Federal Register, Volume 77 Issue 164 (Thursday, August 23, 2012)[Federal Register Volume 77, Number 164 (Thursday, August 23, 2012)]

[Notices]

[Pages 50998-51020]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2012-20589]

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COMMODITY FUTURES TRADING COMMISSION

Proposal To Exempt Certain Transactions Involving Not-for-Profit

Electric Utilities; Request for Comments

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice.

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SUMMARY: The Commodity Futures Trading Commission (“CFTC” or the

“Commission”) is proposing to exempt certain transactions between

not-for-profit utilities (entities described in section 201(f) of the

Federal Power Act (“FPA”)), and other electric utility cooperatives,

from the provisions of the Commodity Exchange Act (“CEA” or “Act”)

and the regulations there under, subject to certain antifraud, anti-

manipulation, and recordkeeping conditions. Authority for this

exemption is found in section 4(c) of the CEA. The Commission is

requesting comment on every aspect of this Notice of Proposed Order

(“Notice”).

DATES: Comments must be received on or before September 24, 2012.

ADDRESSES: You may submit comments by any of the following methods:

Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

Mail: David A. Stawick, Secretary of the Commission,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street NW., Washington, DC 20581.

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 method.

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 CFTC 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 procedures

established in Sec. 145.9 of the CFTC’s regulations.1

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1 17 CFR 145.9.

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The CFTC 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: David Van Wagner, Chief Counsel, (202)

418-5481, [email protected], or Graham McCall, Attorney Advisor,

(202) 418-6150, [email protected], Division of Market Oversight,

Commodity Futures Trading Commission, Three Lafayette

[[Page 50999]]

Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. CEA Section 4(c)

B. FPA Section 201(f)

II. Petition

A. Relief Requested

B. Definition and Scope of Electric Operations-Related

Transactions

1. Electric Energy Delivered

2. Generation Capacity

3. Transmission Services

4. Fuel Delivered

5. Cross-Commodity Transaction

6. Other Goods and Services Agreements, Contracts and

Transactions

7. Environmental Rights, Allowances or Attributes

C. Definition and Scope of NFP Electric Entities

1. FPA 201(f) Entities

a. Government and Cooperatively Owned Electric Utilities

Described by FPA Section 201(f)

b. Federally-Recognized Indian Tribes

2. Non-FPA 201(f) Electric Cooperatives

III. Commission Determinations

A. Scope of the Proposed Order

1. Exempt Entities

a. Electric Utilities Owned by Federal, State, or Local

Government

b. Electric Utilities Owned by an Indian Tribe

c. Electric Utilities Owned as Cooperative Organizations

2. Exempt Non-Financial Energy Transactions

3. Conditions

B. CEA Section 4(c) Considerations

1. Responsible Economic or Financial Innovation and Fair

Competition

2. Applicability of CEA Section 4(a)

3. Public Interest and Purposes of the CEA

a. Public Interest

b. Purposes of the CEA

4. Appropriate Persons

5. Ability to Discharge Regulatory or Self-Regulatory Duties

IV. Proposed Order

V. Request for Comment

VI. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Consideration of Costs and Benefits

I. Introduction

On June 8, 2012, the Commission received a petition (“Petition”)

2 from a group of trade associations that represent government and/or

cooperatively-owned electric utilities requesting relief from the

requirements of the CEA 3 and Commission’s regulations thereunder,4

pursuant to CEA section 4(c),5 for certain electric energy-related

transactions between not-for-profit electric energy utilities. In this

Notice, after summarizing and reviewing the representations made in the

Petition, the Commission proposes conditional relief pursuant to CEA

section 4(c) for non-financial energy transactions between not-for-

profit utilities described in FPA section 201(f) and other electric

cooperatives.

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2 The Petition is available on the Commission’s Web site at

http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nrecaetalltr060812.pdf.

3 7 U.S.C. 1 et seq.

4 The Commission’s regulations are set forth in title 17 of

the Code of Federal Regulations (“CFR”).

5 7 U.S.C. 6(c).

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A. CEA Section 4(c)

Section 4(c) of the CEA provides the Commission with broad

authority to exempt certain transactions and market participants from

the requirements of the Act. When adding section 4(c) to the CEA,

Congress noted that the goal 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.” 6 The House-

Senate Conference Committee reconciling the provision’s language noted

that:

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6 House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213

(“4(c) Conf. Report”).

The Conferees do not intend that the exercise of exemptive

authority by the Commission would require any determination

beforehand that the agreement, instrument, or transaction for which

an exemption is sought is subject to the [CEA]. Rather, this

provision provides flexibility for the Commission to provide legal

certainty to novel instruments where the determination as to

jurisdiction is not straightforward. Rather than making a finding as

to whether a product is or is not a futures contract, the Commission

in appropriate cases may proceed directly to issuing an

exemption.7

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7 4(c) Conf. Report at 3214-3215.

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Specifically, CEA section 4(c)(1) empowers the CFTC to “promote

responsible economic or financial innovation and fair competition” by

exempting any transaction (or class thereof) that otherwise would be

subject to CEA section 4(a), or any person (or class thereof) dealing

in such transaction(s), from any or all of the provisions of the CEA

where the Commission determines that the exemption would be consistent

with the public interest.8 The Commission may grant such an exemption

by rule, regulation or order, after notice and opportunity for hearing,

and may do so on application of any person 9 or on its own

initiative.

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8 Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in

full that:

In order to promote responsible economic or financial innovation

and fair competition, the Commission by rule, regulation, or order,

after notice and opportunity for hearing, may (on its own initiative

or on application of any person, including any board of trade

designated or registered as a contract market or derivatives

transaction execution facility for transactions for future delivery

in any commodity under section 7 of this title) exempt any

agreement, contract, or transaction (or class thereof) that is

otherwise subject to subsection (a) of this section (including any

person or class of persons offering, entering into, rendering advice

or rendering other services with respect to, the agreement,

contract, or transaction), either unconditionally or on stated terms

or conditions or for stated periods and either retroactively or

prospectively, or both, from any of the requirements of subsection

(a) of this section, or from any other provision of this chapter * *

* if the Commission determines that the exemption would be

consistent with the public interest.

9 CEA section 1a(38) defines “person” to include

“individuals, associations, partnerships, corporations, and

trusts.” 7 U.S.C. 1a(38).

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CEA section 4(c)(2) provides that the Commission shall not grant

any exemption under section 4(c)(1) from any of the requirements of

section 4(a) unless the Commission determines, among other things,

that: (i) the exemption would be consistent with the public interest

and the purposes of the CEA; (ii) the exempt agreement, contract, or

transactions will be entered into solely between “appropriate

persons;” and (iii) 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.10

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10 See 7 U.S.C. 6(c)(2).

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CEA section 4(c)(3) outlines which entities may constitute

“appropriate person[s]” for purposes of a CEA section 4(c) exemption,

including (as relevant to this Notice): (i) Any governmental entity

(including the United States, any State, 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; 11 or (ii) 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.12

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11 See 7 U.S.C. 6(c)(3)(H).

12 See 7 U.S.C. 6(c)(3)(K).

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The Dodd-Frank Wall Street Reform and Consumer Protection Act

(“Dodd-Frank Act”) 13 added new subparagraph

[[Page 51000]]

4(c)(6)(C) to the CEA.14 CEA section 4(c)(6)(C) builds upon the

Commission’s general exemptive authority in section 4(c)(1) as follows:

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13 Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm. Title VII of the Dodd-Frank Act amended the

CEA to establish a comprehensive new regulatory framework for swaps

and security-based swaps. The legislation was enacted to reduce

risk, increase transparency, and promote market integrity within the

financial system by, among other things: (1) providing for the

registration and comprehensive regulation of swap dealers (“SDs”)

and major swap participants (“MSPs”); (2) imposing clearing and

trade execution requirements on standardized derivative products;

(3) creating robust recordkeeping and real-time reporting regimes;

and (4) enhancing the Commission’s rulemaking and enforcement

authorities with respect to, among others, all registered entities

and intermediaries subject to the Commission’s oversight.

14 7 U.S.C. 6(c)(6)(C) (as added by section 722(f) of the

Dodd-Frank Act).

(6) If the Commission determines that the exemption would be

consistent with the public interest and the purposes of this Act,

the Commission shall, in accordance with [CEA sections 4(c)(1) and

4(c)(2)], exempt from the requirements of this Act an agreement,

contract, or transaction that is entered into–

[* * *]

(C) between entities described in section 201(f) of the Federal

Power Act (16 U.S.C. 824(f)).

Thus, section 4(c)(6)(C) explicitly spotlights transactions between

entities within the scope of FPA section 201(f) as being eligible for

exemption pursuant to the Commission’s 4(c) authority. However, whether

an exemption is considered under 4(c)(1), 4(c)(6)(C), or both,15 the

CFTC must first determine that the proposed exemption meets certain

threshold criteria including, for example, that the exemption would be

consistent with the public interest and the purposes of the Act.

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15 For any exemption involving CEA section 4(c)(6), the

Commission believes “both” is the correct characterization because

CEA section 4(c)(6) explicitly directs the Commission to consider

any exemption proposed under 4(c)(6) “in accordance with [sections

4(c)(1) and 4(c)(2)].”

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B. FPA Section 201(f)

The FPA 16 authorizes and, along with other statutes, governs the

Federal Energy Regulatory Commission (“FERC”), the federal agency

that regulates the interstate transmission and sale at wholesale in

interstate commerce of electric energy by public utilities, as well as

natural gas and hydropower projects.17 Section 201(f) of the FPA,

which Congress referenced in new CEA section 4(c)(6)(C), provides

broad-based relief from most provisions of Part II 18 of the FPA for

certain government and cooperatively-owned electric utility companies

and states that:

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16 16 U.S.C. 791a et seq.

17 See www.ferc.gov.

18 Part II of the FPA governs the transmission and sale at

wholesale of electric energy in interstate commerce, including the

facilities used for such transmission or sale. See 16 U.S.C. 824 et

seq. Section 201(f) does not, however, provide an exemption from FPA

parts I or III. Part I of the FPA deals with the establishment and

functioning of FERC and the regulation of hydroelectric resources.

See 16 U.S.C. 792 et seq. Part III of the FPA deals with

recordkeeping and reporting requirements and FERC’s procedural rules

concerning complaints, investigations, and hearings. See 16 U.S.C.

825 et seq. Additionally, section 201(f) does not provide an

exemption from FERC’s refund authority, 16 U.S.C. 824e, reliability

standards, 16 U.S.C. 824o(b)(1), or jurisdiction over transmission

facilities and services, 16 U.S.C. 824(i)-(j).

[n]o provision in this subchapter [Part II of the FPA] shall apply

to, or be deemed to include, the United States, a State or any

political subdivision of a State, an electric cooperative that

receives financing under the Rural Electrification Act of 1936 (7

U.S.C. 901 et seq.) or that sells less than 4,000,000 megawatt hours

of electricity per year, or any agency, authority, or

instrumentality of any one or more of the foregoing, or any

corporation which is wholly owned, directly or indirectly, by any

one or more of the foregoing, or any officer, agent, or employee of

any of the foregoing acting as such in the course of his official

duty, unless such provision makes specific reference thereto.19

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19 16 U.S.C. 824(f).

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II. Petition

A. Relief Requested

As noted above, on June 8, 2012, the Commission received the

Petition 20 from a group of trade associations representing

government and/or cooperatively-owned electric utilities. Those

Petitioners consisted of the National Rural Electric Cooperative

Association (“NRECA”),21 the American Public Power Association

(“APPA”),22 the Large Public Power Council (“LPPC”),23 the

Transmission Access Policy Study Group (“TAPS”),24 and the

Bonneville Power Administration (“BPA”) 25 (collectively, the

“Petitioners”). The Petition requests that the Commission provide

categorical exemptive relief from the requirements of the CEA, pursuant

to CEA section 4(c)(6), in accordance with CEA sections 4(c)(1) and

4(c)(2), for all “Electric Operations-Related Transactions” between

“NFP Electric Entities,” retroactive to the enactment of Dodd-Frank,

outstanding now, or that may be developed and executed in the

future.26 The Petitioner’s definition and scope of the terms

“Electric Operations-Related Transactions” and “NFP Electric

Entities” is summarized below.27

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20 The Petition is available on the Commission’s Web site at

http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nrecaetalltr060812.pdf.

21 According to the Petition, NRECA is the national service

organization for more than 900 not-for-profit rural electric

cooperatives and government-owned power districts. NRECA’s members

provide electric energy to approximately 42 million consumers in 47

states, or thirteen percent of the nation’s population. See Petition

at 3.

22 According to the Petition, APPA is the national trade

association that represents the interests of government-owned

electric utilities in the United States. APPA’s member utilities are

not-for-profit utility systems that were created by state or local

governments to serve the public interest. Approximately 2,000

government-owned electric utilities provide over fifteen percent of

all kilowatt hour (“KWh”) sales to retail electric customers. See

Petition at 3-4.

23 According to the Petition, LPPC is an organization

representing 24 of the largest government-owned electric utilities

in the nation. LPPC members own and operate over 86,000 megawatts of

generation capacity and nearly 35,000 circuit miles of high voltage

transmission lines, representing nearly 90 percent of the

transmission investment owned by non-Federal government-owned

electric utilities in the United States. See Petition at 4.

24 According to the Petition, TAPS is an association of

transmission dependent electric utilities located in more than 30

states. All of TAPS member electric utilities except one are FPA

section 201(f) entities. See Petition at 4.

25 According to the Petition, BPA is a self-financed, non-

profit Federal agency created in 1937 by Congress that primarily

markets electric power from 31 federally owned and operated

projects, and supplies 35 percent of the electricity used in the

Pacific Northwest. BPA also owns and operates 75 percent of the

high-voltage transmission in the Pacific Northwest. BPA’s primary

statutory responsibility is to market its Federal system power at

cost-based rates to its “preference customers.” Per the Petition,

BPA has 130 preference customers made up of electric utilities which

are not subject to the jurisdiction of FERC, including Indian

tribes, electric cooperatives, and state and municipally chartered

electric utilities, and other Federal agencies located in the

Pacific Northwest. See Petition at 4.

26 See Petition at 1-2; 4 (emphasis added). The Petition also

requests that the Commission determine that no Electric Operations-

Related Transaction will affect any NFP Electric Entity’s regulatory

status under the CEA (e.g., as a swap dealer or major swap

participant). Id. at 28. The Petition specifically asks that, if the

Commission declines to provide the categorical relief as requested,

the Commission would i) include an additional category of approved

Electric Operations-Related Transactions that includes all “trade

options” referencing the goods or services described in the

categories of transactions currently outstanding between Exempt

Entities (see infra sections II.B.1-7), and ii) delegate to

Commission staff the authority to review on an expedited basis and

approve as eligible for the benefit of the exemptive order any new

Electric Operations-Related Transactions between NFP Electric

Entities. Id. at 13. Finally, the Petition invites the Commission to

determine that any Electric Operations-Related Transaction described

in the Petition does not need an exemption because such transaction

is not a “swap,” is a “commercial merchandising arrangement” or

“trade option,” or is not an agreement, contract or transaction

involving a “commodity.” See id. at 13, note 26.

27 In this Notice, the Commission describes the Petition by

referencing Petitioners’ defined terms. Such references, however,

are not to be interpreted as the Commission proposing to adopt such

terms for the purpose of the exemption proposed herein. Rather, the

proposed exemption establishes its own defined entities and

transactions for which relief is being provided.

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B. Definition and Scope of Electric Operations-Related Transactions

The Petition defines Electric Operations-Related Transactions to

mean:

Any agreement, contract or transaction involving a “commodity”

(as such term is defined in the CEA) and whether or not such

agreement, contract or transaction is a

[[Page 51001]]

“swap,” so long as the NFP Electric Entity is entering into any

such agreement, contract or transaction “to hedge or mitigate

commercial risks” (as such phrase is used in CEA Section

2(h)(7)(A)(ii)) intrinsically related to the electric facilities or

electric operations (or anticipated facilities or operations) of the

NFP Electric Entity, or intrinsically related to the NFP Electric

Entity’s public service obligation to deliver reliable, affordable

electric energy service to electric customers. For the avoidance of

doubt, “intrinsically related” shall include all transactions

related to (i) the generation, purchase or sale, and transmission of

electric energy by the NFP Electric Entity, or the delivery of

reliable, affordable electric energy service to the NFP Electric

Entity’s electric customers, (ii) all fuel supply for the NFP

Electric Entity’s electric facilities or operations, (iii)

compliance with electric system reliability obligations applicable

to the NFP Electric Entity, its electric facilities or operations,

(iv) compliance with energy, conservation or renewable energy or

environmental statutes, regulations or government orders applicable

to the NFP Electric Entity, its electric facilities or operations,

or (v) any other electric operations-related agreement, contract or

transaction to which the NFP Electric Entity is a party. Electric

Operations-Related Transactions shall not include agreements,

contracts or transactions executed, traded, or cleared on a

registered entity, nor shall such defined term include an agreement,

contract or transaction based or derived on, or referencing, a

“commodity” in the interest rate, credit, equity or currency asset

class, or of a product type or category in the “Other Commodity”

asset class that is based or derived on, or referencing, metals, or

agricultural commodities or crude oil or gasoline commodities of any

grade not used as fuel for electric generation.28

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28 Petition at 4-5.

In general, the Petitioners represent that all Electric Operations-

Related Transactions covered by the proposed definition are

intrinsically related to the needs of both NFP Electric Entities

engaged in a transaction “to hedge or mitigate commercial risks”

which arise from their respective electric facilities and ongoing

electric operations and public service obligations.29 The Petitioners

state that, at the time two NFP Electric Entities enter into an

Electric Operations-Related Transaction, the terms of the transaction

contemplate performance of an electric operations-related obligation by

one party, in exchange for payment or reciprocal performance of an

electric operations-related function by the other party.30

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29 See Petition at 12.

30 See id. The Petition notes that the terms “physically-

settled,” “financially-settled,” and “cash-settled,” as such

terms are used in the futures industry, do not translate easily into

a commercial context where NFP Electric Entities enter into

bilateral contracts governed by state law or by FERC, PUCT or state

public utility tariffs to buy and sell goods and services. It is not

readily apparent to the Commission why the terms do not translate

conceptually. Nevertheless, as previously noted, the Petition

represents that Electric Operations-Related Transactions between NFP

Electric Entities are always intrinsically related to the electric

facilities and operations, and/or the public service obligations, of

each of the NFP Electric Entities involved. See id. at 12, n. 24.

—————————————————————————

The Petition, which is summarized herein, specifically describes

seven categories of transactions that currently occur between NFP

Electric Entities, and which are covered by the Petition’s proposed

definition.31

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31 The following transaction category descriptions come from

the Petition at 6-12.

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1. Electric Energy Delivered

In these transactions, NFP Electric Entities agree for one such

entity to provide another such entity with electric energy delivered to

an identified geographic service territory, load,32 or electric

system. Petitioners note that since electric energy is not currently

storable in commercial quantities, the delivery location is critical to

the transaction–electric energy delivered elsewhere is not usable or

valuable for the receiving entity’s operational needs.

—————————————————————————

32 The Commission understands that “load” is an energy

industry term for “demand.” See, e.g., Current Energy, Supply of

and Demand for Electricity in California, available at http://currentenergy.lbl.gov/ca/index.php

(explaining that “[t]he current demand (or `load’) depends on how

much power consumers are using right now”).

—————————————————————————

As described by the Petitioners, this transaction type includes the

most prevalent type of Exempt Electric Operations-Related Transaction

between NFP Electric Entities, i.e., the “full requirements”

contract, or “all requirements” agreement or arrangement 33 that is

often executed between a generation and transmission (“G&T”)

cooperative (i.e., a cooperative that generates and transmits

electricity) and each of its constituent NFP Electric Entity members/

owners, or between a Joint Action Agency (an agency formed under state

law to provide wholesale power supply and transmission service to

member entities) and each of its constituent NFP Electric Entity

members. In some instances, the G&T cooperative or the Joint Action

Agency is formed by its constituent members for the singular purpose of

providing its constituent members with their “full requirements”

obligations to deliver electric energy over an agreed delivery period

at one or multiple delivery points or locations to their retail

electric customers).

—————————————————————————

33 Per the Petition, the “full” or “all” requirements

contract is a bilateral commercial arrangement that is customized to

the two NFP Electric Entities that are parties thereto.

—————————————————————————

In such an arrangement, the provider NFP Electric Entity agrees by

bilateral contract or, in some long-standing relationships established

by governing or legal documents of the G&T cooperative or Joint Action

Agency as the provider NFP Electric Entity, that it will provide for a

recipient NFP Electric Entity’s “full requirements” to provide

reliable electric service to the recipient’s fluctuating electric

energy load over an agreed delivery period at one or multiple delivery

points or locations. In some cases, the delivery period, term, or

“tenor” of such agreements can be for thirty years or more.

In addition to providing the recipient’s full requirements for

electric energy, the arrangement may also include providing services

that are ancillary to the delivery of the electric energy, such as

operating or dispatching one or more of the recipient’s owned

generation units, generation capacity or balancing services, or any of

the other goods, services, or commodities required by the recipient

described under other categories below.

The Petition notes that quantities of electric energy will also

vary during the delivery period. If a recipient NFP Electric Entity

owns some generation itself, the quantity of supplemental electric

energy or capacity to meet its “full requirements” during some

seasons, months, or days of the year (net of its owned generation) may

be zero. Some ancillary services or “commodities” under such a

transaction may be optional. Pricing may vary on a seasonal, monthly,

daily or on-peak/off-peak basis, or may be tied to the cost at which

the provider NFP Electric Entity can generate or purchase electric

energy. Alternatively, the price may be tied to the fuel that the

provider uses for generating the electric energy provided.

2. Generation Capacity

In describing this transaction category, the Petition initially

notes that the term “capacity,” in connection with generation

capacity transactions, has varying meanings across the electric

industry, and that electric operations professionals may reference any

of a number of “capacity” agreements, contracts, transactions, or

arrangements.34 More generally, the

[[Page 51002]]

Petition notes that when two NFP Electric Entities agree that one will

provide “generation capacity” or “capacity” for another, either a

mutual understanding of the engineering context or a customized

bilateral commercial contract further defines the parties’ respective

rights and obligations. Generation capacity is always location-specific

and is monitored by the regional transmission organization (“RTO”) or

independent system operator (“ISO”) 35 or, outside the RTO/ISO

regions, by balancing authorities or reliability coordinators under the

supervision of the North American Electric Reliability Corporation

(“NERC”) and FERC.36 Deliverability of generation capacity to a

particular geographic point or electric system interface is such an

important concept that FERC requires each RTO, ISO, and balancing

authority to establish a framework of engineering studies to

demonstrate/confirm that a particular generation unit’s electrical

energy output is deliverable. If generation capacity from a particular

unit does not satisfy the relevant RTO, ISO or balancing authority’s

deliverability requirements, that generation capacity has no value in

meeting reliability requirements in that reliability area. If

generation capacity is purchased from a generation unit located outside

the relevant reliability area, the correlated electric energy (which,

if “called on,” must be delivered) nonetheless must be deliverable to

the relevant reliability area.

—————————————————————————

34 Counsel for Petitioners represented in subsequent

conversations that generation capacity, generally, can mean the

capability or adequacy of specific owned generation units to supply

fluctuating load requirements within a defined geographic region

(e.g., an RTO region or an electric utility system) at an estimated

or capacity rating level measured in megawatts. The basic concept of

generation capacity can be understood as a separate “commodity”

from electric energy delivered (or other ancillary service or

reserve), such that the purchase and sale of generation capacity may

exist as a stand-alone transaction or as one component of a

“bundled energy” service or transaction, such as a full

requirements contract. When viewed as an “option-like” commodity

transaction, generation capacity can be “delivered” if the

“holder” (or relevant reliability authority) calls on the

corollary electric energy to be delivered. In some circumstances,

the “premium” component can be priced separately and referred to

as a “demand charge.” In others, the generation capacity component

can be a contingent or option-like aspect of a seller’s obligation

to provide the “full requirements” that a load serving entity

(“LSE”) needs to serve the electric consumers and businesses in

its regions, including fulfillment of any generation capacity

obligations that the LSE has to its local reliability authority.

35 More information is available at http://www.ferc.gov/industries/electric/indus-act/rto.asp. The current ISO/RTO entities

operating in North America are PJM Interconnection, Midwest

Independent Transmission System Operator, Southwest Power Pool, ISO

New England, California ISO, New York Independent System Operator

and the Electric Reliability Council of Texas (ERCOT). Each of these

entities, other than ERCOT, was either formed at the direction of

FERC or designated by FERC to direct the operation of the regional

electric transmission grid in its specific geographic area. ERCOT is

fully regulated by the Public Utility Commission of Texas (the

“PUCT”).

36 Counsel for Petitioners in subsequent conversations

represented that generation capacity can be a reliability

requirement that, in some areas, owners of generation units must

maintain in order to provide voltage and frequency support to the

electric grid for reliability purposes. In other areas, generation

capacity reliability requirements may be imposed on LSEs that must,

if they own no generation assets, purchase generating capacity from

third-party generators to fulfill the LSEs’ reliability

requirements.

—————————————————————————

Some generation capacity agreements or arrangements among NFP

Electric Entities may include operational reserves attributable to the

identified generation unit. A generation capacity arrangement or

transaction also may be called a “shared resources agreement,”

whereby NFP Electric Entities agree conditionally to share capacity

resources as needed. The contract may relate to multiple identified

units owned or operated by both NFP Electric Entities. For example,

some state or regional programs to manage limited generation capacity

and maintain voltage support for the electric grid in a geographic area

may allow NFP Electric Entities subject to such program to utilize

“demand-side resources” as part of the generation capacity required

by the specific balancing authority, or to meet the reliability

authority’s requirements in the relevant geographic region.

In general, a generation capacity transaction between two NFP

Electric Entities in one region cannot be presumed to be fungible with

any other generation capacity transaction between two other NFP

Electric Entities, even in the same region.

3. Transmission Services

As with the other transaction categories described by the

Petitioners, the Petition notes that electric transmission services

transactions between NFP Electric Entities will vary by geographic

region and by assets owned and transmission services required by the

operations of different NFP Electric Entities. In some cases, these

transmission services agreements include congestion management

services, system losses, and ancillary services.37 Some NFP Electric

Entities own significant transmission facilities (e.g., BPA owns 75

percent of the transmission lines in the Pacific Northwest). In some

cases, Federal law and the regulations pursuant to which the Federal

power agencies are formed and operate require a particular Federal

power agency to allocate a portion of the transmission to particular

electric entities, including NFP Electric Entities, located within its

geographic area.

—————————————————————————

37 The Petition notes that the concept of generation capacity

is distinguishable from “transmission capacity,” which relates to

the limited amount of electric energy transmission available over

the interconnected electric transmission grid, and which is

generally defined as a measure of the transfer capability or

“capacity” remaining in the physical electric energy transmission

network for further commercial activity over and above already

committed uses. Additionally, Exhibit 2 of the Petition provides the

following example:

Federal power agency K sells to G&T cooperative J 100 MWs of

monthly “firm point-to-point transmission service” from location X

to location Y in the southeast U.S. for a term of 3 months at the

tariff rate of $2,000/MW-Month for a total transaction value of

$600,000. The geographic area in which such transmission service

takes place is outside the “footprint” of an RTO, and therefore

the transmission service is reserved on the Open Access Same Time

Information System (“OASIS”) Web site of the transmission owner,

K. J intends to use the transmission service to deliver wholesale

electric power to its distribution cooperative member-owners to

supply a portion of its distribution cooperative constituents’

retail electric load.

Petition Exhibit 2 at 3.

—————————————————————————

In certain areas of the country, the RTOs/ISOs control allocation

of transmission assets, rights and services, and the individual owners

of transmission assets do not have the ability to engage in bilateral

services arrangements involving those transmission assets, which are

under RTO/ISO management and control. In other areas of the country,

historical transmission services agreements, including those between

NFP Electric Entities, are “grandfathered” from the RTO/ISO rules and

procedures otherwise applicable to electric transmission services in

that region.

4. Fuel Delivered

The Petition describes a fourth category of transactions in which

one NFP Electric Entity delivers to another NFP Electric Entity fuel to

power electric generation facilities. The electric facilities owned and

operated by NFP Electric Entities vary widely in terms of the fuel used

by such facilities for generation. Fuel types may include nonfinancial

commodities such as coal, natural gas, uranium products, heating oil,

and biomass or waste products including wood chips, tires, and manure.

In addition to the fuel, one NFP Electric Entity may provide to another

NFP Electric Entity other services related to the fuel commodity, such

as fuel procurement, fuel transportation over pipeline, rail, barge and

truck, fuel storage, or fuel waste handling and storage services.38

—————————————————————————

38 Petitioners also described a scenario in which one NFP

Electric Entity may agree to manage for another NFP Electric Entity

the operational basis or exchange (location/time of delivery) risk

that arises from the recipient’s NFP Electric Entity’s location-

specific, seasonal, or otherwise variable operational need for fuel

delivered. Another example from Exhibit 2 of the Petition provides

that:

Joint power agency L supplies to municipal utility M a long-term

supply of natural gas from a natural gas project (Project Entity Z)

developed by L and other NFP Electric Entities for the purpose of

fueling L’s and M’s (and other NFP Electric Entity owners of Project

Entity Z’s) natural gas-fired electric generating facilities in the

California ISO market. M pays L for the cost of acquiring,

developing and improving the natural gas Project Entity Z through

direct “capital contributions” to Project Entity Z. In addition M

pays L a monthly fee for the natural gas supplied from the natural

gas project, composed of an operating cost fee component, an

interstate pipeline transportation cost fee component and an

operating reserve cost fee component. The natural gas-fired electric

generating facility is to be used by M to supply a portion of its

expected retail electric load.

Petition Exhibit 2 at 3-4.

—————————————————————————

[[Page 51003]]

5. Cross-Commodity Transactions

The Petition describes such transactions as commercial agreements

entered into between two NFP Electric Entities, including options, heat

rate transactions and tolling arrangements, whereby the electric energy

delivered to the recipient NFP Electric Entity is priced by reference

to the fuel source used or useable by the provider NFP Electric Entity

for generating such electric energy. Alternatively, the price paid for

the fuel by the recipient NFP Electric Entity may be calculated by

reference to the amount of electricity that the recipient NFP Electric

Entity generates using such fuel.

6. Other Goods and Services

The Petition notes that these agreements may involve sharing

property rights, equipment, supplies and services, including

construction, operation, and maintenance agreements, facilities

management, construction management, energy management or other energy-

related services tied to the electric facilities owned by, or

operations of, one or both of the NFP Electric Entities, including

emergency assistance or “mutual aid” arrangements.

In some regions of the country, state regulators or RTOs/ISOs have

established “demand side management programs” to assist utilities in

managing the supply/demand balance that is essential to delivering

reliable electric energy (which is not currently storable in commercial

quantities). Therefore, some NFP Electric Entities engage in joint

demand-side management programs with their retail electric customers

whereby the customers agree to reduce service/load requirements during

certain weather or emergency conditions. NFP Electric Entities may

agree with each other to engage in joint demand-side management

programs to conserve their collective generation resources and reduce

costs, and to comply with their collective obligations to RTOs/ISOs,

regional balancing authorities, and state or local regulators.

The Petition also notes that NFP Electric Entities may provide each

other with services related to the generation, transmission, and/or

distribution facilities owned by each, or with respect to the

maintenance (ongoing, outage, or emergency) or dispatch of generation

units. Especially when there is a weather event or other unexpected

outage which interrupts electric energy service to an NFP Electric

Entity’s customers, other NFP Electric Entities (and other electric

utilities) in the geographic area will provide goods and services on an

immediate basis, often without the opportunity of negotiating pricing

or payment terms until the electric energy service has been restored to

retail electric energy customers. These agreements between NFP Electric

Entities may involve operating each other’s facilities, sharing

equipment, supplies and employees (e.g., line crews), and interfacing

on each other’s behalf with suppliers/vendors, regulators and

reliability authorities and customers.

7. Environmental Rights, Allowances or Attributes

The last category of transactions described in the Petition relates

to a wide variety of Federal, regional, state, and local environmental

rights, allowances or attributes required to operate a particular NFP

Electric Entity’s electric facilities or operations, or to fulfill a

particular NFP Electric Entity’s regulatory requirements. NFP Electric

Entities may transact among themselves in environmental emissions

allowances, offsets or credits (including carbon), renewable energy,

distributed generation, clean energy or energy efficiency credits or

attributes (which can be regional or state specific in nature,

including “green tags”). NFP Electric Entities in a particular

geographic region, whose available allowances may be directly useable

to fulfill the needs of another NFP Electric Entity in the same region,

often will directly transact with each other, rather than go to a non-

NFP Electric Entity to negotiate a particular transaction.

C. Definition and Scope of NFP Electric Entities

The Petition defines NFP Electric Entities as:

(i) The United States, a State or any political subdivision of a

State, or (ii) an “electric cooperative” that receives financing

under the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.)

or that sells less than 4,000,000 megawatt hours of electricity per

year, or [(iii) any other electric cooperative, whether or not such

electric cooperative meets the requirements of clause (ii)

above,]1 or (iv) any agency, authority, instrumentality or

department of any one or more of the foregoing, or a federally-

recognized Indian tribe, or (v) any entity which is wholly owned,

directly or indirectly, by any one or more of the foregoing. For

purposes of this definition, an “electric cooperative” shall mean

an “electric membership corporation” or an “electric power

association” organized under State law, a “rural electric

cooperative,” “cooperative providing electric services to

consumers and farmers” or any similar entity referenced in other

Federal, State and local laws and regulations, so long as any such

entity is formed and continues to operate for the primary purpose of

providing electric service to its members on a not-for-profit,

cooperative basis, and is treated as a cooperative under the Federal

tax law.39

39 Petition at 14 (internal citations omitted).

Generally, the Petition represents that all NFP Electric Entities are

“nonfinancial end users of Electric Operations-Related Transactions,

and enter into such transactions only to hedge or mitigate commercial

risks.” 40 Summarized herein, the Petition describes in detail the

specific classes of entities it believes fall within its proposed NFP

Electric Entity definition, and justifies inclusion of each specific

class based upon a common public interest rationale.

—————————————————————————

40 Petition at 33. Petitioners explain that the term

“nonfinancial end users” means an NFP Electric Entity that does

not fall within the definition of a “financial entity” in CEA

2(h)(7)(C)(i) and that no NFP Electric Entity falls within that

definition. See id. at 33-34.

—————————————————————————

1. FPA 201(f) Entities

“FPA 201(f) entities” is the first class of NFP Electric Entities

defined by Petitioners. These entities include i) certain government

and cooperatively-owned electric utilities (as described in FPA section

201(f)) and ii) federally-recognized Indian tribes that own or operate

electric facilities (as determined by FERC case law).

a. Government and Cooperatively-Owned Electric Utilities Described by

FPA Section 201(f)

Petitioners seek relief from the CEA and Commission regulations

there under for those entities explicitly described by FPA section

201(f) 41 as being exempt from the plenary jurisdiction of FERC. Per

the Petition, the first category of these entities includes certain

government-owned electric utilities, including Federal electric

utilities such as BPA and other Federal agencies that operate electric

generating or transmission facilities,42

[[Page 51004]]

and state-chartered electric utilities such as the New York Power

Authority. Other examples of government-owned electric utilities

include state or county utility boards or public utility districts

formed under state or local law, joint action agencies or joint power

agencies formed under state law to provide wholesale power supply and

transmission services to member entities (each a Joint Action Agency),

and other political subdivisions of a state.43 Finally, municipal

utilities ranging in size from LPPC members such as the Los Angeles

Department of Water and Power and the Sacramento Municipal Utility

District, to the smallest municipal electric utilities with fewer than

500 electric meters, are also contemplated as government electric

utilities under FPA section 201(f).44

—————————————————————————

41 See supra note 19 and accompanying text.

42 Per the Petition, there are nine Federal electric utilities

in the United States, which are part of several agencies of the

United States Government:

The Army Corps of Engineers;

The Bureau of Indian Affairs and the Bureau of

Reclamation in the Department of the Interior,

The International Boundary and Water Commission in the

Department of State,

The Power Marketing Administrations in the Department

of Energy (BPA, Western Area Power Administration, Southwestern Area

Power Administration, and Southeastern Area Power Administration),

and

The Tennessee Valley Authority (TVA).

In addition, three Federal agencies operate electric generating

facilities:

TVA, the largest Federal power producer;

The U.S. Army Corps of Engineers; and

The U.S. Bureau of Reclamation.

43 Per the Petition, a public power district or public utility

district may be owned and operated by a city, county, state or

regional agency. See, e.g., Public Utility District No. 1 of Chelan

County, Washington (http://www.chelanpud.org/your-PUD.html). An

irrigation district is a utility organized under state law which

generates electricity in the course of supplying water. For example,

Imperial Irrigation District in California was formed in 1911 under

the California Irrigation District Act, as described at http://www.iid.com/index.aspx?page=39. Government-owned utilities are

accountable to elected and/or appointed officials and focus on

providing reliable and safe electricity service, keeping costs low

and predictable for its customers, while practicing good

environmental stewardship.

44 Per the Petition, a government owned or operated electric

utility may be a department of the governmental entity, or may be

organized as a separate agency, authority or instrumentality

thereof.

—————————————————————————

Per the Petition, the second category of entities described by FPA

section 201(f) are electric cooperatives that either are financed by

the U.S. Department of Agriculture’s Rural Utilities Service (“RUS”),

sell less than 4,000,000 megawatt hours of electricity per year, or

meet the requirements of an “aggregated FPA 201(f) entity.” These

electric cooperatives generally consist of (i) distribution

cooperatives, which distribute electric energy service directly to

their owner/member customers, and (ii) G&T cooperatives, which are

owned by distribution cooperatives and generate or purchase electricity

and transmit it to their constituent distribution cooperatives for

delivery to the distribution cooperatives’ owner/member customers.

Aggregated entities most commonly consist of a G&T cooperative formed

by its constituent distribution cooperative (NFP Electric Entity)

members or, comparably, a Joint Action Agency which is formed by its

constituent government-owned (NFP Electric Entity) utility members.

As background, Petitioners explain that the FPA originally was

enacted “to remedy rampant abuses in the investor-owned electric

utility industry” 45 but that cooperatively-owned electric utilities

are easily distinguishable from investor-owned electric utilities

because they are “effectively self-regulating.” 46 More

importantly, of the major abuses considered by Congress as the impetus

for the FPA legislation, “virtually none could be associated with the

[electric] cooperative structure where ownership and control is vested

in the consumer-owners.”47 Based on this understanding of the

legislative history, FERC’s predecessor, the Federal Power Commission

(“FPC”), concluded that electric cooperatives financed under the

Rural Electrification Act of 1936 (“REA”) 48 were intended by

Congress to be FPA 201(f) entities and exempt from the FPC’s

jurisdiction over “public utilities.” 49 The FPC made such a

determination in the 1960s notwithstanding the fact that, at that time,

electric cooperatives were not expressly described in FPA section

201(f).50

—————————————————————————

45 Salt River Project Agric. Improvement and Power District v.

Fed. Power Comm’n, 391 F. 2d 470, 475 (D.C. Cir. 1968) (emphasis

added by Petitioners).

46 Id. at 473 (elaborating that electric cooperatives are

“completely owned and controlled by their consumer-members and only

consumers can become members. They are non-profit. Each member has a

single vote in the affairs of the cooperative, and services are

essentially limited to members. No officer receives a salary for his

services[,] and officers and directors are prohibited from engaging

in any transactions with the cooperative from which they can earn

any profit.”) (citation omitted).

47 Id. at 475.

48 7 U.S.C. 901 et seq. The REA established the RUS as the

body to administer financing to rural utilities.

49 See Dairyland Power Coop. et al, v. Fed. Power Comm’n, 37

F.P.C. 12, 27 (1967).

50 As part of the Energy Policy Act of 2005 (“EPAct 2005”),

Congress codified the previous interpretation by FERC in Dairyland,

id., (affirmed by the D.C. Circuit Court in Salt River, 391 F. 2d

470) that electric cooperatives that receive financing under the REA

should be considered FPA 201(f) entities. At the same time, Congress

also expanded the FPA 201(f) exemption to electric cooperatives that

sell less than 4 million megawatt hours per year, even if those

electric cooperatives do not receive any financing from the RUS. See

Public Law 109-58, 1291, 119 Stat. 594, 985 (2005), amending FPA

201(f) “by striking “political subdivision of a state,” and

inserting “political subdivision of a State, an electric

cooperative that receives financing under the Rural Electrification

Act of 1936 (7 U.S.C. 901 et seq.) or that sells less than 4,000,000

megawatt hours of electricity per year.”

—————————————————————————

b. Federally-Recognized Indian Tribes

Federally-recognized Indian tribes that own or operate electric

facilities are not described by FPA section 201(f), and thus would be

subject to regulation as public utilities under the FPA. The Petition

notes, however, that FERC and its predecessor, the FPC, and at least

one court have determined such federally-recognized Indian tribes are

to be treated as entities described in FPA section 201(f).51 To

identify eligible Indian tribes, the Petition recommends that the

Commission rely on determinations made by the Secretary of the

Interior, periodically listed in the Federal Register, of Indian tribes

to be recognized by the U.S. government pursuant to Section 104 of the

Act of November 2, 1994.52

—————————————————————————

51 Per the Petition, see City of Paris, KY vs. Fed. Power

Comm’n, 399 F.2d 983 (D.C. Cir. 1968); Sovereign Power Inc., 84 FERC

] 61,014 (1998); Confederated Tribes of the Warm Springs Reservation

of Or., a Federally Recognized Indian Tribe, and Warm Springs Power

Enterprises, a Chartered Enter. of the Confederated Tribes of the

Warm Springs Reservation of Or., 93 FERC ] 61,182 at 61,599 (2000)

(concluding that “the Tribes are an instrumentality of the `United

States, a State or any political subdivision of a state”’ and that

Warm Springs Power Enterprises, a Chartered Enterprise of the

Tribes, was entitled to Tribes’ Section 201(f) exemption.).

52 Public Law 103-454, 108 Stat. 4791, 4792 (codified at 25

U.S.C. 479a-1).

—————————————————————————

Petitioners note that FERC’s determination that such Indian tribes

should be treated as FPA 201(f) entities was based on the fact that, in

operating such electric facilities, the Indian tribes perform

government functions–the funds generated by such electric operations

would be used for governmental purposes and would decrease the need for

federal funding. Additionally, Indian tribes are subject to Interior

Department oversight. Finally, like the other government or government-

owned electric entities described in FPA section 201(f), the Indian

tribes are tax exempt or “not-for-profit” entities.

2. Non-FPA 201(f) Electric Cooperatives

The Petition also requests relief for the very small number of

cooperatively-owned electric utilities that do not meet the criteria of

FPA section 201(f), either because they do not receive funding from

RUS, sell more than 4,000,000 megawatt hours of electricity in a given

year, or are not an “aggregated NFP

[[Page 51005]]

Electric Entity.” 53 FERC has estimated that there were

approximately fifteen electric cooperatives (of more than 900) which do

not meet the requirements set forth in FPA section 201(f).54

Petitioners request that the Commission recognize such cooperatives as

“appropriate persons,” in accordance with CEA sections 4(c)(1),

4(c)(2)(B), and 4(c)(3)(K), for purposes of an exemption under CEA

section 4(c)(6). Petitioners represent as a threshold matter that,

regardless of whether an electric cooperative meets the specific

criteria of FPA section 201(f), all cooperatively-owned electric

utilities share certain distinguishing features–a common not-for-

profit public service mission and self-regulating governance model–

that form the underlying rationale for the FPA section 201(f)

exemption.55

—————————————————————————

53 See Petition at 23. The Petitioners note that under various

state laws, cooperatively owned electric utilities, or electric

cooperatives, are sometimes called “electric membership

corporations” or “electric power associations.” In addition,

Petitioners note that under certain sections of tax laws, state

public utility laws or regulations, the FPA or the FERC’s

regulations, electric cooperatives are sometimes called “rural

electric cooperatives” or “cooperatives providing electric

services to consumers and farmers,” or by similar, but not

identical, entity names. See Petition at 2, note 5. In this Notice,

as the Petitioners did in their Petition, the Commission uses the

term “electric cooperatives” to encompass all of these entities,

which are formed for the primary purpose of providing electric

energy service to their owners/member customers on a not-for-profit

basis, and which are treated as cooperatives under Federal tax laws.

54 Statement of Cynthia A. Marlette, General Counsel of FERC,

before the Committee on Agriculture, Subcommittee on Conservation,

Credit, Energy, and Research, United States House of Representatives

(July 30, 2008) (available at http://www.ferc.gov/eventcalendar/Files/20080730104611-Marlette.pdf). NRECA believes that, of its

current members, the following six entities are non-FPA 201(f)

electric cooperatives: Pacific Northwest Generating Cooperative

(PNGC Power), Golden Spread Electric Cooperative, Old Dominion

Electric Cooperative, Wabash Valley Power Association, Wolverine

Power Cooperative, and Deseret Power Electric Cooperative.

55 Similarly, to be treated as a “cooperative” under Federal

tax law, regardless of 201(f) status, an electric cooperative must

operate on a cooperative basis. See 26 U.S.C. 501(c)(12),

1381(a)(2)(C). As explained by the United States Tax Court in the

seminal case of Puget Sound Plywood, Inc. v. Commissioner of

Internal Revenue, operating on a cooperative basis means operating

according to the cooperative principles of i) democratic member

control, ii) operation at cost, and iii) subordination of capital.

See 44 T.C. 305 (1965); see also Internal Revenue Manual Sec.

4.76.20.4 (2006) (elaborating on the cooperative principles by

explaining that each member of a cooperative has one vote, a

cooperative must allocate any excess operating revenue to its

members in proportion to the amount of business it did with each,

and that members share their interest, risk, and burden to obtain

services or benefits rather than invest as equity owners).

Additionally, for any electric cooperative to be exempt from Federal

income taxation pursuant to IRC 501(c)(12), it must collect annually

“85 percent or more of [its] income * * * from members for the sole

purpose of meeting losses and expenses.” 26 U.S.C. 501(c)(12)(A).

Accordingly, Petitioners argue that an electric cooperative,

regardless of FPA section 201(f) status, lacks incentive or

motivation to manipulate prices, disrupt market integrity, engage in

fraudulent or abusive sales practices, or misuse customer assets

because it: (1) Is a consumer cooperative; (2) is controlled by its

members; (3) must operate at cost and “not operate either for

profit or below cost;” (4) may not benefit its individual members

financially; and (5) if exempt from Federal income taxation, must

collect at least 85 percent of its income from members.

—————————————————————————

In analyzing whether an entity qualifies as an appropriate person

under CEA section 4(c)(3), Petitioners note that past Commission

determinations have focused on the financial strength and

sophistication of the persons for whom relief is being provided.

Petitioners also posit that CEA section 4(c)(3)(K) allows the

Commission to consider the operations management qualification of the

person or class of persons in relation to the exempted transactions, as

well as the person’s or class of person’s ability to execute the

exempted transactions without additional regulatory protection by the

Commission. When considered in light of these determinative factors,

Petitioners argue that source of financing or total electric energy

sales are not meaningful factors for purposes of differentiating

between electric cooperatives that are appropriate for an exemption

from the CEA and those that are not.56

—————————————————————————

56 Petitioners argue that in promulgating CEA section

4(c)(6)(C), “Congress effectively makes the determination for the

Commission that `entities described in FPA 201(f)’ are `appropriate

persons’ entitled to the benefits of the exemptive order.” Petition

at 23. Thus, by extension, Petitioners argue that if non-FPA 201(f)

electric cooperatives are at least as financially sound and

operationally capable as those electric cooperatives described by

FPA section 201(f), then they should also be considered appropriate

persons.

—————————————————————————

First, the Petition argues that whether out of necessity due to

insufficient Congressional appropriations, or by choice in order to

find more appropriate or less expensive terms for certain needs,

electric cooperatives may look to sources of financing beyond the RUS.

Other nonprofit cooperative financing entities, such as the National

Rural Utilities Cooperative Finance Corporation (“CFC”) or Co-

Bank,57 exist to supplement RUS financing or provide additional

financing resources and terms not available through the RUS.

Petitioners note that electric cooperatives always can choose to borrow

from private lenders or self-finance infrastructure investments and

operations with ongoing revenues and reserves. Eligibility for RUS

financing does not speak to an electric cooperative’s operational

soundness or financial strength.

—————————————————————————

57 Per the Petition, the CFC is a nonprofit cooperative entity

formed in 1969 by NRECA’s electric cooperative members. CFC provides

access to financing to supplement the loan programs of the RUS. CFC

is the largest non-governmental lender to America’s rural electric

systems, and nearly 200 electric cooperatives across the United

States rely solely on CFC for financing. CFC has separately

requested exemptive relief from the Commission for the swaps it

enters into related to providing financing to its members’ electric

cooperatives. CoBank is a cooperative bank owned by electric

cooperatives and agricultural cooperatives, and is a part of the

Farm Credit Administration system.

—————————————————————————

Next, the Petition suggests that greater electric energy sales

could result in greater financial strength. Petitioners note that while

very few electric cooperatives historically have sold 4,000,000

megawatt hours or more in a particular year, the success of the

electric cooperative model means that there may be a small number of

cooperatives in any particular year whose annual sales exceed the

threshold.58 Furthermore, an electric cooperative’s status under the

FPA may fluctuate year-to-year depending on its annual megawatt sales,

which always will fluctuate depending on usage trends, economic

conditions, and weather patterns. Petitioners believe that Congress’

policy decision to codify 4,000,000 megawatt hours per year as a

threshold was based solely upon the fact that FERC, as well as other

agencies, already used this level to identify “small utilities,”

“small entities,” or “small businesses” that should be afforded

protection from the costs and regulatory burdens imposed on larger

entities.59

—————————————————————————

58 Per the Petition’s representation of data collected by

NRECA, fewer than one percent of distribution cooperatives exceed

the four million MWh annual sales threshold, as do approximately 24

of 66 G&T cooperatives. The Commission understands that of those G&T

cooperatives that exceed the sales threshold in a given year, the

majority are still FPA 201(f) entities because they receive

financing from RUS.

59 See Petition at 35-36. Counsel for Petitioners also

represent that EPAct 2005 was largely a response to the electrical

blackouts in the northeast United States during 2003 that later were

found to be attributable to generation and transmission failures of

the largest electric utility providers. Thus, Congress’ chief

concern in expanding the 201(f) exemption for electric cooperatives

was ensuring that entities with substantial generation and

transmission capacity remained subject to the plenary jurisdiction

of FERC. Per the Petition, Congress did not make a policy decision

that the electric cooperatives selling 4 million megawatt hours or

more per year required regulation under FPA 201(f) and, where EPAct

2005 did give FERC additional discretionary jurisdiction over

electric cooperatives, FERC has not chosen to exercise that

discretionary authority to date. When FERC exercises its

jurisdiction in certain instances, it allows non-FPA 201(f) electric

cooperatives additional regulatory flexibility, subject to “self-

regulation” by such cooperatives’ member/owner boards,

distinguishing the not-for-profit electric sector from investor-

owned electric utilities. The very small number of electric

cooperatives that do not meet the 4 million megawatts per year

threshold at any point in time are, nonetheless, “self-regulating

entities,” share the same cooperative governance structure, operate

on a cooperative basis and are not-for-profit entities.

—————————————————————————

[[Page 51006]]

Thus, Petitioners argue that there is no implication under any of

the FPA section 201(f) criteria for electric cooperatives that non-

201(f) electric cooperatives are more or less creditworthy or

financially sound, or more or less deserving of operational deference

or regulatory preference, than electric cooperatives that meet one of

the FPA section 201(f) criteria.60

—————————————————————————

60 Petitioners note that non-FPA 201(f) electric cooperatives

likely own more or larger generation and transmission assets, and

therefore are arguably at least as financially sound and

operationally qualified as electric cooperatives described in FPA

section 201(f). Furthermore, these non-FPA 201(f) electric

cooperatives may meet the financial criteria established in CEA

section 4(c)(3)(F) for an “appropriate person” by having a net

worth exceeding $1,000,000 or total assets exceeding $5,000,000.

—————————————————————————

III. Commission Determinations

A. Scope of the Proposed Order

In the exemptive order proposed herein (the “Proposed

Order”),61 the Commission is providing for a narrower scope of

eligibility than requested by Petitioners. While the proposed exemptive

relief is structured in a manner similar to the Petition’s suggested

approach and incorporates many of the same parameters,62 the Proposed

Order uses different terminology to describe the pertinent categories

of affected entities and transactions, and limits the exempted

transactions to certain enumerated categories.63 The Proposed Order

identifies (i) the entities eligible to rely on the exemption for

purpose of entering into an exempt transaction (“Exempt Entities”);

(ii) the agreement, contract, or transaction for which the exemption

may be relied upon (“Exempt Non-Financial Energy Transactions”); and

(iii) the provisions of the CEA that will continue to apply to Exempt

Entities engaging in Exempt Non-Financial Energy Transactions.

Accordingly, relief from the requirements of the CEA and Commission

regulations provided in the Proposed Order will be available for only

an Exempt Entity entering into an Exempt Non-Financial Energy

Transaction with another Exempt Entity, subject to certain conditions.

—————————————————————————

61 The text of the Proposed Order is set forth in section IV

of this Notice.

62 See Petition Exhibit 3.

63 The Commission believes that the open-ended relief sought

by the Petitioners makes it difficult to evaluate the full range of

transactions that would be subject to exemption and, thus, to

conduct legitimate public interest and CEA purpose determinations as

required under CEA section 4(c). As the Commission is not providing

the categorical relief requested by Petitioners at this time, it

considered the Petition’s secondary requests to provide i) an

additional category for “trade options” and/or ii) delegated

authority to Commission staff to review and approve new categories

of exempted transactions for purposes of being eligible for the

relief provided herein. See supra note 26. Given Congressional

intent that the Commission need not determine the nature of a

product when providing 4(c) relief, the Commission does not believe

it would be appropriate to provide specific relief to trade options

as a category of transactions in the context of this proposed

relief. See supra note 7 and accompanying text. While it is possible

that the scope of the transactions eligible for the relief proposed

herein may include transactions that otherwise would qualify as

trade options, the Commission need not make such a finding in the

context of the proposed 4(c) exemption. Rather, the Commission has

determined to limit the scope of the proposed exemption to Exempt

Non-Financial Energy Transactions, as described in the Proposed

Order, and the Commission is requesting comment on this description.

As for the Petitioner’s request regarding delegated authority to

CFTC staff, the Commission has never in the past delegated authority

to staff to make ad-hoc 4(c) determinations, and does not propose

such a delegation herein. Additionally, the Commission is not

providing relief retroactive to the enactment of Dodd-Frank, as

requested by Petitioners. The Commission specifically requests

comment as to whether it should provide such relief, and as to

whether such relief would be necessary to provide any relief beyond

that which has already been available via the Commission’s Dodd-

Frank implementation program, related exemptive orders, and staff

no-action letters. The Commission also declines to propose, as was

requested by Petitioners, that the transactions subject to the

relief provided herein will not affect any entity’s regulatory

status under the CEA and Commission regulations. The Commission

requests comment as to how the relief provided by the Proposed Order

would be incomplete without such a provision and as to whether the

Commission should include such a provision in the final exemptive

order.

—————————————————————————

1. Exempt Entities

The Commission is proposing to include three general categories of

electric utilities as Exempt Entities in the relief provided herein:

(i) Government-owned electric utilities described by FPA section

201(f); (ii) electric utilities owned by Federally-recognized Indian

tribes, otherwise subject to regulation as public utilities under the

FPA; and (iii) cooperatively-owned electric utilities, regardless of

whether such utilities are described by FPA section 201(f), so long as

they are treated as cooperative organizations under the Internal

Revenue Code (“IRC”).64 Given the unique public service mission and

governance structure of government, Indian tribe, and cooperatively-

owned electric utilities (as compared to investor-owned public

utilities), the Commission believes that such Exempt Entities, when

engaged in Exempt Non-Financial Energy Transactions, have less

financial incentive to engage in market manipulation or other types of

abusive trade practices that may implicate the public interest and/or

purposes of the CEA and therefore are appropriate for section 4(c)

relief.65

—————————————————————————

64 The Proposed Order also includes as an Exempt Entity any

not-for-profit entity that is wholly owned, directly or indirectly,

by any one or more of the entities included within the three general

categories above.

65 The potential for manipulation described here differs from

the situation in CFTC v. Dairy Farmers of America. In this case, a

dairy cooperative was able to have a direct effect on a small

illiquid spot cheese market that was a pricing component in the U.S.

Department of Agriculture formula used to calculate milk prices

under the Federal Milk Marketing Orders in an attempt to manipulate

the price of Class III milk futures. The electric energy market

situation is different because Exempt Entities do not report prices

of Exempt Non-Financial Energy Transactions to indexes used to

settle other derivative products that could benefit an Exempt Entity

cooperative’s members.

—————————————————————————

Generally, Exempt Entities are limited to nonfinancial commercial

end users that operate on a not-for-profit basis. The Proposed Order

defines Exempt Entities as those entities that do not meet the

definition of a “financial entity” in CEA section 2(h)(7)(C). The

purpose of this criterion is to prevent a cooperative that exists

primarily in order to provide financing for its members, and thus

enters into a significant number of derivative transactions to hedge

financial price risks, such as movements in interest rates, from

benefiting from the relief provided in the Proposed Order.66

—————————————————————————

66 The Commission also is proposing, in a separate 4(c) order,

to extend the end-user exception found in CEA section 2(h)(7) to

cooperatives that are financial entities as defined in CEA section

2(h)(7)(C) (“Financial Cooperative 4(c) Order). The purpose of this

4(c) relief is to extend the benefits of the end-user exception to

cooperatives that meet the definition of a financial entity, but

whose members otherwise would qualify for the end-user exception but

choose to take advantage of the cooperative’s low-cost access to

financing. See 77 FR 41940 (July 17, 2012). The Commission notes,

however, that for the policy reasons described herein as well as in

the Financial Cooperative 4(c) Order, the extension of the end-user

exception to financial cooperatives still requires reporting of swap

transactions, whereas the relief provided in this Proposed Order

does not.

—————————————————————————

a. Electric Utilities Owned by Federal, State, or Local Government

Pursuant to the mandate in CEA section 4(c)(6)(C) and subject to

the determinations described in Section III.B below, the Commission is

proposing to include as Exempt Entities in its Proposed Order all

government-owned electric utilities that are described by FPA section

201(f). FPA section 201(f) exempts from the plenary jurisdiction of

FERC “any agency, authority, or instrumentality of” or “any

corporation which is wholly owned, directly or indirectly, by” the

federal government or a state or local government. These entities

include, but are not limited to, all federal agency-owned electric

generation and

[[Page 51007]]

transmission facilities,67 state-chartered electric utilities,68

utility boards or public utility districts formed under state or local

law,69 and joint action or joint power agencies formed under state

law to provide wholesale power supply and transmission services to

member entities.70

—————————————————————————

67 See supra note 42.

68 These utilities include, but are not limited to, entities

such as the New York Power Authority.

69 These utilities include, but are not limited to, municipal

electric utilities, regardless of size.

70 These utilities include government-owned public power and

public utility districts such as an irrigation district organized

under state law that generates electric energy during the course of

supplying water.

—————————————————————————

b. Electric Utilities Owned by an Indian Tribe

Based on the determinations described in Section III.B below and

pursuant to CEA section 4(c)(1), the Commission is proposing to include

as Exempt Entities in its Proposed Order all electric facilities owned

by federally-recognized Indian tribes that otherwise would be subject

to FERC’s plenary jurisdiction. For purposes of the Proposed Order,

“federally-recognized” means that the Indian tribe has been

documented by the Secretary of the Interior in the Federal Register as

having been recognized by the U.S. government, pursuant to section 104

of the Act of November 2, 1994.71

—————————————————————————

71 Public Law 103-454, 108 Stat. 4791, 4792, as codified at 25

U.S.C. 479a-1.

—————————————————————————

The Commission has determined that electric utilities owned by

federally-recognized Indian tribes are no different substantively than

government-owned electric utilities described immediately above for

purposes of benefiting from the relief provided in the Proposed Order.

Like government-owned electric utilities, electric utilities owned by a

federally-recognized Indian tribe use funds generated from electric

energy sales for purposes of running a tribal government. That is,

instead of accruing profits for the benefit of private investors or

shareholders, any excess operating revenues related to the generation

or transmission of electricity are used by the Indian tribe to support

the tribal governing body and reduce dependence on federal funding.

Additionally, Indian tribes are tax-exempt or not-for-profit entities.

Finally, the Commission notes that for many of the same reasons just

noted, FERC has interpreted “instrumentalities” of government to

include federally-recognized Indian tribes, thus treating electric

facilities owned by these Indian tribes as FPA section 201(f)

entities.72

—————————————————————————

72 See supra note 51.

—————————————————————————

c. Electric Utilities Owned as Cooperative Organizations

Pursuant to CEA section 4(c)(6)(C), and subject to the

determinations described in Section III.B below, the Commission is

proposing to include as Exempt Entities in its Proposed Order all

cooperatively-owned electric utilities that are described by FPA

section 201(f).73 Additionally, pursuant to the exemptive authority

provided in CEA section 4(c)(1) and subject to the determination

described in Section III.B below, the Commission is proposing to

include as Exempt Entities all other electric cooperatives that are not

described by FPA section 201(f).74 By reference to the IRC in the

Proposed Order, an “electric cooperative” means a non-profit or not-

for-profit entity that is organized and continues to operate primarily

to provide its members with electric energy services at the lowest cost

possible and is taxed as an electric cooperative pursuant to IRC

section 501(c)(12) or 1381(a)(2)(C).75 In order for an electric

utility to be taxed as a cooperative, the electric utility must

demonstrate that it operates in accordance with three principles: (i)

Democratic member control; (ii) operation at cost (i.e., allocating any

excess revenue, less cost of producing the revenue, among members in

proportion to the amount of business done with each); and (iii)

subordination of capital (i.e., no single contributor of capital to the

cooperative can control the operations or receive most of the pecuniary

benefits of operations, setting a cooperative apart from an

investor).76

—————————————————————————

73 FPA section 201(f) exempts from the plenary jurisdiction of

FERC any electric cooperative that either is funded by the RUS,

sells less than 4,000,000 megawatt hours per year of electricity, or

qualifies as an aggregated FPA 201(f) entity. An aggregated FPA

201(f) entity consists of “any corporation which is wholly owned,

directly or indirectly, by any one or more [FPA 201(f) entity].”

These entities include Joint Action Agencies that are formed by

constituent government-owned electric utilities described by FPA

section 201(f).

74 See infra Section III.B.4 for the Commission’s analysis of

why non-201(f) electric cooperatives are deemed to be appropriate

persons for purposes of CEA section 4(c)(1) relief.

75 26 U.S.C. 501(c)(12), 1381(a)(2)(C). For purposes of the

definition, the term “electric cooperative” includes a “rural

electric cooperative.” The Commission understands that while not

required for federal income tax status, many electric cooperatives

are organized under state cooperative statutes as well. To the

extent such laws impose requirements that conflict with those in IRC

501(c)(12), state law governs without jeopardizing 501(c)(12)

status. See Internal Revenue Manual Sec. 4.76.20.8 (2006).

76 The term “cooperative” is not defined in IRC 501(c)(12)

or 1381(a)(2)(C). Rather, common law has interpreted operation on a

cooperative basis to mean the organization demonstrates the three

principles noted above. See Puget Sound Plywood v. Commissioner, 44

T.C. 305, 307-308 (1965). Electric cooperatives receive tax-exempt

status if they meet the additional criteria of receiving at least 85

percent of revenue from their members for the sole purpose of

meeting losses and expenses. See IRC 501(c)(12)(A). Otherwise,

electric cooperatives are subject to federal income tax. See IRC

1381(a)(2)(C); Rev. Rul. 83-135.

—————————————————————————

Exempt Entity electric cooperatives generally conform to one of two

structures. First, a G&T cooperative generates or purchases and

transmits electric energy at wholesale prices to its constituent

distribution cooperatives, which are members/owners.77 Second, a

distribution cooperative sells electric energy to member/owner retail

customers.78 Both structures are consumer cooperatives, meaning that

they were formed by consumers for the “benefit of [such] members in

their capacity as consumers.” 79 As noted above, Exempt Entities do

not include cooperatives that qualify as financial entities pursuant to

CEA section 2(h)(7)(C), regardless of whether they are recognized as

FPA section 201(f) entities.80

—————————————————————————

77 G&T cooperatives may also transmit electric energy to other

G&T cooperatives that are members based on “generation capacity”

agreements as described by Petitioners. See supra Section II.B.2.

78 Retail customers, in turn, use the electric energy to power

everyday activities, whether commercial or residential in nature.

79 See Puget Sound Plywood, 44 T.C. at 306. Alternatively,

producer cooperatives, such as large farming cooperatives, exist for

the “benefit of the members in their capacity as producers.” See

id. The Commission notes that the public interest rationale for

exempting consumer electric cooperatives articulated herein would

not necessarily apply to other producer cooperatives, given

differences in operational purposes and motivations behind forming

such cooperatives.

80 Additionally, financial cooperatives are not tax-exempt

entities pursuant to IRC 501(c)(12). See Internal Revenue Manual

Sec. 4.76.20.5 (2006). The Commission intends for financial

cooperatives that finance electric cooperatives, such as the CFC, to

rely on the exemptive relief provided in the recently-proposed

financial cooperative 4(c) order. See supra note 66.

—————————————————————————

2. Exempt Non-Financial Energy Transactions

The Proposed Order defines Exempt Non-Financial Energy Transactions

as those agreements, contracts, or transactions entered into between

Exempt Entities primarily in order “to satisfy existing or anticipated

contractual obligations to facilitate the generation, transmission,

and/or delivery of electric energy service to customers at the lowest

cost possible, and the agreement, contract, or transaction is intended

for making or taking physical delivery of the commodity upon which the

agreement, contract, or transaction is based.” 81

[[Page 51008]]

Exempt Non-Financial Energy Transactions are limited to six categories

of agreements, contracts, or transactions, as described in further

detail in the Proposed Order,82 which facilitate: (i) The generation

of electric energy by an Exempt Entity, including fuel supply; (ii) the

purchase or sale and transmission of electric energy by/to an Exempt

Entity; and (iii) compliance with electric system reliability

obligations applicable to the Exempt Entity and its facilities or

operations.

—————————————————————————

81 The Petition asserts that the purpose of all transactions

for which relief is sought (as described therein) must be “ `to

hedge or mitigate commercial risks’ (as such phrase is used in CEA

Section 2(h)(7)(A)(ii)).” See Petition at 4. The Commission

believes, however, that based on the general descriptions and

accompanying examples of Electric Operations-Related Transactions

provided in Petition, some types of transactions may not be

agreements, contracts, or transactions that the Commission

traditionally has viewed to “hedge or mitigate commercial risk” as

such phrase is used in CEA section 2(h)(7)(A)(ii). Due to the

breadth and vagueness of some of the Petition’s descriptions, it is

unpractical for the Commission to identify every manifestation of an

Electric Operations-Related Transaction that does not come within

the Commission’s jurisdiction, although it has attempted to do so to

the extent that the Commission has already made an affirmative

determination elsewhere as to the nature of a product described in

the Petition. See infra notes 86-90 and accompanying text. In any

case, in order to provide Exempt Entities with regulatory certainty

pursuant to CEA section 4(c), the Commission is defining Exempt Non-

Financial Energy Transactions to include all agreements, contracts,

or transactions entered into for the primary purpose of satisfying

existing or anticipated contractual obligations to fulfill an Exempt

Entity’s public service mission that are intended for making or

taking physical delivery of the underlying commodity. The Commission

is seeking comments on the merits to this approach in defining

Exempt Non-Financial Energy Transactions.

82 The descriptions of the categories of exempted transactions

in the Proposed Order are based on the Commission’s understanding of

the transaction types as commonly known to the electric industry, as

informed by the descriptions provided in the Petition and the

Commission’s past experience in these markets. While the categories

are identified with the same terminology used in the Petition, the

Commission notes that these categories are not described in

identical terms and therefore do not necessarily describe the same

scope of transactions as contemplated in the Petition for exemption.

The Commission understands that many of the terms used to identify

categories of transactions in the Petition are terms of art,

commonly understood by the electric energy industry (including by

Exempt Entities).

—————————————————————————

When combined with the requirements for Exempt Entities described

above, the Commission believes that Exempt Non-Financial Energy

Transactions, as defined under the Proposed Order, will not be used for

speculative purposes. That is, Exempt Entity counterparties to Exempt

Non-Financial Energy Transactions must contemplate “delivery” of the

underlying good or service at the time they enter into the agreement,

contract, or transaction, whether that be for electric energy,

generation capacity, access to transmission lines, fuel, or some

combination of the foregoing.83 Furthermore, these transactions

generally are not used by Exempt Entities for the primary purpose of

hedging fluctuations in the price of electric energy or any other

commodity related to the generation, transmission, and/or delivery of

electric energy to customers.84 Finally, the majority of Exempt Non-

Financial Energy Transactions are not suitable for trading on an

exchange such as a registered DCM or SEF due to their highly bespoke

nature, and cannot include transactions based on, derived from, or

referencing any financial commodity or any metal, agricultural, crude

oil or gasoline commodity that cannot be used as fuel to generate

electric energy. For these reasons, and for the reasons discussed in

the 4(c) analysis provided in Section III.B below, the Commission

believes that these transactions are unlikely to have an impact on

price discovery or the functioning of markets regulated by the

Commission, and thus are appropriate for conditional relief from the

requirements of the CEA and regulations thereunder, pursuant to CEA

section 4(c).

—————————————————————————

83 Although some agreements may be settled through a book-out

transaction, the transaction may never be entered into for

speculative purposes.

84 A key component of bona fide hedging, as defined in the

Commission’s regulations, is reducing the risk of fluctuations in

price. In contrast, Exempt Non-Financial Energy Transactions

primarily are used for making or taking delivery of electric energy

in the physical marketing channel.

—————————————————————————

The unique nature of the electric energy industry, including the

unique nature of the not-for-profit utility structure, influenced the

Commission’s choice of the transactions within the scope of the

exemption in the Proposed Order. Supply of reliable, affordable

electric energy has long been constrained by a limited amount of

generation and transmission capacity, particularly in rural regions,

that is capable of meeting peak demand. Unlike many physical

commodities, electric energy is not capable of being purchased in large

commercial quantities ahead of time, delivered, and stored for later

consumption or use. That is, electric energy must be used or consumed

on an as-needed basis.

Demand, on the other hand, can be subject to unpredictable

fluctuations due to emergency situations and changes in weather

patterns, usage trends, and larger macroeconomic conditions. Thus,

electric utilities, including Exempt Entities, negotiate highly

customized commercial arrangements in order to fulfill these constantly

fluctuating retail electric energy needs while still complying with

national and regional environmental and reliability standards. Each

category of Exempt Non-Financial Energy Transactions described in the

Proposed Order represents a component of these larger bespoke

commercial transactions used to fulfill an Exempt Entity’s public

service mission.85

—————————————————————————

85 Each category represents a factor in the ultimate price

paid by retail customers for electric energy. For example,

“generation capacity” transactions represent the cost component of

acquiring and maintaining the generation assets used to produce the

electric energy. “Electric energy delivered” represents the actual

cost of using the generation assets to produce the electric energy.

—————————————————————————

The Commission notes that not every transaction described by the

Petition is being included in the Commission’s definition of Exempt

Non-Financial Energy Transaction. Due to the Commission’s recent joint

final rule and interpretation with the SEC in which it further defined

what is (and is not) a swap (“Products Release”),86 the Commission

believes it would not be appropriate to provide 4(c) relief from the

requirements of the CEA and Commission regulations thereunder for

certain transactions that are not swaps.87

—————————————————————————

86 77 FR 48208 (August 13, 2012).

87 The Commission has determined to interpret the forward

exclusion from the swap definition consistently with the forward

exclusion from the “future delivery” definition. Id. at 48227.

Therefore, the forward exclusion from the swap definition applies

equally to the forward exclusion from the “future delivery”

definition. See id. at 48233, note 271.

—————————————————————————

Specifically, the Commission notes that, consistent with an example

provided in the Products Release, the example of a Fuel Delivered

transaction provided in Exhibit B of the Petition would be covered by

the forward exclusion from the swap definition.88 Additionally, the

Commission notes that, consistent with the general description provided

in the Products Release, agreements, contracts, and transactions

involving the category of Environmental Rights, Allowances or

Attributes as specifically described by the Petition are covered by the

forward exclusion from the swap definition.89 Accordingly, while

these agreements, contracts, and transactions are not covered by the

relief in the Proposed Order, they nonetheless are not subject to the

requirements of the CEA and Commission regulations thereunder otherwise

applicable to swaps, such as

[[Page 51009]]

clearing, trade execution, and reporting.90

—————————————————————————

88 Compare Petition Exhibit 2 at 3 with 77 FR 48236.

89 Compare Petition at 12 and Petition Exhibit 2 at 6 with 77

FR 48233-234.

90 However, any agreement, contract, or transaction that is a

swap referencing one of these agreements, contracts, and

transactions may be subject to the jurisdiction of the CEA (e.g., an

option or other swap on or related to the price of an environmental

allowance).

—————————————————————————

Finally, the descriptions of the categories of Exempt Non-Financial

Energy Transactions in the Proposed Order do not constitute official

Commission determinations as to those transactions’ legal status as a

product subject to the jurisdiction of the CEA.91 To the extent

overlap exists between transactions described as being subject to the

forward exclusion from the swaps definition in the Products Release and

transactions described by the categories of Exempt Non-Financial Energy

Transactions in the Proposed Order, the Commission is requesting public

comment as to whether the Proposed Order should provide relief for such

transactions.

—————————————————————————

91 As noted above, CEA section 4(c) does not compel the

Commission to make such a determination prior to issuing 4(c)

relief. See supra note 7 and accompanying text. In contrast, and in

addition to providing per se determinations as to the product

classification of certain transactions, the Products Release

provides interpretive guidance as to how the Commission would

analyze certain categories of transactions for purposes of

determining whether a particular transaction is a swap. Accordingly,

certain transactions covered by the categories of Exempt Non-

Financial Energy Transactions in the Proposed Order may not be

swaps. See, e.g., 77 FR 48238 (noting that the Commission will

interpret a “full requirements” contract with embedded volumetric

optionality as a forward and not an option if the contract exhibits

the features described in the Products Release in section

II.B.2.(b)(ii)).

—————————————————————————

3. Conditions

Under the Proposed Order, Exempt Entities would remain subject to

certain conditions. First, the Commission’s general anti-fraud, anti-

manipulation, and enforcement authority found in CEA sections

2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and

Commission rules 32.4 and Part 180, which have application to both

derivative and cash market transactions, will still apply. This

condition will allow the Commission to initiate enforcement proceedings

against Exempt Entities found to be engaged in manipulative,

fraudulent, or otherwise abusive trading schemes when executing Exempt

Non-Financial Energy Transactions with other Exempt Entities.

Additionally, the Commission reserves its authority to inspect the

books and records of Exempt Non-Financial Energy Transactions already

kept in the normal course of business pursuant to the Commission’s

regulatory inspection authorities, in the event that circumstances

warrant the need to gain greater visibility with respect to Exempt Non-

Financial Energy Transactions as they relate to Exempt Entities’

overall market positions and to ensure compliance with the terms of the

Proposed Order.

B. CEA Section 4(c) Considerations

The Commission is issuing the Proposed Order pursuant to authority

found in CEA sections 4(c)(1) and 4(c)(6), among other reasons, because

it believes that the proposed exemption will promote responsible

economic or financial innovation and fair competition. In addition to

criteria found in those provisions, both sources of exemptive relief

require the Commission to make certain determinations based on criteria

found in section 4(c)(2), as well.92 Accordingly, the Commission

considers and proposes to determine that: (i) CEA section 4(a) should

not apply to the transactions eligible for the proposed exemption (as

transacted by the entities eligible for the proposed exemption), (ii)

providing section 4(c) relief from the CEA for Exempt Non-Financial

Energy Transactions (as entered into between Exempt Entities) is

consistent with the public interest and the purposes of the CEA, (iii)

Exempt Entities are “appropriate persons” within the meaning of the

term as defined in 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.

—————————————————————————

92 The Commission interprets the phrase, “the Commission

shall, in accordance with [CEA section 4(c)(1) and 4(c)(2)], exempt

from the requirements of [the CEA] * * *,” to mean that the

Commission must make the determinations required under CEA sections

4(c)(1) and 4(c)(2) prior to providing the mandated relief.

—————————————————————————

1. Responsible Economic or Financial Innovation and Fair Competition

The Commission believes that the exemption provided in the Proposed

Order will promote financial innovation in electric energy markets

facilitated by government and cooperatively-owned utilities. Government

and cooperatively-owned electric utilities are not-for-profit entities

whose sole purpose and mission is “to provide reliable electric energy

to retail electric customers every hour of the day and every season of

the year, keeping costs low and supply predictable, while practicing

cost-effective environmental stewardship.” 93 The consumer-as-owner

cooperative model of electric utility, in partnership with municipal

utilities and federal power agencies, has proven to be well-suited in

developing innovative solutions to a complex array of issues related to

extending electric energy generation and transmission resources into

geographic areas of the United States where economies of scale do not

exist, particularly those rural areas where traditional investor-owned

utilities have chosen not to invest.94 In order to meet these

electric energy challenges, however, the Exempt Entity business model

has depended on a flexible operating environment, facilitated over time

by other regulatory relief such as the exemption from FERC’s plenary

jurisdiction provided by FPA section 201(f).

—————————————————————————

93 Petition at 22.

94 For instance, investor-owned, private utilities lacked a

profit incentive early on to invest the vast sums of capital

necessary to expand electric energy service into rural areas where

the requisite infrastructure was not already in place. With support

from the RUS, as established under the FPA, electric cooperatives

were first established in order to serve these rural communities.

—————————————————————————

Due to factors largely beyond the control of Exempt Entities, the

production, distribution, and usage needs of each Exempt Entity are

constantly changing and have the potential to create the substantial

commercial risk of not having enough generation, transmission, or

distribution capacity for Exempt Entities to meet peak demand. Normally

without the benefit of size and customer density, Petitioners contend

that Exempt Entities have evolved to rely largely on each other in

order to fulfill their public service mission of providing electric

energy to their member-owners and retail customers at the lowest cost

possible.95 The transactions listed in the Proposed Order reflect

this type of innovation. Going forward, due to the limitations of

standardized derivative contracts in providing the same type of highly

customized resources to unique energy needs, it is important that

Exempt Entities continue to have the flexibility to negotiate

innovative new arrangements bilaterally for the purpose of achieving

their mission.

—————————————————————————

95 For example, many G&T cooperatives are formed exclusively

by distribution cooperatives for the purpose of providing each

distribution cooperative with its full requirements.

—————————————————————————

Additionally, the Commission notes that, under current Commission

regulations and guidance, it is unclear whether all Exempt Entities

would qualify as eligible contract participants (“ECPs”), as such

term is defined under CEA section 1a(18).96 Therefore, absent

[[Page 51010]]

relief such as that proposed herein, there is a risk that some Exempt

Non-Financial Energy Transactions meeting the definition of a swap that

involve non-ECP counterparties could not be traded away from a

designated contract market.97 As described elsewhere in this release,

Exempt Entities engage in Exempt Non-Financial Energy Transactions with

one another on only a bilateral basis because such transactions are not

replicable on an exchange (whether due to transaction size, customized

terms, or other reasons). Therefore, the Commission is proposing the

exemption in the Proposed Order to ensure that Exempt Entities have the

regulatory certainty necessary to continue negotiating highly

customized, physically-settled agreements, contracts, and transactions

that serve their unique public service mission of providing reliable,

affordable electric energy to customers.

—————————————————————————

96 7 U.S.C. 1a(18). In a recent final interpretive rule

further defining entities under the CEA, as amended by the Dodd-

Frank Act (“Entities Release”), the Commission declined to

recognize certain entities such as not-for-profit natural gas

utilities as having per se ECP status. See Further Definition of

“Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap

Participant,” “Major Security-Based Swap Participant” and

“Eligible Contract Participant,” 77 FR 30596, 30657 (May 23,

2012). The Commission noted that it was, however, considering

granting relief to FPA section 201(f) entities, pursuant to new

authority under CEA section 4(c)(6), which “[might] address the

concerns of some commenters” such as entities similarly situated to

the utilities represented by Petitioners. See id. The relief

provided in the Proposed Order is consistent with the Commission’s

Entities Release.

97 See CEA section 2(e).

—————————————————————————

The Commission also believes that the relief provided in the

Proposed Order will not distort the competitive landscape. First, the

transactions covered by the Proposed Order relate, in many instances,

to longstanding and exclusive agreements between Exempt Entities. As

such, the Commission does not believe that granting an exemption from

the requirements of the CEA either would change the nature of these

transactions, or cause an Exempt Entity to enter into an arrangement

with another Exempt Entity instead of an investor owned utility or some

other counterparty solely because the agreement would be covered by the

exemption in the Proposed Order. The benefits of the relief provided in

the Proposed Order to government utilities and electric cooperatives

will maintain the current competitive landscape, thus permitting Exempt

Entities to continue using Exempt Non-Financial Energy Transactions to

fulfill their public service mission, as opposed to providing an unfair

advantage to one group over another group.98

—————————————————————————

98 The Commission notes that certain non-Exempt Entity

electric utilities also may qualify for the end-user exception from

the clearing and trade execution requirements for swaps under CEA

section 2(h)(7) when engaged in bona fide hedging transactions. See

7 U.S.C. 2(h)(7)-(8).

—————————————————————————

The CFTC is requesting comment on whether the Proposed Order may

foster both financial or economic innovation and fair competition.

2. Applicability of CEA Section 4(a)

The Commission does not believe that CEA section 4(a), the

exchange-trading requirement for futures contracts, should apply to

Exempt Non-Financial Energy Transactions as defined in the Proposed

Order. When transacted between Exempt Entities, these transactions are

highly negotiated and bespoke in nature, cater specifically to the

Exempt Entities’ respective electricity, fuel, or other needs, and are

intrinsically related to the Exempt Entities’ public-service mission.

Accordingly, the Commission does not view Exempt Non-Financial Energy

Transactions as being suitable for on-exchange trading, in large part

because, as noted above, these transactions and markets are unlikely to

have an impact on price discovery or the functioning of markets

regulated by the Commission. Thus, CEA section 4(a) should not apply.

3. Public Interest and the Purposes of the CEA

Exempting certain physical transactions between entities described

in FPA section 201(f), and certain other electric cooperatives, from

the provisions of the CEA and the regulations there under, subject to

certain anti-fraud, anti-manipulation, and recordkeeping conditions, is

consistent with public interest and the purposes of the CEA for the

reasons discussed below.

a. Public Interest

CEA section 3(a) describes Congress’ findings as to certain

national public interests facilitated by transactions subject to the

Act. These public interests include “providing a means for managing

and assuming price risks, discovering prices, or disseminating pricing

information through trading in liquid, fair and financially secure

trading facilities.” 99

—————————————————————————

99 CEA 3(a), 7 U.S.C. 5(a).

—————————————————————————

Given the unique nature of each Exempt Non-Financial Energy

Transaction conducted between Exempt Entities, such transactions are

generally non-fungible and therefore cannot be traded as standardized

products on an exchange. Accordingly, the universe of Exempt Non-

Financial Energy Transactions generally occurs between Exempt Entities,

thus constituting a mostly closed-loop of bilateral transactions. These

bilateral transactions do not, by and large, face markets in which non-

Exempt Entities such as investor-owned utilities engage in similar

transactions, and therefore pose little (if any) threat of negatively

affecting the liquidity, fairness, or financial security of trading

derivative products on a registered designated contract market or swap

execution facility in a material way.

Exempt Non-Financial Energy Transactions, as they are defined and

conditioned in the Proposed Order, are not susceptible to being used as

a means for “assuming price risk,” or speculative activity. Rather,

Exempt Entities may engage in these transactions for purposes of

“managing” commercial risks that arise from electric operations in

which the Exempt Entity engages to fulfill its public service mission

of providing the most affordable and reliable electric energy possible

to its members. Most of these commercial risks, however, are not

directly related to fluctuations in the price of a commodity. Rather,

Exempt Entities’ main concern is a possible inability to satisfy

contractual obligations to supply electric energy service to customers,

which may arise from somewhat unpredictable fluctuations in demand for

electric energy. These fluctuations, in turn, make it difficult for

Exempt Entities to forecast their exact needs for generation and

transmission capacity, the exact amount of fuel to be used for the

generation of electric energy, and related activities necessary to

facilitate the Exempt Entity’s public service mission. Exempt Non-

Financial Energy Transactions generally use variable pricing, as

opposed to fixed pricing, meaning that they are entered into primarily

to ensure that Exempt Entities are able to meet their production,

transmission, and/or distribution obligations, as opposed to serving a

traditional hedging function against the risk of price fluctuations of

electricity or some other commodity.

It is unlikely that an exchange could or would model a standardized

derivative contract to duplicate the highly-customized economic terms

of a bilaterally-negotiated Exempt Non-Financial Energy Transaction.

Accordingly, such transactions between Exempt Entities are not

susceptible to serving a price discovery function for any broader

market or markets. A market participant seeking pricing information for

a product or transaction involving the same underlying commodity would

look to a standardized product or contract traded

[[Page 51011]]

on a regulated exchange involving that commodity.100

—————————————————————————

100 The Commission notes that FERC recently has proposed

requiring entities described in FPA 201(f) to be subject to limited

reporting requirements concerning the availability and prices of

wholesale electric energy. In EPAct 2005, Congress added Section 220

to the FPA (16 U.S.C. 824t) directing FERC to “facilitate price

transparency in markets for the sale and transmission of electric

energy in interstate commerce” with “due regard for the public

interest, the integrity of those markets, fair competition, and the

protection of consumers.” See Electricity Market Transparency

Provisions of Section 220 of the Federal Power Act, 135 FERC ]

61,053 at PP 21-23 (Notice of Proposed Rulemaking) (2011)

(collection of information from “any market participant”

interpreted to include entities described in FPA 201(f)). The

Commission specifically seeks comment on whether, in light of this

proposal, the relief provided in the Proposed Order should be

revised in the future to require reporting to an SDR for certain

transactions.

—————————————————————————

The CFTC is requesting comment on whether the Proposed Order is

consistent with the public interest.

b. Purposes of the CEA

Under section 3(b), in order to foster the public interests, it is

the purpose of the CEA “to deter and prevent price manipulation or any

other disruptions to market integrity; to ensure the financial

integrity of all transactions subject to [the CEA] and the avoidance of

systemic risk; to protect all market participants from fraudulent or

other abusive sales practices and misuses of customer assets; and to

promote responsible innovation and fair competition among boards of

trade, other markets and market participants.” 101 The Commission

believes that the exemptive relief provided in the Proposed Order is

consistent with these purposes.102

—————————————————————————

101 CEA 3(b); 7 U.S.C. 5(b).

102 As noted in section III(B)(1) above, the Commission

believes that the exemption will promote financial innovation and

fair competition.

—————————————————————————

Exempt Entities are either government or cooperatively-owned

electric utilities organized under Federal tax laws as nonprofit or

not-for-profit entities. All Exempt Entities share a public service

mission of providing reliable electric energy to retail electric

customers at all times, keeping costs low and supply predictable, while

practicing cost-effective environmental stewardship. Elected or

appointed government officials or citizens, or cooperative members or

consumers, are directly involved in the day-to-day governance and

management of an Exempt Entity’s facilities and operations. There are

no shareholders or outside investors to profit from the Exempt Non-

Financial Energy Transactions, and any revenues accruing from

operational risk management activities related to the electric

facilities and operations are used to reduce the cost of electric

service provided to cooperative members and retail customers.

Accordingly, the Commission believes that Exempt Non-Financial

Energy Transactions between Exempt Entities are less vulnerable to

fraudulent or manipulative trading activity. Congress affirmatively

recognized this in the context of wholesale electric energy markets

when it exempted government and cooperatively-owned electric utilities

from FERC’s plenary jurisdiction under FPA section 201(f).103

Furthermore, the Proposed Order retains the Commission’s general anti-

fraud, anti-manipulation, and enforcement authority,104 and all

Exempt Entities, regardless of status under FPA section 201(f), remain

subject to FERC’s market manipulation authority.105 Therefore, the

relief provided in the Proposed Order does not interfere with the

Commission’s ability to police markets for manipulation and fraudulent

trade practices.

—————————————————————————

103 See supra notes 45-50 and accompanying text for a

discussion of the FPC’s findings in its Dairyland decision, affirmed

by the federal court in Salt River, explaining the underlying

rationale for exempting non-investor owned public utilities from the

plenary jurisdiction of the FPC.

104 See CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d),

6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4 and Part 180.

105 See FPA 222v; 16 U.S.C. 824v.

—————————————————————————

Finally, the Commission does not view Exempt Non-Financial Energy

Transactions between Exempt Entities as posing a systemic risk to the

financial integrity or stability of markets. By definition, Exempt

Entities do not consist of interconnected “financial institutions”

subject to prudential regulation because they are “systemically

important.” 106 Exempt Non-Financial Energy Transactions do not

involve financial market professionals, intermediaries, or any other

entity registered with the Commission. Rather, Exempt Non-Financial

Energy Transactions involve counterparty credit risk between only

Exempt Entities, which share a common not-for-profit public service

mission and are obligated to pursue operational, not financial,

performance mandates. The Commission does not believe that imposing the

requirements of the CEA on these transactions would reduce systemic

risk or bolster the financial stability and soundness of the markets

that the Commission does regulate. Accordingly, the Commission does not

view the relief provided in the Proposed Order as being contrary to

this purpose of the CEA.

—————————————————————————

106 Additionally, Exempt Entities do not consist of

“financial entities” as the term is defined in CEA 2(h)(7)(C)(i).

—————————————————————————

The CFTC is requesting comment on whether the Proposed Order is

consistent with the purposes of the CEA.

4. Appropriate Persons

Exempt Entities entering into Exempt Non-Financial Energy

Transaction are “appropriate persons” for purposes of satisfying CEA

section 4(c)(2) for different reasons, depending on the type of

electric utility and the corresponding section of the CEA pursuant to

which the relief in the Proposed Order is being granted. The Commission

believes that Congress, in enacting CEA section 4(c)(6)(C), implicitly

identified entities described by FPA section 201(f) as appropriate

persons for purposes of qualifying for an exemption pursuant to CEA

section 4(c)(6); otherwise, Congress would not have mandated that the

Commission “shall * * * exempt” such entities upon making the

required findings.107

—————————————————————————

107 Alternatively, the Commission notes that many FPA section

201(f) entities are government-owned or sponsored, and therefore

would qualify as appropriate persons under CEA section 4(c)(3)(H):

“Any governmental entity * * * or political subdivision thereof, *

* * or any instrumentality, agency, or department of any of the

foregoing.”

—————————————————————————

Next, for the reasons just noted, the Commission believes that

federally-recognized Indian tribes that own electric facilities are

analogous to government entities that sponsor electric facilities, and

therefore qualify as appropriate persons pursuant to CEA section

4(c)(3)(H).108

—————————————————————————

108 See id.

—————————————————————————

Finally, the Commission believes that non-FPA 201(f) electric

cooperatives are appropriate persons for the reasons articulated in the

Petition with respect to such cooperatives. Under CEA section

4(c)(3)(K), the Commission may determine other persons not enumerated

elsewhere in section 4(c)(3) to be appropriate in light of their

financial or other qualifications, or the applicability of appropriate

regulatory protections. As previously noted, the Commission believes

that Congress implicitly deemed FPA 201(f) entities to be appropriate

persons, thus indicating that FPA 201(f) entities have the requisite

financial soundness and operational capabilities to execute

transactions that are exempt from the requirements of the CEA.

For the purposes of a 4(c) exemption, the Commission believes that

there is no material difference in an electric cooperative’s financial

soundness or operational capability based upon

[[Page 51012]]

whether or not the electric cooperative meets the criteria of FPA

section 201(f).109 As Petitioners note, an electric cooperative that

receives financing from a source other than the RUS or sells more than

4,000,000 megawatt hours of electricity per year is at least as

financially sound and operationally qualified as electric cooperatives

described in FPA section 201(f).110 The Commission notes that non-

201(f) electric cooperatives arguably are more financially sound and

operationally capable, as they likely maintain greater generation and

transmission assets capable of facilitating the excess electric energy

sales.111 Additionally, non-FPA 201(f) electric cooperatives that

sell more than the threshold amount of electric energy per year often

are in a position to benefit from better financing terms than those

offered by the RUS based on having greater financial assets to post as

collateral.

—————————————————————————

109 As previously noted, non-FPA 201(f) electric cooperatives

are governed by the same public service mission as FPA 201(f)

electric cooperatives (i.e., providing members with electric energy

at the lowest cost possible).

110 In expanding the FPA 201(f) exemption to include RUS-

financed electric cooperatives, Congress went a step further in

EPAct 2005 by also including electric cooperatives that sold less

than 4,000,000 megawatt hours of electricity per year. According to

counsel for Petitioners, this provision was meant to capture certain

small, distribution-only cooperatives that did not receive financing

from the RUS.

111 Alternatively, certain non-FPA 201(f) electric

cooperatives may qualify as appropriate persons based on their net

worth exceeding $1,000,000 or total assets exceeding $5,000,000. See

CEA section 4(c)(3)(F).

—————————————————————————

The CFTC is requesting comment as to whether the Exempt Entities

identified in the Proposed Order are appropriate persons.

5. Ability to Discharge Regulatory or Self-Regulatory Duties

The exemptive relief contained in the Proposed Order 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. Nothing in the Proposed Order will prevent the

Commission or any contract market from carrying out regulatory or self-

regulatory duties for markets in a commodity that may also be involved

in an Exempt Non-Financial Energy Transaction. As previously discussed,

given the bespoke nature of these transactions, they are not connected

to the pricing and market characteristics of other related derivative

products that trade on exchange. The Commission is less concerned about

the regulatory oversight of Exempt Entities as they are “effectively

self-regulating” bodies subject to government or cooperative-member

management.

The CFTC is requesting comment as to whether the Proposed Order

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 CEA.

IV. Proposed Order

The Commission has determined, pursuant to Commodity Exchange Act

(“CEA”) sections 4(c)(1) and 4(c)(6), to exempt from all requirements

of the CEA and Commission regulations issued there under any Exempt

Non-Financial Energy Transaction entered into solely between Exempt

Entities, subject to the following definitions and conditions:

A. Exempt Entity shall mean (i) any government-owned electric

facility recognized under Federal Power Act (“FPA”) section 201(f),

16 U.S.C. 824(f); (ii) any electric facility otherwise subject to

regulation as a “public utility” under the FPA that is owned by an

Indian tribe recognized by the U.S. government pursuant to section 104

of the Act of November 2, 1994, 25 U.S.C. 479a-1; (iii) any

cooperatively-owned electric utility, regardless of status pursuant to

FPA section 201(f), so long as the utility is treated as a

“cooperative” organization under Internal Revenue Code section

501(c)(12) or 1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C), and

exists for the primary purpose of providing electric energy service to

its member/owner customers at the lowest cost possible; or (iv) any

not-for-profit entity that is wholly owned, directly or indirectly, by

any one or more of the foregoing. The term “Exempt Entity” does not

include any “financial entity,” as defined in CEA section 2(h)(7)(C).

B. Exempt Non-Financial Energy Transaction means any agreement,

contract, or transaction based upon a “commodity,” as such term is

defined and interpreted by the CEA and regulations there under, so long

as the primary purpose of the agreement, contract, or transaction is to

satisfy existing or anticipated contractual obligations to facilitate

the generation, transmission, and/or delivery of electric energy

service to customers at the lowest cost possible, and the agreement,

contract, or transaction is intended for making or taking physical

delivery of the commodity upon which the agreement, contract, or

transaction is based. The term “Exempt Non-Financial Energy

Transaction” excludes agreements, contracts, and transactions based

upon, derived from, or referencing any interest rate, credit, equity or

currency asset class, or any grade of a metal, agricultural product,

crude oil or gasoline that is not used as fuel for electric energy

generation. Exempt Non-Financial Energy Transactions are limited to the

following categories, which may exist as stand-alone agreements or as

components of larger agreements that combine only the following

categories of transactions:

1. Electric Energy Delivered transactions consist of arrangements

in which a provider Exempt Entity agrees to deliver a specified amount

of electric energy to a recipient Exempt Entity within a defined

geographic service territory, load, or electric system over the course

of an agreed period of time. Such transactions include “full

requirements” contracts, under which one Exempt Entity becomes

obligated to provide, and the recipient Exempt Entity becomes obligated

to take, all of the electric energy the recipient needs to provide

reliable electric service to its fluctuating electric load over a

specified delivery period at one or multiple delivery points or

locations, net of any electric energy the recipient is able to produce

through generation assets that it owns.

2. Generation Capacity transactions consist of agreements in which

a recipient Exempt Entity purchases from a provider Exempt Entity the

right to call upon a specified amount of the provider Exempt Entity’s

electric energy generation assets to supply electric energy within a

defined geographic area, regardless of whether such right is ever

exercised for the purposes of the recipient Exempt Entity meeting its

location-specific reliability obligations. Such transactions also may

specify certain conditions that must exist prior to exercising the

right to use an Exempt Entity’s generation assets, or establish an

agreement between Exempt Entities to share pooled electric generation

assets in order to satisfy regionally-imposed demand side management

program requirements.

3. Transmission Services transactions consist of arrangements in

which a provider Exempt Entity owning transmission lines sells to a

recipient Exempt Entity the right to deliver a specified amount of the

recipient Exempt Entity’s electric energy from one designated point on

the transmission lines to another, at a set price per wattage and over

a certain time period, in order for the recipient Exempt Entity to

provide electric energy to its customers. Such transactions may include

ancillary services related to transmission such as congestion

management and system losses.

[[Page 51013]]

4. Fuel Delivered transactions include arrangements used to buy,

sell, transport, deliver, or store fuel used in the generation of

electric energy by an Exempt Entity. Additionally, Fuel Delivered

transactions may include an agreement to manage the operational basis

or exchange (i.e., location or time of delivery) risk of an Exempt

Entity that arises from its location-specific, seasonal or otherwise

variable operational need for fuel to be delivered.

5. Cross-Commodity Pricing transactions include arrangements such

as heat rate transactions and tolling agreements in which the price of

electric energy delivered is based upon the price of the fuel source

used to generate the electric energy. Cross-Commodity transactions also

include fuel delivered agreements in which the price paid for fuel used

to generate electric energy is based upon the amount of electric energy

produced.

6. Other Goods and Services

Other Goods and Services transactions consist of arrangements in

which the Exempt Entities enter into an agreement to share the costs

and economic benefits related to construction, operation, and

maintenance of facilities for the purposes of generation, transmission,

and delivery of electric energy to customers. In a full requirements

contract between Exempt Entities that share ownership of generation

assets, the provider Exempt Entity may determine how generation to meet

the recipient Exempt Entity’s full requirements will be allocated among

the provider’s independent generation assets, the jointly-owned

generation assets, and the recipient’s independent generation assets.

Other Goods and Services transactions also may include agreements

between Exempt Entities to operate each other’s facilities, share

equipment and employees, and interface on each other’s behalf with

third parties such as suppliers, regulators and reliability

authorities, and customers, regardless of whether such agreements are

triggered as contingencies in emergency situations only or are

applicable during the normal course of operations of an Exempt Entity.

C. Conditions. The relief provided herein is subject to the

Commission’s general anti-fraud, anti-manipulation and enforcement

authority under the CEA, including but not limited to CEA sections

2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and

Commission rules 32.4 and Part 180. Additionally, the Commission

reserves its authority to inspect books and records kept in the normal

course of business that relate to Exempt Non-Financial Energy

Transactions between Exempt Entities pursuant to the Commission’s

regulatory inspection authorities. The relief provided herein does not

affect the jurisdiction of FERC or any other government agency over the

entities and transactions described herein. Furthermore, the Commission

reserves the right to revisit any of the terms and conditions of the

relief provided herein and alter or revoke such terms and conditions as

necessary in order for the Commission to execute its duties and advance

the public interests and purposes under the CEA, including a

determination that certain entities and transactions described herein

should be subject to the Commission’s full jurisdiction.

V. Request for Comment

The Commission requests comment on all aspects of the issues

presented by this proposed order. The Commission specifically requests

comment on the scope of both the (a) transactions and (b) entities

which would be eligible to rely upon the exemption provided in the

proposed order. In addition, the Commission requests comment on the

following questions:

1. Should the Commission limit the scope of Exempt Entities to only

those electric utilities described by FPA section 201(f), given that

Congress limited CEA section 4(c)(6)(C) thereto (or, is it an

appropriate use of the Commission’s general exemptive authority

pursuant to CEA section 4(c)(1) to exempt the non-FPA 201(f) electric

cooperatives)? If it is appropriate to expand the scope beyond FPA

201(f) entities, should the Commission still limit the scope of

electric cooperatives included as Exempt Entities to only those

cooperatives with tax exempt status under the IRC (i.e., those that

receive at least 85 percent of revenue from the cooperative

membership)?

2. In light of other exemptive authority that was added to the CEA

by the Dodd-Frank Act, such as the end-user exception in CEA section

2(h)(7)(A), is relief pursuant to CEA section 4(c) necessary and/or

appropriate for Exempt Non-Financial Energy Transactions between Exempt

Entities as described herein?

3. Should the Commission require that any Exempt Entity that is

described by FPA section 201(f) relying on the relief provided herein

notify the Commission of its change in status under FPA section 201(f)

as a condition of such relief? If so, what purpose(s) would this serve?

4. For the purpose of issuing this Proposed Order, the Commission

concluded that Exempt Non-Financial Energy Transactions do not serve a

price discovery purpose. Please comment on the Commission’s assessment.

What facts and circumstances would require the Commission to revisit

its analysis and alter the relief proposed herein such that reporting

to an SDR should be required for certain transactions? 112

—————————————————————————

112 Commenters should consider what impact, if any, it would

have on the response to the question posed if FERC finalizes its

recent proposal to require price transparency reporting in electric

wholesale markets, even by FPA 201(f) entities. See supra note 100.

—————————————————————————

5. The Commission believes that the Proposed Order’s definition of

“Exempt Non-Financial Energy Transaction,” in combination with the

definition of “Exempt Entity”, should ensure that Exempt Non-

Financial Energy Transactions cannot be used for speculative purposes.

Please comment on whether the Proposed Order would so foreclose the

possibility for speculative trading and, if not, how the Proposed Order

should be modified to achieve such a goal.

6. The Commission has proposed that electric facilities owned by

only federally-recognized Indian tribes be included as Exempt Entities

for purposes of the relief provided in the Proposed Order. The

Commission specifically requests comment on every aspect of the

Proposed Order as it relates to Indian tribes.

7. The Commission has limited its definition of Exempt Non-

Financial Energy Transaction to six categories. Do any of the

transactions described by or covered under these categories fail to

come under the Commission’s jurisdiction, such that relief pursuant to

CEA section 4(c) is unnecessary and/or inappropriate, either due to an

interpretation in the Products Release or otherwise?

8. Per the Petition’s request, should the Commission stipulate that

the relief provided in the Proposed Order (i) applies retroactively to

the enactment of the Dodd-Frank Act and (ii) that transactions covered

by the relief will not be considered by the Commission for any purpose

which affects or may affect an Exempt Entity’s regulatory status under

the CEA (e.g., in determining status as a swap dealer or major swap

participant)?

9. The Petition requested that the Commission provide categorical

relief by including “any other agreement, contract, or transaction to

which an Exempt Entity is a party.” Should the Commission provide such

categorical relief, so long as the primary purpose of

[[Page 51014]]

the agreement, contract, or transaction is to satisfy existing or

anticipated contractual obligations to facilitate the generation,

transmission, and/or delivery of electric energy service to customers

at the lowest cost possible, and the contract is intended to be settled

through physical delivery of the underlying commodity?

10. Can any Exempt Non-Financial Energy Transaction, as defined in

the Proposed Order, or any component of an Exempt Non-Financial Energy

Transaction, be used to hedge price risk in an underlying commodity? If

so, should the Commission explicitly exclude such price-hedging

transactions from the definition of Exempt Non-Financial Energy

Transaction?

VI. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires that Federal

agencies consider whether proposed rules will have a significant

economic impact on a substantial number of small entities and, if so,

provide a regulatory flexibility analysis on the impact. The relief

provided in the Proposed Order may be available to some small entities,

because they may fall within standards established by the Small

Business Administration (“SBA”) defining entities with electric

energy output of less than 4,000,000 megawatt hours per year as a

“small entity.” 113

—————————————————————————

113 U.S. Small Business Administration, Table of Small

Business Size Standards Matched to North American Industry

Classification System Codes, footnote 1 (effective March 26, 2012),

available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.

—————————————————————————

The Commission has considered carefully the potential effect of

this Proposed Order on small entities and has determined that the

proposed order will not have a significant economic impact on any

Exempt Entity, including any entities that may be small. Rather, the

Proposed Order relieves the economic impact that the Exempt Entities,

including any small entities that may opt to take advantage of it, by

exempting certain of their transactions from the application of

substantive regulatory compliance requirements of the CEA and

Commission regulations there under. Significantly, the Proposed Order

prevents new requirements for swaps, such as clearing, trade execution

and regulatory reporting, from affecting transactions that Exempt

Entities traditionally have engaged in to serve their unique public

service mission of providing reliable, affordable electric energy

service to customers. Absent such relief and to the extent Exempt Non-

Financial Energy Transactions would qualify as swaps, small entities

covered by the Proposed Order could be subject to compliance with all

aspects of the CEA and its implementing regulations. Accordingly, the

Chairman, on behalf of the Commission, hereby certifies pursuant to 5

U.S.C. 605(b) that the Proposed Order will not have a significant

economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

Under the Paperwork Reduction Act (“PRA”), an agency may not

conduct or sponsor, and a person is not required to respond to, a

collection of information unless it displays a currently valid control

number from the Office of Management and Budget (“OMB”). The Proposed

Order does not contain any new information collection requirements that

would require approval of OMB under the PRA.114 While the Commission

reserves its authority to inspect books and records kept in the normal

course of business that relate to Exempt Non-Financial Energy

Transactions between Exempt Entities pursuant to the Commission’s

regulatory inspection authorities, the Commission is not imposing a

recordkeeping burden with respect to the books and records of Exempt

Non-Financial Energy Transactions that already are kept in the normal

course of business. Moreover, any inspection of books and records

typically only will occur in the event that circumstances warrant the

need to gain greater visibility with respect to Exempt Non-Financial

Energy Transactions as they relate to Exempt Entities’ overall market

positions and to ensure compliance with the terms of this Proposed

Order. Accordingly, each inquiry would be specific to the facts

triggering the inquiry, and thus will not involve “answers to

identical questions posed to * * * ten or more persons,” as the term

“collection of information” is defined in the PRA in pertinent

part.115

—————————————————————————

114 44 U.S.C. 3501 et seq.

115 44 U.S.C. 3502(3)(a)(1). See also 44 U.S.C.

3518(c)(1)(B)(i) and (ii) (excluding collections of information

related to administrative investigations against specific

individuals or entities, and any subsequent civil actions).

—————————————————————————

C. Consideration of Costs and Benefits

1. Introduction

Section 15(a) of the CEA 116 requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

under the CEA or issuing certain orders. Section 15(a) further

specifies that the costs and benefits shall be evaluated in light of

five broad areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations. The Commission considers the costs and benefits

resulting from its discretionary determinations with respect to the

Section 15(a) factors.

—————————————————————————

116 7 U.S.C. 19(a).

—————————————————————————

Prior to the passage of the Dodd-Frank Act, swap market activity

was not regulated. In the wake of the financial crisis of 2008,

Congress adopted the Dodd-Frank Act, in part, to address conditions

with respect to swap market activities.117 Among other things, the

Dodd-Frank Act amends the CEA to establish a comprehensive regulatory

framework for swaps.118 In amending the CEA, however, the Dodd-Frank

Act preserved the Commission’s authority under CEA section 4(c)(1) to

“promote responsible economic or financial innovation and fair

competition” by exempting any transaction or class of transactions,

including swaps, from select provisions of the CEA.119 It also added

new subparagraph 4(c)(6)(C) to the CEA specifically directing the

Commission, in accordance with 4(c)(1) and (2), to exempt agreements,

contracts, or transactions entered into between FPA 201(f) entities if

doing so “is consistent with the public interest and the purposes of”

the CEA.120 For reasons explained above,121 the Commission proposes

to exercise its

[[Page 51015]]

authority under CEA section 4(c)(1) and 4(c)(6) with regard to Exempt

Non-Financial Energy Transactions 122 engaged in between Exempt

Entities,123 subject to the Commission’s general anti-fraud, anti-

manipulation, and enforcement authority pursuant to CEA sections

2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and

Commission rules 32.4 and Part 180. Additionally, the Commission has

reserved its authority to inspect the books and records of Exempt Non-

Financial Energy Transactions already kept in the normal course of

business pursuant to the Commission’s regulatory inspection

authorities, in the event that circumstances warrant the need to gain

greater visibility with respect to Exempt Non-Financial Energy

Transactions as they relate to Exempt Entities’ overall market

positions and to ensure compliance with the terms of this Proposed

Order.

—————————————————————————

117 As the Financial Crisis Inquiry Commission explained:

The scale and nature of the [OTC] derivatives market created

significant systemic risk throughout the financial system and helped

fuel the panic in the fall of 2008: millions of contracts in this

opaque and deregulated market created interconnections among a vast

web of financial institutions through counterparty credit risk, thus

exposing the system to a contagion of spreading losses and defaults.

Financial Crisis Inquiry Commission, “The Financial Crisis

Inquiry Report: Final Report of the National Commission on the

Causes of the Financial and Economic Crisis in the United States,”

Jan. 2011, at 386, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

118 See discussion above at note [13]. Dodd-Frank Act section

721 (amending the CEA to add new section 1a(47)) defines the term

“swap” to include “[an] option of any kind that is for the

purchase or sale, or based on the value, of 1 or more * * *

commodities * * *”).

119 Section 4(c)(1) of the CEA.

120 As discussed above in section I.A., CEA sections 4(c)(2)

and 4(c)(3) further articulate the conditions precedent to granting

an exemption under 4(c)(1) and 4(c)(6)(C), including that the

exempted agreements, contracts, or transactions be entered into

between “appropriate persons,” as that term is defined in

4(c)(6)(3).

121 See section III.B. above.

122 As discussed and further described above in section

III.A.2., these consist of: any agreement, contract, or transaction

based upon a “commodity,” as such term is defined and interpreted

by the CEA and regulations there under, so long as the primary

purpose of the agreement, contract, or transaction is to satisfy

existing or anticipated contractual obligations to facilitate the

generation, transmission, and/or delivery of electric energy service

to customers at the lowest cost possible. When entered into, Exempt

Non-Financial Energy Transactions shall always be intended for

making or taking physical delivery of the commodity upon which the

transaction is based, and such commodity shall never be based upon,

derived from, or reference any interest rate, credit, equity or

currency asset class, or any grade of a metal, agricultural product,

crude oil or gasoline that is not used as fuel for electric

generation. Exempt Non-Financial Energy Transactions are limited to

the following categories: electric energy delivered, generation

capacity, transmission services, fuel delivered, cross-commodity

pricing, and other goods and services.

123 As discussed and further described above in section

III.A.1, these are: (i) Any government-owned electric facility

recognized under Federal Power Act (“FPA”) section 201(f), 16

U.S.C. 824(f); (ii) any electric facility otherwise subject to

regulation as a “public utility” under the FPA that is owned by an

Indian tribe recognized by the U.S. government pursuant to section

104 of the Act of November 2, 1994, 25 U.S.C. 479a-1; (iii) any

cooperatively-owned electric utility, regardless of status pursuant

to FPA section 201(f), so long as the utility is treated as a

“cooperative” organization under Internal Revenue Code section

501(c)(12) or 1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C),

and exists for the primary purpose of providing electric energy

service to its members at the lowest possible cost; or iv) any not-

for-profit entity that is wholly owned, directly or indirectly, by

any one or more of the foregoing.

—————————————————————————

In the discussion that follows, the Commission considers the costs

and benefits of the exemptive order proposed herein (the “Proposed

Order”) to the public and market participants generally, and to Exempt

Entities specifically. As earlier discussed in sections I.A. and

III.A.2., to exempt transactions under CEA section 4(c), the Commission

need not first determine–and is not determining–whether the

transactions subject to the exemption fall within the CEA. However, to

capture all potential costs and benefits, this consideration assumes

that the transactions may now or in the future be swaps.124 In the

event the subject transactions would not be subject to the Commission’s

jurisdiction, the costs and benefits of this Proposed Order relative to

the baseline scenario discussed below would be zero.

—————————————————————————

124 Accord note 81, supra.

—————————————————————————

2. Baseline

The Commission considers the costs and benefits of this Proposed

Order against a baseline scenario of non-action. In other words, the

proposed baseline is the alternative situation that would result if the

Commission declines to exercise its exemptive authority under CEA 4(c).

This means that to the extent Exempt Non-Financial Energy Transactions

engaged in between Exempt Entities qualify as a transaction subject to

regulation under the CEA, they are subject to the regulatory regime

that the CEA, as amended by the Dodd-Frank Act, and Commission

regulations prescribes.

Under the post-Dodd-Frank Act regulatory regime for swaps, Exempt

Entity swap counterparties that, as represented in the Petition, are

“nonfinancial end-users of [Exempt Non-Financial Energy Transactions

entered into] only to hedge or mitigate commercial risks” 125 are

subject to the Commission’s general anti-fraud, anti-manipulation, and

enforcement authority,126 as well as requirements for swap data

reporting 127 and recordkeeping.128 CEA section 2(h)(7) (the “end-

user exception”), excepts a swap from swap clearing 129 and trade

execution,130 requirements if one counterparty is “not a financial

entity; * * * is using swaps to hedge or mitigate commercial risk; and

* * * notifies the Commission, in a manner set forth by the Commission,

how it generally meets its financial obligations associated with

entering into non-cleared swaps.” However, unless both Exempt Entity

counterparties are “eligible contract participants” (“ECPs”),131

CEA section 2(e) prohibits them from executing a swap other than on a

registered DCM, including directly transacting the swap

bilaterally.132 Against this baseline scenario, with respect to an

Exempt Non-Financial Energy Transaction that is a swap, the public and

market participants, including Exempt Entities, would experience the

costs and benefits related to the regulations, noted above, for them as

swaps. As considered below, the Proposed Order could alter these costs

and benefits.

—————————————————————————

125 Petition at 33.

126 See CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d),

6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4 and Part 180.

127 The CEA as amended by the Dodd-Frank Act contemplates two

types of reporting to swap data repositories (“SDRs”). First, is

real-time reporting: For every swap executed, certain transaction

information, including price and volume, is to be reported to an

SDR”) “as soon as technologically practicable.” CEA section

2(a)(13)(A) & (C); see also Real-Time Public Reporting of Swap

Transaction Data, 77 FR 1182 (Jan. 9, 2012) (adopting 17 CFR part 43

regulations to implement real-time reporting). For swaps executed

off of a DCM or SEF and for which neither counterparty is a swap

dealer or major swap participant–as the Commission expects Exempt

Non-Financial Energy Transactions engaged in between Exempt Entities

would be–the real-time reporting obligation for the transaction

falls to one of the counterparties, as agreed between themselves. 17

CFR Sec. 43.3(a)(3) Second, for each swap, additional information

beyond that required in real-time reports must be reported to an SDR

in a “timely manner as may be prescribed by the Commission.” CEA

section 2(a)(13)(G); see also Swap Data Recordkeeping and Reporting

Requirements 77 FR 2136 (Jan. 13, 2012) (adopting 17 CFR part 45);

Swap Data Recordkeeping and Reporting Requirements: Pre-enactment

and Transition Swaps 77 FR 35200 (June 12, 2012) (adopting 17 CFR

part 46).

128 Swap Data Recordkeeping and Reporting Requirements 77 FR

2136 (Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data

Recordkeeping and Reporting Requirements: Pre-enactment and

Transition Swaps 77 FR 35200 (June 12, 2012) (adopting 17 CFR part

46).

129 CEA section 2(h)(1)(A)(it “shall be unlawful for any

person to engage in a swap unless that person submits such swap for

clearing * * * if the swap is required to be cleared”).

130 Transactions subject to the clearing requirement of CEA

section 2(h)(1) must be executed on either a designated contract

market (“DCM”) or a swap execution facility (“SEF”). CEA section

2(h)(8).

131 The term is defined in CEA section 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).

132 CEA section 2(e).

—————————————————————————

Also, the post-Dodd-Frank Act regulatory regime retains

requirements applicable to “contract[s] of sale of a commodity for

future delivery” within the meaning of CEA section 4(a) (commonly

referred to as futures contracts), including that section’s exchange-

trading requirement for such contracts. Though the Commission need not

first determine whether the transactions subject to exemption under CEA

section 4(c) are futures or swaps, it has defined the boundaries for

inclusion within the Exempt Non-Financial Energy Transaction category

in a way that comports with the distinctions between futures contracts

subject to CEA section 4(a) and non-

[[Page 51016]]

futures transactions.133 For this reason, the Commission foresees no

costs or benefits relative to the baseline attributable to exempting

Exempt Non-Financial Energy Transactions as proposed from CEA section

4(a).

—————————————————————————

133 See, e.g., Statement of Policy Concerning Swap

Transactions, 54 Fed. Reg. 30694 (CFTC July 21, 1989). For example,

the transactions encompassed by this proposed exemption would be

limited to those that are highly bespoke and thus not suitable for

exchange trading, executed exclusively bilaterally, off-exchange

between counterparties, and undertaken with the intent of making or

taking physical delivery of the commodity upon which the transaction

is based.

—————————————————————————

The Commission is also cognizant of the regulatory landscape as it

existed before the Dodd-Frank Act’s enactment. Any Exempt Non-Financial

Energy Transactions engaged in between Exempt Entities that now would

qualify as swaps (excluding options) were not regulated prior to Dodd-

Frank. Thus, measured against a pre-Dodd-Frank Act reference point,

Exempt Entities engaging in such swaps could experience costs

attributable to the conditions placed upon the Proposed Order. For

example, Exempt Entities were not subject to the Commission’s

regulatory inspection authorities with respect to swap transaction

records prior to the enactment and effectiveness of the Dodd-Frank Act.

As a general matter, in its cost-benefit considerations, where

reasonably feasible, the Commission endeavors to estimate quantifiable

dollar costs. The costs and benefits of the Proposed Order, however,

are not presently susceptible to meaningful quantification.

Accordingly, the Commission discusses proposed costs and benefits in

qualitative terms.

3. Costs

To Exempt Entities

The proposed rule is exemptive and would provide Exempt Entities

with relief from regulatory requirements of the CEA for the narrow

category of Exempt Non-Financial Energy Transactions engaged in between

them. As with any exemptive rule or order, the proposed rule is

permissive, meaning that potentially eligible affiliates are not

required to elect it. Accordingly, the Commission assumes that an

entity would rely on the Proposed Order only if the anticipated

benefits warrant the costs. Here, the Proposed Order provides for the

continued application of the anti-fraud, anti-manipulation, and

enforcement provisions of the CEA and its implementing regulations, and

additionally reserves the Commission inspection authority for books and

records that the Exempt Entities currently prepare and retain 134–

all continuations of the baseline regulatory scheme established in the

CEA. Accordingly, they generate no incremental costs.

—————————————————————————

134 For example, Exempt Entities that receive financing from

the Rural Utilities Service (“RUS”) are required to keep records

of all master agreements and term contracts for the procurement of

goods and services. See 18 CFR 125.3 (Schedule of records and

periods of retention); RUS Bulletin 180-2. Under the books and

records inspection authority contained in the Proposed Order, the

Commission could request any of these procurement agreements that

document an Exempt Non-Financial Energy Transaction for the purchase

or sale of “electric energy delivered,” as such term is defined in

the Proposed Order.

—————————————————————————

To Market Participants and the Public

The Commission has considered whether an exemption from the CEA as

proposed for Exempt Non-Financial Energy Transactions engaged in

between Exempt Entities will expose market participants and the public

to the risks that the CEA guards against–a potential cost. For a

variety of reasons, the Commission believes that it does not. These

reasons include the following:

The highly bespoke nature of Exempt Non-Financial Energy

Transactions, as well as the fact that they are used to manage unique

electricity industry operational risks, rather than price risk of an

underlying commodity, make them ill-suited for exchange trading and/or

to serve a useful price discovery function.135

—————————————————————————

135 As explained in section III.B.3.d, above, the commercial

risks that Exempt Non-Financial Energy Transactions face generally

are not related to fluctuations in the price of a commodity, but are

rather related to electricity retail demand fluctuations. Exempt

Entities engage in Exempt Non-Financial Energy Transactions

primarily to assure their ability to meet production, transmission,

and/or distribution obligations, not to hedge against the risk of

electricity prices rising or falling.

—————————————————————————

The incentive structure for Exempt Entities–as limited to

not-for-profit governmental, tribal, and IRC section 501(c)(12) or

section 1381(a)(2)(c) electric cooperative entities–is substantially

different than that of investor-owned entities and poses a low risk for

fraud, manipulation, or other abusive practices.136

—————————————————————————

136 See section II.A.1. above.

—————————————————————————

Exempt Non-Financial Energy Transactions are executed

bilaterally within a closed-loop of non-financial, not-for-profit

electric utility entities, are not market facing, and therefore have

little, if any, ability to materially impact liquidity, fairness or

financial security of derivative product trading on DCMs or SEFs.137

—————————————————————————

137 See section III.B.3.a. above.

—————————————————————————

This closed-loop trading characteristic, combined with the

nonfinancial nature of the transacting parties, also limits the ability

of Exempt Non-Financial Energy Transactions to create systemic

risk.138

—————————————————————————

138 See section III.B.3.b. above.

—————————————————————————

Moreover, besides carefully defining the boundaries for Exempt Non-

Financial Energy Transactions between Exempt Entities, the Commission’s

Proposed Order incorporates conditions designed to protect the markets

subject to the Commission’s jurisdiction. Specifically, the Commission

proposes to retain the general anti-fraud, anti-manipulation, and

enforcement authority contained in the CEA and its implementing

regulations. Additionally, the Commission is also retaining authority

to inspect books and records, pursuant to its regulatory inspection

authorities, in the event that circumstances warrant the need to gain

greater visibility with respect to Exempt Non-Financial Energy

Transactions as they relate to Exempt Entities’ overall market

positions and compliance with this Proposed Order. Accordingly, based

on the expectations that–for the narrow subset of electric industry

transactions covered by this Proposed Order–the risk potential, at

most, is remote and the prescribed conditions appropriate to contain

them to the extent they may emerge, the Commission foresees no material

costs attributable to risk associated with the Proposed Order.

The Commission has also considered the potential for the Proposed

Order to exact a competitive cost by affording Exempt Entities an

advantage vis-[agrave]-vis other market participants that may not be

entitled to the exemption. As not-for-profit governmental, tribal, and

cooperative entities as defined in the Proposed Order, the Commission

understands that the mandate for Exempt Entities is to provide

reliable, affordable electricity for their customers. While the

Proposed Order will afford Exempt Entities flexibility and/or reduced

compliance burden to manage their operational risks relative to non-

Exempt Entities, the Commission has no basis to expect that in so doing

the Proposed Order will impose a competitive cost on the markets

subject to its jurisdiction.

4. Benefits

To Exempt Entities

Measured against the baseline scenario, the Proposed Order

expectedly will benefit Exempt Entities by lessening the likelihood

that CEA compliance would diminish their ability and/or incentive to

continue to engage in Exempt Non-Financial Energy Transactions that, as

described in the

[[Page 51017]]

Petition and above,139 are an operational tool relied upon by Exempt

Entities to effectively execute their public service mission. It will

also benefit them by avoiding regulatory costs to comply with CEA swap

requirements whether or not any Exempt Non-Financial Energy Transaction

actually constitutes a swap.140

—————————————————————————

139 Petition at 12 (transactions for which exemption requested

“are intrinsically related to the needs of * * * the [not-for-

profit] Electric Entities * * * which arise from their respective

electric facilities and ongoing electric operations and public

service obligations” (citation omitted)); section III.A.2, above

(the proposed order defines Exempt Non-Financial Energy Transactions

as any agreement, contract, or transaction entered into primarily

“to satisfy existing or anticipated contractual obligations to

facilitate the generation, transmission, and/or delivery of electric

energy service to customers at the lowest cost possible * * * .”).

140 As discussed below with respect to benefits to market

participants and the public, Exempt Entities’ members and other

customers should be the indirect beneficiaries of these avoided

costs.

—————————————————————————

To the extent any Exempt Non-Financial Energy Transactions are

swaps, as a threshold matter Exempt Entities could not execute them off

of a registered DCM unless both Exempt-Entity counterparties qualify as

ECPs.141 The relevant criteria for determining ECP status varies for

Exempt Entities that are governmental entities (or political

subdivisions of governmental entities) and those that are not. For the

former, governmental Exempt Entities must meet certain line of business

requirements,142 or “own * * * and invest * * * on a discretionary

basis $50,000,000 or more in investments.143 For the latter, non-

governmental Exempt Entities either must have: (a) Assets exceeding

$10,000,000; (b) a guarantee for obligations; or, (c) greater than

$1,000,000 net worth and “enter * * * into an agreement, contract, or

transaction in connection with the conduct of the entity’s business or

to manage the risk associated with an asset or liability owned or

incurred or reasonably likely to be owned or incurred by the entity in

the conduct of the entity’s business.” 144 While some of the larger

Exempt Entities in particular may meet the definitional requirements to

be ECPs, the Petition does not provide information evidencing that all

Exempt Entities for all types of Exempt Non-Financial Energy

Transaction clearly would.145

—————————————————————————

141 CEA section 2(e).

142 That is, have “a demonstrable ability, directly or

through separate contractual arrangements, to make or take delivery

of the underlying commodity [or] incur * * * risks, in addition to

price risk, related to the commodity.” CEA section 1a(17)(A)(i) &

(2) (as referenced in CEA section 1a(18)(A)(vii)(aa)). CEA section

1a(18)(A)(vii) specifies alternative criteria to qualify for

governmental-entity ECP status that do not appear relevant given

that Exempt Entities are not SDs, MSPs, or financial entities.

143 CEA section 1a(18)(A)(vii)(bb).

144 CEA section 1a(18)(A)(v).

145 Furthermore, a comment letter submitted by two of the

Petitioners in connection with the Commission rulemaking on the

Further Definition of “Swap Dealer,” “Security-Based Swap

Dealer,” “Major Swap Participant,” “Major Security-Based Swap

Participant,” and “Eligible Contract Participant,” states that

some not-for-profit consumer-owned electric utilities “may not meet

the financial tests listed in the definition of ECP due to the

relatively small size of their physical assets.” Letter from NRECA,

APPA and LPPC dated February 22, 2011, RIN 3235-AK65, at 12.

—————————————————————————

If Exempt Entities are not ECPs, and given that Exempt Non-

Financial Energy Transactions, as proposed, are bespoke to an extent

that makes them incapable of exchange trading, absent Commission action

non-ECP Exempt Entities would be unable to engage bilaterally in any

Exempt Non-Financial Energy Transactions that are swaps. Relative to a

circumstance that would preclude non-ECP Exempt Entities from

continuing to engage in Exempt Non-Financial Energy Transactions that

are swaps, the Proposed Order would afford the benefit of allowing the

use of transactions that are closely related to Exempt Entities’ public

service mission to provide affordable, reliable electricity. The

Proposed Order would also save Exempt Entities the time and expense

that would be necessitated to determine if they were ECPs. For, with

the Proposed Order, ECP status becomes largely irrelevant, while

without it, Exempt Entities may have to concern themselves with ECP

status determinations as a threshold for engaging in certain

transactions.

The Proposed Order would also avoid potential costs that Exempt

Entities might incur to comply with swap data reporting and

recordkeeping requirements as articulated in Commission regulations for

any Exempt Non-Financial Energy Transactions that were swaps.146

—————————————————————————

146 See Real-Time Public Reporting of Swap Transaction Data,

77 FR 1182, 1232-40 (Jan. 9, 2012) (adopting 17 CFR part 43

regulations to implement real-time reporting). Swap Data

Recordkeeping and Reporting Requirements 77 FR 2136, 2176-93 (Jan.

13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping and

Reporting Requirements: Pre-enactment and Transition Swaps 77 FR

35200, 35217-25 (June 12, 2012) (adopting 17 CFR part 46).

Swap Data Recordkeeping and Reporting Requirements 77 FR 2136

(Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping

and Reporting Requirements: Pre-enactment and Transition Swaps 77 FR

35200 (June 12, 2012) (adopting 17 CFR part 46).

—————————————————————————

Even for Exempt Non-Financial Energy Transactions ultimately

determined not to be swaps, if Exempt Entities perceived some potential

that they could be swaps (now or as evolved in the future), Exempt

Entities would likely need to expend resources to monitor contemplated

transactions and make status determinations as to them. Moreover, the

bespoke nature of these transactions could complicate the ability to

generalize conclusions across transactions, potentially resulting in a

need for more frequent, individualized assessments that could multiply

determination costs. While the Commission lacks a basis to meaningfully

project any such benefit in dollar terms, qualitatively it expects that

the benefit would include the avoided costs of training staff to

differentiate between swap and non-swap transactions and, in some cases

at least, to obtain an expert legal opinion to support a determination.

Additionally, uncertainty about whether a certain transaction would or

would not be deemed a swap could prompt an Exempt Entity to forego a

beneficial transaction or to substitute a transaction that served the

operational needs less effectively. Avoiding a result that would

diminish the use of operationally-efficient Exempt Non-Financial Energy

Transactions is another benefit.

To Market Participants and the Public

For reasons similar to those discussed above in the Commission’s

analysis of the Proposed Order under CEA sections 4(c)(1) and (6), the

Commission expects that this Proposed Order will benefit the public

generally.147

—————————————————————————

147 In that the impacted transactions are undertaken

exclusively in a closed-loop environment from which financial

participants are absent, the Commission does not foresee that

derivative market participants beyond Exempt Entities will realize

either a cost (as earlier discussed) or benefit impact.

—————————————————————————

First, the Commission believes that the Proposed Order aligns with

the beneficial public interests served by the FPA, which–in addition

to granting comprehensive jurisdiction over the electric industry to

FERC–reflects, through FPA section 201(f)’s exemption, Congress’

implicit view that, with respect to certain activities, a regulatory

light-touch and avoidance of overlapping regulatory regimes for

governmental and small cooperative electric utilities serves the

public-interest objectives of the FPA.148 The

[[Page 51018]]

Commission interprets CEA section 4(c)(6)(C), directing the Commission

to provide an exemption for FPA 201(f) entities to the extent

consistent with the public interest and the CEA, as an extension of

that view. Accordingly, by tailoring the Proposed Order for FPA section

201(f) entities (as well as others deemed equally suitable) in a

careful manner intended to preserve the public interests protected

under the CEA, the Proposed Order accommodates the public interests of

both statutes.

—————————————————————————

148 See Salt River Project Agricultural Improvement and Power

District v. Federal Power Commission, 391 F. 2d 470, 475 (D.C. Cir.

1968) (“But of the 19 major abuses summarized [in a Federal Trade

Commission report to Congress on the electric utility industry],

virtually none could be associated with the cooperative structure

where ownership and control is vested in the consumer-owners* * *

Consequently, the attention of the 74th Congress, in enacting the

Federal Power Act, was focused on the sorts of evils associated

exclusively with investor-owned utilities”) In Salt River, the

court considered whether the FPA 201(f) exemption, which at the time

did not expressly encompass REA-financed cooperatives–entities

subject to “extensive [REA] supervision over the planning,

construction and operation of the facilities [REA] finances”–fell

within the exemption, as the FPC had interpreted that it did. Id. at

473. The court found that, among other factors, the Congressional

inaction in the face of 30 years of administrative practice

extending FPA 201(f) exemptive treatment to REA-financed

cooperatives reinforced the FPC’s interpretation that REA-financed

cooperatives were exempt from FPA coverage as instrumentalities of

the Government under Section 201(f). Id. at 476.

—————————————————————————

Second, in that the proposed Exempt Entities share the same public-

service mission of providing affordable, reliable electricity to their

customers, those aspects of the Proposed Order that benefit Exempt

Entities directly should indirectly benefit their customers as well.

For example, the Proposed Order would enable non-ECP Exempt Entities to

engage in swap Exempt Non-Financial Energy Transactions that would be

barred to them under CEA section 2(e), or facilitate the likelihood

that they would continue to engage in Exempt Non-Financial Energy

Transactions that they might choose to forego for regulatory

uncertainty or costs reasons absent the exemption. In these

circumstances, Exempt Entity customers should be the ultimate

beneficiaries (via supply reliability and affordability) of the

operational risk-management and efficiencies that Exempt Non-Financial

Energy Transactions afford. Similarly, to the extent that the Proposed

Order enables Exempt Entities to avoid compliance and/or monitoring

costs they would otherwise incur, the non-profit structure, compliance

with requisite Internal Revenue Code conditions, and public service

mission that Exempt Entities share means that the cost savings should

be passed through to members and other customers proportionately in the

form of lower electricity prices and/or higher revenue distributions to

members.

And third, the public also benefits by the promotion of economic

and financial innovation that, as explained above,149 the Commission

expects this Proposed Order will further. For, the unique environment

in which these electric utilities must operate to reliably serve their

customer load in the face of constantly fluctuating demand–compounded

by the fact that many of these Exempt Entities do not enjoy the same

scale economies as investor-owned utilities–places a premium on

innovative solutions to operational issues. Exempt Non-Financial Energy

Transactions represent one such innovation. The Commission envisions

the Proposed Order, as contemplated by Congress,150 will provide

Exempt Entities regulatory certainty important to their ability to

continue to utilize and develop innovative solutions through the use of

highly bespoke, physically settled agreements, contracts, and

transactions. Accordingly, the Commission expects the Proposed Order to

benefit the public.

—————————————————————————

150 See HOUSE CONF. REPORT NO. 102-978, 1992 U.S.C.C.A.N.

3179, 3213 (“4(c) Conf. Report”), noted in section I.A. above.

—————————————————————————

5. Costs and Benefits as Compared to Alternatives

The chief alternatives to this Proposed Order are for the

Commission to: (1) Decline to exercise its exemptive authority, or (2)

to exercise its exemptive authority more broadly and without conditions

as requested in the Petition.

With respect to the first alternative–decline to exempt–the costs

and benefit consideration is the mirror-image of that discussed above

relative to the baseline scenario. A decision not to exercise exemptive

authority in this circumstance would preserve the current post-Dodd-

Frank regulatory environment.

Relative to the second alternative of exercising its exemptive

authority more broadly and in a manner that would provide categorical

relief from all of the requirements of the CEA as requested in the

Petition, the Commission has purposefully proposed to define the

categories of exempt entities and transactions more narrowly, and to

preserve certain aspects of CEA jurisdiction for them. A potentially

material difference between the entities that the Petition sought to

exempt and how the Commission proposes to define the term Exempt

Entities is the Commission’s explicit requirement that an Exempt Entity

not be a “financial entity” within the meaning of CEA section

2(h)(7)(C). Given, however, that the Petition expressly represents that

the not-for-profit electric entities that would be encompassed by the

requested exemption “are all nonfinancial end users,” 151 the

Commission does not foresee a material cost of expressly stating this

requirement relative to the Petitioned-for alternative. Conversely, the

requirement delineates what the Commission considers an important

gating principle for the exemption’s appropriateness, and stating it

explicitly reduces ambiguity that could fuel future disputes over the

issue–a benefit.

—————————————————————————

151 Petition at 33.

—————————————————————————

Also, compared to the Petition’s description of transactions for

which exemption was sought, the proposed definition of Exempt Non-

Financial Energy Transactions incorporates limiting language 152 and

articulates additional definitional elements (e.g., intent at execution

to make or take physical delivery of the commodity upon which the

transaction is based). The more open-ended, Petitioned-for transaction

description theoretically could save Exempt Entities effort that they

might otherwise need to expend to determine whether a transaction

engaged in between them is or is not exempted compared to the more

refined and limited definition of Exempt Non-Financial Energy

Transactions that the Commission proposes. That said, an equally, if

not more, persuasive case might be made that the greater certitude that

the proposed definition’s more bounded approach provides should

mitigate determination costs. More importantly, given the inability to

foresee how these transactions may develop, the Commission considers it

prudent and in the public interest to ring-fence the definition within

stated parameters to restrict the potential for the transactions to

evolve in a manner incompatible with the purposes of the CEA.

—————————————————————————

152 It explicitly limits covered transactions to six

articulated categories, while the Petition proposed a more open-

ended approach that would have included all transactions relating to

particular categories, but not others. See Petition at 4-5.

—————————————————————————

Finally, as proposed, the exemption retains the Commission’s

general anti-fraud, anti-manipulation, and enforcement authority, as

well as the Commission’s authority to review books and records already

kept in the ordinary course of business in the event that circumstances

warrant the need to gain greater visibility with respect to Exempt Non-

Financial Energy Transactions as they relate to Exempt Entities’

overall market positions and to ensure compliance with the terms of

this Proposed Order, in contrast to the Petition’s request for a

wholesale exemption from the CEA. The Commission believes that the

first two conditions serve important beneficial ends to ensure the

integrity of commodity and commodity derivatives markets within its

jurisdiction. To the

[[Page 51019]]

extent Exempt Entities incur some cost to remain compliant with the

CEA’s anti-fraud, anti-manipulation, and enforcement regime, the

Commission considers such costs warranted by the importance of

maintaining commodity market and price discovery integrity. The

Commission also believes that authority to inspect books and records

kept in the ordinary course of business, pursuant to its regulatory

inspection authority, as they relate to Exempt Non-Financial Energy

Transactions is important to assure visibility into activity in such

transactions on an as-needed basis. Further, as a general matter, the

Commission expects infrequently to exert its regulatory inspection

authority with respect to Exempt Non-Financial Energy Transactions and,

as proposed, such authority would involve only records that Exempt

Entities keep in the ordinary course of business, only in the event

that circumstances warrant the need to gain greater visibility with

respect to Exempt Non-Financial Energy Transactions as they relate to

Exempt Entities’ overall market positions, and only to ensure

compliance with the terms of this Proposed Order. The Commission

anticipates that any costs occasioned by this condition are relatively

insignificant.

6. Consideration of CEA Section 15(a) Factors

a. Protection of Market Participants and the Public

As explained above, the Commission does not foresee that the

Proposed Order will have any effect on the protection of market

participants and the public. More specifically, Exempt Non-Financial

Energy Transactions as transacted bilaterally and in a closed loop

between Exempt Entities in the highly specialized and unique electric-

industry circumstances proposed for exemption do not appear to the

Commission to generate risks of the nature addressed by the CEA. The

Commission has attempted to delineate the definitional boundaries for

Exempt Entities and Exempt Non-Financial Energy Transactions in a

manner that appropriately ring-fences against the possibility that they

could generating such risks, either now or as they may evolve in the

future. Moreover, the exemption incorporates conditions to counter

residual risk that conceivably, though unexpectedly, might survive

notwithstanding the Proposed Order’s careful definitional crafting.

b. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

The Commission foresees no negative impact from the Proposed Order

on the efficiency, competitiveness, and financial integrity of markets

regulated under the CEA. As narrowly limited to highly bespoke

transactions, executed bilaterally between non-financial entities

primarily in order to satisfy existing or expected operations-related

contractual obligations, as opposed to speculating or hedging against

the price risk of an underlying commodity, the Commission foresees

little to no capability for Exempt Non-Financial Energy Transactions,

to the extent any are swaps, to directly impact swap market efficiency,

competitiveness, or financial integrity. Also, the Proposed Order

incorporates definitional attributes that largely eliminate the

potential for any futures market impact.

Further, as an exercise of the Commission’s CEA section 4(c)

authority to provide legal certain for novel instruments as Congress

intended, the Proposed Order affords Exempt Entities transactional

flexibility that the Commission understands to be valuable to their

ability to efficiently deploy their limited resources.

c. Price Discovery

The Commission does not foresee that the Proposed Order will

directly impact price discovery. As discussed above, the highly bespoke

nature of Exempt Non-Financial Energy Transactions, as well as the fact

that they are used to manage unique electric industry operational risks

rather than price risk of an underlying commodity, appears to make them

ill-suited for exchange trading and/or to serve a useful price

discovery function.

d. Sound Risk Management Practices

The Commission expects that the Proposed Order will promote the

ability of Exempt Entities to manage the operational risks posed by

unique electric market characteristics, including the non-storable

nature of electricity and demand that can and frequently does fluctuate

dramatically within a short time-span. As discussed above, the

Commission understands that Exempt Non-Financial Energy Transactions

are an important tool facilitating the ability of Exempt Entities to

efficiently manage operational risk in fulfillment of their public

service mission to provide affordable, reliable electricity.

Also, the Commission does not anticipate that the Proposed Order

will compromise systemic risk management. The transactions proposed for

exemption are not market facing, but are executed exclusively within

closed-loops that do not include financial entities. These

characteristics, among others, limit the ability of Exempt Non-

Financial Energy Transactions to create systemic risk.

e. Other Public Interest Considerations

In utilizing its section 4(c)(1) and (6)(C) exemptive authority as

proposed herein, the Commission believes it is acting to promote the

broader public interest in an affordable, reliable electric supply as

Congress contemplated.

7. Request for Public Comment on Costs and Benefits

The Commission invites public comment on its cost-benefit

considerations, including the consideration of reasonable alternatives.

The Commission invites public comment on the magnitude of specific

costs and benefits that would result from the Proposed Order, including

data or other information to estimate the dollar value of such costs

and benefits.

The Commission invites public comment on any cost or benefit

impact, direct or indirect, that the Proposed Order may have with

respect to the factors the Commission considers under CEA section

15(a), specifically: (a) Protection of market participants and the

public; (b) efficiency, competitiveness and financial integrity of the

markets subject to the Commission’s jurisdiction; (c) price discovery;

(d) sound risk management; and (e) other public interest

considerations.

Issued in Washington, DC, on August 16, 2012 by the Commission.

Sauntia S. Warfield,

Assistant Secretary of the Commission.

Appendices to Request for comment on a proposal to exempt, pursuant to

authority in section 4(c) of the Commodity Exchange Act, certain

transactions between entities described in section 201(f) of the

Federal Power Act, and other electric cooperatives –Commission Voting

Summary and Statements of Commissioners

Note: The following appendices will not appear in the Code of

Federal Regulations

Appendix 1–Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Sommers,

Chilton, O’Malia and Wetjen voted in the affirmative; no

Commissioner voted in the negative.

[[Page 51020]]

Appendix 2–Statement of Chairman Gary Gensler

I support the proposed relief from the Dodd-Frank Wall Street

Reform and Consumer Protection Act (Dodd-Frank Act) swaps provisions

for certain electricity and electricity-related energy transactions

between rural electric cooperatives; state, municipal, and tribal

power authorities; and federal power authorities.

Congress directed the CFTC, when it is in the public interest,

to provide relief from the Dodd-Frank Act’s swaps market reform

provisions for certain transactions between these entities.

For decades, these entities have been recognized as performing a

public service mission, a fundamentally different function than

investor-owned utilities. The purpose of these entities is to

provide their customers or cooperative members with reliable

electric energy at the lowest cost possible. They have been largely

exempt from regulation by the Federal Energy Regulatory Commission

because of their government entity status or their not-for-profit

cooperative status.

The scope of the proposed relief extends only to non-financial

electricity and electricity-related energy transactions for the

generation, transmission and delivery of electric energy to

customers. Such transactions must be intended for making or taking

physical delivery of the underlying commodity.

I look forward to receiving public comment on the proposed

relief.

[FR Doc. 2012-20589 Filed 8-22-12; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: August 23, 2012