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2013-07634

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

    [Notices]

    [Pages 19879-19915]

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

    [FR Doc No: 2013-07634]

    [[Page 19879]]

    Vol. 78

    Tuesday,

    No. 63

    April 2, 2013

    Part III

    Commodity Futures Trading Commission

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    Final Order in Response to a Petition From Certain Independent System

    Operators and Regional Transmission Organizations to Exempt Specified

    Transactions Authorized by a Tariff or Protocol Approved by the Federal

    Energy Regulatory Commission or the Public Utility Commission of Texas

    From Certain Provisions of the Commodity Exchange Act Pursuant to the

    Authority Provided in the Act; Notice

    Federal Register / Vol. 78 , No. 63 / Tuesday, April 2, 2013 /

    Notices

    [[Page 19880]]

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    COMMODITY FUTURES TRADING COMMISSION

    RIN 3038-AE02

    Final Order in Response to a Petition From Certain Independent

    System Operators and Regional Transmission Organizations To Exempt

    Specified Transactions Authorized by a Tariff or Protocol Approved by

    the Federal Energy Regulatory Commission or the Public Utility

    Commission of Texas From Certain Provisions of the Commodity Exchange

    Act Pursuant to the Authority Provided in the Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final order.

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

    ``Commission'') is issuing a final order (``Final Order'') in response

    to a consolidated petition (``Petition'') \1\ from certain regional

    transmission organizations (``RTOs'') and independent system operators

    (``ISOs'') (collectively, ``Requesting Parties'') to exempt specified

    transactions (``Covered Transactions'') from the provisions of the

    Commodity Exchange Act (``CEA'' or ``Act''),\2\ and Commission

    regulations. The Final Order exempts contracts, agreements, and

    transactions for the purchase or sale of the limited electric energy-

    related products that are specifically described within the Final Order

    from the provisions of the CEA and Commission regulations, with the

    exception of 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 of the Act 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. To be

    eligible for the exemption contained in the Final Order, the contract,

    agreement, or transaction must be offered or entered into in a market

    administered by a Requesting Party pursuant to that Requesting Party's

    tariff, rate schedule, or protocol (collectively, ``Tariff''), and the

    relevant Tariff must have been approved or permitted to have taken

    effect by either the Federal Energy Regulatory Commission (``FERC'') or

    the Public Utility Commission of Texas (``PUCT''), as applicable. In

    addition, the contract, agreement, or transaction must be entered into

    by persons who are ``appropriate persons,'' as defined in sections

    4(c)(3)(A) through (J) of the Act,\3\ ``eligible contract

    participants,'' as defined in section 1a(18) of the Act and Commission

    regulations,\4\ or persons who are in the business of: (i) Generating,

    transmitting, or distributing electric energy, or (ii) providing

    electric energy services that are necessary to support the reliable

    operation of the transmission system. The Final Order also extends to

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

    advice, or rendering other services with respect to the Covered

    Transactions. Finally, the Final Order is subject to other conditions

    set forth therein. Authority for issuing the exemption is found in

    section 4(c)(6) of the Act.\5\

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    \1\ In the Matter of the Petition for an Exemptive Order Under

    Section 4(c) of the Commodity Exchange Act by California Independent

    Service Operator Corporation; In the Matter of the Petition for an

    Exemptive Order Under Section 4(c) of the Commodity Exchange Act by

    the Electric Reliability Council of Texas, Inc.; In the Matter of

    the Petition for an Exemptive Order Under Section 4(c) of the

    Commodity Exchange Act by ISO New England Inc.; In the Matter of the

    Petition for an Exemptive Order Under Section 4(c) of the Commodity

    Exchange Act by Midwest Independent Transmission System Operator,

    Inc.; In the Matter of the Petition for an Exemptive Order Under

    Section 4(c) of the Commodity Exchange Act by New York Independent

    System Operator, Inc.; and In the Matter of the Petition for an

    Exemptive Order Under Section 4(c) of the Commodity Exchange Act by

    PJM Interconnection, L.L.C. (Feb. 7, 2012, as amended June 11,

    2012).

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

    \3\ 7 U.S.C. 6(c)(3)(A)-(J).

    \4\ 7 U.S.C. 1a(18). ``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.

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

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    A copy of the Petition is available on the Commission's Web site at

    http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4capplication.pdf; the attachments to the

    Petition are posted at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappattach.pdf. A chart

    submitted by the Requesting Parties that sets forth the status of their

    respective implementation of the standards set forth in FERC Order No.

    741 (``FERC Order No. 741 Implementation Chart'') is posted at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappfercchart.pdf, and a revised version of the chart

    (``Revised FERC Order No. 741 Implementation Chart'') is posted at

    http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rtoisoltr011813.pdf. A copy of the ``Notice of Proposed Order

    and Request for Comment on a Petition from Certain Independent System

    Operators and Regional Transmission Organizations to Exempt Specified

    Transactions Authorized by a Tariff or Protocol Approved by the Federal

    Energy Commission or the Public Utility Commission of Texas From

    Certain Provisions of the Commodity Exchange Act Pursuant to the

    Authority Provided in Section 4(c)(6) of the Act'' (``Proposed Order'')

    is available at 77 FR 52138, Aug. 28, 2012, and on the Commission's Web

    site at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-20965a.pdf. A copy of the comment file is also

    available on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1265.

    DATES: Effective date: April 2, 2013.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel,

    202-418-5092, rwasserman@cftc.gov, Laura Astrada, Associate Chief

    Counsel, 202-418-7622, lastrada@cftc.gov, Nadia Zakir, Associate

    Director, 202-418-5720, nzakir@cftc.gov, Jocelyn Partridge, Special

    Counsel, 202-418-5926, jpartridge@cftc.gov, or Kirsten Robbins,

    Attorney-Advisor, 202-418-5313, krobbins@cftc.gov, Division of Clearing

    and Risk; David P. Van Wagner, Chief Counsel, 202-418-5481,

    dvanwagner@cftc.gov, or W. Graham McCall, Attorney-Advisor, 202-418-

    6150, gmccall@cftc.gov, Division of Market Oversight; Mark Higgins,

    Counsel, 202-418-5864, mhiggins@cftc.gov, or Thuy Dinh, Counsel, 202-

    418-5128, tdinh@cftc.gov, Office of the General Counsel; or Robert

    Pease, 202-418-5863, rpease@cftc.gov, Division of Enforcement in each

    case at the Commodity Futures Trading Commission, Three Lafayette

    Centre, 1151 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Relevant Dodd-Frank Provisions

    II. Background--Proposed Order

    A. The Petition

    B. The Proposal

    1. Transactions Proposed To Be Exempted

    2. Conditions to the Proposed Order

    3. Additional Limitations

    III. Summary of the Comments

    IV. Determinations

    A. Scope of the Final Order

    1. Covered Transactions Subject to the Final Order

    2. Additional Definitions and Provisions in the Final Order

    3. Conditions to the Final Order

    B. Section 4(c) Analysis

    1. Overview of CEA Section 4(c)

    2. CEA Section 4(c) Determinations

    C. Issuance of a Separate or a Collective Order

    [[Page 19881]]

    D. Additional Limitations

    E. Effectiveness of the Exemption

    V. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Cost-Benefit Considerations

    1. Background

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

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

    3. Proposed Order and Request for Comment on the Commission's

    Proposed Consideration of Costs and Benefits

    4. Summary of Comments on the Costs and Benefits of the Proposed

    Order

    5. Summary of the Final Order--Determinations and Conditions

    6. Costs of the Final Order

    7. Benefits

    8. Consideration of Alternatives

    9. Consideration of CEA Section 15(a) Factors

    VI. Order

    I. Relevant Dodd-Frank Provisions

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\6\ Title VII

    of the Dodd-Frank Act amended the CEA \7\ and altered the scope of the

    Commission's exclusive jurisdiction.\8\ In particular, it expanded the

    Commission's exclusive jurisdiction, which had included futures traded,

    executed and cleared on CFTC-regulated exchanges and clearinghouses, to

    also cover swaps traded, executed, or cleared on CFTC-regulated

    exchanges or clearinghouses.\9\ As a result, the Commission's exclusive

    jurisdiction now includes swaps as well as futures, and is clearly

    expressed in CEA section 2(a)(1)(A), which reads:

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    \6\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.htm.

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

    \8\ Section 722(e) of the Dodd-Frank Act.

    \9\ See 7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added

    section 2(h)(1)(A), which requires swaps to be cleared if required

    to be cleared and not subject to a clearing exception or exemption.

    See 7 U.S.C. 2(h)(1)(A).

    The Commission shall have exclusive jurisdiction, except to the

    extent otherwise provided in the Wall Street Transparency and

    Accountability Act of 2010 (including an amendment made by that Act)

    and subparagraphs (C), (D), and (I) of this paragraph and

    subsections (c) and (f), with respect to accounts, agreements

    (including any transaction which is of the character of * * * an

    ``option''), and transactions involving swaps or contracts of sale

    of a commodity for future delivery (including significant price

    discovery contracts) traded or executed on a contract market * * *

    or a swap execution facility * * * or any other board of trade,

    exchange, or market * * *.\10\

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    \10\ 7 U.S.C. 2(a)(1)(A).

    The Dodd-Frank Act also added a savings clause that addresses the

    roles of the Commission, FERC, and state agencies as they relate to

    certain agreements, contracts, or transactions traded pursuant to the

    tariff or rate schedule of an RTO or ISO.\11\ Toward that end,

    paragraph (I) of CEA section 2(a)(1) repeats the Commission's exclusive

    jurisdiction and clarifies that the Commission retains its authorities

    over agreements, contracts or transactions traded pursuant to FERC- or

    state-approved tariff or rate schedules.\12\ The same paragraph (I)

    also explains that the FERC and state agencies preserve their existing

    authorities over agreements, contracts, or transactions ``entered into

    pursuant to a tariff or rate schedule approved by [FERC] or a State

    regulatory agency,'' that are: ``(I) not executed, traded, or cleared

    on'' an entity or trading facility subject to registration or ``(II)

    executed, traded, or cleared on a registered entity or trading facility

    owned or operated by a[n RTO] or [ISO].'' \13\

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    \11\ See 7 U.S.C. 2(a)(1)(I).

    \12\ See 7 U.S.C. 2(a)(1)(I)(i) and (ii).

    \13\ 7 U.S.C. 2(a)(1)(I)(i)(II). The savings clause in CEA

    section 2(a)(1)(I) provides that:

    (I)(i) Nothing in this Act shall limit or affect any statutory

    authority of the Federal Energy Regulatory Commission or a State

    regulatory authority (as defined in section 3(21) of the Federal

    Power Act (16 U.S.C. 796(21)) with respect to an agreement,

    contract, or transaction that is entered into pursuant to a tariff

    or rate schedule approved by the Federal Energy Regulatory

    Commission or a State regulatory authority and is--

    (I) not executed, traded, or cleared on a registered entity or

    trading facility; or

    (II) executed, traded, or cleared on a registered entity or

    trading facility owned or operated by a regional transmission

    organization or independent system operator.

    (ii) In addition to the authority of the Federal Energy

    Regulatory Commission or a State regulatory authority described in

    clause (i), nothing in this subparagraph shall limit or affect--

    (I) any statutory authority of the Commission with respect to an

    agreement, contract, or transaction described in clause (i); or

    (II) the jurisdiction of the Commission under subparagraph (A)

    with respect to an agreement, contract, or transaction that is

    executed, traded, or cleared on a registered entity or trading

    facility that is not owned or operated by a regional transmission

    organization or independent system operator (as defined by sections

    3(27) and (28) of the Federal Power Act (16 U.S.C. 796(27),

    796(28)).

    In addition, Dodd-Frank Act section 722(g) (not codified in the

    United States Code) expressly states that FERC's pre-existing

    statutory enforcement authority is not limited or affected by

    amendments to the CEA. Section 722(g) states:

    (g) AUTHORITY OF FERC.--Nothing in the Wall Street Transparency

    and Accountability Act of 2010 or the amendments to the Commodity

    Exchange Act made by such Act shall limit or affect any statutory

    enforcement authority of the Federal Energy Regulatory Commission

    pursuant to section 222 of the Federal Power Act and section 4A of

    the Natural Gas Act that existed prior to the date of enactment of

    the Wall Street Transparency and Accountability Act of 2010.

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    The Dodd-Frank Act granted the Commission specific powers to exempt

    certain contracts, agreements, or transactions from duties otherwise

    required by statute or Commission regulation by adding new sections to

    the CEA, sections 4(c)(6)(A) and (B). Specifically, sections 4(c)(6)(A)

    and (B) provide for exemptions for certain transactions entered into

    (a) pursuant to a tariff or rate schedule approved or permitted to take

    effect by FERC, or (b) pursuant to a tariff or rate schedule

    establishing rates or charges for, or protocols governing, the sale of

    electric energy approved or permitted to take effect by the regulatory

    authority of the State or municipality having jurisdiction to regulate

    rates and charges for the sale of electric energy within the State or

    municipality.\14\

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    \14\ The exemption language in section 4(c)(6) reads:

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

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

    the Commission shall, in accordance with paragraphs (1) and (2),

    exempt from the requirements of this Act an agreement, contract, or

    transaction that is entered into--

    (A) pursuant to a tariff or rate schedule approved or permitted

    to take effect by the Federal Energy Regulatory Commission;

    (B) pursuant to a tariff or rate schedule establishing rates or

    charges for, or protocols governing, the sale of electric energy

    approved or permitted to take effect by the regulatory authority of

    the State or municipality having jurisdiction to regulate rates and

    charges for the sale of electric energy within the State or

    municipality; or

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

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

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    The Commission must act ``in accordance with'' sections 4(c)(1) and

    (2) of the CEA, when issuing an exemption under section 4(c)(6).\15\

    [[Page 19882]]

    Section 4(c)(1) of the CEA grants the Commission the authority to

    exempt any transaction or class of transactions, including swaps, from

    certain provisions of the CEA, in order to ``promote responsible

    economic or financial innovation and fair competition.'' \16\ Section

    4(c)(2) \17\ of the Act further provides that the Commission may not

    grant exemptive relief unless it determines that: (1) The exemption

    would be consistent with the public interest and the purposes of the

    CEA; (2) the transaction will be entered into solely between

    ``appropriate persons;'' \18\ and (3) the exemption will not have a

    material adverse effect on the ability of the Commission or any

    contract market to discharge its regulatory or self-regulatory

    responsibilities under the CEA.\19\ In enacting section 4(c), Congress

    noted that the purpose of the provision is to give the Commission a

    means of providing certainty and stability to existing and emerging

    markets so that financial innovation and market development can proceed

    in an effective and competitive manner.\20\

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    \15\ Section 4(c) was added to the CEA by the Futures Trading

    Practices Act of 1992, Pub. L. 102-564. The Commission's authority

    under section 4(c) was explained by the Conferees:

    In granting exemptive authority to the Commission under new

    section 4(c), the Conferees recognize the need to create legal

    certainty for a number of existing categories of instruments which

    trade today outside of the forum of a designated contract market.

    The provision included in the Conference substitute is designed

    to give the Commission broad flexibility in addressing these

    products

    *****

    In this respect, the Conferees expect and strongly encourage the

    Commission to use its new exemptive power promptly upon enactment of

    this legislation in four areas where significant concerns of legal

    uncertainty have arisen: (1) Hybrids, (2) swaps, (3) forwards, and

    (4) bank deposits and accounts.

    The Commission is not required to ascertain whether a particular

    transaction would fall within its jurisdiction prior to exercising

    its exemptive authority under section 4(c). The Conferees stated

    that they did:

    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 Act. Rather, this provision provides

    flexibility for the Commission to provide legal certainty to novel

    instruments where the determination as to jurisdiction is not

    straightforward * * *

    H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).

    \16\ 7 U.S.C. 6(c)(1).

    \17\ 7 U.S.C. 6(c)(2).

    \18\ Section 4(c)(3) of the CEA further outlines who may

    constitute an appropriate person for the purpose of a particular

    4(c) exemption and includes, as relevant to this Final Order:

    (a) Any person that qualifies for one of ten defined categories

    of appropriate persons; or

    (b) such other persons that the Commission determines to be

    appropriate in light of their financial or other qualifications, or

    the applicability of appropriate regulatory protections.

    \19\ 7 U.S.C. 6(c)(2).

    \20\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).

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    II. Background

    A. The Petition

    On February 7, 2012, the Requesting Parties \21\ filed a joint

    Petition \22\ with the Commission requesting that the Commission

    exercise its authority under section 4(c)(6) of the CEA \23\ and

    section 712(f) of the Dodd-Frank Act \24\ to exempt certain contracts,

    agreements and transactions for the purchase or sale of specified

    electric energy \25\ products, that are offered pursuant to a FERC- or

    PUCT-approved Tariff,\26\ from most provisions of the Act.\27\ The

    Requesting Parties include three RTOs (Midwest Independent Transmission

    System Operator, Inc. (``MISO''); ISO New England, Inc. (``ISO NE'');

    and PJM Interconnection, L.L.C. (``PJM'')), and two ISOs (California

    Independent System Operator Corporation (``CAISO'') and New York

    Independent System Operator, Inc. (``NYISO'')), whose central role as

    transmission utilities is subject to regulation by FERC. The Requesting

    Parties also include the Electric Reliability Council of Texas, Inc.

    (``ERCOT''), an entity that performs the role of an ISO, but whose

    central role as a transmission utility in the electric energy market is

    subject to regulation by PUCT, the authority with jurisdiction to

    regulate rates and charges for the sale of electric energy within the

    state of Texas.\28\ The Requesting Parties represented that the roles,

    responsibilities and services of ISOs and RTOs are substantially

    similar.\29\ As described in the Proposed Order, the Requesting Parties

    represented that FERC encouraged the formation of ISOs to consolidate

    and manage the operation of electric energy transmission facilities in

    order to provide open, non-discriminatory transmission service for

    generators and transmission customers.\30\ The Requesting Parties also

    represented that FERC encouraged the formation of RTOs to administer

    the transmission grid on a regional basis.\31\

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    \21\ In the preamble to the Proposed Order, the Requesting

    Parties were also referred to as ``Petitioners.'' For consistency

    with the Final Order, the term ``Requesting Parties'' is used

    throughout the preamble to the Final Order.

    \22\ Requesting Parties submitted an amended Petition on June

    11, 2012. Citations herein to ``Petition'' are to the amended

    Petition.

    \23\ 7 U.S.C. 6(c)(6).

    \24\ See section 712(f) of the Dodd-Frank Act.

    \25\ In the Proposed Order, ``electric energy'' was also

    referred to as ``electricity'' and ``electric power.'' For the sake

    of consistency in the Final Order, the term ``electric energy'' is

    used throughout the Final Order.

    \26\ ``Tariff'' collectively refers to a tariff, rate schedule,

    or protocol, to account for differences in terminology used by the

    Requesting Parties and their respective regulators.

    \27\ See 77 FR 52139. See also Petition at 2-3, 6.

    \28\ See 77 FR 52139. See also Petition at 2-4; 16 Tex. Admin.

    Code (``TAC'') 25.1 (1998).

    \29\ See 77 FR 52139. See also Petition at 2 n.2.

    \30\ See 77 FR 52139. See also FERC Order No. 888 Promoting

    Wholesale Competition Through Open Access Non-Discriminatory

    Transmission Facilities (``FERC Order No. 888''), 61 FR 21540, April

    24, 1996.

    \31\ See 77 FR 52139. See also Petition at 3.

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

    The Requesting Parties specifically petitioned the Commission to

    exempt from most provisions of the CEA certain ``financial transmission

    rights,'' ``energy transactions,'' ``forward capacity transactions,''

    and ``reserve or regulation transactions,'' as defined in the Petition,

    if such transactions are offered or entered into pursuant to a Tariff

    under which a Requesting Party operates that has been approved by FERC

    or PUCT, as applicable, as well as any persons (including the

    Requesting Parties, their members and their market participants)

    offering, entering into, rendering advice, or rendering other services

    with respect to such transactions.\32\ The Requesting Parties asserted

    that each of the transactions for which an exemption was requested is

    (a) subject to a long-standing, comprehensive regulatory framework for

    the offer and sale of such transactions established by FERC, or in the

    case of ERCOT, PUCT, and (b) part of, and inextricably linked to, the

    organized wholesale electric energy markets that are subject to the

    regulation and oversight of FERC or PUCT, as applicable.\33\ The

    Requesting Parties expressly excluded from the Petition a request for

    relief from sections 4b, 4o, 6(c), and 9(a)(2) of the Act,\34\ and such

    provisions explicitly have been carved out of the exemption set forth

    in the Final Order.\35\ The Requesting Parties asked that, due to the

    commonalities in the Requesting Parties' markets, the exemption apply

    to all Requesting Parties and their respective market participants with

    respect to each category of electric energy-related transactions

    described in the Petition, regardless of whether such transactions are

    offered or entered into at the current time pursuant to an individual

    Requesting Party's Tariff.\36\ The Requesting Parties asserted that

    this uniformity would avoid an individual Requesting Party being

    required to seek future amendments to the exemption in order to offer

    or enter into the same type of transactions currently offered by

    another Requesting Party.\37\

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

    \32\ See 77 FR 52139. See also Petition at 2-3.

    \33\ See 77 FR 52139. See also Petition at 11.

    \34\ See 77 FR 52139. See also Petition at 3.

    \35\ See discussion in section IV.D. infra.

    \36\ See 77 FR 52139. See also Petition at 6.

    \37\ See id.

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    B. The Proposal

    On August 28, 2012, the Commission issued the Proposed Order.\38\

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

    \38\ 77 FR 52138.

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    1. Transactions Proposed to Be Exempted

    The Commission proposed to exempt the purchase and sale of four

    types of transactions \39\ defined within the Proposed Order: (1)

    Financial Transmission Rights (``FTRs''), (2) Energy Transactions, (3)

    Forward Capacity Transactions, and (4) Reserve

    [[Page 19883]]

    or Regulation Transactions, pursuant to section 4(c)(6) of the CEA.\40\

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

    \39\ In the preamble to the Proposed Order, the term

    ``Transactions'' was used to collectively refer to the transactions

    covered by the Proposed Order. For clarity, the term ``Covered

    Transactions'' is used throughout the preamble to the Final Order to

    refer collectively to the transactions covered by the Final Order.

    \40\ Id. at 52141, 52166-67.

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

    An ``FTR'' was proposed to be defined as ``a transaction, however

    named, that entitles one party to receive, and obligates another party

    to pay, an amount based solely on the difference between the price for

    electricity, established on an electricity market administered by a

    Requesting Party at a specified source (i.e., where electricity is

    deemed injected into the grid of a Requesting Party) and a specified

    sink (i.e., where electricity is deemed withdrawn from the grid of a

    Requesting Party).'' \41\ As set forth in the Proposed Order, FTRs

    would be exempt only where each FTR is linked to, and the aggregate

    volume of FTRs for any period of time is limited by, the physical

    capability (after accounting for counterflow) of the electric energy

    transmission system operated by the Requesting Party offering the

    contract for such period; a Requesting Party serves as the market

    administrator for the market on which the FTR is transacted; each party

    to the FTR is a member of a particular Requesting Party (or is the

    Requesting Party itself); the FTR is executed on a market administered

    by that Requesting Party; and the FTR does not require any party to

    make or take physical delivery of electric energy.\42\

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

    \41\ Id. at 52166. The proposed definition of FTRs included such

    rights ``in the form of options (i.e., where one party has only the

    obligation to pay, and the other party only the right to receive, an

    amount as described above).'' Id.

    \42\ Id. at 52166. See also id. at 52141.

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

    ``Energy Transactions'' were proposed to be defined as transactions

    in a ``Day-Ahead Market'' \43\ or ``Real-Time Market'' (``RTM'') \44\

    as those terms were defined in the Proposed Order, for the purchase or

    sale of a specified quantity of electric energy at a specified

    location, including ``Demand Response,'' \45\ as defined in the

    Proposed Order, where: (1) The price of electric energy is established

    at the time the Energy Transaction is executed; \46\ (2) performance

    occurs in the RTM by either the physical delivery or receipt of the

    specified electric energy or a cash payment or receipt at the price

    established in the RTM; and (3) the aggregate cleared volume of both

    physical and cash-settled Energy Transactions for any period of time is

    limited by the physical capability of the electric energy transmission

    system operated by a Requesting Party for that period of time.\47\

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

    \43\ ```Day-Ahead Market' '' was defined in the Proposed Order

    as ``an electricity market administered by a Requesting Party on

    which the price of electricity at a specified location is

    determined, in accordance with the Requesting Party's Tariff, for

    specified time periods, none of which is later than the second

    operating day following the day on which the Day-Ahead Market

    clears.'' Id. at 52167.

    \44\ ```Real-Time Market' '' was defined in the Proposed Order

    as ``an electricity market administered by a Requesting Party on

    which the price of electricity at a specified location is

    determined, in accordance with the Requesting Party's Tariff, for

    specified time periods within the same 24-hour period.'' Id.

    \45\ `` `Demand Response' '' was defined in the Proposed Order

    as ``the right of a Requesting Party to require that certain sellers

    of such rights curtail their consumption of electric energy from the

    electric power transmission system operated by a Requesting Party

    during a future period of time as specified in the Requesting

    Party's Tariff.'' Id. The definition of Demand Response, as adopted

    in this Order, should be read to be consistent with FERC's

    definition of demand response, and thus any demand response rights

    recognized under this Order must comport with the definition

    provided by FERC. See 18 CFR 35.28(b)(4) (2012) (providing that

    demand response means a reduction in the consumption of electric

    energy by customers from their expected consumption in response to

    an increase in the price of electric energy or to incentive payments

    designed to induce lower consumption of electric energy).

    \46\ See id. at 52141-42, 52166-67. For purposes of the Final

    Order, the Commission is clarifying that Energy Transactions include

    virtual and convergence bids and offers, as they are methods of

    conducting such Energy Transactions. See section IV.A.1.c. infra.

    \47\ See 77 FR 52167. See also id. at 52142; Petition at 7.

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

    ``Forward Capacity Transactions'' were proposed to include

    transactions in which a Requesting Party, for the benefit of load-

    serving entities (``LSEs'') purchases the rights described in the

    Proposed Order.\48\ The Commission proposed to limit eligibility of

    Forward Capacity Transactions for the exemption by requiring that the

    aggregate cleared volume of all such transactions for any period of

    time must be limited to the physical capability of the electric energy

    transmission system operated by the applicable Requesting Party for

    that period of time.\49\

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

    \48\ See 77 FR at 52167.

    \49\ See id.

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

    ``Reserve Regulation Transactions'' were defined in the Proposed

    Order as transactions:

    (1) In which a Requesting Party, for the benefit of [LSEs] and

    resources, purchases, through auction, the right, during a period of

    time specified in the Requesting Party's Tariff, to require the

    seller to operate electric facilities in a physical state such that

    the facilities can increase or decrease the rate of injection or

    withdrawal of electricity to the electric power transmission system

    operated by the Requesting Party with:

    (a) Physical performance by the seller's facilities within a

    response interval specified in the Requesting Party's Tariff

    (Reserve Transaction); or

    (b) Prompt physical performance by the seller's facilities (Area

    Control Error Regulation Transaction);

    (2) For which the seller receives, in consideration, one or more

    of the following:

    (a) Payment at the price established in the Requesting Party's

    Day-Ahead or Real-Time Market, as those terms are defined in the

    Proposed Order, price for electricity applicable whenever the

    Requesting Party exercises its right that electric energy be

    delivered (including Demand Response, as defined [in the Proposed]

    Order);

    (b) Compensation for the opportunity cost of not supplying or

    consuming electricity or other services during any period during

    which the Requesting Party requires that the seller not supply

    energy or other services;

    (c) An upfront payment determined through the auction

    administered by the Requesting Party for this service;

    (d) An additional amount indexed to the frequency, duration, or

    other attributes of physical performance as specified in the

    Requesting Party's Tariff; and

    (3) In which the value, quantity and specifications for such

    Transactions for a Requesting Party for any period of time are

    limited by the physical capability of the electric transmission

    system operated by Requesting Parties.\50\

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

    \50\ See id. See also id. at 52145.

    Finally, in the Proposed Order, the Commission clarified that

    financial transactions that are not tied to the allocation of the

    physical capabilities of an electric energy transmission grid would not

    be suitable for exemption, and were therefore not covered by the

    Proposed Order, because such activity would not be inextricably linked

    to the physical delivery of electric energy.\51\

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

    \51\ See id. at 52143.

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

    The Commission proposed to limit the exemption to the transactions

    described in the Proposed Order in which all parties thereto fall

    within one of the appropriate persons categories in CEA sections

    4(c)(3)(A) through (J), or, pursuant to CEA section 4(c)(3)(K), that

    otherwise qualify as an eligible contract participant (``ECP''), as

    such term is defined in section 1a(18)(A) of the Act and in Commission

    regulation 1.3(m).\52\ The Proposed Order also required that the

    delineated ``Transactions be offered or sold pursuant to a Requesting

    Party's Tariff, which has been approved or permitted to take effect by:

    (1) In the case of ERCOT, the PUCT or (2) In the

    [[Page 19884]]

    case of all other Requesting Parties, FERC.'' \53\

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

    \52\ For those ECPs engaging in the transactions delineated in

    the Proposed Order in markets administered by a Requesting Party

    that do not fit within the categories of ``appropriate persons'' set

    forth in sections 4(c)(3)(A) through (J), the Commission proposed to

    determine that they are appropriate persons pursuant to section

    4(c)(3)(K), ``in light of their financial or other qualifications,

    or the applicability of appropriate regulatory protections.'' The

    Commission also noted that CEA section 2(e) permits all ECPs to

    engage in swaps transactions other than on a designated contract

    market (``DCM'') and that such entities should similarly be

    appropriate persons for the purpose of the Proposed Order. See id.

    at 52145-46.

    \53\ See id.

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

    2. Conditions to the Proposed Order

    a. Conditions Precedent to the Proposed Order

    In the Proposed Order, the Commission proposed two conditions

    precedent to the issuance of a final exemption. First, the Commission

    proposed that it would not issue a final order to a specific RTO or ISO

    until (i) such time as the Requesting Parties had adopted in their

    Tariffs all of the requirements set forth in FERC regulation 35.47;

    \54\ (ii) such Tariff provisions have been approved or have been

    permitted to take effect by FERC or PUCT, as applicable; and (iii) such

    Tariff provisions, have become effective and have been fully

    implemented by the particular RTO or ISO.\55\ Second, as an additional

    prerequisite to the issuance of a final order, the Commission proposed

    to require that each Requesting Party provide a well-reasoned legal

    opinion or memorandum from outside counsel that, in the Commission's

    sole discretion, provides the Commission with assurance that the

    netting arrangements contained in the approach selected by the

    particular Requesting Party to satisfy the obligations contained in

    FERC regulation 35.47(d) will, in fact, provide the Requesting Party

    with enforceable rights of set off against any of its market

    participants under title 11 of the United States Code \56\ in the event

    of the bankruptcy of the market participant.\57\

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

    \54\ 18 CFR 35.47. See detailed discussion in section IV.3.a.i.

    infra regarding the requirements set forth in FERC regulation 35.47.

    \55\ See 77 FR 52164.

    \56\ See 11 U.S.C. 553.

    \57\ See 77 FR 52165.

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

    b. Conditions Subsequent to the Proposed Order

    The Proposed Order included two information-sharing conditions

    subsequent. First, the Commission proposed that, after promulgation of

    the order, none of a Requesting Party's Tariffs or other governing

    documents may include any requirement that the Requesting Party notify

    a member prior to providing information to the Commission in response

    to a subpoena or other request for information or documentation.\58\

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

    \58\ See id. at 52142.

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

    Second, the Commission proposed that the exemption be conditioned

    upon information sharing arrangements that are satisfactory to the

    Commission between the Commission and FERC and between the Commission

    and PUCT being in full force and effect.\59\

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

    \59\ See id. When the Proposed Order was published, the

    Commission and FERC had already entered into a Memorandum of

    Understanding, available at http://www.ferc.gov/legal/maj-ord-reg/mou/mou-33.pdf.

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

    3. Additional Limitations

    In the Proposed Order, the Commission expressly noted that the

    proposed exemption was based upon the representations made in the

    Petition and in the supporting materials provided by the Requesting

    Parties and their counsel, and that any material change or omission in

    the facts and circumstances that alter the grounds for the Proposed

    Order might require the Commission to reconsider its finding that the

    exemption contained therein is appropriate and/or in the public

    interest and consistent with the purposes of the CEA.\60\ The

    Commission highlighted several of the Requesting Parties'

    representations of particular importance, including: (1) The exemption

    sought by the Requesting Parties relates to the transactions described

    in the Proposed Order, which are primarily entered into by commercial

    participants that are in the business of generating, transmitting, and

    distributing electric energy; \61\ (2) the Requesting Parties were

    established for the purpose of providing affordable, reliable electric

    energy to consumers within their geographic region; \62\ (3) the

    transactions described in the Proposed Order are an essential means,

    designed by FERC and PUCT as an integral part of their statutory

    responsibilities, to enable the reliable delivery of affordable

    electric energy; \63\ (4) each of the transactions defined in the

    Proposed Order taking place on the Requesting Parties' markets is

    monitored by Market Monitoring Units (``MMUs'') responsible to either

    FERC or, in the case of ERCOT, PUCT; \64\ and (5) each transaction

    defined in the Proposed Order is directly tied to the physical

    capabilities of the Requesting Parties' electric energy grids.\65\ In

    the Proposed Order, the Commission explicitly reserved the authority

    to, in its discretion, revisit any of the terms of the relief provided

    by the Proposed Order including, but not limited to, making a

    determination that certain entities should be subject to the

    Commission's jurisdiction.\66\ The Commission also explicitly reserved

    the authority to, in its discretion, suspend, terminate, or otherwise

    modify or restrict the Proposed Order.\67\ Finally, the Commission

    announced its intention to exclude from the exemptive relief its

    general anti-fraud, anti-manipulation, and enforcement authority under

    the CEA over the Requesting Parties and the transactions defined in the

    Proposed Order, including, but not limited to, sections 2(a)(1)(B), 4b,

    4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9,

    and 13 of the CEA and any implementing regulations promulgated

    thereunder including, but not limited to, Commission regulations

    23.410(a) and (b), 32.4, and part 180.\68\

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

    \60\ See id. at 52167. See also id. at 52142, 52165.

    \61\ See id. at 52142. See also Petition at 20.

    \62\ See 77 FR 52142.

    \63\ See id. See also generally FERC Order No. 888; FERC Order

    No. 2000; 18 CFR 35.34(k)(2); TAC 25.1; Petition at 11, 13-14.

    \64\ See 77 FR 52142. See also Petition at 15-18.

    \65\ See 77 FR 52142.

    \66\ See id. at 52167. See also id. at 52142.

    \67\ See id. at 52167-68. See also id. at 52142; Petition at 15-

    18.

    \68\ See 77 FR at 52166. See also id. at 52163.

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

    II. Summary of the Comments

    The public comment period on the Proposed Order ended on September

    27, 2012. The Commission received twenty-three (23) comment letters on

    the Proposed Order,\69\ the majority of which provided general support

    for the proposed exemption.\70\ The comment

    [[Page 19885]]

    letters addressed a variety of issues including: the scope of the

    transactions set forth in the Proposed Order; the scope of the

    definition of appropriate persons for purposes of the exemption; the

    use of the derivatives clearing organization (``DCO'') and swap

    execution facility (``SEF'') Core Principles in the public interest and

    purposes of the CEA analysis; both proposed conditions precedent

    (i.e.,--the requirements that the Requesting Parties fully comply with

    the standards set forth in FERC regulation 35.47 and submit a legal

    opinion or memorandum providing assurances regarding the netting

    arrangements in their respective approach to satisfying the standard

    set forth in FERC regulation 35.47(d)); the proposed information

    sharing agreement between the Commission and PUCT; the proposed

    condition subsequent that the Requesting Parties revise their Tariffs

    to remove requirements to notify their members upon receipt of requests

    for information by the Commission; whether other conditions should be

    imposed; the Commission's jurisdiction; the Commission's reservation of

    anti-fraud, anti-manipulation, and enforcement authority; the

    effectiveness of the exemption \71\; the issuance of a separate or

    collective Final Order; the extension of supplemental relief to all

    Requesting Parties; and other considerations regarding the costs and

    benefits of the exemptive relief. In determining the scope and content

    of the Final Order, the Commission has taken into account issues raised

    by commenters, including those issues with respect to the costs and

    benefits associated with the exemption.

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

    \69\ All comment letters are available through the Commission's

    Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1265. Comments addressing the Proposed Order

    were received from: AB Energy; American Public Power Association

    (``APPA''); Coalition of Physical Energy Companies (``COPE''); The

    Commercial Energy Working Group (``Commercial Working Group''); DC

    Energy, LLC (``DC Energy''); Staff of the Federal Energy Regulatory

    Commission (``FERC Staff''); Financial Institutions Energy Group

    (``FIEG''); Financial Marketers Coalition; the Industrial Coalitions

    (collectively referring to PJM Industrial Customer Coalition, NEPOOL

    Industrial Customer Coalition, and Coalition of Midwest Transmission

    Customers); Joint Trade Associations (collectively referring to

    Electric Power Supply Association, Edison Electric Institute;

    National Rural Electric Cooperative Association, APPA, and Large

    Public Power Council); New England Power Pool Participants Committee

    (``NEPOOL''); New York Public Service Commission (``NYPSC''); New

    York Transmission Owners (``NYTOs'') (collectively referring to

    Central Hudson Gas & Electric Corporation, Consolidated Edison

    Company of New York, Inc., Long Island Power Authority, New York

    Power Authority, New York State Electric & Gas Corporation, Niagara

    Mohawk Power Corporation d/b/a National Grid, Orange and Rockland

    Utilities, Inc., and Rochester and Electric Corporation); PUCT;

    Tarachand Enterprises, Inc. (``Tarachand''); and Texas Energy

    Association and Alliance for Retail Markets (collectively, ``TEAM/

    ARM''). The Requesting Parties jointly submitted a comment letter,

    which contained a supplement pertaining solely to NYISO (``NYISO

    Supplement to Requesting Parties' Comment Letter, Attachment B'').

    In addition, CAISO and ISO NE jointly submitted two supplemental

    comment letters (``CAISO/ISO NE January'' and ``CAISO/ISO NE

    March''), NYISO and PJM each submitted supplemental comment letters

    on their own behalf, and ERCOT submitted two supplemental comment

    letters (``ERCOT October'' and ``ERCOT December'').

    \70\ See, e.g., APPA at 1; Commercial Working Group at 1; DC

    Energy at 1; FIEG at 1; Financial Marketers Coalition at 1;

    Industrial Coalitions at 1, 3; Joint Trade Associations at 1, 3, 5;

    NEPOOL at 2; NYTOs at 1, 3; PUCT at 2.

    \71\ See section IV.E. infra.

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

    IV. Determinations

    A. Scope of the Final Order

    1. Covered Transactions Subject to the Final Order

    The Commission received multiple comments regarding the scope of

    the transactions that are covered by the exemption set forth in the

    Final Order, including comments requesting: (1) Clarification of the

    types of transactions that the Commission intended to include within

    the definitions of the transactions proposed for exemption; (2) a broad

    expansion of the Covered Transactions in the Final Order to include,

    for example, additional transactions that are ``logical outgrowths'' of

    a Requesting Party's core function as an RTO or ISO; (3) expansion of

    the exemptive relief specifically to include virtual and convergence

    bids and offers; and (4) an expedited process for expanding the

    exemption to include additional transactions.

    a. Determinations With Respect to Types of Transactions

    Some commenters requested that the Commission confirm that the

    exemption is not limited to products currently traded in their

    respective markets, and that modifications to existing products and new

    products, however named, that fall within the definitions of the

    Covered Transactions and that are offered pursuant to the Requesting

    Parties' Tariffs would be covered by the Final Order.\72\ On the other

    hand, one commenter requested that the Commission identify, and provide

    notice and an opportunity to comment on, any specific categories of

    transactions that the Commission intends to exclude from the Final

    Order.\73\

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

    \72\ See NYTOs at 5; Requesting Parties at 9-10.

    \73\ See Joint Trade Associations at 3 n.3.

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

    The Commission confirms that the definitions of the Covered

    Transactions included in the Final Order do not limit the exemption to

    those products that are currently traded in a Requesting Party's

    markets. Any products that are offered by a Requesting Party, presently

    or in the future, pursuant to a FERC- or PUCT-approved Tariff and that

    fall within these definitions, as well as any modifications to existing

    products that are offered by a Requesting Party pursuant to a FERC- or

    PUCT-approved Tariff and that do not alter the characteristics of the

    Covered Transactions in a way that would cause such products to fall

    outside these definitions, are intended to be included within the Final

    Order. Accordingly, with respect to the request to expressly specify

    transactions that are excluded from the exemption, the Commission notes

    that a Requesting Party would not be required to request or to obtain

    future supplemental relief for a product that is modified as described

    above or a product that it subsequently (but does not currently) offer,

    if the product qualifies as one of the four types of Covered

    Transactions in the Final Order.

    The Commission notes that the definitions of the Covered

    Transactions set forth in the Final Order are sufficiently broad to

    include modifications to existing products and new products that fall

    within such definitions. These definitions are substantially similar to

    the specific definitions that were requested in the Petition. Moreover,

    commenters have had the opportunity to identify and comment upon

    instances, if any, of existing transactions that fall outside the scope

    of the Proposed Order. In addition, the Commission is concerned that

    providing lists of excluded transactions may limit the Requesting

    Parties' flexibility, may require more frequent requests for

    supplemental relief (possibly incurring inadvertent delays), and may

    add market confusion. As such, consistent with the confirmation set

    forth above, the Commission believes it would be inappropriate and

    inefficient to set forth all transactions that would be excluded from

    the scope of the Final Order.

    b. Determinations With Respect to Requests to Broadly Expand the

    Covered Transactions in the Final Order

    Multiple commenters requested that the scope of transactions

    eligible for the exemption in the Final Order be expanded to include

    (a) transactions and services that are logical outgrowths of the

    Requesting Parties' functions as RTOs or ISOs,\74\ (b) transactions

    that are directly related to, and a natural outgrowth of, the four

    categories of transactions set forth in the Proposed Order,\75\ or (c)

    transactions and services that are ``economically comparable'' in

    substance to the four types of transactions described in the Proposed

    Order.\76\ Commenters generally argued that such expansion was

    necessary to allow flexibility in the adaption and development of the

    transactions and services of the RTOs and ISOs, which flexibility is

    necessary for reliable and cost-effective distribution of electric

    energy services.\77\ In addition, one

    [[Page 19886]]

    commenter specifically asked whether `logical outgrowth' ``transactions

    [should] be viewed as Commission-regulated until a future exemption is

    issued * * *'' \78\

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

    \74\ See, e.g., FERC Staff at 5; FIEG at 2; Joint Trade

    Associations at 9; NEPOOL at 5.

    \75\ See, e.g., PUCT at 7-8.

    \76\ See, e.g., Requesting Parties at 10-11; NYTOs at 5.

    \77\ See, e.g., FERC Staff at 5 (stating that the products and

    services offered by the RTOs and ISOs are an ``essential means for

    carrying out FERC's statutory responsibilities'' and that the

    failure to expand the scope of the exemption as requested could

    ``unduly inhibit or delay innovation by RTOs and ISOs''); Joint

    Trade Associations at 9-10 (arguing that the product restrictions

    contained in the Proposed Order ``could have a chilling effect'' on

    the development of ``more efficient or innovative market structures

    which, in turn, will affect the efficient operation of the

    markets''); NEPOOL at 4-5 (arguing that absent an expansion, market

    participants may need additional exemptions from the Commission for

    relatively minor modifications regardless of whether such

    modifications are designed to ensure reliability and cost-effective

    electric energy services); PUCT at 7-8 (asserting that requiring

    supplemental relief for products that are directly related to, and a

    natural outgrowth of, the four categories of transactions specified

    in the Final Order ``could have a chilling effect on innovation and

    overall market efficiency.'').

    \78\ COPE at 5.

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

    Nonetheless, one commenter agreed that a modification to the Final

    Order should be required for new products that do not logically fit

    within the Final Order's specified categories, noting that the

    Commission should have the opportunity to evaluate whether exempting

    such products would be consistent with the public interest.\79\ The

    Requesting Parties also stated that they ``have not requested a blanket

    exemption and agree that they should seek to supplement the Proposed

    Order if they develop new products that are potentially within the

    Commission's jurisdiction and that present significantly different

    economic characteristics from those products covered by the Proposed

    Order.'' \80\

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

    \79\ PUCT at 7.

    \80\ Requesting Parties at 11.

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

    As set forth above, the Commission re-affirms that the exemption

    extends to any transaction that falls within the Covered Transactions

    set forth in this Final Order, whether currently existing or later

    included in a Requesting Party's Tariff. The Commission declines,

    however, to magnify the Final Order to include the expansive terms

    requested by the specified commenters. Section 4(c)(6) of the CEA, by

    its terms, was not intended to permit a blanket exemption for all

    transactions entered into pursuant to a FERC- or PUCT- approved Tariff.

    Moreover, section 4(c)(6) expressly prohibits the Commission from

    issuing an exemption for such transactions unless it affirmatively

    determines that exempting them would be consistent with the public

    interest and the purposes of the CEA. While the Commission has been

    able to perform this evaluation for the Covered Transactions delineated

    in the Final Order, phrases such as ``logical outgrowth,'' ``natural

    outgrowth,'' and ``economically comparable'' are too vague and

    potentially too far reaching to permit meaningful analysis under the

    statutory standard of review. Commenters have not provided, by way of

    explanation or example, sufficient insight as to what, if any,

    boundaries an exemption would have if it were extended to the degrees

    requested.

    Moreover, the Commission's determination that this exemption is in

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

    grounded, in part, on certain characteristics of the Covered

    Transactions and market circumstances described by the Requesting

    Parties including, for example, that the Covered Transactions are

    ``part of, and inextricably linked to, the organized wholesale

    electricity markets that are subject to FERC or PUCT regulation and

    oversight.'' \81\ Such qualities may or may not be shared by other, as

    yet undefined, transactions. Additionally, it is impossible for the

    Commission to determine whether unidentified transactions include novel

    features or have market implications or risks that are not present in

    the Covered Transactions, which could, in turn, impact the Commission's

    public interest and purposes of the CEA analysis or necessitate the

    inclusion of additional or differing terms and conditions in a final

    order.

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

    \81\ 77 FR 52144. See also Petition at 11.

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

    Finally, there may be differences in opinion among the Requesting

    Parties with respect to the expansion of relief beyond the Covered

    Transactions. Indeed, the Requesting Parties themselves request that

    future supplemental relief not be automatically granted to all

    Requesting Parties and the Commission notes that it has already

    received supplemental requests for relief that would apply only to

    certain Requesting Parties, and might be objected to by other

    Requesting Parties.\82\

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

    \82\ See In the Matter of the Application for an Exemptive Order

    Under Section 4(c) of the Commodity Exchange Act by ISO New England

    Inc. (April 30, 2012); In the Matter of the Application for an

    Exemptive Order Under Section 4(c) of the Commodity Exchange Act by

    California Independent System Operator Corporation (May 30, 2012).

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

    In light of these considerations and the potential for adverse

    consequences that may result from an exemption that includes

    transactions whose qualities and effect on the broader market cannot be

    fully appreciated absent further specification, a virtually unlimited

    exemption would be contrary to the public interest and purposes of the

    CEA. In addition, consideration of new categories of transactions could

    be aided by the public notice and comment process. Furthermore, the

    Commission notes that it is prepared to review requests for

    supplemental relief from the Requesting Parties.\83\

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

    \83\ See 77 FR 52163.

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

    c. Determinations With Regards to Scope of ``Energy Transactions''

    Definition

    In discussing the scope of ``Energy Transactions'' included in the

    Proposed Order, the Commission stated that such transactions ``are also

    referred to as Virtual Bids or Convergence Bids.'' \84\ Commenters

    noted,\85\ however, that, in a later discussion of the categories of

    transactions to which the exemption would apply, the Commission stated

    that ``virtual and convergence bids/transactions'' would be included

    within the scope of the exemption only to the extent that they would

    qualify under one of the four categories of transactions explicitly

    defined in the Proposed Order.\86\ Multiple commenters requested that

    the Commission clarify that virtual and convergence bids and offers are

    explicitly included within the scope of the Covered Transactions that

    qualify for an exemption under the Final Order.\87\ Specifically, the

    Requesting Parties asked that the Final Order define ``Energy

    Transactions'' to include ``virtual and convergence bids and offers.''

    \88\

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

    \84\ 77 FR 52142 (citing Petition at 6).

    \85\ See, e.g., DC Energy at 2; PUCT at 5-6; Requesting Parties

    at 12.

    \86\ Specifically, the Proposed Order explained:

    The particular categories of contracts, agreements and

    transactions to which the Proposed Exemption would apply correspond

    to the types of transactions for which relief was explicitly

    requested in the Petition. Petitioners requested relief for four

    specific types of transactions and the Proposed Exemption would

    exempt those transactions. With respect to those transactions, the

    Petition also included the parenthetical ``(including generation,

    demand response or convergence or virtual bids/transactions).'' The

    Commission notes that such transactions would be included within the

    scope of the exemption if they would qualify as the financial

    transmission rights, energy transactions, forward capacity

    transactions or reserve or regulation transactions for which relief

    is explicitly provided within the exemption.

    77 FR 52163 (internal citations omitted).

    \87\ Commercial Working Group at 2; DC Energy at 2; FIEG at 2;

    NEPOOL at 10; Requesting Parties at 12; PUCT at 5.

    \88\ Requesting Parties at 13.

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

    Several commenters expressed concerns that certain statements

    regarding the physical nature of transactions proposed to be exempt,

    and the role of market participants as physical generators,

    transmitters, and distributors of electric energy, cast further doubt

    as to whether the Commission intended to include virtual and

    convergence bids and offers within the scope of the Proposed Order. One

    commenter noted that the Commission's statement that the transactions

    proposed to be exempt are ``primarily entered into by commercial

    participants that are in the business of generating, transmitting and

    distributing electricity'' suggested that virtual and convergence bids

    and offers may not qualify as Covered Transactions because both

    traditional and non-traditional utilities engage in such transactions,

    yet many do not own physical generation or wholesale

    [[Page 19887]]

    transmission facilities.\89\ Similarly, the Requesting Parties

    requested the removal of the statement in the Proposed Order that

    provided ``[t]o be eligible for the proposed exemption, the contract,

    agreement, or transaction would be required to be offered or entered

    into in a market administered by a Petitioner pursuant to that

    Petitioner's tariff or protocol for the purposes of allocating such

    Petitioner's physical resources.'' \90\ Finally, other commenters noted

    concern with the Commission's qualification that ``financial

    transactions that are not tied to the allocation of the physical

    capabilities of an electric transmission grid would not be suitable for

    exemption because such activity would not be inextricably linked to the

    physical delivery of electricity,'' \91\ suggesting that the phrase

    potentially excluded virtual and convergence bids and offers from the

    scope of Covered Transactions, depending upon the interpretation of the

    relationship between virtual transactions and the physical delivery of

    electricity.\92\

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

    \89\ See Financial Marketers Coalition at 3-4 (quoting 77 FR

    52144). The Commission notes that the statement referenced by this

    commenter was intended to summarize a representation made by the

    Requesting Parties. See 77 FR 52144 (``Petitioners also explain that

    the Transactions are primarily entered into by commercial

    participants that are in the business of generating, transmitting,

    and distributing electricity'').

    \90\ Requesting Parties at 13 (citing 77 FR 52138).

    \91\ 77 FR 52143.

    \92\ See Financial Marketers Coalition at 7-8; FIEG at 2; NEPOOL

    at 3.

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

    Despite their uncertainty with respect to particular statements,

    multiple commenters contended that virtual and convergence bids and

    offers fell within the transactions described in the Proposed

    Order.\93\ Commenters posited that virtual and convergence bids and

    offers, like all other transactions described in the Proposed Order,

    are entered into pursuant to FERC- or PUCT-approved Tariffs, and thus

    are subject to the oversight of the Requesting Parties' MMUs. In

    addition, certain commenters argued that virtual and convergence bids

    and offers are inextricably linked to the physical delivery of electric

    energy by being tied to the allocation of the physical capabilities of

    the electric energy transmission grid.\94\

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

    \93\ See, e.g., Requesting Parties at 12 (noting that virtual

    transactions fall into the category of ``Energy Transactions,''

    specifically, as such term was defined in the Proposed Order). The

    Commercial Working Group noted that, in addition to virtual

    transactions, ``financial schedules'' and ``internal bilateral

    transactions'' can appropriately be placed in one of the four

    enumerated categories of transactions defined in the Proposed Order,

    and as such, should be explicitly included in the Final Order as

    Covered Transactions. See Commercial Working Group at 2. The

    Commission notes that financial schedules and internal bilateral

    transactions are the subject of a separate request for supplemental

    relief filed by CAISO and ISO NE and, therefore, the Commission is

    taking no position in this Final Order with respect to those

    products. See note 82 supra.

    \94\ Requesting Parties at 14 (``On a net basis, Virtual

    Transactions in the RTOs and ISOs are modeled identically to

    generation and load; therefore, the net cleared amount of all bids

    and offers (including virtual bids and offers) cannot exceed the

    physical capability of the grid to flow electricity.''); PUCT at 6;

    DC Energy at 2 (``[V]irtual energy transactions also serve to

    converge the Day-Ahead and Real-Time markets as well as provide

    liquidity and price discovery, all of which are inextricably linked

    to the physical capabilities of an efficient electricity market and

    grid.''); FIEG at 2 (``While virtual bids are indeed financial, they

    do not exist in isolation from the capabilities of the electric

    grid. Indeed, RTOs significantly restrict virtual bids based in

    large part on their potential to tangibly impact the electric grid

    itself.''); Financial Marketers Coalition at 8-9 (``Virtual

    Transactions cannot be entered into unless the selected node and the

    grid are capable of supporting the transaction. If the physical node

    is not available, the transaction is rejected. Thus the aggregate

    cleared volume of Virtual Transactions for any period is limited by

    the physical capability of the electricity system operated by the

    RTOs/ISOs and is based on the projected physical power needs of the

    system for the specific hour, day, month or year.'').

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

    Commenters represented that virtual and convergence bids and offers

    were established as a means by which to improve efficiency and

    competitiveness in the electric energy markets through the convergence

    of Day-Ahead Market and RTM prices,\95\ and have been promoted by FERC

    and PUCT.\96\ The Requesting Parties further explained that ``[a]

    Virtual Transaction is a cleared offer to sell energy in the day-ahead

    market (an `incremental offer' or `inc') or a cleared bid to buy energy

    in the day-ahead market (a `decremental bid' or `dec'),'' and ``may be

    submitted by market participants that do not have a physical position

    in the ISO/RTO markets, which is to say, they do not own generation or

    serve load.'' \97\ Day-Ahead Market transactions are not, however,

    limited to non-generating or non-LSEs, as ``owners of physical

    generating units that are capacity resources in the ISO/RTO must submit

    an offer to sell the energy output of their units into the day-ahead

    market,'' and ``[s]imilarly, participants that serve load in an ISO/RTO

    market may additionally submit bids into the day-ahead market.'' \98\

    The Requesting Parties asserted that, because the Day-Ahead Market is

    cleared by modeling all bids and offers without distinction as to

    whether they are virtual or physical in nature, virtual and convergence

    bids and offers satisfy the proposed criteria that the aggregate

    cleared volume of Energy Transactions be limited by the physical

    capability of the electric energy transmission system in order for an

    Energy Transaction to be subject to the exemption.\99\

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

    \95\ PUCT at 6 (``The [Day-Ahead Market] was instituted in the

    ERCOT market to provide opportunities for increased efficiency in

    the market for physical energy transactions,'' and ``would not exist

    but for its direct linkage to the real-time market for energy and

    ancillary services necessary to operate the electric system.'');

    Financial Marketers Coalition at 8 (noting that Day-Ahead Market

    modeling ``results in both price and operational efficiency because

    it allows the system operator to determine which units to dispatch

    based on the best price and projected demands considering all offers

    and bids including virtuals.''); NEPOOL at 3 (``Virtual bidding

    allows virtual traders to supply power to service areas where

    physical competition is constrained due to insufficient transmission

    and to increase market efficiency by making pricing less volatile as

    day-ahead prices converge with real-time prices.'').

    \96\ PUCT at 6; Financial Marketers Coalition at 3-4, 12 (noting

    that FERC has encouraged, and in some cases even required,

    unbundling of services, and promoted market entry by non-traditional

    utilities lacking physical resources in order to enhance

    competition).

    \97\ Requesting Parties at 14. PUCT explained that, ``in the

    ERCOT market, Virtual Transactions are limited to transactions in

    the Day Ahead Market (DAM).'' PUCT at 6. The Financial Marketers

    Coalition defined a ``virtual transaction'' as ``a purchase or sale

    of energy in the day-ahead market that is settled against real-time

    energy prices.'' Financial Marketers Coalition at 2 n.2.

    \98\ Requesting Parties at 14.

    \99\ See id.

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

    In response to commenters' concerns, the Commission has added

    language to the Energy Transactions definition to clarify in the Final

    Order that Energy Transactions ``includ[e] * * * Virtual and

    Convergence Bids and Offers.'' \100\ This clarification is based on

    Requesting Parties' and other regulators' representations that virtual

    and convergence bids and offers are ``Energy Transactions'' in the

    ``Day-Ahead Market,'' as such terms are defined in the Final

    Order,\101\ that enable market participants to buy and sell electric

    energy without physically producing or consuming it.\102\ Although

    there is an apparent financial settlement nature of virtual and

    convergence bids and offers transacted in the Day-Ahead Market,

    Requesting Parties represented that they are inextricably linked to the

    physical delivery of electric energy due to their being subject to the

    same aggregate physical capabilities of the electric energy

    transmission grid as other

    [[Page 19888]]

    physical Energy Transactions.\103\ Requesting Parties also represented

    that virtual and convergence bids and offers are integral to achieving

    increased efficiency, and ultimately lower consumer costs, through the

    convergence of Day-Ahead Market and RTM prices.\104\ Accordingly, based

    on these representations, the Commission confirms that the inclusion of

    virtual and convergence bids and offers that are Energy Transactions

    within the scope of the Covered Transactions in the Final Order is

    consistent with the public interest and purposes of the CEA.

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

    \100\ See paragraph 5(b) of the Order. Additionally, in response

    to the Requesting Parties' comment, the Commission has not included

    any reference in the Final Order suggesting that the purpose of a

    Covered Transaction must be to allocate a Requesting Party's

    physical resources.

    \101\ Consistent with the Commission's understanding of industry

    practice as reflected in the Requesting Parties' current Tariffs,

    ``the day on which the Day-Ahead Market clears'' in the Order

    definition of ``Day-Ahead Market'' shall mean the same day that the

    relevant transaction in the Day-Ahead Market is entered into. See

    paragraph 5(e) of the Order.

    \102\ Requesting Parties at 14. See also PUCT at 6.

    \103\ Requesting Parties at 14.

    \104\ See, e.g., NYISO at 3-4.

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

    Finally, CAISO and ISO NE requested that the proposed definition of

    ``Energy Transactions'' be amended to allow for cash settlement based

    upon the Day-Ahead Market price (in addition to the Real-Time Market

    price), due to the fact that for both CAISO and ISO NE., the Day-Ahead

    Market may be preferable to the Real-Time Market as a source of

    settlement prices for certain energy transactions.\105\ CAISO and ISO

    NE requested such a change to account for certain energy transactions

    in their markets that otherwise might not be included within the scope

    of the Energy Transactions definition, but nonetheless are settled

    ``under tariff provisions which have been approved by the FERC'' and

    that ``[o]nce entered into the settlement system * * *, are

    operationally treated the same as any other Energy Transaction included

    in the Commission's Proposed Order.'' \106\ Accordingly, the Commission

    has amended the definition to provide that the requisite performance of

    an energy transaction may occur in the Real-Time Market through ``[a]

    cash payment or receipt at the price established in the Day-Ahead

    Market or Real-Time Market (as permitted by each Requesting Party in

    its Tariff).'' \107\ The Commission stresses that any Energy

    Transaction settling based upon the Day-Ahead Market price must be

    inextricably linked to the physical delivery of electric energy.

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

    \105\ See CAISO/ISO NE March at 2-3.

    \106\ Id. at 3.

    \107\ See paragraph 5(b) of the Order (emphasis added).

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

    d. Determinations With Regards to the Process for Expanding the

    Transactions Covered by the Final Order

    Several commenters requested a streamlined or expedited process for

    Commission review of supplemental requests for related exemptions

    submitted by the Requesting Parties.\108\ Specifically, some commenters

    argued that Commission action is not necessary where a ``FERC- or PUCT-

    approved change was made to an already exempted transaction'' \109\ and

    where Tariff changes that are related to core RTO and ISO market

    functions are filed and accepted by FERC.\110\

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

    \108\ See generally Joint Trade Associations at 10; NEPOOL at 4;

    PUCT at 8; Requesting Parties at 10-11.

    \109\ See generally Joint Trade Associations at 10.

    \110\ See generally NEPOOL at 4.

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

    Another commenter generally noted that ``the Commission * * *

    should provide an efficient process for Petitioners to confirm the

    applicability of the exemptive relief to new or modified products in a

    timely manner,'' \111\ while the Requesting Parties asked ``the

    Commission [to] adopt a process whereby a Petitioner could

    simultaneously provide the Commission a copy of its FERC filing (or in

    the case of ERCOT, the Protocol revisions)* * * .'' \112\ The

    Requesting Parties proposed that, for FERC-regulated RTOs and ISOs,

    ``if, during the 60-day FERC review period, the Commission informs the

    Petitioners that the new or modified product is not covered by the

    exemption or that the Commission needs additional time to review the

    product, the Petitioner would delay offering the new product until such

    time as the Commission completes its review or grants supplemental

    relief.'' \113\

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

    \111\ PUCT at 8.

    \112\ Requesting Parties at 10-11.

    \113\ Id.

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

    As discussed above, the Commission notes that that there is no need

    to review new or revised Tariffs that are limited to transactions that

    fall within the definitions of the Covered Transactions set forth in

    the Final Order. A supplemental exemption is not necessary in such

    instances. The Commission declines to adopt a streamlined or expedited

    process for the review of supplemental requests to expand the exemption

    to additional transactions. As noted above, section 4(c)(6) of the CEA

    mandates that the Commission, in granting any exemption thereunder,

    must act in accordance with CEA sections 4(c)(1) and (2). The

    Commission will strive to address any requests for supplemental relief

    as expeditiously as possible.

    2. Additional Definitions and Provisions in the Final Order

    The Commission proposed to exempt any persons (including the

    Requesting Parties, their members and their market participants)

    offering, entering into,\114\ rendering advice, or rendering other

    services with respect to the transactions defined in the Proposed

    Order.\115\ The Commission also proposed that, in order to be eligible

    for exemptive relief, ``[t]he agreement, contract or transaction must

    be offered or sold pursuant to a Requesting Party's tariff and that

    tariff must have been approved or permitted to take effect by: (1) [i]n

    the case of [ERCOT], the [PUCT] or (2) in the case of all other

    Requesting Parties, [FERC].''\116\ The Commission did not receive any

    comments with respect to this requirement. In addition, this

    requirement is consistent with the range of the Commission's authority

    as set forth in section 4(c)(6) of the CEA and with the scope of the

    relief requested,\117\ and therefore the Commission has not altered the

    requirement in the Final Order.

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

    \114\ The Commission clarifies that the exemption is only

    available to persons ``entering into'' the Covered Transactions if

    such persons satisfy the criteria set forth in paragraph 2(b) of the

    Order (i.e., such persons are ``appropriate persons,'' as defined in

    sections 4(c)(3)(A) through (J) of the CEA; ``eligible contract

    participants,'' as defined in section 1a(18)(A) of the CEA and in

    Commission regulation 1.3(m); or ``persons who actively participate

    in the generation, transmission, or distribution of electric

    energy'' as defined in paragraph 5(g) of the Order.

    \115\ 77 FR at 52166.

    \116\ Id.

    \117\ See id. at 52142, 521664; Petition at 2-3.

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

    In the Proposed Order, the term ``Requesting Party'' was defined to

    include the six Requesting Parties (i.e., CAISO, ERCOT, ISO NE., MISO,

    NYISO, and PJM) and any of their respective successors in

    interest.\118\ The Commission has incorporated this definition into the

    Final Order without alteration. In the Proposed Order, ``[r]eference to

    a Requesting Party's `tariff' includes a tariff, rate schedule or

    protocol,'' \119\ in order to account for differences in terminology

    used by such entities and their respective regulators.\120\ The

    Commission did not receive any comment on this definition and,

    accordingly, has incorporated this definition into the Final Order

    unchanged.

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

    \118\ 77 FR 52167.

    \119\ Id.

    \120\ See id. at 52164.

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

    3. Conditions to the Final Order

    a. Conditions to the Effectiveness of the Exemption Set Forth in the

    Final Order

    i. FERC Regulation 35.47

    On October 21, 2010, FERC adopted FERC regulation 35.47 \121\ to

    encourage

    [[Page 19889]]

    clear and consistent risk and credit practices in the organized

    wholesale electric energy markets to, inter alia, ``ensure that all

    rates charged for the transmission or sale of electric energy in

    interstate commerce are just, reasonable, and not unduly discriminatory

    or preferential.'' \122\ As more fully described in the Proposed

    Order,\123\ FERC regulation 35.47 directs each of the RTOs and ISOs

    within its jurisdiction to adopt Tariffs that implement specified

    credit practice reforms.\124\ These credit reforms include limitations

    on the amount of credit an RTO or ISO may extend for each market

    participant; shortened billing and settlement periods of no more than

    seven days; the elimination of unsecured credit in FTR or equivalent

    markets; requiring RTOs and ISOs to ensure the enforceability of their

    netting arrangements in the event of the insolvency of a member by (1)

    establishing a single counterparty to all market participant

    transactions, (2) requiring each market participant to grant a security

    interest in the receivables of its transactions to the relevant RTO or

    ISO, or (3) providing another method that supports netting that is

    approved by FERC and that provides a similar level of protection to the

    market; adoption of a two-day grace period for curing collateral calls;

    establishment of minimum market participation eligibility requirements

    that apply consistently to all market participants and that require

    RTOs and ISOs to engage in periodic verification of market participant

    risk management policies and procedures; and Tariff clarifications

    regarding the conditions under which RTOs and ISOs will request

    additional collateral due to a material adverse change.\125\ In the

    Proposed Order, the Commission stated that these credit requirements

    appear to achieve goals that are similar to the regulatory objectives

    of the Commission's DCO Core Principles,\126\ and set forth a detailed

    analysis of each credit requirement and DCO Core Principle supporting

    such assertion.\127\ Due, in part, to the consistency in regulatory

    objectives between FERC regulation 35.47 and several of the

    Commission's DCO Core Principles, the Commission proposed requiring

    each Requesting Party, including ERCOT, to comply with FERC regulation

    35.47 as a condition precedent to the granting of a 4(c)(6) exemption

    for the transactions described in the Proposed Order.\128\ The

    Commission requested comment on this proposal.\129\

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

    \121\ The Proposed Order referred to FERC Order 741 to

    collectively describe 75 FR 65942 (``FERC Original Order 741'') and

    76 FR 10492 (``FERC Revised Order 741'') (slightly amending and

    clarifying FERC Original Order 741). The standards set forth in

    these FERC Orders are codified as FERC regulation 35.47 and,

    therefore, for clarity, reference herein is to the regulation.

    \122\ 75 FR 65942, 65942, Oct. 21, 2010. These requirements were

    later amended and clarified in an order on rehearing. See 76 FR

    10492, Feb. 25, 2011.

    \123\ See 77 FR at 52147-48.

    \124\ See id.

    \125\ See id. at 52147-48, 52150-53.

    \126\ See id. at 52147.

    \127\ See id. at 52147-48; 52150-53.

    \128\ See 77 FR 52164-65. The Commission noted that, while ERCOT

    is not subject to FERC regulation, the fact that these mandates were

    developed specifically for RTOs and ISOs suggests that holding ERCOT

    to these standards may well be appropriate. See id. at 52165.

    \129\ See id. at 52172.

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

    Several commenters argued against this prerequisite, citing FERC's

    authority over the implementation of FERC regulation 35.47,\130\ while

    others proposed that the Commission rely on FERC's determination that

    the Requesting Parties have complied with FERC regulation 35.47.\131\

    Further, commenters requested clarification from the Commission as to

    ``what will constitute a finding that an RTO or ISO is fully compliant

    with'' FERC regulation 35.47,\132\ with one commenter suggesting that

    the Requesting Parties' ongoing efforts to comply with FERC regulation

    35.47 are a sufficient demonstration of compliance.\133\ In addition,

    several commenters proposed that a final order from FERC, or, with

    respect to ERCOT, PUCT, is adequate to demonstrate compliance and the

    Commission need not do any further analysis upon receipt of such a

    final order.\134\

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

    \130\ See, e.g., Joint Trade Associations at 15; COPE at 7.

    \131\ See generally Commercial Working Group at 4.

    \132\ See, e.g., Joint Trade Associations at 14-15; Commercial

    Working Group at 4.

    \133\ See, e.g., Joint Trade Associations at 15.

    \134\ See, e.g., id.

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

    With respect to ERCOT, several commenters objected to the condition

    precedent because ERCOT is subject to PUCT's jurisdiction and not that

    of FERC,\135\ and further asserted ERCOT should be evaluated on its

    compliance with PUCT regulations.\136\ One commenter cited the

    successful operation of the ERCOT market over the past decade as

    support for its position.\137\ In addition, commenters noted that ERCOT

    has, in part, voluntarily and, in part, in conjunction with regulations

    set forth by PUCT, implemented protocols that are comparable to those

    identified in FERC regulation 35.47.\138\ Indeed, these commenters

    argued that some of these efforts are more conservative than those

    required by FERC regulation 35.47, and thus these commenters expressed

    concern that the condition precedent will require ERCOT to adopt less

    stringent practices.\139\

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

    \135\ See, e.g., COPE at 7-8; Joint Trade Associations at 14;

    PUCT at 3, 11; Requesting Parties at 19.

    \136\ See, e.g., COPE at 7-8; Joint Trade Associations at 14.

    \137\ See COPE at 8.

    \138\ See PUCT at 11; Requesting Parties at 19.

    \139\ See PUCT at 11-12; Requesting Parties at 19-22.

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

    ERCOT has represented that it implemented protocols that are

    comparable to \140\ all of the standards set forth in FERC regulation

    35.47, with the sole exception of the billing period requirement in the

    RTM.\141\ FERC regulation 35.47(b) requires that RTO and ISO Tariffs

    ``[a]dopt a billing period of no more than seven days and allow a

    settlement period of no more than seven days.'' \142\ ERCOT represented

    that its rules applicable to the Day-Ahead Market are more conservative

    than FERC regulation 35.47(b) obligations with respect to both the

    statement issuance and payment deadlines.\143\ ERCOT's RTM settlement

    rules have a longer issuance period of nine days, but a shorter payment

    period of two bank business days within issuance of the statement and

    invoice.\144\ ERCOT asserted that its ``RTM settlement timeline is

    consistent with the goals of FERC'' regulation 35.47 because RTM

    transactions are paid within eleven and thirteen days (shorter than the

    fourteen-day time frame established by FERC regulation 35.47(b)) for

    92% of operating days and within the fourteen-day period for 98% of

    operating days.\145\ ERCOT claimed that ERCOT RTM transactions that are

    paid beyond the fourteen days from the operating day are paid on the

    fifteenth day.\146\ ERCOT also

    [[Page 19890]]

    contended that any incremental risk related to ERCOT's RTM nine-day

    statement issuance period is mitigated because RTM positions in the

    ERCOT market are known and fully collateralized subsequent to the

    relevant operating day and prior to the FERC-required seven day

    statement issuance period.\147\

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

    \140\ See Revised FERC Order No. 741 Implementation Chart at 1

    n.1, 3. See also Requesting Parties at 19 (``ERCOT has adopted

    credit standards that are either the same as or substantially

    equivalent to those set forth in FERC Order No. 741.'').

    \141\ See Requesting Parties at 19-22; Revised FERC Order No.

    741 Implementation Chart. ERCOT indicates that it has implemented

    these practices ``with the approval of PUCT,'' Requesting Parties at

    19, and that all applicable changes became effective on or before

    January 1, 2013, with the exception of a protocol that ``will

    further reduce the [Real-Time] settlement cycle in phases by an

    additional two days,'' which was in the stakeholder process'' as of

    January 18, 2012. Revised FERC Order No. 741 Implementation Chart.

    \142\ 18 CFR 35.47(b).

    \143\ See Requesting Parties at 20.

    \144\ See id.

    \145\ Id.

    \146\ See id. at 20-21. ERCOT represents that longer payment and

    settlement timelines are ``expected to be primarily due to weekend

    and holiday schedules.'' Revised FERC Order No. 741 Implementation

    Chart at 3. See also Requesting Parties at 21.

    \147\ See id. at 21.

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

    As discussed in detail below in section IV.B.2.e.ii., the

    Commission believes that the DCO Core Principles provide a useful

    framework to help measure the extent to which the exemption is in the

    public interest and consistent with the purposes of the CEA. Because

    substantial compliance with the standards set forth in FERC regulation

    35.47 forms the basis for the determination that the Tariffs and

    activities of the Requesting Parties are congruent with, and--in the

    context of the Covered Transactions--sufficiently accomplish, the

    regulatory objectives of the DCO Core Principles, such compliance is

    necessary for the Commission's public interest and purposes of the CEA

    determination.\148\ Nonetheless, the Commission notes that each

    Requesting Party has represented to the Commission that its Tariffs

    have been revised to substantially meet the standards set forth in FERC

    regulation 35.47.\149\ Indeed, the Commission notes that the Requesting

    Parties have represented that several of those Tariff revisions have

    already been approved or permitted to take effect by FERC or PUCT, as

    applicable.\150\ As such, and after careful consideration of the

    comments, the Commission believes that for each Requesting Party that

    is regulated by FERC, full compliance with FERC regulation 35.47, as

    measured by FERC's acceptance and approval of all of that Requesting

    Party's Tariffs necessary to implement the standards set forth in FERC

    regulation 35.47, is a necessary prerequisite to the effectiveness of

    the exemption in the Final Order with respect to that Requesting Party.

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

    \148\ In the case of ERCOT, which is regulated by PUCT, what is

    necessary is compliance with standards that are the same as those

    set forth in FERC regulation 35.47.

    \149\ See FERC Order No. 741 Implementation Chart; Revised FERC

    Order No. 741 Implementation Chart.

    \150\ See Revised FERC Order No. 741 Implementation Chart.

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

    With respect to ERCOT, the Commission has considered the comments

    regarding ERCOT's efforts to reform its market protocols in a manner

    that is the same as or substantially similar to the credit requirements

    of FERC regulation 35.47. The Commission believes, on the basis of

    ERCOT's representations, as set forth above, that ERCOT's market

    protocols differ from the standards set forth in FERC regulation 35.47

    in a manner that is sufficiently minor as to permit the Commission to

    accept them for the purpose of determining that the requested exemption

    with respect to ERCOT is in the public interest and consistent with the

    purposes of the CEA. Thus, for ERCOT, adopting measures that are

    substantially similar to standards that are the same as those set forth

    in FERC regulation 35.47, as measured by PUCT's permitting all of the

    ERCOT protocols that are discussed above and as set forth in the

    Revised FERC Order No. 741 Implementation Chart to take effect, is a

    necessary prerequisite to the effectiveness of the exemption in the

    Final Order with respect to ERCOT.

    ii. Legal Memorandum or Legal Opinion of Counsel

    The Proposed Order contemplated requiring, as a condition precedent

    to the issuance of a Final Order, that each Requesting Party provide a

    well-reasoned legal opinion or memorandum from outside counsel that, in

    the Commission's sole discretion, provides the Commission with

    assurance that the netting arrangements contained in the approach

    selected by the particular Requesting Party to satisfy the obligations

    contained in FERC regulation 35.47(d) \151\ will provide the Requesting

    Party with legally enforceable rights of set off against any of its

    market participants under title 11 of the United States Bankruptcy Code

    in the event of a bankruptcy of the market participant. This condition

    precedent was proposed in light of diversity among the Requesting

    Parties surrounding the interpretation of the single counterparty

    requirement and whether a Requesting Party's adopted practices would

    provide enforceable set-off rights.\152\ The Commission requested

    comment on this proposal.\153\

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

    \151\ FERC regulation 35.47(d) was adopted as part of the

    ``Credit Reforms in the Wholesale Electricity Market'' established

    by FERC Order No. 741. It requires an organized electric energy

    market to have tariff provisions that establish a single

    counterparty to all market participant transactions, or require each

    market participant in an organized wholesale electric energy market

    to grant a security interest to the organized wholesale electric

    market in the receivables of its transactions, or provide another

    method of supporting netting that provides a similar level of

    protection to the market and is approved by the Commission. In the

    alternative, the organized wholesale electric energy market is not

    permitted to net market participants' transactions and must

    establish credit based on market participants' gross obligations. 18

    CFR 35.47(d).

    \152\ 77 FR 52165. Requesting Parties have defined the term

    ``single counterparty'' differently. In addition, each Requesting

    Party plans on implementing a central counterparty structure based

    on its individual views. Because of these differing views, the legal

    opinion or memorandum requirement is meant to provide comfort to the

    Commission that the single counterparty structure chosen by each

    Requesting Party provides enforceable set off rights, without having

    the Commission specify what would be an acceptable central

    counterparty structure, which could contrast with what FERC and PUCT

    have permitted.

    \153\ See id. at 52172.

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

    The Commission received three types of comments on this

    requirement: (1) Comments that opposed the condition precedent; (2)

    comments that did not opine on the propriety of the requirement, but

    expressed concern with respect to the possible unintended and adverse

    tax consequences the obligation may have for the Requesting Parties;

    and (3) a comment that objected to the specific requirement that the

    memorandum or opinion of counsel be signed by the law firm as opposed

    to an individual partner of the law firm.

    Commenters that opposed the condition precedent generally did so on

    the basis that the Commission ``should not be the arbiter of whether a

    FERC-approved RTO regime consistent with'' FERC regulation 35.47

    ``meets bankruptcy goals,'' \154\ and that ``the existence of FERC

    regulation should be the premise upon which an exemption is granted.''

    \155\

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

    \154\ COPE at 8.

    \155\ Id.

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

    In addition, two commenters urged the Commission to avoid taking

    any action that could undermine a Requesting Party's tax-exempt status

    and continued ability to use tax-exempt financing to finance its

    operations,\156\ while the Requesting Parties asked the Commission to

    ``clarify that any memorandum or opinion of counsel need not be signed

    by a law firm that provides it, as opposed to any individual partner.''

    \157\

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

    \156\ See generally APPA at 4; Joint Trade Associations at 15.

    \157\ Requesting Parties at 16-17.

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

    With respect to the comments opposing the condition precedent, the

    Commission reiterates that this requirement is designed to permit the

    Commission to avoid being the arbiter of whether a Requesting Party has

    satisfied the requirements of FERC regulation 35.47(d). The Commission

    notes that no Requesting Party has asserted that it would be unable to

    obtain such a document. In addition, the Commission notes that the

    ambiguities discussed in the Proposed Order with respect to some

    Requesting Parties' interpretations

    [[Page 19891]]

    of the single counterparty requirement have not been clarified.\158\

    The Commission continues to believe that the legal memorandum

    requirement will provide the Commission with assurance that the netting

    arrangements contained in the approach selected by each Requesting

    Party to satisfy the standards set forth in FERC regulation 35.47(d)

    (or in the case of ERCOT, standards that are the same as those set

    forth in FERC regulation 35.47(d)) will, in fact, provide the

    Requesting Party with enforceable rights of set off against any of its

    market participants under title 11 of the United States Bankruptcy

    Code, in the event of the bankruptcy of a market participant. However,

    the Commission believes that this condition may be met subsequent to

    the issuance of this Final Order, provided that as a condition to the

    effectiveness of the exemption set forth in this Final Order, the

    Commission must receive, from each Requesting Party, a legal memorandum

    or opinion of outside counsel that is satisfactory to the Commission.

    In addition, the Commission clarifies that it retains discretion as to

    whether the legal opinion or memorandum provides the Commission with

    the assurances desired, and may elect not to require that a memorandum

    or opinion be signed by the law firm if the circumstances so warrant.

    Moreover, as discussed further in section IV.E. below, the Commission

    is delegating its authority to review and accept the legal memoranda or

    opinions to the Director of the Division of Clearing and Risk and to

    his designees, in consultation with the General Counsel or the General

    Counsel's designees,\159\ which will expedite the process by which the

    Requesting Parties are able to satisfy this condition.

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

    \158\ See 77 FR 52165.

    \159\ See paragraph 7 of the Order.

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

    With respect to the comment that the condition precedent requiring

    a legal memorandum or opinion of outside counsel may create adverse tax

    consequences, the Commission notes that such tax issues are beyond the

    scope of this Final Order.

    b. Conditions Subsequent to the Final Order

    i. Notification of Requests for Information

    The Proposed Order included a condition requiring that ``neither

    the tariffs nor any other governing documents of the particular RTO or

    ISO pursuant to whose tariff the agreement, contract, or transaction is

    to be offered or sold, shall include any requirement that the RTO or

    ISO notify its members prior to providing information to the Commission

    in response to a subpoena or other request for information or

    documentation.'' \160\ As noted in the Proposed Order, a ``notice

    requirement could significantly compromise the Commission's enforcement

    efforts as there are likely to be situations where it would be neither

    prudent nor advisable for an entity under investigation by the

    Commission to learn of the investigation prior to Commission

    notification to the entity.'' \161\ The Commission requested comment on

    this proposal and as to whether there may be an alternative condition

    that the Commission might use to achieve the same result.\162\

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

    \160\ Id. at 52166.

    \161\ Id.

    \162\ See id.

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

    One commenter asked ``[d]oes the Commission's subpoena secrecy

    requirement described in the Proposed Order mandate that FERC approve

    tariff changes that are required by the Commission regardless of

    whether FERC views them to be `just and reasonable' as required by the

    Federal Power Act?'' \163\ Another commenter opposed this condition,

    arguing that ``[r]eopening a tariff could result in multiple issues

    arising, many of which have nothing to do with the notice of inquiry,

    and may result in undue delay.'' \164\

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

    \163\ COPE at 4 (internal footnote omitted).

    \164\ Commercial Working Group at 3 n.4.

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

    In response to the comments, the Commission recognizes that while

    this condition may require a Tariff change for some Requesting Parties,

    this is a necessary condition to the exemptive relief. As an initial

    matter, RTOs and ISOs amend their Tariffs on a regular basis. Thus,

    amending one Tariff provision would not necessarily result in opening

    unrelated Tariff provisions.\165\ The Commission notes that none of the

    Requesting Parties have indicated in their comment letters that they

    need to revise their Tariffs to comply with this condition. Moreover,

    the Commission notes that RTOs and ISOs have proposed, and FERC has

    approved,\166\ similar changes to RTO and ISO Tariffs enabling FERC

    Enforcement staff to issue subpoenas or requests for information

    without notification to RTO or ISO members.\167\ This requirement

    provides the same protections to CFTC Enforcement investigations.

    Commenters have not explained why doing so would not be ``just and

    reasonable.'' In addition, the Commission notes that, in their

    respective comment letters, neither FERC staff nor the PUCT opposed the

    inclusion of this condition. Therefore, the Commission has determined

    that the removal of notice requirements from the Requesting Party's

    Tariffs will remain a condition to the Final Order.

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

    \165\ See e.g., 18 CFR 35.9(c), 35.10(b)-(c) (providing

    procedures for amending individual tariff provisions, and requiring

    that OATT and other open access documents filed by ISOs or RTOs must

    be filed either as individual sheets or sections).

    \166\ In the absence of evidence to the contrary, the Commission

    would anticipate that PUCT would act similarly with respect to

    ERCOT.

    \167\ See, e.g., PJM Interconnection, L.L.C. Open Access

    Transmission Tariff, Sixth Revised Volume No. 1, Attachment M,

    Market Monitoring Plan (permitting the MMU to provide information to

    FERC on a confidential basis without notice to any party).

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

    ii. Information Sharing Agreements

    The Proposed Order contemplated two conditions that addressed the

    Commission's ability to obtain information from the Requesting

    Parties.\168\ First, with respect to ERCOT, the Proposed Order required

    that an information sharing arrangement acceptable to the Commission be

    executed between PUCT and the Commission and continue to be in effect.

    Second, for all FERC-regulated Requesting Parties, the Proposed Order

    required that information sharing arrangements between FERC and the

    Commission that are acceptable to the Commission continue to be in

    effect. The Commission specifically sought comment as to whether the

    information sharing arrangement to be executed between PUCT and the

    Commission should be a condition precedent to the effectiveness of a

    final exemption for ERCOT, and whether all Requesting Parties should be

    required, as a condition of any final exemption, to cooperate with the

    Commission's requests for information with respect to agreements,

    contracts, or transactions that are, or are related to, the agreements,

    contracts, or transactions that were the subject of the Proposed

    Order.\169\

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

    \168\ See 77 FR 52166.

    \169\ See id. at 52172.

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

    Of those commenters that addressed the information sharing

    condition precedent for ERCOT, all viewpoints received requested that

    the Commission refrain from requiring that an information sharing

    agreement between PUCT and the Commission be in place prior to a final

    exemption becoming effective for ERCOT. The Requesting Parties and PUCT

    noted that fulfillment of such a requirement is beyond the control of

    ERCOT in terms of timing and terms, and therefore would be more

    appropriate as a condition subsequent to the effectiveness of the

    exemption in

    [[Page 19892]]

    order to avoid uncertainty.\170\ Similarly, another commenter suggested

    that the Commission grant preliminary approval of the exemption for

    ERCOT while discussions between the Commission and PUCT remained

    ongoing due to ERCOT's comparable market position with respect to the

    other Requesting Parties, and the lack of any specific timeline under

    which the information sharing agreement must be completed.\171\ Another

    commenter objected to the condition precedent, noting that ``[a] one-

    way information sharing requirement acceptable to the CFTC is beyond

    what is necessary and implies that the Commission does not trust PUCT

    regulation.'' \172\ Finally, notwithstanding its objection to the

    condition precedent, PUCT expressed full support of working with the

    Commission to develop and execute an appropriate information sharing

    arrangement on a timely basis.\173\

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

    \170\ Requesting Parties at 15; PUCT at 13.

    \171\ Commercial Working Group at 4.

    \172\ COPE at 8.

    \173\ PUCT at 13.

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

    Regarding the Commission's contemplation of affirmatively requiring

    all Requesting Parties to cooperate with requests for information as a

    condition of the exemption, commenters did not respond directly,

    although one commenter suggested that the imposition of additional

    requirements upon the Requesting Parties for purposes of obtaining

    information through FERC or PUCT as the Requesting Parties' primary

    regulator amounts to indirect regulation.\174\

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

    \174\ COPE at 8.

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

    In response to the comments opposing an information sharing

    agreement between PUCT and the Commission as a condition precedent to

    the effectiveness of relief for ERCOT, the Commission has determined

    not to pursue such a condition, and thus has stricken the execution of

    an information-sharing agreement with PUCT as a condition of the Final

    Order. Rather, with respect to ERCOT, the Final Order conditions the

    exemption upon ``the Commission's ability to request, and obtain, on an

    as-needed basis from ERCOT, concurrently with the provision of written

    notice to PUCT and in connection with an inquiry consistent with the

    CEA and Commission regulations, positional and transactional data

    within ERCOT's possession for products in ERCOT's markets that are

    related to markets that are subject to the Commission's jurisdiction,

    including any pertinent information concerning such data, and ERCOT's

    compliance with such requests by sharing the requested information.''

    \175\ This revision dispels any concerns regarding potential delay to

    the effectiveness of the Final Order with respect to ERCOT that could

    result from the time it might take for PUCT and the Commission to

    complete an acceptable information sharing arrangement. This revision

    also responds to competitiveness concerns that ERCOT and the other

    Requesting Parties should be treated comparably with respect to

    conditions that could affect the timing of the effectiveness of the

    Final Order due to their comparable market positions.

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

    \175\ See paragraph 4(a)(2) of the Order. The Commission is

    finalizing this condition under authority in CEA section 4(c)(1) to

    issue 4(c) relief conditionally with respect to those entities

    requesting/benefiting from the relief. See 7 U.S.C. 6(c)(1).

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

    Consistent with the revised language noted above requiring ERCOT to

    comply with the Commission's requests for related market data on an as-

    needed basis, the Commission has revised the information sharing

    condition applicable to the FERC-regulated Requesting Parties. The

    Final Order conditions the exemption with respect to FERC-regulated

    Requesting Parties upon: (1) Information sharing arrangements between

    the Commission and FERC that are acceptable to the Commission and that

    continue to be in effect \176\ and (2) ``those Requesting Parties'

    compliance with the Commission's requests through FERC to share, on an

    as-needed basis and in connection with an inquiry consistent with the

    CEA and Commission regulations, positional and transactional data

    within the Requesting Parties' possession for products in Requesting

    Parties' markets that are related to markets that are subject to the

    Commission's jurisdiction, including any pertinent information

    concerning such data.'' \177\ The Commission notes that the Proposed

    Order only provided for information sharing arrangements. Thus, to

    qualify for the exemption provided by the Final Order, the Requesting

    Parties must comply with the Commission's requests for related market

    data, regardless of whether the request is made directly (in the case

    of ERCOT) or through FERC (in the case of all other Requesting

    Parties).\178\

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

    \176\ As discussed in the Proposed Order, the Commission notes

    that the CFTC and FERC executed a Memorandum of Understanding in

    2005 pursuant to which the agencies have shared information

    successfully. 77 FR 52165.

    \177\ See paragraph 4(a)(1) of the Order.

    \178\ The Commission has delegated to the Director of the

    Division of Market Oversight and to such members of the Division's

    staff acting under his or her direction as he or she may designate,

    in consultation with the General Counsel or such members of the

    General Counsel's staff acting under his or her direction as he or

    she may designate, the authority to request information from

    Requesting Parties pursuant to sections 4(a)(1) and 4(a)(2) of the

    Order. See paragraph 7 of the Order.

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

    The Commission notes that any contemplated request for related

    market data would not be an attempt to indirectly regulate the

    Requesting Parties or their markets, contrary to some commenters'

    suggestion. In order for the Commission to determine that the Final

    Order is consistent with the public interest and the purposes of the

    CEA, the terms of the Final Order cannot adversely affect the ability

    of the Commission to discharge its regulatory duties under the CEA in

    monitoring energy markets under its jurisdiction.\179\ Therefore,

    conditioning the exemption provided in the Final Order upon the

    Commission's ability to obtain related transactional and positional

    data from the Requesting Parties, and the Requesting Parties'

    compliance with such requests by sharing the requested information, is

    meant to enable the Commission to continue discharging its regulatory

    duties under the Act as set forth in CEA section 3.\180\ The Commission

    notes that such requested information should already be in the

    possession of the Requesting Parties.

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

    \179\ See 7 U.S.C. 6(c)(2)(B)(ii).

    \180\ 7 U.S.C. 5.

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

    B. Section 4(c) Analysis

    1. Overview of CEA Section 4(c)

    a. Sections 4(c)(6)(A) and (B)

    As discussed above in section I., the Dodd-Frank Act amended CEA

    section 4(c) to add sections 4(c)(6)(A) and (B), which provide for

    exemptions for certain transactions entered into (a) pursuant to a

    tariff or rate schedule approved or permitted to take effect by FERC,

    or (b) pursuant to a tariff or rate schedule establishing rates or

    charges for, or protocols governing, the sale of electric energy

    approved or permitted to take effect by the regulatory authority of the

    State or municipality having jurisdiction to regulate rates and charges

    for the sale of electric energy within the State or municipality, as

    eligible for exemption pursuant to the Commission's 4(c) exemptive

    authority.\181\ Indeed, 4(c)(6) provides

    [[Page 19893]]

    that ``[i]f the Commission determines that the exemption would be

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

    the Commission shall'' issue such an exemption.\182\ However, any

    exemption considered under 4(c)(6)(A) and/or (B) must be done ``in

    accordance with [CEA section 4(c)(1) and (2)].'' \183\

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

    \181\ The exemption language in section 4(c)(6) reads:

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

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

    the Commission shall, in accordance with paragraphs (1) and (2),

    exempt from the requirements of this Act an agreement, contract, or

    transaction that is entered into--

    (A) pursuant to a tariff or rate schedule approved or permitted

    to take effect by the Federal Energy Regulatory Commission;

    (B) pursuant to a tariff or rate schedule establishing rates or

    charges for, or protocols governing, the sale of electric energy

    approved or permitted to take effect by the regulatory authority of

    the State or municipality having jurisdiction to regulate rates and

    charges for the sale of electric energy within the State or

    municipality; or

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

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

    \182\ Id. (emphasis added).

    \183\ CEA section 4(c)(6) explicitly directs the Commission to

    consider any exemption proposed under 4(c)(6) ``in accordance with

    [CEA sections 4(c)(1) and (2)].''

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

    b. Section 4(c)(1)

    As described above in section I., CEA section 4(c)(1) requires that

    the Commission act ``by rule, regulation or order, after notice and

    opportunity for hearing.'' It also provides that the Commission may act

    ``either unconditionally or on stated terms or conditions or for stated

    periods and either retroactively or prospectively or both'' and that

    the Commission may provide an exemption from any provisions of the CEA

    except subparagraphs (C)(ii) and (D) of section 2(a)(1).\184\

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

    \184\ Section 4(c)(1), 7 U.S.C. 6(c)(1), states:

    (c)(1) In order to promote responsible economic or financial

    innovation and fair competition, the Commission by rule, regulation,

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

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

    trade designated or registered as a contract market or derivatives

    transaction execution facility for transactions for future delivery

    in any commodity under section 5 of this Act) exempt any agreement,

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

    subject to subsection (a) (including any person or class of persons

    offering, entering into, rendering advice or rendering other

    services with respect to, the agreement, contract, or transaction),

    either unconditionally or on stated terms or conditions or for

    stated periods and either retroactively or prospectively, or both,

    from any of the requirements of subsection (a), or from any other

    provision of this Act (except subparagraphs (C)(ii) and (D) of

    section 2(a)(1), except that--

    (A) unless the Commission is expressly authorized by any

    provision described in this subparagraph to grant exemptions, with

    respect to amendments made by subtitle A of the Wall Street

    Transparency and Accountability Act of 2010--

    (i) with respect to--

    (I) paragraphs (2), (3), (4), (5), and (7), paragraph

    (18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39),

    (41), (42), (46), (47), (48), and (49) of section 1a, and sections

    2(a)(13), 2(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a),

    5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and

    (II) section 206(e) of the Gramm-Leach-Bliley Act (Public Law

    106-102; 15 U.S.C. 78c note); and

    (ii) in sections 721(c) and 742 of the Dodd-Frank Wall Street

    Reform and Consumer Protection Act; and

    (B) the Commission and the Securities and Exchange Commission

    may by rule, regulation, or order jointly exclude any agreement,

    contract, or transaction from section 2(a)(1)(D)) if the Commissions

    determine that the exemption would be consistent with the public

    interest.

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

    c. Section 4(c)(2)

    As set forth above in section I., CEA section 4(c)(2) requires the

    Commission to determine that: to the extent an exemption provides

    relief from any of the requirements of CEA section 4(a), the

    requirement should not be applied to the agreement, contract or

    transaction; the exempted agreement, contract, or transactions will be

    entered into solely between appropriate persons; \185\ and the

    exemption will not have a material adverse effect on the ability of the

    Commission or any contract market to discharge its regulatory or self-

    regulatory duties under the CEA.\186\

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

    \185\ See CEA 4(c)(2)(B)(i) and the discussion of CEA section

    4(c)(3) in sections I. supra and IV.B.1.d. infra.

    \186\ CEA section 4(c)(2)(A) also requires that the exemption

    would be consistent with the public interest and the purposes of the

    CEA, but that requirement duplicates the requirement of section

    4(c)(6).

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

    d. Section 4(c)(3)

    As explained in section I. above, CEA section 4(c)(3) outlines who

    may constitute an appropriate person for the purpose of a 4(c)

    exemption, including as relevant to this Final Order: (a) Any person

    that fits in one of ten defined categories of appropriate persons; or

    (b) such other persons that the Commission determines to be appropriate

    in light of their financial or other qualifications, or the

    applicability of appropriate regulatory protections.

    2. CEA Section 4(c) Determinations

    a. Commission Jurisdiction

    Subject to the limitations set forth in the CEA, sections

    4(c)(6)(A) and (B) of the Act grant the Commission the authority to

    exempt certain electric energy transactions provided that the

    Commission determines, among other things, that such exemption is

    consistent with the public interest and purposes of the CEA.\187\ The

    Commission received several comments relating to the Commission's

    interpretation of its jurisdiction pursuant to section 4(c)(6).

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

    \187\ See discussion regarding CEA section 4(c)(6) in sections

    I. supra and IV.B.1.a. infra.

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

    Two commenters argued that, the Commission should ``interpret the

    Dodd-Frank Act as not applying to any contract or agreement traded in

    an RTO or ISO market pursuant to a FERC-accepted or approved rate

    schedule or tariff'' and that the Commission should exclude RTO or ISO

    contracts or instruments from the definition of swap.\188\ One of these

    commenters further argued that ``Congress did not intend for

    Petitioners to be subject to such regulation under the Dodd-Frank Act.

    Congress recognized the impropriety of imposing duplicative regulation

    over entities such as Petitioners and instructed the Commission and

    FERC to `appl[y] their respective authorities in a manner so as to

    ensure the effective and efficient regulation in the public interest'

    and to `[avoid], to the extent possible, conflicting or duplicative

    regulation.' '' \189\

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

    \188\ Joint Trade Associations at 5. See also id. at 3, 8; FERC

    Staff at 4.

    \189\ Joint Trade Associations at 5 (alterations in original).

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

    A different commenter claimed that the Commission should not

    regulate ``[a]ccess to physical electricity markets.'' \190\ This

    commenter argued that the Proposed Order is ``more of a delegation of

    authority (to FERC and the PUCT) than an exemption,'' which

    ``establishes a sort of joint regulation going forward with the CFTC

    setting minimum RTO participation standards, approving new transactions

    or `material modifications,' and, through its ability to alter or

    withdraw the exemption, indirectly regulating RTOs.''\191\

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

    \190\ COPE at 10.

    \191\ Id. (arguing that the Commission in fact proposed to

    retain jurisdiction over RTOs and ISOs because it did not propose to

    issue a blanket exemption and rather proposed to: (1) Refrain from

    issuing a final order until two preconditions have been met; (2)

    require information sharing agreements while failing to negotiate a

    Congressionally-mandated memorandum of understanding with PUCT; (3)

    require Requesting Parties to change their Tariffs to remove member

    notification requirements in the event of Commission requests for

    information; (4) retain the authority to alter or revoke the

    exemption upon a change of material facts; (5) require Requesting

    Parties to submit supplemental filings; (6) reject that `logical

    extensions'' of exempted transactions also be subject to the order;

    and (7) impose limitations on participation the Requesting Parties'

    market through the Commission's application of the appropriate

    person standard).

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

    Another commenter recognized the Commission's exemptive authority

    under section 4(c)(6), but requested that the Commission affirmatively

    state in any final order that it makes no determination as to whether

    the transactions included in the final order fall within the

    Commission's jurisdiction because the absence of such statement ``could

    actually undermine the very regulatory certainty being requested by

    Petitioners, and potentially

    [[Page 19894]]

    give rise to unnecessary jurisdictional disputes.'' \192\

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

    \192\ PUCT at 4.

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

    In response to the comments, the Commission notes that the

    definition of a ``swap'' set forth in Commission regulations is beyond

    the scope of this Final Order. The Commission further notes that the

    interpretation of the Dodd-Frank Act proffered by the commenters is

    contrary to the express language of that statute. The Dodd-Frank Act

    added a savings clause to the CEA that addresses the roles of the

    Commission, FERC, and state agencies as they relate to transactions

    traded pursuant to FERC- or state-approved tariffs or rate schedules.

    Section 2(a)(1)(I) of the Act repeats the Commission's exclusive

    jurisdiction and clarifies that the Commission retains its authority

    over transactions that are within its jurisdiction. Moreover, while,

    section 4(c)(6) of the CEA, added by the Dodd-Frank Act, empowers the

    Commission to exempt contracts, agreements or transactions traded

    pursuant to a Tariff or rate schedule that has been approved or

    permitted to take effect by FERC or a state regulatory authority, it

    does not permit the Commission to automatically or mechanically apply

    the exemption. Instead, section 4(c)(6) mandates that the Commission

    initially determine that the exemption would be in the public interest

    and consistent with the purposes of the CEA, that the exemption would

    be applied only to agreements, contracts, or transactions that are

    entered into solely between appropriate persons, and that the exemption

    will not have a material adverse effect on the ability of the

    Commission or any contract market to discharge its regulatory or self-

    regulatory duties under the CEA.

    b. Consistent With the Public Interest and the Purposes of the CEA

    As required by CEA section 4(c)(2)(A), as well as section 4(c)(6),

    the Commission determines that the Final Order is consistent with the

    public interest and the purposes of the CEA. Section 3(a) of the CEA

    provides that transactions subject to the CEA affect the national

    public interest by providing a means for managing and assuming price

    risk, discovering prices, or disseminating pricing information through

    trading in liquid, fair and financially secure trading facilities.\193\

    Section 3(b) of the CEA identifies the purposes of the CEA:

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

    \193\ 7 U.S.C. 5(a).

    It is the purpose of this Act to serve the public interests

    described in subsection (a) through a system of effective self-

    regulation of trading facilities, clearing systems, market

    participants and market professionals under the oversight of the

    Commission. To foster these public interests, it is further the

    purpose of this Act to deter and prevent price manipulation or any

    other disruptions to market integrity; to ensure the financial

    integrity of all transactions subject to this Act and the avoidance

    of systemic risk; to protect all market participants from fraudulent

    or other abusive sales practices and misuses of customer assets; and

    to promote responsible innovation and fair competition among boards

    of trade, other markets and market participants.\194\

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

    \194\ 7 U.S.C. 5(b).

    Consistent with the proposed determinations set forth in the

    Proposed Order,\195\ the Commission finds that: (a) The Covered

    Transactions have been, and are, subject to a long-standing, regulatory

    framework for the offer and sale of the Transactions established by

    FERC or PUCT; and (b) the Covered Transactions administered by the

    RTOs, ISOs, or ERCOT are part of, and inextricably linked to, the

    organized wholesale electric energy markets that are subject to FERC

    and PUCT regulation and oversight. For example, FERC Order No. 2000

    (which, along with FERC Order No. 888, encouraged the formation of RTOs

    and ISOs to operate the electronic transmission grid and to create

    organized wholesale electric energy markets) requires an RTO or ISO to

    demonstrate that it has four minimum characteristics: (1) Independence

    from any market participant; (2) a scope and regional configuration

    which enables the RTO or ISO to maintain reliability and effectively

    perform its required functions; (3) operational authority for its

    activities, including being the security coordinator for the facilities

    that it controls; and (4) short-term reliability.\196\ In addition, the

    Requesting Parties stated that an RTO or ISO must demonstrate to FERC

    that it performs certain self-regulatory and/or market monitoring

    functions,\197\ and analogous requirements are applicable to ERCOT

    under PUCT and the Public Utility Regulatory Act \198\ (``PURA'').\199\

    Requesting Parties also represented that they are responsible for

    ``ensur[ing] the development and operation of market mechanisms to

    manage transmission congestion * * * The market mechanisms must

    accommodate broad participation by all market participants, and must

    provide all transmission customers with efficient price signals that

    show the consequences of their transmission usage decisions.'' \200\

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

    \195\ See 77 FR 52144-45.

    \196\ See id.

    \197\ See id. (explaining that, according to the Requesting

    Parties, each RTO and ISO must employ a transmission pricing system

    that promotes efficient use and expansion of transmission and

    generation facilities; develop and implement procedures to address

    parallel path flow issues within its region and with other regions;

    serve as a provider of last resort of all ancillary services

    required by FERC Order No. 888 including ensuring that its

    transmission customers have access to a Real-Time balancing market;

    be the single OASIS (Open-Access Same-Time Information System) site

    administrator for all transmission facilities under its control and

    independently calculate Total Transmission Capacity and Available

    Transmission Capability; provide reliable, efficient, and not unduly

    discriminatory transmission service, it must provide for objective

    monitoring of markets it operates or administers to identify market

    design flaws, market power abuses and opportunities for efficiency

    improvements; be responsible for planning, and for directing or

    arranging, necessary transmission expansions, additions, and

    upgrades; and ensure the integration of reliability practices within

    an interconnection and market interface practices among regions).

    See also Petition at 13-14.

    \198\ TEX. UTIL. CODE ANN. 11.001 et seq. (Vernon 1998 & Supp.

    2005).

    \199\ See id.; Petition at 14-15. ERCOT represented that,

    pursuant to PURA 39.151(a), its roles and duties are to provide

    access to the transmission and distribution systems for all buyers

    and sellers of electric energy on nondiscriminatory terms; ensure

    the reliability and adequacy of the regional electric energy

    network; ensure that information relating to a customer's choice of

    retail electric energy provider is conveyed in a timely manner to

    the persons who need that information; and ensure that electric

    energy production and delivery are accurately accounted for among

    the generators and wholesale buyers and sellers in the region. See

    77 FR 52144-45; Petition at 14-15.

    \200\ See 77 FR 52144 (quoting Petition at 14). See also 18 CFR

    35.34(k)(2).

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

    Furthermore, as explained by the Requesting Parties and discussed

    in the Proposed Order, the Commission notes that the Covered

    Transactions are entered into primarily by commercial participants that

    are in the business of generating, transmitting, and distributing

    electric energy,\201\ and the Requesting Parties were established for

    the purpose of providing affordable, reliable electric energy to

    consumers within their geographic region.\202\ Additionally, the

    Covered Transactions that take place on the Requesting Parties' markets

    are overseen by an MMU, required by FERC for each Requesting Party

    under its jurisdiction and by PUCT in the case of ERCOT, to identify

    manipulation of electric energy on the Requesting Parties'

    markets.\203\

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

    \201\ See 77 FR 52144. See also generally Petition at 20.

    \202\ See 77 FR 52144. See also Petition at 3-4.

    \203\ See 77 FR 52144. See also Petition at 15-18.

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

    Moreover, fundamental to this ``public interest'' and ``purposes of

    the [Act]'' analysis is the fact that the Covered Transactions are

    inextricably tied to the Requesting Parties' physical delivery of

    electric energy.\204\ Another

    [[Page 19895]]

    important factor is that the Final Order is explicitly limited to

    Covered Transactions taking place on markets that are monitored by

    either an independent MMU, a market administrator (the RTO, ISO, or

    ERCOT), or both, and a government regulator (FERC or PUCT). In

    contrast, an exemption for transactions that are not so monitored, or

    not related to the physical capacity of an electric transmission grid,

    or not directly linked to the physical generation and transmission of

    electric energy, or not limited to appropriate persons,\205\ is

    unlikely to be in the public interest or consistent with the purposes

    of the CEA, taking such transactions outside the scope of the Final

    Order.

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

    \204\ See id. See also Petition at 6-9 (describing the

    transactions for which an exemption was requested and noting that

    each of them ``is part of, and inextricably linked to, the organized

    wholesale electricity markets that are subject to FERC and PUCT

    regulation and oversight'').

    \205\ See 77 FR 52145-47.

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

    Finally, the extent to which the Final Order is consistent with the

    public interest and the purposes of the Act can, in major part, be

    assessed by the extent to which the Tariffs and activities of the

    Requesting Parties, and supervision by FERC and PUCT, are congruent

    with, and sufficiently accomplish, the regulatory objectives of the

    relevant Core Principles set forth in the CEA for DCOs and SEFs.

    Specifically, providing a means for managing or assuming price risk and

    discovering prices, as well as prevention of price manipulation and

    other disruptions to market integrity, are addressed by the Core

    Principles for SEFs. Ensuring the financial integrity of the Covered

    Transactions and the avoidance of systemic risk, as well as protection

    from the misuse of participant assets, are addressed by the Core

    Principles for DCOs. Deterrence of price manipulation (or other

    disruptions to market integrity) and protection of market participants

    from fraudulent sales practices is achieved by the Commission retaining

    and exercising its jurisdiction over these matters. Therefore, the

    Commission has incorporated its DCO and SEF Core Principle analyses,

    set forth in the Proposed Order, into its consideration of the Final

    Order's consistency with the public interest and the purposes of the

    Act.\206\ In the same way, the Commission has considered how the public

    interest and the purposes of the CEA are also addressed by the manner

    in which the Requesting Parties comply with FERC's credit reform

    policy.\207\

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

    \206\ See sections IV.B.2.e.ii.-iii. infra; 77 FR at 52149-62.

    The Commission received several comments regarding the use of the

    DCO and SEF Core Principles as a measure for the Commission's public

    interest and purposes of the CEA determination. These comments are

    addressed in sections IV.B.2.e.ii.-iii. infra.

    \207\ See sections IV.A.3.a.i. infra and IV B.2.e.ii. infra; 77

    FR at 52147-48.

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

    The Commission specifically requested comment on whether it used

    the appropriate standard in making its section 4(c) determination. The

    Commission received comments with respect to compliance with FERC's

    credit reform policy as a precondition to the issuance of a Final

    Order, which are discussed in sections IV.A.3.a.i. and IV.B.2.e.i., and

    on the Commission's use of the DCO and SEF Core Principles, which are

    discussed in sections IV.B.2.e.i.-ii. below.

    The Commission received a number of comments regarding the

    appropriateness of the public interest and purposes of the CEA standard

    outlined above.\208\ One commenter stated that the standard set forth

    in the Proposed Order, and in particular compliance with FERC

    regulation 35.47, ``sufficiently demonstrates that the proposed

    exemption is consistent with the public interest and the purposes of

    the Act.'' \209\ However, another commenter argued that the Commission

    did not use the appropriate standard in analyzing whether the exemption

    is in the public interest and consistent with the purposes of the Act,

    because the Requesting Parties are ``physical electricity transmission

    and market operators pervasively regulated by either FERC or the

    PUCT,'' and ``[t]he existence of such regulation should be the premise

    upon which an exemption is granted.'' \210\

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

    \208\ See, e.g., COPE at 6; Commercial Working Group at 4.

    \209\ Commercial Working Group at 4.

    \210\ COPE at 6.

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

    The Commission has considered the comments, and believes that it

    has used the appropriate standard in making its public interest and

    purpose of the CEA determination for purposes of this Final Order. The

    Commission disagrees that the existence of pervasive FERC and PUCT

    regulations is, by itself, a sufficient standard to analyze that the

    requested exemptive relief is consistent with the public interest and

    the purposes of the CEA, because, as set forth above,\211\ section

    4(c)(6) of the CEA, added by the Dodd-Frank Act, does not permit the

    Commission to automatically or mechanically apply an exemption.

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

    \211\ See sections I. and IV.B.1.a. supra.

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

    After consideration of the comments received and for the reasons

    set forth in this Final Order, the Commission has determined that the

    exemption set forth in this Final Order is consistent with the public

    interest and the purposes of the CEA.

    c. CEA Section 4(a) Should Not Apply to the Transactions or Entities

    Eligible for the Exemption

    CEA section 4(c)(2)(A) requires, in part, that the Commission

    determine that the Covered Transactions described in the Final Order

    should not be subject to CEA section 4(a)--generally, the Commission's

    exchange trading requirement for a contract for the purchase or sale of

    a commodity for future delivery. As set forth in the Proposed Order,

    the Commission has examined the Covered Transactions, the Requesting

    Parties, and their markets using the CEA Core Principle requirements

    applicable to a DCO and to a SEF as a framework for its public interest

    and purposes of the CEA determination.\212\ As further support for this

    determination, the Commission also is relying on the public interest

    and the purposes of the Act analysis in subsection IV.B.2.f. below. In

    so doing, the Commission has determined that, due to the FERC or PUCT

    regulatory scheme and the RTO or ISO market structure already

    applicable to the Covered Transactions, the linkage between the Covered

    Transactions and those regulatory schemes, and the unique nature of the

    market participants that would be eligible to rely on the

    exemption,\213\ CEA section 4(a) should not apply to the Covered

    Transactions under the Final Order.

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

    \212\ See sections IV.B.2.e.i.-ii. infra; 77 FR at 52149-62.

    \213\ See appropriate persons analysis, section IV.B.2.d. infra;

    77 FR at 52147-48.

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

    d. Appropriate Persons

    Section 4(c)(2)(B)(i) of the CEA \214\ requires, for an exemption

    to be granted, that the Commission make a determination that the

    exemption is restricted to Covered Transactions entered into solely

    between ``appropriate persons,'' as that term is defined in section

    4(c)(3) of the Act.\215\ Section 4(c)(3) defines the term ``appropriate

    person'' to include: (1) Any person that falls within one of the ten

    categories of persons delineated in sections 4(c)(3)(A) through (J) of

    the Act or (2) such other persons that the Commission determines to be

    appropriate pursuant to the limited authority provided by section

    4(c)(3)(K).\216\ The Commission may determine that persons that do not

    meet the requirements of sections 4(c)(3)(A) through (J) are

    ``appropriate persons'' for

    [[Page 19896]]

    purposes of section 4(c) only if it determines that such persons ``are

    appropriate in light of their financial or other qualifications, or the

    applicability of regulatory protections.'' \217\

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

    \214\ 7 U.S.C. 6(c)(2)(B)(i).

    \215\ 7 U.S.C. 6(c)(3).

    \216\ Id.

    \217\ Id.

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

    The Commission proposed to limit the exemption to transactions

    where all parties thereto either (a) satisfy the appropriate persons

    criteria set forth in sections 4(c)(3)(A) through (J) or, (using its

    authority under section 4(c)(3)(K)) (b) qualify as ECPs, as defined in

    section 1a(18)(A) of the CEA and in Commission regulation 1.3(m).\218\

    The Commission requested comment as to whether ECPs should be

    considered appropriate persons for purposes of the Final Order.\219\

    The Commission recognized, however, that ``the market participant

    eligibility standards of an individual RTO or ISO may not be

    coextensive with the criteria required by sections 4(c)(3)(A) through

    (J) or section 1a(18) of the Act'' \220\ and that, therefore, there may

    be certain RTO or ISO market participants engaging in the transactions

    proposed for exemption that would not qualify for the exemption as set

    forth in the Proposed Order. Accordingly, the Commission requested

    comment as to whether there are any entities currently engaging in the

    transactions delineated in the Proposed Order, and in the markets

    administered by the Requesting Parties that are neither appropriate

    persons under sections 4(c)(3)(A)-(J) of the CEA nor ECPs, and on what

    basis the Commission should exercise its authority under section

    4(c)(3)(K) with respect to such entities to conclude that such parties

    should be appropriate persons for purposes of the Final Order.\221\ The

    Commission also requested descriptions of the additional parties that

    should be included in the scope of the term appropriate persons for

    these purposes,\222\ and expressed particular interest in considering

    the inclusion of market participants who actively participate in the

    generation, transmission, or distribution of electric energy.\223\

    Finally, the Commission requested that any comments seeking to include

    additional parties within the scope of the appropriate person

    definition for purposes of the Final Order be accompanied by an

    explanation of the financial or other qualifications of such persons or

    the available regulatory protections that would render such persons

    appropriate persons and the bases for determining that (1) such parties

    could bear the financial risks of the transactions,\224\ (2) the

    inclusion of such parties would not have any adverse effect on the

    relevant RTO or ISO, and (3) failing to include such parties would have

    an adverse effect on the relevant RTO or ISO.\225\

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

    \218\ 77 FR 52166. See also id. at 52145-46, 52163-64.

    \219\ See generally id. at 52146. The Commission proposed to

    deem ECPs as ``appropriate persons'' pursuant to the authority set

    forth in section 4(c)(3)(K) of the CEA.

    \220\ Id. at 52163-64.

    \221\ See id. at 52146, 52166, 52172.

    \222\ See id. at 52172.

    \223\ See id. at 52164, 52172.

    \224\ See id.

    \225\ See id. at 52172.

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

    The Commission did not receive any comment objecting to its

    proposed determination, pursuant to section 4(c)(3)(K) of the Act, that

    ECPs be included within the definition of appropriate persons for

    purposes of the Final Order. Accordingly, and pursuant to the authority

    set forth in section 4(c)(3)(K) of the CEA, the Commission has

    determined that ECPs, as defined in section 1a(18)(A) of the CEA and in

    Commission regulation 1.3(m), are appropriate persons for purposes of

    the Final Order in light of their financial or other qualifications, or

    the applicability of regulatory protections. In addition, in response

    to confusion regarding whether market participants are required to

    establish compliance with section 4(c)(3)(F) or demonstrate their ECP

    status for purposes of this Final Order through the use of audited

    financial statements, the Commission also is clarifying that market

    participants that qualify as appropriate persons under section

    4(c)(3)(F) of the CEA or on the grounds that they are ECPs as defined

    in section 1a(18)(A) of the Act and Commission regulation 1.3(m), are

    not required to prove such qualification through the use of audited

    financial statements.

    The Commission also received several comments requesting that it

    exercise its statutory authority under section 4(c)(3)(K) to expand

    further the definition of appropriate person for purposes of the Final

    Order. These comments generally fell into three categories: requests to

    extend the definition to specific subsets of market participants;

    requests to expand the definition more broadly to include, for example,

    all market participants that satisfy the participant eligibility

    criteria established by the Requesting Parties; and requests to clarify

    that certain market participants are included in the definition of

    appropriate person set forth in CEA sections 4(c)(3)(F) and (H).

    Several commenters also requested that all market participants who

    engage in particular types of transactions (such as virtual and demand

    response transactions) be included in the definition of appropriate

    person for the purpose of the Final Order.

    i. Determinations Regarding the Inclusion of Specifically Identified

    Market Participants as Appropriate Persons for Purposes of the Final

    Order

    The Commission received multiple requests to include various

    categories of market participants within the scope of appropriate

    person for purposes of the Final Order. One commenter urged the

    Commission to expand the definition to include all persons who actively

    participate in the generation, transmission, or distribution of

    electric energy, noting that the proposed definition of appropriate

    person could exclude traditionally active market participants whose

    participation facilitates demand response activities, and reduces

    costs.\226\ Other commenters requested the inclusion of specifically

    identifiable groups of market participants such as electric

    cooperatives,\227\ retail electric providers (``REPs''),\228\ load

    serving entities (``LSEs''),\229\ curtailment service providers

    (``CSPs''),\230\ and persons who engage in virtual and convergence bids

    and offers.\231\

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

    \226\ See generally Industrial Coalitions at 4-5.

    \227\ See, e.g., APPA at 3; FERC Staff at 6; Joint Trade

    Associations at 11-13; PUCT at 11. The Joint Trade Associations also

    requested, in the alternative, that the Commission determine that

    electric cooperatives are ECPs. See generally Joint Trade

    Associations at 3.

    \228\ See, e.g., TEAM/ARM at 2-3; PUCT at 10.

    \229\ See, e.g., Industrial Coalitions at 4; NYISO Supplement to

    Requesting Parties' Comment, Attachment B at 6-7.

    \230\ See, e.g., Industrial Coalitions at 4.

    \231\ See, e.g., Financial Marketers Coalition at 2-13; NYISO at

    2-10.

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

    Multiple commenters requested that electric cooperatives be deemed

    appropriate persons for purposes of the Final Order.\232\ One commenter

    asserted that electric cooperatives, by their nature, ``actively

    participate in the generation, transmission or distribution of

    electricity.'' \233\ Certain commenters asserted that electric

    cooperatives may be required to obtain transmission and other services

    from RTOs and ISOs and that the participation of electric cooperatives

    in the RTO and ISO markets assists in ensuring the availability of

    electric energy, transmission, or capacity to their consumers.\234\ One

    commenter additionally noted the operational qualifications and non-

    profit status of electric cooperatives in support of their

    [[Page 19897]]

    consideration as appropriate persons.\235\ Some commenters requested

    that the Commission designate all REPs that have been certified by PUCT

    as appropriate persons for purposes of the Final Order.\236\ One

    commenter asserted that REP transactions ``are generally conducted for

    the narrow purposes of purchasing electricity for provision to retail

    customers and for hedging the dynamic risks of purchasing supply to

    meet demand'' and that ``the relatively small scale'' of these

    transactions makes it ``unlikely that the transactions will result in

    market harm.'' \237\ This commenter also noted that REPs are subject to

    certification requirements in addition to the capital requirements set

    forth in applicable market protocols.\238\ Another commenter argued

    that the inclusion of REPs would further the public interest in a

    ``vibrant, diverse market.'' \239\ Multiple commenters also requested

    the inclusion of LSEs.\240\ One of the Requesting Parties stated that

    at least ten percent of the LSEs in its market may not qualify as

    appropriate persons under the proposed standard and maintained that the

    loss of these market participants could undermine a program through

    which the LSEs compete to offer end-use customers competitive energy

    prices and services.\241\ Another commenter suggested that certain LSEs

    and CSPs could participate in the market in a manner that facilitates

    demand response and reduces costs.\242\ Certain commenters requested

    that market participants who engage in virtual and convergence bids and

    offers be deemed appropriate persons for purposes of the

    exemption.\243\ Finally, one commenter requested confirmation that

    market participants ``do not have to own physical assets, such as

    transmission lines or generating facilities,'' in order to qualify for

    the exemption set forth in the Proposed Order.\244\

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

    \232\ See, e.g., APPA at 3, FERC Staff at 6; Joint Trade

    Associations at 11-13; PUCT at 11.

    \233\ See generally Joint Trade Associations at 11-12.

    \234\ See generally APPA at 3; Joint Trade Association at 12.

    \235\ See generally Joint Trade Associations at 12.

    \236\ See, e.g., TEAM/ARM at 2-3; PUCT at 10.

    \237\ See, e.g., TEAM/ARM at 2-3.

    \238\ Id.

    \239\ PUCT at 10.

    \240\ See, e.g., Industrial Coalitions at 4; NYISO Supplement to

    Requesting Parties' Comment, Attachment B at 6-7.

    \241\ See generally NYISO Supplement to Requesting Parties'

    Comment, Attachment B at 6-7.

    \242\ See generally Industrial Coalitions at 4-5.

    \243\ See, e.g., Financial Marketers Coalition at 2-13; NYISO at

    2-10.

    \244\ See generally Financial Marketers Coalition at 2-10.

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

    After consideration of the comments described above, the Commission

    is using the authority provided by section 4(c)(3)(K) of the CEA to

    determine that a ``person who actively participates in the generation,

    transmission, or distribution of electric energy,'' as defined within

    the Final Order, is an appropriate person for purposes of the exemption

    provided therein.\245\ The Final Order defines a ``person who actively

    participates in the generation, transmission, or distribution of

    electric energy'' as ``a person that is in the business of: (1)

    Generating, transmitting or distributing electric energy or (2)

    providing electric energy services that are necessary to support the

    reliable operation of the transmission system.'' The Commission has

    determined that the inclusion of transactions entered into by such

    persons is proper because such persons' active participation in the

    physical markets provide them with the requisite ``qualifications''

    necessary to be deemed an ``appropriate person'' under section

    4(c)(3)(K) for purposes of the Final Order.

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

    \245\ Accordingly, the exemption provided by the Final Order

    will apply to agreements, contracts or transactions where (1) each

    party thereto is an ``appropriate person,'' as defined in sections

    4(c)(3)(A) through (J) of the CEA; an ``eligible contract

    participant,'' as defined in section 1a(18)(A) of the CEA and in

    Commission regulation 1.3(m); or a ``person who actively

    participates in the generation, transmission, or distribution of

    electric energy,'' as defined in Final Order and (2) that satisfy

    the additional parameters for inclusion in the exemption set forth

    in the Final Order.

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

    Although the Commission expects that the definition of a ``person

    who actively participates in the generation, transmission, or

    distribution of electric energy'' will capture many of the market

    participants referenced in the comments that the Commission

    received,\246\ the Commission has chosen to define the phrase generally

    by reference to the relevant person's business activities, rather than

    referencing or delineating particular market participant labels or

    terms that may have different meanings in different markets and that

    may be subject to change over time. By way of example, however, the

    Commission notes that the definition would include an entity that is in

    the business of providing demand response services in the markets as

    they are currently operated by the Requesting Parties. In response to

    the request for clarification of this issue, the Commission confirms

    that, to be eligible for the exemption set forth in this Final Order, a

    transaction (including a virtual or convergence bid or offer) need not

    be entered into by market participants who own physical transmission or

    generation assets, as long as the transaction is entered into by

    persons who satisfy the criteria set forth in the Final Order. The

    Final Order would not, however, extend to agreements, contracts, or

    transactions that are entered into by individuals and entities that are

    engaged in the business of entering into or facilitating financial

    transactions (such as virtual and convergence bids and offers), and

    that (1) do not actively participate in the generation, distribution

    and transmission of electric energy, (2) are not ECPs, or (3) do not

    satisfy any of the criteria set forth in sections 4(c)(3)(A) through

    (J) of the CEA. The Commission is concerned that a person or entity

    that is engaged in purely financial transactions in the RTO or ISO

    markets, but that does not meet either the ECP or the CEA sections

    4(c)(3)(A) through (J) appropriate person criteria may be operating on

    inadequate resources and may pose inappropriate risks to itself and

    other market participants.

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

    \246\ See generally CAISO/ISO NE January at 4 (noting that ``the

    Petitioners' wholesale electricity markets mainly cater to Load

    Serving Entities, their suppliers, and others whose primary business

    is the physical generation of electricity and most transactions on

    the market involve the actual supply and demand of electricity'').

    See also Petition at 27.

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

    ii. Determinations Regarding the Inclusion of All RTO and ISO Market

    Participants as Appropriate Persons for Purposes of the Final Order

    Several commenters advocated that the Commission use the authority

    provided by section 4(c)(3)(K) of the CEA to expand the definition of

    appropriate persons for purposes of the Final Order to include all

    entities that satisfy the market participant eligibility requirements

    established by the RTOs and ISOs.\247\ Commenters generally supported

    their positions by: (1) Citing to the capitalization, financial

    security and/or other requirements that RTO and ISO market participants

    must satisfy; \248\ (2) alleging potential adverse effects of the exit

    from the RTO and ISO markets of current participants that would be

    unable to meet the proposed appropriate person criteria; \249\ and/or

    (3) asserting a perceived lack of risk to the overall

    [[Page 19898]]

    economy from a default in an RTO or ISO market.\250\

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

    \247\ See, e.g., AB Energy at 1; Commercial Working Group at 2-

    4; COPE at 7; ERCOT October at 1-11; ERCOT December at 2, 10; FERC

    Staff at 6; Financial Marketers Coalition at 2, 11-16; Industrial

    Coalitions at 1, 3-5; Joint Trade Associations at 11-13; NEPOOL at

    2-3; NYISO Supplement to Requesting Parties' Comment, Attachment B

    at 1; NYTOs at 3-4; NYPSC at 2; Requesting Parties at 2-5; PJM at 1,

    4; PUCT at 9; Tarachand at 1-2.

    \248\ See, e.g., AB Energy at 1; ERCOT October at 2-11;

    Industrial Coalitions at 5; NEPOOL at 2; NYISO Supplement to

    Requesting Parties' Comment, Attachment B at 1-4; NYPSC at 2; NYTOs

    at 4; PUCT at 10; Requesting Parties at 2-5; Tarachand at 1-2; TEAM/

    ARM at 2.

    \249\ See, e.g., Commercial Working Group at 3; ERCOT December

    at 7; FERC Staff at 6; Financial Marketers Coalition at 11-12;

    Industrial Coalitions at 5; NYPSC at 3; PJM at 4; PUCT at 11;

    Tarachand at 2.

    \250\ See, e.g., AB Energy at 1-2; FERC Staff at 6; Financial

    Marketers Coalition at 15; NYTOs at 4; PUCT at 11; Requesting

    Parties at 4; Tarachand at 2.

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

    Multiple commenters asserted that the Commission should deem all

    RTO and ISO market participants as appropriate persons for purposes of

    the Final Order by referencing specific types of participation

    standards established by the RTOs and ISOs.\251\ Certain of those

    commenters claimed that such requirements minimize the risks in the

    applicable markets \252\ and help to ensure that only sophisticated

    players enter the markets.\253\ Commenters cited, for example, the RTO

    and ISO market participant obligations to either satisfy a baseline

    capitalization requirement and/or to post participation-based financial

    security \254\ as well as credit,\255\ disclosure,\256\ training,\257\

    risk management,\258\ personnel,\259\ and/or technical capability

    requirements \260\ that may apply to market participants. Multiple

    commenters noted that RTO- and ISO-established market participation

    criteria have been approved by FERC or PUCT, as applicable.\261\ Other

    commenters cited the regulatory oversight and/or market monitoring to

    which the RTOs and ISOs are subject \262\ and/or certain mechanisms

    employed by RTOs and ISOs to support the financial integrity of the

    market.\263\ Multiple commenters also expressed concern with potential

    conflicts between the appropriate persons determinations being made by

    the Commission and the determinations made by an RTO or ISO and its

    regulator with respect to market participation eligibility.\264\ One

    commenter questioned whether, through the appropriate persons

    limitations, the Commission intended to regulate minimum RTO

    participation standards \265\ and another asserted that it is

    ``unnecessary'' and ``burdensome'' for the Commission to duplicate the

    efforts of the RTOs and ISOs and their regulators in establishing

    market participation requirements.\266\

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

    \251\ See, e.g., AB Energy at 2; CAISO/ISO NE January at 6;

    ERCOT October at 4-11; ERCOT December at 7; Financial Marketers

    Coalition at 13-14; Industrial Coalitions at 5; NEPOOL at 2; NYISO

    Supplement to Requesting Parties' Comment, Attachment B at 1-4;

    NYPSC at 2; NYTOs at 4; Requesting Parties at 3-6, 8; PJM at 4; PUCT

    at 9; Tarachand at 2.

    \252\ See, e.g., AB Energy at 2; CAISO/ISO NE January at 6-7;

    Financial Markets Coalition at 13-15; PUCT at 10.

    \253\ See generally CAISO/ISO NE January at 7.

    \254\ See, e.g., ERCOT October at 2-5; Financial Marketers

    Coalition at 14, 15; NYPSC at 3; PUCT at 10; Requesting Parties at

    3-5, 8.

    \255\ See, e.g., ERCOT October at 2-3, 6-9; ERCOT December at 7;

    Financial Marketers Coalition at 15; NYISO Supplement to Requesting

    Parties' Comment, Attachment B at 2-4; NYPSC at 2; PUCT at 10;

    Requesting Parties at 4; TEAM/ARM at 2.

    \256\ See, e.g., Financial Marketers Coalition at 15-16; NYPSC

    at 2.

    \257\ See, e.g., CAISO/ISO NE January at 7; Requesting Parties

    at 4.

    \258\ See, e.g., Commercial Working Group at 4; ERCOT October at

    5-6; NYPSC at 2; Requesting Parties at 4.

    \259\ See generally Requesting Parties at 4.

    \260\ See generally id.

    \261\ See, e.g., AB Energy at 1; CAISO/ISO NE January at 3;

    Commercial Working Group at 3; Financial Marketers Coalition at 4;

    COPE at 10; Joint Trade Associations at 11; NYISO Supplement to

    Requesting Parties' Comment, Attachment B at 6; Tarachand at 1;

    TEAM/ARM at 2.

    \262\ See, e.g., CAISO/ISO NE January at 3, 8; ERCOT October at

    2; Financial Marketers Coalition at 11-12; Joint Trade Associations

    at 11-13; NYISO Supplement to Requesting Parties' Comment,

    Attachment B at 5-6; NYPSC at 2; NYTOs at 4; Requesting Parties at

    2-5.

    \263\ NYISO Supplement to Requesting Parties' Comment,

    Attachment B at 4-5; Requesting Parties at 5.

    \264\ See, e.g., NEPOOL at 2-3; PJM at 4; PUCT at 9; Requesting

    Parties at 2-5.

    \265\ See generally COPE at 5.

    \266\ See generally AB Energy at 2.

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

    Certain commenters claimed that some entities that currently

    participate in the RTO and ISO markets might not be able to satisfy the

    appropriate person standard set forth in the Proposed Order and would

    exit the market.\267\ While some commenters did not name the specific

    types of entities that they believed would be excluded,\268\ others

    identified particular groups of market participants that could be

    eliminated, including municipalities and electric cooperatives,\269\

    REPs,\270\ emergency load providers,\271\ LSEs,\272\ special case

    resources,\273\ demand response providers,\274\ marketers,\275\ and

    generators.\276\ One commenter asserted that exempting some market

    participants, but not others, would create an artificial distinction

    between market participants that conflicts with the Federal Power Act

    and would create an unfairly discriminatory regulatory scheme.\277\

    Commenters also expressed concern that market participants who fall

    outside the exemption would be subject to duplicative regulation,\278\

    with some questioning the efficiency or operational workability of a

    dual regulatory structure.\279\

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

    \267\ See, e.g., AB Energy at 2; Commercial Working Group at 3-

    4; Financial Marketers Coalition at 11-12, 13-16; NYPSC at 3; NYTOs

    at 4.

    \268\ See, e.g., Commercial Working Group at 4; NYPSC at 2.

    \269\ See, e.g., FERC Staff at 6; Joint Trade Associations at

    11-13; NEPOOL at 2-3; PUCT at 11. But see ERCOT December at 6 (``The

    proposed `Appropriate Persons' limitation would not affect any * * *

    electric cooperatives.'').

    \270\ See, e.g., PUCT at 9; TEAM/ARM at 2-3.

    \271\ See, e.g., PJM at 2.

    \272\ See, e.g., Financial Marketers Coalition at 14; NYISO

    Supplement to Requesting Parties' Comment, Attachment B at 6;

    Requesting Parties at 6; PJM at 2.

    \273\ See, e.g., Requesting Parties at 6; Tarachand at 2.

    \274\ See, e.g., PJM at 2; Requesting Parties at 6; Tarachand at

    2.

    \275\ See, e.g., Financial Marketers Coalition at 14; NYISO at

    2-10; NYISO Supplement to Requesting Parties' Comment, Attachment B

    at 6; Requesting Parties at 6.

    \276\ See, e.g., Financial Marketers Coalition at 14; NYISO

    Supplement to Requesting Parties' Comment, Attachment B at 6;

    Requesting Parties at 6; PJM at 2.

    \277\ See, e.g., Financial Marketers Coalition at 10-11

    (alleging that ``[t]he Federal Power Act states that `[n]o public

    utility shall, with respect to any transmission or sale subject to

    the jurisdiction of [FERC], make or grant any undue preference or

    advantage of any person or subject any person to any undue prejudice

    or disadvantage * * *.' '') (citing 16 U.S.C. 824d(b)); NYISO at 9-

    10.

    \278\ See, e.g., NYPSC at 3.

    \279\ See, e.g., CAISO/ISO NE January at 3; Financial Marketers

    Coalition at 3, 11, 16-18.

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

    Several commenters alleged that the exit of existing market

    participants would have a negative impact on the functioning of the RTO

    and ISO markets.\280\ Certain commenters claimed that reduced

    participation would result in volatility \281\ or reduced

    liquidity,\282\ including one commenter that noted the effect of

    liquidity on the price discovery process.\283\ In addition, certain

    commenters asserted that decreased participation would result in

    increased market concentration and diminished competition,\284\

    including one commenter who alleged that the increased market

    concentration that could result from the forced exit of small market

    participants is ``at cross-purposes to the legislative spirit'' of the

    Dodd-Frank Act, which was intended to end ``too-big-to-fail.'' \285\

    One commenter also noted that the high barriers to entry and high

    concentration of ownership in the RTO and ISO markets make such markets

    more susceptible to abuse when smaller entities are forced out,\286\

    while another commenter stated that reduced competition would result in

    higher electric energy prices, causing harm to rate payers.\287\ One

    commenter claimed

    [[Page 19899]]

    that the departure of market participants would cause remaining

    participants who serve the load of the withdrawing participants to face

    higher prices to procure the additional electric energy and would cause

    existing load forecasts to be inaccurate as new customers would not

    factor into the remaining participants' forecast models and would limit

    the available electric energy in instances of unplanned outages,

    thereby increasing the risks posed to remaining providers, the RTOs and

    ISOs, and the marketplace as a whole.\288\ Another commenter alleged

    that a ``chilling effect on the development of technologies to provide

    renewable energies and the systems that complement the integration of

    renewable resources'' would result if certain small market participants

    that are the ``vanguard of innovation'' are removed.\289\ Some

    commenters also stated that reduced market participation would

    eliminate jobs and reduce tax revenue.\290\ Certain commenters asserted

    that the exclusion of certain market participants would create

    regulatory uncertainty.\291\ Others claimed that the exclusion of

    participants would violate the Congressional intent behind section

    4(c)(3)(K) of the CEA \292\ or the competitive principles underlying

    the administration of electric energy competition in the relevant

    area.\293\

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

    \280\ See, e.g., CAISO/ISO NE January at 3; Commercial Working

    Group at 3-4; FERC Staff at 6; Tarachand at 2.

    \281\ See generally Commercial Working Group at 3.

    \282\ See, e.g., CAISO/ISO NE January at 3, 6, 8; Commercial

    Working Group at 3-; Financial Marketers Coalition at 11-12; NYPSC

    at 2-3; Tarachand at 2. But see ERCOT December at 6 (``[I]t does not

    appear that the proposed Appropriate Person limitation would have a

    significant impact on market liquidity in ERCOT.'').

    \283\ See generally Tarachand at 2.

    \284\ See, e.g., Commercial Working Group at 4; Financial

    Marketers Coalition at 11-12, 14, 16; Industrial Coalitions at 5;

    NYPSC at 3; Tarachand at 2.

    \285\ Tarachand at 2.

    \286\ Industrial Coalitions at 4-5.

    \287\ See generally Financial Marketers Coalition at 12.

    \288\ See generally Commercial Working Group at 3-4.

    \289\ Tarachand at 2.

    \290\ See, e.g., AB Energy at 2; Tarachand at 2.

    \291\ See, e.g., FERC Staff at 6; PUCT at 9; Requesting Parties

    at 3, 8.

    \292\ See, e.g., CAISO/ISO NE January at 7-8; Requesting Parties

    at 3.

    \293\ See generally ERCOT December at 8-9.

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

    Certain commenters supported the inclusion of all RTO and ISO

    market participants in the appropriate persons definition for purposes

    of the Final Order by claiming that recently increased collateral

    requirements have reduced the default risks of particular RTOs \294\

    and/or that the mutualized risk of market participants for participant

    defaults has reduced the risk of a financial default in an RTO or ISO

    market spreading to the rest of the economy.\295\ Some of those

    commenters specifically noted that market participant failures have not

    posed a significant threat to the health of the RTO or ISO or other

    market participants.\296\

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

    \294\ See generally Tarachand at 2.

    \295\ See, e.g., AB Energy at 2; Commercial Working Group at 3;

    Tarachand at 2.

    \296\ See, e.g., AB Energy at 2; Tarachand at 2; PUCT at 11.

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

    However, certain commenters who contended that the Commission

    should invoke the authority provide by section 4(c)(3)(K) of the CEA to

    include all RTO and ISO market participants in the definition of

    appropriate persons for purposes of the Final Order nonetheless

    suggested that the market impact of the participation limitations

    imposed by the proposed appropriate persons definition could be

    minimal.\297\

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

    \297\ For example, one Requesting Party stated that ``past

    experience has shown that many market participants, when faced with

    modestly higher capitalization requirements, will meet these

    requirements in order to remain active market participants.'' See

    generally PJM at 3. The commenter further noted that, although the

    number of entities potentially affected by the proposed appropriate

    person limitations ``appear[s] to compromise a very large percentage

    of the Petitioners' market participants,'' such entities ``account

    for minimal transactional activity'' in comparison to the Requesting

    Party's ``market transactions as a whole'' and, thus, the

    appropriate persons limitation ``would likely not have a significant

    impact on Petitioners' market liquidity.'' Id. Similarly, another

    Requesting Party stated that, if the Commission were to add LSEs to

    the definition of appropriate persons pursuant to section 4(c)(3)(K)

    of the Act, only three financial traders would be excluded from its

    markets when taking into account its own revised market participant

    eligibility requirements, which ``is arguably insignificant when

    viewed solely from the impact to the number of eligible market

    participants.'' ERCOT December at 4-5. According to this Requesting

    Party, the appropriate persons limitation ``would appear to have an

    immaterial incremental liquidity impact'' above that associated with

    the effects of its own eligibility standards and ``no impact on the

    competitive retail market.'' Id. at 5.

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

    As set forth above, the Commission considered requests from the

    commenters to categorize particular types of entities as appropriate

    persons for purposes of the Final Order and, pursuant to the authority

    provided by section 4(c)(3)(K) of the CEA, is expanding the definition

    to include a ``person who actively participates in the generation,

    transmission, or distribution of electric energy.'' \298\ The

    Commission believes that this expansion, when combined with the

    ``appropriate persons'' definition delineated in sections 4(c)(3)(A)

    through (J) of the CEA and the determination, as proposed, to include

    ECPs, as defined in section 1a(18)(A) of the CEA and in Commission

    regulation 1.3(m), would appear to strike the appropriate balance. It

    would not exempt only those RTO and ISO market participants that can

    demonstrate neither the financial wherewithal nor the requisite

    business activities and congruent expertise to qualify as appropriate

    persons under section 4(c)(3)(K) of the CEA.

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

    \298\ Paragraph 5(g) of the Order.

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

    The Commission declines to generally and broadly extend the

    exemption contained in the Final Order to transactions involving all

    persons that satisfy the market participant eligibility criteria

    established by the RTOs and ISOs. The Commission notes that the

    definition of appropriate person set forth in sections 4(c)(3)(A)

    through (J) of the CEA explicitly defines the types of qualified

    entities that Congress intended to be eligible for an exemption under

    section 4(c).\299\ Certain of these categories reflect an intention to

    limit a section 4(c) exemption to entities of reasonably significant

    financial means, while others apply to entities that have regulatory

    status that implies functional expertise. For example, section

    4(c)(3)(F) defines ``appropriate person'' to include ``a corporation,

    partnership, proprietorship, organization, trust, or other business

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

    $5,000,000 or the obligations of which under the agreement, contract or

    transaction is guaranteed by or otherwise supported by a letter of

    credit or keepwell, support, or other agreement by any such entity or

    by an entity referred to in subparagraphs (A), (B), (C), (H), (I), or

    (K) of [section 4(c)(3)].'' \300\ Moreover, section 4(c)(3)(K) of the

    CEA expressly restricts the Commission's authority to expand the

    definition of appropriate person beyond persons whom the Commission

    determines are ``appropriate in light of [such persons'] financial or

    other qualifications, or the applicability of appropriate regulatory

    protections.'' As noted by one of the commenters, the RTO and ISO

    ``markets are complex and not geared to unsophisticated traders * * * .

    [T]hey are designed as wholesale * * * markets.'' \301\ The Commission

    believes that the ability of persons who fail to satisfy an RTO's or

    ISO's capitalization criteria to nonetheless participate in the RTO's

    or ISO's market by providing financial security in an amount below the

    standard established in section 4(c)(3)(F), as indicated in the

    Petition,\302\ would render the section 4(c)(3)(K) determination

    difficult to make on a wholesale basis. While the Commission

    understands that the Requesting Parties, with the oversight of FERC or

    PUCT, as applicable, have established participation standards that they

    believe are sufficient to protect their own markets, the Commission

    notes that those participation standards are not directed to meeting

    the language of section 4(c)(3)(K), which is focused on protecting

    market participants. As set forth in the Proposed Order, the

    Commission's preliminary

    [[Page 19900]]

    determination that the exemption would not have a material adverse

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

    discharge its duties under the CEA was based on the reasoning that

    ``the limitation of the exemption to Transactions between certain

    `appropriate persons' * * * avoids potential issues regarding financial

    integrity and customer protection. That is, this approach would appear

    to ensure that Transactions subject to the Final Order would be limited

    to sophisticated entities that are able to, from a financial

    standpoint, understand and manage the risks associated with such

    Transactions.'' \303\ Notwithstanding the comments received, the

    Commission has determined to limit the exemption set forth in the Final

    Order to Covered Transactions in which each party to the Covered

    Transaction is: (1) An ``appropriate person'' as defined in sections

    4(c)(3)(A) through (J) of the CEA; (2) an ``eligible contract

    participant,'' as defined in section 1a(18)(A) of the CEA and in

    Commission regulation 1.3(m); or (3) a ``person who actively

    participates in the generation, transmission, or distribution of

    electric energy,'' as that term is defined in the Final Order.

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

    \299\ 7 U.S.C. 6(c)(A)-(J).

    \300\ 7 U.S.C. 6(c)(F).

    \301\ CAISO/ISO NE January at 7.

    \302\ See, e.g., Petition at 27-28.

    \303\ 77 FR 52146.

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

    iii. Determinations Regarding the Inclusion of Public Power Systems and

    Tribal Governments as Appropriate Persons Pursuant to Section

    4(c)(3)(H) of the CEA

    One commenter asked that the Commission affirm that public power

    systems, and that units or instrumentalities of tribal governments are

    ``appropriate persons'' under section 4(c)(3)(H) of the CEA.\304\ This

    commenter asserted that, because public power systems are ``units of

    state or local governments, or agencies or instrumentalities of the

    foregoing,'' they properly are within the scope of ``appropriate

    persons,'' as defined by section 4(c)(3)(H).\305\ In addition, the

    commenter argued that because units or instrumentalities of tribal

    governments are governmental entities, they too fall within the

    definition of ``appropriate persons'' set forth in section

    4(c)(3)(H).\306\

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

    \304\ APPA at 3.

    \305\ Id. In support of this position, APPA noted that, in the

    preamble to the Proposed Order, the Commission observed that

    ``municipal entities * * * appear to qualify as `appropriate

    persons' pursuant to CEA section 4(c)(3)(H)'' and that the

    definition would cover ``municipalities and other government owned

    market participants.'' Id. at 2 (citing 77 FR 52145 n.99).

    \306\ Id.

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

    The Commission interprets section 4(c)(3)(H) to include public

    power systems and the units or instrumentalities of tribal governments

    within the meaning of ``governmental entities.'' This interpretation is

    consistent with both the Commission's approach to public power

    entities, which are operated by local governments for the benefit of

    its citizens \307\ and Indian tribes in the exemption for 201(f)

    entities.\308\

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

    \307\ E.g., municipal utilities such as the Los Angeles

    Department of Water and Power and the Sacramento Municipal Utility

    District, or a PUD (``public utility district'') organized under

    state law and operated by a city, county, state, or regional agency.

    ``Proposal to Exempt Certain Transactions Involving Not-For-Profit

    Electric Utilities,'' 77 FR 50998 at 51004 nn.43-44, Aug. 23, 2012.

    \308\ Id. at 51004-05 (Commission determination that electric

    utilities owned by federally-recognized Indian tribes are no

    different substantively than government-owned electric utilities for

    purposes of the relief provided). The Commission's interpretation is

    also informed by CEA section 4s(h)(2), which directs the Commission

    (albeit in another context) to look to section 3 of ERISA (29 U.S.C.

    1002) for the purposes of defining ``special entity,'' including

    ``any governmental plan.'' ERISA includes Indian tribes within the

    meaning of ``governmental plan.'' Further, the Commission

    incorporates by reference the list of Indian tribes recognized by

    the Department of Interior's Bureau of Indian Affairs (BIA) as set

    forth in, ``Indian Entities Recognized and Eligible To Receive

    Services From the Bureau of Indian Affairs,'' 77 FR 47868, Aug. 10,

    2012, or any successor to that document issued by the BIA.

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

    iv. Clarifications with Respect to Certain Language in Section

    4(c)(3)(F) of the CEA for Purposes of the Final Order

    Section 4(c)(3)(F) of the CEA defines ``appropriate person'' to

    include ``[a] corporation, partnership, proprietorship, organization,

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

    total assets exceeding $5,000,000, or the obligations of which under

    the agreement, contract or transaction are guaranteed or otherwise

    supported by a letter of credit or keepwell, support, or other

    agreement by any such entity or by an entity referred to [in sections

    4(c)(3)(A), (B),(C), (H), (I) or (K)] of the CEA].'' \309\ One

    commenter argued that the language ``or the obligations of which under

    the agreement, contract or transaction are guaranteed or otherwise

    supported by a letter of credit or keepwell, support, or other

    agreement'' can be interpreted to mean that a market participant that

    provides an RTO or ISO with a letter of credit that has been issued by

    an appropriate person \310\ in the amount of the RTO or ISO-specific

    credit requirements (i.e., the amount of its estimated obligations to

    the RTO or ISO) satisfies the ``appropriate person'' standard set forth

    in section 4(c)(3)(F) of the CEA.\311\ This commenter also interpreted

    the quoted language to mean that a market participant that provides to

    the RTO or ISO an unlimited guaranty that has been issued by an

    appropriate person \312\ thereby supports its obligation to the RTO or

    ISO and, thus, satisfies the section 4(c)(3)(F) criteria.\313\

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

    \309\ 7 U.S.C. 6(c)(3)(F) (emphasis added).

    \310\ As described by Requesting Parties, ``appropriate person''

    in this context would include only those market participants that

    are defined under the Commission's regulations as ``appropriate

    persons'' or ``eligible contract participants.'' Requesting Parties

    at 7-8.

    \311\ Id.

    \312\ As described by Requesting Parties, ``appropriate person''

    in this context would include only those market participants that

    are defined under the Commission's regulations as ``appropriate

    persons'' or ``eligible contract participants.'' Id.

    \313\ Id.

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

    In addition, one commenter requested that the Commission provide

    guidance as to what would be acceptable as a ``keepwell, support, or

    other agreement'' for purposes of section 4(c)(3)(F),\314\ and

    specifically asked whether a parental guaranty would be sufficient and

    whether audited financial statements would be required. This commenter

    also asked how the Commission would quantify the obligations of a

    business entity for purposes of this provision.\315\

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

    \314\ Financial Marketers Coalition at 15-16.

    \315\ Id.

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

    The Commission clarifies that a market participant that provides to

    the RTO or ISO an unlimited guaranty or other support in the form of a

    ``letter of credit or keepwell, support, or other agreement,'' which

    guarantee or other support has been issued by an appropriate person,

    thereby supports its obligation to the RTO or ISO and, thus, satisfies

    the section 4(c)(3)(F) criteria. The guaranteeing or supporting entity

    will not be required by the Final Order to demonstrate its status as an

    ``appropriate person'' \316\ through the use of audited financial

    statements.

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

    \316\ As described by the Requesting Parties, ``appropriate

    person'' in this context would include only those market

    participants that are defined under the Commission's regulations as

    ``appropriate person'' or ``eligible contract participants.''

    Requesting Parties at 7-8.

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

    e. Public Interest and Purposes of the CEA

    i. FERC Credit Reform Policy

    As discussed in greater detail above,\317\ the standards set forth

    in FERC regulation 35.47 appear to achieve goals similar to the

    regulatory objectives of the Commission's DCO Core Principles, and

    substantial compliance with such requirements is key to the

    Commission's determination that the Tariffs and activities of the

    Requesting

    [[Page 19901]]

    Parties and supervision by FERC and PUCT are congruent with, and--in

    the context of the Covered Transactions--sufficiently accomplish, the

    regulatory objectives of each DCO Core Principle.

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

    \317\ See section IV.A.3.i. infra.

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

    ii. Use of the DCO Core Principles in the Public Interest and Purposes

    of the CEA Analysis

    In the Proposed Order, in determining whether an exemption for the

    transactions defined therein was consistent with the public interest

    and the purposes of CEA, the Commission preliminarily determined, based

    upon the Requesting Parties' representations and in the context of the

    Requesting Parties' activities with respect to the transactions within

    the scope of the Proposed Order, that the Requesting Parties' practices

    or Tariffs and supervision by FERC and PUCT appeared to be congruent

    with, and sufficiently accomplish, the regulatory objectives of the

    Core Principles set forth in the CEA for DCOs.\318\ Following the

    analysis of each DCO Core Principle, the Commission expressly sought

    comment with respect to its preliminary conclusions.\319\

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

    \318\ See 77 FR 52148-57.

    \319\ See id.

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

    The Commission received several comments regarding the use of the

    DCO Core Principles as part of the public interest and purposes of the

    CEA analysis.\320\ One commenter expressly ``support[ed] the

    Commission's determination that the Petitioners' tariffs and market

    rules are consistent with the spirit of the DCO Core Principles[.]''

    \321\ However, this commenter requested clarification that the

    Commission's DCO Core Principle analysis ``does not equate to a finding

    on Petitioners' status as a * * * DCO or the transactions executed on

    or through the Petitioners' markets as swaps.'' \322\ Another commenter

    stated that the DCO Core Principle analysis is not an appropriate

    standard in analyzing whether the exemption is in the public interest

    because ``RTOs are physical electricity transmission and market

    operators pervasively regulated by either FERC or the PUCT'' and are

    not DCOs,\323\ while a different commenter asserted that the Commission

    ``should not require RTOs and ISOs to comply with the'' DCO Core

    Principles.\324\

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

    \320\ See, e.g., Joint Trade Associations at 4, 6; COPE at 6, 9;

    Commercial Working Group at 4.

    \321\ Joint Trade Associations at 6 (noting in particular

    Requesting Parties' credit-worthiness provisions and financial

    integrity rules).

    \322\ Id. at 4.

    \323\ COPE at 6, 9.

    \324\ Commercial Working Group at 4.

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

    The Commission believes that the analysis drawing from the DCO Core

    Principles contained in the Proposed Order should be used to determine

    whether the exemption is consistent with the public interest and the

    purposes of the CEA. The Commission is not using the analysis to

    determine whether the Requesting Parties are DCOs. The Commission is

    not holding the Requesting Parties to the same standards as DCOs, and

    is not concluding that the Requesting Parties would meet the standards

    set forth in section 5b(c)(2) of the CEA and part 39 of the

    Commission's regulations. Nonetheless, the Commission believes that the

    DCO Core Principles provide a useful framework by which to measure the

    extent to which the Tariffs and activities of the Requesting Parties,

    and supervision by FERC and PUCT, are congruent with, and--in the

    context of the Covered Transactions--sufficiently accomplish, the

    regulatory objectives of the CEA. As discussed herein, particularly in

    sections IV.A.3.a.i. and IV.B.2.e.i., the Commission believes that the

    standards set forth in FERC regulation 35.47 appear to achieve goals

    similar to the regulatory objectives of the Commission's DCO Core

    Principles. Moreover, as set forth in the Commission's DCO Core

    Principle analysis in the Proposed Order,\325\ the Commission

    determines that the Requesting Parties' policies and procedures appear

    to be consistent with, and to accomplish sufficiently for purposes of

    this Final Order, the regulatory objectives of the DCO Core Principles

    in the context of the Covered Transactions.

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

    \325\ See 77 FR 524149-57.

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

    iii. Use of the SEF Core Principles in the Public Interest and Purposes

    of the CEA Analysis

    In the Proposed Order, in determining whether the proposed

    exemption was consistent with the public interest and the purposes of

    CEA, the Commission preliminarily determined, based upon the Requesting

    Parties' representations and in the context of the Requesting Parties'

    activities with respect to the transactions within the scope of the

    Proposed Order, that the Requesting Parties' practices or Tariffs, and

    supervision by FERC and PUCT, appeared to be congruent with, and

    sufficiently accomplish, the regulatory objectives of the Core

    Principles set forth in the CEA for SEFs.\326\ Following the analysis

    of each SEF Core Principle, the Commission expressly sought comment

    with respect to its preliminary conclusions.\327\

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

    \326\ See 77 FR 52157-62.

    \327\ See id.

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

    One commenter implored the Commission to allow the RTO and ISO

    markets to continue to exist largely as they currently do by not

    requiring compliance with the SEF Core Principles.\328\ Similarly,

    another commenter contended that, because the Requesting Parties are

    neither DCMs nor SEFs, ``the application of [DCM or SEF] core

    principles to such markets provides little value,'' and the existence

    of [FERC or PUCT] regulation should be the premise upon which an

    exemption is granted.\329\

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

    \328\ Commercial Working Group at 4.

    \329\ COPE at 6. Additionally, in response to the Commission

    asking whether ``the procedures and principles in place allow the

    Requesting Parties to meet the requirements of SEF core principles

    10-15,'' 77 FR 52173, COPE questioned why FERC and PUCT regulation

    in those areas would not be sufficient. Id. at 10.

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

    Regarding the Commission's 4(c) public interest analysis, one

    commenter agreed ``that rules and regulations under the Petitioners'

    [Open Access Transmission Tariffs] in general satisfy the Core

    Principles and regulatory requirements that would apply to entities

    seeking designation as a SEF.'' \330\ Notwithstanding this agreement,

    however, the commenter also requested that the Commission clarify that

    its public interest analysis and determinations regarding SEF Core

    Principles does not constitute a finding that the Requesting Parties

    are SEFs or that the transactions executed on their markets constitute

    swaps.\331\

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

    \330\ Joint Trade Associations at 6.

    \331\ Id. at 7.

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

    Similar to its view of the DCO Core Principles analysis and comment

    received thereon, the Commission believes its analysis drawing from the

    SEF Core Principles contained in the Proposed Order should be used to

    determine whether the exemption is consistent with the public interest

    and purposes of the Act--not as a determination that the Requesting

    Parties are SEFs themselves, or that the products traded in their

    markets are swaps. To the contrary, and consistent with the legislative

    history behind CEA section 4(c), the Commission takes no position as to

    the jurisdictional status of any Requesting Party or Covered

    Transaction in the Final Order. Furthermore, in making its public

    interest and purposes of the CEA determination based upon, in part, the

    SEF Core Principle analysis, the Commission is not holding the

    Requesting Parties to the same standards as SEFs, nor is it concluding

    that the

    [[Page 19902]]

    Requesting Parties would meet the standards set forth in section 5h(f)

    of the CEA.

    Nonetheless, the Commission views the SEF Core Principles as a

    useful way of measuring the extent to which the Tariffs and activities

    of the Requesting Parties, and supervision by FERC and PUCT, are

    congruent with, and--in the context of the Covered Transactions--

    sufficiently accomplish, the regulatory objectives of the CEA. As set

    forth in the Commission's SEF Core Principles analysis in the Proposed

    Order,\332\ the Commission has determined that the Requesting Parties'

    policies and procedures appear to be consistent with, and to accomplish

    sufficiently for purposes of the Final Order, the regulatory objectives

    of the SEF Core Principles in the context of the Covered Transactions.

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

    \332\ 77 FR 52157-62.

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

    iv. Imposition of Position Limits

    In the Proposed Order, the Commission requested comment as to

    whether ``the lack of position limits or position accountability

    thresholds for speculators in Petitioners' markets, given the nature of

    their markets and market participants, and the other regulatory

    protections applicable to these markets as described [in the Proposed

    Exemption], would prevent the Commission from determining that the

    Proposed Exemption is consistent with the public interest and the

    purposes of the CEA.'' \333\ The Commission also specifically requested

    comment on the basis for concluding that market participants should or

    should not have to satisfy position limit requirements, particularly

    with respect to FTRs or virtual bids.\334\

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

    \333\ 77 FR 52159.

    \334\ 77 FR 52173.

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

    Generally, commenters responded that the Commission should not

    impose position limits on the Covered Transactions. Several commenters

    objected on the ground that, because the Commission had not determined

    that the transactions subject to the Proposed Order were subject to the

    jurisdiction of the Commission, the imposition of an existing

    regulatory regime on such transactions would be unreasonable.\335\

    Another commenter argued that the transactions set forth in the

    Proposed Order are not based on any reference contract within the

    Requesting Parties' markets, and that imposition of position limits

    would be impractical and unnecessary because the Federal Power Act

    already requires rates to be just and reasonable.\336\ Commenters also

    posited that the application of position limits would be a duplication

    of the currently applicable financial assurance requirements in FERC-

    approved RTO and ISO Tariffs \337\ and, similarly, that FERC and PUCT

    regulation should be the only factor considered in issuing the

    exemption, even assuming position limits were relevant to RTO and ISO

    electric energy markets.\338\

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

    \335\ Requesting Parties at 17; Joint Trade Associations at 8;

    FIEG at 3.

    \336\ Joint Trade Associations at 8.

    \337\ FIEG at 3.

    \338\ COPE at 10.

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

    Commenters also highlighted that the Requesting Parties' markets

    are administrated so that the total amount of energy represented by

    instruments created on the markets is related to the deliverable

    capacity of the physical transmission systems, making them a more

    effective limitation than position limits since, as currently

    constructed under the Commission's rules, position limits do not cap

    overall open interest.\339\ Finally, the Requesting Parties pointed out

    the fact that the Commission developed speculative position limits on

    cash-settled contracts to ensure that no single trader can exert enough

    market power to influence the cash settlement price of that contract,

    whereas generators and LSEs are required to use the Requesting Parties'

    electric energy markets for the purpose of delivering electric energy,

    which effectively ensures the same result.\340\

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

    \339\ Requesting Parties at 17; see DC Energy at 3 (noting in

    particular that FTRs and virtual bids are constrained by the natural

    physical limits of RTO and ISO market design, due to the products'

    relation to the deliverable capacity of each RTO and ISO system).

    \340\ Requesting Parties at 17-18.

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

    Without making any determinations regarding the merits of the

    commenters' concerns regarding position limits, the Commission's Final

    Order does not impose position limits on the Covered Transactions. The

    Commission accepts the Requesting Parties' representations that the

    physical capability of their transmission grids limits the size of

    positions that any single market participant can take at a given time.

    Moreover, based upon the representations made in the Petition, the

    Proposed Order provided that each category of exempted transaction,

    including FTRs, would be limited by the physical capability of the

    electric energy transmission system. Accordingly, as the Final Order

    continues to limit each Covered Transaction category to the physical

    capability of the transmission grid,\341\ the Commission believes that

    imposing position limits on the Covered Transactions is not necessary

    at this time in order to make the requisite public interest and

    purposes of the CEA determinations.

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

    \341\ The Final Order explicitly includes ``Virtual and

    Convergence Bids and Offers'' as a type of Energy Transaction.

    Consistent with DC Energy's comments, such transactions are also

    limited to the physical capabilities of the physical transmission

    grid, as required by the definition in the Final Order. See section

    IV.A.1.c. supra.

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

    v. Ability To Re-Create the Day-Ahead Market and Real-Time Prices

    The Proposed Exemption specifically sought public comment as to

    whether the Requesting Parties ``should [be] capable of re-creating the

    Day-Ahead Market and Real-Time prices.'' \342\

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

    \342\ 77 FR 52173.

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

    Some commenters contested the underlying utility of being able to

    re-create the market. The Requesting Parties argued that it is

    impossible to predict how other market participants would have reacted

    to a hypothetical situation.\343\ One commenter argued that claiming an

    ability to re-create market prices would ``create the misimpression

    that such recreations can be done accurately,'' and thus would

    negatively affect market certainty.\344\ Similarly, another commenter

    opposed any requirement that the RTO and ISOs be able to ``re-create,

    re-state or in any way change prices,'' believing that it would

    negatively affect confidence in the integrity of markets if prices

    could be altered after-the-fact.\345\ Another commenter argued that the

    ability to re-create the Day-Ahead Market and Real-Time prices was

    unnecessary because MMUs already have substantial tools and broad

    authority to obtain and analyze market data in order ``to address

    potential market flaws, as well as instances of potential fraudulent

    market activity.'' \346\ Finally, one commenter questioned the

    relevance of such a requirement for transactions that are being

    exempted.\347\

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

    \343\ Requesting Parties at 18 (citing several FERC decisions

    and related RTO and ISO filings that ``unequivocally reject the

    market re-run concept'').

    \344\ PUCT at 13.

    \345\ DC Energy at 3.

    \346\ See PUCT at 13-14. PUCT also noted that its enforcement

    approach, as implemented by ERCOT, ``makes remediation a matter of

    enforcement rather than of disrupting markets by using post-hoc

    resettlement tools.'' PUCT at 14.

    \347\ COPE at 8.

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

    Regardless of underlying utility, necessity, or relevance, the

    Requesting Parties noted that building the capability to re-run a

    market (other than a straight reproduction of what occurred) would be

    extremely expensive in all cases, and in some cases, impossible to

    do.\348\

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

    \348\ Requesting Parties at 18-19 (listing such costs as

    entailing development of a user interface to vary price inputs that

    kept track of changes in market rules and data formats over time, as

    well as the physical maintenance of the hardware and software

    involved with all trading and clearing over time).

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

    [[Page 19903]]

    Generally, the Commission notes that the ability to re-create

    market prices entails simulating what price outcomes in a market

    auction would have occurred, but for certain bids and offers being

    placed. This ability is required of Commission-regulated DCMs \349\ in

    order to allow the Commission's Division of Enforcement to determine

    the magnitude of loss caused by any fraudulent or manipulative trading

    scheme that may have occurred, as opposed to providing an initial means

    of detecting fraud or manipulation, or enabling third parties to

    contest market outcomes through private rights of action. Therefore,

    the Commission disagrees with the assertions that it is impossible to

    retroactively predict market outcomes based upon hypothetical price

    inputs, or that the ability to re-create prices would result in market

    uncertainty or loss of confidence in the integrity of prices.

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

    \349\ See 17 CFR 38.552(c). The SEF proposed rules contained a

    similar requirement in section 37.406. See ``Core Principles and

    Other Requirements for Swap Execution Facilities,'' 76 FR 1214 at

    1247, Jan. 7, 2011.

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

    Nevertheless, due to the potentially significant costs for the

    Requesting Parties that could be associated with building the

    capability to re-run their markets, the Commission is not requiring

    such a capability as a condition of the Final Order. While the

    Commission encourages FERC and PUCT to continue contemplating requiring

    the Requesting Parties to implement the ability to re-run their

    markets, the Commission does not believe that such a capability is

    necessary at this time to its determination that the Final Order is

    consistent with the public interest and purposes of the Act.\350\

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

    \350\ See 77 FR 52158-59.

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

    f. Effect on the Commission's or Any Contract Market's Ability To

    Discharge Its Regulatory or Self-Regulatory Duties Under the CEA

    CEA section 4(c)(2)(B)(ii) requires the Commission to make a

    determination regarding whether exempting the Covered Transactions will

    have a material adverse effect on the ability of the Commission or any

    contract markets to perform regulatory or self-regulatory duties.\351\

    In making this determination, the Commission should consider such

    regulatory concerns as ``market surveillance, financial integrity of

    participants, protection of customers and trade practice enforcement.''

    \352\ These considerations are similar to the purposes of the CEA as

    defined in section 3, initially addressed in the public interest and

    purposes of the CEA discussion.

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

    \351\ 7 U.S.C. 6(c)(2)(B).

    \352\ See H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 79

    (1992).

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

    The Commission proposed to determine that the exemption would not

    have a material adverse effect on the Commission's or any contract

    market's ability to discharge its regulatory function. In the Proposed

    Order, the Commission noted the following assertion by the Requesting

    Parties as support for its determination:

    Under Section 4(d) of the Act, the Commission will retain

    authority to conduct investigations to determine whether Petitioners

    are in compliance with any exemption granted in response to this

    request. * * * [T]he requested exemptions would also preserve the

    Commission's existing enforcement jurisdiction over fraud and

    manipulation. This is consistent with section 722 of the Dodd-Frank

    Act, the existing MOU between the FERC and the Commission and other

    protocols for inter-agency cooperation. The Petitioners will

    continue to retain records related to the Transactions, consistent

    with existing obligations under FERC and PUCT regulations.

    The regulation of exchange-traded futures contracts and

    significant price discovery contracts (``SPDCs'') will be unaffected

    by the requested exemptions. Futures contracts based on electricity

    prices set in Petitioners' markets that are traded on a designated

    contract market and SPDCs will continue to be regulated by and

    subject to the requirements of the Commission. No current

    requirement or practice of the ISOs/RTOs or of a contract market

    will be affected by the Commission's granting the requested

    exemptions.\353\

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

    \353\ 77 FR at 52146 (quoting Petition at 28).

    In addition, the Commission stated that the limitation of the

    exemption to transactions delineated in the Proposed Order between

    certain appropriate persons avoids potential issues regarding financial

    integrity and customer protection.\354\

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

    \354\ See id.

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

    Moreover, the Commission did not propose to exempt the Requesting

    Parties from certain CEA provisions, including, but not limited to,

    sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c),

    6(d), 6(e), 6c, 6d, 8, 9, and 13 or and any implementing regulations

    promulgated thereunder including, but not limited to, Commission

    regulations 23.410(a) and (b), 32.4, and part 180, to the extent that

    those sections prohibit fraud or manipulation of the price of any swap,

    contract for the sale of a commodity in interstate commerce, or for

    future delivery on or subject to the rules of any contract market.\355\

    As such, the Commission proposed to expressly retain authority to

    pursue fraudulent or manipulative conduct.\356\

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

    \355\ See id. at 52143.

    \356\ Nor did the Requesting Parties seek an exemption from

    these provisions. See 77 FR at 52146; Petition at 2-3. See section

    IV.D. infra for a detailed discussion regarding the comments the

    Commission received regarding this reservation of authority.

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

    In addition, the Commission proposed that granting the exemption

    for the transactions delineated in the Proposed Order would not have a

    material adverse effect on the ability of any contract market to

    discharge its self-regulatory duties under the Act.\357\ Specifically,

    with respect to FTRs, Forward Capacity Transactions, and Reserve or

    Regulation Transactions, the Commission found that the exemption would

    not have a material adverse effect on any contract market carrying out

    its self-regulatory function because these transactions did not appear

    to be used for price discovery or as settlement prices for other

    transactions in Commission regulated markets.\358\ With respect to

    Energy Transactions, the Commission proposed that, while these

    transactions did have a relationship to Commission regulated markets

    because they can serve as a source of settlement prices for other

    transactions within Commission jurisdiction, they should not pose

    regulatory burdens on a contract market because the Requesting Parties

    have market monitoring systems in place to detect and deter

    manipulation that takes place on their markets.\359\ In addition, the

    Commission noted that, as a condition to the exemption, the Commission

    would be able to obtain data from FERC and PUCT with respect to

    activity on the Requesting Parties' markets that may impact trading on

    Commission regulated markets.\360\

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

    \357\ See 77 FR at 52147.

    \358\ See id. at 52146.

    \359\ See id. at 52148, 52151, 52157-58.

    \360\ See id. at 52146-47.

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

    Finally, the Commission noted that if the transactions described in

    the Proposed Order could ever be used in combination with trading

    activity or in a position in a DCM contract to conduct market abuse,

    both the Commission and DCMs have sufficient independent authority over

    DCM market participants to monitor for such activity.

    While the Commission did not receive any comments on its proposed

    determination that the exemption would not have a material adverse

    effect on the Commission's ability to discharge its

    [[Page 19904]]

    regulatory duties, important caveats should be made. With regard to the

    SEF Core Principle 3 analysis and general statements regarding the

    Requesting Parties' MMUs' ability to detect and deter

    manipulation,\361\ the Commission notes that such statements were not

    meant to be construed as a final and irrevocable approval of the

    integrity of reference prices derived from the Requesting Parties'

    markets. The Commission retains the authority to question and obtain

    additional information in a timely manner regarding the underlying

    prices to which FTRs and other electric energy contracts, which are

    subject to the Commission's jurisdiction, settle. As previously

    discussed, the Commission maintains the responsibility of ensuring that

    exchange-traded and cleared financial electric energy contracts are

    constructed such that the settlement mechanism produces prices that

    accurately reflect the underlying supply and demand fundamentals of the

    RTO and ISO markets and are not readily susceptible to manipulation.

    For this reason, the Commission has conditioned the Final Order upon

    access to related transactional and positional data from the Requesting

    Parties' markets.\362\

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

    \361\ See note 359 and accompanying text supra.

    \362\ See section IV.A.3.b.ii. supra.

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

    For the reasons set forth herein and in the Proposed Order, the

    Commission determines that the exemption for the Covered Transactions

    in this Final Order would not have a material adverse effect on the

    Commission's or any contract market's ability to discharge its

    regulatory function.

    C. Issuance of Separate or a Collective Order

    The Commission proposed to issue a single exemptive order for all

    Requesting Parties in lieu of the six separate exemptive orders

    requested by the Requesting Parties because, as explained in the

    Proposed Order, there are `` `[congruents] in [the Petitioners']

    markets and operations,' '' \363\ and ``it would appear that issuing

    six separate but identical * * * [e]xemptions that raise the same

    issues and questions is unnecessary, could result in needlessly

    duplicative comments, and would be an inefficient use of Commission

    resources.'' \364\ The Commission further ``disagree[d] with the

    Requesting Parties' assertion that separate orders are necessary

    because a solitary order would require each Requesting Party to submit

    an individual application to obtain supplemental relief or to amend the

    relief provided thereby.'' \365\

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

    \363\ 77 FR 52164 (alterations in original).

    \364\ Id. C.f. section IV.B.2.a. supra.

    \365\ 77 FR 52164.

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

    Several commenters urged the Commission to adopt separate final

    orders for particular Requesting Parties because of concerns

    surrounding the delays and regulatory uncertainty that may be caused by

    requiring compliance by all Requesting Parties with the proposed

    conditions precedent.\366\ One commenter specifically asked the

    Commission to grant ERCOT's exemption pursuant to a separate order that

    recognizes the differences between the ERCOT regulatory regime and the

    regime applicable to the other RTOs and ISOs.\367\

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

    \366\ See, e.g., Requesting Parties at 14-15; Joint Trade

    Associations at 14-15.

    \367\ See, e.g., PUCT at 4.

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

    Another commenter requested that the Commission clarify that any

    supplemental relief requested by one Requesting Party would not, if

    granted, apply to any other Requesting Party, unless specifically

    requested by that Requesting Party.\368\ The commenter claimed that the

    Requesting Parties' respective operations are not identical and that

    ``[i]t is necessary for each Petitioner to have the ability to evaluate

    whether any supplemental relief requested by another Petitioner should

    apply to its market and whether the Petitioner is willing to be bound

    by conditions, if any, set forth in such supplemental relief.'' \369\

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

    \368\ See, e.g., Requesting Parties at 15.

    \369\ Id. at 15-16.

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

    After careful consideration of these comments, the Commission has

    determined, for the same reasons set forth in the Proposed Order,\370\

    to issue a single final order on the basis of administrative economy.

    The Commission notes that the issuance of a single final order should

    not delay any particular Requesting Party's relief as the relief will

    become effective for any particular Requesting Party upon that party's

    compliance with the conditions in the Final Order.\371\

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

    \370\ See 77 FR 52164.

    \371\ See discussion regarding effectiveness of the exemption,

    section IV.E. infra.

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

    The Commission also confirms that individual Requesting Parties may

    file individual requests for supplemental exemptions. Future requests

    for supplemental relief will be dealt with as expeditiously as

    practicable based upon the petition submitted, the facts and

    circumstances at the time of the submission, and the Commission's

    resources at the time. The Requesting Parties have noted the importance

    of quick action, and the Commission notes that certain efficiencies may

    stem from coordinated action for relief.

    D. Additional Limitations

    As described in detail above,\372\ the Commission expressly noted

    in the Proposed Order \373\ that the proposed exemption was based upon

    the representations made in the Petition and in the supporting

    materials provided by the Requesting Parties and their counsel, and

    that any material change or omission in the facts and circumstances

    that alter the grounds for the Proposed Order might require the

    Commission to reconsider its finding that the exemption contained

    therein is appropriate and/or in the public interest and consistent

    with the purposes of the CEA. The Commission did not receive any

    comments on this proposal. As such, the Final Order is based on the

    representations made by the Requesting Parties and their counsel in the

    Petition, the supplemental information, and supporting materials filed

    with the Commission. In particular, the Commission notes that the

    following representations are of particular importance and integral to

    the Commission's decision to grant the exemption set forth in this

    Final Order: (1) The exemption requested by the Requesting Parties

    relate to Covered Transactions that are primarily entered into by

    commercial participants that are in the business of generating,

    transmitting and distributing electric energy; \374\ (2) the Requesting

    Parties were established for the purpose of providing affordable,

    reliable electric energy to consumers within their geographic region;

    \375\ (3) the Covered Transactions are an essential means, designed by

    FERC and PUCT as an integral part of their statutory responsibilities,

    to enable the reliable delivery of affordable electric energy; \376\

    (4) each of the Covered Transactions taking place on the Requesting

    Parties' markets is monitored by MMUs responsible to either FERC or, in

    the case of ERCOT, PUCT; \377\ and (5) each Covered Transaction is

    directly tied to the physical capabilities of the Requesting Parties'

    electric energy grids.\378\ Therefore, the Commission affirms that any

    material change or omission in the facts and circumstances that alter

    the grounds for the Final

    [[Page 19905]]

    Order might require the Commission to reconsider its finding that the

    exemption contained therein is appropriate and consistent with the

    public interest and purposes of the CEA. The Commission reiterates that

    Covered Transactions must be tied to the allocation of the physical

    capabilities of an electric energy transmission grid in order to be

    suitable for exemption because such activity would be inextricably

    linked to the physical delivery of electric energy.

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

    \372\ See section II.B.3. supra.

    \373\ See 77 FR at 52142, 52165.

    \374\ See id. at 52142. See also Petition at 20.

    \375\ See 77 FR 52142.

    \376\ See id. See also generally FERC Order No. 888; FERC Order

    No. 2000; 18 CFR 35.34(k)(2); TAC 25.1; Petition at 11, 13-14.

    \377\ See 77 FR 52142. See also Petition at 15-18.

    \378\ See 77 FR 52142.

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

    In addition, the Commission proposed to exclude from the exemptive

    relief its general anti-fraud, anti-manipulation, and enforcement

    authority over the Requesting Parties and the transactions described in

    the Proposed Order under the CEA, including, but not limited to,

    sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c),

    6(d), 6(e), 6c, 6d, 8, 9, and 13 of the CEA and any implementing

    regulations promulgated thereunder including, but not limited to,

    Commission regulations 23.410(a) and (b), 32.4, and part 180.\379\ The

    Commission received several comments regarding this reservation of

    authority.\380\

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

    \379\ See id. at 52163, 52166.

    \380\ See, e.g., Industrial Coalitions at 3; Joint Trade

    Associations at 10-11; FERC Staff at 5.

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

    One commenter expressed full support for this reservation of

    authority because ``the Commission's continued oversight in these vital

    areas protects the markets, market participants, and the customers they

    serve.'' \381\ Another commenter noted that CEA section 4c(b) and

    regulation 32.4 are not part of the Commission's anti-fraud and anti-

    manipulation enforcement authority, but rather ``articulate the

    Commission's jurisdiction over option transaction[s]'' and requested

    that section 4c(b) and regulation 32.4 be removed from the carve-out in

    the final order.\382\ Additionally, one commenter stated that it had no

    issue with the Commission's retention of anti-manipulation jurisdiction

    generally, but cautioned that the Commission cannot use an exemption

    order to extend the CFTC's anti-manipulation jurisdiction beyond that

    which the Dodd-Frank Act provides.\383\

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

    \381\ See, e.g., Industrial Coalitions at 3.

    \382\ See, e.g., Joint Trade Associations at 10-11.

    \383\ See, e.g., FERC Staff at 5.

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

    After consideration of the comments, the Commission believes it

    prudent to reserve in the Final Order its anti-fraud and anti-

    manipulation authority, as well as those scienter-based prohibitions in

    the specified provisions of the Act and Commission regulations (without

    finding it necessary in this particular context to preserve other

    enforcement authority). The Commission notes that reservation of

    enforcement authority is standard practice with exemptive orders issued

    pursuant to CEA section 4(c). While the commenter is correct that

    section 4c(b) and regulation 32.4 do not articulate the Commission's

    general anti-fraud, anti-manipulation, and enforcement authority

    directly, these provisions exemplify a possible statutory basis for

    bringing an enforcement action, should there be a need 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. In addition, these carve-outs are

    consistent with past exemptive orders and do not expand the

    Commission's jurisdiction.

    The Commission also 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.'' \384\

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

    \384\ See 7 U.S.C. 6(d).

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

    E. Effectiveness of the Exemption

    The Commission proposed to make the exemption effective

    immediately.\385\ In response to the Commission's general request for

    comments, the Commission received two types of comments with respect to

    the effectiveness of the exemption: (1) Comments requesting that the

    Commission issue a final order rapidly, and (2) one comment asking for

    clarification as to when the exemption will become effective with

    respect to individual Requesting Parties in light of the conditions

    precedent.

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

    \385\ See 77 FR at 52167.

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

    Several commenters requested that the Commission issue a final

    order as quickly as possible or practical, respectively.\386\ Of these,

    one commenter also requested that the Commission issue an interim or

    temporary order to make it clear that the RTO and ISO transactions are

    ``temporarily exempt'' and not subject to the Commission's jurisdiction

    until a final order is issued.\387\

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

    \386\ Commercial Working Group at 2; DC Energy at 2.

    \387\ DC Energy at 2.

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

    Another commenter stated that, if the Commission determines not to

    issue separate exemption orders, it should specify how and when a

    single order will take effect for each Requesting Party.\388\ This

    commenter noted that ``[e]ach Petitioner's ability to satisfy the

    proposed conditions precedent depends on the terms of the final

    exemption and the individual Petitioner's stakeholder process for

    amending its tariff or protocol.'' \389\ As a result, each Requesting

    Party is likely to satisfy the proposed conditions precedent at a

    different time.\390\ This commenter also asserted that it would be

    unreasonable for the Commission to delay the effectiveness of a final

    order until all of the Requesting Parties have satisfied all of the

    conditions precedent.\391\

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

    \388\ Requesting Parties at 15.

    \389\ Id.

    \390\ Id.

    \391\ Id.

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

    The Commission notes that it is not anticipated that any individual

    Requesting Party will be in need of a final order to continue its

    present business until the date by which all Requesting Parties have

    satisfied the conditions precedent described in the Proposed Order.

    Indeed, the Commission also notes that the Commission's Divisions of

    Clearing and Risk, Market Oversight, and Swap and Intermediary

    Oversight issued a no-action letter preserving the regulatory status

    quo of the transactions that are the subject of the Proposed Order

    until the earlier of March 31, 2013, or such earlier date as the

    Commission may establish in taking final action on the Proposed

    Order.\392\ Nonetheless, the Commission recognizes the concerns raised

    by the commenters with respect to the market uncertainty that may be

    caused if publication of a final order is delayed until all Requesting

    Parties have satisfied the conditions precedent. Moreover, with one

    exception, all Requesting Parties have represented that all of the

    necessary Tariffs and other documents have been submitted to, and have

    either already been approved or permitted to take effect or are

    currently being reviewed by, FERC or PUCT, as applicable.\393\

    Accordingly, the Commission has decided to publish this Final Order in

    advance of the full satisfaction by each Requesting Party of the

    prerequisites to the exemption set forth therein, so as to provide

    market participant with sufficient notice of the

    [[Page 19906]]

    prerequisites and conditions attendant to the Final Order. The

    Commission notes, however, that the exemption provided under the Final

    Order will not become effective with respect to a particular Requesting

    Party until that Requesting Party has complied with all of the

    specified prerequisites provided in the Final Order. That is, the

    conditions precedent are now prerequisites to the effectiveness of the

    exemption contained in the Final Order and not to the issuance of the

    Final Order. Specifically, a Requesting Party and its participants will

    not benefit from the exemption described in the Final Order unless and

    until: (1) Submission and acceptance of a legal opinion or memorandum

    of outside counsel that is satisfactory to the Commission, in the

    Commission's sole discretion, and that provides the Commission with

    assurance that the netting arrangements contained in the approach

    selected by the particular Requesting Party to satisfy the standards

    set forth in FERC regulation 35.47(d) (or in the case of ERCOT,

    standards that are the same as those set forth in FERC regulation

    35.47(d)) will, in fact, provide the Requesting Party with enforceable

    rights of set off against any of its market participants under title 11

    of the United States Code \394\ in the event of the bankruptcy of the

    market participant,\395\ and (2) in the case of Requesting Parties that

    are subject to regulation by FERC, the Requesting Party is in full

    compliance with FERC regulation 35.47 \396\ or, in the case of ERCOT,

    which is subject to regulation by PUCT, ERCOT is in substantial

    compliance with standards that are the same as those set forth in FERC

    regulation 35.47.\397\

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    \392\ CFTC Staff Letter 12-11.

    \393\ See Revised FERC Order No. 741 Implementation Chart.

    \394\ See 11 U.S.C. 553.

    \395\ See section IV.A.3.a.ii. supra.

    \396\ See section IV.A.3.a.i. supra.

    \397\ See id.

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    With respect to the required legal memorandum or opinion of

    counsel, the Commission is delegating to the Director of the Division

    of Clearing and Risk and to his designees, in consultation with the

    General Counsel or the General Counsel's designees, the authority to

    accept or reject the legal memorandum or opinion. The Director of

    Clearing and Risk will affirmatively communicate to the Requesting

    Party when the Requesting Party's legal memorandum or opinion has been

    accepted or rejected.

    With respect to the condition requiring compliance with the

    standards set forth in FERC regulation 35.47, Requesting Parties

    governed by FERC will be deemed to have satisfied this condition upon

    FERC's acceptance and approval of all of the Requesting Parties'

    Tariffs that are necessary to implement such standards.\398\ ERCOT will

    be deemed to have satisfied this condition upon PUCT permitting all of

    the necessary ERCOT protocol revisions to take effect, except that the

    Commission will accept a demonstration that ERCOT has protocols in

    effect that substantially meet the settlement and billing standards set

    forth in FERC regulation 35.47(b).\399\

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    \398\ See sections IV.A.3.a.i. and IV.B.2.e.i. supra.

    \399\ See id.

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    V. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the exemption set forth in the Final Order will have a

    significant economic impact on a substantial number of small entities

    and, if so, provide a regulatory flexibility analysis respecting the

    impact.\400\ In the Proposed Order, the Commission found that the

    Requesting Parties should not be considered small entities based on the

    central role they play in the operation of the electronic transmission

    grid and the creation of organized wholesale electric markets that are

    subject to FERC and PUCT regulatory oversight,\401\ analogous to

    functions performed by DCMs and DCOs, which the Commission has

    previously determined not to be small entities.\402\ The Proposed Order

    included entities that qualify as ``appropriate persons'' pursuant to

    CEA sections 4(c)(3)(A) through (J), or 4(c)(3)(K) that otherwise

    qualify as ECPs, as defined in CEA section 1a(18)(A) and Commission

    regulation 1.3 (m).\403\ The Commission previously determined that ECPs

    are not ``small entities'' for purposes of the RFA.\404\ As a result,

    the Commission certified that the Proposed Order would not have a

    significant economic impact on a substantial number of small entities

    for purposes of the RFA, and requested written comments regarding this

    certification.\405\ After further consideration of the comments

    received, the Commission has again determined that the Final Order

    would not have a significant economic impact on a substantial number of

    small entities for purposes of the RFA.

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

    \400\ 5 U.S.C. 601 et seq.

    \401\ See RFA analysis as conducted by FERC regarding five of

    the Requesting Parties, CAISO, NYISO, PJM, MISO, and ISO NE.,

    https://www.federalregister.gov/articles/2011/10/26/2011-27626/enhancement-of-electricity-market-surveillance-and-analysis-through-ongoing-electronic-delivery-of#h-17.

    Commission staff also performed an independent RFA analysis

    based on Subsector 221 of sector 22 (utilities companies), which

    defines any small utility corporation as one that does not generate

    more than 4 million of megawatts of electric energy per year, and

    Subsector 523 of Sector 52 (Securities Commodity Contracts, and

    Other Financial Investments and Related Activities) of the SBA

    standards, 13 CFR 121.201 (1-1-11 Edition), which identifies a small

    business size standard of $7 million or less in annual receipts.

    Staff concluded that none of the Requesting Parties is a small

    entity, based on the following information:

    MISO reports 594 million megawatt hours per year, https://www.midwestiso.org/Library/Repository/Communication%20Material/Corporate/Corporate%20Fact%20Sheet.pdf.

    ERCOT reports 335 million megawatt hours per year, http://www.ercot.com/content/news/presentations/2012/ERCOT_Quick_Facts_June_%202012.pdf.

    CAISO reports 200 million megawatts per year, http://www.caiso.com/Documents/CompanyInformation_Facts.pdf.

    NYISO reports 17 million megawatts per month, which calculates

    to 204 megawatts per year, http://www.nyiso.com/public/about_nyiso/nyisoataglance/index.jsp.

    PJM reports $35.9 billion billed in 2011, http://pjm.com/markets-and-operations.aspx.

    ISO NE reports 32,798 gigawatt hours in the first quarter of

    2011, which translates into almost 33 million megawatts for the

    first quarter of 2011, http://www.iso-ne.com/markets/mkt_anlys_rpts/qtrly_mktops_rpts/2012/imm_q1_2012_qmr_final.pdf.

    \402\ See A New Regulatory Framework for Clearing Organizations,

    66 FR 45604 at 45609, Aug. 29, 2001 (DCOs); Policy Statement and

    Establishment of Definitions of ``Small Entities'' for Purposes of

    the Regulatory Flexibility Act, 47 FR 18618 at 18618-19, April 30,

    1982 (DCMs).

    \403\ See 77 FR at 52145. Under CEA section 2(e), only ECPs are

    permitted to participate in a swap, subject to the end-user clearing

    exception.

    \404\ See Opting Out of Segregation, 66 FR 20740 at 20743, April

    25, 2001.

    \405\ See 77 FR at 52168.

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    In response to its request for comments on the Proposed Order, the

    Commission received comment letters relevant to the RFA that primarily

    focused on the scope of the term ``appropriate persons.'' \406\

    Specifically, the Commission requested comments on whether to expand

    the list of appropriate persons to include those entities that

    ``actively participate in the generation, transmission or distribution

    of electricity,'' but that are not ECPs and do not fall within CEA

    sections 4(c)(3)(A) through (J).\407\ Multiple commenters urged the

    Commission to expand the definition to include all persons who actively

    participate in the generation, transmission, or distribution of

    electric energy or specified types of entities that do so, noting that

    the proposed definition of an appropriate person was not sufficiently

    inclusive and could exclude traditionally active market participants

    whose participation facilitates demand response activities and reduces

    costs.\408\ The Commission

    [[Page 19907]]

    has carefully considered the comments and, using the authority provided

    by section 4(c)(3)(K) of the CEA, has determined that a ``person who

    actively participates in the generation, transmission, or distribution

    of electric energy'' as defined in the Final Order, is an appropriate

    person for purposes of the exemption provided therein.\409\ The

    Commission has based its determination, in part, on the view that the

    Covered Transactions ``subject to the Final Order would be limited to

    sophisticated entities that are able to, from a financial standpoint,

    understand and manage the risks associated with such Transactions.''

    \410\ The relief provided in the Final Order to a person who actively

    participates in the generation, transmission, or distribution of

    electric energy may impact some small entities to the extent they may

    fall within standards established by the Small Business Administration

    (``SBA'') regulations defining entities with electric energy output of

    less than 4,000,000 megawatt hours per year as a ``small entity.''

    \411\ However, based on the Commission's existing information about the

    RTO and ISO markets and the comments received, market participants

    consist mostly of entities exceeding the thresholds defining ``small

    entities'' set out above. \412\ Therefore, based on the comments

    received and industry feedback, the Commission is of the view that the

    Final Order would not affect a substantial number of small

    entities.\413\

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    \406\ See discussion in section IV.b.2.d. supra.

    \407\ See 77 FR at 52164, 52172.

    \408\ See, e.g., Industrial Coalitions at 4-5. See section

    IV.B.2.d.ii. supra.

    \409\ Accordingly, the exemption provided by the Final Order

    will apply to agreements, contracts, and transactions where (1) each

    party thereto is an ``appropriate person,'' as defined in sections

    4(c)(3)(A) through (J) of the CEA; an ``eligible contract

    participant,'' as defined in section 1a(18)(A) of the CEA and in

    Commission regulation 1.3(m); or a ``person who actively

    participates in the generation, transmission, or distribution of

    electric energy,'' as defined in Final Order and (2) that satisfy

    the additional parameters for inclusion in the exemption set forth

    in the Final Order. See paragraph 2 of the Order.

    \410\ See section IV.B.2.d.ii. supra (citing 77 FR at 52146).

    \411\ See note 401 supra (citing 13 CFR 121.201).

    \412\ PJM indicates that 55 of its 588 market participants may

    not be appropriate persons because they might not meet the

    requirements in CEA sections 4(c)(3)(A) through (J). However, PJM

    states that this number accounts for less than 10% of the total

    number of participants and thus is not considered significant. See

    PJM at 2. Similarly, in the CAISO market, 74 participants are

    authorized to purchase or hold FTRs. Of those, 13 are estimated to

    be market participants that actively participate in the generation,

    transmission, or distribution of electric energy, but that may not

    be appropriate persons because they might not meet the requirements

    in CEA sections 4(c)(3)(A) through (J) or qualify as ECPs

    (``Additional Participants''). In terms of total dollar volume,

    approximately 6.5% of the FTR payments and charges are with

    Additional Participants. See CAISO/ISO NE January at 5. With respect

    to ISO NE., as of September 20, 2012, there were 392 market

    participants that actively participated in the generation,

    transmission, or distribution of electric energy. However, while ISO

    NE did not provide financials on which to make a determination as to

    whether 169 of the 392 active market participants would be

    Additional Participants, in each instance, such active market

    participants are required to post sufficient collateral to cover the

    risk of their positions. Among the participants that have filed

    financial statements with ISO NE., 23 would be active market

    participants. These active market participants constitute 3.2% of

    the gross invoices billed to the 392 active market participants

    across all ISO NE markets in 2011. Of these 23 participants, ten

    (10) representing 2.8% of the total invoices billed to the 392

    market participants in 2011 have met their participation

    qualification by posting supplemental collateral. Id.

    \413\ The Commission notes that to the extent that market

    participants are required to meet capitalization requirement

    totaling $1 million net worth or $10 million total assets and are

    sophisticated entities that are able to, from a financial

    standpoint, understand and manage the risks associated with the

    exempted transactions, they are not considered ``small entities''

    for RFA purposes. See, e.g., Industrial Coalitions at 4 n.12 (citing

    FERC regulation 35.47 and stating that ``all market participants are

    required to meet a baseline capitalization requirement totaling $1

    million net worth or $10 million total assets'').

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

    The Commission is further of the view that the Final Order relieves

    the economic impact that the exempt entities, including any small

    entities that may opt to take advantage of the exemption set forth in

    the Final Order otherwise would be subjected to by exempting certain of

    their transactions from the application of substantive regulatory

    compliance requirements of the CEA and Commission regulations

    thereunder. Indeed, pursuant to section 4(c)(3)(K) of the CEA, the

    Final Order expands the category of persons that are ``appropriate

    persons'' that may avail themselves of the exemption. Accordingly, the

    Commission does not expect the Final Order to have a significant impact

    on a substantial number of small entities. Therefore, the Chairman, on

    behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.

    605(b), that the exemption set forth in the Final Order would not have

    a significant economic impact on a substantial number of small

    entities.

    B. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501

    et seq. (``PRA'') are, among other things, to minimize the paperwork

    burden to the private sector, ensure that any collection of information

    by a government agency is put to the greatest possible uses, and

    minimize duplicative information collections across the government. The

    PRA applies to all information, ``regardless of form or format,''

    whenever the government is ``obtaining, causing to be obtained [or]

    soliciting'' information, and includes and requires ``disclosure to

    third parties or the public, of facts or opinions,'' when the

    information collection calls for ``answers to identical questions posed

    to, or identical reporting or recordkeeping requirements imposed on,

    ten or more persons.'' The Proposed Order provided that the exemption

    would be expressly conditioned upon information sharing: ``With respect

    to ERCOT, information sharing arrangements between the Commission and

    PUCT that are acceptable to the Commission are executed and continue to

    be in effect. With respect to all other Requesting Parties, information

    sharing arrangements between the Commission and FERC that are

    acceptable to the Commission continue to be in effect.'' \414\ The

    Commission determined that the Proposed Order did not impose any new

    recordkeeping or information requirements, or other collections of

    information on ten or more persons that require approval of the Office

    of Management and Budget (``OMB''), and did not receive any comments

    regarding this determination.

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

    \414\ 77 FR at 52166.

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

    The Final Order has amended the information sharing conditions to

    provide that the exemption is expressly conditioned upon information

    sharing:

    (1) With respect to all Requesting Parties subject to the

    jurisdiction of FERC, information sharing arrangements between the

    Commission and FERC that are acceptable to the Commission continue

    to be in effect, and those Requesting Parties' compliance with the

    Commission's requests through FERC to share, on an as-needed basis

    and in connection with an inquiry consistent with the CEA and

    Commission regulations, positional and transactional data within the

    Requesting Parties' possession for products in the Requesting

    Parties' markets that are related to markets that are subject to the

    Commission's jurisdiction, including any pertinent information

    concerning such data.

    (2) With respect to ERCOT, the Commission's ability to request,

    and obtain, on an as-needed basis from ERCOT, concurrently with the

    provision of written notice to PUCT and in connection with an

    inquiry consistent with the CEA and Commission regulations,

    positional and transactional data within ERCOT's possession for

    products in ERCOT's markets that are related to markets that are

    subject to the Commission's jurisdiction, including any pertinent

    information concerning such data, and ERCOT's compliance with such

    requests by sharing the requested information.\415\

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

    \415\ Paragraph 4(a) of the Order.

    Nevertheless, the PRA would not apply in this case, given that the

    information sharing conditions in the Final Order would not impose any

    new recordkeeping or information collection requirements, or other

    collections of

    [[Page 19908]]

    information on ten or more persons that require OMB approval.

    C. Consideration of Costs and Benefits

    1. Background

    As discussed in section I. above, the Dodd-Frank Act amended CEA

    section 4(c) to add sections 4(c)(6)(A) and (B), which permit

    exemptions for certain transactions entered into (a) pursuant to a

    tariff or rate schedule approved or permitted to take effect by FERC,

    or (b) pursuant to a tariff or rate schedule establishing rates or

    charges for, or protocols governing, the sale of electric energy

    approved or permitted to take effect by the regulatory authority of the

    State or municipality having jurisdiction to regulate rates and charges

    for the sale of electric energy within the State or municipality

    pursuant to the Commission's 4(c) exemptive authority. However, the

    Commission must act ``in accordance with'' sections 4(c)(1) and (2) of

    the CEA.\416\

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

    \416\ See more detailed discussion in section I. supra.

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

    On February 7, 2012, the Requesting Parties filed a joint Petition

    \417\ with the Commission requesting that the Commission exercise its

    authority under section 4(c)(6) of the CEA and section 712(f) of the

    Dodd-Frank Act to exempt certain contracts, agreements and transactions

    for the purchase or sale of specified electric energy products, that

    are offered pursuant to a FERC- or PUCT-approved Tariff, from most

    provisions of the Act.\418\ The Requesting Parties asserted that each

    of the transactions for which an exemption is requested is (a) subject

    to a long-standing, comprehensive regulatory framework for the offer

    and sale of such transactions established by FERC, or in the case of

    ERCOT, PUCT, and (b) part of, and inextricably linked to, the organized

    wholesale electric energy markets that are subject to regulation and

    oversight of FERC or PUCT, as applicable. The Requesting Parties

    expressly excluded from the Petition a request for relief from sections

    4b, 4o, 6(c), and 9(a)(2) of the Act,\419\ and such provisions, among

    others, explicitly have been carved out of the Final Order.\420\

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

    \417\ As noted above, the Requesting Parties amended their

    Petition on June 11, 2012 and citations to Petition herein are to

    the amended Petition. See note 22 supra.

    \418\ See 77 FR 52139. See also Petition at 2-3, 6.

    \419\ See 77 FR 52139. See also Petition at 3.

    \420\ See paragraph 1 of the Order.

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

    The Requesting Parties requested that, due to the commonalities in

    their markets, the exemption apply to all Requesting Parties and their

    respective market participants with respect to each category of

    electricity energy transactions described in the Petition, regardless

    of whether such transactions are offered or entered into at the current

    time pursuant to an individual RTO or ISO's Tariff. The Requesting

    Parties asserted that this uniformity would avoid an individual RTO or

    ISO being required to seek future amendments to the exemption in order

    to offer or enter into the same type of transactions currently offered

    by another RTO or ISO.\421\

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

    \421\ See 77 FR 52139. See also Petition at 6.

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

    2. 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 \422\ 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.

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

    \422\ 7 U.S.C. 19(a).

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

    3. Proposed Order and Request for Comment on the Commission's Proposed

    Consideration of Costs and Benefits

    Upon consideration of the Petition, the Commission issued the

    Proposed Order which proposed to exempt certain transactions pursuant

    to section 4(c)(6) of the CEA.\423\ The Commission proposed to limit

    the exemption set forth in the Proposed Order to entities that meet one

    of the appropriate persons categories in CEA sections 4(c)(3)(A)

    through (J), or, pursuant to CEA section 4(c)(3)(K), that otherwise

    qualify as an ECP.\424\ Furthermore, under the Proposed Order, ``the

    covered agreements, contracts or transactions must be offered or sold

    pursuant to a Petitioner's tariff, which has been approved or permitted

    to take effect by: (1) In the case of ERCOT, the PUCT or (2) In the

    case of all other Petitioners, FERC.'' \425\

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

    \423\ 77 FR 52166-67. See also section II.B.1. supra.

    \424\ For those ECPs engaging in the transactions delineated in

    the Proposed Order in markets administered by a Requesting Party

    that do not fit within the categories of ``appropriate persons'' set

    forth in sections 4(c)(3)(A) through (J), the Commission proposed to

    determine that they are appropriate persons pursuant to section

    4(c)(3)(K), ``in light of their financial or other qualifications,

    or the applicability of appropriate regulatory protections.'' The

    Commission also noted that CEA section 2(e) permits all ECPs to

    engage in swaps transactions other than on a DCM and that such

    entities should similarly be appropriate persons for the purpose of

    the Proposed Order. See 77 FR 52145-46.

    \425\ Id.

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

    In the Proposed Order, the Commission clarified that financial

    transactions that are not tied to the allocation of the physical

    capabilities of an electric energy transmission grid would not be

    suitable for exemption, and were therefore not covered by the Proposed

    Order because such activity would not be inextricably linked to the

    physical delivery of electric energy.\426\

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

    \426\ See id. at 52143.

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

    The Proposed Order expressly requested public comment on the

    Commission's proposed cost-benefit consideration, including with

    respect to reasonable alternatives; the magnitude of specific costs and

    benefits, and data or other information to estimate a dollar valuation;

    and any impact on the public interest factors specified in CEA section

    15(a).\427\

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

    \427\ See id. at 52172. As a general matter, in considering the

    costs and benefits of its actions, the Commission endeavors to

    quantify estimated costs and benefits where reasonably feasible.

    Here, however, the Commission considers the costs and benefits of

    this Final Order mostly in qualitative terms because the commenters,

    including the Requesting Parties, provided no such data or

    information to assist the Commission in doing so despite the

    Proposed Order's request.

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

    4. Summary of Comments on the Costs and Benefits of the Proposed Order

    The Commission requested, but received no comments providing data

    or other information to enable the Commission to better quantify the

    expected costs and benefits attributable to the Final Order. In terms

    of qualitative cost and benefit comments, COPE stated that the

    Commission's Proposed Order creates confusion and inefficient,

    duplicative regulation, thus, imposing unnecessary costs.\428\ COPE

    also stated that the Commission should recognize the regulation of FERC

    and the PUCT and limit to the degree possible any regulatory burden

    imposed on RTOs, ISOs, and their members.\429\ The Joint Trade

    Associations stated that any additional regulation by the Commission

    would be duplicative and would lead to increased costs passed on to

    consumers.\430\

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

    \428\ COPE at 2, 5.

    \429\ Id. at 11.

    \430\ Joint Trade Associations at 5.

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    Another commenter, NYSIO, asserted that the benefit of Commission

    [[Page 19909]]

    regulation of smaller NYSIO market participants was unclear, but stated

    that costs of such regulation were certain.\431\ NYSIO noted that

    consequence of the Commission's possible conclusion that all authorized

    participants in NYSIO's markets were not ``appropriate persons'' would

    result in regulatory uncertainty and would result in potential

    exclusion of significant number of market participants from the NYSIO's

    markets. NYSIO also noted that, as a result, NYSIO would have to

    increase its resources to respond to the new regulatory and compliance

    requirements. NYSIO pointed out that this increase in their operating

    costs would be passed on to New York electricity consumers. More

    specifically, NYISO noted that the decision not to expand the scope of

    the Final Order to encompass all current market participants that

    otherwise qualify to participate in NYISO's markets would result in one

    of two consequences: ``(1) NYISO would be subject to Commission

    regulation by virtue of the ongoing participation by market

    participants that do not qualify as Appropriate Persons; or (2) NYISO

    would have to seek to amend its tariffs with FERC to change its

    participation criteria to effectively exclude these market

    participants.'' \432\ Under the first scenario, ``[t]he potential for

    inconsistent regulatory requirements would significantly weaken the

    regulatory certainty that is the intended benefit of the Exemption,''

    and ``[s]uch additional and potentially conflicting regulation would be

    certain to lead to increased costs to the NYISO, its market

    participants, and ultimately electric ratepayers.'' \433\ Under the

    second scenario, NYISO would have ``to seek approval to amend its

    tariffs to make its minimum participation criteria consistent with the

    Commission's definition of Appropriate Persons,'' which requires

    showing ``that the proposed tariff amendments are `just and reasonable'

    and do not `grant any undue preference or advantage to any person or

    subject any person to any undue prejudice or disadvantage.' '' \434\

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

    \431\ NYISO Supplement to Requesting Parties' Comment,

    Attachment B at 7.

    \432\ NYISO at 9.

    \433\ Id.

    \434\ Id. (citing 16 U.S.C. 824d).

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

    The Financial Marketers Coalition stated that excluding one set of

    market participants (i.e., those that do not own physical assets) from

    the exemption delineated in the Proposed Order would cause many market

    participants to exit the market because they could not operate based on

    the requirements of a dual regulatory structure.\435\ Such an outcome,

    according the Financial Marketers Coalition, would decrease

    competition, harm liquidity in the markets and allow the continued

    exercise of market power.\436\ The PUCT stated that excluding persons

    currently authorized to participate in ERCOT would introduce

    significant negative implications on the competitive (wholesale and

    retail) electric energy markets.\437\ Similarly, Tarachand commented

    that the exit of small market participants could adversely affect

    liquidity and the price discovery process.\438\ The Requesting Parties

    expressed similar concerns regarding the potential detrimental impact

    on the robustness of their markets.\439\

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

    \435\ Financial Marketers Coalition at 11-12.

    \436\ Id.

    \437\ PUCT at 9.

    \438\ Tarachand at 2.

    \439\ Requesting Parties at 8.

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

    The Industrial Coalitions generally supported the Proposed Order,

    stating that the Commission's continued jurisdiction over fraud and

    manipulation in the ISO and RTO markets provides crucial ongoing market

    oversight necessary for market transparency and customer

    protection.\440\ The Commercial Working Group stated that the

    Commission's Proposed Order offers legal certainty, and it commended

    the Commission for eliminating an unnecessary layer of regulation in an

    area that is highly complex and highly regulated.\441\ The Requesting

    Parties commented that regulatory certainty is the primary benefit of

    the exemption set forth in the Proposed Order.\442\

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

    \440\ Industrial Coalitions at 3.

    \441\ Commercial Working Group at 2.

    \442\ Requesting Parties at 3.

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

    Regarding whether the Commission should extend the definitions of

    the transactions set forth in the Proposed Order to include ``logical

    outgrowths'' of the same, NEPOOL stated that absent such an inclusion,

    market participants and Requesting Parties would be required to seek

    additional exemptions from the Commission for relatively minor

    modifications to existing Tariffs and/or transactions, which in turn

    could dramatically increase the Commission's workload.\443\

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

    \443\ NEPOOL at 4.

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

    Regarding the proposed requirement related to the memorandum of

    counsel stating that their netting arrangements satisfy FERC regulation

    35.47(d), the Requesting Parties stated that the Commission should

    forego that requirement as redundant with their existing obligations to

    FERC.\444\

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

    \444\ Requesting Parties at 16.

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

    In response to a request for comment, the Requesting Parties stated

    that the Commission should not require RTOs and ISOs to have the

    ability to recreate Day-Ahead and RTM prices.\445\

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

    \445\ Id. at 18.

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

    5. Summary of Final Order--Determinations and Conditions

    As discussed above, the Final Order makes certain determinations

    with respect to the scope of relief, including the scope of the Covered

    Transactions \446\ and the process for expanding the Covered

    Transactions.\447\ The Commission determined that any products that are

    offered by a Requesting Party, presently or in the future, pursuant to

    a Tariff that has been approved or permitted to take effect by FERC or

    PUCT and that fall within the provided definitions of the Covered

    Transactions, as well as any modifications to existing products that

    are offered by a Requesting Party pursuant to a Tariff that has been

    approved or permitted to take effect by FERC and PUCT and that do not

    alter the characteristics of the Covered Transactions in a way that

    would cause such products to fall outside these definitions are

    intended to be included within the Final Order. In this way, the

    Commission's Final Order provides beneficial flexibility and efficiency

    in that, if the product qualifies as one of the four Covered

    Transactions in the Final Order, the Requesting Party would not be

    required to request or to obtain future supplemental relief for a

    modified product. At the same time, however, the Commission declined to

    include phrases such as ``logical outgrowth,'' ``natural outgrowth,''

    and ``economically comparable'' in the definitions of the Covered

    Transactions because such phrases are too vague and too potentially far

    reaching to permit meaningful analysis under the Commission's statutory

    standard of review.

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

    \446\ See sections II.A.1.a.-c. supra.

    \447\ See section II.A.1.d. supra.

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

    The Final Order also sets forth certain conditions subsequent and

    conditions to the effectiveness of the exemption set forth therein.

    More specifically, two conditions subsequent relate to information

    requests by the Commission. First, the Commission must be able to

    obtain, either directly from ERCOT, or through FERC with respect to the

    other Requesting Parties, positional and transactional data within the

    Requesting Parties' possession for products in the Requesting Parties'

    markets that are related to markets subject to the Commission's

    [[Page 19910]]

    jurisdiction, including any pertinent information concerning such data.

    Second, the exemption is expressly conditioned upon the requirement,

    that with respect to each Requesting Party, neither the Tariffs nor any

    other governing documents of the particular RTO or ISO pursuant to

    whose Tariff the agreement, contract or transaction is to be offered or

    sold, shall include any requirement that the RTO or ISO notify its

    members prior to providing information to the Commission in response to

    a subpoena or other request for information or documentation.\448\

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

    \448\ Paragraph 4(b) of the Order.

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

    There are also two conditions to the effectiveness of the exemption

    set forth in the Final Order. For a Requesting Party subject to the

    jurisdiction of FERC, the exemption set forth in the Final Order is

    effective upon satisfaction of all of the following: (1) Submission and

    acceptance of a legal opinion or memorandum of outside counsel that is

    satisfactory to the Commission, in the Commission's sole discretion,

    and that provides the Commission with assurance that the netting

    arrangements contained in the approach selected by that Requesting

    Party to satisfy the obligations contained in FERC regulation 35.47(d)

    will, in fact, provide the Requesting Party with enforceable rights of

    set off against any of its market participants under title 11 of the

    United States Code in the event of the bankruptcy of the market

    participant; and (2) demonstration that the Requesting Party has fully

    complied with FERC regulation 35.47, as measured by FERC's acceptance

    and approval of all of the Requesting Party's submissions that are

    necessary to implement the requirements of FERC regulation 35.47.\449\

    For ERCOT, which is subject to the jurisdiction of PUCT, the exemption

    set forth in the Final Order is effective upon satisfaction of all of

    the following: (1) submission and acceptance of a legal opinion or

    memorandum of outside counsel that is satisfactory to the Commission,

    in the Commission's sole discretion, and that provides the Commission

    with assurance that the netting arrangements contained in the approach

    selected by ERCOT to satisfy standards that are the same as those

    contained in FERC regulation 35.47(d) will, in fact, provide the ERCOT

    with enforceable rights of set off against any of its market

    participants under title 11 of the United States Code in the event of

    the bankruptcy of the market participant; and (2) demonstration that

    ERCOT has fully complied with standards that are the same as those set

    forth in FERC regulation 35.47, as measured by PUCT permitting all of

    the necessary ERCOT protocol revisions to take effect; provided that

    the Commission will accept a demonstration that ERCOT has protocols in

    effect that substantially meet the settlement and billing period

    standards set forth in FERC regulation 35.47(b).\450\

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

    \449\ Paragraph 6(a) of the Order.

    \450\ Paragraph 6(b) of the 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 the Requesting Parties specifically. It also

    considers the costs and benefits of the exemption described in the

    Final Order, in light of the public interest factors enumerated in CEA

    section 15(a).

    6. Costs of the Final Order

    The Final Order is exemptive and provides ``appropriate persons''

    engaging in Covered Transactions relief from certain of the

    requirements of the CEA and attendant Commission regulations. As with

    any exemptive rule or order, the exemption in the Final Order is

    permissive, meaning that the Requesting Parties were not required to

    request it and are not required to rely on it. Accordingly, the

    Commission assumes that the Requesting Parties would rely on the

    exemption only if the anticipated benefits warrant the costs of the

    exemption.

    In response to the comments of NYISO and others, the Commission is

    of the view that the Requesting Parties will experience minimal, if

    any, ongoing costs as a result of the determinations and conditions set

    forth in the Final Order because, as the Requesting Parties certify

    pursuant to Commission regulation 140.99(c)(3)(ii), the attendant

    conditions are substantially similar to requirements that the

    Requesting Parties and their market participants already incur in

    complying with FERC or PUCT regulations.

    The requirement that all parties to the agreements, contracts, or

    transactions that are covered by the exemption in the Final Order must

    be (1) an ``appropriate person,'' as defined sections 4(c)(3)(A)

    through (J) of the CEA; (2) an ``eligible contract participant,'' as

    defined in section 1a(18)(A) of the CEA and in Commission regulation

    1.3(m); or (3) a ``person who actively participates in the generation,

    transmission, or distribution of electric energy,'' as defined in

    paragraph 5(g) of the Order--is not likely to impose any significant,

    incremental costs on the Requesting Parties because their existing

    legal and regulatory obligations under the FPA and FERC or PUCT

    regulations mandate that only eligible market participants may engage

    in the Covered Transactions, as explained above.\451\ To the comments

    of NYISO and others, the Commission recognizes that this requirement

    will mean that certain entities that currently operate in RTOs and ISOs

    but that do not satisfy the minimum financial criteria described above

    will not be able to avail themselves of the exemption. Such a result

    could cause those market participants wishing to avail themselves of

    the exemption to incur costs to satisfy the Final Order's minimum

    criteria or exit the market. The Commission considered these costs but

    has determined that these market participants must be excluded because

    they lack the minimum financial wherewithal the Commission believes is

    necessary to make the requisite finding under CEA section 4(c)(3)(K)

    that they meet the statutory requirements of CEA section 4(c)(3)(K). In

    response to the comments of the Financial Marketers Coalition, the

    Commission has clarified that if an entity meets the minimum criteria

    set forth in the Final Order, they may continue to operate in these

    markets even if they do not own or operate physical assets.

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

    \451\ See section IV.B.2.d. supra. While not compelled to, if a

    Requesting Party decided to amend its Tariff to conform with the

    Final Order's participant criteria for purposes of securing

    regulatory certainty--and assuming FERC would approve such an

    amendment--the Commission believes that a minimal cost would be

    imposed, mitigated to the extent that the Requesting Party already

    is required to amend its Tariff to comply with other terms of the

    Final Order. Alternatively, the Commission does not believe it is

    likely that the Requesting Parties themselves would become dually

    regulated by virtue of market participants not qualifying under the

    scope of the Final Order continuing to transact in the Requesting

    Parties' markets. To the extent that any Covered Transaction would

    be subject to the Commission's jurisdiction, the potential dual-

    regulatory requirements resulting from other Dodd-Frank rulemakings

    would be most likely to affect the market participants that do not

    qualify for the exemption set forth in the Final Order.

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

    The requirement that the Covered Transactions must be offered or

    sold pursuant to a Requesting Party's Tariff--which has been approved

    or permitted to take effect by: (1) In the case of ERCOT, the PUCT or;

    (2) in the case of all other Requesting Parties, FERC--is a statutory

    requirement for the exemption set forth in CEA section 4(c)(6) and

    therefore is not a cost attributable to an act of discretion by the

    Commission.\452\ Moreover, requiring that the Requesting Parties not

    operate outside their approved Tariffs derives from existing

    [[Page 19911]]

    legal requirements and is not a cost attributable to this Final Order.

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

    \452\ See 7 U.S.C. 6(c)(6)(A), (B).

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

    As described above, FERC and PUCT impose on the Requesting Parties,

    and their MMUs, various information management requirements. These

    existing requirements are not materially different from the condition

    that none of a Requesting Party's Tariffs or other governing documents

    may include any requirement that the Requesting Party notify a member

    prior to providing information to the Commission in response to a

    subpoena, special call, or other request for information or

    documentation. While the Commission is mindful that the process of

    changing Tariffs will cause the Requesting Parties to incur costs,

    those costs are necessary for the Commission to find that the exemption

    is in the public interest and consistent with the purposes of the CEA.

    Requiring that an information sharing arrangement between the

    Commission and FERC be in full force and effect is not a cost to the

    Requesting Parties or to other members of the public because it has

    been an inter-agency norm since 2005. The requirement that the

    Requesting Parties comply with the Commission's requests on an as-

    needed basis for related transactional and positional market data will

    impose only minimal costs on the Requesting Parties to respond because

    the Commission contemplates that any information requested will already

    be in the possession of the Requesting Parties.\453\

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

    \453\ See section IV.A.3.b.ii. supra.

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

    The legal opinion or memorandum of counsel requirement \454\ will

    require the Requesting Parties to incur costs to acquire. Based on the

    Laffey Matrix for 2012, assuming the opinion or memorandum is prepared

    by an experienced attorney (with 20 plus years of legal practice), his/

    her hourly rate ($734 per hour) multiplied by the amount of hours taken

    to prepare the opinion, will be the basic cost of such an opinion.\455\

    The Commission estimates that the cost of such memoranda will range

    between $15,000 and $30,000, part of which depends on the complexity of

    the analysis necessary to support the conclusion that the Requesting

    Party's set off rights are enforceable, and assuming that the opinion

    will take 20-40 hours to prepare.\456\ While important, these costs are

    mitigated by the Commission determination, in response to comments, not

    to require that the opinions or memoranda be signed on behalf of the

    law firm that is issuing the opinion.

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

    \454\ See section IV.A.3.a.ii. supra.

    \455\ The Court in Laffey v. Northwest Airlines, Inc., 572

    F.Supp. 354, 371 (D.D.C. 1983) ruled that hourly rates for attorneys

    practicing civil law in the Washington, DC metropolitan area could

    be categorized by years in practice and adjusted yearly for

    inflation. For 2012 Laffey Matrix rates, see http://www.justice.gov/usao/dc/divisions/civil_Laffey_Matrix_2003-2012.pdf.

    \456\ There are possibilities of economies of scale if multiple

    Requesting Parties share the same counsel in preparing these

    memoranda or opinions.

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

    7. Benefits

    The Commission's comprehensive action in this Final Order benefits

    the public and market participants in several substantial if

    unquantifiable ways, as discussed below. First, by considering a single

    application from all Requesting Parties at the same time, and deciding

    to allow all provisions of the exemption set forth in the Final Order

    to apply to all Requesting Parties and their respective market

    participants, the Final Order provides a cost-mitigating, procedural

    efficiency.

    By cabining the Covered Transactions to the definitions provided in

    this Final Order, the Commission limits the potential that purely

    financial risk can accumulate outside the comprehensive regime for

    swaps regulation established by Congress in the Dodd-Frank Act and

    implemented by the Commission. The mitigation of such risk inures to

    the benefit of the Requesting Parties, market participants, and the

    public, especially electric energy ratepayers.

    The condition that only appropriate persons may enter the Covered

    Transactions benefits the public, and the excluded market participants

    themselves, by ensuring that only persons with resources sufficient to

    understand and manage the risks of the transactions are permitted to

    engage in the same. Further, the condition requiring that the Covered

    Transactions only be offered or sold pursuant to a FERC- or PUCT-

    approved Tariff benefits the public by, for example, ensuring that the

    Covered Transactions are subject to a regulatory regime that is focused

    on the physical provision of reliable electric energy, and also has

    credit requirements that are designed to achieve risk management goals

    congruent with the regulatory objectives of the Commission's DCO and

    SEF Core Principles. Absent these and other similar limitations on

    participant- and financial-eligibility, the integrity of the markets at

    issue could be compromised, and members and ratepayers left unprotected

    from potentially significant losses resulting from purely financial,

    speculative activity. Moreover, the Commission's requirement that the

    Requesting Parties file an opinion of counsel regarding the right of

    set off in bankruptcy provides a benefit in that the analytical process

    necessary to formulate such an opinion would highlight risks faced by

    the Requesting Parties, and permit them to adapt their structure and

    procedures in a manner best calculated to mitigate such risks, and thus

    helps ensure the orderly handling of financial affairs in the event a

    participant defaults as a result of the Covered Transactions. Further,

    ensuring that the Requesting Parties have enforceable rights of set off

    against any of its market participants in the event of a bankruptcy of

    a market participant also provides a benefit in reducing costs to the

    Requesting Party that arise from a bankruptcy proceeding.

    The Commission's retention of its authority to redress any fraud or

    manipulation in connection with the Covered Transactions protects

    market participants and the public generally, as well as the financial

    markets for electric energy products. For example, the Final Order is

    conditioned upon the Commission's ability to obtain certain positional

    and transactional data within the Requesting Parties' possession from

    the Requesting Parties. Through this condition, the Commission expects

    that it will be able to continue discharging its regulatory duties

    under the CEA. Further, the condition that the Requesting Parties

    remove any Tariff provisions that would require a Requesting Party to

    notify members prior to providing the Commission with information will

    help maximize the effectiveness of the Commission's enforcement

    program.

    8. Consideration of Alternatives

    The chief alternatives to this Final Order relate to the scope of

    RTO and ISO market participants that are eligible for the exemption set

    forth therein, and the scope of Covered Transactions.

    As discussed above in section IV.B.2.d.i., the Commission received

    several requests to include various subsets of market participants in

    the definition of ``appropriate person'' pursuant to 4(c)(3)(K) of the

    CEA for purposes of the exemption described in the Proposed Order,

    including requests to extend the exemption to (1) any persons who

    qualify under market participant standards set forth in FERC- or PUCT-

    approved Tariffs, (2) persons who actively participate in the

    generation, transmission, or distribution of electric energy, and (3)

    more specific requests to include particular market participants, such

    as CSPs, LSEs, and

    [[Page 19912]]

    REPs.\457\ The exemption set forth in the Final Order includes those

    entities described in (2) and (3), but does not include other entities

    who are not ``appropriate persons'' as defined in sections 4(c)(3)(A)

    through (J) of the Act, are not ECPs, and are not in the business of

    (i) generating, transmitting, or distributing electric energy or (ii)

    providing electric energy services that are necessary to support the

    reliable operation of the transmission system.\458\ For those excluded

    entities, the exemption in the Final Order would impose costs relative

    to a definition that would allow all current market participants to

    avail themselves of the exemption. These affected market participants

    are excluded because, in the Commission's opinion, they lack the

    minimum financial wherewithal and therefore pose a risk to themselves

    and the physical electric energy market.\459\

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

    \457\ See section IV.B.2.d.i. supra.

    \458\ See paragraph 2(b) of the Order.

    \459\ See section IV.B.2.d.i. supra.

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

    Regarding the scope of Covered Transactions, the Commission

    considered the costs and benefits of various alternatives posed by

    commenters, including whether to expand the definition of Covered

    Transactions to include future products that are the ``logical

    outgrowth'' of existing products.\460\ The Commission declined this

    approach, in part, because of the concern that such an open-ended

    definition could present risks beyond those contemplated. At the same

    time, the Commission made clear that any new transactions that fall

    within the Covered Transactions, which are explicitly defined in the

    Final Order, and any modifications to existing transactions that do not

    alter the Covered Transactions' characteristics in a way that would

    cause them to fall outside those definitions, that are offered by a

    Requesting Party pursuant to a FERC- or PUCT-approved Tariff, are

    intended to be included within the exemption in the Final Order.\461\

    This provides a benefit in that no supplemental relief for such

    products would be required, which is a cost-mitigating efficiency gain

    for the Requesting Parties.

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

    \460\ See section IV.A.1.d. supra.

    \461\ See id.

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

    9. 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 have any negative effect on the protection of market

    participants and the public. More specifically, the Covered

    Transactions, in light of the representations of the Petitioners and in

    the context of their regulation by FERC and PUCT, do not appear to

    generate significant risks of the nature of those addressed by the CEA.

    The Commission has attempted to delineate the definitional boundaries

    for the Covered 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. In addition, the Commission has

    limited the exemption set forth in the Final Order to persons with

    resources sufficient to understand and manage the risks of the Covered

    Transactions. This requirement serves to protect excluded market

    participants and it minimizes the risk of potential misuse of the

    exempt transactions.

    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. 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

    entities who partake of the exemption delineated therein 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 markets subject to the

    Commission's jurisdiction. As discussed above, the Covered Transactions

    are used to manage unique electric industry operational risks, which

    appears to make them ill-suited for exchange trading and/or to serve a

    useful price discovery function.

    d. Sound Risk Management Practices

    The Commission believes that the Final Order will promote the

    ability of RTOs, ISOs, and their market participants to manage the

    operational risks posed by unique electric energy market

    characteristics, including the non-storable nature of electric energy

    and demand that can and frequently does fluctuate dramatically within a

    short time-span. As discussed above, the Commission understands that

    the Covered Transactions are an important tool facilitating the ability

    of the Requesting Parties to efficiently manage operational risk in

    fulfillment of their public service mission to provide affordable,

    reliable electric energy.

    e. Other Public Interest Considerations

    In exercising its sections 4(c)(1) and 4(c)(6)(C) exemptive

    authority in the Final Order, the Commission is acting to promote the

    broader public interest by facilitating the supply of affordable,

    reliable electric energy, as contemplated by Congress.\462\

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

    \462\ See related discussion in section I. supra.

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

    VI. Order

    Upon due consideration and consistent with the determinations set

    forth above, the Commission hereby issues the following Order:

    Pursuant to its authority under section 4(c)(6) of the Commodity

    Exchange Act (``CEA'' or ``Act'') and in accordance with sections

    4(c)(1) and (2) of the Act, the Commodity Futures Trading Commission

    (``Commission'')

    1. Exempts, subject to the conditions and limitations specified

    herein, the execution of the electric energy-related agreements,

    contracts, and transactions that are specified in paragraph 2 of this

    Order and any person or class of persons offering, entering into,

    rendering advice, or rendering other services with respect thereto,

    from all provisions of the CEA, except, in each case, 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.

    2. Scope. This exemption applies only to agreements, contracts, and

    transactions that satisfy each of the following requirements:

    a. The agreement, contract, or transaction is for the purchase and

    sale of one of the following electric energy-related products:

    (1) ``Financial Transmission Rights'' defined in paragraph 5(a) of

    this Order, except that the exemption shall only apply to such

    Financial Transmission Rights where:

    (a) Each Financial Transmission Right is linked to, and the

    aggregate volume of Financial Transmission Rights for any period of

    time is limited by, the physical capability (after accounting for

    counterflow) of the electric energy transmission system operated by a

    Requesting Party, as defined in paragraph 5(h) of this Order, offering

    the contract, for such period;

    [[Page 19913]]

    (b) The Requesting Party serves as the market administrator for the

    market on which the Financial Transmission Rights are transacted;

    (c) Each party to the transaction is a member of the Requesting

    Party (or is the Requesting Party itself) and the transaction is

    executed on a market administered by that Requesting Party; and

    (d) The transaction does not require any party to make or take

    physical delivery of electric energy.

    (2) ``Energy Transactions'' as defined in paragraph 5(b) of this

    Order.

    (3) ``Forward Capacity Transactions,'' as defined in paragraph 5(c)

    of this Order.

    (4) ``Reserve or Regulation Transactions'' as defined in paragraph

    5(d) of this Order.

    b. Each party to the agreement, contract or transaction is:

    (1) an ``appropriate person,'' as defined sections 4(c)(3)(A)

    through (J) of the CEA;

    (2) an ``eligible contract participant,'' as defined in section

    1a(18)(A) of the CEA and in Commission regulation 1.3(m); or

    (3) a ``person who actively participates in the generation,

    transmission, or distribution of electric energy,'' as defined in

    paragraph 5(g) of this Order.

    c. The agreement, contract, or transaction is offered or sold

    pursuant to a Requesting Party's Tariff and that Tariff has been

    approved or permitted to take effect by:

    (1) In the case of the Electricity Reliability Council of Texas

    (``ERCOT''), the Public Utility Commission of Texas (``PUCT''), or

    (2) In the case of all other Requesting Parties, the Federal Energy

    Regulatory Commission (``FERC'').

    3. Applicability to particular regional transmission organizations

    (``RTOs'') and independent system operators (``ISOs). Subject to the

    conditions contained in the Order, the Order applies to all Requesting

    Parties with respect to the transactions described in paragraph 2 of

    this Order.

    4. Conditions. The exemption provided by this Order is expressly

    conditioned upon the following:

    a. Information sharing:

    (1) With respect to all Requesting Parties subject to the

    jurisdiction of FERC, information sharing arrangements between the

    Commission and FERC that are acceptable to the Commission continue to

    be in effect, and those Requesting Parties' compliance with the

    Commission's requests through FERC to share, on an as-needed basis and

    in connection with an inquiry consistent with the CEA and Commission

    regulations, positional and transactional data within the Requesting

    Parties' possession for products in the Requesting Parties' markets

    that are related to markets that are subject to the Commission's

    jurisdiction, including any pertinent information concerning such data.

    (2) With respect to ERCOT, the Commission's ability to request, and

    obtain, on an as-needed basis from ERCOT, concurrently with the

    provision of written notice to PUCT and in connection with an inquiry

    consistent with the CEA and Commission regulations, positional and

    transactional data within ERCOT's possession for products in ERCOT's

    markets that are related to markets that are subject to the

    Commission's jurisdiction, including any pertinent information

    concerning such data, and ERCOT's compliance with such requests by

    sharing the requested information.

    b. Notification of requests for information: With respect to each

    Requesting Party, neither the Tariffs nor any other governing documents

    of the particular RTO or ISO pursuant to whose Tariff the agreement,

    contract or transaction is to be offered or sold, shall include any

    requirement that the RTO or ISO notify its members prior to providing

    information to the Commission in response to a subpoena or other

    request for information or documentation.

    5. Definitions. The following definitions shall apply for purposes

    of this Order:

    a. A ``Financial Transmission Right'' is a transaction, however

    named, that entitles one party to receive, and obligates another party

    to pay, an amount based solely on the difference between the price for

    electric energy, established on an electric energy market administered

    by a Requesting Party, at a specified source (i.e., where electric

    energy is deemed injected into the grid of a Requesting Party) and a

    specified sink (i.e., where electric energy is deemed withdrawn from

    the grid of a Requesting Party). The term ``Financial Transmission

    Rights'' includes Financial Transmission Rights and Financial

    Transmission Rights in the form of options (i.e., where one party has

    only the obligation to pay, and the other party only the right to

    receive, an amount as described above).

    b. ``Energy Transactions'' are transactions in a ``Day-Ahead

    Market'' or ``Real-Time Market,'' as those terms are defined in

    paragraphs 5(e) and 5(f) of this Order, for the purchase or sale of a

    specified quantity of electric energy at a specified location

    (including virtual and convergence bids and offers), where:

    (1) The price of the electric energy is established at the time the

    transaction is executed;

    (2) Performance occurs in the Real-Time Market by either

    (a) Delivery or receipt of the specified electric energy, or

    (b) A cash payment or receipt at the price established in the Day-

    Ahead Market or Real-Time Market (as permitted by each Requesting Party

    in its Tariff); and

    (3) The aggregate cleared volume of both physical and cash-settled

    energy transactions for any period of time is limited by the physical

    capability of the electric energy transmission system operated by a

    Requesting Party for that period of time.

    c. ``Forward Capacity Transactions'' are transactions in which a

    Requesting Party, for the benefit of load-serving entities, purchases

    any of the rights described in subparagraphs (1), (2), and (3) below.

    In each case, to be eligible for the exemption, the aggregate cleared

    volume of all such transactions for any period of time shall be limited

    to the physical capability of the electric energy transmission system

    operated by a Requesting Party for that period of time.

    (1) ``Generation Capacity,'' meaning the right of a Requesting

    Party to:

    (a) Require certain sellers to maintain the interconnection of

    electric generation facilities to specific physical locations in the

    electric-energy transmission system during a future period of time as

    specified in the Requesting Party's Tariff;

    (b) Require such sellers to offer specified amounts of electric

    energy into the Day-Ahead or Real-Time Markets for electric energy

    transactions; and

    (c) Require, subject to the terms and conditions of a Requesting

    Party's Tariff, such sellers to inject electric energy into the

    electric energy transmission system operated by the Requesting Party;

    (2) ``Demand Response,'' meaning the right of a Requesting Party to

    require that certain sellers of such rights curtail consumption of

    electric energy from the electric energy transmission system operated

    by a Requesting Party during a future period of time as specified in

    the Requesting Party's Tariff; or

    (3) ``Energy Efficiency,'' meaning the right of a Requesting Party

    to require specific performance of an action or actions that will

    reduce the need for Generation Capacity or Demand Response Capacity

    over the duration of a future period of time as specified in the

    Requesting Party's Tariff.

    d. ``Reserve or Regulation Transactions'' are transactions:

    [[Page 19914]]

    (1) In which a Requesting Party, for the benefit of load-serving

    entities and resources, purchases, through auction, the right, during a

    period of time as specified in the Requesting Party's Tariff, to

    require the seller of such right to operate electric facilities in a

    physical state such that the facilities can increase or decrease the

    rate of injection or withdrawal of a specified quantity of electric

    energy into or from the electric energy transmission system operated by

    the Requesting Party with:

    (a) physical performance by the seller's facilities within a

    response time interval specified in a Requesting Party's Tariff

    (Reserve Transaction); or

    (b) prompt physical performance by the seller's facilities (Area

    Control Error Regulation Transaction);

    (2) For which the seller receives, in consideration, one or more of

    the following:

    (a) Payment at the price established in the Requesting Party's Day-

    Ahead or Real-Time Market, as those terms are defined in paragraphs

    5(e) and 5(f) of this Order, price for electric energy applicable

    whenever the Requesting Party exercises its right that electric energy

    be delivered (including Demand Response,'' as defined in paragraph

    5(c)(2) of this Order);

    (b) Compensation for the opportunity cost of not supplying or

    consuming electric energy or other services during any period during

    which the Requesting Party requires that the seller not supply energy

    or other services;

    (c) An upfront payment determined through the auction administered

    by the Requesting Party for this service;

    (d) An additional amount indexed to the frequency, duration, or

    other attributes of physical performance as specified in the Requesting

    Party's Tariff; and

    (3) In which the value, quantity, and specifications of such

    transactions for a Requesting Party for any period of time shall be

    limited to the physical capability of the electric energy transmission

    system operated by the Requesting Party for that period of time.

    e. ``Day-Ahead Market'' means an electric energy market

    administered by a Requesting Party on which the price of electric

    energy at a specified location is determined, in accordance with the

    Requesting Party's Tariff, for specified time periods, none of which is

    later than the second operating day following the day on which the Day-

    Ahead Market clears.

    f. ``Real-Time Market'' means an electric energy market

    administered by a Requesting Party on which the price of electric

    energy at a specified location is determined, in accordance with the

    Requesting Party's Tariff, for specified time periods within the same

    24-hour period.

    g. ``Person who actively participates in the generation,

    transmission, or distribution of electric energy'' means a person that

    is in the business of: (1) Generating, transmitting, or distributing

    electric energy or (2) providing electric energy services that are

    necessary to support the reliable operation of the transmission system.

    h. ``Requesting Party'' means California Independent Service

    Operator Corporation (``CAISO''); ERCOT; ISO New England Inc. (``ISO

    NE''); Midwest Independent Transmission System Operator, Inc.

    (``MISO''); New York Independent System Operator, Inc. (``NYISO'') or

    PJM Interconnection, L.L.C. (``PJM''), or any successor in interest to

    any of the foregoing.

    i. ``Tariff.'' Reference to a Requesting Party's ``Tariff''

    includes a tariff, rate schedule or protocol.

    j. ``Petition'' means the consolidated petition for an exemptive

    order under 4(c)(6) of the CEA filed by CAISO, ERCOT, ISO NE, MISO,

    NYISO, and PJM on February 7, 2012, as amended June 11, 2012.

    6. Effectiveness of the Exemption.

    a. For a Requesting Party subject to the jurisdiction of FERC, the

    exemption set forth in this Order is effective upon satisfaction of all

    of the following:

    (1) Submission and acceptance of a legal opinion or memorandum of

    outside counsel that is satisfactory to the Commission, in the

    Commission's sole discretion, and that provides the Commission with

    assurance that the netting arrangements contained in the approach

    selected by that Requesting Party to satisfy the obligations contained

    in FERC regulation 35.47(d) will, in fact, provide the Requesting Party

    with enforceable rights of set off against any of its market

    participants under title 11 of the United States Code in the event of

    the bankruptcy of the market participant; and

    (2) Demonstration that the Requesting Party has fully complied with

    FERC regulation 35.47, as measured by FERC's acceptance and approval of

    all of the Requesting Party's submissions that are necessary to

    implement the requirements of FERC regulation 35.47.

    b. For ERCOT, which is subject to the jurisdiction of PUCT, the

    exemption set forth in this Order is effective upon satisfaction of all

    of the following:

    (1) Submission and acceptance of a legal opinion or memorandum of

    outside counsel that is satisfactory to the Commission, in the

    Commission's sole discretion, and that provides the Commission with

    assurance that the netting arrangements contained in the approach

    selected by ERCOT to satisfy standards that are the same as those

    contained in FERC regulation 35.47(d) will, in fact, provide the ERCOT

    with enforceable rights of set off against any of its market

    participants under title 11 of the United States Code in the event of

    the bankruptcy of the market participant; and

    (2) Demonstration that ERCOT has fully complied with standards that

    are the same as those set forth in FERC regulation 35.47, as measured

    by PUCT permitting all of the necessary ERCOT protocol revisions to

    take effect; provided that the Commission will accept a demonstration

    that ERCOT has protocols in effect that substantially meet the

    settlement and billing period standards set forth in FERC regulation

    35.47(b).

    7. Delegation of Authority. The Commission hereby delegates, until

    such time as the Commission orders otherwise, to the Director of the

    Division of Clearing and Risk and to such members of the Division's

    staff acting under his or her direction as he or she may designate, in

    consultation with the General Counsel or such members of the General

    Counsel's staff acting under his or her direction as he or she may

    designate, the authority to accept or reject any legal memorandum or

    opinion that is required by sections 6(a)(1) and 6(b)(1) of this Order.

    Further, The Commission hereby delegates to the Director of the

    Division of Market Oversight and to such members of the Division's

    staff acting under his or her direction as he or she may designate, in

    consultation with the General Counsel or such members of the General

    Counsel's staff acting under his or her direction as he or she may

    designate, the authority to request information from Requesting Parties

    pursuant to sections 4(a)(1) and 4(a)(2) of this Order.

    This Order is based upon the representations made in the

    consolidated petition for an exemptive order under 4(c) of the CEA

    filed by the Requesting Parties \463\ and supporting

    [[Page 19915]]

    materials provided to the Commission by the Requesting Parties and

    their counsel. Any material change or omission in the facts and

    circumstances pursuant to which this Order is granted might require the

    Commission to reconsider its finding that the exemption contained

    therein is appropriate and/or consistent with the public interest and

    purposes of the CEA. Further, the Commission reserves the right, in its

    discretion, to revisit any of the terms and conditions of the relief

    provided herein, including but not limited to, making a determination

    that certain entities and transactions described herein should be

    subject to the Commission's full jurisdiction, and to condition,

    suspend, terminate or otherwise modify or restrict the exemption

    granted in this Order, as appropriate, upon its own motion.

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

    \463\ In the Matter of the Petition for an Exemptive Order Under

    Section 4(c) of the Commodity Exchange Act by California Independent

    Service Operator Corporation; In the Matter of the Petition for an

    Exemptive Order Under Section 4(c) of the Commodity Exchange Act by

    the Electric Reliability Council of Texas, Inc.; In the Matter of

    the Petition for an Exemptive Order Under Section 4(c) of the

    Commodity Exchange Act by ISO New England Inc.; In the Matter of the

    Petition for an Exemptive Order Under Section 4(c) of the Commodity

    Exchange Act by Midwest Independent Transmission System Operator,

    Inc.; In the Matter of the Petition for an Exemptive Order Under

    Section 4(c) of the Commodity Exchange Act by New York Independent

    System Operator, Inc.; and In the Matter of the Petition for an

    Exemptive Order Under Section 4(c) of the Commodity Exchange Act by

    PJM Interconnection, L.L.C. (Feb. 7, 2012, as amended June 11,

    2012).

    Issued in Washington, DC, on March 28, 2013, by the Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendices to Final Order in Response to a Petition From Certain

    Independent System Operators and Regional Transmission Organizations To

    Exempt Specified Transactions Authorized by a Tariff or Protocol

    Approved by the Federal Energy Regulatory Commission or the Public

    Utility Commission of Texas From Certain Provisions of the Commodity

    Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of

    the Act--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 specified electric energy-

    related transactions entered into on markets administered by

    regional transmission organizations (RTOs) or independent system

    operators (ISOs).

    Congress authorized that these transactions be exempt from

    certain provisions of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act as they are subject to extensive regulatory oversight

    by the Federal Energy Regulatory Commission (FERC) or, in one

    instance, the Public Utility Commission of Texas (PUCT).

    This final order responds to a petition filed by a group of RTOs

    and ISOs and has benefitted from public input.

    These entities were established for the purpose of providing

    affordable, reliable electric energy to consumers within their

    geographic region. In addition, these markets administered by RTOs

    and ISOs are central to FERC and PUCT's regulatory missions to

    oversee wholesale sales and transmission of electric energy.

    The scope of the final order is carefully tailored to four

    categories of transactions--financial transmission rights; energy

    transactions; forward capacity transactions; and reserve or

    regulation transactions, which are offered or entered into a market

    administered by one of the requesting RTOs or ISOs. This exemption

    is conditioned on, among other things, each of these transactions

    being inextricably linked to the physical delivery of electric

    energy.

    [FR Doc. 2013-07634 Filed 4-1-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: April 2, 2013



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