On November 14, 2012, the Office of the General Counsel (the "OGC") responded to frequently asked questions regarding which commercial agreements for the supply and consumption of energy would be considered a commodity option, and therefore a swap, subject to the Dodd Frank Act.
In its rules issued jointly with the SEC further defining certain key terms such as "Swap," and "Security-Based Swap," published in August 2012, the CFTC included an interpretation regarding certain physical commercial agreements for the supply and consumption of energy that provide flexibility, such as tolls on power plants, transportation agreements on natural gas pipelines, and natural gas storage agreements. The CFTC stated that it will interpret an agreement, contract or transaction not to be a commodity option if three elements are satisfied: (1) the agreement is for the use of a specified facility rather than the purchase or sale of the commodity that is to be created, transported, processed or stored there; (2) the agreement grants the buyer the exclusive use of the facility during its term; and (3) payment represents a payment for use of the facility rather than the option to use it.
In its interpretation, the CFTC clarified that if the right to use the facility is only obtained via the payment of a demand charge or reservation fee, and the exercise of the right requires further payment of actual storage fees, usage fees, rents, or other service charges not included in the demand charge or reservation fee, such agreement is a commodity option and therefore is within the swap definition (colloquially referred to as "the 'however paragraph.'"). As a result of the "however paragraph", market participants were concerned that some transportation and storage agreements would be considered swaps. Market participants asserted to the CFTC that such a two-part fee structure is the standard fee structure for a wide variety of usage contracts and they view the demand charge/reservation fee as a payment in advance for a physical service, not a payment for the right to later obtain a physical service if the buyer chooses to do so.
In its response, the OGC comments that the "however paragraph" was not intended to apply to agreements, contracts or transactions in which the buyer pays for a commodity in two parts, paying the seller's fixed/known costs upfront and the seller's variable costs associated with that commodity later once those costs are established or incurred. In the OGC's view, if (1) an agreement includes a two-part fee structure, (2) the right to use the facility is legally established upon entering into the agreement, (3) payment of the Demand Charge/Reservation Fee is made in a commercially reasonable time, (4) the use of the facility does not depend on the further exercise of an option, and (5) the Usage Fee represents a reimbursement for the variable costs incurred by providing the service, such a facility usage agreement is not an option and is not intended to be covered by the "however paragraph." A facility usage agreement, contract or transaction with a two-part fee structure that fails to meet one or more of the conditions above may or may not be an option. Whether such an agreement that does not meet all of these requirements is an option depends on the specific facts and circumstances of the agreement as a whole.