On April 4, 2016, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) jointly issued guidance (“Proposed Guidance”) preliminarily concluding that certain electric power capacity contracts and certain natural gas supply contracts (each as described below) constitute “customary commercial arrangements”[1] and, as such, should not be considered “swaps” under the Commodity Exchange Act, as amended by the Dodd-Frank Act (“CEA”).  The Proposed Guidance generally describes these two types of qualifying contracts as follows:

  • Certain electric power capacity contracts: Capacity contracts in electric power markets that are used in situations where regulatory requirements from a state public utility commission obligate load serving entities and load serving electric utilities in that state to purchase ‘‘capacity’’ (sometimes referred to as ‘‘resource adequacy’’) from suppliers to secure grid management and on-demand deliverability of power to consumers.
  • Certain natural gas supply contracts: Peaking supply contracts that enable an electric utility to purchase natural gas from another natural gas provider on those days when its local natural gas distribution companies curtail its natural gas transportation service.

The Proposed Guidance does not supersede or affect the CFTC’s earlier exclusion from the swap definition for capacity contracts and peaking supply contracts that qualify as forward contracts with “embedded volumetric optionality.”[2]  The comment period for the Proposed Guidance ends on May 9, 2016.