On March 28, 2013, the United States Commodity Futures Trading Commission (CFTC) issued two final orders. The first, the RTO/ISO Order, exempts four types of specified transactions in certain organized markets of five petitioning regional transmission organizations (RTOs), independent system operators (ISOs) and the Electric Reliability Council of Texas (ERCOT). The second final order, the 210(f) Order, exempts certain non-financial derivative transactions between or among certain entities specified in section 210(f) of the Federal Power Act (FPA) and/or other electric cooperatives. These final orders were required due to the pending expiration of prior time-limited relief.
The RTO/ISO Order broadly follows the related August 28, 2012 proposed order and responds to an original petition, dated February 7, 2012 (and amended on June 11, 2012), for an exemptive order under section 4(c) of the Commodity Exchange Act (CEA). Under certain conditions, the RTO/ISO Order exempts from regulation by the CFTC under the CEA (other than reserved anti-fraud and anti-manipulation authority and scienter-based prohibitions) purchases and sales of the following defined products (Covered Transactions):
- Financial Transmission Rights;
- Energy Transactions in Day-Ahead and Real-Time Markets;
- Forward Capacity Transactions; and
- Reserve or Regulation Transactions.
To be exempt, the related Covered Transactions must be executed on an RTO/ISO market under a tariff approved, or allowed to become effective, by the Federal Electric Regulatory Commission (FERC) or ERCOT, as applicable. Additionally, the parties to such Covered Transactions must be either “appropriate persons” (as defined in CEA section 4(c)(3)(A) through (J)), “eligible contract participants” (as defined in CEA section 1(a)(18) and CFTC regulation 1.3(m)) or other persons who are in the business of either (i) generating, transmitting or distributing electric energy or (ii) providing electric energy services that are necessary to support the reliable operation of the transmission system.
The effectiveness of the exemptions under the RTO/ISO Order is conditioned on continued information sharing arrangements between the CFTC and FERC—or, in the case of ERCOT, the Public Utility Commission of Texas (PUCT)—that are satisfactory to the CFTC. The effectiveness is also conditioned on the CFTC’s receipt of, and satisfaction with, certain (i) opinions or memoranda that provide sufficient assurance that netting arrangements to satisfy FERC regulation 35.47(d) will provide enforceable set-off in bankruptcy and (ii) evidence that the RTO or ISO has fully complied with the requirements of FERC regulation 35.47 as measured by FERC’s acceptance and approval of all submissions that are required to implement such requirements (or, in the case of ERCOT, as measured by the PUCT permitting all necessary protocol revisions to take effect).
In a related no-action letter, no. 13-05, the CFTC staff provided time-limited relief to the petitioning RTOs and ISOs to permit them to make tariff, protocol and rate schedule changes that are necessary to meet the conditions of the RTO/ISO Order.
The 210(f) Order, closely follows the related August 23, 2012 proposed order. It exempts, pursuant to CEA section 4(c), certain non-financial derivative transactions between or among entities described in FPA section 210(f) and/or other electric cooperatives from regulation by the CFTC under the CEA, other than retained anti-fraud and anti-manipulation authority, scienter-based prohibitions and record inspection conditions.
The 210(f) Order exempts certain defined “Exempt Non-Financial Energy Transactions” by defined “Exempt Entities.” An Exempt Entity is defined as follows:
- any electric facility or utility that is wholly owned by a government entity, as described in FPA section 201(f), 16 U.S.C. 824(f);
- any electric facility or utility that is wholly owned by an Indian tribe recognized by the U.S. government pursuant to section 104 of the Act of November 2, 1994, 25 U.S.C. 479a–1;
- any electric facility or utility that is wholly owned by a cooperative, regardless of such cooperative’s status pursuant to FPA section 201(f), so long as the cooperative is treated as such under Internal Revenue Code section 501(c)(12) or 1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C), and exists for the primary purpose of providing electric energy service to its member/owner customers at cost; or
- any other entity that is wholly owned, directly or indirectly, by any one or more of the foregoing.
The term ‘‘Exempt Entity’’ does not include any ‘‘financial entity,’’ as defined in CEA section 2(h)(7)(C).
An “Exempt Non-Financial Energy Transaction” includes any agreement, contract or transaction based upon a ‘‘commodity’’—as such term is defined in CEA section 1a(9) and CFTC regulation 1.3(e)—that would not have been entered into, but for an Exempt Entity’s need to manage supply and/or price risks arising from its existing or anticipated public service obligations to physically generate, transmit, and/or deliver electric energy service to customers.
The term ‘‘Exempt Non-Financial Energy Transaction’’ excludes agreements, contracts and transactions based upon, derived from or referencing: any interest rate, credit, equity or currency asset class; any grade of a metal; any agricultural product; or any grade of crude oil or gasoline that is not used as fuel for electric energy generation.
The Exempt Non-Financial Energy Transaction must consist of one of the following six specified categories (either on a stand-alone basis or in combination with other specified categories):
- “Electric Energy Delivered” transactions consist of arrangements in which a provider Exempt Entity agrees to deliver electric energy to a recipient Exempt Entity within a geographic service territory, load, or electric system over a period of time. Such transactions include ‘‘full requirements’’ contracts, under which one Exempt Entity becomes obligated to provide, and the recipient Exempt Entity becomes obligated to take, all of the electric energy the recipient needs to provide reliable electric service to its fluctuating electric load over a specified delivery period at one or more delivery points, net of any electric energy the recipient is able to produce through its own generation assets.
- “Generation Capacity” transactions consist of agreements in which a recipient Exempt Entity purchases from a provider Exempt Entity the right to call upon the provider Exempt Entity’s electric energy generation assets to supply electric energy within a geographic area, regardless of whether such right is ever exercised for the purposes of the recipient Exempt Entity meeting its location-specific reliability obligations. Such transactions also may specify certain conditions that must exist prior to exercising the right to use an Exempt Entity’s generation assets, or establish an agreement between Exempt Entities to share pooled electric generation assets in order to satisfy regionally imposed demand side management program requirements.
- “Transmission Services” transactions consist of arrangements in which a provider Exempt Entity that owns transmission lines sells to a recipient Exempt Entity the right to use the transmission lines to deliver the recipient Exempt Entity’s electric energy from one designated point on the transmission lines to another, at a price per wattage and over a period of time, in order for the recipient Exempt Entity to provide electric energy to its customers. Such transactions may include ancillary services related to transmission such as congestion management and system losses.
- “Fuel Delivered” transactions consist of arrangements used to buy, sell, transport, deliver or store fuel used in the generation of electric energy by an Exempt Entity. Additionally, Fuel Delivered transactions may include an agreement to manage the operational basis or exchange (i.e., location or time of delivery) risk of an Exempt Entity that arises from its location-specific, seasonal or otherwise variable operational need for fuel to be delivered.
- “Cross-Commodity Pricing” transactions consist of arrangements such as heat rate transactions and tolling agreements in which the price of electric energy delivered is based upon the price of the fuel source used to generate the electric energy. Cross-Commodity transactions also include fuel delivered agreements in which the price paid for fuel used to generate electric energy is based upon the amount of electric energy produced.
- “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.
While generally expected, these order provide welcome certainty to affected electric market participants.