract
participants as appropriate persons for the purposes of this Order.
See infra note 75 and accompanying text; see also 7 U.S.C. 1a(18)
and ``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.
\61\ Consistent with the RTO-ISO Order, the Commission is also
proposing to use its authority pursuant to CEA section 4(c)(3)(K) to
include 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. See RTO-ISO Order at 19899,
19913.
---------------------------------------------------------------------------
Second, the agreements, contracts or transactions that are covered
by the Proposed Exemption must be offered or sold pursuant to SPP's
Tariff, which has been approved or permitted to take effect by FERC.
Third, neither SPP's Tariff nor other governing documents may
include any requirement that SPP notify a member prior to providing
information to the Commission in response to a subpoena or other
request for information or documentation.
Finally, information-sharing arrangements that are satisfactory to
the Commission between the Commission and FERC must remain in full
force and effect.\62\ This condition also requires that SPP comply with
the Commission's requests on an as-needed basis for related
transactional and positional market data.
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\62\ As discussed in section VI.A. below, the CFTC and FERC
signed a Memorandum of Understanding (``MOU'') on January 2, 2014,
which addresses the sharing of information in connection with market
surveillance and investigations into potential market manipulation,
fraud or abuse. The MOU is available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcfercismou2014.pdf.
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C. Additional Limitations
As discussed above, the Commission proposes to exempt the
Transactions pursuant to section 4(c)(6) of the Act based upon
representations made in the Exemption Application and in the supporting
materials provided by SPP and its counsel, and any material change or
omission in the facts and circumstances that alter the grounds for the
Proposed Exemption might require the Commission to reconsider its
finding that the exemption is appropriate and/or in the public interest
and consistent with the purposes of the CEA (these limitations are,
again, consistent with the RTO-ISO Order).\63\ As represented in the
Exemption Application, the exemption requested by SPP relates to
Covered Transactions that are primarily entered into by commercial
participants that are in the business of generating, transmitting and
distributing electric energy.\64\ In addition, the Commission notes
that it appears that SPP was established for the purpose of providing
affordable, reliable electric energy to consumers within its geographic
region.\65\ Critically, these Covered Transactions are an essential
means, designed by FERC as an integral part of its statutory
responsibilities, to enable the reliable delivery of affordable
electric energy.\66\ The Commission also notes that each of the Covered
Transactions taking place on SPP's markets is monitored by both a
market administrator (SPP) and an independent market monitor (``SPP
Market Monitor'') responsible to FERC.\67\ Finally, as discussed above,
each Covered Transaction is directly tied to the physical capabilities
of SPP's electric energy grid.\68\ As more fully described below,\69\
and on the basis of the aforementioned representations, the Commission
proposes to find that the Proposed Exemption for the Covered
Transactions would be in the public interest. To be clear, however,
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 electric energy.
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\63\ See RTO-ISO Order at 19914-15.
\64\ See Exemption Application at 17.
\65\ See id. at 2, 17.
\66\ See generally, FERC Order 888; FERC Order 2000; 18 CFR
35.34(k)(2); see also Exemption Application at 17.
\67\ Exemption Application at 17.
\68\ See id. at 12-15.
\69\ See discussions infra sections V.B., V.D., and V.E.
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V. Section 4(c) Analysis
A. Overview of CEA Section 4(c)
1. Sections 4(c)(6)(A) and (B)
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.\70\ Indeed,
section 4(c)(6) provides 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.\71\
However, any exemption considered under section 4(c)(6)(A) and/or (B)
must be done ``in accordance with [CEA section 4(c)(1) and (2)].'' \72\
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\70\ The exemption language in section 4(c)(6) states: 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)).
\71\ Id. (emphasis added).
\72\ CEA section 4(c)(6) explicitly directs the Commission to
consider any exemption proposed under 4(c)(6) ``in accordance with
[CEA section 4(c)(1) and (2)].''
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[[Page 29495]]
2. Section 4(c)(1)
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 exemption from any provisions of the CEA except subparagraphs
(C)(ii) and (D) of section 2(a)(1).
3. Section 4(c)(2)
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; \73\ 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.\74\
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\73\ See CEA 4(c)(2)(B)(i) and the discussion of CEA section
4(c)(3) below.
\74\ 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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4. Section 4(c)(3)
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 Proposed Exemption: (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.\75\
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\75\ Section 4(c)(3), 7 U.S.C. 6(c)(3), provides that the term
``appropriate person'' shall be limited to the following persons or
classes thereof: (A) A bank or trust company (acting in an
individual or fiduciary capacity); (B) A savings association; (C) An
insurance company; (D) An investment company subject to regulation
under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.);
(E) A commodity pool formed or operated by a person subject to
regulation under this Act; (F) 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 subparagraph (A), (B), (C), (H), (I),
or (K) of this paragraph; (G) An employee benefit plan with assets
exceeding $1,000,000, or whose investment decisions are made by a
bank, trust company, insurance company, investment adviser
registered under the Investment Advisers Act of 1940 (15 U.S.C. 80a-
1 et seq.), or a commodity trading advisor subject to regulation
under this Act; (H) Any governmental entity (including the United
States, any state, 4-1 or any foreign government) or political
subdivision thereof, or any multinational or supranational entity or
any instrumentality, agency, or department of any of the foregoing;
(I) A broker-dealer subject to regulation under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.) acting on its own
behalf or on behalf of another appropriate person; (J) A futures
commission merchant, floor broker, or floor trader subject to
regulation under this Act acting on its own behalf or on behalf of
another appropriate person; (K) 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.
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B. Proposed CEA Section 4(c) Determinations
In connection with the Proposed Exemption, the Commission has
considered the request to exempt the Covered Transaction from most
provisions of the Act, and proposes to determine that: (i) The Proposed
Exemption is consistent with the public interest and the purposes of
the CEA; (ii) CEA section 4(a) should not apply to the Covered
Transactions or entities eligible for the Proposed Exemption, (iii) the
persons eligible to rely on the Proposed Exemption are appropriate
persons pursuant to CEA section 4(c)(3); and (iv) the Proposed
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.
1. 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 proposes to determine that the Proposed Exemption 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.\76\ Section 3(b) of the CEA identifies the purposes
of the CEA:
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\76\ 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.\77\
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\77\ 7 U.S.C. 5(b).
SPP asserts that the Proposed Exemption would be consistent with
the public interest and purposes of the CEA,\78\ stating generally
that: (a) The Covered Transactions have been, and are, subject to a
long-standing, comprehensive regulatory framework for the offer and
sale of the Transactions established by FERC; and (b) the Covered
Transactions administered by SPP are part of, and inextricably linked
to, the organized wholesale electric energy markets that are subject to
FERC regulation and oversight.\79\ For example, SPP explains that FERC
Order 2000 (which, along with FERC Order 888, encouraged the formation
of RTOs and ISOs to operate the electronic transmission grid and to
create organized wholesale electric markets) requires an RTO to
demonstrate that it has four minimum characteristics: (1) Independence
from any market participant; (2) a scope and regional configuration
which enables the RTO 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.\80\ In addition, SPP states
that an RTO must demonstrate to FERC that it performs certain self-
regulatory and/or market monitoring functions.\81\ SPP also represents
that it
[[Page 29496]]
is ``responsible for ensur[ing] the development and operation of market
mechanisms to manage transmission congestion'' \82\ and to establish
``market mechanisms [that] 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.'' \83\
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\78\ See Exemption Application at 17.
\79\ See id.
\80\ See Exemption Application at 18; 18 CFR 35.34(j).
\81\ SPP states that the Covered Transactions will take place on
markets that are monitored by both a market administrator (SPP) and
an independent market monitor (the ``SPP Market Monitor''). See
Exemption Application at 17. SPP also states that it ``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).'' Exemption Application
at 18; 18 CFR 35.34(k).
\82\ See Exemption Application at 18.
\83\ See Exemption Application at 18-19; 18 CFR 35.34(k)(2).
---------------------------------------------------------------------------
SPP also explains that the Covered Transactions are entered into by
commercial participants that are in the business of generating,
transmitting, and distributing electric energy,\84\ and that SPP was
established for the purpose of providing affordable, reliable electric
energy to consumers within their geographic region.\85\ Furthermore,
the Covered Transactions that take place on SPP's markets are overseen
by a market monitoring function, required by FERC to identify
manipulation of electric energy on SPP's markets.\86\
---------------------------------------------------------------------------
\84\ See generally, Exemption Application at 17.
\85\ See id.
\86\ See id.
---------------------------------------------------------------------------
Fundamental to the Commission's ``public interest'' and ``purposes
of the [Act]'' analysis is the fact that the Covered Transactions are
inextricably tied to SPP's physical delivery of electric energy, as
represented in the Exemption Application.\87\ Another important factor
is that the Proposed Exemption is explicitly limited to Covered
Transactions taking place on markets that are monitored by the SPP
Market Monitor, SPP, or both, and FERC. 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,\88\ is unlikely to be in the public
interest or consistent with the purposes of the CEA and would be
outside the scope of this exemption.
---------------------------------------------------------------------------
\87\ See id. at 12-15, 17 (describing the Covered Transactions
and noting that each of them ``is part of, and inextricably linked
to, the organized wholesale electric energy markets that are subject
to FERC regulation and oversight'').
\88\ See appropriate persons discussion infra section V.B.3.
---------------------------------------------------------------------------
Finally, and as discussed in detail below, the extent to which the
Proposed Exemption is consistent with the public interest and the
purposes of the Act can, in major part, be assessed by the extent to
which the Tariff and activities of SPP, and supervision by FERC, are
congruent with, and sufficiently accomplish, the regulatory objectives
of the relevant core principles (``Core Principles'') set forth in the
CEA for derivatives clearing organizations (``DCOs'') and swap
execution facilities (``SEFs''). Specifically, 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. 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. 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 below, into its
consideration of the Proposed Exemption's consistency with the public
interest and the purposes of the Act. 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 SPP complies with FERC's Credit
Reform Policy.\89\
---------------------------------------------------------------------------
\89\ See FERC Credit Reform Policy discussion infra section V.C.
---------------------------------------------------------------------------
Based on this review, the Commission proposes to determine that the
Proposed Exemption is consistent with the public interest and the
purposes of the CEA,\90\ and the Commission is specifically requesting
comment on whether the Proposed Exemption is consistent with the public
interest and the purposes of the Act.
---------------------------------------------------------------------------
\90\ The Commission notes that such a determination would be
consistent with a similar determination made in the RTO-ISO Order.
See RTO-ISO Order at 19895.
---------------------------------------------------------------------------
2. CEA Section 4(a) Should Not Apply to the Transactions or Entities
Eligible for the Proposed Exemption
CEA section 4(c)(2)(A) requires, in part, that the Commission
determine that the Covered Transactions described in the Proposed
Exemption 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. Based in major
part on SPP's representations, the Commission has reviewed the Covered
Transactions, SPP, and its 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.\91\ As further
support for this determination, the Commission also is relying on the
public interest and the purposes of the Act analysis in subsection
V.B.4 below. In so doing, the Commission proposes to determine that,
due to the FERC regulatory scheme and the RTO market structure
applicable to the Covered Transactions, the linkage between the Covered
Transactions and that regulatory scheme, and the unique nature of the
market participants that would be eligible to rely on the Proposed
Exemption,\92\ CEA section 4(a) should not apply to the Covered
Transactions under the Proposed Exemption.\93\
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\91\ See DCO core principle analysis infra section V.D.; see
also SEF core principle analysis infra section V.E.
\92\ See appropriate persons analysis infra section V.B.3.
\93\ The Commission notes that such a determination would be
consistent with a similar determination made in the RTO-ISO Order.
See RTO-ISO Order at 19895.
---------------------------------------------------------------------------
The Commission is requesting comment on whether its Proposed
Exemption of the Covered Transactions from CEA section 4(a) is
appropriate.
3. Appropriate Persons
Section 4(c)(2)(B)(i) of the CEA requires that the Commission
determine that the Proposed 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. 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).\94\ The Commission
may determine that persons that do not meet the requirements of
sections 4(c)(3)(A) through (J) are ``appropriate persons'' for
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.'' \95\
---------------------------------------------------------------------------
\94\ See supra note 75.
\95\ Id.
---------------------------------------------------------------------------
SPP asserts that its market participants fit within the
``appropriate person'' requirement under CEA section 4(c)(3) and as set
forth in the RTO-ISO Order, relying primarily on two categories of
appropriate persons. The first category includes those entities that
have a net worth exceeding $1,000,000
[[Page 29497]]
or total assets exceeding $5,000,000, as identified in CEA section
4(c)(3)(F).\96\ The second group of appropriate persons would fall
within a grouping under CEA section 4(c)(3)(K), which includes persons
deemed appropriate by the Commission ``in light of their financial or
other qualifications, or the applicability of appropriate regulatory
protection.'' \97\
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\96\ CEA section 4(c)(3)(F) provides that the following entities
are ``appropriate persons'' that the Commission may exempt under CEA
section 4(a). The relevant text of 4(c)(3)(F) provides: ``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
subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph.'' 7
U.S.C. 6(c)(3)(F).
\97\ 7 U.S.C. 6(c)(3)(K).
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SPP explains that FERC has instructed all RTOs and ISOs subject to
FERC supervision to create minimum standards for market participants.
SPP states that:
In FERC Order No. 741, FERC directed each RTOs and ISOs to
establish minimum criteria for market participants. FERC did not
specify the criteria the RTOs or ISOs should apply, but rather
directed them to establish criteria through their stakeholder
processes.\98\
---------------------------------------------------------------------------
\98\ Exemption Application at 20 (citations omitted).
SPP further states that its Tariff includes minimum capitalization
criteria that require market participants to have at a minimum: (a) A
tangible net worth of $1,000,000; (b) assets of $10,000,000; (c) a
credit rating of BBB- or its equivalent; (d) a guaranty through which
the Guarantor is used to meet alternatives (a) through (c); or (e) a
minimum deposit of $200,000 in financial security, plus, if the
participant's estimated market exposure is greater than $100,000,
double the amount of any financial security required under the SPP
Tariff.\99\
---------------------------------------------------------------------------
\99\ Id. SPP represents that its Tariff contains the Appropriate
Person Requirement set forth in RTO-ISO Order. See Exemption
Application at 21; Exemption Application Attachments at 11-12; see
also RTO-ISO Order at 19913.
---------------------------------------------------------------------------
Consistent with CEA section 4(c)(3), the Commission is proposing to
limit the Proposed Exemption to persons who are ``appropriate
persons,'' as defined in sections 4(c)(3)(A) through (J) of the
Act,\100\ ``eligible contract participants,'' as defined in section
1a(18) of the Act and in Commission regulation 1.3(m),\101\ 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.\102\
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\100\ 7 U.S.C. 6(c)(3)(A)-(J).
\101\ 7 U.S.C. 1a(18); see also ``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.
\102\ The Commission notes that the proposed limitation on the
Proposed Exemption is consistent with the RTO-ISO Order. RTO-ISO
Order at 19913.
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The Commission is requesting comment on whether such limitation on
the Proposed Exemption is appropriate.
4. 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 whether the Covered Transactions subject to the Proposed
Exemption will have a material adverse effect on the ability of the
Commission or any contract markets to perform regulatory or self-
regulatory duties.\103\ 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.'' \104\ 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.
---------------------------------------------------------------------------
\103\ 7 U.S.C. 6(c)(2)(B).
\104\ See H.R. No. 978, 102d Cong. 2d Sess. 79 (1992).
---------------------------------------------------------------------------
SPP contends that the Proposed Exemption will not have a material
adverse effect on the Commission's or any contract market's ability to
discharge its regulatory function,\105\ asserting that:
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\105\ See Exemption Application at 22.
Under Section 4(d) of the Act, the Commission will retain
authority to conduct investigations to determine whether SPP is 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. SPP will continue to retain records
related to the Transactions, consistent with existing obligations
under FERC 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 SPP's 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 SPP or of a contract market will be affected by the Commission's
granting the requested exemptions.\106\
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\106\ See id.
These factors appear to support the Proposed Exemption. In
addition, the limitation of the Proposed Exemption to Covered
Transactions between certain appropriate persons avoids potential
issues regarding financial integrity and customer protection.
Moreover, the Proposed Exemption does not exempt SPP from certain
CEA provisions, including, but not limited to, 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 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.
Therefore, the Commission retains authority to pursue fraudulent or
manipulative conduct.\107\
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\107\ Nor did SPP seek an exemption from these provisions. See
id. at 1.
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In addition, it appears that granting the Proposed Exemption for
the Covered Transactions would not have a material adverse effect on
the ability of any contract market to discharge its self-regulatory
duties under the Act. With respect to TCRs and Operating Reserve
Transactions, these transactions do not appear to be used for price
discovery or as settlement prices for other transactions in Commission-
regulated markets. Therefore, the Proposed Exemption should not have a
material adverse effect on any contract market carrying out its self-
regulatory function.
With respect to Energy Transactions, these transactions do have a
relationship to Commission-regulated markets because they can serve as
a source of settlement prices for other transactions within Commission
jurisdiction. Granting the Proposed Exemption, however, should not pose
regulatory burdens on a contract market because, as discussed in more
detail below, SPP has market monitoring systems in place to detect and
deter manipulation that takes place on its markets. Also, as a
condition of the Proposed Exemption, the Commission would be able to
obtain data from FERC with respect to activity on SPP's markets that
may impact trading on Commission-regulated markets.
Finally, the Commission notes that if the Covered Transactions ever
could be used in combination with trading
[[Page 29498]]
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.\108\ Typically,
cross-market abuse schemes will involve a reportable position in the
DCM contract involved. In such cases, Commission regulation 18.05
requires the reportable trader to keep books and records evidencing all
details concerning cash and over-the-counter positions and transactions
in the underlying commodity and to provide such data to the Commission
upon demand. Likewise, Commission regulation 38.254(a) requires that
DCMs have rules that require traders to keep records of their trading,
including records of their activity in the underlying commodity and
related derivatives markets, and make such records available, upon
request, to the DCM.\109\ Similar recordkeeping requirements apply to
swaps.\110\
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\108\ The Commission notes that its authority to prosecute
market abuses involving the Covered Transactions would not be
limited to instances where the Covered Transactions were part of
some cross-market scheme involving DCM trading activity.
\109\ Final Rulemaking--Core Principles and Other Requirements
for Designated Contract Markets, 72 FR 36612, June 19, 2012.
\110\ See Commission regulations 20.6, 20.7, 37.404, 37.500,
37.502, 37.503, and 45.2, which were adopted following the Dodd-
Frank Act's expansion of the Commission's jurisdiction to cover
swaps; see 7 U.S.C. 2(a)(1)(A); see also supra note 19 and
accompanying text. For physical commodity swaps, Commission
regulations 20.6 and 20.7 require a reportable trader to keep books
and records evidencing all details concerning cash and over-the-
counter positions and transactions in the underlying commodity and
to provide such data to the Commission upon demand. Regulation 45.2
requires certain reporting entities, as denominated in the
regulation, to keep full, complete, and systematic records, together
with all pertinent data and memoranda, of all activities related to
the business of such entity or persons with respect to swaps and
available to the Commission via real time electronic access. In
addition, under regulations 37.404, 37.500, 37.502 and 37.503, SEFs
must have rules that require their swap participants to keep books
and records evidencing all details concerning cash and over-the-
counter positions and transactions in the underlying commodity, to
allow examination of those books and records, and the provision of
such information to the Commission upon demand.
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The CFTC is requesting comment as to whether the Proposed Exemption
will 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 Act, and, if so, what conditions can or should be
imposed on the Order to mitigate such effects.
C. FERC Credit Reform Policy
On October 21, 2010, FERC amended its regulations to encourage
clear and consistent risk and credit practices in the organized
wholesale electric 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.'' \111\
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\111\ 75 FR 65942, 65942, Oct. 21, 2010 (the ``FERC Original
Order 741''). These requirements were later slightly amended and
clarified in an order on rehearing. See 76 FR 10492, Feb. 25, 2011
(``FERC Revised Order 741,'' and together with Original Order 741,
``FERC Order 741'').
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In effect, FERC Order 741 requires those RTOs that are subject to
FERC supervision to implement the following reforms: ``shortened
settlement timeframes, restrictions on the use of unsecured credit,
elimination of unsecured credit in all [FTRs] or equivalent markets,
adoption of steps to address the risk that RTOs . . . may not be
allowed to use netting and set-offs, establishment of minimum criteria
for market participation, clarification regarding the organized
markets' administrators' ability to invoke `material adverse change'
clauses to demand additional collateral from participants, and adoption
of a two-day grace period for `curing' collateral calls.'' \112\
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\112\ FERC Revised Order 741 at 10492-93.
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As discussed in more detail below, particularly in section V.D.,
the requirements set forth in FERC Order 741 appear to achieve goals
similar to the regulatory objectives of the Commission's DCO Core
Principles.
FERC regulation 35.47(c) calls for the elimination of unsecured
credit in the FTR markets and equivalent markets.\113\ This requirement
appears to be congruent with Core Principle D's requirement that each
DCO limit its exposure to potential losses from defaults by clearing
members. Because, according to FERC, risks arising out of the FTR
markets are ``difficult to quantify,'' \114\ eliminating the use of
unsecured credit in these markets may help avoid the unforeseen and
substantial costs for an RTO in the event of a default.\115\ Thus, the
requirement set forth in regulation 35.47(c) appears to advance the
objectives of Core Principle D by reducing risk and minimizing the
effect of defaults through the elimination of unsecured credit in the
FTR and equivalent markets.
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\113\ 18 CFR 35.47(c).
\114\ Specifically, FERC stated that ``the risk associated with
the potentially rapidly changing value of FTRs warrants adoption of
risk management measures, including the elimination of unsecured
credit. Because financial transmission rights have a longer-dated
obligation to perform which can run from a month to a year or more,
they have unique risks that distinguish them from other wholesale
electric markets, and the value of a financial transmission right
depends on unforeseeable events, including unplanned outages and
unanticipated weather conditions. Moreover, financial transmission
rights are relatively illiquid, adding to the inherent risk in their
valuation.'' FERC Original Order 741 at 65950.
\115\ Id. at 65949.
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In addition, FERC regulation 35.47(a) requires RTOs to have tariff
provisions that ``[l]imit the amount of unsecured credit extended by
[an RTO] to no more than $50 million for each market participant.''
\116\ This requirement appears to be congruent with one of the
regulatory objectives of Core Principle D, as implemented by Commission
regulation 39.13, specifically the requirement that each DCO limit its
exposure to potential losses from defaults by clearing members. In
capping the use of unsecured credit at $50 million, FERC stated its
belief that RTOs ``could withstand a default of this magnitude by a
single market participant,'' \117\ thereby limiting an RTO's exposure
to potential losses from defaults by its market participants. Thus, it
seems both Core Principle D and FERC regulation 35.47(a) help protect
the markets and their participants from unacceptable disruptions,
albeit in different ways and to a different extent.
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\116\ In addition, FERC regulation 35.47(a) states that ``where
a corporate family includes more than one market participant
participating in the same [RTO], the limit on the amount of
unsecured credit extended by that [RTO] shall be no more than $50
million for the corporate family.'' 18 CFR 35.47(a).
\117\ FERC Original Order 741 at 65948.
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FERC regulation 35.47(b) mandates that RTOs have billing periods
and settlement periods of no more than seven days.\118\ While this
mandate does not meet the standards applicable to registered DCOs,\119\
it supports Core Principle D's requirement that each DCO have
appropriate tools and procedures to manage the risks associated with
discharging its responsibilities. In promulgating FERC regulation
35.47(b), FERC found a shorter cycle necessary to promote market
liquidity and a necessary change ``to reduce default risk, the costs of
which would be socialized across market participants and, in certain
events, of market disruptions that could undermine overall market
function.'' \120\ Recognizing the correlation between a reduction in
the length of the ``settlement cycle'' and a reduction in costs
attributed to a default, FERC stated that shorter cycles reduce the
amount of unpaid debt left outstanding, which, in turn, reduces ``the
size of any default and therefore reduces the likelihood of
[[Page 29499]]
the default leading to a disruption in the market such as cascading
defaults and dramatically reduced market liquidity.'' \121\ Thus, FERC
regulation 35.47(b) appears to aid RTOs in managing the risks
associated with their responsibilities, which also appears to support
Core Principle D's goals.
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\118\ 18 CFR 35.47(b).
\119\ See 17 CFR 39.14(b) (requiring daily settlements).
\120\ FERC Original Order 741 at 65946.
\121\ Id.
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FERC regulation 35.47(d) requires RTOs to ensure the enforceability
of their netting arrangements in the event of the insolvency of a
member by doing one of the following: (1) Establish a single
counterparty to all market participant transactions, (2) require each
market participant to grant a security interest in the receivables of
its transactions to the relevant RTO, or (3) provide another method of
supporting netting that provides a similar level of protection to the
market that is approved by FERC.\122\ In the alternative, the RTOs
would be prohibited from netting market participants' transactions, and
required to establish credit based on each market participant's gross
obligations. Congruent to the regulatory objectives of Core Principles
D and G, FERC regulation 35.47(d) attempts to ensure that, in the event
of a bankruptcy of a participant, RTOs are not prohibited from
offsetting accounts receivable against accounts payable. In effect,
this requirement attempts to clarify an RTO's legal status to take
title to transactions in an effort to establish mutuality in the
transactions as legal support for set-off in bankruptcy.\123\ This
clarification, in turn, would appear to limit an RTO's exposure to
potential losses from defaults by market participants.
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\122\ 18 CFR 35.47(d).
\123\ See 11 U.S.C. 553; see generally, In re SemCrude, L.P.,
399 B.R. 388 (Bankr. D. Del. 2009), aff'd, 428 B.R. 590 (D. Del.
2010).
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FERC regulation 35.47(e) limits the time period within which a
market participant must cure a collateral call to no more than two
days.\124\ This requirement appears to be congruent with Core Principle
D's requirement that each DCO limit its exposure to potential losses
from defaults by clearing members. In Original Order 741, FERC stated
that a two day time period for curing collateral calls balances (1) the
need for granting market participants sufficient time to make funding
arrangements for collateral calls with (2) the need to minimize
uncertainty as to a participant's ability to participate in the market,
as well as the risk and costs of a default by a participant. By
requiring each RTO to include this two day cure period in the credit
provisions of its tariff language, FERC regulation 35.47(e) appears to
both promote the active management of risks associated with the
discharge of an RTO's responsibilities, while at the same time limiting
the potential losses from defaults by market participants.
---------------------------------------------------------------------------
\124\ 18 CFR 35.47(e).
---------------------------------------------------------------------------
FERC regulation 35.47(f) imposes minimum market participant
eligibility requirements that apply consistently to all market
participants and, as set forth in the preamble to Original Order 741,
requires RTOs to engage in periodic verification of market participant
risk management policies and procedures.\125\ The Commission believes
that the requirements set forth in FERC regulation 35.47(f) appear
congruent with some of the regulatory objectives of DCO Core Principle
C, as implemented by Commission regulation 39.12. In general, DCO Core
Principle C requires each DCO to establish appropriate admission and
continuing eligibility standards for members of, and participants in, a
DCO that are objective, publicly disclosed, and permit fair and open
access.\126\ In addition, Core Principle C also requires that each DCO
establish and implement procedures to verify compliance with each
participation and membership requirement, on an ongoing basis.\127\
Similarly, while FERC regulation 35.47(f) does not prescribe the
particular participation standards that must be implemented, as
suggested in the preamble to Original Order 741, these standards should
address ``adequate capitalization, the ability to respond to RTO
direction and expertise in risk management'' \128\ and ensure that
proposed tariff language ``is just and reasonable and not unduly
discriminatory.'' \129\ Moreover, FERC specifically stated that these
participation standards ``could include the capability to engage in
risk management or hedging or to out-source this capability with
periodic compliance verification, to make sure that each market
participant has adequate risk management capabilities and adequate
capital to engage in trading with minimal risk, and related costs, to
the market as a whole.'' \130\ Thus, both DCO Core Principle C and
Order 741 appear to promote fair and open access for market
participants as well as impose compliance verification requirements.
---------------------------------------------------------------------------
\125\ 18 CFR 35.47(f).
\126\ 7 U.S.C. 7a-1(c)(2)(C).
\127\ Id.
\128\ FERC Original Order 741 at 65956.
\129\ Id.
\130\ Id.
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FERC regulation 35.47(g) requires RTOs to specify in their tariffs
the conditions under which they will request additional collateral due
to a material adverse change.\131\ FERC, however, noted that the
examples set forth in each RTO's tariffs are not exhaustive and that
ISOs and RTOs are permitted to use ``their discretion to request
additional collateral in response to unusual or unforeseen
circumstances.'' \132\ The Commission believes that the requirements
set forth in FERC regulation 35.47(g) appear congruent with the
following DCO Core Principle D requirements: (1) That DCOs have
appropriate tools and procedures to manage the risks associated with
discharging its responsibilities, and (2) that DCOs limit their
exposure to potential losses from defaults by clearing members.\133\ By
requiring RTOs to actively consider the circumstances that could give
rise to a material adverse change, FERC appears to be encouraging RTOs
to actively manage their risks to ``avoid any confusion, particularly
during times of market duress, as to when such a clause may be
invoked.'' \134\ Moreover, such clarification could prevent a market
participant's ability to ``exploit ambiguity as to when a market
administrator may invoke a `material adverse change,' or a market
administrator may be uncertain as to when it may invoke a `material
adverse change,' '' \135\ thereby avoiding potentially harmful delays
or disruptions that could subject the RTOs to unnecessary damage.
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\131\ 18 CFR 35.47(g).
\132\ FERC Original Order 741 at 65957.
\133\ 7 U.S.C. 7a-1(c)(2)(D).
\134\ FERC Original Order 741 at 65958.
\135\ Id.
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SPP represents that it has complied with, and fully implemented,
the requirements set forth in Order 741.\136\
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\136\ See Exemption Application at 3-4; FERC Order 741
Implementation Chart.
---------------------------------------------------------------------------
D. DCO Core Principle Analysis
1. DCO Core Principle A: Compliance With Core Principles
DCO Core Principle A requires a DCO to comply with each core
principle set forth in section 5b(c)(2) of the CEA, as well as any
requirement that the Commission may impose by rule or regulation
pursuant to section 8a(5) of the Act for a DCO to be registered and
maintain its registration.\137\ In addition, Core Principle A states
that a DCO shall have reasonable discretion in establishing the manner
by which it complies with each core principle
[[Page 29500]]
subject to any rule or regulation prescribed by the Commission.\138\
---------------------------------------------------------------------------
\137\ 7 U.S.C. 7a-1(c)(2)(A)(i).
\138\ 7 U.S.C. 7a-1(c)(2)(A)(ii).
---------------------------------------------------------------------------
SPP represents that, although it is principally regulated by FERC
and that there are differences between it and registered DCOs, SPP's
practices are consistent with the core principles for DCOs.\139\ SPP
represents that, though its methods are different than those employed
by a registered DCO, its practices and the comprehensive regulatory
regime of FERC achieve the goals of, and are consistent with, the
policies of the Act.\140\ Based upon SPP's representations and the Core
Principle discussions below, and in the context of SPP's activities
with respect to the Covered Transactions within the scope of this
Proposed Exemption, SPP's practices appear congruent with, and to
accomplish sufficiently, the regulatory objectives of each DCO Core
Principle. The Commission seeks comment with respect to this
preliminary conclusion.
---------------------------------------------------------------------------
\139\ Exemption Application Attachments at 1.
\140\ Id.
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2. DCO Core Principle B: Financial and Operational Resources
DCO Core Principle B requires a DCO to have adequate financial,
operational, and managerial resources to discharge each of its
responsibilities.\141\ In addition, a DCO must have financial resources
that, at a minimum, exceed the total amount that would: (i) Enable the
DCO to meet its financial obligations to its clearing members
notwithstanding a default by the clearing member creating the largest
financial exposure for the DCO in extreme but plausible market
conditions; and (ii) enable the DCO to cover its operating costs for a
period of 1 year, as calculated on a rolling basis.\142\
---------------------------------------------------------------------------
\141\ 7 U.S.C. 7a-1(c)(2)(B)(i).
\142\ 7 U.S.C. 7a-1(c)(2)(B)(ii).
---------------------------------------------------------------------------
a. Financial Resources
SPP represents that it maintains sufficient financial resources to
meet its financial obligations to its members notwithstanding a default
by the member creating the largest financial exposure for that
organization in extreme but plausible market conditions.\143\ As an
initial matter, SPP must take the following steps to address the
outstanding obligation: (i) Segregate funds held by SPP with respect to
the defaulting market participant; (ii) draw on collateral provided by
the defaulting market participant; (iii) seek to recover from any
guarantor of the defaulting market participant; (iv) seek to exercise
other remedies under the credit support documents provided by the
defaulting market participant; and (v) pursue other available remedies
for defaults, including, without limitation, initiating a filing with
FERC to terminate the Service Agreement of the defaulting market
participant.\144\ Further, if these steps are inadequate to cover the
obligation, SPP represents that its Tariff permits SPP to mutualize the
loss among the non-defaulting market participants to whom SPP would
otherwise be obligated.\145\ Therefore, SPP will then make reduced
payments to the non-defaulting market participants receiving revenues
for market services associated with the outstanding obligation.\146\
SPP represents that the payment to a non-defaulting market participant
will be reduced in amount equal to such non-defaulting market
participant's pro-rata share of the outstanding obligation.\147\ This
process is often referred to as ``short-paying.'' \148\ SPP further
represents that once SPP deems the obligation as uncollectible, the
short-pay would be ``uplifted'' or ``socialized'' more broadly across
the market, with the losses reallocated among all non-defaulting market
participants.\149\
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\143\ See Exemption Application Attachments at 3.
\144\ Id.
\145\ See Exemption Application Attachments at 4; Letter from
SPP to the Commission dated October 7, 2014 Providing Clarifying
Information in Support of Amended Application for Exemptive Order
(``October 2014 Supplemental Letter'') at 3.
\146\ Id.
\147\ Id.
\148\ See 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
Regulatory Commission or the Public Utility Commission of Texas From
Certain Provisions of the Commodity Exchange Act, 77 FR 52138,
52149, Aug. 28, 2012.
\149\ See Exemption Application Attachments at 4. SPP states
that the loss would be allocated pro-rata to all non-defaulting
market participants who conducted business in the market during the
period covered by the invoice(s) associated with the loss, including
those market participants who had not been owed revenues. See also
October 2014 Supplemental Letter at 3.
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On the basis of these representations, the Commission believes that
SPP's financial resource requirements appear to be congruent with, and
to accomplish sufficiently, the regulatory objectives of DCO Core
Principle B in the context of SPP's activities with respect to the
Covered Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
b. Operational Resources
SPP represents that it has sufficient operational resources to
cover its operating costs through a Tariff Administration Charge
(``Charge'') allocated to its participants and set forth in Schedule 1-
A of its Tariff.\150\ SPP represents that the amount of the Charge is
not subject to annual approval by FERC, but SPP submits an
informational filing to FERC on an annual basis outlining its budget
and this Charge.\151\ SPP further represents that the Charge is based
on expected costs for the following year.\152\ Under the regulatory
structure in the wholesale electric industry, market participants are
obligated to pay the fees required by SPP,\153\ and are thus, in a
sense, a ``captive audience.'' SPP also represents that to the extent
that an SPP member terminates its membership, its Bylaws and Membership
Agreement require that the member pay its share of SPP's outstanding
financial obligations, including principal and interest on SPP debt
obligations.\154\ These provisions protect SPP and its remaining
members from increased financial exposure due to a member's termination
of its participation in SPP. SPP further represents that the Bylaws
also provide SPP with the ability to assess a charge to all SPP members
to recover any SPP costs that SPP is not otherwise able to collect
under its Tariff and other governing documents, which further insures
that SPP will have sufficient operational resources to satisfy its
obligations.\155\ Therefore, these policies and procedures appear to be
consistent with, and to accomplish sufficiently, the regulatory
objectives of DCO Core Principle B in the context of the Covered
Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
---------------------------------------------------------------------------
\150\ See Exemption Application Attachments at 6-7. SPP states
that the charge is allocated to their market participants based on
each megawatt of transmission capacity reserved during the year. Id.
\151\ Id. at 7.
\152\ Id. at 6-8.
\153\ Id. at 7.
\154\ Id.
\155\ Id.
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c. Managerial Resources
SPP represents that it has adequate managerial resources to
discharge its responsibilities as an organized wholesale electric
energy market.\156\ The Commission notes that FERC Order 888 sets forth
the principles used by FERC to assess ISO proposals and requires that
ISOs have appropriate incentives for efficient management and
administration.\157\ This requirement
[[Page 29501]]
provides that ISOs should procure the services needed for such
management and administration in an open competitive market, similar to
how Core Principle B requires a DCO to possess managerial resources
necessary to discharge each responsibility of the DCO. In addition,
FERC Order 2000 requires that RTOs have an open architecture so that
the RTO and its members have the flexibility to improve their
organizations in the future in terms of structure, geographic scope,
market support and operations in order to adapt to an environment that
is rapidly changing and meet market needs.\158\
---------------------------------------------------------------------------
\156\ See id. at 9.
\157\ See generally, FERC Order 888 at 21540. In addition to
establishing ISOs, FERC Order 888 mandated that all public utilities
file open access transmission tariffs that contain minimum terms and
conditions for non-discriminatory service. As a public utility
transmission provider, SPP is obligated to comply with the open
access requirements of FERC Order 888, which includes the
requirement for appropriate incentives for efficient management and
administration. See Exemption Application at 2-3 n. 7.
\158\ FERC Order 2000 at 502.
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SPP represents that it has sufficient human resources to fulfill
its obligations to its members, market participants, and
customers.\159\ SPP represents that it employs more than 500 employees
with experience in engineering, market operations, legal and regulatory
compliance, finance and credit, and other disciplines, that carry out
SPP market and services and support the various SPP member
organizational groups.\160\ Based on these representations, SPP's
managerial resources appear to be consistent with, and to accomplish
sufficiently, the regulatory objectives of DCO Core Principle B in the
context of the Covered Transactions. The Commission seeks comment with
respect to this preliminary conclusion.
---------------------------------------------------------------------------
\159\ See Exemption Application Attachments at 8-9.
\160\ Id. at 8.
---------------------------------------------------------------------------
3. DCO Core Principle C: Participant and Product Eligibility
DCO Core Principle C requires each DCO to establish appropriate
admission and continuing eligibility standards for member and
participants (including sufficient financial resources and operational
capacity), as well as to establish procedures to verify, on an ongoing
basis, member and participant compliance with such requirements.\161\
The DCO's participant and membership requirements must also be
objective, be publicly disclosed, and permit fair and open access.\162\
In addition, Core Principle C obligates each DCO to establish
appropriate standards for determining the eligibility of agreements,
contracts, or transactions submitted to the DCO for clearing.\163\
---------------------------------------------------------------------------
\161\ 7 U.S.C. 7a-1(c)(2)(C).
\162\ Id.
\163\ Id. As set forth above, the exemption that would be
provided by the Proposed Exemption would be available only with
respect to the transactions specifically delineated therein.
Accordingly, the DCO Core Principle C analysis is limited to a
discussion of SPP's participant eligibility requirements.
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a. FERC Credit Policy Requirements
As discussed above, the FERC Credit Policy appears to impose
participant eligibility requirements that are consistent with
regulatory objectives of DCO Core Principle C.\164\ In the FERC Credit
Policy, FERC notes that ``[h]aving minimum criteria in place can help
minimize the dangers of mutualized defaults posed by inadequately
prepared or under-capitalized participants.'' \165\ Specifically, FERC
regulation 35.47(f) requires organized wholesale electric markets to
adopt tariff provisions that require minimum market participant
eligibility criteria.\166\ Though the regulation does not prescribe the
particular participation standards that must be implemented; in the
rule's preamble, FERC suggests that such standards should address
``adequate capitalization, the ability to respond to RTO direction and
expertise in risk management.'' \167\ Regarding risk management, FERC
further suggests that minimum participant eligibility criteria should
``include the capability to engage in risk management or hedging or to
out-source this capability with periodic compliance verification.''
\168\ Although market participant criteria may vary among different
types of market participants, all market participants must be subject
to some minimum criteria.\169\ An RTO subject to FERC's supervision is
obligated to establish market participant criteria, even if the RTO
applies vigorous standards in determining the creditworthiness of its
market participants.\170\
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\164\ See supra note 128.
\165\ FERC Original Order 741 at 65955.
\166\ 18 CFR 35.47(f).
\167\ FERC Original Order 741 at 65956.
\168\ Id.
\169\ Although the FERC Credit Policy states that FERC ``directs
that [the market participation criteria] apply to all market
participants rather than only certain participants,'' FERC clarified
this comment in its Order of Rehearing by stating that its intent
``was that there be minimum criteria for all market participants and
not that all market participants necessarily be held to the same
criteria'' based upon, for example, the size of the participant's
positions. See FERC Revised Order 741 at n. 43. This approach
appears to be consistent with Commission regulation 39.12, which
implements Core Principle C and requires that participation
requirements for DCO members be risk-based.
\170\ See FERC Original Order 741 at 65956 (noting that ``An . .
. RTO's ``ability to accurately assess a market participant's
creditworthiness is not infallible'' and ``[w]hile an analysis of
creditworthiness may capture whether the market participant has
adequate capital, it may not capture other risks, such as whether
the market participant has adequate expertise to transact in an RTO
. . . market.'').
---------------------------------------------------------------------------
Because the minimum participation criteria adopted by SPP is
included in its Tariff, which is publicly available on SPP's Web site,
such criteria is publicly disclosed. In addition, FERC notes that it
reviews proposed tariff language ``to ensure that it is just and
reasonable and not unduly discriminatory,'' \171\ which practice would
appear to be consistent with DCO Core Principle C's directive that
market participation standards permit fair and open access.
---------------------------------------------------------------------------
\171\ Id.
---------------------------------------------------------------------------
b. SPP's Representations
SPP represents that it has adopted minimum participant eligibility
criteria that include capitalization requirements (which permits
participation by less-well-capitalized members if they post additional
collateral), as well as certain minimum eligibility
qualifications.\172\ The minimum capitalization requirements state that
a market participant must possess either: (i) A tangible net worth of
$1,000,000; (ii) assets of $10,000,000; (iii) a credit rating of BBB-
or its equivalent; or (iv) a guaranty where the guarantor meets one of
those requirements. Alternatively, if the market participant cannot
meet one of those requirements, it may provide a deposit of $200,000,
which is segregated and unavailable to be used as financial security
for market transactions. If, under this alternative provision, the
market participant's expected market exposure exceeds $100,000, it must
also provide twice the amount of financial security otherwise required
pursuant to the SPP Tariff.\173\ The capitalization requirements appear
to be risk-based in that the requirements may vary by type of market
and/or type or size of participant.\174\
---------------------------------------------------------------------------
\172\ See Exemption Application Attachments at 11-12.
\173\ Id. at 12.
\174\ See id.
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SPP represents that its Tariff includes minimum eligibility
requirements consistent with the RTO-ISO Order's Appropriate Persons
Requirement.\175\ Specifically, in order to participate in SPP's
markets, each market participant must demonstrate to SPP that it
qualifies as (a) an appropriate person as that term is defined under
section 4(c)(3)(A) through (J) of the CEA; (b) an eligible contract
participant (``ECP'') as that term is defined in Section 1a(18) of the
CEA and in Commission regulation 1.3(m); or (c) a person or entity that
is in the business of: (i) Generating transmitting or distributing
electric energy or (ii) providing electric services
[[Page 29502]]
that are necessary to support the reliable operation of the
transmission system.\176\
---------------------------------------------------------------------------
\175\ Id.; see also Exemption Application at 21.
\176\ Exemption Application Attachments at 12; see also RTO-ISO
Order at 19913.
---------------------------------------------------------------------------
In addition, SPP requires that its market participants satisfy
specified credit requirements \177\ and provide an attestation of their
risk management capabilities.\178\ SPP represents that its Tariff
contains requirements that enable SPP to periodically review and verify
a market participant's risk management policies, practices, and
procedures pertaining to its activities in SPP's markets.\179\ SPP may
select market participants for review on a random basis and/or based
upon identified risk factors such as, but not limited to, the SPP
markets in which the market participant is transacting, the magnitude
of the market participant's transactions, or the volume of the market
participant's open positions.\180\ SPP further represents that
successful completion of SPP's verification is required for a selected
market participant's continued eligibility to participate in SPP's
markets.\181\ In addition to requiring a market participant to describe
its risk management capabilities and procedures, SPP represents that
the attestation requires a market participant to describe whether it is
engaged in hedging, describe the employees who perform the risk
management procedures, define the special training, skills, experience,
and industry tenure of those employees, and provide any additional
information in determining the risk management capabilities of the
market participant.\182\ Market participants also are required to
notify SPP of material adverse changes in their financial
conditions.\183\ It appears from the foregoing that SPP's arrangements
with respect to participant eligibility requirements are congruent
with, and sufficiently accomplish, the regulatory objectives of Core
Principle C in the context of SPP's activities with respect to the
Covered Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
---------------------------------------------------------------------------
\177\ Id. at 11.
\178\ Id. at 11-12.
\179\ Id. at 12.
\180\ Id.
\181\ Id.
\182\ Id.
\183\ Id.
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4. DCO Core Principle D: Risk Management
DCO Core Principle D requires each DCO to demonstrate the ability
to manage the risks associated with discharging the responsibilities of
a DCO through the use of appropriate tools and procedures.\184\ As
amended by the Dodd-Frank Act, Core Principle D also requires a DCO to:
(1) Measure and monitor its credit exposures to each clearing member
daily; (2) through margin requirements and other risk control
mechanisms, limit its exposure to potential losses from a clearing
member default; (3) require sufficient margin from its clearing members
to cover potential exposures in normal market conditions; and (4) use
risk-based models and parameters in setting margin requirements that
are reviewed on a regular basis.\185\
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\184\ 7 U.S.C. 7a-1(c)(2)(D).
\185\ Id.
---------------------------------------------------------------------------
a. Risk Management Framework
SPP represents that the risk management provisions set forth in
SPP's Tariff provide SPP with appropriate tools and procedures to
manage the risk associated with operating its wholesale and related
markets.\186\ As part of the tools and procedures that RTOs use to
manage the risks associated with their activities, FERC regulation
35.47(b) mandates that RTOs have billing periods and settlement periods
of no more than seven days.\187\ As discussed above, FERC found a
shorter cycle necessary to promote market liquidity and a necessary
change ``to reduce default risk, the costs of which would be socialized
across market participants and, in certain events, of market
disruptions that could undermine overall market function.'' \188\
Recognizing the correlation between a reduction in the ``settlement
cycle'' and a reduction in costs attributed to a default, FERC stated
that shorter cycles reduce the amount of unpaid debt left outstanding,
which, in turn, reduces ``the size of any default and therefore reduces
the likelihood of the default leading to a disruption in the market
such as cascading defaults and dramatically reduced market liquidity.''
\189\ SPP represents that it has a Tariff in place that limits billing
periods and settlement periods to no more than seven days.\190\
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\186\ See Exemption Application Attachments at 15-27.
\187\ 18 CFR 35.47(b).
\188\ FERC Original Order 741 at 65946.
\189\ Id.
\190\ Exemption Application Attachments at 17; see FERC Order
741 Implementation Chart at 3.
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In addition, an RTO's participation standards can include the
supervision of a market participant's risk management program.\191\ As
discussed in section V.C., FERC Order 741 states that an RTO could
include periodic verification of market participant's capability to
engage in risk management or hedging or to out-source that capability
``to make sure each market participant has adequate risk management
capabilities and adequate capital to engage in trading with minimal
risk, and related costs, to the market as a whole.'' \192\ SPP
represents that it has a verification program in place.\193\ On the
basis of the representations contained in the Exemption Application, it
appears that these policies and procedures, are congruent with, and
will sufficiently accomplish, the regulatory objectives of DCO Core
Principle D with respect to SPP's risk management framework. The
Commission seeks comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------
\191\ See supra note 127.
\192\ See FERC Original Order 741 at 65946.
\193\ Exemption Application Attachments at 16; see FERC Order
741 Implementation Chart at 8-9.
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b. Measurement and Monitoring of Credit Exposure
SPP represents that its risk management procedures measure,
monitor, and mitigate its credit exposure to market participants.\194\
In addition, SPP states that it calculates credit exposure daily.\195\
SPP further states that it uses a highly customized system that
collects data from multiple SPP systems to provide accurate and up-to-
date credit exposures for each market participant.\196\ It appears
that, for the most part, given the unique characteristics of the
wholesale electric markets, and particularly those of the TCR and
equivalent markets, the practices specified in the Exemption
Application appear congruent with, and to accomplish sufficiently, with
respect to SPP, DCO Core Principle D's objective that a DCO measure its
credit exposure to each of its clearing members. The Commission seeks
comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------
\194\ See Exemption Application Attachments at 11, 18-20.
\195\ Id. at 18. For TCR auctions, SPP represents that its
system calculates credit exposure for each bid or offer in real-time
and compares the market participant's credit limit available. Bids
and offers are systematically rejected if they contribute to
exceeding the market participant's available credit. See id.
\196\ See id.
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c. Unsecured Credit
SPP represents that a market participant is required to have credit
that is sufficient to support its market activities or total potential
exposure.\197\
[[Page 29503]]
SPP further represents that this credit can either be in the form of
(i) unsecured credit granted by SPP, and/or (ii) financial security
\198\ provided by the market participant to SPP.\199\ FERC regulation
35.47(a) requires RTOs to have tariff provisions that ``[l]imit the
amount of unsecured credit extended by [an RTO] to no more than $50
million for each market participant.'' As mentioned above,\200\ in
capping the use of unsecured credit at $50 million, FERC stated its
belief that RTOs ``could withstand a default of this magnitude by a
single market participant,'' thereby limiting an RTO's exposure to
potential losses from defaults by its market participants. SPP
represents that its Tariff limits the amount of unsecured credit
extended to any market participant to no more than $25 million and
therefore, complies with FERC regulation 35.47(a).\201\ Moreover, FERC
regulation 35.47(c) prohibits the use of unsecured credit in the FTR
markets and equivalent markets because, according to FERC, risks
arising out of the FTR markets are ``difficult to quantify,'' and
eliminating the use of unsecured credit in these markets avoids the
unforeseen and substantial costs for an RTO in the event of a default.
SPP states that unsecured credit is unavailable for TCR activity and
that its Tariff complies with FERC regulation 35.47(c).\202\ SPP
further states that a market participant is required to provide
financial security to support all of its TCR activity.
---------------------------------------------------------------------------
\197\ See id. SPP indicates that a market participant's total
potential exposure is a calculated value applied to assure that the
market participant engages in activities within its total credit
limit as determined by SPP. The total potential exposure is based on
the market participant's estimated cumulative financial obligation
under the SPP Tariff or otherwise to SPP, excluding TCR activity.
SPP calculates a market participant's potential exposure to
nonpayment separately for each category of service (except TCR
activity) and then sums this information to obtain the amount of
total potential exposure. See id. at 19.
\198\ SPP represents that it only accepts financial security
that is in the form of cash deposits or irrevocable letters of
credit, or if the market participant is a Federal Power Marketing
Agency, a Federal Power Marketing Agency Letter executed by an
officer of the agency that includes an attestation that the agency
is lawfully allowed to participate in the SPP TCR market and that
any debt the agency incurs from such participation is a debt of the
United States, and that identifies the current appropriations for
the agency from the United States Congress and verifies that such
amount meets or exceeds the amount required to satisfy the credit
requirements set forth in the SPP Credit Policy. SPP further
represents that it requires financial security for any activity
where a market participant's total potential exposure is greater
than the unsecured credit granted to the market participant. See id.
at 18-19.
\199\ A market participant's total credit limit is the amount of
any unsecured credit allowance approved by SPP plus the amount of
any financial security the market participant has provided to SPP.
Id.
\200\ See supra note 116.
\201\ See FERC Order 741 Implementation Chart at 2; Exemption
Application Attachments at 19-20.
\202\ See FERC Order 741 Implementation Chart at 3; Exemption
Application Attachments at 18-19.
---------------------------------------------------------------------------
Since FERC regulations 35.47(a) and 35.47(c) appear to be designed
to manage risk and limit an RTO's exposure to potential losses from a
market participant, SPP's compliance with these requirements would
appear to be congruent with, and to accomplish sufficiently, the
regulatory objectives of Core Principle D, with respect to unsecured
credit, in the context of SPP's activities with respect to the Covered
Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
d. Limiting Exposure to Potential Losses Through Use of Risk Control
Mechanisms and Grace Period To Cure
SPP represents that it requires a market participant to either pay
SPP invoices to reduce its credit exposure and/or post additional
financial security (collateral) whenever there is a total potential
exposure violation, specifically (1) the participant's total potential
exposure equals or exceeds that participant's unsecured credit and
posted financial security (excluding any financial security provided
for TCR activity), and/or (2) the credit required for a market
participant's TCR activity exceeds the financial security provided by
the market participant to support the activity.\203\ Moreover, FERC
regulation 35.47(e) limits the time period by which a market
participant must cure a collateral call to no more than two days. In
Original Order 741, FERC stated that a two day time period for curing
collateral calls balances the need for granting market participants
sufficient time to make funding arrangements for collateral calls with
the need to minimize uncertainty as to a participant's ability to
participate in the market as well as the risk and costs of a default by
a participant. By requiring each RTO to include this two day cure
period in its tariff provisions, FERC regulation 35.47(e) appears to
both promote the active management of risks associated with the
discharge of an RTO's responsibilities, while at the same time limiting
the potential losses from defaults by market participants. SPP
represents that it has implemented this requirement.\204\ If a market
participant fails to pay SPP invoices and/or post additional financial
security within the requisite two day period, SPP represents that this
failure to cure is considered a default and SPP has a wide array of
remedies available, including remedies available at law or in equity
\205\ and assessing a variety of sanctions against the market
participant.\206\ Depending on the timing and number of events of
defaults, SPP will suspend any unsecured credit allowances, and if an
event of default is not cured within in the requisite two day period,
SPP may terminate the market participant's rights under the SPP credit
policy and may terminate service in accordance with the SPP Tariff and
applicable law. If the event of default is that the market participant
is in bankruptcy or has commenced bankruptcy proceedings, SPP will
immediately suspend the market participant's unsecured credit and may
terminate the market participant's rights under the SPP credit policy,
and SPP may terminate service in accordance with the SPP Tariff and
applicable law. The SPP Tariff also sets forth procedures to close out
and liquidate TCRs held by a defaulting market participant.\207\
---------------------------------------------------------------------------
\203\ See Exemption Application Attachments at 20-21.
\204\ See FERC Order 741 Implementation Chart at 5; Exemption
Application Attachments at 21.
\205\ SPP states that such remedies include, but are not limited
to, bringing suit or otherwise initiating monetary damages,
injunctive relief, specific performance, and relief available under
the Federal Power Act, except to the extent such remedy is limited
under the SPP Credit Policy. See Exemption Application Attachments
at 22.
\206\ See Exemption Application Attachments at 21; see DCO Core
Principle G discussion infra.
\207\ See id.
---------------------------------------------------------------------------
On the basis of these representations, it appears that the
requirements to post additional financial security and cure collateral
calls in no more than two days help SPP manage risk and limit its
exposure against potential losses from a market participant. These
requirements appear to be congruent with, and to accomplish
sufficiently, the regulatory objectives of DCO Core Principle D, with
respect to limiting exposure to potential losses through the use of
risk control mechanisms and the grace period to cure, in the context of
SPP's activities with respect to the Covered Transactions. The
Commission seeks comment with respect to this preliminary conclusion.
e. Calls for Additional Collateral Due to a Material Adverse Change
FERC regulation 35.47(g) requires RTOs to specify in their tariffs
the conditions under which they will request additional collateral due
to a material adverse change. However, as stated by FERC, this list of
conditions is not meant to be exhaustive, and RTOs are permitted to use
``their discretion to request additional collateral in response to
unusual or unforeseen circumstances.'' \208\ SPP represents that
[[Page 29504]]
its Tariff complies with these requirements.\209\ Since SPP does not
appear to be limited in its ability to call for additional collateral
in unusual or unforeseen circumstances, FERC regulation 35.47(g)
appears to support some of DCO Core Principle D's objectives, namely
that a DCO have appropriate tools and procedures to manage the risks
associated with discharging its responsibilities, and that a DCO limit
its exposure to potential losses from defaults by clearing members.
FERC has noted that information regarding when an RTO will request
additional collateral due to a material adverse change may help to
``avoid any confusion, particularly during times of market duress, as
to when such a clause may be invoked,'' \210\ while at the same time
preventing a market participant from ``exploit[ing] ambiguity as to
when a market administrator may invoke a `material adverse change.' ''
\211\ As such, this policy appears to help avoid potentially harmful
delays or disruptions that could subject SPP to unnecessary damage, and
thus is congruent with, and appears to accomplish sufficiently, the
regulatory objectives of Core Principle D, with respect to calls for
additional collateral due to a material adverse change, in the context
of SPP's activities with respect to the Covered Transactions. The
Commission seeks comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------
\208\ FERC Original Order 741 at 65957.
\209\ See FERC Order 741 Implementation Chart at 7-8.
\210\ FERC Original Order 741 at 65958.
\211\ Id.
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f. Margin Requirement and Use of Risk-Based Models and Parameters in
Setting Margin
As discussed previously, SPP represents that it requires a market
participant to maintain unsecured credit and/or post financial security
(collectively, ``margin'') that is sufficient to support its market
activities or total potential exposure at all times.\212\ As
represented by SPP, these practices appear to be congruent with, and to
accomplish sufficiently, the regulatory objectives of DCO Core
Principle D, with respect to a margin requirement and the use of risk-
based models and parameters in setting margin, in the context of SPP's
activities with respect to the Covered Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------
\212\ See Exemption Application Attachments at 22-23.
---------------------------------------------------------------------------
g. Ability To Offset Market Obligations
FERC regulation 35.47(d) requires RTOs to either (1) establish a
single counterparty to all market participant transactions, (2) require
each market participant to grant a security interest in the receivables
of its transactions to the relevant RTO, or (3) provide another method
of supporting netting that provides a similar level of protection to
the market that is approved by FERC. Otherwise, RTOs are prohibited
from netting market participants' transactions and required to
establish credit based on market participants' gross obligations. FERC
regulation 35.47(d), which attempts to ensure that, in the event of a
bankruptcy, RTOs are not prohibited from offsetting accounts receivable
against accounts payable, is congruent with the regulatory objectives
of Core Principle D. In effect, this requirement appears to attempt to
clarify an RTO's legal status to take title to transactions in an
effort to establish mutuality in the transactions as legal support for
set-off in bankruptcy.\213\ This clarification, in turn, would seem to
limit an RTO's exposure to potential losses from defaults by market
participants.
---------------------------------------------------------------------------
\213\ See supra note 123.
---------------------------------------------------------------------------
SPP represents that it is a central counterparty and that its
Tariff indicates that SPP is the counterparty to the Covered
Transactions.\214\ SPP has submitted a memorandum of outside counsel
that states that SPP's counterparty arrangements will provide SPP with
enforceable rights of set off against a market participant in the event
of the market participant's bankruptcy.\215\
---------------------------------------------------------------------------
\214\ Exemption Application Attachments at 23; see FERC Order
741 Implementation Chart at 4-5.
\215\ As part of the Exemption Application, SPP provided the
Commission with a legal opinion that, provided the Commission with
assurance that the netting arrangements contained in the approach
selected by SPP to satisfy the obligations contained in FERC
regulation 35.47(d) will, in fact, provide SPP with enforceable
rights of setoff against any of its market participants under title
11 of the United States Code in the event of the bankruptcy of the
market participant. See Memorandum regarding Enforceability of
Netting Practices from Hunton and Williams to SPP dated December 2,
2013.
---------------------------------------------------------------------------
Compliance with FERC regulation 35.47(d) appears to be congruent
with, and to accomplish sufficiently, Core Principle D's regulatory
objectives, with respect to the ability to offset market obligations,
in the context of SPP's activities with respect to the Covered
Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
5. DCO Core Principle E: Settlement Procedures
Among the requirements set forth by Core Principle E are the
requirements that a DCO (a) have the ability to complete settlements on
a timely basis under varying circumstances, and (b) maintain an
adequate record of the flow of funds associated with each transaction
that the DCO clears.\216\
---------------------------------------------------------------------------
\216\ 7 U.S.C. 7a-1(c)(2)(E)(i) and (iv).
---------------------------------------------------------------------------
SPP represents that it has policies and procedures that contain
detailed procedures regarding data and record-keeping, and that it has
billing periods and settlement periods of no more than seven days each
(for a total of 14 days).\217\ Specifically, the SPP Tariff requires
SPP to invoice market participants for market transactions on a weekly
basis detailing all charges and payments.\218\ Market participants are
required to make payments equal to the net charge on the invoice by
5:00 p.m. on the third business day following the date of the invoice,
while SPP makes payments to the market participants equal to the net
credit on the invoice by 5:00 p.m. on the fifth business day following
the date of the invoice.\219\ In addition, SPP represents that it
maintains records concerning the flow of funds involved in the
settlements by market participants.\220\ While this approach does not
meet the standards applicable to registered DCOs,\221\ it appears to be
congruent with, and to accomplish sufficiently, the regulatory
objectives of DCO Core Principle E in the context of SPP's activities
with respect to the Covered Transactions. The Commission seeks comment
on this preliminary conclusion.
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\217\ See Exemption Application Attachments at 28-29.
\218\ Id. at 28.
\219\ Id. at 28-29.
\220\ Id. at 29.
\221\ See 17 CFR 39.14(b) (requiring daily settlements).
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6. DCO Core Principle F: Treatment of Funds
DCO Core Principle F requires a DCO to have standards and
procedures designed to protect and ensure the safety of member and
participant funds, to hold such funds in a manner that would minimize
the risk of loss or delay in access by the DCO to the funds, and to
invest such funds in instruments with minimal credit, market, and
liquidity risks.\222\
---------------------------------------------------------------------------
\222\ 7 U.S.C. 7a-1(c)(2)(F).
---------------------------------------------------------------------------
SPP represents that it has Tariff provisions that accomplish the
regulatory goals of DCO Core Principle F.\223\ SPP maintains separate
accounts
[[Page 29505]]
for the funds it receives or holds from market participants that are
invoiced for market transactions.\224\ In addition, SPP represents that
the SPP Tariff requires SPP to deposit cash collateral received from a
market participant/customer in a segregated, interest bearing account
in SPP's name, with all of the interest accruing to the benefit of the
market participant/customer.\225\ As represented by SPP, these
practices appear congruent with, and to accomplish sufficiently, the
regulatory objectives of DCO Core Principle F in the context of SPP's
activities with respect to the Covered Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------
\223\ See Exemption Application Attachments at 30.
\224\ Id. As discussed above, SPP represents that pursuant to
the SPP tariff, market participants pay amounts they owe by the
third business day after being invoiced, and SPP pays amounts owed
to market participants pertaining to market transactions by the
fifth business day after the invoice is issued.
\225\ Id.
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7. DCO Core Principle G: Default Rules and Procedures
DCO Core Principle G requires a DCO to have rules and procedures
designed to allow for the efficient, fair, and safe management of
events when members or participants become insolvent or otherwise
default on their obligations to the DCO.\226\ Core Principle G also
requires a DCO to clearly state its default procedures, make publicly
available its default rules, and ensure that it may take timely action
to contain losses and liquidity pressures and to continue meeting each
of its obligations.\227\
---------------------------------------------------------------------------
\226\ 7 U.S.C. 7a-1(c)(2)(G)(i).
\227\ 7 U.S.C. 7a-1(c)(2)(G)(ii).
---------------------------------------------------------------------------
a. General Default Procedures
SPP represents that it has Tariff procedures that address events
surrounding the insolvency or default of a market participant.\228\ For
example, SPP represents that its Tariff identifies events of default
(e.g., failure to post any financial security required under the SPP
credit policy, failure to pay in full amounts payable, unless cured,
events of insolvency, defaults under the credit policy, and failure to
provide information under the credit policy in a timely manner),
describes the cure period associated with an event of default, and
describes the actions to be taken in the event of default and detail
the remedies available to SPP--which may include, among other things,
suspension of unsecured credit allowances, termination of services in
accordance with the SPP Tariff, termination of market activity, and
close out and liquidation of TCRs held by a defaulting market
participant.\229\ As detailed above, in the event that the remedies
outlined in SPP's Tariff are insufficient to timely cure a default, SPP
has the right to socialize losses from the default among other market
participants by, for example, ``short-paying'' such other
participants.\230\
---------------------------------------------------------------------------
\228\ See Exemption Application Attachments at 32-35.
\229\ Id. at 32-33. SPP states that these remedies are without
prejudice to other remedies. SPP also may exercise any rights or
remedies it may have at law or in equity, including, but not limited
to, bringing suit or otherwise initiating monetary damages,
injunctive relief, specific performance, and relief available under
the Federal Power Act, except to the extent such remedy is limited
under the SPP Credit Policy. Id. at 33.
\230\ See supra notes 148 and 149 and accompanying text.
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b. Setoff
Generally speaking, it is a well-established tenet of clearing that
a DCO acts as the buyer to every seller and as the seller to every
buyer, thereby substituting the DCO's credit for bilateral counter-
party risk. As such, when a DCO is involved, there is little question
as to the identity of a counterparty to a given transaction. However,
because an RTO can act as agent for its participants, there could be
ambiguity as to the identity of a counterparty to a given transaction.
As a result, in the event of a bankruptcy of a market participant and
in the event of a lack of the mutuality of obligation required by the
Bankruptcy Code,\231\ an RTO may be liable to pay a bankrupt market
participant for transactions in which that participant is owed funds,
without the ability to offset amounts owed by that participant with
respect to other transactions. Stated differently, although the
defaulting market participant may owe money to the RTO, if the RTO also
owes money to such participant, the RTO may be required to pay the
defaulting participant the full amount owed without being able to
offset the amounts owed by that participant to the RTO, which latter
amounts may be relegated to claims in the bankruptcy proceedings. As
more fully described in section V.D.4.g., the memorandum of counsel
provided by SPP addresses this issue.
---------------------------------------------------------------------------
\231\ See 11 U.S.C. 553.
---------------------------------------------------------------------------
The foregoing arrangements appear congruent to, and to accomplish
sufficiently, the regulatory objectives of DCO Core Principle G in the
context of SPP's activities with respect to the Covered Transactions.
The Commission seeks comment with respect to this preliminary
conclusion.
8. DCO Core Principle H: Rule Enforcement
DCO Core Principle H requires a DCO to (1) maintain adequate
arrangements and resources for the effective monitoring and enforcement
of compliance with its rules and for resolution of disputes, (2) have
the authority and ability to discipline, limit, suspend, or terminate a
clearing member's activities for violations of those rules, and (3)
report to the Commission regarding rule enforcement activities and
sanctions imposed against members and participants.\232\
---------------------------------------------------------------------------
\232\ 7 U.S.C. 7a-1(c)(2)(H).
---------------------------------------------------------------------------
SPP represents that it maintains a Tariff or other procedures that
accomplish the regulatory goals of DCO Core Principle H.\233\ SPP
maintains that its Bylaws, Membership Agreement and Tariff contain
substantial rules governing member, customer, and market participant
conduct, and provide SPP with the ability to discipline such conduct
and report certain conduct to FERC.\234\ SPP has, e.g., the power to
take a range of actions against participants that fail to pay, pay
late, or fail to comply with SPP's credit policy.\235\ In addition,
SPP's Bylaws, Membership Agreement and Tariff establish dispute
resolution procedures.\236\
---------------------------------------------------------------------------
\233\ Exemption Application Attachments at 36-40.
\234\ Id. at 36.
\235\ Id. at 38-39.
\236\ Id. at 36, 40.
---------------------------------------------------------------------------
Based on SPP's representations, it appears that these practices are
congruent with, and sufficiently accomplish, the regulatory objectives
of DCO Core Principle H in the context of SPP's activities with respect
to the Covered Transactions. The Commission seeks comment with respect
to this preliminary conclusion.
9. DCO Core Principle I: System Safeguards
DCO Core Principle I requires a DCO to demonstrate that: (1) It has
established and will maintain a program of oversight and risk analysis
to ensure that its automated systems function properly and have
adequate capacity and security, and (2) it has established and will
maintain emergency procedures and a plan for disaster recovery and will
periodically test backup facilities to ensure daily processing,
clearing and settlement of transactions.\237\ Core Principle I also
requires that a DCO establish and maintain emergency procedures, backup
facilities, and a plan for disaster recovery that allows for the timely
recovery and resumption of the DCO's
[[Page 29506]]
operations and the fulfillment of each of its obligations and
responsibilities.\238\
---------------------------------------------------------------------------
\237\ 7 U.S.C. 7a-1(c)(2)(I)(i)-(ii).
\238\ 7 U.S.C. 7a-1(c)(2)(I)(iii).
---------------------------------------------------------------------------
SPP represents that it has policies and procedures that accomplish
the regulatory goals of DCO Core Principle I,\239\ albeit in a manner
that is somewhat different than the way in which a DCO complies with
DCO Core Principle I. This is because SPP is also responsible for
managing power reliably and, thus, requires additional operational
safeguards to specifically address that function. For example, SPP is
subject to reliability rules established by the North American Electric
Reliability Corporation.\240\ In order to comply with these rules, SPP
has procedures in place to address emergency situations and maintains
redundant communication and computer systems, and redundant primary and
back-up control centers in separate secured locations.\241\ SPP also
has implemented on- and off-site data storage and back-up.\242\ SPP has
emergency preparedness, business continuity, and disaster recovery
plans, which are reviewed and updated on a regular basis.\243\ SPP also
conducts periodic emergency drills and mock disaster scenarios to
ensure the readiness of back-up facilities and personnel. Multiple SPP
business units, including SPP's Internal Audit Department, work to
review, test, and update SPP's business continuity plans.\244\ In
addition, SPP has a business continuity plan to provide for the
calculation of market prices in the event of Day-Ahead Market or Real-
Time Balancing Market system failures or isolation of portions of the
SPP market from the rest of the market footprint.\245\
---------------------------------------------------------------------------
\239\ See generally, Exemption Application Attachments at 41-43.
\240\ See id. at 41.
\241\ See id.
\242\ See id.
\243\ See id. at 42.
\244\ See id.
\245\ See id.
---------------------------------------------------------------------------
Based on SPP's representations, it appears that these system
safeguard practices are congruent with, and accomplish sufficiently,
the regulatory objectives of DCO Core Principle I in the context of
SPP's activities with respect to the Covered Transactions. The
Commission seeks comment with respect to this preliminary conclusion.
10. DCO Core Principle J: Reporting
DCO Core Principle J requires a DCO to provide to the Commission
all information that the Commission determines to be necessary to
conduct oversight of the DCO.\246\ SPP represents that it has adopted
substantial data and information disclosure provisions, which enables
SPP to provide information to the Commission, including information
deemed confidential by market participants.\247\ Moreover, pursuant to
SPP's Tariff and FERC regulations, FERC has access to the information
that it would need to oversee SPP.\248\ With respect to the disclosure
of confidential information received from market participants, SPP
states that it has adopted procedures to allow for disclosure of such
information to FERC and state regulatory agencies.\249\ These
procedures apply both to SPP and the SPP Market Monitor. SPP represents
that its Tariff permits the disclosure of confidential information to
the Commission.\250\ In addition, when SPP receives a request that
involves a market participant's confidential information, SPP is not
required to provide notice to such market participant(s), where the
Commission or FERC, or their respective staffs, are the party
requesting the confidential information.\251\
---------------------------------------------------------------------------
\246\ 7 U.S.C. 7a-1(c)(2)(J).
\247\ See Exemption Application Attachments at 44-46.
\248\ Id.
\249\ Id. at 44.
\250\ See Exemption Application at 22; Exemption Application
Attachments at 44-45.
\251\ See Exemption Application Attachments at 44-45.
---------------------------------------------------------------------------
Based on the foregoing, including SPP's representations, it appears
that these practices are congruent with, and sufficiently accomplish,
the regulatory objectives of Core Principle J in the context of
Petitioners' activities with respect to the Covered Transactions. The
Commission seeks comment with respect to this preliminary conclusion.
11. DCO Core Principle K: Recordkeeping
DCO Core Principle K requires a DCO to maintain records of all
activities related to its business as a DCO in a form and manner
acceptable to the Commission for a period of not less than five
years.\252\
---------------------------------------------------------------------------
\252\ 7 U.S.C. 7a-1(c)(2)(K).
---------------------------------------------------------------------------
SPP represents that its practices satisfy the regulatory goals of
DCO Core Principle K because it has adequate recordkeeping requirements
or systems.\253\ SPP represents that it complies with FERC's
comprehensive regulations governing public utility recordkeeping, many
of which require retention of data for at least five years.\254\ In
addition, under SPP's Standards of Conduct, SPP is required to maintain
records showing the transactions under the SPP Tariff for a period of 5
years unless otherwise provided in the Tariff or by law or
regulation.\255\ SPP retains such records in either electronic or paper
format. SPP further represents that its Market Monitoring Plan requires
all market data and information held by SPP or the SPP Market Monitor
to be retained for a minimum period of three years, and requires market
participants to retain such data in their possession for a minimum
period of three years.\256\
---------------------------------------------------------------------------
\253\ Exemption Application Attachments at 48.
\254\ Exemption Application Attachments at 47; see 18 CFR part
125.
\255\ Exemption Application Attachments at 47.
\256\ Id.
---------------------------------------------------------------------------
Based on these regulations and SPP's representations, it appears
that these practices are congruent with, and sufficiently accomplish,
the regulatory objectives of DCO Core Principle K in the context of
SPP's activities with respect to the Covered Transactions. The
Commission seeks comment with respect to this preliminary conclusion.
12. DCO Core Principle L: Public Information
DCO Core Principle L requires a DCO to make information concerning
the rules and operating procedures governing its clearing and
settlement systems (including default procedures) available to market
participants.\257\ Core Principle L also requires a DCO to provide
market participants with sufficient information to enable them to
identify and evaluate accurately the risks and costs associated with
using the DCO's services, and to disclose publicly and to the
Commission information concerning: (1) The terms and conditions of each
contract, agreement, and transaction cleared and settled by the DCO;
(2) the fees that the DCO charges its members and participants; (3) the
DCO's margin-setting methodology, and the size and composition of its
financial resources package; (4) daily settlement prices, volume, and
open interest for each contract the DCO settles or clears; and (5) any
other matter relevant to participation in the DCO's settlement and
clearing activities.\258\
---------------------------------------------------------------------------
\257\ 7 U.S.C. 7a-1(c)(2)(L)(i)-(ii).
\258\ 7 U.S.C. 7a-1(c)(2)(L)(iii).
---------------------------------------------------------------------------
SPP represents that it makes its Tariff and related governing
documents, such as the SPP Bylaws, Membership Agreement, and the IM
Protocols, publicly available on its Web site, which, in turn, allows
market participants (and the public) to access information about the
rules and operations of the SPP markets, including among other things,
participant and product eligibility requirements, credit requirements
for
[[Page 29507]]
market participants, default procedures and default allocations,
settlement procedures, SPP fees, and extensive data regarding market
and transmission system operations, policies, and procedures.\259\
---------------------------------------------------------------------------
\259\ See Exemption Application Attachments at 49-50.
---------------------------------------------------------------------------
Based on SPP's representations, it appears that these practices are
congruent with, and sufficiently accomplish, the regulatory objectives
of DCO Core Principle L in the context of SPP's activities with respect
to the Covered Transactions. The Commission seeks comment with respect
to this preliminary conclusion.
13. DCO Core Principle M: Information Sharing
DCO Core Principle M requires a DCO to enter into and abide by the
terms of all appropriate and applicable domestic and international
information-sharing agreements, and use relevant information obtained
from the agreements in carrying out the DCO's risk management
program.\260\
---------------------------------------------------------------------------
\260\ 7 U.S.C. 7a-1(c)(2)(M).
---------------------------------------------------------------------------
SPP represents that it has policies and procedures that allow it to
share information with, and receive information from, other entities as
necessary to carry out its risk management functions.\261\ SPP
represents that its Tariff, Bylaws, Membership Agreement, and Standards
of Conduct set forth rules for SPP's information sharing with SPP
members, market participants, regulatory agencies, and other
stakeholders.\262\ SPP further represents that it has executed ``Joint
Operating Agreements,'' with interconnected electric transmission
providers, such as (among others) the Midcontinent Independent System
Operator, to provide for the sharing of certain transmission system
planning and operational information between SPP and the
counterparty.\263\ Moreover, SPP represents that its Tariff contains
procedures to allow for disclosure to the Commission, FERC and state
regulatory agencies of confidential information it receives from a
market participant.\264\ SPP states that notice of such request is not
provided to the market participant when the Commission, FERC or their
respective staffs are the party requesting the confidential
information.\265\
---------------------------------------------------------------------------
\261\ See generally, Exemption Application Attachments at 52-55;
see also DCO Core Principle J discussion supra.
\262\ See id. at 52.
\263\ See id. at 53.
\264\ See Exemption Application Attachments at 54.
\265\ Id.
---------------------------------------------------------------------------
Based on the foregoing and SPP's representations, it appears that
these practices are congruent with, and sufficiently accomplish, the
regulatory objectives of Core Principle M in the context of SPP's
activities with respect to the Covered Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
14. DCO Core Principle N: Antitrust
DCO Core Principle N requires a DCO to avoid, unless necessary or
appropriate to achieve the purposes of the CEA, adopting any rule or
taking any action that results in any unreasonable restraint of trade,
or imposing any material anticompetitive burden.\266\
---------------------------------------------------------------------------
\266\ 7 U.S.C. 7a-1(c)(2)(N).
---------------------------------------------------------------------------
As discussed above, the formation of SPP and other RTOs and ISOs
was encouraged by FERC (pursuant to FERC Orders 888 and 2000) in order
to foster greater competition in the electric energy generation sectors
by allowing open access to transmission lines.\267\ In addition, SPP
represents that its rules and actions are subject to continued
oversight by FERC and the SPP Market Monitor.\268\ Such oversight could
detect activities such as undue concentrations or market power,
discriminatory treatment of market participants or other
anticompetitive behavior.\269\
---------------------------------------------------------------------------
\267\ See FERC Order 888; FERC Order 2000.
\268\ See Exemption Application Attachments at 56.
\269\ See id.
---------------------------------------------------------------------------
Based on SPP's representations, it appears that SPP's existence and
practices are congruent with, and sufficiently accomplish, the
regulatory objectives of Core Principle N. The Commission seeks comment
with respect to this preliminary conclusion.
15. DCO Core Principle O: Governance and Fitness Standards
DCO Core Principle O requires a DCO to establish governance
arrangements that are transparent to fulfill public interest
requirements and to permit the consideration of the views of owners and
participants.\270\ A DCO must also establish and enforce appropriate
fitness standards for directors, members of any disciplinary committee,
members of the DCO, any other individual or entity with direct access
to the settlement or clearing activities of the DCO, and any party
affiliated with any of the foregoing individuals or entities.\271\
---------------------------------------------------------------------------
\270\ 7 U.S.C. 7a-1(c)(2)(O)(i).
\271\ 7 U.S.C. 7a-1(c)(2)(O)(ii)
---------------------------------------------------------------------------
SPP represents that its Tariff, governing documents, and applicable
state law set forth specific governance standards that are consistent
with the regulatory goals which address, for example, director
independence and fitness requirements.\272\ In addition, SPP asserts
that FERC Orders 719 and 2000 set out certain minimum governance
structures for RTOs. SPP states that Order 719 requires sets forth
minimum standards for RTO governance regarding responsiveness to
stakeholders. Specifically, Order 719 directed RTOs to adopt means for
direct access to their boards of directors for customers and
stakeholders and established obligations for RTOs to increase
responsiveness to customers and stakeholders using four responsiveness
criteria: (1) Inclusiveness; (2) fairness in balancing diverse
interests; (3) representation of minority positions; and (4) ongoing
responsiveness.\273\ SPP asserts that FERC Order 2000 likewise
identified minimum characteristics that RTOs must exhibit, including,
independence from all market participants.\274\
---------------------------------------------------------------------------
\272\ See Exemption Application Attachments at 57-61.
\273\ See FERC Order 719. SPP represents that FERC has
determined that SPP has met the governance criteria for stakeholder
responsiveness set forth in FERC Order 719. See Exemption
Application Attachments at 58.
\274\ See Exemption Application Attachments at 57 (citing to
FERC Order 2000). SPP represents that all SPP Officers and employees
are required to execute a statement certifying they have read the
SPP Standards of Conduct (which outline the independence
requirements for all SPP employees) upon employment and annually
thereafter, and to complete an annual review of the Standards of
Conduct and certification thereof. The Standards of Conduct govern
and limit employee conduct regarding: (1) Involvement in marketing
of electric energy; (2) handling and disclosure of confidential
information and transmission system information; (3) access to
facilities; (4) implementation of the SPP Tariff; (5) recordkeeping;
(6) investments; (7) relationships with other parties; (8) reporting
of violations of the Standards of Conduct; and (9) conflicts of
interest. Id. at 61.
---------------------------------------------------------------------------
Based on SPP's representations, it appears that SPP's governance
structure is congruent with, and sufficiently accomplishes, the
regulatory objectives of DCO Core Principle O in the context of SPP's
activities with respect to the Covered Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
16. DCO Core Principle P: Conflicts of Interest
Pursuant to DCO Core Principle P, each DCO must establish and
enforce rules to minimize conflicts of interest in the decision-making
process of the DCO.\275\ In addition, each DCO must establish a process
for resolving conflicts of interest.\276\
---------------------------------------------------------------------------
\275\ 7 U.S.C. 7a-1(c)(2)(P)(i).
\276\ 7 U.S.C. 7a-1(c)(2)(P)(ii).
---------------------------------------------------------------------------
SPP represents that it has adopted stringent conflict of interest
requirements as well as a process for resolving such conflicts in its
Standards of Conduct for members of its board of
[[Page 29508]]
directors and its employees (including officers).\277\ The Standards of
Conduct for board members and employees require such individuals to,
among other things, avoid activities that are contrary to the interests
of SPP.\278\ SPP further represents that members of the SPP Board of
Directors are also subject to conflict of interest and independence
standards set forth in the SPP Bylaws.\279\
---------------------------------------------------------------------------
\277\ See Exemption Application Attachments at 62-64; see, e.g.,
sections 9.3-9.5 of Attachment to the October 2014 Supplemental
Letter.
\278\ See Exemption Application Attachments at 62-64.
\279\ See id. at 62; October 2014 Supplemental Letter at 4.
---------------------------------------------------------------------------
In addition to the Standards of Conduct, SPP asserts that the SPP
Market Monitor and all of its employees must comply with additional
independence and ethics standards set forth in the SPP Tariff,
including prohibiting: (a) Material affiliation with any market
participant or any affiliate of a market participant; (b) serving as an
officer, employee, or partner of a market participant; (c) material
financial interest in any market participant or any affiliate of a
market participant (allowing for such potential exceptions as mutual
funds and non-directed investments); (d) engaging in any market
transactions other than the performance of their duties under the
Tariff; (e) receiving compensation, other than by SPP, for any expert
witness testimony or other commercial services to SPP or to any other
party in connection with any legal or regulatory proceeding or
commercial transaction relating to SPP; and (f) acceptance of anything
of value from a market participant in excess of a de minimis
amount.\280\
---------------------------------------------------------------------------
\280\ See Exemption Application Attachments at 63-64.
---------------------------------------------------------------------------
Based upon SPP's representations, it appears that the conflict of
interest policies SPP has adopted and that the requirements SPP is
subject to are congruent with, and sufficiently accomplish, the
regulatory objectives of DCO Core Principle P in the context of SPP's
activities with respect to the Covered Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
17. DCO Core Principle Q: Composition of Governing Boards
DCO Core Principle Q provides that each DCO shall ensure that the
composition of the governing board or committee of the derivatives
clearing organization includes market participants.\281\
---------------------------------------------------------------------------
\281\ 7 U.S.C. 7a-1(c)(2)(Q).
---------------------------------------------------------------------------
FERC regulations require that an RTO ``must have a decision making
process that is independent of control by any market participant or
class of participants.'' \282\ However, FERC also requires that each
RTO ``adopt business practices and procedures that achieve Commission-
approved independent system operator and regional transmission
organization board of directors' responsiveness to customers and other
stakeholders and satisfy [specified] criteria.'' \283\ SPP represents
that its Bylaws require members of its board of directors to be
independent of any member, and that board members may not be a
director, officer, or employee of, or have a direct business
relationship or affiliation with or a financial interest in a member or
customer of services provided by SPP.\284\ SPP further represents that
the composition of its board of directors is influenced by SPP's
members through the nomination and election process.\285\ In addition,
SPP asserts that its members and market participants have ample
opportunity to express their viewpoints to the board of directors
through member committees, market participant committees, taskforces,
and working groups.\286\
---------------------------------------------------------------------------
\282\ See 18 CFR 35.34(j)(1)(ii).
\283\ See 18 CFR 35.28(g)(6).
\284\ See Exemption Application Attachments at 65. SPP also
notes that except for the President of SPP, no other board member
may be an employee of SPP. Id.
\285\ See id. SPP states that its Corporate Governance
Committee, which includes member representatives, nominates
candidates for board positions.
\286\ See id.
---------------------------------------------------------------------------
Based on SPP's representations, and the regulations and supervision
of FERC, it appears that these practices are congruent with, and
sufficiently accomplish, the regulatory objectives of DCO Core
Principle Q in the context of SPP's activities with respect to the
Covered Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
18. DCO Core Principle R: Legal Risk
DCO Core Principle R requires a DCO to have a well-founded,
transparent, and enforceable legal framework for each aspect of its
activities.\287\
---------------------------------------------------------------------------
\287\ 7 U.S.C. 7a-1(c)(2)(R).
---------------------------------------------------------------------------
SPP asserts that it operates under a transparent and comprehensive
legal framework that is grounded in the Federal Power Act and
administered by FERC.\288\ Indeed, SPP asserts that it is subject to
FERC orders rules and regulations and that SPP operates pursuant to a
Tariff that has been reviewed and approved by FERC.\289\ SPP further
asserts that its Tariff states that SPP is the counterparty to the
Covered Transactions.\290\ Moreover, with respect to eligibility for
setoff in bankruptcy, SPP has submitted a separate legal memorandum of
outside counsel that SPP's counterparty arrangements will provide SPP
with enforceable rights of set off against a market participant in the
event of the market participant's bankruptcy.\291\
---------------------------------------------------------------------------
\288\ See Exemption Application Attachments at 68.
\289\ See id.
\290\ See id.
\291\ See id.; see discussion supra section V.D.4.g.
---------------------------------------------------------------------------
Based on SPP's representations, it appears that this framework is
congruent with, and sufficiently accomplishes, the regulatory
objectives of Core Principle R in the context of SPP's activities with
respect to the Covered Transactions. The Commission seeks comment with
respect to this preliminary conclusion.
E. SEF Core Principle Analysis
1. SEF Core Principle 1: Compliance With Core Principles
SEF Core Principle 1 requires a SEF to comply with the Core
Principles described in part 37 of the Commission's Regulations.\292\
SPP represents that, although that there are differences between it and
registered SEFs and it is principally regulated by FERC, SPP's
practices are consistent with the SEF core principles.\293\ In
addition, SPP represents that, though its methods are different than
those employed by a registered SEF, its practices and the comprehensive
regulatory regime of FERC achieve the goals of, and are consistent
with, the policies of the Act.\294\
---------------------------------------------------------------------------
\292\ 7 U.S.C. 7b-3(f)(1).
\293\ See Exemption Application Attachments at 70-71.
\294\ Id.
---------------------------------------------------------------------------
As demonstrated by the following analysis, based upon SPP's
representations and the Core Principle discussions below, and in the
context of SPP's activities with respect to the Covered Transactions
within the scope of this Proposed Exemption, the Commission has made a
preliminary determination that in the context of SPP's activities with
respect to the Covered Transactions within the scope of this Proposed
Exemption, SPP's practices appear congruent with, and to accomplish
sufficiently, the regulatory objectives of each SEF Core Principle. The
Commission requests comment with respect to this preliminary
determination.
[[Page 29509]]
2. SEF Core Principle 2: Compliance With Rules
SEF Core Principle 2 requires a SEF to establish and enforce
compliance with any rule of the SEF.\295\ A SEF is also required to (1)
establish and enforce rules with respect to trading, trade processing,
and participation that will deter market abuses and (2) have the
capacity to detect, investigate and enforce those rules, including a
means to (i) provide market participants with impartial access to the
market, and (ii) capture information that may be used in establishing
whether rule violations have occurred.\296\
---------------------------------------------------------------------------
\295\ 7 U.S.C. 7b-3(f)(2).
\296\ SEF Core Principle 2 also requires a SEF to establish
rules governing the operation of the facility, including trading
procedures, and provide rules that, when a swap is subject to the
mandatory clearing requirement, hold swap dealers and major swap
participants responsible for compliance with the mandatory trading
requirement under section 2(h)(8) of the Act.
---------------------------------------------------------------------------
According to SPP, each of the Covered Transactions takes place on
markets that are monitored by both SPP and the SPP Market Monitor (its
independent market monitor responsible to FERC). In addition, SPP
states that an RTO must demonstrate to FERC that it performs certain
self-regulatory and/or market monitoring functions.\297\
---------------------------------------------------------------------------
\297\ According to SPP, it is required to satisfy four minimum
characteristics as a FERC-approved RTO: (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, as well
as other requirements FERC imposes on RTOs. Exemption Application at
18.
---------------------------------------------------------------------------
SPP asserts that FERC Order Nos. 719 and 2000 require RTOs to
employ a Market Monitor to monitor the conduct of both the RTO and its
market participants with regard to all RTO markets and services,
stating that the SPP Market Monitor is an independent department within
SPP that reports directly to the SPP Board of Directors, except that
the President of SPP (a member of the Board of Directors) is excluded
from participating in oversight of the Market Monitor. Moreover,
according to SPP, it is obligated to ensure that the Market Monitor is
appropriately staffed and provided with sufficient resources and access
to data to carry out its duties under the Tariff.\298\
---------------------------------------------------------------------------
\298\ Exemption Application Attachments at 73-74.
---------------------------------------------------------------------------
SPP represents that it has transparent rules for its market,
including rules to deter abuses, market monitoring and mitigation plans
aimed at discovering and addressing potential and actual abuses, and
has enforcement mechanisms that allow SPP and the SPP Market Monitor
to, among other things, monitor its markets, investigate suspected
Tariff violations, take actions against violators and refer potential
violations to FERC.\299\
---------------------------------------------------------------------------
\299\ See Exemption Application at 17; see also Exemption
Application Attachments at 72-76.
---------------------------------------------------------------------------
Based on the foregoing, it appears that SPP's practices are
consistent with, and sufficiently accomplish, the regulatory goals of
SEF Core Principle 2 in the context of SPP's activities with respect to
the Covered Transactions. The Commission requests comment with respect
to this preliminary determination.
3. SEF Core Principle 3: Swaps Not Readily Susceptible to Manipulation
SEF Core Principle 3 requires a SEF submitting a contract to the
Commission for certification or approval to demonstrate that the swap
is not readily susceptible to manipulation.\300\ SPP represents that it
has detailed rules in its Tariff and IM Protocols to deter, detect, and
prevent market manipulation in the SPP markets, and a staffed and
resourced Market Monitor to implement the rules.\301\ SPP also makes
specific representations regarding its cash-settled energy
transactions, transmission congestion rights and capacity and reserve
transactions to demonstrate that they are consistent with the
Commission's focus in the RTO-ISO Order.\302\ SPP also indicated that
the Covered Transactions for which SPP is seeking an exemption under
Section 4(c) of the CEA include the three categories of transactions
mentioned above, as well as any product or any modifications that are
offered in the future pursuant to the FERC-approved Tariff that do not
alter the characteristics of the transactions in a way that would cause
them to fall outside of the definitions in the RTO-ISO Order.\303\
---------------------------------------------------------------------------
\300\ 7 U.S.C. 7b-3(f)(3).
\301\ See Exemption Application Attachments at 77-79.
\302\ See Exemption Application Attachments at 79-81.
\303\ See Exemption Application at 11.
---------------------------------------------------------------------------
a. Cash-Settled Energy Transactions
SPP defines Energy Transactions as transactions in the SPP Day-
Ahead-Market or Real-Time Balancing Market for the purchase or sale of
a specified quantity of electric energy at a specified location
(including virtual bids and offers) where among other conditions, 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 SPP
for that period of time.\304\ SPP further indicates that the purpose of
the virtual transactions in the Day-Ahead-Market is to promote
convergence between the Day-Ahead-Market and Real-Time Balancing Market
prices, which reduces price volatility normally found in electric
markets.\305\
---------------------------------------------------------------------------
\304\ See Exemption Application at 13-14. SPP represents that
its definition is similar to the definition for energy transactions
used by the Commission in the RTO-ISO Order (see RTO-ISO Order at
19913, Order section VI.5.b(1), (2) and (3), which, according to
SPP, contain the same provisions as SPP's definition).
\305\ See Exemption Application Attachments at 79.
---------------------------------------------------------------------------
SPP indicates that its representations to the Commission are
similar to that of other RTOs and ISOs to which the RTO-ISO Order was
issued with respect to SEF Core Principle 3.\306\ The Commission
understands that the SPP Market Monitor operated by SPP has been
organized in such a way that both the Real-Time Balancing and Day-Ahead
markets are monitored to identify suspicious trading activity and that
the SPP Market Monitor notifies FERC of suspicious activity, including
transactions that involve repeated losses.\307\ Furthermore, SPP
represents that they are obligated to ensure that the SPP Market
Monitor is appropriately staffed and provided with sufficient resources
and access to data to carry out its duties under its Tariff.\308\
---------------------------------------------------------------------------
\306\ Exemption Application Attachments at 80.
\307\ Id.
\308\ Id. at 78, 83.
---------------------------------------------------------------------------
Based on SPP's representations regarding the surveillance carried
out by its SPP Market Monitor and the method by which the Day-Ahead and
Real-Time Balancing auctions are conducted, it appears that SPP's
policies and procedures to mitigate the susceptibility of Energy
Transactions to manipulation are congruent with, and sufficiently
accomplish, the regulatory objectives of SEF Core Principle 3 in the
context of SPP's activities with respect to the Energy Transactions.
The Commission seeks comment with respect to this preliminary
conclusion.
b. Transmission Congestion Rights
SPP represents that a Transmission Congestion Right (``TCR'') is a
transaction that entitles one party to receive, and obligates another
party to pay, an amount based solely on the difference the price of
electric energy, established on an electric energy market administered
by SPP, at a specified source and a specified sink.\309\ Based
[[Page 29510]]
upon SPP's representations, the Commission understands TCRs to be cash-
settled contracts that entitle the holder to a payment equal to the
difference in the price of electric energy between the specified source
and the specified sink. The difference in price between the two them
represents the settlement price. The price at each node (source or
sink) is established through auctions conducted on the Day-Ahead market
of SPP. The Commission notes that in the RTO-ISO Order, it made a
preliminary determination that the Real-Time Balancing and Day-Ahead
markets, which set energy transaction prices on SPP's platform, appears
to be consistent with SEF Core Principle 3. The Commission seeks
comment regarding whether this preliminary conclusion is correct.
---------------------------------------------------------------------------
\309\ As noted above, TCRs are SPP's equivalent transaction to
what was referred in the RTO-ISO Order as ``Financial Transmission
Rights'' or ``FTRs.'' See Exemption Application at 1 n. 3; see also,
Exemption Application at 12 n. 54 and accompanying text.
---------------------------------------------------------------------------
As previously discussed, SPP and the SPP Market Monitor conduct
market surveillance of both the Real-Time Balancing and Day-Ahead
markets to identify manipulation of the price of electric energy. In
the event unusual trading activity is detected by the SPP Market
Monitor, the SPP Market Monitor will immediately contact FERC's Office
of Enforcement, so that an investigation into the unusual activity may
begin.\310\ Although the price of TCRs may be altered by the
manipulation of the Real-Time Balancing or Day-Ahead markets, FERC
requires that the Applicant have systems to monitor for such activity.
---------------------------------------------------------------------------
\310\ See Exemption Application Attachments at 81.
---------------------------------------------------------------------------
The Commission believes that SPP's policies and procedures should
mitigate the susceptibility of TCRs to manipulation and that they are
congruent with, and sufficiently accomplish, the regulatory objectives
of SEF Core Principle 3 in the context of SPP's activities with respect
to TCRs. The Commission seeks comment with respect to this preliminary
conclusion.
c. Reserve Transactions Market
SPP has proposed a Reserve Transactions Market.\311\ Reserve
Transactions are entered into pursuant to auctions carried out by
SPP.\312\ However, unlike the auctions for the Real-Time Balancing and
Day-Ahead markets, the auctions for reserve transactions simply allow
SPP to accept bids submitted by market participants that have the
ability to inject electric energy into SPP's electric energy
transmission system.\313\
---------------------------------------------------------------------------
\311\ The Commission notes that while the RTO-ISO Order also
addressed Forward Capacity Transactions Market, SPP's Exemption
Application does not propose such transactions.
\312\ See Exemption Application at 14-15.
\313\ See id.
---------------------------------------------------------------------------
The Commission notes that SPP would apply the same oversight
policies and procedures to Reserve Transactions that it applies to
Energy Transactions and FTRs. The Commission believes that these
measures appear to be consistent with, and to accomplish sufficiently,
the regulatory objectives of SEF Core Principle 3 in the context of
SPP's activities with respect to Reserve Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
4. SEF Core Principle 4: Monitoring of Trading and Trade Processing
SEF Core Principle 4 requires a SEF to establish and enforce rules
or terms and conditions defining trading procedures to be used in
entering and executing orders traded on or through the SEF and
procedures for the processing of swaps on or through the SEF.\314\ SEFs
are also required to establish a system to monitor trading in swaps to
prevent manipulation, price distortion and disruptions of the delivery
or cash settlement process through surveillance, compliance and
disciplinary practices and procedures. The main goal of this Core
Principle is to monitor trading activity to detect or deter market
participants from manipulating the price or deliverable supply of a
commodity.
---------------------------------------------------------------------------
\314\ 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------
a. Energy Transactions
Generally, SPP's Tariff lists how Energy Transactions are to be
entered into the trading platform.\315\ Using these procedures, the SPP
Market Monitor is able to track the Energy Transactions submitted by
market participants and identify trading activity that could be
manipulative. As a result, SPP's policies and procedures regarding
monitoring of trading and trade processing appear to be consistent
with, and to accomplish sufficiently, the regulatory objectives of SEF
Core Principle 4 in the context of SPP's activities with respect to
Energy Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
---------------------------------------------------------------------------
\315\ See generally, Exemption Application Attachments at 82-86.
---------------------------------------------------------------------------
b. TCRs \316\
---------------------------------------------------------------------------
\316\ As noted above, the RTO-ISO Order used the term FTRs. See
Exemption Application at 12 n. 54 (noting that TCR is SPP's
equivalent of FTR in the RTO-ISO Order).
---------------------------------------------------------------------------
The process by which the TCR allocation and auction takes place
provides SPP with a basic system that allows SPP to determine which
market participants hold TCRs. According to SPP's Tariff, and similar
to other RTOs, SPP offers ARRs to eligible transmission customers to
address their exposure to transmission congestion costs, which is based
on their transmission service or network load, with SPP performing a
simultaneous feasibility analysis to ensure that ARR awards do not
exceed physical system capability. SPP then conducts auctions for TCRs,
and also oversees a secondary TCR market. SPP systems track ownership
of ARRs and TCRs, including transfers of TCR ownership in the secondary
market and SPP verification that secondary TCR owners qualify under
SPP's TCR creditworthiness requirements. SPP applies to this market the
market monitoring and mitigation plans that SPP has developed for all
markets and services under the SPP Tariff.\317\
---------------------------------------------------------------------------
\317\ See generally, Exemption Application Attachments at 82-86.
---------------------------------------------------------------------------
Based on the foregoing representations, it appears that SPP's
policies and procedures regarding the monitoring of trading and trade
processing are consistent with, and to accomplish sufficiently, the
regulatory objectives of SEF Core Principle 4 in the context of SPP's
activities with respect to TCRs. The Commission seeks comment with
respect to this preliminary conclusion.
c. Reserve Transactions
As discussed above, the auction process used for Reserve
Transactions differs from the process used in the Real-Time Balancing
and Day-Ahead markets.\318\ Furthermore, Reserve Transactions are not
used to limit exposure to price volatility, discover prices or engage
in arbitrage. The transactions are predominantly bilateral agreements
between SPP and certain of SPP's market participants for the provision
of electric energy in order to meet the technical requirements
necessary to operate the electric transmission system. The contracts
are not readily susceptible to manipulation and there is no market
trading that must be monitored to prevent manipulation or congestion of
the physical delivery market. As a result, SPP's policies and
procedures regarding the monitoring of trading and trade processing
appear to be consistent with, and to accomplish sufficiently, the
regulatory objectives of SEF Core Principle 4 in the context of SPP's
activities with respect to Capacity and Reserve Transactions. The
[[Page 29511]]
Commission seeks comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------
\318\ The Commission notes that SPP does not propose a Forward
Capacity Market.
---------------------------------------------------------------------------
5. SEF Core Principle 5: Ability To Obtain Information
SEF Core Principle 5 requires a SEF to establish and enforce rules
that will allow it to obtain any necessary information to perform the
functions described in section 733 of the Dodd-Frank Act, provide
information to the Commission upon request, and have the capacity to
carry-out such international information-sharing agreements as the
Commission may require.\319\ As discussed above,\320\ SPP represents
that it has rules in place that require market participants to submit
information to SPP upon request so that SPP may conduct investigations
and provide or give access to such information to the SPP Market
Monitor and FERC.\321\ On the basis of these representations, it
appears that SPP's practices are consistent with, and sufficiently
accomplish, the regulatory goals of SEF Core Principle 5. The
Commission seeks comment with respect to this preliminary
determination.
---------------------------------------------------------------------------
\319\ 7 U.S.C. 7b-3(f)(5).
\320\ See generally, discussions supra in sections V.D.10. and
V.D.13.
\321\ See generally, Exemption Application Attachments at 87-89.
---------------------------------------------------------------------------
6. SEF Core Principle 6: Position Limits or Accountability
SEF Core Principle 6 requires SEFs that are trading facilities, as
that term is defined in CEA section 1a(51), to establish position
limits or position accountability for speculators, as is necessary and
appropriate, for each swap traded on the SEF in order to reduce the
potential threat of market manipulation or congestion, especially
during trading in the delivery month.\322\ While the markets
administered by SPP are subject to the SPP Market Monitor (as discussed
above in section IV.C.), SPP does not have position limits or position
accountability thresholds for speculators in order to reduce the
potential threat of market manipulation or congestion.
---------------------------------------------------------------------------
\322\ 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.
---------------------------------------------------------------------------
The Commission notes that in the RTO-ISO Order, it did not impose
position limits on the transactions covered by the Order. Instead,
without making any determinations regarding the merits of the concerns
regarding position limits raised in comments responding to that
proposal, the Commission stated that it accepted 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.\323\ Furthermore, the Commission
stated that as the RTO-ISO Order limited each transaction category it
covered to the physical capability of the transmission grid, the
Commission stated its belief that imposing position limits on the
transactions covered by that Order was not necessary at that time in
order to make the requisite public interest and purposes of the CEA
determinations.\324\
---------------------------------------------------------------------------
\323\ RTO-ISO Order at 19902.
\324\ Id.
---------------------------------------------------------------------------
According to SPP's Exemption Application, each category of
transactions for which SPP is requesting relief would be limited by the
physical capability of the transmission grid and that the physical
capability of its transmission grid limits the size of positions that
any single market participant can take at a given time.\325\ On the
basis of SPP's representations, and consistent with the RTO-ISO Order,
the Commission is preliminarily determining that it is not necessary,
when considering the requisite public interest and purposes of the CEA
determinations, to impose position limits on SPP's Integrated
Marketplace. The Commission seeks comment with respect to this
preliminary determination.
---------------------------------------------------------------------------
\325\ See Exemption Application at 12-15, 17; Exemption
Application Attachments at 90-93.
---------------------------------------------------------------------------
7. SEF Core Principle 7: Financial Integrity of Transactions
SEF Core Principle 7 requires a SEF to establish and enforce rules
and procedures for ensuring the financial integrity of swaps entered on
or through the facilities of the SEF, including the clearance and
settlement of swaps pursuant to section 2(h)(1) of the CEA.
a. Risk Management Requirements and Credit Policies
SPP represents that its risk management provisions provide it with
appropriate tools and procedures to manage risk associated with
operating its wholesale and related markets.\326\ According to SPP, the
credit policy contained in its Tariff includes, in compliance with
FERC's Order No. 741, minimum capitalization requirements and an
attestation of a market participant's risk management
capabilities.\327\ The attestation requires that the market participant
describe its risk management capabilities and procedures and whether it
is engaged in hedging, describe the employees who perform the risk
management procedures, define the special training, skills, experience,
and industry tenure of those employees, and provide any additional
information in determining the risk management capabilities of the
market participant. Market participants also are required to notify SPP
of material adverse changes in their financial conditions.\328\
---------------------------------------------------------------------------
\326\ See Exemption Application at 17-20; Exemption Application
Attachments at 94-100.
\327\ See Exemption Application Attachments at 94.
\328\ Id.
---------------------------------------------------------------------------
SPP represents that its credit policy provides the process by which
SPP will periodically review and verify a market participant's risk
management policies, practices, and procedures pertaining to its
activities in SPP, as well as procedures for SPP to complete credit
assessments. Successful completion of SPP's verification is required
for a selected market participant's continued eligibility to
participate in the SPP markets.\329\
---------------------------------------------------------------------------
\329\ See Exemption Application Attachments at 95.
---------------------------------------------------------------------------
b. Minimum Financial Standards and Ongoing Monitoring for Compliance
In addition, based on SPP's representations, it appears that SPP's
policies and procedures include minimum financial standards and
creditworthiness standards for their market participants.\330\
Moreover, SPP represents that its policies and procedures, require SPP
to monitor, on an ongoing basis, their market participants for
compliance with such standards.\331\
---------------------------------------------------------------------------
\330\ See, e.g., Exemption Application Attachments at 10-14, 96-
100. SPP requires market participants to demonstrate and maintain
the certain minimum financial requirements. The Commission notes
that SPP has represented that it has market participants that may
not meet the definition of eligible contract participant as defined
by the CEA, but are ``appropriate persons'' for purposes of the 4(c)
exemption. See Exemption Application Attachments at 11-12, 16-17,
60, 95. The Commission proposes to condition the granting of the
4(c) request on all parties to the agreement, contract or
transaction being (1) ``appropriate persons,'' as defined sections
4(c)(3)(A) through (J) of the Act; (2) ``eligible contract
participants'' as defined in section 1a(18)(A) of the Act 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(h) of the Proposed
Exemption. See provision 2.b. of the Proposed Exemption.
\331\ See, e.g., Exemption Application Attachments at 12-14, 16-
20, 24-25, 96-97, 99-100. For example, according to SPP, it
completes credit assessments annually and has access to and reviews
multiple rating agency and industry advisories on market participant
activities. Id. at 95.
---------------------------------------------------------------------------
c. Establishment of a Central Counterparty
As discussed in section V.C. above, FERC regulation 35.47(d)
requires RTOs
[[Page 29512]]
and ISOs to (1) establish a single counterparty to all market
participant transactions, (2) require each market participant to grant
a security interest in the receivables of its transactions to the
relevant RTO or ISO, or (3) provide another method of supporting
netting that provides a similar level of protection to the market that
is approved by FERC.\332\
---------------------------------------------------------------------------
\332\ 18 CFR 35.47(d).
---------------------------------------------------------------------------
According to SPP, in compliance with FERC Order No. 741's
requirement to establish the ability to net and offset market
obligations in bankruptcy, SPP is the counterparty to certain market
transactions that are pooled within the Integrated Marketplace.\333\
SPP also is the counterparty with each market participant for that
market participant's Integrated Marketplace agreements and transactions
in the TCR Market, Day-Ahead Market, and Real-Time Balancing Market,
with specified exclusions regarding bilateral transactions between
market participants, and self-committed, self-scheduled, and self-
supplied arrangements.\334\ SPP also is the counterparty to TCR and ARR
instruments held by market participants.
---------------------------------------------------------------------------
\333\ SPP represents that it has become a central counterparty
and that its Tariff indicates that SPP will be the counterparty to
certain market transactions that are pooled in SPP's market. See
Exemption Application Attachments at 95 n. 450; see generally,
Exemption Application at 19-21, Exemption Application Attachments at
94-100, and FERC Order 741 Implementation Chart at 4.
\334\ See Exemption Application Attachments at 96 n. 453 and
accompanying text. SPP represents that it is not the counterparty to
agreements and transactions for transmission service and certain
ancillary services, which are not agreements and transactions in the
Integrated Marketplace. Id.
---------------------------------------------------------------------------
As noted in section V.D.4.g. above, SPP submitted a legal
memorandum from outside counsel that states that SPP's counterparty
arrangements will provide SPP with enforceable rights of set-off in the
event of the market participant's bankruptcy.
d. Conclusion
Issues regarding risk management requirements, financial standards,
and the use of a central counterparty are also addressed within the
context of DCO Core Principle D. The Commission's preliminary
conclusion that SPP's policies and procedures are congruent with, and
sufficiently accomplish, the regulatory objectives of Core Principle D
in the context of SPP's activities with respect to the Covered
Transactions is relevant in considering SEF Core Principle 7.
Based on the foregoing analysis, including the representations and
submissions of SPP, SPP's policies and procedures appear to be
consistent with, and to accomplish sufficiently, the regulatory
objectives of SEF Core Principle 7 in the context of SPP's activities
with respect to the Covered Transactions. The Commission seeks comment
with respect to this preliminary conclusion.
8. SEF Core Principle 8: Emergency Authority
SEF Core Principle 8 requires that SEFs adopt rules to provide for
the exercise of emergency authority.\335\ The SEF should have
procedures and guidelines for decision-making and implementation of
emergency intervention in the market. The SEF should have the authority
to perform various actions, including without limitation: Liquidating
or transferring open positions in the market, suspending or curtailing
trading in any swap, and taking such market actions as the Commission
may direct. In addition, SEFs must provide prompt notification and
explanation to the Commission of the exercise of emergency
authority.\336\
---------------------------------------------------------------------------
\335\ 7 U.S.C. 7b-3(f)(8).
\336\ Final Rulemaking--Core Principles and Other Requirements
for Swap Execution Facilities, 78 FR 33476, 33536, June 4, 2013.
---------------------------------------------------------------------------
SPP represents that its Tariff generally provides a wide range of
authorities to address emergency situations, and that its emergency
authority provisions are similar to those of the RTOs/ISOs covered by
the RTO-ISO Order.\337\ According to SPP, its Tariff and applicable law
includes provisions to address a market participant's default on its
obligations, including the ability, in the event of default, to suspend
any unsecured credit allowances, terminate the market participant's
rights under the SPP credit policy, terminate service, liquidate a
market participant's TCR positions in the Integrated Marketplace, as
well as the authority to suspend or curtail trading in its
markets.\338\
---------------------------------------------------------------------------
\337\ See Exemption Application Attachments at 101-103.
\338\ Id. SPP notes that its Tariff also provides for SPP's
response to transmission system emergency conditions related to the
physical operation of the system. See also system safeguards
discussion infra section V.E.14. In addition, SPP notes that it is
revenue neutral with respect to all market transactions and services
that SPP provides, and that shortfalls resulting from a failure of
one or more market participants to pay market service invoices are
socialized among the market participants receiving revenues for the
market services associated with the unpaid obligations. For
discussion of financial integrity of transactions, see section V.E.7
for SEF Core Principle 7, Financial Integrity of Transactions
discussion.
---------------------------------------------------------------------------
Just as the SEF's have rules in place that require them to take
emergency actions to protect the markets by ``including imposing or
modifying position limits, imposing or modifying price limits, imposing
or modifying intraday market restrictions, imposing special margin
requirements, ordering the liquidation or transfer of open positions in
any contract, ordering the fixing of a settlement price,'' SPP
represents that it may take actions to protect its markets. SPP states
that if the SPP Market Monitor discovers any weaknesses or failures in
market design that requires immediate corrective action, the SPP Market
Monitor may request that the president of SPP authorize an immediate
FERC filing to implement a corrective action while the appropriate SPP
organizational group considers a solution, and that SPP has additional
Tariff provisions to govern the calculation of market prices in the
event of a failure of either the Day-Ahead Market or Real-Time
Balancing Market systems, as well as calculation of prices in the event
that a portion of the SPP system becomes isolated from the remainder of
the market.\339\
---------------------------------------------------------------------------
\339\ Exemption Application Attachments at 103.
---------------------------------------------------------------------------
Based on the foregoing representations, it appears that SPP's
policies and procedures regarding the exercise of emergency authority
are congruent with, and sufficiently accomplish, the regulatory
objectives of SEF Core Principle 8 in the context of SPP's activities
with respect to the Covered Transactions. The Commission seeks comment
with respect to this preliminary conclusion.
9. SEF Core Principle 9: Timely Publication of Trading Information
SEF Core Principle 9 requires a SEF to make public timely
information on price, trading volume, and other data on swaps to the
extent prescribed by the Commission.\340\ In addition, SEFs are
required to have the capacity to electronically capture and transmit
trade information with respect to transactions executed on the
SEF.\341\
---------------------------------------------------------------------------
\340\ 7 U.S.C. 7b-3f(9)(A).
\341\ 7 U.S.C. 7b-3f(9)(B).
---------------------------------------------------------------------------
SPP represents that its Tariff requires the timely publication of
trading information, and SPP is subject to FERC's Open Access Same-Time
Information System (``OASIS'') regulations and publishes market
operation and grid management data on the SPP OASIS.\342\ SPP also
asserts that it is able to publicly release market operations and grid
management information using their OASIS program.\343\ This system
transmits information which includes market
[[Page 29513]]
results, the market clearing price and volume.\344\
---------------------------------------------------------------------------
\342\ See Exemption Application Attachments at 104-106. See,
e.g., id. at 104, n. 492; see also id. at 106.
\343\ See id. at 104.
\344\ See id.; see also October 2014 Supplemental Letter at 3.
---------------------------------------------------------------------------
Based on the foregoing representations, it appears that SPP's
policies and procedures regarding the publication of trading
information are congruent with, and sufficiently accomplish, the
regulatory objectives of SEF Core Principle 9 in the context of SPP's
activities with respect to the Covered Transactions. The Commission
seeks comment with respect to this preliminary conclusion.
10. SEF Core Principle 10: Recordkeeping and Reporting
SEF Core Principle 10 requires a SEF to maintain records of all
activity relating to the business of the SEF, report such information
to the Commission and to keep swaps information open to inspection by
the Commission.\345\ SPP represents that it has adopted data retention
and disclosure policies and is required to comply with FERC regulations
regarding data retention and disclosure.\346\ In addition, SPP
represents that its Tariff requires its market participants to provide
the SPP Market Monitor with certain information on a regular and ad hoc
basis for use in its market monitoring activities.\347\ SPP further
represents that it is required to comply with FERC regulations
regarding the maintenance of information by public utilities.\348\
---------------------------------------------------------------------------
\345\ 7 U.S.C. 7b-3(f)(10).
\346\ See generally, Exemption Application Attachments at 107-
111; see also, October 2014 Supplemental Letter at 3.
\347\ See generally, Exemption Application Attachments at 107 n.
503 and accompanying text; see also id. at 111.
\348\ See, e.g., id. at 111.
---------------------------------------------------------------------------
Based on SPP's representations and the discussion regarding DCO
Core Principles J and K above,\349\ it appears that these practices are
congruent with, and sufficiently accomplish the regulatory objectives
of SEF Core Principle 10 in the context of SPP's activities with
respect to the Covered Transactions. The Commission seeks comment with
respect to this preliminary conclusion.
---------------------------------------------------------------------------
\349\ See discussions supra sections V.D.10. and V.D.11.
---------------------------------------------------------------------------
11. SEF Core Principle 11: Antitrust Considerations
SEF Core Principle 11 prevents a SEF from adopting any rule or
taking any action that results in any unreasonable restraint of trade,
or imposes any material anticompetitive burden, unless necessary or
appropriate to achieve the purposes of the Act.\350\ As discussed
above, FERC established the RTO/ISO system to promote competition in
the electric energy market.\351\ SPP represents that its rates and
actions are subject to the oversight of FERC.\352\ SPP further
represents that FERC and the SPP Market Monitor review trading activity
to identify anticompetitive behavior and market design flaws.\353\
---------------------------------------------------------------------------
\350\ 7 U.S.C. 7b-3(f)(11).
\351\ See generally, discussion in section III.B, including
consideration of FERC Orders 888 and 2000; see also Exemption
Application Attachments at 112; see also discussion supra section
V.D.14.
\352\ See generally, Exemption Application Attachments at 112.
\353\ Id.
---------------------------------------------------------------------------
Based on SPP's representations and the discussion of DCO Core
Principle N above,\354\ it appears that SPP's existence and practices
are congruent with, and sufficiently accomplish, the regulatory
objectives of SEF Core Principle 11 in the context of SPP's activities
with respect to the Covered Transactions. The Commission seeks comment
on this preliminary conclusion.
---------------------------------------------------------------------------
\354\ See also, discussion supra section V.D.14.
---------------------------------------------------------------------------
12. SEF Core Principle 12: Conflicts of Interest
Core Principle 12 requires a SEF to establish and enforce rules to
minimize conflicts of interest and establish a process for resolving
conflicts of interest.\355\ FERC Order 888 requires ISOs to adopt or
enforce strict conflict of interest policies.\356\ Similarly, FERC
Order 2000 requires RTOs to be independent of any market participant,
and to include in their demonstration of independence that the RTO, its
employees, and any non-stakeholder directors do not have financial
interests in any market participant.\357\
---------------------------------------------------------------------------
\355\ 7 U.S.C. 7b-3(f)(12).
\356\ See FERC Order 888 at 281.
\357\ See FERC Order 2000 at 709; 18 CFR 35.34(j)(1).
---------------------------------------------------------------------------
SPP represents that it meets the requirements of FERC's Order No.
2000. Moreover, it represents that it has developed extensive standards
of conduct and conflict of interest provisions for members of the Board
of Directors and employees (including officers).\358\ SPP's Standards
of Conduct for board members and employees require such individuals to,
among other things, avoid activities that are contrary to the interests
of SPP.\359\ In addition to the Standards of Conduct, SPP asserts that
the SPP Market Monitor and all of its employees must comply with
additional independence and ethics standards set forth in the SPP
Tariff, including prohibiting: (a) Material affiliation with any market
participant or any affiliate of a market participant; (b) serving as an
officer, employee, or partner of a market participant; (c) material
financial interest in any market participant or any affiliate of a
market participant (allowing for such potential exceptions as mutual
funds and non-directed investments); (d) engaging in any market
transactions other than the performance of their duties under the
Tariff; (e) receiving compensation, other than by SPP, for any expert
witness testimony or other commercial services to SPP or to any other
party in connection with any legal or regulatory proceeding or
commercial transaction relating to SPP; and (f) acceptance of anything
of value from a market participant in excess of a de minimis
amount.\360\
---------------------------------------------------------------------------
\358\ See Exemption Application Attachments at 113-115, and
October 2014 Supplemental Letter at 4-5 (see, e.g., SPP
representation that ``[m]embers of the SPP Board of Directors are
subject to Conflict of Interest and Independence standards set forth
in the SPP Bylaws,'' and that ``SPP Officers are required to execute
the Standards of Conduct upon employment. SPP staff members are
required to execute the Standards of Conduct upon employment and
annually thereafter.'' In addition, SPP represents ``SPP's
discussion of DCO Core Principles O and P also supports SPP's
discussion of SEF Core Principle 12.'' October 2014 Supplemental
Letter at 4-5. See also discussion supra section V.D.16, DCO Core
Principle P.
\359\ Exemption Application Attachments at 113-115; October 2014
Supplemental Letter at 4-5.
\360\ Id.
---------------------------------------------------------------------------
Based on SPP's representations and the discussion of DCO Core
Principle P above,\361\ it appears that SPP's conflict of interest
policies and the requirements SPP is subject to are congruent with, and
sufficiently accomplish, the regulatory objectives of SEF Core
Principle 12 in the context of SPP's activities with respect to the
Covered Transactions. The Commission seeks comment with respect to this
preliminary conclusion.
---------------------------------------------------------------------------
\361\ Id. See also DCO Core Principle P discussion supra section
V.D.16.
---------------------------------------------------------------------------
13. SEF Core Principle 13: Financial Resources
SEF Core Principle 13 requires a SEF to have adequate financial,
operational and managerial resources to discharge each responsibility
of the SEF.\362\ In addition, the financial resources of a SEF are
considered to be adequate if the value of the financial resources
exceeds the total amount that would enable the SEF to cover the
operating costs of the SEF for a 1-year period, as calculated on a
rolling basis.\363\
---------------------------------------------------------------------------
\362\ 7 U.S.C. 7b-3(f)(13)(A).
\363\ 7 U.S.C. 7b-3(f)(13)(B).
---------------------------------------------------------------------------
SPP represents that it has adopted provisions to ensure adequate
financial, operational and managerial resources to
[[Page 29514]]
discharge its responsibilities.\364\ For example, SPP states that it is
revenue neutral with respect to all market transactions and services
that it provides, that it has rules in place that allow it to collect
revenue from market participants sufficient for each of their
operations, that it imposes strict creditworthiness and collateral
requirements on market participants to reduce the possibility of a
market participant's default and mitigate the impact of such a default
on SPP's ability to meet its obligations to other market participants,
and has authority to terminate a market participant's ability to
transact in the market in situations of default or bankruptcy.\365\ SPP
further represents to it has sufficient operational resources to
fulfill its obligations, and has adequate managerial resources to
operate its systems.\366\ In addition, SPP states that FERC Orders 888
and 2000 provides RTOs with incentives and imposes requirements to
promote effective management of RTOs.\367\ SPP represents that it has
sufficient staff necessary for its operations, and has sufficient human
resources to fulfill its obligations to its members, market
participants, and customers.\368\
---------------------------------------------------------------------------
\364\ See Exemption Application Attachments at 116.
\365\ Id. at 116-120.
\366\ Id. at 118-119.
\367\ Id. at 119.
\368\ Id. at 118-120; see also DCO Core Principle B analysis
supra.
---------------------------------------------------------------------------
Based on SPP's representations and the discussion regarding DCO
Core Principle B above,\369\ it appears that SPP's practices are
congruent with, and sufficiently accomplish, the regulatory objectives
of SEF Core Principle 13 in the context of SPP's activities with
respect to the Covered Transactions. The Commission seeks comment with
respect to this preliminary conclusion.
---------------------------------------------------------------------------
\369\ Id. at 116-120; see also DCO Core Principle B discussion
supra section V.D.2.
---------------------------------------------------------------------------
14. SEF Core Principle 14: System Safeguards
SEF Core Principle 14 requires a SEF to establish and maintain a
program of risk analysis and oversight to identify and minimize sources
of operational risk, through the development of appropriate controls
and procedures, and automated systems, that are reliable and secure,
and have adequate scalable capacity.\370\ Moreover, a SEF must
establish and maintain emergency procedures, backup facilities, and a
plan for disaster recovery that allows for the timely recovery and
resumption of operations, and the fulfillment of the responsibilities
and obligations of the SEF.\371\ The SEF must also conduct tests to
verify that the backup resources of the SEF are sufficient to ensure
continued order processing and trade matching, price reporting, market
surveillance, and maintenance of a comprehensive and accurate audit
trail.\372\
---------------------------------------------------------------------------
\370\ 7 U.S.C. 7b-3(f)(14)(A).
\371\ 7 U.S.C. 7b-3(f)(14)(B).
\372\ 7 U.S.C. 7b-3(f)(14)(C).
---------------------------------------------------------------------------
SPP represents that it has developed and adopted system safeguard
controls and procedures to identify and minimize operational risk,
including back-up facilities, emergencies and disaster.\373\ Indeed,
SPP states that as a North American Electric Reliability Corporation
registered entity, it is required to comply with mandatory electric
reliability standards that include (among other things) protecting
against risk to control centers, information systems and
communications, thus, requires additional operational safeguards to
specifically address that function.\374\
---------------------------------------------------------------------------
\373\ See generally, Exemption Application Attachments at 41-43,
121-123.
\374\ See Exemption Application Attachments at 121-123; see
also, supra notes 239-245 and accompanying text.
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For example, SPP represents that in order to comply with these
requirements, it has computer systems that incorporate adequate
business continuity and disaster recovery functionality.\375\ SPP has
installed and maintains redundant communications and computer systems,
has redundant primary and back-up control centers in separate secured
locations, and has implemented on- and off-site data storage and back-
up.\376\ Furthermore, SPP states that it has emergency preparedness,
business continuity and disaster recovery plans that are regularly
reviewed and updated, and it conducts periodic emergency drills and
mock disaster scenarios to ensure the readiness of backup facilities
and personnel.\377\ Multiple SPP business units, including SPP's
Internal Audit Department, work to review, test, and update SPP's
business continuity plans. In addition, SPP has a business continuity
plan to provide for the calculation of market prices in the event of
Day-Ahead Market or Real-Time Balancing Market system failures or
isolation of portions of the SPP market from the rest of the market
footprint. Separately, if the SPP Market Monitor discovers any weakness
or failures in market design that requires immediate corrective action,
the Market Monitor may request authorization for an immediate FERC
filing to implement a corrective action while a solution is being
considered.\378\
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\375\ See Exemption Application Attachments at 41-43, 121-123.
\376\ See id.
\377\ See id. at 42, 122.
\378\ See id. at 122-123.
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Based on SPP's representations as well as the discussion regarding
DCO Core Principle I above,\379\ it appears that SPP's practices are
congruent with, and sufficiently accomplish, the regulatory objectives
of SEF Core Principle 14 in the context of SPP's activities with
respect to the Covered Transactions. The Commission seeks comment with
respect to this preliminary conclusion.
---------------------------------------------------------------------------
\379\ See id. at 121-123; see also discussion supra section
V.D.9.
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15. SEF Core Principle 15: Designation of Chief Compliance Officer
SEF Core Principle 15 requires that a SEF designate an individual
as Chief Compliance Officer, with specific delineated duties.\380\ The
Chief Compliance Officer for a SEF would be responsible for reporting
to the board and ensuring that the SEF is in compliance with the SEF
rules.
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\380\ See 7 U.S. C. 7b-3(f)(15). This provision requires that
the chief compliance officer (i) report directly to the board or to
the senior officer of the facility; (ii) review compliance with the
core principles in this subsection; (iii) in consultation with the
board of the facility, a body performing a function similar to that
of a board, or the senior officer of the facility, resolve any
conflicts of interest that may arise; (iv) be responsible for
establishing and administering the policies and procedures required
to be established pursuant to this section; (v) ensure compliance
with this Act and the rules and regulations issued under this Act,
including rules prescribed by the Commission pursuant to this
section; and (vi) establish procedures for the remediation of
noncompliance issues found during compliance office reviews, look
backs, internal or external audit findings, self-reported errors, or
through validated complaints.
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SPP represents that it has a Chief Compliance Officer, who is
responsible for overseeing compliance, internal audit and market
monitoring.\381\ In addition, SPP's Board of Director's Oversight
Committee is responsible for overseeing the process of monitoring
compliance with SPP and NERC policies, including market monitoring and
internal compliance with NERC Operating Standards, while its Finance
Committee oversees SPP's compliance with financially-based legal and
regulatory requirements.\382\
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\381\ See Exemption Application Attachments at 124-125. SPP also
has a compliance department.
\382\ See id.
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Based on SPP's representations, it appears that SPP's practices are
congruent with, and sufficiently accomplish, the regulatory objectives
of SEF Core Principle 15 in the context of SPP's activities with
respect to the Covered Transactions. The Commission
[[Page 29515]]
seeks comment with respect to this preliminary conclusion.
VI. Proposed Exemption
A. Discussion of Proposed Exemption
Pursuant to the authority provided by section 4(c)(6) of the
CEA,\383\ in accordance with CEA sections 4(c)(1) and (2), and
consistent with the Commission's determination that the statutory
requirements for granting an exemption pursuant to section 4(c)(6) of
the Act have been satisfied, the Commission is proposing to issue the
exemption described in the Proposed Exemption set forth below. The
Proposed Exemption would exempt, subject to the limitations and
conditions contained therein, contracts, agreements and transactions
for the purchase and sale of certain electric energy-related products,
including specifically-defined ``transmission congestion rights,''
``energy transactions,'' and ``operating reserve transactions,'' from
most provisions of the CEA. The Commission is proposing to explicitly
exclude from the exemption relief 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.\384\
The preservation of the Commission's anti-fraud and anti-manipulation
authority provided by these provisions generally is consistent with
both the scope of the exemption requested in the Exemption Application
\385\ and recent Commission practice.\386\
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\383\ 7 U.S.C. 6(c).
\384\ 17 CFR 23.410(a)-(b), 32.4, and part 180.
\385\ See Exemption Application at 1. SPP requested relief from
``all provisions of the CEA and Commission rules thereunder, except
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)-(b), 32.4 and part 180.'' The
Proposed Exemption simply would preserve the Commission's authority
under the delineated provisions and their implementing regulations
without caveat, in order to avoid ambiguity as to what conduct
remains prohibited.
\386\ See, e.g., Order (1) Pursuant to Section 4(c) of the
Commodity Exchange Act, Permitting the Kansas City Board of Trade
Clearing Corporation To Clear Over-the-Counter Wheat Calendar Swaps,
(2) Pursuant to Section 4d of the Commodity Exchange Act, Permitting
Customer Positions in Such Cleared-Only Swaps and Associated Funds
To Be Commingled With Other Positions and Funds Held in Customer
Segregated Accounts, 75 FR 34983, 34985 (2010), and (3) RTO-ISO
Order at 19880.
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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 Exemption
Application.\387\ SPP requested relief for three specific types of
transactions and the Proposed Exemption would exempt those
transactions. With respect to those transactions, the Exemption
Application also included the parenthetical ``(including convergence or
virtual bids and offers).'' \388\ The Commission notes that such
transactions would be included within the scope of the exemption if
they would qualify as the transmission congestion rights, energy
transactions, or operating reserve transactions for which relief is
explicitly provided within the exemption. SPP also has requested relief
for ``the purchase and sale of a product or service that is directly
related to, and a logical outgrowth of, any of SPP's core functions as
an RTO and all services related thereto.'' \389\ The Commission has
determined that it would be inappropriate, and, accordingly, has
declined to propose that the exemption be extended beyond the scope of
the transactions that are specifically defined in the Proposed
Exemption. As noted above, the authority to issue an exemption from the
CEA provided by section 4(c) of the Act may not be automatically or
mechanically exercised. Rather, the Commission is required to
affirmatively determine, inter alia, that the exemption would be
consistent with the public interest and the purposes of the Act.\390\
With respect to the three groups of transactions explicitly detailed in
the Proposed Exemption, the Commission's proposed finding that the
Proposed Exemption would be in the public interest and would be
consistent with the purposes of the CEA was grounded, in part, on
certain transaction characteristics and market circumstances described
in the Exemption Application that may or may not be shared by other, as
yet undefined, transactions engaged in by SPP or other RTO market
participants.\391\ Similarly, unidentified transactions might include
novel features or have market implications or risks that are not
present in the specified transactions. Such elements may impact the
Commission's required section CEA 4(c) public interest analysis or may
warrant the attachment of additional or differing terms and conditions
to any relief provided. Due to the potential for adverse consequences
resulting from an exemption that includes transactions whose qualities
and effect on the broader market cannot be fully appreciated absent
further specification, it does not appear that the Commission can
justify a conclusion that it would be in the public interest to provide
an exemption of the full breadth requested. The Commission notes,
however, that it has requested comment on whether the proposed scope of
the exemption is sufficient to allow for innovation and, if not, how
the scope could be expanded, without exempting products that may be
substantially different from those reviewed by the Commission. The
Commission also notes that it stands ready to review promptly any
additional applications for an exemption pursuant to section 4(c)(6),
in accordance with CEA sections 4(c)(1) and (2), of the CEA for other
precisely defined products.
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\387\ Exemption Application at 11-15.
\388\ Id. at 12.
\389\ Id. at 15.
\390\ 7 U.S.C. 6(c).
\391\ For example, the transactions that are included within the
scope of the Proposed Exemption appear to be limited to those tied
to the physical capacity of SPP's electric energy grid. Exemption
Application at 11-15.
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The scope of the Proposed Exemption is limited by two additional
factors. First, it is restricted to agreements, contracts or
transactions where all parties thereto are either: (1) Entities
described in section 4(c)(3)(A) through (J) of the CEA; \392\ (2)
``eligible contract participants,'' as defined in section 1a(18) of the
Act \393\ or in Commission regulation 1.3(m); \394\ or (3) a person who
actively participates in the generation, transmission, or distribution
of electric energy.\395\ Although SPP has requested an exemption
pursuant to section 4(c)(6) of the CEA, any exemption pursuant to this
subsection must be issued ``in accordance with'' sections 4(c)(1) and
4(c)(2).\396\ Section 4(c)(2) prohibits the Commission from issuing an
exemption pursuant to section 4(c) unless the Commission determines
that the agreement, contract or transaction ``will be entered into
solely between `appropriate persons.' '' Appropriate persons include
those entities explicitly delineated in sections 4(c)(3)(A) through (J)
of the Act as well as others that the Commission, under the
discretionary authority provided by
[[Page 29516]]
section 4(c)(3)(K), deems to be appropriate persons ``in light of their
financial or other qualifications, or the applicability of appropriate
regulatory protections.''\397\ As noted above, the Commission has
proposed to determine that eligible contract participants, as defined
in section 1a(18) of the Act or in Commission regulation 1.3(m), and
persons that ``active[ly] participat[e] in the generation, transmission
or distribution of electric energy'' \398\ should be considered
appropriate persons for purposes of the Proposed Exemption.\399\
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\392\ 7 U.S.C. 6(c)(3)(A)-(J).
\393\ 7 U.S.C. 1a(18).
\394\ 17 CFR 1.3(m).
\395\ Consistent with the RTO-ISO Order, the term ``a person who
actively participates in the generation, transmission, or
distribution of electric energy'' is defined 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. RTO-ISO Order at 19897.
\396\ 7 U.S.C. 6(c).
\397\ 7 U.S.C. 6(c)(3).
\398\ See supra note 395.
\399\ See discussion supra section V.B.3.
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Second, in order to be eligible for the exemption that would be
provided by the Proposed Exemption, the agreement, contract or
transaction also must be offered or sold pursuant to SPP's ``Tariff''
and the tariff must have been approved by FERC. This requirement
reflects the range of the Commission's authority as set forth in
section 4(c)(6) \400\ of the CEA and is consistent with the scope of
the relief requested.\401\
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\400\ See discussion supra section V.A.
\401\ Exemption Application at 1.
---------------------------------------------------------------------------
Consistent with the range of the statutory authority explicitly
provided by CEA section 4(c), the Proposed Exemption would extend the
exemption to the agreements, contracts or transactions set forth
therein and ``any person or class of persons offering, entering into,
rendering advice, or rendering other services with respect to'' such
transactions. In addition, for as long as the Proposed Exemption would
remain in effect, SPP would be able to avail itself of the Proposed
Exemption with respect to all three expressly-identified groups of
products, regardless of whether or not SPP offers the particular
product at the present time. That is, SPP would not be required to
request future supplemental relief for a product that it does not
currently offer, but that qualifies as one of the three types of
transactions in the Proposed Exemption. SPP's Exemption Application
requested an exemption of the scope provided and the Exemption
Application was analyzed accordingly.\402\
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\402\ SPP requests that ``the exemptive Order it seeks apply to
each relevant class of contracts, agreements or transactions offered
or entered into under SPP's FERC-approved Tariff that will be in
effect . . . as well as any product or any modifications that are
offered in the future pursuant to the FERC-approved Tariff that do
not alter the characteristics of the Transactions in a way that
would cause them to fall outside of the definitions.'' Exemption
Application at 11.
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The Proposed Exemption indicates that, when a final order is
issued, it would be made effective upon publication. The Proposed
Exemption also contains two information-sharing conditions. First, the
Proposed Exemption is expressly conditioned upon the continuation of
information sharing arrangements between the Commission and FERC. The
Commission notes that the CFTC and FERC have executed several MOUs
since 2005, pursuant to which the agencies have shared information
successfully. Most recently, the Commission and FERC signed an MOU on
January 2, 2014 which provides for the sharing of information for use
in analyzing market activities and protecting market integrity.\403\
The terms of this MOU provide that FERC will furnish information in its
possession to the CFTC upon its request and will notify the CFTC if any
information requested by it is not in FERC's possession. Moreover, the
Proposed Exemption requires SPP to comply 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 SPP's possession for products
in its markets that are related to markets that are subject to the
Commission's jurisdiction, including any pertinent information
concerning such data.\404\ Second, the Proposed Exemption includes an
information-sharing condition that requires that neither SPP's Tariff
nor any other SPP governing documents shall include any requirement
that SPP notify its members prior to providing information to the
Commission in response to a subpoena or other request for information
or documentation.\405\ The Commission specifically requests comment on
this condition and as to whether there may be an alternative condition
that the Commission might use to achieve the same result.
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\403\ MOU, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcfercismou2014.pdf.
\404\ SPP further represents that it will comply with the
Commission's requests for related transactional and positional
market data. See Exemption Application at 22.
\405\ SPP represents that its Tariff permits the sharing of
information with the Commission without prior notice to market
participants. See Exemption Application at 22; Exemption Application
Attachments at 52, 54.
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Finally, the Proposed Exemption expressly notes that it is based
upon the representations made in the Exemption Application, including
those representations with respect to compliance with FERC regulation
35.47. It is also based on supporting materials provided to the
Commission by SPP and its counsel, including a legal memorandum that,
in the Commission's sole discretion, provides the Commission with
assurance that the netting arrangements contained in the approach
selected by SPP to satisfy the obligations contained in FERC regulation
35.47(d) will, in fact, provide SPP with enforceable rights of setoff
against any of its market participants under title 11 of the United
States Code in the event of the bankruptcy of the market participant.
Any material change or omission in the facts and circumstances pursuant
to which the Proposed Exemption is granted might require the Commission
to reconsider its finding that the exemption contained therein is
appropriate and/or in the public interest. The Commission has also
explicitly reserved the discretionary authority to suspend, terminate
or otherwise modify or restrict the exemption provided. The reservation
of these rights is consistent with prior Commission practice and is
necessary to provide the Commission with the flexibility to address
relevant facts or circumstances as they arise.
B. Proposed Exemption
Upon due consideration and consistent with the determinations set
forth above, the Commission hereby proposes to issue the following
order (``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 (``CFTC''
or ``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:
[[Page 29517]]
a. The agreement, contract or transaction is for the purchase and
sale of one of the following electric energy-related products:
(1) ``Transmission Congestion Rights'' defined in paragraph 5(a) of
this Order, except that the exemption shall only apply to such
Transmission Congestion Rights where:
(a) Each Transmission Congestion Right is linked to, and the
aggregate volume of Transmission Congestion Rights for any period of
time is limited by, the physical capability (after accounting for
counterflow) of the electric energy transmission system operated by SPP
for such period;
(b) SPP serves as the market administrator for the market on which
the Transmission Congestion Rights are transacted;
(c) Each party to the transaction is a member of SPP (or is SPP
itself) and the transaction is executed on a market administered by
SPP; 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) ``Operating Reserve Transactions'' as defined in paragraph 5(c)
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(f) of this Order.
c. The agreement, contract or transaction is offered or sold
pursuant to SPP's Tariff and that Tariff has been approved by the
Federal Energy Regulatory Commission (``FERC'').
3. Applicability to SPP. Subject to the conditions contained in the
Order, the Order applies to SPP 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: Information sharing arrangements between
the Commission and FERC that are acceptable to the Commission continue
to be in effect, and SPP's 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 SPP's possession for products in SPP's
markets that are related to markets that are subject to the
Commission's jurisdiction, including any pertinent information
concerning such data.
b. Notification of requests for information: Neither the Tariff nor
any other governing documents of SPP shall include any requirement that
SPP 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 ``Transmission Congestion 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 SPP, at a specified source (i.e., where electric energy is deemed
injected into the grid of SPP) and a specified sink (i.e., where
electric energy is deemed withdrawn from the grid of SPP).
b. ``Energy Transactions'' are transactions in a ``Day-Ahead
Market'' or ``Real-Time Balancing Market,'' as those terms are defined
in paragraphs 5(d) and 5(e) of this Order, for the purchase or sale of
a specified quantity of electric energy at a specified location
(including virtual 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 Balancing 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 Balancing Market (as permitted by SPP 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 SPP
for that period of time.
c. ``Operating Reserve Transactions'' are transactions:
(1) In which SPP, for the benefit of load-serving entities and
resources, purchases, through auction, the right, during a period of
time as specified in SPP's Tariff, to require the seller of such right
to operate electric energy 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 SPP with:
(a) Physical performance by the seller's facilities within a
response time interval specified in SPP'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 SPP's Day-Ahead or Real-
Time Balancing Market, as those terms are defined in paragraphs 5(d)
and 5(e) of this Order, price for electric energy applicable whenever
SPP exercises its right that electric energy be delivered (including
``Demand Response,'' as defined in paragraph 5(g) of this Order);
(b) Compensation for the opportunity cost of not supplying or
consuming electric energy or other services during any period during
which SPP requires that the seller not supply energy or other services;
(c) An upfront payment determined through the auction administered
by SPP for this service;
(d) An additional amount indexed to the frequency, duration, or
other attributes of physical performance as specified in SPP's Tariff;
and
(3) In which the value, quantity, and specifications of such
transactions for SPP for any period of time shall be limited to the
physical capability of the electric energy transmission system operated
by SPP for that period of time.
d. ``Day-Ahead Market'' means an electric energy market
administered by SPP on which the price of electric energy at a
specified location is determined, in accordance with SPP'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.
e. ``Real-Time Balancing Market'' means an electric energy market
administered by SPP on which the price of electric energy at a
specified location is determined, in accordance with SPP's Tariff, for
specified time periods within the same 24-hour period.
f. ``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.
g. ``Demand Response'' means the right of SPP to require that
certain sellers of such rights curtail consumption of electric energy
from the
[[Page 29518]]
electric energy transmission system operated by SPP during a future
period of time as specified in SPP's Tariff.
h. ``SPP'' means Southwest Power Pool, Inc. or any successor in
interest to Southwest Power Pool.
i. ``Tariff.'' Reference to a SPP ``Tariff'' includes a tariff,
rate schedule or protocol.
j. ``Exemption Application'' means the application for an exemptive
order under 4(c)(6) of the CEA filed by SPP on October 17, 2013, as
amended August 1, 2014.
6. Effective Date. This Order is effective upon publication in the
Federal Register.
7. Delegation of Authority. The Commission hereby delegates, until
such time as the Commission orders otherwise, to the Director of the
Division of Market Oversight (``Division'') 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 SPP
pursuant to sections 4(a)(1) and 4(a)(2) of this Order.
This Order is based upon the representations made in the Exemption
Application for an exemptive order under 4(c) of the CEA filed by
SPP,\406\ including those representations with respect to compliance
with FERC regulation 35.47. It is also based on supporting materials
provided to the Commission by SPP and its counsel, including a legal
memorandum that, in the Commission's sole discretion, provides the
Commission with assurance that the netting arrangements contained in
the approach selected by SPP to satisfy the obligations contained in
FERC regulation 35.47(d) will, in fact, provide SPP with enforceable
rights of setoff against any of its market participants under title 11
of the United States Code in the event of the bankruptcy of the market
participant. 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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\406\ In the Matter of the Application for an Exemptive Order
Under Section 4(c) of the Commodity Exchange Act by Southwest Power
Pool, Inc., amended Aug. 1, 2014.
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VII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the Proposed Exemption will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\407\
The Commission believes that the Proposed Exemption will not have a
significant economic impact on a substantial number of small entities.
The Proposed Exemption includes entities that qualify as (1)
``appropriate persons'' pursuant to CEA sections 4(c)(3)(A) through
(J), (2) ``eligible contract participants,'' as defined in CEA section
1a(18)(A) and Commission regulation 1.3(m), or (3) 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
Proposed Exemption also would include any person or class of persons
offering, entering into, rendering advice or rendering other services
with respect to the transactions set forth above.\408\ The Commission
previously determined that ECPs are not ``small entities'' for purposes
of the RFA.\409\ In addition, the Commission believes that SPP should
not be considered a small entity based on the central role it plays in
the operation of the electronic transmission grid and the creation of
organized wholesale electric markets that are subject to FERC
regulatory oversight,\410\ analogous to functions performed by DCMs and
DCOs, which the Commission has determined not to be small
entities.\411\
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\407\ 5 U.S.C. 601 et seq.
\408\ Under CEA section 2(e), only ECPs are permitted to
participate in a swap subject to the end-user clearing exception.
\409\ See Opting Out of Segregation, 66 FR 20740, 20743, Apr.
25, 2001.
\410\ See Enhancement of Electricity Market Surveillance and
Analysis Through Ongoing Electronic Delivery of Data from Regional
Transmission Organizations and Independent System Operators, 77 FR
26674 at 26685-26686, May 7, 2012 (RFA analysis as conducted by FERC
regarding six RTOs and ISOs, including SPP).
Commission staff also performed an independent RFA analysis
based on Subsector 221 of Sector 22 (utilities companies) of the SBA
which defines any small utility corporation as one that does not
have more than 250 employees. See 13 CFR 121.201 (1-1-15 Edition).
Staff concludes that SPP is not a small entity, since SPP represents
that it employs more than 500 employees. See Exemption Application
Attachments at 8.
\411\ 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 18618-18619, Apr. 30,
1982 (DCMs).
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Accordingly, the Commission does not expect the Proposed Exemption
to have a significant impact on a substantial number of entities.
Therefore, the Chairman, on behalf of the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the Proposed Exemption would not have
a significant economic impact on a substantial number of small
entities. The Commission invites the public to comment on whether the
entities covered by the Proposed Exemption should be considered small
entities for purposes of the RFA, and, if so, whether there is a
significant impact on a substantial number of 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 Exemption provides that the
exemption is expressly conditioned upon information sharing
arrangements between the Commission and FERC that are acceptable to the
Commission continue to be in effect. The PRA would not apply in this
case given that the exemption would not impose any new recordkeeping or
information collection requirements, or other collections of
information on ten or more persons that require approval of the Office
of Management and Budget (``OMB'').
[[Page 29519]]
C. Cost-Benefit Considerations
1. Consideration of Costs and Benefits
a. Introduction
Section 15(a) of the CEA \412\ requires the Commission to
``consider the costs and benefits'' of its actions before promulgating
a regulation under the CEA or issuing certain orders. In proposing this
exemption, the Commission is required by section 4(c)(6) to ensure the
same is consistent with the public interest. In much the same way,
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.
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\412\ 7 U.S.C. 19(a).
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As discussed above, in response to an Exemption Application from
SPP, the Commission is proposing to exempt certain transactions from
the provisions of the CEA and Commission regulations with the exception
of those prohibiting fraud and manipulation (i.e., 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). The Proposed Exemption is
transaction-specific--that is, it would exempt contracts, agreements
and transactions for the purchase or sale of the limited set of
electric energy-related products that are offered or entered into in a
market administered by SPP pursuant to SPP's Tariff for the purposes of
allocating its physical resources.
More specifically, the Commission is proposing to exempt from most
provisions of the CEA certain ``transmission congestion rights,''
``energy transactions,'' and ``operating reserve transactions,'' as
those terms are defined in the Proposed Exemption (collectively
referred to as Covered Transactions), if such transactions are offered
or entered into pursuant to a Tariff under which SPP operates that has
been approved or permitted to take effect by FERC. The Proposed
Exemption would extend to a person who is: (1) An ``appropriate
person,'' as defined in CEA sections 4(c)(3)(A) through (J); (2) an
``eligible contract participant,'' as defined in CEA section 1a(18)(A)
and in Commission regulation 1.3(m); or (3) a person who actively
participates in the generation, transmission, or distribution of
electric energy.\413\ The Proposed Exemption also would extend to any
person or class of persons offering, entering into, rendering advice or
rendering other services with respect to the Covered Transactions.
Important to the Commission's Proposed Exemption is SPP's
representation that the aforementioned transactions are: (i) Tied to
the physical capacity of SPP's electric energy grids; (ii) used to
promote the reliable delivery of electric energy; and (iii) are
intended for use by commercial participants that are in the business of
generating, transmitting and distributing electric energy.\414\ In
other words, these are not purely financial transactions; rather, they
are inextricably linked to, and limited by, the capacity of the grid to
physically deliver electric energy.\415\
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\413\ See supra note 395.
\414\ See Exemption Application at 17.
\415\ Id.
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In the discussion that follows, the Commission considers the costs
and benefits of the Proposed Exemption to the public and market
participants generally, including the costs and benefits of the
conditions precedent that must be satisfied before SPP may claim the
exemption.
b. Proposed Baseline
The Commission's proposed baseline for consideration of the costs
and benefits of this Proposed Exemption are the costs and benefits that
the public and market participants (including SPP) would experience in
the absence of this proposed regulatory action. In other words, the
proposed baseline is an alternative situation in which the Commission
takes no action and exercises jurisdiction, meaning that the
transactions that are the subject of this Exemption Application would
be required to comply with all of the CEA and Commission regulations,
as applicable. In such a scenario, the public and market participants
would experience the full benefits and costs related to the CEA and
Commission regulations, but as discussed in detail above, the
transactions would still be subject to the congruent regulatory regime
of FERC.
The Commission also considers the regulatory landscape as it exists
outside the context of the Dodd-Frank Act's enactment. In this
instance, it also is important to highlight SPP's representation that
each of the transactions for which an exemption is requested is already
subject to a long-standing, comprehensive regulatory framework for the
offer and sale of such transactions established by FERC.\416\ For
example, the costs and benefits attendant to the Commission's condition
that transactions be entered into between ``appropriate persons'' as
described in CEA section 4(c)(3) has an analog outside the context of
the Dodd-Frank Act in FERC's minimum criteria for RTO market
participants as set forth in FERC Order 741. Moreover, the Commission
has granted similar relief to other RTOs and ISOs regulated by either
FERC or the Public Utility Commission of Texas.\417\
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\416\ Id.
\417\ RTO-ISO Order. See supra section III.C.
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In the discussion that follows, where reasonably feasible, the
Commission endeavors to estimate quantifiable dollar costs of the
Proposed Exemption. The benefits and costs of the Proposed Exemption,
however, are not presently susceptible to meaningful quantification.
Most of the costs arise from limitations on the scope of the Proposed
Exemption, and many of the benefits tied to those limitations arise
from avoiding defaults and their implications that are clearly large in
magnitude, but impracticable to estimate. Where it is unable to
quantify, the Commission discusses proposed costs and benefits in
qualitative terms.
c. Costs
The Proposed Exemption is exemptive and would provide ``appropriate
persons'' engaging in the Covered Transactions relief from certain of
the requirements of the CEA and attendant Commission regulations. As
with any exemptive rule or order, the Proposed Exemption is permissive,
meaning that SPP was not required to request it and is not required to
rely on it. Accordingly, the Commission assumes that SPP would rely on
the Proposed Exemption only if the anticipated benefits to SPP outweigh
the costs of the exemption. Here, the Proposed Exemption identifies
certain conditions to the grant of the Proposed Exemption. The
Commission is of the view that, as a result of the conditions, SPP,
market participants and the public would experience minimal, if any,
ongoing costs as a result of these conditions because, as SPP certifies
pursuant to CFTC Rule 140.99(c)(3)(ii), the attendant conditions are
substantially similar to requirements that SPP and its market
participants
[[Page 29520]]
already incur in complying with FERC regulations.
The condition that all parties to the agreements, contracts or
transactions that are covered by the Proposed Exemption must be (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'' \418\--is not likely
to impose any significant, incremental costs on SPP because its
existing legal and regulatory obligations under the FPA and FERC
regulations mandate that only eligible market participants may engage
in the Covered Transactions, as explained above.\419\
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\418\ See supra notes 393-395.
\419\ See supra section V.B.3.
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The second condition is that the Covered Transactions must be
offered or sold pursuant to SPP's Tariff--which has been approved or
permitted to take effect by FERC. This 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.\420\
Moreover, requiring that SPP not operate outside its Tariff
requirements derives from existing legal requirements and is not a cost
attributable to this proposal.
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\420\ See 7 U.S.C. 6(c)(6)(A), (B).
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As discussed above, FERC imposes on SPP, and its market monitor,
various information management requirements.\421\ These existing
requirements are not materially different from the condition, in the
Proposed Exemption, that neither SPP's Tariff nor other governing
documents may include any requirement that SPP notify a member prior to
providing information to the Commission in response to a subpoena,
special call, or other request for information or documentation. SPP
indicated in its Exemption Application that on March 1, 2014, FERC
accepted a revision to SPP's Tariff governing the sharing of
information that meets this proposed condition.\422\ The Commission
requests comment as to whether a provision in the Proposed Exemption
that effectively requires SPP continues to meet this condition imposes
a significant burden or increase in cost on SPP, and whether there are
alternative conditions that may be used to achieve a similar result.
Further, SPP has agreed to provide any information to the Commission
upon request that will further enable the Commission to perform its
regulatory and enforcement duties. While the Commission is mindful that
the process of responding to subpoenas or requests for information
involves costs, the requirement to respond to such subpoenas and
requests for information, and thus the associated costs, is independent
of the current Proposed Exemption.
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\421\ See supra section V.B.1.
\422\ SPP represents that its Tariff requires the sharing of
information with the Commission without prior notice to market
participants. See Exemption Application Attachments at 52, 54.
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Finally, the condition that information sharing arrangements that
are satisfactory to the Commission between the Commission and FERC must
be in full force and effect is not a cost to SPP or to other members of
the public and has been an inter-agency norm since 2005.\423\ Moreover,
the condition that SPP comply with the Commission's requests on an as-
needed basis for related transactional and positional market data will
impose only minimal costs on SPP to respond because the Commission
contemplates that any information requested will already be in SPP's
possession.\424\
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\423\ The CFTC and FERC first signed an MOU on October 12, 2005.
On January 2, 2014, as directed by Congress under the Dodd-Frank
Act, the Commission and FERC entered into an MOU, which superseded
the 2005 MOU and provided for the sharing of information for use in
analyzing market activities and protecting market integrity. See
supra note 62.
\424\ See supra section IV.B.
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d. Benefits
In proposing this exemption, the Commission is required by section
4(c)(6) to ensure that it is consistent with the public interest. In
much the same way, CEA section 15(a) requires that the Commission
consider the benefits to the public of its action. In meeting its
public interest obligations under both 4(c)(6) and 15(a), the
Commission in sections V.B.1., V.D., and V.E. proposes a detailed
consideration of the nature of the transactions and FERC's regulatory
regime, including whether the protections provided by that regime is,
at a minimum, congruent with the Commission's oversight of DCOs and
SEFs.
This exercise is not rote; rather, in proposing that this exemption
is in the public interest, the Commission's comprehensive action
benefits the public and market participants in several substantial
ways, as discussed below. First, the parameters for the Covered
Transactions set forth in the Proposed Exemption limit the financial
risk that may impact the markets. The mitigation of such risk inures to
the benefit of SPP, market participants and the public, especially
SPP's members and electric energy ratepayers.
The condition that only ``appropriate persons'' may enter the
Covered Transactions benefits the public and the entities that fall
under the ``appropriate persons'' definition themselves, by ensuring
that (1) only persons with resources sufficient to understand and
manage the risks of the transactions are permitted to engage in the
same, and (2) persons without such resources do not impose credit costs
on other participants (and the ratepayers for such other participants).
Further, the condition requiring that the Covered Transactions only be
offered or sold pursuant to a FERC-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.
Finally, 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
Proposed Exemption is conditioned upon effective information sharing
arrangements between the FERC and the Commission being in place.
Through such an arrangement, the Commission expects that it will be
able to request information necessary to examine whether activity on
SPP's markets is adversely affecting the Commission-regulated markets.
Further, the Proposed Exemption is conditioned upon the Commission's
ability to obtain certain data within SPP's possession from SPP.
Through this condition, the Commission expects that it will be able to
continue discharging its regulatory duties under the CEA. Further, the
condition that SPP may not, in the future, maintain any Tariff
provisions that would require SPP to notify members prior to providing
the Commission with information will help maximize the effectiveness of
the Commission's enforcement program.
[[Page 29521]]
e. Consideration of Alternatives
The Commission considered alternatives to the proposed rulemaking.
For instance, the Commission could have chosen: (i) Not to propose an
exemption or (ii), as SPP requested, to provide relief for ``the
purchase and sale of a product or service that is directly related to,
and a logical outgrowth of, any of SPP's core functions as an RTO . . .
and all services related thereto.'' Regarding this latter request, the
Commission understands the Exemption Application as requesting relief
for transactions not yet in existence. In this exemption, the
Commission proposes what it considers a measured approach--in terms of
the implicated costs and benefits of the exemption--given its current
understanding of the Covered Transactions.
Regarding the first alternative, the Commission considered that
Congress, in the Dodd-Frank Act, required the Commission to exempt
certain contracts, agreements or transactions from duties otherwise
required by statute or Commission regulation by adding a new section
that requires the Commission to exempt from its regulatory oversight
agreements, contracts, or transactions traded pursuant to an RTO tariff
that has been approved or permitted to take effect by FERC, where such
exemption was in the public interest and consistent with the purposes
of the CEA. Having concluded that the Proposed Exemption meets those
tests, the Commission proposes that a no exemption alternative would be
inconsistent with Congressional intent and contrary to the public
interest. At the same time, however, the Commission believes it would
also be inappropriate to adopt the second alternative.
The second alternative would extend the Proposed Exemption to
future products that are ``logical outgrowths'' of the Covered
Transactions. The Commission proposes that such alternative would be
contrary to the Commission's obligation under section 4(c) of the Act.
As noted above, the authority to issue an exemption from the CEA
provided by section 4(c) of the Act may not be automatically or
mechanically exercised. Rather, the Commission is required to
affirmatively determine, inter alia, that the exemption would be
consistent with the public interest and the purposes of the Act.
The Commission is concerned that such an open-ended definition
could present risks beyond those contemplated. At the same time, the
Commission believes that any new transactions that fall within the
Covered Transactions, which are explicitly defined in the Proposed
Exemption, 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 SPP
pursuant to a FERC-approved Tariff, are intended to be included within
the Proposed Exemption. This provides a benefit in that no supplemental
relief for such products would be required, which is a cost mitigating
efficiency gain for SPP. Moreover, unidentified transactions might
include novel features or have market implications or risks that are
beyond evaluation at the present time, and are not present in the
specified transactions.
2. Consideration of CEA Section 15(a) Factors
a. Protection of Market Participants and the Public
In proposing the exemption as it did, the Commission endeavored to
provide relief that was in the public interest. A key component of that
consideration is the assessment of how the Proposed Exemption protects
market participants and the public. As discussed above, market
participants and the public are protected by the existing regulatory
structure that includes congruent regulatory goals, and by the four
conditions placed upon the proposed relief by requiring, inter alia,
that: (i) Only those with the financial wherewithal are permitted to
engage in the transactions; (ii) the transactions at issue must be
within the scope of SPP's FERC-approved Tariff; (iii) no advance notice
to members of information requests to SPP from the Commission; and (iv)
the Commission and FERC, must continue to have an information sharing
arrangement in full force and effect. In addition, the Proposed
Exemption is limited to the transactions identified and defined herein.
In this way, the Commission eliminates the potential that as-yet-
unknown transactions not linked to the physicality of the electric
system may be offered or sold under this Proposed Exemption, protecting
market participants and the public from risk that might arise from sale
of such unknown transactions.
b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
In this Proposed Exemption, the Commission considered its effect on
the efficiency, competitiveness, and financial integrity of the markets
subject to the Commission's jurisdiction. As means of increasing
competition and efficiency, the Commission recognizes that entities
falling under the ``appropriate persons'' definition will benefit from
increased competition among RTOs benefiting from this type of exemption
with the addition of SPP to the existing ones and will be able to
engage in the Covered Transactions in a more efficient manner. Further,
the Commission's retention of its full enforcement authority will help
ensure that any misconduct in connection with the exempted transactions
does not jeopardize the financial integrity of the markets under the
Commission's jurisdiction.
c. Price Discovery
As discussed above in section V.B.4, with respect to TCRs and
Operating Reserve Transactions, these transactions do not appear to
directly impact transactions taking place on Commission-regulated
markets--they are not used for price discovery and are not used as
settlement prices for other transactions in Commission-regulated
markets.
With respect to Energy Transactions, these transactions have a
relationship to Commission-regulated markets because they can serve as
a source of settlement prices for other transactions subject to the
Commission's jurisdiction. Granting the Proposed Exemption, however,
does not mean that these transactions will be unregulated. To the
contrary, as explained in more detail above, SPP has a market
monitoring system in place to detect and deter manipulation that takes
place on its markets. Further, as noted above, the Commission retains
all of its anti-fraud and anti-manipulation authority as a condition of
the Proposed Exemption.
d. Sound Risk Management Practices
As with the other areas of cost-benefit consideration, the
Commission's evaluation of sound risk management practices occurs
throughout this release, notably in sections V.D.4.a. and V.E.7.a.
which consider SPP's risk management policies and procedures, and the
related requirements of FERC (in particular, FERC Order 741 on Credit
Policies), in light of the Commission's risk management requirements
for DCOs and SEFs.
In addition, the Commission believes that the Proposed Exemption
will allow market participants who are eligible for this exemption to
more effectively manage their operational risk arising from the non-
storable nature of electric energy and fluctuating end-user demand for
it.
[[Page 29522]]
e. Other Public Interest Considerations
The Commission proposes that because these transactions are part
of, and inextricably linked to, the organized wholesale, physical
electric energy markets that are subject to regulation and oversight of
FERC, the Commission's Proposed Exemption, with its attendant
conditions, requirements, and limitations, is in the public interest.
The Commission recognizes that the Proposed Exemption supports eligible
market participants' supply of affordable and reliable electric energy
to the public by exempting their use of the Covered Transactions from
CEA.
3. Request for Public Comment on Costs and Benefits
The Commission invites public comment on its cost-benefit
considerations and dollar cost estimates, including the consideration
of reasonable alternatives. Commenters are invited to submit any data
or other information that they may have quantifying or qualifying the
costs and benefits of the proposal with their comment letters.
VIII. Request for Comment
The Commission requests comment on all aspects of its Proposed
Exemption. In addition, the Commission specifically requests comment on
the specific provisions and issues highlighted in the discussion above
and on the issues presented in this section. For each comment
submitted, please provide a detailed rationale supporting the response.
1. Has the Commission used the appropriate standard in analyzing
whether the Proposed Exemption is in the public interest?
2. Is the scope set forth for the Proposed Exemption sufficient to
allow for innovation? Why or why not? If not, how should the scope be
modified to allow for innovation without exempting products that may be
materially different from those reviewed by the Commission? Should the
Commission exempt such products without considering whether such
exemption is in the public interest? In answering this question, please
consider that SPP may separately petition the Commission for an
amendment of any final order granted in this matter. In addition,
please consider that the Commission has, to a certain extent, addressed
these innovation questions in the RTO-ISO Order.
3. Should the Proposed Exemption be conditioned upon the
requirement that SPP cooperate with the Commission in its conduct of
special calls/further requests for information with respect to
contracts, agreements or transactions that are, or are related to, the
contracts, agreements, or transactions that are the subject of the
Proposed Exemption?
4. What is the basis for the conclusion that SPP does, or does not,
provide to the public sufficient timely information on price, trading
volume, and other data with respect to the markets for the contracts,
agreements and transactions that are the subject of the Proposed
Exemption? What Tariff provisions, if any, requires it to do so or
precludes it from doing so?
5. What is the basis for the conclusion that the Proposed Exemption
will, or will not, have any material adverse effect on the Commission's
ability to discharge its regulatory duties under the CEA, or on any
contract market's ability to discharge its self-regulatory duties under
the CEA?
6. What are the bases for the conclusions that SPP's Tariff,
practices, and procedures do, or do not, appropriately address the
regulatory goals of each of the DCO and SEF Core Principles?
7. What factors support, or detract from, the Commission's
preliminary conclusion that TCRs, Energy Transactions, and Operating
Reserve Transactions are not susceptible to manipulation for the
reasons stated above? What is the basis for the conclusion that market
participants can, or cannot, use Energy Transactions to manipulate
electric energy prices without detection by the SPP Market Monitor?
8. What is the basis for the conclusion that SPP has, or has not,
satisfied applicable market monitoring requirements with respect to
TCRs, Energy Transactions, and Operating Reserve Transactions? What is
the basis for the conclusion that the record-keeping functions
performed by SPP is, or is not, appropriate to address any concerns
raised by the market monitoring process? What is the basis for the
conclusion that the market monitoring functions performed by SPP and
the SPP Market Monitor do, or do not, provide adequate safeguards to
prevent the manipulation of SPP's markets?
9. What are the bases for the conclusions that SPP does, or does
not, adequately satisfy the SEF requirements for (a) recordkeeping and
reporting, (b) preventing restraints on trade or imposing any material
anticompetitive burden, (c) minimizing conflicts of interest, (d)
providing adequate financial resources, (e) establishing system
safeguards and (f) designating a CCO? Specifically, do the procedures
and principles in place allow SPP to meet the requirements of SEF core
principles 10-15?
10. What is the basis for the conclusion that SPP's eligibility
requirements for participants are, or are not, appropriate to ensure
that market participants can adequately bear the risks associated with
the Participants markets?
11. What is the basis for the conclusion that SPP does, or does
not, have adequate rules in place to allow it to deal with emergency
situations as they arise? What deficiencies, if any, are there with
respect to SPP's emergency procedures that would prevent SPP from
taking necessary action to address sudden market problems?
12. What would be the basis for the conclusion that SPP should not
receive relief that is substantially similar to the relief the
Commission granted other RTOs and ISOs in the RTO-ISO Order?
13. The Commission invites comment on its consideration of the
costs and benefits of the Proposed Exemption, including the costs of
any information requirements imposed therein. The Commission also seeks
comment on the costs and benefits of this Proposed Exemption,
including, but not limited to, those costs and benefits specified
within this proposal. Commenters are also are invited to submit any
data or other information that they may have quantifying or qualifying
the costs and benefits of the proposal with their comment letters.
Issued in Washington, DC, on May 18, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Appendix to Notice of Proposed Order and Request for Comment on an
Application for an Exemptive Order From Southwest Power Pool, Inc. From
Certain Provisions of the Commodity Exchange Act Pursuant to the
Authority Provided in Section 4(c)(6) of the Act--Commission Voting
Summary
On this matter, Chairman Massad and Commissioners Wetjen, Bowen,
and Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2015-12346 Filed 5-20-15; 8:45 am]
BILLING CODE 6351-01-P