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2013-07633

  • Federal Register, Volume 78 Issue 63 (Tuesday, April 2, 2013)[Federal Register Volume 78, Number 63 (Tuesday, April 2, 2013)]

    [Notices]

    [Pages 19670-19689]

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

    [FR Doc No: 2013-07633]

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    COMMODITY FUTURES TRADING COMMISSION

    RIN 3038-AE01

    Order Exempting, Pursuant to Authority of the Commodity Exchange

    Act, Certain Transactions Between Entities Described in the Federal

    Power Act, and Other Electric Cooperatives

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final order.

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    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is exempting certain transactions between entities

    described in section 201(f) of the Federal Power Act (``FPA''), and/or

    other electric utility cooperatives, from the provisions of the

    Commodity Exchange Act (``CEA'' or ``Act'') and the Commission's

    regulations, subject to certain anti-fraud, anti-manipulation, and

    record inspection conditions. Authority for this exemption is found in

    section 4(c) of the CEA.

    DATES: Effective date: April 2, 2013.

    FOR FURTHER INFORMATION CONTACT: David Van Wagner, Chief Counsel, (202)

    418-5481, dvanwagner@cftc.gov, or Graham McCall, Attorney-Advisor,

    (202) 418-6150, gmccall@cftc.gov, Division of Market Oversight; or

    David Aron, Counsel, (202) 418-6621, daron@cftc.gov, Office of General

    Counsel; Commodity Futures Trading Commission, Three Lafayette Centre,

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Petition for Relief

    B. Summary of Proposed Order

    II. Comments Received and Commission Response

    A. Clarification With Respect to the Definition of ``Exempt

    Entity''

    [[Page 19671]]

    B. Clarification With Respect to the Definition of ``Exempt Non-

    Financial Energy Transaction''

    C. Clarification With Respect to the Commission's Right To

    Revisit the Terms of the Relief

    D. Request That Relief Not Be Conditioned Upon a Reservation of

    Jurisdiction Under the Commission's Authority Over Options

    Transactions

    E. Other Clarification and Comments

    1. Clarification With Respect to the Ability of Exempt Entities

    To Use Exempt Non-Financial Energy Transactions To Manage Price

    Risks

    2. Request That Relief Be Retroactive To the Date of Enactment

    of the Dodd-Frank Act

    3. Request That Relief Be Categorical

    III. CEA Section 4(c) Determinations

    A. Applicability of CEA Section 4(a)

    B. Public Interest and the Purposes of the CEA

    C. Appropriate Persons

    D. Ability To Discharge Regulatory or Self-Regulatory Duties

    IV. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Consideration of Costs and Benefits

    1. The Statutory Mandate To Consider the Costs and Benefits of

    the Commission's Action: Section 15(a) of the CEA

    2. Costs

    3. Benefits

    4. Consideration of Alternatives

    5. Consideration of CEA Section 15(a) Factors

    V. Final Order

    I. Background

    A. Petition for Relief

    On June 8, 2012, the Commission received a petition (``Petition'')

    from a group of trade associations and other organizations representing

    the interests of government and/or cooperatively-owned electric

    utilities \1\ requesting relief from the requirements of the CEA \2\

    and Commission's regulations issued thereunder,\3\ pursuant to its

    exemptive authority under CEA section 4(c),\4\ for certain ``Electric

    Operations-Related Transactions'' entered into between certain ``NFP

    Electric Entities.''

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    \1\ The Petition was submitted by the National Rural Electric

    Cooperative Association, the American Public Power Association, the

    Large Public Power Council, the Transmission Access Policy Study

    Group and the Bonneville Power Administration (collectively,

    ``Petitioners''), and is available on the Commission's Web site at

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

    \2\ 7 U.S.C. 1 et seq.

    \3\ The Commission's regulations are set forth in title 17 of

    the Code of Federal Regulations (``CFR'').

    \4\ 7 U.S.C. 6(c).

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    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 in order to ``provid[e] certainty and

    stability to existing and emerging markets so that financial innovation

    and market development can proceed in an effective and competitive

    manner.'' \5\ Importantly, the legislative history notes that the

    Commission need not determine whether the product for which an

    exemption is sought is within the Commission's jurisdiction prior to

    issuing 4(c) relief.\6\ The Dodd-Frank Wall Street Reform and Consumer

    Protection Act (``Dodd-Frank Act'') \7\ added section 4(c)(6) to the

    CEA, which builds upon the Commission's existing 4(c) exemptive

    authority by providing that the Commission ``shall, in accordance with

    sections 4(c)(1) and 4(c)(2), exempt from the requirements of th[e] Act

    an agreement, contract, or transaction that is entered into * * *

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

    (16 U.S.C. 824(f)),'' but only ``[i]f the Commission determines that

    the exemption would be consistent with the public interest and the

    purposes of th[e] Act.'' \8\

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    \5\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213

    (``4(c) Conf. Report'').

    \6\ The 4(c) Conference Report provides in relevant part that

    [t]he 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.

    Id. at 3214-15.

    \7\ Public Law 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.

    \8\ 7 U.S.C. 6(c)(6)(C) (as added by section 722(f) of the Dodd-

    Frank Act).

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    Petitioners represented that section 201(f) of the Federal Power

    Act (``FPA''), administered by the Federal Energy Regulatory Commission

    (``FERC''), provides broad-based relief from most provisions of Part II

    of the FPA \9\ for certain government and cooperatively-owned electric

    utility companies.\10\ According to Petitioners, Congress recognized

    that the same rampant abuses which existed with investor-owned public

    utilities and that the Public Utility Act of 1935 and Rural

    Electrification Act of 1936 (``REA'') were enacted to combat simply did

    not exist with government and consumer-owned electric utilities.\11\

    Rather, Petitioners maintain that Congress understood these utilities

    to exist as self-regulating, not-for-profit entities with a shared

    public service mission of providing reliable, low-cost electric energy

    service through the management and operational oversight of elected or

    appointed government officials or

    [[Page 19672]]

    cooperative member/consumers, and thus excluded them from the same

    degree of federal oversight as investor-owned public utilities by

    promulgating FPA section 201(f).\12\

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    \9\ Per the Petition, Part II of the FPA governs the

    transmission of electric energy in interstate commerce, the sale at

    wholesale of electric energy in interstate commerce, and the

    facilities used for such transmission or sale. See Petition at 15

    (citing FPA section 201(b)); Petition Exhibit 1, at 1 (providing the

    full text of 16 U.S.C. 824 et seq.). Petitioners represented that

    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 Petition at 15 n.31 (citing 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 id. (citing 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). See Petition at 16-17.

    \10\ FPA section 201(f) provides in relevant part that

    [n]o provision in [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.

    Petition at 16 (quoting 16 U.S.C. 824(f)).

    \11\ See Petition at 17-18. Petitioners explained that the FPA

    was enacted originally ``to remedy rampant abuses in the investor-

    owned electric utility industry.'' See Salt River Project Agric.

    Improvement and Power District v. Fed. Power Comm'n, 391 F. 2d 470,

    475 (D.C. Cir. 1968). Petitioners maintained that of all the major

    abuses considered by Congress as the impetus for enacting the FPA,

    ``virtually none could be associated with the [electric] cooperative

    structure where ownership and control is vested in the consumer-

    owners.'' Id. at 475. Per the Petition, while FPA section 201(f), as

    originally enacted, exempted only government entities, the Federal

    Power Commission (``FPC''), FERC's predecessor at the time,

    determined that Congress had intended also to exempt electric

    cooperatives financed under the REA from the FPC's jurisdiction over

    ``public utilities.'' See Dairyland Power Coop. et al. v. Fed. Power

    Comm'n, 37 F.P.C. 12, 27 (1967). Finally, Petitioners explained that

    Congress codified the FPC's interpretation as part of the Energy

    Policy Act of 2005 (``EPAct 2005''), as articulated in Dairyland and

    affirmed in Salt River, 391 F.2d 470, and further expanded the scope

    of FPA section 201(f) by also exempting electric cooperatives that

    sell less than 4,000,000 megawatt hours of electricity per month,

    regardless of financing under the REA. See Public Law 109-58, 1291,

    119 Stat. 594, 985 (2005). Counsel for Petitioners represented that

    while Congress did not exempt electric cooperatives that sell in

    excess of 4,000,000 megawatt hours of electricity per month due to

    EPAct 2005 attempting to focus on issues with large electricity

    providers that had caused the 2003 blackouts in the northeast United

    States, FERC nonetheless often has allowed non-FPA 201(f)

    cooperatives additional regulatory flexibility, subject to ``self-

    regulation'' by the cooperatives' member/owner boards.

    \12\ See Petition at 17-18, 22 (FPA section 201(f) entities are

    ``effectively self-regulating'' (quoting Salt River, 371 F.2d at

    473)).

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    While CEA section 4(c)(6) prompted the Petitioners to request

    relief for FPA section 201(f) entities, Petitioners also sought to

    include in their definition of NFP Electric Entities, in accordance

    with CEA sections 4(c)(1) and 4(c)(2), any Federally-recognized Indian

    tribe and the very small number of electric cooperatives that are not

    described by FPA section 201(f). Petitioners argued that FERC has

    precedent for treating Federally-recognized Indian tribes as FPA 201(f)

    government entities.\13\ Additionally, Petitioners argued that

    regardless of whether an electric cooperative is recognized under FPA

    section 201(f) by virtue of receiving funding from the Rural Utilities

    Service (``RUS'') \14\ or selling less than 4 million megawatt hours of

    electricity per year, 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.\15\

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    \13\ See id. at 20 (citing 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)).

    \14\ Per the Petition, the REA established the RUS as the

    federal agency to administer financing to rural utilities. See 7

    U.S.C. 901 et seq.

    \15\ Per the Petition, to be treated as a ``cooperative'' under

    Federal tax law, regardless of FPA section 201(f) status, an

    electric cooperative must operate on a cooperative basis. See 26

    U.S.C. 501(c)(12), 1381(a)(2)(C). Petitioners explained that the

    United States Tax Court, in the seminal case of Puget Sound Plywood,

    Inc. v. Comm'r of Internal Revenue, held that 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). 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 argued 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: (i) Is a

    consumer cooperative; (ii) is controlled by its members; (iii) must

    operate at cost and ``not operate either for profit or below cost;''

    (iv) may not benefit its individual members financially; and (v) if

    exempt from Federal income taxation, must collect at least 85

    percent of its income from members.

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    Petitioners limited the relief requested to certain Electric

    Operations-Related Transactions that meet defined criteria. The

    Petition described seven specific categories of transactions that

    traditionally occur between NFP Electric Entities and provided examples

    of each: Electric energy delivered, generation capacity, transmission

    services, fuel delivered, cross-commodity transactions, other goods and

    services, and environmental rights, allowances or attributes.\16\ Under

    the Petitioners' proposed definition, Electric Operations-Related

    Transactions would not reference any ``commodity'' in the financial

    asset class or ``Other Commodity'' asset class that is based upon or

    derived from a metal, agricultural product or fuel of any grade not

    used for electric energy generation.\17\ In general, Petitioners

    represented that all transactions described by the seven categories fit

    within their proposed definition of Electric Operations-Related

    Transactions and were ``intrinsically related'' to the needs of NFP

    Electric Entities ``to hedge or mitigate commercial risks'' which arise

    from the entities' public service obligations.\18\ Notably, however,

    Petitioners requested categorical relief for ``any other electric

    operations-related agreement, contract or transaction to which the NFP

    Electric Entity is a party,'' even if such transaction was not

    described by one of the Petition's categories, but could be developed

    as a new category in the future.\19\

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    \16\ See generally Petition at 6-12, and Exhibit 2.

    \17\ See id. at 13.

    \18\ See id. at 12.

    \19\ See id. at 5, 13.

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    B. Summary of Proposed Order

    The Commission published for comment in the Federal Register a

    ``Proposal To Exempt Certain Transactions Involving Not-for-Profit

    Electric Utilities; Request for Comment'' (``Proposed Order'').\20\ The

    Proposed Order identified (i) the entities eligible to rely on the

    exemption for purposes of entering into an exempt transaction (``Exempt

    Entities''); \21\ (ii) the agreement, contract, or transaction for

    which the exemption could be relied upon (``Exempt Non-Financial Energy

    Transactions''); \22\ and (iii) the provisions of the CEA and

    Commission regulations that would continue to apply to Exempt Entities

    entering into Exempt Non-Financial Energy Transactions with one

    another.\23\

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    \20\ 77 FR 50998 (August 23, 2012).

    \21\ Exempt Entities are defined in Section IV.A of the Proposed

    Order. See id. at 51012.

    \22\ Exempt Non-Financial Energy Transactions are defined in

    Section IV.B of the Proposed Order. See id. at 51012-13.

    \23\ The conditions the Commission proposed to impose on the

    Proposed Order are described in Section IV.C thereof. See id. at

    51013.

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    The Commission proposed a definition of Exempt Entities intended to

    capture the same scope of entities for which relief was requested by

    Petitioners. Generally, these entities included (i) electric facilities

    owned by government entities described in FPA section 201(f), (ii)

    electric facilities owned by Federally-recognized Indian tribes, (iii)

    any cooperatively-owned electric utility treated as a cooperative under

    Federal tax laws, and (iv) any other not-for-profit entity wholly-owned

    by one or more of the foregoing.\24\ The Proposed Order provided the

    caveat that no Exempt Entity could qualify as a ``financial entity'' as

    such term is defined in CEA section 2(h)(7)(C).\25\

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    \24\ See id. at 51012.

    \25\ See id.

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    The Commission's proposed definition of Exempt Non-Financial Energy

    Transaction was narrower in scope than the transaction definition

    proposed by Petitioners. Namely, the Commission declined to propose

    categorical relief for any transaction not described by one of the

    seven categories included in the Petition because the broader

    transaction definition is too vague for the Commission to conduct a

    considered and robust public interest and CEA purposes analysis under

    CEA section 4(c).\26\ Additionally, due to overlap between certain

    transaction categories for which both Petitioners requested relief and

    the Commission's joint final rule and interpretation with the

    Securities Exchange Commission (``SEC'') determined not to be

    swaps,\27\ the Commission believed it was unnecessary to provide

    additional relief pursuant to CEA section 4(c) for those

    [[Page 19673]]

    overlapping transaction categories.\28\ Otherwise, the Commission

    proposed a definition for Exempt Non-Financial Energy Transactions that

    was intended to capture a similar scope of transactions as described in

    the Petition, limited in the Proposed Order to Electric Energy

    Delivered, Generation Capacity, Transmission Services, Fuel Delivered,

    Cross-Commodity Pricing, and Other Goods and Services.\29\

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    \26\ Id. at 51006, n.63. The Commission also declined to propose

    Petitioners' secondary requests for i) an additional exempted

    transaction category for ``trade options'' and/or ii) delegated

    authority to Commission staff to review and approve new categories

    of exempted transactions, for the reasons set forth in the Petition.

    See id. Also, because the Commission has promulgated a trade option

    exemption in Commission regulation 32.3, there was no need to

    promulgate a separate trade option exemption for Petitioners, who,

    like all other persons whose transactions satisfy the terms of the

    trade option exemption, can rely thereon.

    \27\ 77 FR 48208 (August 13, 2012) (``Products Release'').

    \28\ See Proposed Order at 51008-09. Specifically, the

    Commission noted that certain ``Fuel Delivered'' transactions, as

    described in Exhibit B of the Petition, would be covered by the

    forward exclusion from the swap definition. Id. at 51008 (citing

    Products Release, 77 FR 48236). Additionally, the Commission noted

    that agreements, contracts, and transaction involving the category

    of Environmental Rights, Allowances or Attributes, as specifically

    described by the Petition, would be covered by the forward exclusion

    from the swap definition. Id. (citing Products Release, 77 FR 48233-

    34).

    \29\ See id. at 51012-13. Generally, the description of each

    category mirrored the descriptions provided in the Petition.

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    Pursuant to CEA section 4(c)(1), the Commission also proposed

    conditioning its relief. First, the Commission proposed to reserve its

    general anti-fraud, anti-manipulation, and enforcement authority.\30\

    Second, the Commission proposed to reserve its general authority to

    inspect books and records of Exempt Non-Financial Energy Transactions

    already kept in the normal course of business.\31\ The overarching goal

    of these proposed conditions would be to allow the Commission to gain

    greater visibility with respect to Exempt Non-Financial Energy

    Transactions to ensure Exempt Entities' compliance with the terms of

    the order, provide a means to ensure that the relief provided in the

    order remains appropriate and in the public interest given the

    potential that Exempt Non-Financial Energy Transactions may continue to

    evolve and their usage otherwise change, and to maintain the ability 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.\32\

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    \30\ Id. at 51013 (reserving authority 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).

    \31\ Id.

    \32\ Id. at 51009.

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    Given the scope of the relief contemplated by the Proposed Order as

    just described, the Commission was able to make the public interest

    determinations required under CEA sections 4(c)(1) and 4(c)(2). In the

    Proposed Order, the Commission determined that (i) Exempt Non-Financial

    Energy Transactions were innovative products necessary to meet the

    unique production, distribution, and usage needs of Exempt Entities

    that were constantly changing due to factors beyond their control; \33\

    (ii) CEA section 4(a) should not apply to Exempt Non-Financial Energy

    Transactions, which were bespoke in nature and conducted in a closed

    loop between Exempt Entities, therefore making them unsuitable for

    exchange trading and less likely to affect price discovery in

    Commission-regulated markets; \34\ (iii) relief for Exempt Non-

    Financial Energy Transactions between Exempt Entities was not

    inconsistent with the public interest because the transactions were

    used to ``manage'' commercial risks arising from electric operations

    and facilities, and therefore were not speculative in nature; \35\ (iv)

    Exempt Entities were self-regulating, not-for-profit public utilities

    with no outside investors or shareholders to profit from transactions,

    and as such, were less vulnerable to fraudulent or manipulative trading

    activity in accordance with the purposes of the CEA; \36\ (v) Exempt

    Entities were ``appropriate persons'' for purposes of 4(c) relief

    either by virtue of having been identified explicitly by Congress in

    CEA section 4(c)(6)(C) as being eligible for a 4(c) exemption, by being

    a government-sponsored entity, and/or otherwise being appropriate due

    to sufficient financial soundness and operational capabilities; \37\

    and (vi) because of the foregoing, nothing would prevent the Commission

    or any contract market from discharging its respective regulatory or

    self-regulatory duties under the CEA.\38\

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    \33\ See id.

    \34\ See id. at 51010.

    \35\ See id.

    \36\ See id. at 51011.

    \37\ See id. at 51011-12.

    \38\ See id. at 51012.

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    In addition to requesting comment on the scope of the relief and

    the Commission's 4(c) determinations, the Commission posed specific

    questions \39\ related to different aspects of the Proposed Order and

    provided a 30-day comment period to respond.

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    \39\ See id. at 51013-14.

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    II. Comments Received and Commission Response

    In response to the Proposed Order's Request for Comments, the

    Commission received two responses, both of which were generally

    supportive. The Electric Power Supply Association and the Edison

    Electric Institute, writing together (``Joint Associations''), voiced

    general support for the Proposed Order and the Commission's

    determinations that the exemption would be in the public interest, and

    did not request any clarification or propose any changes.\40\ The

    Petitioners also submitted a comment letter which, while approving

    overall of the Proposed Order and the Commission's ``appropriate[ ]

    implement[ation] [of] Congressional intent,'' requested that any final

    relief be clarified ``in certain minor respects to align more closely

    with the Congressional intent,'' and that responded directly to the

    Commission's specific questions.\41\

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    \40\ Letter from the Electric Power Supply Association and the

    Edison Electric Institute, at 1-2 (September 24, 2012) (``Joint

    Associations' Letter'') (``The Joint Associations support the

    Commission's Proposed 201(f) Exemption and agree that the Proposed

    201(f) Exemption is in the public interest.'').

    \41\ Letter from the National Rural Electric Cooperative

    Association, the American Public Power Association, the Large Public

    Power Council, the Transmission Access Policy Study Group and the

    Bonneville Power Administration, at 1-2 (September 24, 2012)

    (``Petitioners' Letter''). As discussed below, the Petitioners did

    not respond directly to the Commission's ``Request for Public

    Comment on Costs and Benefits'' of the Proposed Order.

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    Upon careful consideration of the comments received, the Commission

    has determined to finalize the Proposed Order, with certain revisions

    to the ``Final Order,''\42\ the majority of which are in response to

    comments discussed below and subject to the following interpretive

    guidance used to clarify the Commission's intent. Unless noted below,

    the Commission is finalizing the Proposed Order without change because

    it continues to believe that the scope of the Proposed Order is

    consistent with the public interest and purposes of the Act.\43\

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    \42\ See infra Section V.

    \43\ See Proposed Order at 51006-09.

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    A. Clarification With Respect to the Definition of ``Exempt Entity''

    Generally, Petitioners agreed with the scope of entities included

    in the definition of Exempt Entity. In response to a question posed by

    the Commission,\44\ Petitioners commented that the scope of the Exempt

    Entities definition should not be limited further to include only those

    electric cooperatives with tax-exempt status under Federal tax law

    because ``[t]here is no operational or governance difference between

    electric cooperatives

    [[Page 19674]]

    that are tax exempt under IRC Section 501(c)(12) and those that are

    taxable under IRC Section 1381(a)(2)(C).'' \45\ Similarly, in response

    to a different question,\46\ Petitioners reiterated their support for

    including Federally-recognized Indian tribes within the scope of the

    relief for the same reasons that they provided in the Petition.\47\

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    \44\ Specifically, the Commission asked whether it should

    ``limit the scope of Exempt Entities to only those electric

    utilities described by FPA section 201(f),'' and even if not,

    ``should the Commission still limit the scope of electric

    cooperatives included as Exempt Entities to only those cooperatives

    with tax exempt status[?]'' Proposed Order at 51013.

    \45\ Petitioners' Letter at 9.

    \46\ Specifically, the Commission sought comment ``on every

    aspect of the Proposed Order as it relates to Indian tribes.''

    Proposed Order at 51013.

    \47\ Petitioners' Letter at 10-11.

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    The Proposed Order defined Exempt Entities to include not only

    those entities described in FPA section 201(f),\48\ but federally-

    recognized Indian tribes and non-FPA section 201(f) electric

    cooperatives. The Commission accepted Petitioners' representations that

    FERC has traditionally treated federally-recognized Indian tribes as

    FPA section 201(f) entities due to the similarities they share with

    government entities.\49\ The Commission also accepted Petitioners'

    representations that non-FPA section 201(f) electric cooperatives, so

    long as they are treated as cooperatives under Federal tax law but

    regardless of whether they have tax-exempt status, are owned and

    operated in the same not-for-profit, self-regulated manner as FPA

    section 201(f) cooperatives, and their source of financing or amount of

    monthly electricity sold does not affect their sharing with FPA section

    201(f) electric cooperatives the same underlying public service mission

    of providing affordable, reliable electric energy service to

    customers.\50\ Having received no comments challenging the Commission's

    determination based upon these representations, the Commission

    continues to believe that the scope of Exempt Entities included in the

    Proposed Order is consistent with the public interest and purposes of

    the Act, and thus is adopting the same general scope of Exempt Entities

    in the Final Order.\51\

    ---------------------------------------------------------------------------

    \48\ See Proposed Order at 51006-07.

    \49\ See id. at 51007.

    \50\ See id.

    \51\ With regard to the Commission asking whether an Exempt

    Entity should be required to notify the Commission of any change in

    status under FPA section 201(f), Proposed Order at 51013, the

    Commission notes that the question was only relevant to electric

    cooperatives that fall in-and-out of FPA section 201(f) status based

    upon the amount of electricity they sell or from whom they receive

    financing. The Petitioners stated that such a change in status

    ``would have no effect on outstanding Exempt Non-Financial Energy

    Transactions entered into with Exempt Entities prior to the change

    in status.'' Petitioners' Letter at 9. Having further considered the

    issue, the Commission confirms its belief that, for the reasons

    stated in the adopting release to the Proposed Order, an electric

    cooperative's FPA 201(f) status should not be determinative of its

    inclusion in the relief provided herein as long as it continues to

    meet the criteria for cooperatives as noted herein. Furthermore, the

    Commission does not believe that being notified of an electric

    cooperative's change in FPA 201(f) status would further any

    regulatory purposes under the Act, and therefore is not imposing any

    new reporting condition. The Commission is cognizant that any

    incentive provided by the Final Order for electric cooperatives to

    sell additional electricity and still be covered by the relief could

    be negated by the consequence of becoming fully regulated by FERC.

    The Commission stresses, however, that to the extent an electric

    cooperative no longer meets the criteria for cooperatives provided

    in the definition of an Exempt Entity, such electric cooperative may

    no longer rely on the relief provided in the Final Order.

    ---------------------------------------------------------------------------

    Petitioners suggested a number of minor revisions to the language

    used in defining Exempt Entities in the Proposed Order in order ``to

    clearly encompass the appropriate categories of electric entities

    discussed in the Petition and elsewhere in the Proposal.'' \52\ For

    example, Petitioners suggested clarifying that Exempt Entities can own

    either a facility ``or utility'' that is subject to exemption under FPA

    section 201(f), and that such a facility or utility should be ``wholly-

    owned'' instead of partially-owned by entities that qualify under FPA

    section 201(f).\53\ The Commission agrees that the proposed revisions

    would help align the Final Order with the Commission's intent as

    expressed in the adopting release of the Proposed Order, and has

    modified the definition of ``Exempt Entity'' accordingly.\54\

    ---------------------------------------------------------------------------

    \52\ Id. at 3.

    \53\ Id.

    \54\ The Commission understands that a ``facility'' refers to an

    asset used in relation to the generation, transmission and/or

    delivery of electricity, whereas a ``utility'' refers to the entity

    that owns and/or operates the facility. Additionally, to qualify

    under FPA section 201(f) and, by extension, CEA section 4(c)(6)(C),

    an electric facility or utility cannot be partially-owned by an

    entity not described by FPA section 201(f). Furthermore, the

    Commission has clarified in the Final Order that, consistent with

    FPA section 201(f), an aggregated entity such as a Joint Power

    Administration can own facilities or utilities covered by the

    relief, subject to the caveat that the aggregated entity must

    consist solely of entities otherwise described as Exempt Entities.

    While not explicitly requested, the Commission has deleted the

    requirement that Federally-recognized Indian tribes must be

    ``otherwise subject to regulation as a `public utility' under the

    FPA'' to account for the possibility that Indian tribes recognized

    by the U.S. government may someday be recognized explicitly under

    FPA section 201(f), at which point it could be confusing as to

    whether they are covered by the Final Order due to status with FERC

    as a public utility.

    ---------------------------------------------------------------------------

    Petitioners also requested that the Commission remove the reference

    to ``lowest cost possible'' from clause (iii) in the Proposed Order's

    definition of electric ``cooperatives'' that qualify as Exempt Entities

    in order ``to recognize that electric cooperatives have operational

    objectives in addition to low cost, e.g., electric service reliability

    and environmental stewardship.'' \55\ The Petitioners represented that

    these are additional public service objectives that all Exempt Entities

    share as part of their collective public service mission, in addition

    to providing affordable electric energy service.\56\ Additionally,

    Petitioners originally maintained that providing electric energy

    service at the lowest cost possible may be an operational goal of a

    cooperative, and that Federal tax law requires cooperatives to operate

    ``at cost,'' as opposed to the lowest cost possible.\57\ The Commission

    agrees that this is a worthwhile clarification and, accordingly, has

    revised the language in clause (iii) of the Proposed Order describing

    electric cooperatives included in the definition of Exempt Entity to

    make clear that such cooperatives must provide electric energy service

    to their member/owner customers ``at cost,'' which the Commission

    intends to reflect the lowest cost possible in light of certain

    reliability and environmental standards and objectives, among others.

    ---------------------------------------------------------------------------

    \55\ Petitioners' Letter at 4.

    \56\ See id.

    \57\ See Petition at 26 (defining ``at cost'' as ``return[ing]

    excess operating revenues to [the cooperative's] member-patrons,''

    which means the cooperative ``must not operate either for profit or

    below cost'' (citing Puget Sound Plywood v. Comm'r, 44 T.C. 305,

    307-308 (1965)).

    ---------------------------------------------------------------------------

    Lastly, Petitioners requested that the Commission delete the

    qualifier, ``not-for-profit,'' from clause (iv) of the Exempt Entity

    definition describing entities that are wholly-owned by one or multiple

    other Exempt Entities.\58\ The Petitioners noted that ``[e]ach of these

    subsidiary or aggregated entities are FPA 201(f) entities because they

    are wholly-owned by other FPA 201(f) entities, without regard to tax

    status,'' and therefore ``their activities do not benefit entities

    outside the `closed loop' of entities'' described in CEA section

    4(c)(6)(C).\59\ The Commission agrees that Petitioners' interpretation

    is consistent with FPA section 201(f) and CEA section 4(c)(6)(C). FPA

    section 201(f) provides that ``any corporation which is wholly owned,

    directly or indirectly, by any one or more of the foregoing [entities

    described in FPA section 201(f)]'' is exempted under the statute as

    well.\60\ Under the Proposed Order, relief is provided for transactions

    entered into solely between Exempt Entities, meaning that all exempted

    transactions, whether they generate profit or not, are

    [[Page 19675]]

    for the benefit of facilitating the closed loop's public service

    mission. Because it has determined the qualifier to not be necessary,

    the Commission has struck the reference to ``not-for-profit'' status in

    clause iv) of the Exempt Entity definition.

    ---------------------------------------------------------------------------

    \58\ Petitioner's Letter at 4.

    \59\ Id. (noting, as an example, that some Exempt Entities may

    have subsidiaries that provide their consumer-members with propane,

    on top of the subsidiary's primary electric service obligations).

    \60\ See FPA section 201(f), supra note 10.

    ---------------------------------------------------------------------------

    B. Clarification With Respect to the Definition of ``Exempt Non-

    Financial Energy Transaction''

    Similar to their suggested revisions to the definition of Exempt

    Entity, Petitioners suggested a number of minor revisions to the

    definition of Exempt Non-Financial Energy Transaction in order to align

    the Final Order more closely with Congressional intent. First,

    Petitioners requested that the Commission substitute the words ``public

    service obligations'' for ``contractual obligations'' in Section IV.B

    of the proposed definition to account for the fact that ``Exempt

    Entities' obligations to electric customers arise in some cases under

    Federal or state law, or under local municipal ordinances or city

    charters, under Tribal laws or, for electric cooperatives, under

    organizational charters or by-laws, rather than under individual

    customer contracts.'' \61\ Next, for the same reasons applicable to the

    requested revision of the definition of Exempt Entity, Petitioners

    requested that the Commission delete the phrase, ``at the lowest cost

    possible,'' when referring to the purpose of engaging in Exempt Non-

    Financial Energy Transactions.\62\ Finally, Petitioners requested that

    the Commission delete the word ``only'' from the sentence immediately

    preceding enumerated transaction categories in Section IV.B of the

    proposed definition because it is industry practice to include these

    transactions as part of larger commercial agreements or arrangements

    that also encompass components not covered by the relief.\63\

    Petitioners requested that the Commission not impose upon Exempt

    Entities the new burden of having to compartmentalize their commercial

    relationships in such a way as to limit certain arrangements to only

    those six exempted transaction categories.\64\

    ---------------------------------------------------------------------------

    \61\ Petitioners' Letter at 4.

    \62\ Id. at 5.

    \63\ Id. at 7 (citing fuel delivery contracts and environmental

    commodity and other nonfinancial commodity transactions as examples

    of larger agreements, and noting that some such agreements may

    include governance or employee sharing provisions that have nothing

    to do with operational goods and services).

    \64\ Id.

    ---------------------------------------------------------------------------

    The Commission agrees with these suggestions and has revised the

    definition of Exempt Non-Financial Energy Transaction accordingly. The

    Commission notes, however, that by allowing Exempt Non-Financial Energy

    Transactions to be included as part of larger commercial agreements, it

    is not providing relief to any other type of transaction or component

    of the agreement that is not explicitly defined in the Final Order.

    That is, the inclusion of an Exempt Non-Financial Energy Transaction

    within a broader commercial agreement does not thereby provide relief

    to every transaction included within the entire agreement.

    Petitioners also requested certain other clarifications with

    respect to the definition of Exempt Non-Financial Energy Transaction.

    First, the Commission is confirming that any ``agricultural product or

    diesel fuel or [other] grade of crude oil that is used as fuel for

    electric generation may be the underlying commodity upon which an

    `Exempt Non-Financial Energy Transaction' is based.'' \65\ Next, the

    Commission is clarifying that there is no requirement that Exempt Non-

    Financial Energy Transactions ``involve only fixed amounts of goods or

    services, or fixed time frames or only fixed measures.'' \66\ Rather,

    the Commission confirms that the price, duration, quantity and any

    other aspect of these transactions may be variable, adjusted or

    adjustable during the term of an agreement, contract or transaction, as

    is customary for Exempt Non-Financial Energy Transactions.\67\ The

    definition in the Final Order has been revised to reflect these two

    points.

    ---------------------------------------------------------------------------

    \65\ See Petitioners' Letter at 6-7.

    \66\ See id. at 7.

    \67\ The Commission notes that the definition of Exempt Non-

    Financial Energy Transaction is being revised in the Final Order to

    allow for price-hedging transactions, and that contrary to what was

    stated in the Proposed Order, some agreements may be variable price

    instead of fixed price. See infra Section II.E.1 and note 114 and

    accompanying text.

    ---------------------------------------------------------------------------

    Next, the Petitioners' requested certain changes to the proposed

    definition of Exempt Non-Financial Energy Transactions regarding what

    ultimate purpose the transactions must serve. First, Petitioners

    requested that the Commission substitute the words ``related to'' for

    ``to facilitate'' in Section IV.B of the proposed definition because in

    some cases, such as with an agreement to share a generation asset in

    order to more cost-effectively comply with environmental standards, the

    transaction may ``limit rather than facilitate electric generation,

    transmission or distribution operations.'' \68\ Second, Petitioners

    requested that the Commission not include the proposed requirement that

    Exempt Non-Financial Energy Transactions must be ``intended for making

    or taking physical delivery of the commodity upon which the agreement,

    contract or transaction is based.'' \69\ Petitioners reiterated their

    original request that in issuing any 4(c) relief, the Commission not

    determine the regulatory status of any transaction or whether any

    transaction involves a ``commodity,'' including a ``nonfinancial

    commodity,'' as those terms are defined in the CEA.\70\ Specifically,

    Petitioners provided examples of certain transactions that fall within

    the defined ``Other Goods and Services'' transaction category in the

    Proposed Order, but that ``do not always involve an identifiable,

    tangible commodity intended for `delivery,' '' or where it would be

    objectively impractical for counterparties, who under an agreement

    jointly own and operate transmission facilities, to objectively monitor

    ``intent'' because there is not a ``single, comprehensive operating

    agreement that embodies the relationship.'' \71\

    ---------------------------------------------------------------------------

    \68\ Id. at 5.

    \69\ Id.

    \70\ See id.

    \71\ See id.

    ---------------------------------------------------------------------------

    The Commission has determined to revise the purpose language to

    address Petitioners' concerns with the ``intent to physically deliver''

    requirement. The amended definition no longer directly modifies an

    Exempt Entity's public service obligation as ``facilitating''

    generation, transmission and/or delivery of electric energy service,

    and no longer includes the ``intent to physically deliver'' language.

    Rather, the amended definition provides that an Exempt Non-Financial

    Energy Transaction ``would not have been entered into, but for an

    Exempt Entities' 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.'' \72\

    ---------------------------------------------------------------------------

    \72\ See supra Section IV.B.

    ---------------------------------------------------------------------------

    The effect of the Commission's revisions to the definition should

    make it clear that Exempt Non-Financial Energy Transactions do not

    necessarily result in an immediate net increase in generation,

    transmission, and/or delivery of electric energy for each Exempt Entity

    involved. The Commission interprets the Final Order definition, as

    amended, in the larger context of an Exempt Entity's public service

    obligations, which can include certain reliability, conservation, and

    environmental considerations related to their operations and

    facilities. Thus,

    [[Page 19676]]

    under the examples posed in Petitioners' Letter, the need to enter into

    a demand-side management agreement or generation facility-sharing

    arrangement would still arise from the Exempt Entity's public service

    obligations, even if one Exempt Entity is required under the terms of

    the agreement to scale back its generation output to comply with

    demand-side management programming criteria, or the agreement itself

    does not directly result in physical generation, transmission, or

    delivery of electric energy service, but instead enables the

    fulfillment of physical obligations going forward.

    These revisions are based on the Commission's recognition that not

    all Exempt Non-Financial Energy Transactions necessarily result in

    making or taking physical delivery of the ``commodity'' upon which the

    transaction is based, although many will.\73\ As described in the Final

    Order, all categories of Exempt Non-Financial Energy Transactions

    represent agreements entered into by Exempt Entities in order to manage

    price \74\ and/or supply risk resulting from the public service role

    they play in physical electricity markets. The Commission stresses that

    the revised definition still does not allow for Exempt Non-Financial

    Energy Transactions to be purely financial arrangements lacking any

    essential relationship to a physical generation, transmission, and/or

    delivery obligation of electric energy service to customers.\75\ The

    proposed 4(c) public interest determination was premised on Exempt Non-

    Financial Energy Transactions not being speculative transactions.\76\

    Without requiring more than the ``closed loop'' limitation as advocated

    for by Petitioners, the Commission believes that the Exempt Non-

    Financial Energy Transaction definition could be interpreted to cover

    purely financial transactions capable of being used for speculative

    purposes, which would not be in the public interest for the Commission

    to exempt.\77\ Thus, the Commission has revised the Final Order

    definition to include the ``but for'' language.

    ---------------------------------------------------------------------------

    \73\ With respect to Petitioners' comment that they specifically

    requested the Commission to not make any determination as to whether

    any Exempt Non-Financial Energy Transaction involves a

    ``commodity,'' the Commission notes that Petitioners originally

    proposed that ``Electric Operations-Related Transactions'' be

    defined as ``involving a `commodity' (as such term is defined in the

    CEA) * * * .'' See Petition at 4.

    \74\ See supra Section II.E.1 (discussing the Commission's

    determination to clarify that an Exempt Non-Financial Energy

    Transaction can be used to manage the price risk of a commodity

    underlying the transaction).

    \75\ To emphasize the requirement that Exempt Non-Financial

    Energy Transactions be tied to obligations in physical electricity

    markets, the Commission has qualified the language in the Final

    Order definition to state that Exempt Entities' ``public service

    obligations'' are ``to physically generate, transmit, and/or deliver

    electric energy service to customers.'' See supra Section IV.B

    (emphasis added).

    \76\ See Proposed Order at 51010. The Commission explained that

    the scope of the proposed definition required that the transaction

    would ``contemplate `delivery' of the underlying good or service,''

    but that settlement of the transaction could occur in some

    circumstances through a financial book-out transaction so long as

    the transaction was not intended for speculative purposes. Id. at

    51008, n.83 and accompanying text. Without the physical delivery

    requirement, the Commission notes that price management transactions

    under the Final Order can be financially settled, so long as the

    underlying physical commodity is being procured through a

    corresponding physical delivery agreement.

    \77\ In response to the Commission asking whether the Proposed

    Order's definitions would foreclose the possibility of exempt

    speculative trading, the Petitioners responded that ``Exempt

    Entities do not execute Exempt Non-Financial Energy Transactions for

    speculative purposes, but only to hedge or mitigate commercial risks

    arising from electric operations.'' Petitioners' Letter at 10. While

    the Commission appreciates that Petitioners represent their intent

    never will be to use the transactions to speculate, the Commission

    also believes it is in the public interest to foreclose the

    possibility of such exempt speculative trading activity through

    additional limiting language in the definition of Exempt Non-

    Financial Energy Transactions.

    ---------------------------------------------------------------------------

    Lastly, while not requested by commenters, the Commission has

    further revised the Exempt Non-Financial Energy Transaction definition.

    The descriptions of ``Fuel Delivered'' and ``Cross-Commodity Pricing''

    transactions have been modified by replacing the operative verb

    ``include'' with ``consist of.'' While the category description is not

    necessarily closed, the Commission notes that the change is intended to

    reflect that there are certain characteristics that must be present for

    these types of transactions. The ``consist of'' language is consistent

    with the other four Exempt Non-Financial Energy Transaction category

    descriptions. Additionally, the Commission has added the qualification

    that Exempt Non-Financial Energy Transactions are not entered into on

    or subject to the rules of a registered entity, submitted for clearing

    to a derivatives clearing organization (``DCO''), and/or reported to a

    swap data repository (``SDR''). This modification is based on

    Petitioners' representation that Exempt Non-Financial Energy

    Transactions are not standardized instruments suitable for exchange

    trading, clearing, or reporting.\78\ If persons otherwise able to claim

    the relief in the Final Order choose to (i) enter into an agreement,

    contract or transaction on or subject to the rules of a registered

    entity, (ii) submit an agreement, contract or transaction for clearing

    to a DCO or (iii) report an agreement, contract or transaction to an

    SDR, such an agreement, contract or transaction will be not be an

    Exempt Non-Financial Energy Transaction and will be outside the scope

    of the Final Order. In such circumstances, such persons, agreements,

    contracts or transactions will be subject to the applicable regulatory

    regime.

    ---------------------------------------------------------------------------

    \78\ See, e.g., Petition at 6-7 (noting that ``Electric Energy

    Delivered'' contracts are not fungible and cannot be described in

    electronically reportable formats); Petition at 31 (explaining that

    ``it is highly unlikely that any [ ] standardized derivatives

    trading contracts would contain the same customized economic terms

    of any particular [Exempt Non-Financial Energy Transactions]''). The

    Commission notes that Petitioners' original proposed transaction

    definition stated that the exempted transactions ``shall not include

    agreements, contracts or transactions executed, traded, or cleared

    on a registered entity * * * .'' See Petition at 5.

    ---------------------------------------------------------------------------

    C. Clarification With Respect to the Commission's Right To Revisit the

    Terms of the Relief

    Regarding the condition that the Commission reserves the right to

    revisit any of the terms and conditions of the exemptive relief,\79\

    the Petitioners requested that the Commission clarify that any such

    reconsideration would be subject to notice and comment under the

    Administrative Procedure Act (``APA'').\80\ The Commission clarifies

    that exemptive orders issued pursuant to section 4(c) of the CEA are

    subject to ``notice and opportunity for hearing.'' \81\

    ---------------------------------------------------------------------------

    \79\ Proposed Order at 51013.

    \80\ Id. at 7-8 (citing the APA, 5 U.S.C. 500 et seq.)

    \81\ CEA section 4(c)(1); 7 U.S.C. 6(c)(1) (providing that the

    Commission may exempt certain transactions ``after notice and

    opportunity for hearing'').

    ---------------------------------------------------------------------------

    D. Request That Relief Not Be Conditioned Upon a Reservation of

    Jurisdiction Under the Commission's Authority Over Options Transactions

    Petitioners requested that the Commission remove references in the

    Proposed Order to CEA section 4c(b) and Commission regulation 32.4 as

    non-exclusive provisions being reserved for purposes of conditioning

    the relief on the Commission's general anti-fraud, anti-manipulation,

    and enforcement authority.\82\ Petitioners noted that the two

    ``provisions are not part of the general anti-fraud, anti-market

    manipulation and enforcement authority, but instead articulate the

    Commission's jurisdiction over option transactions.'' \83\

    Specifically, Petitioners expressed concern that the references were an

    attempt by the Commission ``to

    [[Page 19677]]

    reserve the right to decide later that it has jurisdiction over [a

    ``Generation Capacity'' transaction between ``Exempt Entities''] as an

    option.'' \84\

    ---------------------------------------------------------------------------

    \82\ Petitioners' Letter at 8.

    \83\ Id.

    \84\ See id.

    ---------------------------------------------------------------------------

    The Commission has declined to remove the reference to CEA section

    4c(b) and Commission regulation 32.4 from the Conditions of the Final

    Order. As is standard practice with past exemptive orders issued

    pursuant to CEA section 4(c), the Commission reserves its general anti-

    fraud and anti-manipulation authority, as well as the ability to

    revisit the terms and conditions of the relief at any time and

    determine that certain transactions are jurisdictional in order to

    execute the Commission's duties and advance the public interests and

    purposes of the CEA. The Commission also believes it prudent to reserve

    certain scienter-based prohibitions in the Act and Commission

    regulations (without finding it necessary in this particular context to

    preserve other enforcement authority), and has modified the language in

    the Final Order to make the scope of this reservation clear. While

    Petitioners are correct that the provisions in question do not

    articulate the Commission's general anti-fraud, anti-manipulation and

    enforcement authority directly, the provisions exemplify a possible

    statutory basis for bringing an enforcement action, were a need to

    arise for the Commission to do so, and notes that the inclusion of

    these provisions is not intended to bring any transactions under CFTC

    jurisdiction for purposes other than enforcement.

    The Commission also has determined to add new CEA sections

    4s(h)(1)(A) and 4s(h)(4)(A) \85\ and Commission regulations 32.410(a)

    and (b) \86\ to the non-exclusive list of provisions that could provide

    a possible statutory basis for an enforcement action, as it has done in

    a similar proposed exemption for certain regional transmission

    organizations (``RTO'') and independent system operators (``ISO'').\87\

    The inclusion of CEA sections 4c(b), 4s(h)(1)(A) and 4s(h)(4)(A), and

    Commission regulation 32.4, as examples of reserved authority in no way

    indicates the Commission's belief that a certain Exempt Non-Financial

    Energy Transaction is or could be a commodity option or other type of

    swap; to the contrary, consistent with the Commission's interpretation

    of the authority contained in section 4(c), the Commission has taken no

    position in issuing the Final Order as to the product category or

    jurisdictional or non-jurisdictional nature of any of the exempted

    transactions.

    ---------------------------------------------------------------------------

    \85\ 7 U.S.C. 6s(h)(1)(A), 6s(h)(4)(A) (as added by the Dodd-

    Frank Act section 731). CEA section 4s(h)(1)(A) requires a swap

    dealer (``SD'') or major swap participant (``MSP'') to comply with

    all Commission rules and regulations related to fraud, manipulation,

    and other abusive practices involving swaps, while CEA section

    4s(h)(4)(A) makes it unlawful for any SD or MSP acting as an advisor

    to employ any deceptive device or scheme to defraud a Special

    Entity.

    \86\ These regulations prohibit an SD or MSP from perpetrating

    fraud, manipulation, or other abusive trading practices on ``Special

    Entities,'' as such term is defined in Commission regulation

    23.401(c), and provide an affirmative defense against charges of

    perpetrating such abusive schemes. See 77 FR 9822-23 (Feb. 17,

    2012).

    \87\ See 77 FR 52138, 52166 (August 28, 2012) (``Proposed RTO/

    ISO Order''). The Proposed RTO/ISO Order exempted certain electric

    energy transactions that occur pursuant to a RTO/ISO tariff approved

    by the Federal Energy Regulatory Commission, subject to the

    Commission's general anti-fraud, anti-manipulation, and enforcement

    authority. Similar to the FPA section 201(f) Petitioners, the RTO/

    ISO petitioners requested relief pursuant to the Commission's new

    authority in CEA section 4(c)(6).

    ---------------------------------------------------------------------------

    Finally, the Commission is adding CEA section 4(d) to the non-

    exclusive list of reserved enforcement authority. The Commission

    believes it is important to highlight that, as with all exemptions

    issued pursuant to CEA section 4(c), the exemption ``shall not affect

    the authority of the Commission under any other provision of [the CEA]

    to conduct investigations in order to determine compliance with the

    requirements or conditions of such exemption or to take enforcement

    action for any violation of any provision of [the CEA] or any rule,

    regulation or order thereunder caused by the failure to comply with or

    satisfy such conditions or requirements.'' \88\

    ---------------------------------------------------------------------------

    \88\ See 7 U.S.C. 6(d).

    ---------------------------------------------------------------------------

    E. Other Clarification and Comments

    The Commission is providing further clarification with respect to

    the appropriate uses of Exempt Non-Financial Energy Transactions and

    responding to other comments made by the Petitioners.

    1. Clarification With Respect to the Ability of Exempt Entities To Use

    Exempt Non-Financial Energy Transactions To Manage Price Risks

    The Commission requested comment on whether Exempt Non-Financial

    Energy Transactions, as defined in the Proposed Order, could be used to

    hedge price risk in an underlying commodity, and if so, whether the

    Commission explicitly should exclude such price-hedging

    transactions.\89\ Petitioners responded that they use Exempt Non-

    Financial Energy Transactions to `` `hedg[e] or mitigat[e] commercial

    risks' arising from electric operations,'' and that commercial risks

    include ``both price and availability risks of the nonfinancial

    commodities required as fuel for generation or the goods or services

    that the entity sells or anticipates selling.'' \90\ If the Commission

    explicitly were to exclude price hedging transactions from the scope of

    relief, Petitioners argued they would be required to rely on the more

    limited end-user exception to clearing for such transactions,\91\ which

    Congress could not have intended because it added additional relief

    specifically for FPA section 201(f) entities in section 4(c)(6) of the

    CEA.\92\

    ---------------------------------------------------------------------------

    \89\ Proposed Order at 51014. In making its public interest

    determination in the Proposed Order, the Commission represented that

    it understood Exempt Entities to use Exempt Non-Financial Energy

    Transactions mainly to manage supply risk, and not price risk, of an

    underlying commodity. See id. at 51010. Therefore, the Commission

    declined to adopt Petitioners' proposed definition incorporating the

    phrase, `` `to hedge or mitigate commercial risks' (as such phrase

    is used in CEA Section 2(h)(7)(A)(ii),'' because the Commission

    generally did not interpret this phrase to refer to the full scope

    of transactions described in the Petition and incorporated into the

    Proposed Order through enumerated categories of Exempt Non-Financial

    Energy Transactions. Id. at 51007-08, n.81.

    \90\ See Petitioners' Letter at 12.

    \91\ CEA section 2(h)(7)(A), 7 U.S.C. 2(h)(7)(A) (providing

    relief from the clearing and trade execution mandate for swap

    transactions entered into where at least one counterparty is not a

    financial entity and uses the swap to hedge or mitigate commercial

    risk). As Petitioners note, while the end-user exception would

    provide some relief for Exempt Non-Financial Energy Transactions,

    the transactions ``nonetheless [would be] subject to other

    regulatory requirements.'' Petitioners' Letter at 12.

    \92\ See id. Petitioners argue that by providing both the

    ``general end-user exception'' and the ``specific 4(c)(6) public

    interest waiver,'' ``Congress clearly intended that that the

    Commission waive its jurisdiction over [transactions entered into

    between FPA section 201(f) entities], not merely that such entities

    would have the end-user exception.'' Id.

    ---------------------------------------------------------------------------

    The Commission is persuaded that Congress intended for the

    Commission to consider providing relief for transactions managing price

    risk entered into between FPA section 201(f) entities that goes beyond

    the relief available through the end-user exception for price hedging

    transactions, if in the public interest. Therefore, the Commission has

    made explicit in the Final Order definition that the scope of relief

    covers transactions entered into not only to manage supply risk arising

    from an Exempt Entity's public service obligation to physically

    generate, transmit, and/or deliver electric energy service, but also

    any price risk associated with an underlying commodity used to

    facilitate the public service obligation. The Commission believes that

    the overall effect of the revisions to the definition of Exempt Non-

    Financial Energy Transaction

    [[Page 19678]]

    previously discussed \93\ also helps to clarify that the Final Order

    clearly covers price-risk management transactions directly related to

    an Exempt Entity's public service obligation. The Commission notes,

    however, that because these transactions cannot be used for speculative

    purposes,\94\ any Exempt Non-Financial Energy Transaction used to

    manage the price risk of an underlying commodity must always be

    associated with an obligation to make or take physical delivery of that

    underlying commodity.\95\

    ---------------------------------------------------------------------------

    \93\ See supra Section II.B.

    \94\ As previously noted, the Commission's public interest

    determination was premised on an Exempt Entity's inability to use

    Exempt Non-Financial Energy Transactions as purely financial

    transactions for speculative purposes only. See supra Section II.B.

    \95\ The Commission also confirms its determination, as

    expressed in the Proposed Order, that Exempt Non-Financial Energy

    Transactions entered into solely between Exempt Entities do not

    materially impair price discovery in Commission-regulated markets.

    See supra Section III.C. In response to the Commission asking

    whether there could be any circumstances where it should revisit

    this determination and require reporting of swap transactions to a

    swap data repository for price transparency purposes, Petitioners

    responded by reiterating their argument that because Exempt Non-

    Financial Energy Transactions are bespoke and occur within a

    ``closed loop'' of Exempt Entities, they do not affect price

    discovery in Commission-regulated markets. Petitioners' Letter at 9-

    10. Petitioners also argued that were FERC to require regulatory

    reporting of electric energy transactions entered into by FPA

    section 201(f) entities, the nature of the reporting and regulatory

    purposes behind requiring such reporting would be very different

    from those behind price transparency reporting of swaps as required

    by the CEA and Commission regulations. See id. At this time, the

    Commission agrees that any incremental regulatory benefit that might

    be gained from requiring regulatory reporting of Exempt Non-

    Financial Energy Transactions entered into between Exempt Entities

    is not necessary for purposes of making the required public interest

    determinations in issuing the Final Order, regardless of whether

    FERC requires reporting for FPA 201(f) entities in the future.

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    2. Request That Relief Be Retroactive to the Date of Enactment of the

    Dodd-Frank Act

    The Commission sought comment on whether it should grant

    Petitioners' original request for the effective date of any 4(c) relief

    issued to be retroactive to the date of enactment of the Dodd-Frank

    Act.\96\ Petitioners reiterated their rationale from the Petition that

    certain transactions covered by the proposed definition of Exempt Non-

    Financial Energy Transactions ``might otherwise require analysis as to

    whether they are `historical swaps,' and might otherwise require

    reporting by one or the other of the Exempt Entities, both of which are

    non-SDs/MSPs under the Dodd-Frank Act.'' \97\ In order to prevent

    Exempt Entities from passing along the costs of such historical swap

    analysis and reporting to electric energy consumers, the Commission has

    provided that the relief in the Final Order applies retroactively to

    the date of enactment of the Dodd-Frank Act.\98\ The Commission is

    persuaded that the representations made by Petitioners with respect to

    the public service obligations of government and cooperatively-owned

    not-for-profit electric utility companies and the transactions entered

    into to satisfy such obligations apply equally to the period between

    the enactment of the Dodd-Frank Act and the issuance of the Final Order

    contained herein, and thus the same public interest determinations

    support retroactive 4(c) relief.

    ---------------------------------------------------------------------------

    \96\ Proposed Order at 51013.

    \97\ Petitioners' Letter at 11.

    \98\ CEA section 4(c)(1) provides that the Commission may exempt

    any agreement, contract, or transaction ``either retroactively or

    prospectively, or both * * *.'' 7 U.S.C. 6(c)(1).

    ---------------------------------------------------------------------------

    3. Request That Relief Be Categorical

    In response to the Commission's specific request for comments on

    the topic,\99\ Petitioners reiterated their support for the Commission

    issuing categorical relief that would apply to all Electric Operation-

    Related Transactions, regardless of whether a transaction was described

    by one of the six defined categories.\100\ Petitioners interpreted the

    ``public interest waiver'' codified in CEA section 4(c)(6) as a mandate

    to the Commission to exempt all transactions that occur between the

    ``closed loop'' of FPA section 201(f) entities, and that ``[n]othing in

    the statute require[d] the Commission to analyze or categorize [such]

    transactions * * * .'' \101\ The Commission rejects this interpretation

    of Congressional intent.

    ---------------------------------------------------------------------------

    \99\ Proposed Order at 51013.

    \100\ Id. at 11-12.

    \101\ Id. Petitioners specifically noted their disagreement with

    the Commission's interpretation of CEA section 4(c)(6) ``as

    requiring an analysis of, or a limitation on, the transactions or

    class of transactions to be exempted * * *.'' Id. at 2, n.5.

    ---------------------------------------------------------------------------

    As acknowledged by Petitioners elsewhere in their comment letter,

    Congress intended for all transactions occurring within the closed-loop

    of FPA section 201(f) entities to be ``eligible for'' an

    exemption,\102\ rather than automatically exempt without further

    Commission consideration or action. First, the plain language of CEA

    section 4(c)(6) added by the Dodd-Frank Act is unambiguous: Categorical

    relief is not mandatory and any relief provided requires an analysis

    of, and possible limitation to, the transactions being exempted. The

    provision begins with an explicit ``if'' clause pre-conditioning any

    relief upon the Commission ``determin[ing] that the exemption would be

    consistent with the public interest and purposes of [the] Act.'' \103\

    If this determination can be made, the provision then instructs the

    Commission to issue relief ``in accordance with'' CEA sections 4(c)(1)

    and 4(c)(2), implying that additional analysis and limitations may be

    necessary and/or appropriate in the judgment of the Commission.\104\

    Second, the Commission notes that the Dodd-Frank Act also amended CEA

    section 2(a)(1)(A) to codify the Commission's exclusive jurisdiction

    with respect to swap transactions.\105\ Had Congress intended for any

    transaction entered into between FPA section 201(f) entities to be

    exempt from this exclusive jurisdiction, it could have explicitly

    carved out these entities and any transactions occurring between them

    as categorically exempt.\106\ Instead, the Commission believes that

    Congress explicitly recognized transactions between entities described

    in FPA section 201(f) as eligible for a mandatory exemption, subject to

    those pre-conditions which the Commission deems appropriate.

    ---------------------------------------------------------------------------

    \102\ See id. at 5.

    \103\ CEA section 4(c)(6), 7 U.S.C. 6(c)(6).

    \104\ Id.

    \105\ See 7 U.S.C. 2(a)(1)(A), as amended by the Dodd-Frank Act

    section 722(a). The provision already codified the Commission's

    exclusive jurisdiction with respect to commodity futures and options

    transactions.

    \106\ The Commission notes that such a carve-out would not be

    without precedent. See, e.g., CEA section 2(c)(1), 7 U.S.C. 2(c)(1)

    (providing that, subject to certain exceptions, the CEA does not

    govern or apply to an agreement, contract, or transaction in foreign

    currency, government securities, security warrants, security rights,

    resales of installment loan contracts, repurchase transaction in an

    excluded commodity, or mortgages or mortgage purchase commitments);

    CEA section 2(a)(1)(C)(i), 7 U.S.C. 2(a)(1)(C)(i) (providing that

    the CEA shall not apply to, and the Commission shall not have

    jurisdiction with respect to, designating a contract market for any

    transaction in which a party to such transaction acquires a put,

    call, or other option on one or more securities).

    ---------------------------------------------------------------------------

    Accordingly, as stated in the Proposed Order, the Commission does

    not believe it can determine conclusively that it would be in the

    public interest to exempt any transaction entered into between Exempt

    Entities. Even if a transaction were to meet the requirements of the

    Exempt Non-Financial Energy Transactions definition, but not be

    described by one of the six enumerated transaction categories, the

    Commission would lack the necessary information about the specific

    nature of the transaction in order to make the requisite public

    interest determination.

    [[Page 19679]]

    III. CEA Section 4(c) Determinations

    The Commission is issuing the Final Order pursuant its authority in

    CEA sections 4(c)(1) and 4(c)(6).\107\ As required under both sections,

    the Commission must make certain determinations prior to issuing

    exemptive relief.\108\ Generally, the Commission confirms the

    determinations it made in the Proposed Order because it believes that

    such determinations continue to support adopting the Final Order.\109\

    Where substantive changes have been made to the scope of the Final

    Order, the Commission is addressing such changes with additional

    discussion. In some instances, the Commission is expanding upon its

    proposed determinations to further support adoption of final exemptive

    relief for Exempt Non-Financial Energy Transactions entered into

    between Exempt Entities.

    ---------------------------------------------------------------------------

    \107\ To the extent that the Final Order applies to entities not

    explicitly described in FPA section 201(f), the Commission is using

    its general exemptive authority found in CEA section 4(c)(1).

    \108\ These determinations include that (i) CEA section 4(a)--

    the exchange trading requirement--should not apply; (ii) the

    exemption is consistent with the public interest and purposes of the

    CEA; (iii) the exemption is available only for ``appropriate

    persons,'' as such term is defined in CEA section 4(c)(3); and (iv)

    the exemption will not have a materially adverse effect on the

    ability of the Commission or any contract market to discharge its

    regulatory or self-regulatory duties under the CEA. See 7 U.S.C.

    6(c)(2).

    \109\ See generally Proposed Order at 51009-12 (proposing the

    Commission's CEA section 4(c) determinations).

    ---------------------------------------------------------------------------

    A. Applicability of CEA Section 4(a)

    Due to the bespoke nature of Exempt Non-Financial Energy

    Transactions, the Commission does not believe that the exchange-trading

    requirement of CEA section 4(a) should apply. Generally, the exchange-

    trading requirement is meant to facilitate the price discovery and

    price transparency processes. Because (i) exchange-traded contracts are

    less effective at adequately performing as risk management substitutes

    for Exempt Non-Financial Energy Transactions; and (ii) Exempt Non-

    Financial Energy Transactions are executed within a closed-loop of

    Exempt Entities, and thus are not market facing, Exempt Non-Financial

    Energy Transactions do not materially impair price discovery in

    Commission-regulated markets and can continue to be executed

    bilaterally. For that reason, the Commission is limiting the Final

    Order to Exempt Non-Financial Energy Transactions entered into between

    Exempt Entities.

    B. Public Interest and Purposes of the CEA

    The Commission continues to believe that the scope of the Final

    Order is consistent with the public interest supported by the CEA.\110\

    As previously noted, Exempt Non-Financial Energy Transactions are

    bespoke and not suitable for trading as standardized products on a

    board of trade. Furthermore, the Final Order applies only to Exempt

    Non-Financial Energy Transactions entered into between Exempt Entities,

    which are transacting within a closed loop, and therefore do not

    materially impair price discovery in Commission-regulated markets.\111\

    Therefore, exempting these types of transactions from the Commission's

    jurisdiction will not materially impair price discovery of electricity-

    related commodities in Commission-regulated markets.\112\

    ---------------------------------------------------------------------------

    \110\ 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.'' CEA section 3(a), 7

    U.S.C. 5(a).

    \111\ Given that Petitioners represented that exchange-traded

    instruments are, by their nature, primarily standardized, and

    therefore in many or most cases may be less effective for purposes

    of hedging the risks that Exempt Non-Financial Energy Transactions

    are specifically tailored to offset (e.g., due to the contract sizes

    not matching the risk being hedged, inconvenient delivery points,

    and/or unavailability of a contract overlying the specific

    commodity, the risk of which a market participant seeks to hedge),

    the Commission likewise presently considers any price link between

    Exempt Non-Financial Energy Transactions and transactions executed

    on exchange-traded derivative markets too attenuated to materially

    impair price discovery of exchange-traded derivatives.

    \112\ The Joint Associations agreed with this determination in

    the Proposed Order. See Joint Associations' Letter at 3.

    ---------------------------------------------------------------------------

    As discussed previously in response to Petitioners' comments, the

    Commission has clarified in the Final Order that Exempt Non-Financial

    Energy Transactions can be used to hedge prices of underlying

    commodities, so long as the transaction meets the other definitional

    criteria and falls into one of the delineated transaction

    categories.\113\ The Commission believes that exempting price hedging

    transactions is still in the public interest because of Exempt

    Entities' unique public service mission and not-for-profit operational

    structure. Like all public utilities, Exempt Entities have a need to

    manage the risk associated with fluctuations in both the supply and

    price of a commodity underlying a transaction.\114\ While managing

    supply risk goes to the reliability aspect of Exempt Entities' public

    service mission, hedging price risk goes to providing electric energy

    service that is low-cost as well. Therefore, it is in the public

    interest to allow Exempt Entities to continue engaging in price hedging

    transactions with one another, such that they can continue to provide

    both reliable and affordable electric energy service to customers.\115\

    ---------------------------------------------------------------------------

    \113\ See supra Section II.E.1.

    \114\ In the Proposed Order, the Commission noted that Exempt

    Non-Financial Energy Transactions generally are variable-priced

    transactions, as opposed to fixed-price, and therefore are entered

    into for the purposes of hedging supply risk resulting from

    unpredictable fluctuations in demand for electric energy. See

    Proposed Order at 51010. The Commission understands this to still be

    true, but also understands that in limited circumstances, fixed-

    price arrangements exist such that Exempt Entities can hedge price

    risk.

    \115\ The Final Order, however, still does not exempt

    transactions that are speculative. Unlike price and supply risk

    management, speculative swap activity is not necessary to allow

    Exempt Entities to carry out their public service mission.

    ---------------------------------------------------------------------------

    The Commission also believes that the Final Order is consistent

    with the purposes of the CEA.\116\ As recognized by Congress in passing

    FPA section 201(f),\117\ the not-for-profit structure and governance

    model--elected or appointed government officials or citizens, or

    cooperative members or consumers--of all Exempt Entities reduce the

    incentives and other conditions that traditionally lead to fraudulent

    or manipulative trading activity, and thus should mitigate the need for

    prescriptive federal oversight.\118\ As previously noted, the

    Commission has clarified in the Final Order that some Exempt Entities

    may have a corporate for-profit form, but must nonetheless be wholly

    owned by other not-for-profit Exempt Entities. The Commission takes

    notice of the petitioner's representation that a for-profit subsidiary

    of an Exempt Entity, when engaged in Exempt Non-Financial Energy

    Transactions with other Exempt Entities, is less likely to engage in

    abusive trading practices than other entities, particularly in light of

    the non-profit, public service nature of the parent Exempt Entity (or

    Exempt Entities).\119\

    ---------------------------------------------------------------------------

    \116\ 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 sale practices and misuses of customer assets; and to

    promote responsible innovation and fair competition among boards of

    trade, other markets and market participants.'' CEA section 3(b), 7

    U.S.C. 5(b).

    \117\ See supra note 11 and accompanying text.

    \118\ The Joint Associations agreed with this determination in

    the Proposed Order. See Joint Associations' Letter at 2.

    \119\ The Commission notes that the Final Order retains the

    Commission's general anti-fraud and anti-manipulation authority, and

    certain scienter-based prohibitions, in addition to all public

    utilities, regardless of FPA section 201(f) status, being subject to

    FERC's market manipulation authority. See FPA section 222v, 16

    U.S.C. 824v.

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    [[Page 19680]]

    C. Appropriate Persons

    The Commission believes that Exempt Entities, as defined in the

    Final Order, are all ``appropriate persons'' for purposes of satisfying

    the CEA section 4(c)(2) requirement.\120\ As a starting point, the

    Commission believes that there is a presumption that entities

    explicitly described in FPA section 201(f) are appropriate persons

    because of Congress' mandate to the Commission to exempt, in accordance

    with CEA sections 4(c)(1) and 4(c)(2) (which precludes the Commission

    from granting a CEA section 4(c) exemption to persons other than

    appropriate persons), transactions entered into between such entities

    if it is in the public interest and consistent with the purposes of the

    Act.\121\ That is, the Commission infers that Congress would not have

    added CEA section 4(c)(6)(C), which explicitly identifies FPA section

    201(f) entities as eligible for an exemption, unless it had presumed

    such entities were appropriate beneficiaries of an exemption for

    purposes of the CEA section 4(c)(2) requirement, and subjected CEA

    section 4(c)(6) to CEA section 4(c)(2) simply so that the Commission

    would verify that presumption. For the reasons discussed throughout

    this release, the Commission believes that FPA section 201(f) entities

    are appropriate persons.\122\

    ---------------------------------------------------------------------------

    \120\ CEA section 4(c)(2)(B)(i) requires that the Commission

    exercise its 4(c) exemptive authority with respect to transactions

    entered into solely between ``appropriate persons.'' See 7 U.S.C.

    6(c)(2)(B)(i). CEA section 4(c)(3) provides various criteria an

    entity can meet for purposes of qualifying as an appropriate person.

    7 U.S.C. 6(c)(3). The Joint Associations supported the Commission's

    proposed determination and underlying rationale that all Exempt

    Entities were appropriate persons. See Joint Associations' Letter at

    2.

    \121\ CEA section 4(c)(6)(C), 7 U.S.C. 6(c)(6)(C). Under CEA

    section 4(c)(3)(K), the Commission can determine other persons not

    explicitly enumerated in section 4(c)(3) ``to be appropriate in

    light of their financial or other qualifications, or the

    applicability of appropriate regulatory protections.'' 7 U.S.C.

    6(c)(3)(K). The Commission believes that Congress' explicit

    recognition of FPA section 201(f) entities as being eligible for

    exemptive relief under CEA section 4(c)(6) constitutes an ``other

    qualification'' in support of such entities being appropriate

    persons, regardless of whether they otherwise would qualify under

    one of the enumerated appropriate person categories in CEA sections

    4(c)(3)(A)-(J).

    \122\ The Commission notes that many FPA section 201(f) entities

    would qualify as appropriate persons under other CEA section 4(c)(3)

    criteria. See, e.g., CEA section 4(c)(3)(F) (providing that a

    business entity with a net worth exceeding $1,000,000 or total

    assets exceeding $5,000,000 is an appropriate person); CEA section

    4(c)(3)(H) (providing that a government entity or political

    subdivision thereof, or any instrumentality, agency, or department

    of a government entity or political subdivision thereof, is an

    appropriate person).

    ---------------------------------------------------------------------------

    The Commission believes that Exempt Entities not explicitly

    described in FPA section 201(f) are also appropriate persons.\123\

    First, the Commission interprets Federally-recognized Indian tribes as

    appropriate persons under CEA section 4(c)(3)(H) because they are

    analogous to governmental entities.

    ---------------------------------------------------------------------------

    \123\ The Commission notes that such entities are being exempted

    pursuant to the Commission's general exemptive authority in CEA

    section 4(c)(1).

    ---------------------------------------------------------------------------

    Next, some non-FPA section 201(f) electric cooperatives may qualify

    as appropriate persons under the CEA section 4(c)(3)(F) criteria by

    having a net worth exceeding $1,000,000 or total assets exceeding

    $5,000,000. For any non-FPA section 201(f) cooperative that does not

    otherwise qualify as an appropriate person under the specific

    provisions of section 4(c)(3), the Commission believes that such

    entities are at least as financially sophisticated and operationally

    capable as FPA section 201(f) cooperatives. Such cooperatives would not

    qualify as FPA section 201(f) entities because they sell in excess of

    4,000,000 megawatt hours of electricity per month, and/or receive

    financing from lenders other than the RUS. In either case, such

    cooperatives likely would have greater assets due to the increased

    sales, which could qualify them for better financing terms than those

    offered by the RUS. Additionally, the Commission notes that such

    cooperatives are not exempt from FERC's jurisdiction, and thus subject

    to more regulatory oversight than FPA section 201(f) electric

    cooperatives. The Commission interprets such FERC oversight of non-FPA

    section 201(f) electric cooperatives as the type of ``appropriate

    regulatory protections'' within the meaning of CEA section 4(c)(3)(K)

    that Congress had in mind when promulgating new exemptive authority for

    FPA 201(f) entities in CEA section 4(c)(6)(C).\124\ Therefore, under

    the Commission's discretionary authority in CEA section 4(c)(3)(K) to

    determine non-enumerated entities as appropriate persons based upon

    financial or other qualifications, or the applicability of other

    appropriate regulatory protections, the Commission believes that such

    non-FPA section 201(f) cooperatives are appropriate persons.\125\

    ---------------------------------------------------------------------------

    \124\ Compared to 201(f) cooperatives, non-201(f) electric

    cooperatives are still treated as ``public utilities'' for purposes

    of Part II of the FPA, and thus must receive FERC authorization

    under FPA section 203 to sell, merge or consolidate their electric

    facilities, or to purchase, acquire, or take any security of any

    other public utility. See Petition at 16 (citing 18 CFR Parts 2 and

    33, Transactions Subject to FPA Section 203). Additionally, such

    cooperatives must seek approval under FPA sections 205 and 206 when

    altering rates and charges to be collected in transmitting or

    selling electric energy service in interstate commerce. See id.

    (citing Promoting Wholesale Competition Through Open Access Non-

    discriminatory Transmission Services by Public Utilities, Recovery

    of Stranded Costs by Public Utilities and Transmitting Utilities, 78

    FERC ] 61,315 at 62,270 (2005)).

    \125\ To the extent that an electric cooperative would not

    otherwise qualify as an appropriate person, regardless of whether it

    qualifies as an FPA section 201(f) entity, the Commission notes that

    its determination that such cooperatives are appropriate persons

    applies only in the context of the Final Order, and should not be

    interpreted to mean that all electric cooperatives are appropriate

    for purposes of any existing or future exemptions issued by the

    Commission pursuant to CEA section 4(c).

    ---------------------------------------------------------------------------

    D. Ability to Discharge Regulatory or Self-Regulatory Duties

    As stated previously, Exempt Non-Financial Energy Transactions are

    bespoke and executed within the closed-loop of Exempt Entities, meaning

    they do not materially affect trading or pricing of transactions

    involving the same underlying commodity in Commission-regulated

    markets. Additionally, the Commission has retained its anti-fraud and

    anti-manipulation authority, as well as certain scienter-based

    prohibitions. Accordingly, the Commission does not believe that the

    exemptive relief provided in the Final Order will have a materially

    adverse effect on the ability of the Commission or any contract market

    to discharge their regulatory or self-regulatory duties under the CEA.

    As noted above, the Commission is limiting the Final Order to Exempt

    Non-Financial Energy Transactions entered into other than on or subject

    to the rules of a registered entity, submitted for clearing to a DCO,

    and/or reported to a SDR.

    IV. 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.\126\ The

    relief provided in the Final 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.'' \127\

    ---------------------------------------------------------------------------

    \126\ 5 U.S.C. 601 et seq.

    \127\ 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.

    ---------------------------------------------------------------------------

    [[Page 19681]]

    In response to the Proposed Order, the Commission received several

    comments from the Petitioners relevant to the RFA. The Petitioners

    requested that the Commission conduct future analyses of the impact on

    small entities the Petitioners represent if the Commission ever were to

    revisit the terms and conditions of the relief, and that the Commission

    provide relief retroactively to the enactment of the Dodd-Frank Act in

    the Final Order. In response to the request that the Commission conduct

    a future Small Business Regulatory Enforcement Fairness Act

    (``SBREFA'') analysis,\128\ the Commission notes that it does not

    conduct RFA analyses based upon requests; rather, all Commission

    rulemaking are subject to the legal requirements of the RFA, which

    provides that a RFA analysis shall not apply if the head of the agency

    certifies that the rule will not, if promulgated, have a significant

    economic impact on a substantial number of small entities.\129\ In

    response to the request that the Commission conduct a full RFA analysis

    if it were to decide not to grant the relief provided herein

    retroactively to the enactment of the Dodd-Frank Act,\130\ the

    Commission has addressed this comment by providing retroactive relief

    in the Final Order.\131\ To the extent that these comments are

    preemptive in nature or have been addressed in the Final Order, the

    Commission is of the view that the Final Order would not have a

    significant economic impact on a substantial number of small entities,

    including any Exempt Entities that may qualify as a small entity.

    ---------------------------------------------------------------------------

    \128\ Petitioners' Letter at 8. The SBREFA amended the RFA.

    \129\ See 5 U.S.C. 605.

    \130\ Petitioners' Letter at 11.

    \131\ See supra Section II.E.2.

    ---------------------------------------------------------------------------

    With regards to the Petitioners' general conclusion that the

    organizations that they represent fall within the definition of ``small

    entity,'' \132\ the Commission notes that it has considered carefully

    the potential effect of this Final Order on small entities and has

    determined that it will not have a significant economic impact on any

    Exempt Entity, including any entities that may be small. Rather, the

    Final Order relieves the economic impact that the Exempt Entities,

    including any small entities that may opt to take advantage of the

    Final Order, by exempting certain of their transactions from the

    application of substantive regulatory compliance requirements of the

    CEA and Commission regulations thereunder. Significantly, the Final

    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 Final 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 Final Order will not have a significant

    economic impact on a substantial number of small entities.

    ---------------------------------------------------------------------------

    \132\ Petitioners highlighted that the majority of the entities

    their respective organizations represent fall within the definition

    of ``small entity'' under the SBREFA, which incorporates by

    reference the SBA definition. Petitioners' Letter at 2.

    ---------------------------------------------------------------------------

    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

    Commission determined that the Proposed Order did not contain any new

    information collection requirements, and did not receive any comments

    regarding this determination. As the Commission has left the conditions

    that were contained in the Proposed Order unchanged, the Final Order

    therefore also does not contain any new information collection

    requirements that would require approval of OMB under the PRA.\133\

    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 Final 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.\134\

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    \133\ 44 U.S.C. 3501 et seq.

    \134\ 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).

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    C. Consideration of Costs and Benefits

    Prior to the passage of the Dodd-Frank Act, swap market activity

    was largely unregulated. 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. Among other things, the Dodd-

    Frank Act amends the CEA to expand its scope beyond regulation of

    ``contract[s] of sale of a commodity for future delivery'' \135\

    (commonly referred to as futures) and options,\136\ by establishing a

    comprehensive regulatory framework for swaps as well.\137\ In amending

    the CEA, however, the Dodd-Frank Act preserved the Commission's

    authority under CEA section 4(c)(1) to exempt any transaction or class

    of transactions, including swaps, from select provisions of the

    CEA.\138\ It also added new subparagraph 4(c)(6)(C) to the CEA

    specifically directing the Commission, in accordance with 4(c)(1) and

    4(c)(2), to exempt agreements, contracts, or transactions entered into

    between FPA 201(f) entities if doing so ``is consistent with the public

    interest

    [[Page 19682]]

    and the purposes of'' the CEA.\139\ The Commission, through this Final

    Order, is exercising its exemptive authority under CEA section 4(c)(1)

    and 4(c)(6) with respect to ``Exempt Non-Financial Energy

    Transactions'' \140\ entered into solely between ``Exempt Entities,''

    \141\ subject to certain conditions.\142\ These conditions are, among

    others, that the relief provided in the Final Order is subject to (i)

    the Commission's general anti-fraud and anti-manipulation authority,

    and scienter-based prohibitions under CEA sections 2(a)(1)(B), 4(d),

    4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9

    and 13, and Commission rules 32.4, 23.410(a) and (b), and Part 180;

    and, ii) the Commission's reserved authority to inspect the books and

    records related to Exempt Non-Financial Energy Transactions kept by

    Exempt Entities in the normal course of business pursuant to the

    Commission's regulatory inspection authorities.

    ---------------------------------------------------------------------------

    \135\ CEA section 4(a). See also CEA sections 1a(19) (``the term

    `future delivery' does not include any sale of a cash commodity for

    deferred shipment or delivery''); 1a(47)(B)(ii) (excluding from the

    swap definition ``any sale of a nonfinancial commodity * * * for

    deferred shipment or delivery, so long as the transaction is

    intended to be physically settled'').

    \136\ CEA section 1a(36).

    \137\ Public Law 111-203, 124 Stat. 1376 (2010). More

    specifically, Title VII of the Dodd-Frank Act amended the CEA to

    establish a comprehensive new regulatory framework for swaps, a term

    defined by the statute. See Section 4(c)(1) of the CEA. The

    legislative framework seeks 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. Futures, options, and swaps are referred

    to collectively herein as ``derivatives.''

    \138\ Section 4(c)(1) of the CEA.

    \139\ CEA sections 4(c)(2) and 4(c)(3) further articulate the

    conditions precedent to granting an exemption under CEA section

    4(c)(1), including that the exempted agreements, contracts, or

    transactions be entered into between ``appropriate persons,'' as

    that term is defined in CEA section 4(c)(3).

    \140\ Section V.B., infra. ``Exempt Non-Financial Energy

    Transactions'' consist of ``any agreement, contract, or transaction

    based upon a `commodity,' as such term is defined and interpreted by

    the CEA and regulations thereunder, 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, or any grade of a metal, or any

    agricultural product, or any grade of crude oil or gasoline that is

    not used as fuel for electric energy generation. The term `Exempt

    Non-Financial Energy Transaction' also excludes agreements,

    contracts, or transactions entered into on or subject to the rules

    of a registered entity, submitted for clearing to a derivatives

    clearing organization, and/or reported to a swap data repository.

    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 the following

    categories of transactions: [electric energy delivered, generation

    capacity, transmission services, fuel delivered, cross-commodity

    pricing, and other goods and services].''

    \141\ Section IV.A., infra. An Exempt Entity is: (i) Any

    electric facility or utility that is wholly owned by a government

    entity, as described in Federal Power Act (``FPA'') section 201(f),

    16 U.S.C. 824(f); (ii) 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; (iii) 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 (iv) any other entity that is wholly owned, directly or

    indirectly, by any one or more of the foregoing. A ``financial

    entity'' as defined in CEA section 2(h)(7)(C) is not an Exempt

    Entity.

    \142\ Section V.C., infra.

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    1. The Statutory Mandate To Consider the Costs and Benefits of the

    Commission's Action: Section 15(a) of the CEA

    Section 15(a) of the CEA \143\ 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.

    ---------------------------------------------------------------------------

    \143\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    The Commission considers the costs and benefits of the Final Order

    to the public and market participants, including Exempt Entities,

    against the backdrop of the CEA regulatory regime for derivatives, as

    amended by the Dodd-Frank Act, and absent the relief provided by the

    Final Order.\144\ Under the post-Dodd-Frank Act regulatory regime,

    Exempt Entities 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,'' \145\ are

    subject to the Commission's general anti-fraud and anti-manipulation

    authority, as well as certain scienter-based prohibitions under the

    CEA.\146\ Absent the Final Order, to the extent that Exempt Non-

    Financial Energy Transactions are futures transactions within the

    meaning of the CEA, they would be subject to the statute's exchange-

    trading requirement and a comprehensive regulatory scheme.\147\

    Similarly, absent the Final Order, to the extent that Exempt Non-

    Financial Energy Transactions are swaps as defined in the CEA, the

    Exempt Entity counterparties to these transactions would be subject to

    requirements for swap data reporting \148\ and recordkeeping; \149\ in

    addition, unless both Exempt Entity counterparties to a swap

    transaction are eligible contract participants (``ECPs''),\150\ CEA

    section 2(e) would prohibit them from executing the swap other than on

    or subject to the rules of a registered DCM.\151\

    ---------------------------------------------------------------------------

    \144\ As discussed earlier, 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 potential costs and benefits,

    this consideration assumes that the transactions may now or in the

    future be jurisdictional.

    \145\ Petition at 33.

    \146\ See, e.g., CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o,

    6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4,

    23.410(a) and (b), and Part 180. CEA section 2(h)(7) (the ``end-user

    exception''), excepts a swap from the swap clearing requirement of

    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'') and the trade execution

    requirement of CEA section 2(h)(8) (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'')). The end-user exception applies 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.''

    \147\ CEA section 4(a). The same is true for options on futures.

    See 17 CFR 33.3(a). The discussion of cost-benefit implications of

    this Final Order with respect to futures contracts applies equally

    to options on futures.

    \148\ The CEA as amended by the Dodd-Frank Act contemplates two

    types of reporting to SDR. 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 an SD or MSP--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 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 F.R. 35200 (June

    12, 2012) (adopting 17 CFR part 46).

    \149\ 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 F.R. 35200 (June 12, 2012) (adopting 17 CFR part

    46).

    \150\ 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 (May 23, 2012).

    \151\ 7 U.S.C. 2(e). Additionally, absent the Final Order, in

    the event that executing Exempt Non-financial Energy Transactions

    required an Exempt Entity to register as an SD or MSP, additional

    regulatory requirements would apply. See, e.g., Confirmation,

    Portfolio Reconciliation, Portfolio Compression, and Swap Trading

    Relationship Documentation Requirements for Swap Dealers and Major

    Swap Participants, 77 FR 55904 (Sept. 11, 2012); Swap Dealer and

    Major Swap Participant Recordkeeping, Reporting, and Duties Rules;

    Futures Commission Merchant and Introducing Broker Conflicts of

    Interest Rules; and Chief Compliance Officer Rules for Swap Dealers,

    Major Swap Participants, and Futures Commission Merchants, 77 FR

    20128 (Apr. 3, 2012); Business Conduct Standards for Swap Dealers

    and Major Swap Participants With Counterparties, 77 FR 9734 (Feb.

    17, 2012).

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    [[Page 19683]]

    The Commission remains cognizant of the regulatory landscape as it

    existed before the enactment of Dodd-Frank. As such, the Commission

    notes that any Exempt Non-Financial Energy Transactions engaged in

    between Exempt Entities that are swaps (excluding options) under the

    statutory definition and Commission rules 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 Final Order. For

    example, Exempt Entities were not subject to the Commission's routine

    regulatory inspection authorities with respect to records of Exempt

    Non-Financial Energy Transactions transacted bilaterally away from a

    trading facility prior to the enactment and effectiveness of the Dodd-

    Frank Act. The same was not true to the extent Exempt Non-Financial

    Energy Transactions are futures contracts, as such contracts have

    always been regulated by the Commission and Dodd-Frank did not

    fundamentally alter the futures regulatory scheme.

    The Proposed Order expressly requested public comment on the

    Commission's cost-benefit considerations, including with respect to

    reasonable alternatives; the magnitude of specific costs and benefits

    (including data or other information to estimate a dollar valuation);

    and any impact on the public interest factors specified in CEA section

    15(a).\152\ Neither of the two comments received specifically addressed

    the Proposed Order's consideration of costs and benefits or otherwise

    provided data or other information to enable the Commission to better

    quantify the expected costs and benefits attributable to the Final

    Order. While, as a general matter, the Commission endeavors to quantify

    estimated costs and benefits where reasonably feasible, it considers

    the costs and benefits of this Final Order in qualitative terms only

    given that commenters did not provide data or information necessary for

    quantification.\153\

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    \152\ 77 FR 50988, 51019 (Aug. 23, 2012).

    \153\ In the Proposed Order, the Commission noted that it could

    not quantify the costs and benefits of the relief provided therein

    because it did not have such information available to it;

    accordingly, the Commission requested commenters provide specific

    figures for its consideration. See Proposed Order at 51019. Because

    the core requirements of the Dodd-Frank Act are currently being

    implemented, the Commission's ability to quantify the costs and

    benefits of the Final Order is unchanged from when it published the

    Proposed Order.

    ---------------------------------------------------------------------------

    In the discussion that follows, the Commission considers the costs

    and benefits of the Final Order to the public and market participants,

    generally, and to Exempt Entities, specifically. As discussed above,

    the Commission has refined the Final Order to clarify several issues

    identified in the Petitioners' comment letter.\154\ To the extent these

    refinements reflect a substantive choice among alternatives with

    potential cost-benefit significance, they are included in the

    discussion of alternatives, below. Finally, the Commission considers

    the Final Order's costs and benefits relative to the public interest

    factors enumerated in CEA section 15(a).

    ---------------------------------------------------------------------------

    \154\ More specifically, as discussed above in section II, these

    refinements include several modifications to clarify: The definition

    of ``Exempt Entity,'' the definition of ``Exempt Non-Financial

    Energy Transaction,'' the Commission's right to revisit the terms of

    relief, the ability to manage price risk, retroactivity, and the

    categorical nature of relief.

    ---------------------------------------------------------------------------

    2. Costs

    To Exempt Entities

    The Final Order provides 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

    exemption, this order is permissive, meaning that potentially eligible

    entities are not required to avail themselves of the relief it offers.

    Accordingly, the Commission presumes that an entity would rely on the

    Final Order only if the anticipated benefits warrant the costs. Here,

    the Final Order provides for the continued application of the

    Commission's general anti-fraud and anti-manipulation authority, and

    certain scienter-based prohibitions, under the CEA and its implementing

    regulations, and additionally reserves the Commission's inspection

    authority for books and records that the Exempt Entities currently

    prepare and retain.\155\ Accordingly, and to the extent Exempt Non-

    Financial Energy Transactions are jurisdictional agreements, contracts

    or transactions, the incorporation of these conditions within the Final

    Order generates no incremental costs beyond those that currently exist

    under the CEA, a point that no commenter disputed.

    ---------------------------------------------------------------------------

    \155\ For example, Exempt Entities that receive financing from

    the 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 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--which

    were identified in the Proposed Order and not disputed by commenters--

    include the following:

    Exempt Non-Financial Energy Transactions are ill-suited

    for exchange trading, as evidenced by their bespoke nature to manage

    Exempt Entities' operational risks, and thus do not serve a material

    price discovery function.\156\

    ---------------------------------------------------------------------------

    \156\ In the Proposed Order, the Commission noted its belief

    that 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 ensuring Exempt

    Entities' ability to meet production, transmission, and/or

    distribution obligations. Proposed Order at 51010. As previously

    discussed, however, the Commission has determined in the Final Order

    that Exempt Non-Financial Energy Transactions can also be used to

    hedge price risk of an underlying commodity, but only if ``arising

    from its existing or anticipated public service obligations to

    physically generate, transmit, and/or deliver electric energy

    service to customers.'' See supra Section II.E.1; section B of the

    Final Order. The additional cost/benefit implications of this

    clarification are discussed in context of the Commission's

    Consideration of Alternatives, infra Section IV.C.4.

    ---------------------------------------------------------------------------

    The incentive structure for Exempt Entities--as generally

    limited to not-for-profit governmental, tribal, and IRC section

    501(c)(12) or section 1381(a)(2)(c) electric cooperative entities

    \157\--is different than that of investor-owned entities and, according

    to Petitioners, mitigates incentives for fraud, manipulation, or other

    abusive practices against which Commission oversight and trading

    facility rules guard.\158\

    ---------------------------------------------------------------------------

    \157\ As discussed in section II.A, above, to avoid confusion,

    the Commission has struck the explicit ``non-profit'' modifier from

    the fourth clause of the definition of Exempt Entity in the Final

    Order. As explained, FPA section 201(f) utilities may include for-

    profit subsidiaries that are wholly-owned by other not-for profit

    FPA section 201(f) utilities. Subsequent short-hand references in

    this Consideration of Costs and Benefits to ``not-for-profit

    electric utility entities'' or ``not-for-profit Exempt Entities''

    are intended to include all subsidiary entities captured by Final

    Order, including those for-profit subsidiaries.

    \158\ See Proposed Order, 77 FR 51011.

    ---------------------------------------------------------------------------

    Exempt Non-Financial Energy Transactions are executed

    bilaterally

    [[Page 19684]]

    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 products trading on regulated exchanges.\159\

    ---------------------------------------------------------------------------

    \159\ See Proposed Order, 77 FR 51010.

    ---------------------------------------------------------------------------

    Besides carefully defining the boundaries for Exempt Non-Financial

    Energy Transactions between Exempt Entities, the Final Order

    incorporates conditions designed to protect the markets subject to the

    Commission's jurisdiction. Specifically, the Commission retains its

    general anti-fraud and anti-manipulation authority, and certain

    scienter-based prohibitions, contained in the CEA and its implementing

    regulations. Additionally, the Commission retains authority to inspect

    books and records kept in the normal course of business, pursuant to

    its regulatory inspection authorities, in the event that circumstances

    warrant greater visibility with respect to Exempt Non-Financial Energy

    Transactions as they relate to Exempt Entities' overall market

    positions and compliance with this Final Order. This retained authority

    to inspect books and records also provides a tool for the Commission to

    monitor any evolution and/or change in the usage of Exempt Non-

    Financial Energy Transactions to ensure that they conform to the

    expectations described in this order and that the relief provided

    herein remains appropriate and in the public interest. Accordingly, for

    the narrow subset of electric industry transactions covered by this

    Final Order, the Commission believes that the risk potential, at most,

    is remote and the prescribed conditions appropriate to contain it. The

    Final Order, therefore, should not give rise to any costs attributable

    to increased risk.

    Next, the Commission considered the potential that price discovery

    in jurisdictional, non-exempt markets could be diminished because

    Exempt Entities, acting under the relief provide in this Final Order,

    eschewed such markets in favor of performing production and price risk

    management via Exempt Non-Financial Energy Transactions with one

    another. The Commission deems the risk of this occurring to be

    insignificant. While an underlying commodity may be similar or

    identical to that which underlies a standardized product available for

    trading in a non-exempt, jurisdictional market, the bespoke nature of

    Exempt Non-Financial Energy Transactions is such that it is unlikely

    that non-exempt market transactions would be an effective substitute

    for Exempt Entities going forward. As such, and in addition to the

    Commission's anticipation that the number of Exempt Entity transactions

    will be small relative to the total number of transactions in related

    non-exempt markets, any distortive impact on price discovery in

    Commission-regulated markets would be immaterial.

    Similarly, the Commission considered whether the Final Order would

    have any impact on the efficiency, competitiveness,\160\ and financial

    integrity of markets regulated under the CEA. Since Exempt Non-

    Financial Energy Transactions are executed bilaterally between non-

    financial entities primarily in order to satisfy existing or expected

    operations-related public service obligations, and since they are

    bespoke transactions, the Commission expects the exemptive relief

    provided herein to have little, if any, negative effect on market

    efficiency, competitiveness, or financial integrity of markets

    regulated by the CFTC.

    ---------------------------------------------------------------------------

    \160\ More specifically with respect to competition, absent the

    exemptive relief provided herein, it is unclear whether Exempt

    Entities otherwise would qualify as ECPs, and thus be able to

    continue transacting Exempt Non-Financial Energy Transactions

    bilaterally with one another at all. Because many of the

    transactions exempted under the Final Order relate to longstanding

    and exclusive agreements between Exempt Entities, the limited relief

    provided in the exemption is not likely, in and of itself, to cause

    Exempt Entities to change the nature or frequency of conducting

    Exempt Non-Financial Energy Transaction with one another; rather,

    they will continue to carry out their public service obligations

    under standard industry practices, as was intended by Congress in

    adding CEA section 4(c)(6)(c).

    ---------------------------------------------------------------------------

    The Commission does not view the various refinements that it

    incorporated in the Final Order in response to comments as altering the

    continuing logic or validity of these reasons; rather, as explained

    above,\161\ these refinements are mostly technical in nature and

    clarify the Commission's intended scope and operation of the relief as

    necessitated by certain practical issues highlighted by commenters.

    Substantive changes are addressed below in the ``Consideration of

    Alternatives.'' \162\

    ---------------------------------------------------------------------------

    \161\ See supra Section II.

    \162\ See supra Section IV.C.4.

    ---------------------------------------------------------------------------

    3. Benefits

    To Exempt Entities

    Relative to no exemption, the Final Order will benefit Exempt

    Entities by lessening the likelihood that compliance with the CEA and

    Commission regulations would diminish their ability and/or incentives

    to continue to engage in Exempt Non-Financial Energy Transactions that,

    as described in the Petition, the Proposed Order, and above, are an

    operational tool relied upon by Exempt Entities to effectively execute

    their public service mission. The exemption will benefit Exempt

    Entities by providing assurances that these Exempt Non-Financial Energy

    Transactions upon which they rely are not subject to the CEA and

    Commission regulations.\163\

    ---------------------------------------------------------------------------

    \163\ The refinements that the Commission has made in the Final

    Order to clarify its terms and application reinforce these benefits.

    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. The Commission

    is aware, however, that the Final Order stops short of providing the

    categorical relief requested by Petitioners, and thus does not give

    Exempt Entities exact certitude that any electric energy

    transactions not specifically covered under the terms of this Order

    entered into between Exempt Entities will not be subject to the

    requirements of the CEA.

    ---------------------------------------------------------------------------

    To the extent Exempt Non-Financial Energy Transactions are swaps,

    as a threshold matter, absent Commission action, CEA section 2(e) would

    prohibit Exempt Entities from executing them away from a registered DCM

    unless both Exempt Entity counterparties qualify as ECPs. 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,\164\ or ``own

    * * * and invest * * * on a discretionary basis $50,000,000 or more in

    investments.\165\ 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.'' \166\ 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

    [[Page 19685]]

    Non-Financial Energy Transaction clearly would.\167\

    ---------------------------------------------------------------------------

    \164\ 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.

    \165\ CEA section 1a(18)(A)(vii)(bb).

    \166\ CEA section 1a(18)(A)(v).

    \167\ 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 Petitioners have

    represented that Exempt Non-Financial Energy Transactions are bespoke

    and therefore unsuitable for 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 Final Order allows for the continued use of

    transactions that are closely related to Exempt Entities' public

    service mission to provide affordable, reliable electricity--a benefit.

    The Final Order also saves Exempt Entities the time and expense

    necessary to determine if they are ECPs. While under the Final Order,

    ECP status becomes largely irrelevant, without it, Exempt Entities may

    have to concern themselves with ECP status determinations as a

    threshold for engaging in certain transactions.

    Even assuming, arguendo, that all Exempt Entities are ECPs, absent

    this Final Order, Exempt Non-Financial Energy Transactions engaged in

    by Exempt Entities in the normal course of carrying out their public

    service obligations would count towards the de minimis swap dealing

    threshold, and thus impact whether an Exempt Entity would need to

    register with the Commission as an SD or MSP.\168\ The Final Order

    eliminates this possibility and any attendant compliance costs it might

    entail.\169\

    ---------------------------------------------------------------------------

    \168\ 77 FR 30596, 30744-45 (May 23, 2012).

    \169\ Further, to the extent the potential for triggering a

    registration requirement might otherwise deter Exempt Entities from

    engaging in Exempt Non-Financial Energy Transactions with one

    another, the Final Order benefits Exempt Entities by maintaining the

    current number of available counterparties for such transactions and

    exempting Exempt Entities from otherwise applicable reporting and

    recordkeeping requirements applicable to non-SDs/MSPs.

    ---------------------------------------------------------------------------

    Lastly, to the extent that Exempt Non-Financial Energy Transactions

    are swaps, the Final Order also avoids potential costs that Exempt

    Entities might incur to comply with swap data reporting and

    recordkeeping requirements as articulated in Commission

    regulations.\170\

    ---------------------------------------------------------------------------

    \170\ 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); see also supra

    Section II.E.3 (clarifying that exemptive relief is granted

    retroactively to the date of Dodd-Frank Act enactment to avoid costs

    associated with the reporting requirements for historical swaps).

    ---------------------------------------------------------------------------

    Even for Exempt Non-Financial Energy Transactions that are not

    swaps, if Exempt Entities perceived some potential that they could be

    swaps (now or as they evolve 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. The Commission considers avoiding a

    result that would diminish the use of operationally-efficient Exempt

    Non-Financial Energy Transactions to be an important benefit.

    To Market Participants and the Public

    For reasons similar to those discussed in the Commission's analysis

    of the Proposed Order under CEA sections 4(c)(1) and 4(c)(6), the

    Commission asserts that this Final Order will benefit the public,

    generally.\171\

    ---------------------------------------------------------------------------

    \171\ 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, in that the Exempt Entities share the same public-service

    mission of providing affordable, reliable electricity to their

    customers, those aspects of the Final Order that benefit Exempt

    Entities directly should benefit their customers indirectly as well.

    For example, the Final Order would enable non-ECP Exempt Entities to

    engage in Exempt Non-Financial Energy Transactions, to the extent they

    are swaps, 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 cost reasons absent the exemption. In these

    circumstances, Exempt Entity customers likely would 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 Final

    Order enables Exempt Entities to avoid compliance and/or monitoring

    costs they would otherwise incur, the non-profit structure, conformance

    with requisite Internal Revenue Code guidelines, and public service

    mission that Exempt Entities share means that the cost savings should

    be passed through to members and other customers in the form of lower

    electricity prices.

    Second, the public also benefits by the promotion of economic and

    financial innovation that this Final Order facilitates.\172\ 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 economies of scale as investor-owned utilities--

    places a premium on innovative solutions to operational issues. Exempt

    Non-Financial Energy Transactions represent one such innovation. The

    Commission intends for the Final Order, as contemplated by

    Congress,\173\ to provide Exempt Entities with regulatory certainty

    important to their ability to continue to develop and deploy innovative

    solutions through bespoke, closed-loop agreements, contracts, and

    transactions.

    ---------------------------------------------------------------------------

    \172\ See Proposed Order, 77 FR 51009-10.

    \173\ See House Conf. Report No. 102-978, 1992 U.S.C.C.A.N.

    3179, 3213 (``4(c) Conf. Report'').

    ---------------------------------------------------------------------------

    Accordingly, the Final Order provides an overall benefit to the

    public.

    4. Consideration of Alternatives

    The chief alternatives to this Final Order are for the Commission

    to (i)

    [[Page 19686]]

    decline to exercise its exemptive authority; (ii) adopt the Proposed

    Order without certain substantive changes made to the Final Order; or

    (iii) exercise its exemptive authority more broadly and without

    conditions as requested in the Petition or reiterated in the

    Petitioners' comment letter.

    With respect to the first alternative--decline to exempt--the costs

    and benefit consideration is the mirror-image of that discussed above.

    A decision not to provide an exemption in this circumstance would

    preserve the current post-Dodd-Frank regulatory environment.

    Relative to the second alternative--adopting the exemption as

    proposed--the Commission has made two substantive changes to the

    definition of Exempt Non-Financial Energy Transaction based upon

    Petitioners' comments. These are: i) Striking the requirement that

    Exempt Non-Financial Energy Transactions be ``intended for making or

    taking physical delivery of the commodity upon which the agreement,

    contract, or transaction is based'' (the ``physical delivery

    requirement''); and ii) consistent with the first change, explicitly

    clarifying that Exempt Non-Financial Energy Transactions can be used to

    ``manage supply and/or price risk.'' As explained above, the Commission

    premised these changes on the Petitioners' representation that, absent

    such changes, certain benefits sought through the exemption would be

    lost, namely regulatory certainty of knowing that price management

    transactions falling within one of the six defined transaction

    categories would be afforded greater regulatory relief than otherwise

    would be provided through the end-user exception.\174\

    ---------------------------------------------------------------------------

    \174\ See Petitioners' Letter at 5-6, 12.

    ---------------------------------------------------------------------------

    Eliminating the physical delivery requirement and clarifying that

    Exempt Non-Financial Energy Transactions may be used to manage price

    risk (as well as supply risk) arguably blurs the definitional

    distinction that the Proposed Order otherwise would have expressly

    provided between Exempt Non-Financial Energy Transactions and

    jurisdictional futures contracts.

    However, even without the physical-delivery requirement and with

    the price-risk management clarification, the Commission does not expect

    the Final Order to undermine the exchange trading requirement for, or

    the Commission's oversight of, futures.\175\ Indeed, the Commission

    intends the protection of the public interest affected through

    Commission oversight of such activity to be fully preserved. As clearly

    stated throughout the Final Order, a foundational basis for granting

    this exemptive relief is the Commission's understanding, based on

    Petitioners' representations, that Exempt Non-Financial Energy

    Transaction are undertaken solely to manage supply and/or price risks

    arising from Exempt Entities' public service obligation to supply

    electric energy to customers and are bespoke to meet the needs of

    particular Exempt Entities, and thus not suited to DCM trading (or DCO

    clearing).\176\ The Commission expects this to continue to remain the

    case.\177\ Accordingly, the Commission views the revised terms of the

    Final Order as preserving similar protections as the Proposed Order,

    while affording enhanced direct benefits for Exempt Entities.

    ---------------------------------------------------------------------------

    \175\ See CEA sections 2(h)(1) and 2(h)(8), 7 U.S.C. 2(h)(1),

    2(h)(8). The same is true for swap clearing and DCM or SEF trade

    execution mandates.

    \176\ For the same reasons as represented by Petitioners, a

    foundational basis for exempting Exempt Non-Financial Energy

    Transactions that may be swaps is that they are not suited to SEF

    trading.

    \177\ The Final Order's reservation of authority to revisit

    terms and conditions serves as adequate protection that, over time,

    transactions subject to the exemption retain their foundational

    characteristics, including that they be (i) undertaken solely to

    manage supply and/or price risks arising from Exempt Entities'

    public service obligation to supply electric energy to customers and

    (ii) bespoke and are not otherwise suitable for exchange trading as

    futures. In the hypothetical event that, over time, this proves

    untrue, the Commission anticipates it would use its reserved

    authority to revisit the terms and conditions of this Final Order's

    exemptive relief to realign it with the Commission's understanding

    and expectations in this regard.

    ---------------------------------------------------------------------------

    The Commission also has revised the Final Order from what was

    proposed to accommodate Petitioners' request that final exemptive

    relief apply retroactively to the enactment of the Dodd-Frank Act. As a

    consequence, Exempt Entities will be saved any costs associated with

    determining whether certain Exempt Non-Financial Energy Transactions

    entered into prior to the effective date of the Final Order were

    historical swaps or not, and reporting those historical transactions to

    an SDR.\178\ Given the Commission's understanding of the nature and

    volume of Exempt Non-Financial Energy Transactions between Exempt

    Entities, it believes that any diminution in benefit attributable to

    historical swap reporting will be de minimis, if any.

    ---------------------------------------------------------------------------

    \178\ See supra Section II.E.3.

    ---------------------------------------------------------------------------

    Relative to the third 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 by

    Petitioners in their original Petition, the Commission purposefully has

    defined the categories of exempt transactions more narrowly, and

    preserved certain aspects of CEA jurisdiction with respect to them. As

    reiterated in their comment letter,\179\ Petitioners sought categorical

    relief for all Electric Operation-Related Transactions, regardless of

    whether the transactions fell within a specifically-defined category.

    The more open-ended categorical relief sought by Petitioners

    theoretically would lessen the burden on Exempt Entities 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 proposed. As stated

    previously in this release, however, while transactions may be relief-

    eligible under 4(c)(6), the Commission must ``determine that the

    exemption would be consistent with the public interest and purposes of

    [the] Act.'' \180\ Commenters have not provided sufficient information

    for the Commission to make such a determination, or meaningfully

    quantify the costs and benefits that categorical relief, as

    distinguished from the relief provided in the Final Order, would confer

    on market participants and the public. 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 public interest and purposes of the CEA.

    ---------------------------------------------------------------------------

    \179\ Petitioners' Letter at 11-12; see also Petition at 4-5.

    \180\ CEA section 4(c)(6), 7 U.S.C. 6(c)(6).

    ---------------------------------------------------------------------------

    Finally, the exemption reserves the Commission's general anti-fraud

    and anti-manipulation authority, and certain scienter-based

    prohibitions, 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 Final Order.\181\ Petitioners'

    [[Page 19687]]

    comment letter did not challenge the Proposed Order's imposition of

    these conditions on cost-benefit grounds, generally, though it did

    request that the Commission's reserved authority not explicitly include

    CEA section 4c(b) and regulation 32.4, as those provisions could be

    interpreted as a Commission determination that certain Exempt Non-

    Financial Energy Transactions constituted commodity options.\182\

    Reserving CEA section 4c(b) and regulation 32.4 should not be so

    interpreted. Furthermore, such reservations impose no additional costs

    on Exempt Entities, as currently they are subject to the Commission's

    authority under these provisions to the extent their transactions are

    options.

    ---------------------------------------------------------------------------

    \181\ As explained in the Proposed Order, the Commission

    believes that this reservation of authority serves important

    beneficial ends to ensure the integrity of commodity and commodity

    derivatives markets within its jurisdiction. To the extent Exempt

    Entities incur some cost to remain compliant with the CEA's anti-

    fraud and anti-manipulation regime, and the specified scienter-based

    prohibitions, the Commission considers such costs warranted by the

    importance of maintaining commodity market 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 to exert its regulatory inspection authority

    with respect to Exempt Non-Financial Energy Transactions

    infrequently; and, such authority would involve only records that

    Exempt Entities keep in the ordinary course of business, and only be

    exercised 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 Final

    Order. The Commission believes that any costs occasioned by this

    condition are de minimis.

    \182\ See supra Section II.D.

    ---------------------------------------------------------------------------

    5. 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 Final

    Order will negatively affect 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, do not appear to generate risks of the nature addressed

    by the CEA. The Commission has delineated 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 generate such risks, either now or as they may evolve in the

    future. Moreover, the exemption incorporates conditions \183\ to

    counter residual risk that conceivably, though unexpectedly, might

    survive notwithstanding the Final Order's definitional crafting.

    ---------------------------------------------------------------------------

    \183\ These conditions include the reservation of the

    Commission's anti-fraud and anti-manipulation authority, and certain

    scienter-based prohibitions, as well as its authority to inspect

    books and records already kept in the normal course of business.

    Further, the Commission reserves the right to revisit the terms and

    conditions of the Final Order's relief and alter or revoke them as

    appropriate. See Section V.C.

    ---------------------------------------------------------------------------

    b. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    The Commission foresees little, if any, negative impact from the

    Final Order on the efficiency, competitiveness, and financial integrity

    of markets regulated under the CEA. This is because, to the extent any

    are jurisdictional, Exempt Non-Financial Energy Transactions entered

    into between Exempt Entities constitute only a narrow market segment

    limited to bespoke transactions, executed bilaterally between non-

    financial entities primarily in order to satisfy existing or expected

    operations-related public service obligations. Moreover, the Commission

    anticipates the Final Order will help to maintain the competitive

    landscape and efficiency of the market segment for Exempt Non-Financial

    Energy Transactions entered into between Exempt Entities. As previously

    discussed, the Final Order maintains the number of counterparties that

    Exempt Entities will be able to face--namely, other Exempt Entities

    with which they already conduct Exempt Non-Financial Energy

    Transactions--by exempting Exempt Non-Financial Energy Transactions

    between Exempt Entities from CEA section 2(e), and eliminates the

    possibility that entering into Exempt Non-Financial Energy Transactions

    will subject Exempt Entities to the full array of compliance costs

    arising from the Commission's ongoing oversight regime.\184\ In

    addition, the Commission expects that the Final Order will contribute

    to operational efficiency in the market segment where Exempt Entities

    conduct Exempt Non-Financial Energy Transactions with one another by

    eliminating costs necessary to determine their regulatory status or the

    status of Exempt Non-Financial Energy Transactions.

    ---------------------------------------------------------------------------

    \184\ Exempt Entities may still incur minimal episodic

    compliance costs with respect to Exempt Non-Financial Energy

    Transactions if the Commission has a need to exercise its reserved

    authority.

    ---------------------------------------------------------------------------

    Further, as an exercise of the Commission's CEA section 4(c)

    authority to provide legal certainty for novel instruments as Congress

    intended, the Final 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 believe that the Final Order will

    materially impair price discovery in non-exempt, jurisdictional

    markets. The Commission recognizes that a desire to avoid regulation in

    theory could incentivize Exempt Entities to participate in Exempt Non-

    Financial Energy Transactions to a greater extent than they otherwise

    might choose to do, vis-[agrave]-vis related non-exempt markets. This

    is unlikely, however, due to the requirement that Exempt Non-Financial

    Energy Transactions be entered into only to manage supply and/or price

    risk arising from their public service obligations to physically supply

    electric energy service to customers, and only with other Exempt

    Entities. The relatively small size of trading in this market segment

    also renders it unlikely that the Final Order will materially impair

    price discovery in jurisdictional markets even were the Final Order to

    incentivize Exempt Entities to execute some of their customer-serving

    transactions pursuant to the Final Order instead of on a registered

    entity. Thus, against the backdrop of Congress' mandate to consider

    exempting transactions between FPA 201(f) entities, the Commission

    believes that the Final Order would not materially distort price

    discovery in non-exempt, jurisdictional markets.

    d. Sound Risk Management Practices

    The Final Order will promote the ability of Exempt Entities to

    manage the operational risks posed by unique electricity 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.

    e. Other Public Interest Considerations

    In exercising its exemptive authority under CEA sections 4(c)(1)

    and 4(c)(6) in the Final Order, the Commission is acting to promote the

    broader public interest in facilitating the generation, transmission,

    and delivery of affordable, reliable electric energy service as

    Congress contemplated.

    V. Final Order

    Based on the Petitioners' representations, and for the reasons set

    forth above, the Commission hereby

    [[Page 19688]]

    exempts, pursuant to Commodity Exchange Act (``CEA'') sections 4(c)(1)

    and 4(c)(6), from all requirements of the CEA and Commission

    regulations issued thereunder, except those specified below, all Exempt

    Non-Financial Energy Transactions (as defined below) entered into

    solely between Exempt Entities (as defined below), retroactive to the

    date of enactment of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, and subject to certain conditions (as detailed below):

    A. Exempt Entity means (i) any electric facility or utility that is

    wholly owned by a government entity, as described in Federal Power Act

    (``FPA'') section 201(f), 16 U.S.C. 824(f); (ii) 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; (iii) 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 (iv) 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).

    B. Exempt Non-Financial Energy Transaction means any agreement,

    contract, or transaction based upon a ``commodity,'' as such term is

    defined in CEA section 1a(9) and Commission 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, or any grade

    of a metal, or any agricultural product, or any grade of crude oil or

    gasoline that is not used as fuel for electric energy generation. The

    term ``Exempt Non-Financial Energy Transaction'' also excludes

    agreements, contracts, or transactions entered into on or subject to

    the rules of a registered entity, submitted for clearing to a

    derivatives clearing organization, and/or reported to a swap data

    repository. 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 the following categories

    of transactions:

    1. 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 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 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.

    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 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.

    4. 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.

    5. 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.

    6. 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 and anti-manipulation authority, and

    scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b,

    4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and

    13, and any implementing regulations promulgated under these sections

    including, but not limited to, Commission regulations 23.410(a) and

    (b), 32.4, and Part 180. 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

    [[Page 19689]]

    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.

    Issued in Washington, DC, on March 28, 2013, by the Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendices to Order Exempting, 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 Statement of the

    Chairman

    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.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final order regarding certain electricity and

    electricity-related energy transactions between rural electric

    cooperatives and/or federal, state, municipal, and tribal power

    authorities (as defined in section 201F of the Federal Power Act).

    Congress authorized that these transactions be exempt from

    certain provisions of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, which is consistent with previous exemptions

    Congress has granted from the Federal Power Act. For decades, these

    entities have been generally recognized as performing a public

    service mission to provide their customers or cooperative members

    with reliable, affordable electric energy service. 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.

    This final order responds to a petition filed by a group of

    these cooperatives and authorities and has benefitted from public

    input.

    The scope of the final order is carefully tailored to physically

    backed electricity and electricity-related energy transactions that

    are necessary for the generation, transmission and delivery of

    electric energy services to customers.

    [FR Doc. 2013-07633 Filed 4-1-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: April 2, 2013



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