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2012-20589

  • Federal Register, Volume 77 Issue 164 (Thursday, August 23, 2012)[Federal Register Volume 77, Number 164 (Thursday, August 23, 2012)]

    [Notices]

    [Pages 50998-51020]

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

    [FR Doc No: 2012-20589]

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    COMMODITY FUTURES TRADING COMMISSION

    Proposal To Exempt Certain Transactions Involving Not-for-Profit

    Electric Utilities; Request for Comments

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice.

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

    ``Commission'') is proposing to exempt certain transactions between

    not-for-profit utilities (entities described in section 201(f) of the

    Federal Power Act (``FPA'')), and other electric utility cooperatives,

    from the provisions of the Commodity Exchange Act (``CEA'' or ``Act'')

    and the regulations there under, subject to certain antifraud, anti-

    manipulation, and recordkeeping conditions. Authority for this

    exemption is found in section 4(c) of the CEA. The Commission is

    requesting comment on every aspect of this Notice of Proposed Order

    (``Notice'').

    DATES: Comments must be received on or before September 24, 2012.

    ADDRESSES: You may submit comments by any of the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street NW., Washington, DC 20581.

    Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the CFTC to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the CFTC's regulations.\1\

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    \1\ 17 CFR 145.9.

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    The CFTC reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of this action will be retained in the public comment file

    and will be considered as required under the Administrative Procedure

    Act and other applicable laws, and may be accessible under the Freedom

    of Information Act.

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

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

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

    Commodity Futures Trading Commission, Three Lafayette

    [[Page 50999]]

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Introduction

    A. CEA Section 4(c)

    B. FPA Section 201(f)

    II. Petition

    A. Relief Requested

    B. Definition and Scope of Electric Operations-Related

    Transactions

    1. Electric Energy Delivered

    2. Generation Capacity

    3. Transmission Services

    4. Fuel Delivered

    5. Cross-Commodity Transaction

    6. Other Goods and Services Agreements, Contracts and

    Transactions

    7. Environmental Rights, Allowances or Attributes

    C. Definition and Scope of NFP Electric Entities

    1. FPA 201(f) Entities

    a. Government and Cooperatively Owned Electric Utilities

    Described by FPA Section 201(f)

    b. Federally-Recognized Indian Tribes

    2. Non-FPA 201(f) Electric Cooperatives

    III. Commission Determinations

    A. Scope of the Proposed Order

    1. Exempt Entities

    a. Electric Utilities Owned by Federal, State, or Local

    Government

    b. Electric Utilities Owned by an Indian Tribe

    c. Electric Utilities Owned as Cooperative Organizations

    2. Exempt Non-Financial Energy Transactions

    3. Conditions

    B. CEA Section 4(c) Considerations

    1. Responsible Economic or Financial Innovation and Fair

    Competition

    2. Applicability of CEA Section 4(a)

    3. Public Interest and Purposes of the CEA

    a. Public Interest

    b. Purposes of the CEA

    4. Appropriate Persons

    5. Ability to Discharge Regulatory or Self-Regulatory Duties

    IV. Proposed Order

    V. Request for Comment

    VI. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Consideration of Costs and Benefits

    I. Introduction

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

    \2\ from a group of trade associations that represent government and/or

    cooperatively-owned electric utilities requesting relief from the

    requirements of the CEA \3\ and Commission's regulations thereunder,\4\

    pursuant to CEA section 4(c),\5\ for certain electric energy-related

    transactions between not-for-profit electric energy utilities. In this

    Notice, after summarizing and reviewing the representations made in the

    Petition, the Commission proposes conditional relief pursuant to CEA

    section 4(c) for non-financial energy transactions between not-for-

    profit utilities described in FPA section 201(f) and other electric

    cooperatives.

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    \2\ The Petition is available on the Commission's Web site at

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

    \3\ 7 U.S.C. 1 et seq.

    \4\ The Commission's regulations are set forth in title 17 of

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

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

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    A. CEA Section 4(c)

    Section 4(c) of the CEA provides the Commission with broad

    authority to exempt certain transactions and market participants from

    the requirements of the Act. When adding section 4(c) to the CEA,

    Congress noted that the goal 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.'' \6\ The House-

    Senate Conference Committee reconciling the provision's language noted

    that:

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    \6\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213

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

    The Conferees do not intend that the exercise of exemptive

    authority by the Commission would require any determination

    beforehand that the agreement, instrument, or transaction for which

    an exemption is sought is subject to the [CEA]. Rather, this

    provision provides flexibility for the Commission to provide legal

    certainty to novel instruments where the determination as to

    jurisdiction is not straightforward. Rather than making a finding as

    to whether a product is or is not a futures contract, the Commission

    in appropriate cases may proceed directly to issuing an

    exemption.\7\

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    \7\ 4(c) Conf. Report at 3214-3215.

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    Specifically, CEA section 4(c)(1) empowers the CFTC to ``promote

    responsible economic or financial innovation and fair competition'' by

    exempting any transaction (or class thereof) that otherwise would be

    subject to CEA section 4(a), or any person (or class thereof) dealing

    in such transaction(s), from any or all of the provisions of the CEA

    where the Commission determines that the exemption would be consistent

    with the public interest.\8\ The Commission may grant such an exemption

    by rule, regulation or order, after notice and opportunity for hearing,

    and may do so on application of any person \9\ or on its own

    initiative.

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    \8\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in

    full that:

    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 7 of this title) exempt any

    agreement, contract, or transaction (or class thereof) that is

    otherwise subject to subsection (a) of this section (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) of this section, or from any other provision of this chapter * *

    * if the Commission determines that the exemption would be

    consistent with the public interest.

    \9\ CEA section 1a(38) defines ``person'' to include

    ``individuals, associations, partnerships, corporations, and

    trusts.'' 7 U.S.C. 1a(38).

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    CEA section 4(c)(2) provides that the Commission shall not grant

    any exemption under section 4(c)(1) from any of the requirements of

    section 4(a) unless the Commission determines, among other things,

    that: (i) the exemption would be consistent with the public interest

    and the purposes of the CEA; (ii) the exempt agreement, contract, or

    transactions will be entered into solely between ``appropriate

    persons;'' and (iii) 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.\10\

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    \10\ See 7 U.S.C. 6(c)(2).

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    CEA section 4(c)(3) outlines which entities may constitute

    ``appropriate person[s]'' for purposes of a CEA section 4(c) exemption,

    including (as relevant to this Notice): (i) Any governmental entity

    (including the United States, any State, or any foreign government) or

    political subdivision thereof, or any multinational or supranational

    entity or any instrumentality, agency, or department of any of the

    foregoing; \11\ or (ii) 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.\12\

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    \11\ See 7 U.S.C. 6(c)(3)(H).

    \12\ See 7 U.S.C. 6(c)(3)(K).

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    The Dodd-Frank Wall Street Reform and Consumer Protection Act

    (``Dodd-Frank Act'') \13\ added new subparagraph

    [[Page 51000]]

    4(c)(6)(C) to the CEA.\14\ CEA section 4(c)(6)(C) builds upon the

    Commission's general exemptive authority in section 4(c)(1) as follows:

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    \13\ Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm. Title VII of the Dodd-Frank Act amended the

    CEA to establish a comprehensive new regulatory framework for swaps

    and security-based swaps. The legislation was enacted to reduce

    risk, increase transparency, and promote market integrity within the

    financial system by, among other things: (1) providing for the

    registration and comprehensive regulation of swap dealers (``SDs'')

    and major swap participants (``MSPs''); (2) imposing clearing and

    trade execution requirements on standardized derivative products;

    (3) creating robust recordkeeping and real-time reporting regimes;

    and (4) enhancing the Commission's rulemaking and enforcement

    authorities with respect to, among others, all registered entities

    and intermediaries subject to the Commission's oversight.

    \14\ 7 U.S.C. 6(c)(6)(C) (as added by section 722(f) of the

    Dodd-Frank Act).

    (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 [CEA sections 4(c)(1) and

    4(c)(2)], exempt from the requirements of this Act an agreement,

    contract, or transaction that is entered into--

    [* * *]

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

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

    Thus, section 4(c)(6)(C) explicitly spotlights transactions between

    entities within the scope of FPA section 201(f) as being eligible for

    exemption pursuant to the Commission's 4(c) authority. However, whether

    an exemption is considered under 4(c)(1), 4(c)(6)(C), or both,\15\ the

    CFTC must first determine that the proposed exemption meets certain

    threshold criteria including, for example, that the exemption would be

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

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    \15\ For any exemption involving CEA section 4(c)(6), the

    Commission believes ``both'' is the correct characterization because

    CEA section 4(c)(6) explicitly directs the Commission to consider

    any exemption proposed under 4(c)(6) ``in accordance with [sections

    4(c)(1) and 4(c)(2)].''

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    B. FPA Section 201(f)

    The FPA \16\ authorizes and, along with other statutes, governs the

    Federal Energy Regulatory Commission (``FERC''), the federal agency

    that regulates the interstate transmission and sale at wholesale in

    interstate commerce of electric energy by public utilities, as well as

    natural gas and hydropower projects.\17\ Section 201(f) of the FPA,

    which Congress referenced in new CEA section 4(c)(6)(C), provides

    broad-based relief from most provisions of Part II \18\ of the FPA for

    certain government and cooperatively-owned electric utility companies

    and states that:

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    \16\ 16 U.S.C. 791a et seq.

    \17\ See www.ferc.gov.

    \18\ Part II of the FPA governs the transmission and sale at

    wholesale of electric energy in interstate commerce, including the

    facilities used for such transmission or sale. See 16 U.S.C. 824 et

    seq. Section 201(f) does not, however, provide an exemption from FPA

    parts I or III. Part I of the FPA deals with the establishment and

    functioning of FERC and the regulation of hydroelectric resources.

    See 16 U.S.C. 792 et seq. Part III of the FPA deals with

    recordkeeping and reporting requirements and FERC's procedural rules

    concerning complaints, investigations, and hearings. See 16 U.S.C.

    825 et seq. Additionally, section 201(f) does not provide an

    exemption from FERC's refund authority, 16 U.S.C. 824e, reliability

    standards, 16 U.S.C. 824o(b)(1), or jurisdiction over transmission

    facilities and services, 16 U.S.C. 824(i)-(j).

    [n]o provision in this subchapter [Part II of the FPA] shall apply

    to, or be deemed to include, the United States, a State or any

    political subdivision of a State, an electric cooperative that

    receives financing under the Rural Electrification Act of 1936 (7

    U.S.C. 901 et seq.) or that sells less than 4,000,000 megawatt hours

    of electricity per year, or any agency, authority, or

    instrumentality of any one or more of the foregoing, or any

    corporation which is wholly owned, directly or indirectly, by any

    one or more of the foregoing, or any officer, agent, or employee of

    any of the foregoing acting as such in the course of his official

    duty, unless such provision makes specific reference thereto.\19\

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    \19\ 16 U.S.C. 824(f).

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    II. Petition

    A. Relief Requested

    As noted above, on June 8, 2012, the Commission received the

    Petition \20\ from a group of trade associations representing

    government and/or cooperatively-owned electric utilities. Those

    Petitioners consisted of the National Rural Electric Cooperative

    Association (``NRECA''),\21\ the American Public Power Association

    (``APPA''),\22\ the Large Public Power Council (``LPPC''),\23\ the

    Transmission Access Policy Study Group (``TAPS''),\24\ and the

    Bonneville Power Administration (``BPA'') \25\ (collectively, the

    ``Petitioners''). The Petition requests that the Commission provide

    categorical exemptive relief from the requirements of the CEA, pursuant

    to CEA section 4(c)(6), in accordance with CEA sections 4(c)(1) and

    4(c)(2), for all ``Electric Operations-Related Transactions'' between

    ``NFP Electric Entities,'' retroactive to the enactment of Dodd-Frank,

    outstanding now, or that may be developed and executed in the

    future.\26\ The Petitioner's definition and scope of the terms

    ``Electric Operations-Related Transactions'' and ``NFP Electric

    Entities'' is summarized below.\27\

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    \20\ The Petition is available on the Commission's Web site at

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

    \21\ According to the Petition, NRECA is the national service

    organization for more than 900 not-for-profit rural electric

    cooperatives and government-owned power districts. NRECA's members

    provide electric energy to approximately 42 million consumers in 47

    states, or thirteen percent of the nation's population. See Petition

    at 3.

    \22\ According to the Petition, APPA is the national trade

    association that represents the interests of government-owned

    electric utilities in the United States. APPA's member utilities are

    not-for-profit utility systems that were created by state or local

    governments to serve the public interest. Approximately 2,000

    government-owned electric utilities provide over fifteen percent of

    all kilowatt hour (``KWh'') sales to retail electric customers. See

    Petition at 3-4.

    \23\ According to the Petition, LPPC is an organization

    representing 24 of the largest government-owned electric utilities

    in the nation. LPPC members own and operate over 86,000 megawatts of

    generation capacity and nearly 35,000 circuit miles of high voltage

    transmission lines, representing nearly 90 percent of the

    transmission investment owned by non-Federal government-owned

    electric utilities in the United States. See Petition at 4.

    \24\ According to the Petition, TAPS is an association of

    transmission dependent electric utilities located in more than 30

    states. All of TAPS member electric utilities except one are FPA

    section 201(f) entities. See Petition at 4.

    \25\ According to the Petition, BPA is a self-financed, non-

    profit Federal agency created in 1937 by Congress that primarily

    markets electric power from 31 federally owned and operated

    projects, and supplies 35 percent of the electricity used in the

    Pacific Northwest. BPA also owns and operates 75 percent of the

    high-voltage transmission in the Pacific Northwest. BPA's primary

    statutory responsibility is to market its Federal system power at

    cost-based rates to its ``preference customers.'' Per the Petition,

    BPA has 130 preference customers made up of electric utilities which

    are not subject to the jurisdiction of FERC, including Indian

    tribes, electric cooperatives, and state and municipally chartered

    electric utilities, and other Federal agencies located in the

    Pacific Northwest. See Petition at 4.

    \26\ See Petition at 1-2; 4 (emphasis added). The Petition also

    requests that the Commission determine that no Electric Operations-

    Related Transaction will affect any NFP Electric Entity's regulatory

    status under the CEA (e.g., as a swap dealer or major swap

    participant). Id. at 28. The Petition specifically asks that, if the

    Commission declines to provide the categorical relief as requested,

    the Commission would i) include an additional category of approved

    Electric Operations-Related Transactions that includes all ``trade

    options'' referencing the goods or services described in the

    categories of transactions currently outstanding between Exempt

    Entities (see infra sections II.B.1-7), and ii) delegate to

    Commission staff the authority to review on an expedited basis and

    approve as eligible for the benefit of the exemptive order any new

    Electric Operations-Related Transactions between NFP Electric

    Entities. Id. at 13. Finally, the Petition invites the Commission to

    determine that any Electric Operations-Related Transaction described

    in the Petition does not need an exemption because such transaction

    is not a ``swap,'' is a ``commercial merchandising arrangement'' or

    ``trade option,'' or is not an agreement, contract or transaction

    involving a ``commodity.'' See id. at 13, note 26.

    \27\ In this Notice, the Commission describes the Petition by

    referencing Petitioners' defined terms. Such references, however,

    are not to be interpreted as the Commission proposing to adopt such

    terms for the purpose of the exemption proposed herein. Rather, the

    proposed exemption establishes its own defined entities and

    transactions for which relief is being provided.

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    B. Definition and Scope of Electric Operations-Related Transactions

    The Petition defines Electric Operations-Related Transactions to

    mean:

    Any agreement, contract or transaction involving a ``commodity''

    (as such term is defined in the CEA) and whether or not such

    agreement, contract or transaction is a

    [[Page 51001]]

    ``swap,'' so long as the NFP Electric Entity is entering into any

    such agreement, contract or transaction ``to hedge or mitigate

    commercial risks'' (as such phrase is used in CEA Section

    2(h)(7)(A)(ii)) intrinsically related to the electric facilities or

    electric operations (or anticipated facilities or operations) of the

    NFP Electric Entity, or intrinsically related to the NFP Electric

    Entity's public service obligation to deliver reliable, affordable

    electric energy service to electric customers. For the avoidance of

    doubt, ``intrinsically related'' shall include all transactions

    related to (i) the generation, purchase or sale, and transmission of

    electric energy by the NFP Electric Entity, or the delivery of

    reliable, affordable electric energy service to the NFP Electric

    Entity's electric customers, (ii) all fuel supply for the NFP

    Electric Entity's electric facilities or operations, (iii)

    compliance with electric system reliability obligations applicable

    to the NFP Electric Entity, its electric facilities or operations,

    (iv) compliance with energy, conservation or renewable energy or

    environmental statutes, regulations or government orders applicable

    to the NFP Electric Entity, its electric facilities or operations,

    or (v) any other electric operations-related agreement, contract or

    transaction to which the NFP Electric Entity is a party. Electric

    Operations-Related Transactions shall not include agreements,

    contracts or transactions executed, traded, or cleared on a

    registered entity, nor shall such defined term include an agreement,

    contract or transaction based or derived on, or referencing, a

    ``commodity'' in the interest rate, credit, equity or currency asset

    class, or of a product type or category in the ``Other Commodity''

    asset class that is based or derived on, or referencing, metals, or

    agricultural commodities or crude oil or gasoline commodities of any

    grade not used as fuel for electric generation.\28\

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    \28\ Petition at 4-5.

    In general, the Petitioners represent that all Electric Operations-

    Related Transactions covered by the proposed definition are

    intrinsically related to the needs of both NFP Electric Entities

    engaged in a transaction ``to hedge or mitigate commercial risks''

    which arise from their respective electric facilities and ongoing

    electric operations and public service obligations.\29\ The Petitioners

    state that, at the time two NFP Electric Entities enter into an

    Electric Operations-Related Transaction, the terms of the transaction

    contemplate performance of an electric operations-related obligation by

    one party, in exchange for payment or reciprocal performance of an

    electric operations-related function by the other party.\30\

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    \29\ See Petition at 12.

    \30\ See id. The Petition notes that the terms ``physically-

    settled,'' ``financially-settled,'' and ``cash-settled,'' as such

    terms are used in the futures industry, do not translate easily into

    a commercial context where NFP Electric Entities enter into

    bilateral contracts governed by state law or by FERC, PUCT or state

    public utility tariffs to buy and sell goods and services. It is not

    readily apparent to the Commission why the terms do not translate

    conceptually. Nevertheless, as previously noted, the Petition

    represents that Electric Operations-Related Transactions between NFP

    Electric Entities are always intrinsically related to the electric

    facilities and operations, and/or the public service obligations, of

    each of the NFP Electric Entities involved. See id. at 12, n. 24.

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    The Petition, which is summarized herein, specifically describes

    seven categories of transactions that currently occur between NFP

    Electric Entities, and which are covered by the Petition's proposed

    definition.\31\

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    \31\ The following transaction category descriptions come from

    the Petition at 6-12.

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    1. Electric Energy Delivered

    In these transactions, NFP Electric Entities agree for one such

    entity to provide another such entity with electric energy delivered to

    an identified geographic service territory, load,\32\ or electric

    system. Petitioners note that since electric energy is not currently

    storable in commercial quantities, the delivery location is critical to

    the transaction--electric energy delivered elsewhere is not usable or

    valuable for the receiving entity's operational needs.

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    \32\ The Commission understands that ``load'' is an energy

    industry term for ``demand.'' See, e.g., Current Energy, Supply of

    and Demand for Electricity in California, available at http://currentenergy.lbl.gov/ca/index.php

    (explaining that ``[t]he current demand (or `load') depends on how

    much power consumers are using right now'').

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

    As described by the Petitioners, this transaction type includes the

    most prevalent type of Exempt Electric Operations-Related Transaction

    between NFP Electric Entities, i.e., the ``full requirements''

    contract, or ``all requirements'' agreement or arrangement \33\ that is

    often executed between a generation and transmission (``G&T'')

    cooperative (i.e., a cooperative that generates and transmits

    electricity) and each of its constituent NFP Electric Entity members/

    owners, or between a Joint Action Agency (an agency formed under state

    law to provide wholesale power supply and transmission service to

    member entities) and each of its constituent NFP Electric Entity

    members. In some instances, the G&T cooperative or the Joint Action

    Agency is formed by its constituent members for the singular purpose of

    providing its constituent members with their ``full requirements''

    obligations to deliver electric energy over an agreed delivery period

    at one or multiple delivery points or locations to their retail

    electric customers).

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    \33\ Per the Petition, the ``full'' or ``all'' requirements

    contract is a bilateral commercial arrangement that is customized to

    the two NFP Electric Entities that are parties thereto.

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    In such an arrangement, the provider NFP Electric Entity agrees by

    bilateral contract or, in some long-standing relationships established

    by governing or legal documents of the G&T cooperative or Joint Action

    Agency as the provider NFP Electric Entity, that it will provide for a

    recipient NFP Electric Entity's ``full requirements'' to provide

    reliable electric service to the recipient's fluctuating electric

    energy load over an agreed delivery period at one or multiple delivery

    points or locations. In some cases, the delivery period, term, or

    ``tenor'' of such agreements can be for thirty years or more.

    In addition to providing the recipient's full requirements for

    electric energy, the arrangement may also include providing services

    that are ancillary to the delivery of the electric energy, such as

    operating or dispatching one or more of the recipient's owned

    generation units, generation capacity or balancing services, or any of

    the other goods, services, or commodities required by the recipient

    described under other categories below.

    The Petition notes that quantities of electric energy will also

    vary during the delivery period. If a recipient NFP Electric Entity

    owns some generation itself, the quantity of supplemental electric

    energy or capacity to meet its ``full requirements'' during some

    seasons, months, or days of the year (net of its owned generation) may

    be zero. Some ancillary services or ``commodities'' under such a

    transaction may be optional. Pricing may vary on a seasonal, monthly,

    daily or on-peak/off-peak basis, or may be tied to the cost at which

    the provider NFP Electric Entity can generate or purchase electric

    energy. Alternatively, the price may be tied to the fuel that the

    provider uses for generating the electric energy provided.

    2. Generation Capacity

    In describing this transaction category, the Petition initially

    notes that the term ``capacity,'' in connection with generation

    capacity transactions, has varying meanings across the electric

    industry, and that electric operations professionals may reference any

    of a number of ``capacity'' agreements, contracts, transactions, or

    arrangements.\34\ More generally, the

    [[Page 51002]]

    Petition notes that when two NFP Electric Entities agree that one will

    provide ``generation capacity'' or ``capacity'' for another, either a

    mutual understanding of the engineering context or a customized

    bilateral commercial contract further defines the parties' respective

    rights and obligations. Generation capacity is always location-specific

    and is monitored by the regional transmission organization (``RTO'') or

    independent system operator (``ISO'') \35\ or, outside the RTO/ISO

    regions, by balancing authorities or reliability coordinators under the

    supervision of the North American Electric Reliability Corporation

    (``NERC'') and FERC.\36\ Deliverability of generation capacity to a

    particular geographic point or electric system interface is such an

    important concept that FERC requires each RTO, ISO, and balancing

    authority to establish a framework of engineering studies to

    demonstrate/confirm that a particular generation unit's electrical

    energy output is deliverable. If generation capacity from a particular

    unit does not satisfy the relevant RTO, ISO or balancing authority's

    deliverability requirements, that generation capacity has no value in

    meeting reliability requirements in that reliability area. If

    generation capacity is purchased from a generation unit located outside

    the relevant reliability area, the correlated electric energy (which,

    if ``called on,'' must be delivered) nonetheless must be deliverable to

    the relevant reliability area.

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

    \34\ Counsel for Petitioners represented in subsequent

    conversations that generation capacity, generally, can mean the

    capability or adequacy of specific owned generation units to supply

    fluctuating load requirements within a defined geographic region

    (e.g., an RTO region or an electric utility system) at an estimated

    or capacity rating level measured in megawatts. The basic concept of

    generation capacity can be understood as a separate ``commodity''

    from electric energy delivered (or other ancillary service or

    reserve), such that the purchase and sale of generation capacity may

    exist as a stand-alone transaction or as one component of a

    ``bundled energy'' service or transaction, such as a full

    requirements contract. When viewed as an ``option-like'' commodity

    transaction, generation capacity can be ``delivered'' if the

    ``holder'' (or relevant reliability authority) calls on the

    corollary electric energy to be delivered. In some circumstances,

    the ``premium'' component can be priced separately and referred to

    as a ``demand charge.'' In others, the generation capacity component

    can be a contingent or option-like aspect of a seller's obligation

    to provide the ``full requirements'' that a load serving entity

    (``LSE'') needs to serve the electric consumers and businesses in

    its regions, including fulfillment of any generation capacity

    obligations that the LSE has to its local reliability authority.

    \35\ More information is available at http://www.ferc.gov/industries/electric/indus-act/rto.asp. The current ISO/RTO entities

    operating in North America are PJM Interconnection, Midwest

    Independent Transmission System Operator, Southwest Power Pool, ISO

    New England, California ISO, New York Independent System Operator

    and the Electric Reliability Council of Texas (ERCOT). Each of these

    entities, other than ERCOT, was either formed at the direction of

    FERC or designated by FERC to direct the operation of the regional

    electric transmission grid in its specific geographic area. ERCOT is

    fully regulated by the Public Utility Commission of Texas (the

    ``PUCT'').

    \36\ Counsel for Petitioners in subsequent conversations

    represented that generation capacity can be a reliability

    requirement that, in some areas, owners of generation units must

    maintain in order to provide voltage and frequency support to the

    electric grid for reliability purposes. In other areas, generation

    capacity reliability requirements may be imposed on LSEs that must,

    if they own no generation assets, purchase generating capacity from

    third-party generators to fulfill the LSEs' reliability

    requirements.

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

    Some generation capacity agreements or arrangements among NFP

    Electric Entities may include operational reserves attributable to the

    identified generation unit. A generation capacity arrangement or

    transaction also may be called a ``shared resources agreement,''

    whereby NFP Electric Entities agree conditionally to share capacity

    resources as needed. The contract may relate to multiple identified

    units owned or operated by both NFP Electric Entities. For example,

    some state or regional programs to manage limited generation capacity

    and maintain voltage support for the electric grid in a geographic area

    may allow NFP Electric Entities subject to such program to utilize

    ``demand-side resources'' as part of the generation capacity required

    by the specific balancing authority, or to meet the reliability

    authority's requirements in the relevant geographic region.

    In general, a generation capacity transaction between two NFP

    Electric Entities in one region cannot be presumed to be fungible with

    any other generation capacity transaction between two other NFP

    Electric Entities, even in the same region.

    3. Transmission Services

    As with the other transaction categories described by the

    Petitioners, the Petition notes that electric transmission services

    transactions between NFP Electric Entities will vary by geographic

    region and by assets owned and transmission services required by the

    operations of different NFP Electric Entities. In some cases, these

    transmission services agreements include congestion management

    services, system losses, and ancillary services.\37\ Some NFP Electric

    Entities own significant transmission facilities (e.g., BPA owns 75

    percent of the transmission lines in the Pacific Northwest). In some

    cases, Federal law and the regulations pursuant to which the Federal

    power agencies are formed and operate require a particular Federal

    power agency to allocate a portion of the transmission to particular

    electric entities, including NFP Electric Entities, located within its

    geographic area.

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

    \37\ The Petition notes that the concept of generation capacity

    is distinguishable from ``transmission capacity,'' which relates to

    the limited amount of electric energy transmission available over

    the interconnected electric transmission grid, and which is

    generally defined as a measure of the transfer capability or

    ``capacity'' remaining in the physical electric energy transmission

    network for further commercial activity over and above already

    committed uses. Additionally, Exhibit 2 of the Petition provides the

    following example:

    Federal power agency K sells to G&T cooperative J 100 MWs of

    monthly ``firm point-to-point transmission service'' from location X

    to location Y in the southeast U.S. for a term of 3 months at the

    tariff rate of $2,000/MW-Month for a total transaction value of

    $600,000. The geographic area in which such transmission service

    takes place is outside the ``footprint'' of an RTO, and therefore

    the transmission service is reserved on the Open Access Same Time

    Information System (``OASIS'') Web site of the transmission owner,

    K. J intends to use the transmission service to deliver wholesale

    electric power to its distribution cooperative member-owners to

    supply a portion of its distribution cooperative constituents'

    retail electric load.

    Petition Exhibit 2 at 3.

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

    In certain areas of the country, the RTOs/ISOs control allocation

    of transmission assets, rights and services, and the individual owners

    of transmission assets do not have the ability to engage in bilateral

    services arrangements involving those transmission assets, which are

    under RTO/ISO management and control. In other areas of the country,

    historical transmission services agreements, including those between

    NFP Electric Entities, are ``grandfathered'' from the RTO/ISO rules and

    procedures otherwise applicable to electric transmission services in

    that region.

    4. Fuel Delivered

    The Petition describes a fourth category of transactions in which

    one NFP Electric Entity delivers to another NFP Electric Entity fuel to

    power electric generation facilities. The electric facilities owned and

    operated by NFP Electric Entities vary widely in terms of the fuel used

    by such facilities for generation. Fuel types may include nonfinancial

    commodities such as coal, natural gas, uranium products, heating oil,

    and biomass or waste products including wood chips, tires, and manure.

    In addition to the fuel, one NFP Electric Entity may provide to another

    NFP Electric Entity other services related to the fuel commodity, such

    as fuel procurement, fuel transportation over pipeline, rail, barge and

    truck, fuel storage, or fuel waste handling and storage services.\38\

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

    \38\ Petitioners also described a scenario in which one NFP

    Electric Entity may agree to manage for another NFP Electric Entity

    the operational basis or exchange (location/time of delivery) risk

    that arises from the recipient's NFP Electric Entity's location-

    specific, seasonal, or otherwise variable operational need for fuel

    delivered. Another example from Exhibit 2 of the Petition provides

    that:

    Joint power agency L supplies to municipal utility M a long-term

    supply of natural gas from a natural gas project (Project Entity Z)

    developed by L and other NFP Electric Entities for the purpose of

    fueling L's and M's (and other NFP Electric Entity owners of Project

    Entity Z's) natural gas-fired electric generating facilities in the

    California ISO market. M pays L for the cost of acquiring,

    developing and improving the natural gas Project Entity Z through

    direct ``capital contributions'' to Project Entity Z. In addition M

    pays L a monthly fee for the natural gas supplied from the natural

    gas project, composed of an operating cost fee component, an

    interstate pipeline transportation cost fee component and an

    operating reserve cost fee component. The natural gas-fired electric

    generating facility is to be used by M to supply a portion of its

    expected retail electric load.

    Petition Exhibit 2 at 3-4.

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    [[Page 51003]]

    5. Cross-Commodity Transactions

    The Petition describes such transactions as commercial agreements

    entered into between two NFP Electric Entities, including options, heat

    rate transactions and tolling arrangements, whereby the electric energy

    delivered to the recipient NFP Electric Entity is priced by reference

    to the fuel source used or useable by the provider NFP Electric Entity

    for generating such electric energy. Alternatively, the price paid for

    the fuel by the recipient NFP Electric Entity may be calculated by

    reference to the amount of electricity that the recipient NFP Electric

    Entity generates using such fuel.

    6. Other Goods and Services

    The Petition notes that these agreements may involve sharing

    property rights, equipment, supplies and services, including

    construction, operation, and maintenance agreements, facilities

    management, construction management, energy management or other energy-

    related services tied to the electric facilities owned by, or

    operations of, one or both of the NFP Electric Entities, including

    emergency assistance or ``mutual aid'' arrangements.

    In some regions of the country, state regulators or RTOs/ISOs have

    established ``demand side management programs'' to assist utilities in

    managing the supply/demand balance that is essential to delivering

    reliable electric energy (which is not currently storable in commercial

    quantities). Therefore, some NFP Electric Entities engage in joint

    demand-side management programs with their retail electric customers

    whereby the customers agree to reduce service/load requirements during

    certain weather or emergency conditions. NFP Electric Entities may

    agree with each other to engage in joint demand-side management

    programs to conserve their collective generation resources and reduce

    costs, and to comply with their collective obligations to RTOs/ISOs,

    regional balancing authorities, and state or local regulators.

    The Petition also notes that NFP Electric Entities may provide each

    other with services related to the generation, transmission, and/or

    distribution facilities owned by each, or with respect to the

    maintenance (ongoing, outage, or emergency) or dispatch of generation

    units. Especially when there is a weather event or other unexpected

    outage which interrupts electric energy service to an NFP Electric

    Entity's customers, other NFP Electric Entities (and other electric

    utilities) in the geographic area will provide goods and services on an

    immediate basis, often without the opportunity of negotiating pricing

    or payment terms until the electric energy service has been restored to

    retail electric energy customers. These agreements between NFP Electric

    Entities may involve operating each other's facilities, sharing

    equipment, supplies and employees (e.g., line crews), and interfacing

    on each other's behalf with suppliers/vendors, regulators and

    reliability authorities and customers.

    7. Environmental Rights, Allowances or Attributes

    The last category of transactions described in the Petition relates

    to a wide variety of Federal, regional, state, and local environmental

    rights, allowances or attributes required to operate a particular NFP

    Electric Entity's electric facilities or operations, or to fulfill a

    particular NFP Electric Entity's regulatory requirements. NFP Electric

    Entities may transact among themselves in environmental emissions

    allowances, offsets or credits (including carbon), renewable energy,

    distributed generation, clean energy or energy efficiency credits or

    attributes (which can be regional or state specific in nature,

    including ``green tags''). NFP Electric Entities in a particular

    geographic region, whose available allowances may be directly useable

    to fulfill the needs of another NFP Electric Entity in the same region,

    often will directly transact with each other, rather than go to a non-

    NFP Electric Entity to negotiate a particular transaction.

    C. Definition and Scope of NFP Electric Entities

    The Petition defines NFP Electric Entities as:

    (i) The United States, a State or any political subdivision of a

    State, or (ii) an ``electric cooperative'' that receives financing

    under the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.)

    or that sells less than 4,000,000 megawatt hours of electricity per

    year, or [(iii) any other electric cooperative, whether or not such

    electric cooperative meets the requirements of clause (ii)

    above,]\1\ or (iv) any agency, authority, instrumentality or

    department of any one or more of the foregoing, or a federally-

    recognized Indian tribe, or (v) any entity which is wholly owned,

    directly or indirectly, by any one or more of the foregoing. For

    purposes of this definition, an ``electric cooperative'' shall mean

    an ``electric membership corporation'' or an ``electric power

    association'' organized under State law, a ``rural electric

    cooperative,'' ``cooperative providing electric services to

    consumers and farmers'' or any similar entity referenced in other

    Federal, State and local laws and regulations, so long as any such

    entity is formed and continues to operate for the primary purpose of

    providing electric service to its members on a not-for-profit,

    cooperative basis, and is treated as a cooperative under the Federal

    tax law.\39\

    \39\ Petition at 14 (internal citations omitted).

    Generally, the Petition represents that all NFP Electric Entities are

    ``nonfinancial end users of Electric Operations-Related Transactions,

    and enter into such transactions only to hedge or mitigate commercial

    risks.'' \40\ Summarized herein, the Petition describes in detail the

    specific classes of entities it believes fall within its proposed NFP

    Electric Entity definition, and justifies inclusion of each specific

    class based upon a common public interest rationale.

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

    \40\ Petition at 33. Petitioners explain that the term

    ``nonfinancial end users'' means an NFP Electric Entity that does

    not fall within the definition of a ``financial entity'' in CEA

    2(h)(7)(C)(i) and that no NFP Electric Entity falls within that

    definition. See id. at 33-34.

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    1. FPA 201(f) Entities

    ``FPA 201(f) entities'' is the first class of NFP Electric Entities

    defined by Petitioners. These entities include i) certain government

    and cooperatively-owned electric utilities (as described in FPA section

    201(f)) and ii) federally-recognized Indian tribes that own or operate

    electric facilities (as determined by FERC case law).

    a. Government and Cooperatively-Owned Electric Utilities Described by

    FPA Section 201(f)

    Petitioners seek relief from the CEA and Commission regulations

    there under for those entities explicitly described by FPA section

    201(f) \41\ as being exempt from the plenary jurisdiction of FERC. Per

    the Petition, the first category of these entities includes certain

    government-owned electric utilities, including Federal electric

    utilities such as BPA and other Federal agencies that operate electric

    generating or transmission facilities,\42\

    [[Page 51004]]

    and state-chartered electric utilities such as the New York Power

    Authority. Other examples of government-owned electric utilities

    include state or county utility boards or public utility districts

    formed under state or local law, joint action agencies or joint power

    agencies formed under state law to provide wholesale power supply and

    transmission services to member entities (each a Joint Action Agency),

    and other political subdivisions of a state.\43\ Finally, municipal

    utilities ranging in size from LPPC members such as the Los Angeles

    Department of Water and Power and the Sacramento Municipal Utility

    District, to the smallest municipal electric utilities with fewer than

    500 electric meters, are also contemplated as government electric

    utilities under FPA section 201(f).\44\

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

    \41\ See supra note 19 and accompanying text.

    \42\ Per the Petition, there are nine Federal electric utilities

    in the United States, which are part of several agencies of the

    United States Government:

    The Army Corps of Engineers;

    The Bureau of Indian Affairs and the Bureau of

    Reclamation in the Department of the Interior,

    The International Boundary and Water Commission in the

    Department of State,

    The Power Marketing Administrations in the Department

    of Energy (BPA, Western Area Power Administration, Southwestern Area

    Power Administration, and Southeastern Area Power Administration),

    and

    The Tennessee Valley Authority (TVA).

    In addition, three Federal agencies operate electric generating

    facilities:

    TVA, the largest Federal power producer;

    The U.S. Army Corps of Engineers; and

    The U.S. Bureau of Reclamation.

    \43\ Per the Petition, a public power district or public utility

    district may be owned and operated by a city, county, state or

    regional agency. See, e.g., Public Utility District No. 1 of Chelan

    County, Washington (http://www.chelanpud.org/your-PUD.html). An

    irrigation district is a utility organized under state law which

    generates electricity in the course of supplying water. For example,

    Imperial Irrigation District in California was formed in 1911 under

    the California Irrigation District Act, as described at http://www.iid.com/index.aspx?page=39. Government-owned utilities are

    accountable to elected and/or appointed officials and focus on

    providing reliable and safe electricity service, keeping costs low

    and predictable for its customers, while practicing good

    environmental stewardship.

    \44\ Per the Petition, a government owned or operated electric

    utility may be a department of the governmental entity, or may be

    organized as a separate agency, authority or instrumentality

    thereof.

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    Per the Petition, the second category of entities described by FPA

    section 201(f) are electric cooperatives that either are financed by

    the U.S. Department of Agriculture's Rural Utilities Service (``RUS''),

    sell less than 4,000,000 megawatt hours of electricity per year, or

    meet the requirements of an ``aggregated FPA 201(f) entity.'' These

    electric cooperatives generally consist of (i) distribution

    cooperatives, which distribute electric energy service directly to

    their owner/member customers, and (ii) G&T cooperatives, which are

    owned by distribution cooperatives and generate or purchase electricity

    and transmit it to their constituent distribution cooperatives for

    delivery to the distribution cooperatives' owner/member customers.

    Aggregated entities most commonly consist of a G&T cooperative formed

    by its constituent distribution cooperative (NFP Electric Entity)

    members or, comparably, a Joint Action Agency which is formed by its

    constituent government-owned (NFP Electric Entity) utility members.

    As background, Petitioners explain that the FPA originally was

    enacted ``to remedy rampant abuses in the investor-owned electric

    utility industry'' \45\ but that cooperatively-owned electric utilities

    are easily distinguishable from investor-owned electric utilities

    because they are ``effectively self-regulating.'' \46\ More

    importantly, of the major abuses considered by Congress as the impetus

    for the FPA legislation, ``virtually none could be associated with the

    [electric] cooperative structure where ownership and control is vested

    in the consumer-owners.''\47\ Based on this understanding of the

    legislative history, FERC's predecessor, the Federal Power Commission

    (``FPC''), concluded that electric cooperatives financed under the

    Rural Electrification Act of 1936 (``REA'') \48\ were intended by

    Congress to be FPA 201(f) entities and exempt from the FPC's

    jurisdiction over ``public utilities.'' \49\ The FPC made such a

    determination in the 1960s notwithstanding the fact that, at that time,

    electric cooperatives were not expressly described in FPA section

    201(f).\50\

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    \45\ Salt River Project Agric. Improvement and Power District v.

    Fed. Power Comm'n, 391 F. 2d 470, 475 (D.C. Cir. 1968) (emphasis

    added by Petitioners).

    \46\ Id. at 473 (elaborating that electric cooperatives are

    ``completely owned and controlled by their consumer-members and only

    consumers can become members. They are non-profit. Each member has a

    single vote in the affairs of the cooperative, and services are

    essentially limited to members. No officer receives a salary for his

    services[,] and officers and directors are prohibited from engaging

    in any transactions with the cooperative from which they can earn

    any profit.'') (citation omitted).

    \47\ Id. at 475.

    \48\ 7 U.S.C. 901 et seq. The REA established the RUS as the

    body to administer financing to rural utilities.

    \49\ See Dairyland Power Coop. et al, v. Fed. Power Comm'n, 37

    F.P.C. 12, 27 (1967).

    \50\ As part of the Energy Policy Act of 2005 (``EPAct 2005''),

    Congress codified the previous interpretation by FERC in Dairyland,

    id., (affirmed by the D.C. Circuit Court in Salt River, 391 F. 2d

    470) that electric cooperatives that receive financing under the REA

    should be considered FPA 201(f) entities. At the same time, Congress

    also expanded the FPA 201(f) exemption to electric cooperatives that

    sell less than 4 million megawatt hours per year, even if those

    electric cooperatives do not receive any financing from the RUS. See

    Public Law 109-58, 1291, 119 Stat. 594, 985 (2005), amending FPA

    201(f) ``by striking ``political subdivision of a state,'' and

    inserting ``political subdivision of a State, an electric

    cooperative that receives financing under the Rural Electrification

    Act of 1936 (7 U.S.C. 901 et seq.) or that sells less than 4,000,000

    megawatt hours of electricity per year.''

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

    b. Federally-Recognized Indian Tribes

    Federally-recognized Indian tribes that own or operate electric

    facilities are not described by FPA section 201(f), and thus would be

    subject to regulation as public utilities under the FPA. The Petition

    notes, however, that FERC and its predecessor, the FPC, and at least

    one court have determined such federally-recognized Indian tribes are

    to be treated as entities described in FPA section 201(f).\51\ To

    identify eligible Indian tribes, the Petition recommends that the

    Commission rely on determinations made by the Secretary of the

    Interior, periodically listed in the Federal Register, of Indian tribes

    to be recognized by the U.S. government pursuant to Section 104 of the

    Act of November 2, 1994.\52\

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    \51\ Per the Petition, see City of Paris, KY vs. Fed. Power

    Comm'n, 399 F.2d 983 (D.C. Cir. 1968); Sovereign Power Inc., 84 FERC

    ] 61,014 (1998); Confederated Tribes of the Warm Springs Reservation

    of Or., a Federally Recognized Indian Tribe, and Warm Springs Power

    Enterprises, a Chartered Enter. of the Confederated Tribes of the

    Warm Springs Reservation of Or., 93 FERC ] 61,182 at 61,599 (2000)

    (concluding that ``the Tribes are an instrumentality of the `United

    States, a State or any political subdivision of a state''' and that

    Warm Springs Power Enterprises, a Chartered Enterprise of the

    Tribes, was entitled to Tribes' Section 201(f) exemption.).

    \52\ Public Law 103-454, 108 Stat. 4791, 4792 (codified at 25

    U.S.C. 479a-1).

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

    Petitioners note that FERC's determination that such Indian tribes

    should be treated as FPA 201(f) entities was based on the fact that, in

    operating such electric facilities, the Indian tribes perform

    government functions--the funds generated by such electric operations

    would be used for governmental purposes and would decrease the need for

    federal funding. Additionally, Indian tribes are subject to Interior

    Department oversight. Finally, like the other government or government-

    owned electric entities described in FPA section 201(f), the Indian

    tribes are tax exempt or ``not-for-profit'' entities.

    2. Non-FPA 201(f) Electric Cooperatives

    The Petition also requests relief for the very small number of

    cooperatively-owned electric utilities that do not meet the criteria of

    FPA section 201(f), either because they do not receive funding from

    RUS, sell more than 4,000,000 megawatt hours of electricity in a given

    year, or are not an ``aggregated NFP

    [[Page 51005]]

    Electric Entity.'' \53\ FERC has estimated that there were

    approximately fifteen electric cooperatives (of more than 900) which do

    not meet the requirements set forth in FPA section 201(f).\54\

    Petitioners request that the Commission recognize such cooperatives as

    ``appropriate persons,'' in accordance with CEA sections 4(c)(1),

    4(c)(2)(B), and 4(c)(3)(K), for purposes of an exemption under CEA

    section 4(c)(6). Petitioners represent as a threshold matter that,

    regardless of whether an electric cooperative meets the specific

    criteria of FPA section 201(f), all cooperatively-owned electric

    utilities share certain distinguishing features--a common not-for-

    profit public service mission and self-regulating governance model--

    that form the underlying rationale for the FPA section 201(f)

    exemption.\55\

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

    \53\ See Petition at 23. The Petitioners note that under various

    state laws, cooperatively owned electric utilities, or electric

    cooperatives, are sometimes called ``electric membership

    corporations'' or ``electric power associations.'' In addition,

    Petitioners note that under certain sections of tax laws, state

    public utility laws or regulations, the FPA or the FERC's

    regulations, electric cooperatives are sometimes called ``rural

    electric cooperatives'' or ``cooperatives providing electric

    services to consumers and farmers,'' or by similar, but not

    identical, entity names. See Petition at 2, note 5. In this Notice,

    as the Petitioners did in their Petition, the Commission uses the

    term ``electric cooperatives'' to encompass all of these entities,

    which are formed for the primary purpose of providing electric

    energy service to their owners/member customers on a not-for-profit

    basis, and which are treated as cooperatives under Federal tax laws.

    \54\ Statement of Cynthia A. Marlette, General Counsel of FERC,

    before the Committee on Agriculture, Subcommittee on Conservation,

    Credit, Energy, and Research, United States House of Representatives

    (July 30, 2008) (available at http://www.ferc.gov/eventcalendar/Files/20080730104611-Marlette.pdf). NRECA believes that, of its

    current members, the following six entities are non-FPA 201(f)

    electric cooperatives: Pacific Northwest Generating Cooperative

    (PNGC Power), Golden Spread Electric Cooperative, Old Dominion

    Electric Cooperative, Wabash Valley Power Association, Wolverine

    Power Cooperative, and Deseret Power Electric Cooperative.

    \55\ Similarly, to be treated as a ``cooperative'' under Federal

    tax law, regardless of 201(f) status, an electric cooperative must

    operate on a cooperative basis. See 26 U.S.C. 501(c)(12),

    1381(a)(2)(C). As explained by the United States Tax Court in the

    seminal case of Puget Sound Plywood, Inc. v. Commissioner of

    Internal Revenue, operating on a cooperative basis means operating

    according to the cooperative principles of i) democratic member

    control, ii) operation at cost, and iii) subordination of capital.

    See 44 T.C. 305 (1965); see also Internal Revenue Manual Sec.

    4.76.20.4 (2006) (elaborating on the cooperative principles by

    explaining that each member of a cooperative has one vote, a

    cooperative must allocate any excess operating revenue to its

    members in proportion to the amount of business it did with each,

    and that members share their interest, risk, and burden to obtain

    services or benefits rather than invest as equity owners).

    Additionally, for any electric cooperative to be exempt from Federal

    income taxation pursuant to IRC 501(c)(12), it must collect annually

    ``85 percent or more of [its] income * * * from members for the sole

    purpose of meeting losses and expenses.'' 26 U.S.C. 501(c)(12)(A).

    Accordingly, Petitioners argue that an electric cooperative,

    regardless of FPA section 201(f) status, lacks incentive or

    motivation to manipulate prices, disrupt market integrity, engage in

    fraudulent or abusive sales practices, or misuse customer assets

    because it: (1) Is a consumer cooperative; (2) is controlled by its

    members; (3) must operate at cost and ``not operate either for

    profit or below cost;'' (4) may not benefit its individual members

    financially; and (5) if exempt from Federal income taxation, must

    collect at least 85 percent of its income from members.

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

    In analyzing whether an entity qualifies as an appropriate person

    under CEA section 4(c)(3), Petitioners note that past Commission

    determinations have focused on the financial strength and

    sophistication of the persons for whom relief is being provided.

    Petitioners also posit that CEA section 4(c)(3)(K) allows the

    Commission to consider the operations management qualification of the

    person or class of persons in relation to the exempted transactions, as

    well as the person's or class of person's ability to execute the

    exempted transactions without additional regulatory protection by the

    Commission. When considered in light of these determinative factors,

    Petitioners argue that source of financing or total electric energy

    sales are not meaningful factors for purposes of differentiating

    between electric cooperatives that are appropriate for an exemption

    from the CEA and those that are not.\56\

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

    \56\ Petitioners argue that in promulgating CEA section

    4(c)(6)(C), ``Congress effectively makes the determination for the

    Commission that `entities described in FPA 201(f)' are `appropriate

    persons' entitled to the benefits of the exemptive order.'' Petition

    at 23. Thus, by extension, Petitioners argue that if non-FPA 201(f)

    electric cooperatives are at least as financially sound and

    operationally capable as those electric cooperatives described by

    FPA section 201(f), then they should also be considered appropriate

    persons.

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

    First, the Petition argues that whether out of necessity due to

    insufficient Congressional appropriations, or by choice in order to

    find more appropriate or less expensive terms for certain needs,

    electric cooperatives may look to sources of financing beyond the RUS.

    Other nonprofit cooperative financing entities, such as the National

    Rural Utilities Cooperative Finance Corporation (``CFC'') or Co-

    Bank,\57\ exist to supplement RUS financing or provide additional

    financing resources and terms not available through the RUS.

    Petitioners note that electric cooperatives always can choose to borrow

    from private lenders or self-finance infrastructure investments and

    operations with ongoing revenues and reserves. Eligibility for RUS

    financing does not speak to an electric cooperative's operational

    soundness or financial strength.

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

    \57\ Per the Petition, the CFC is a nonprofit cooperative entity

    formed in 1969 by NRECA's electric cooperative members. CFC provides

    access to financing to supplement the loan programs of the RUS. CFC

    is the largest non-governmental lender to America's rural electric

    systems, and nearly 200 electric cooperatives across the United

    States rely solely on CFC for financing. CFC has separately

    requested exemptive relief from the Commission for the swaps it

    enters into related to providing financing to its members' electric

    cooperatives. CoBank is a cooperative bank owned by electric

    cooperatives and agricultural cooperatives, and is a part of the

    Farm Credit Administration system.

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

    Next, the Petition suggests that greater electric energy sales

    could result in greater financial strength. Petitioners note that while

    very few electric cooperatives historically have sold 4,000,000

    megawatt hours or more in a particular year, the success of the

    electric cooperative model means that there may be a small number of

    cooperatives in any particular year whose annual sales exceed the

    threshold.\58\ Furthermore, an electric cooperative's status under the

    FPA may fluctuate year-to-year depending on its annual megawatt sales,

    which always will fluctuate depending on usage trends, economic

    conditions, and weather patterns. Petitioners believe that Congress'

    policy decision to codify 4,000,000 megawatt hours per year as a

    threshold was based solely upon the fact that FERC, as well as other

    agencies, already used this level to identify ``small utilities,''

    ``small entities,'' or ``small businesses'' that should be afforded

    protection from the costs and regulatory burdens imposed on larger

    entities.\59\

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    \58\ Per the Petition's representation of data collected by

    NRECA, fewer than one percent of distribution cooperatives exceed

    the four million MWh annual sales threshold, as do approximately 24

    of 66 G&T cooperatives. The Commission understands that of those G&T

    cooperatives that exceed the sales threshold in a given year, the

    majority are still FPA 201(f) entities because they receive

    financing from RUS.

    \59\ See Petition at 35-36. Counsel for Petitioners also

    represent that EPAct 2005 was largely a response to the electrical

    blackouts in the northeast United States during 2003 that later were

    found to be attributable to generation and transmission failures of

    the largest electric utility providers. Thus, Congress' chief

    concern in expanding the 201(f) exemption for electric cooperatives

    was ensuring that entities with substantial generation and

    transmission capacity remained subject to the plenary jurisdiction

    of FERC. Per the Petition, Congress did not make a policy decision

    that the electric cooperatives selling 4 million megawatt hours or

    more per year required regulation under FPA 201(f) and, where EPAct

    2005 did give FERC additional discretionary jurisdiction over

    electric cooperatives, FERC has not chosen to exercise that

    discretionary authority to date. When FERC exercises its

    jurisdiction in certain instances, it allows non-FPA 201(f) electric

    cooperatives additional regulatory flexibility, subject to ``self-

    regulation'' by such cooperatives' member/owner boards,

    distinguishing the not-for-profit electric sector from investor-

    owned electric utilities. The very small number of electric

    cooperatives that do not meet the 4 million megawatts per year

    threshold at any point in time are, nonetheless, ``self-regulating

    entities,'' share the same cooperative governance structure, operate

    on a cooperative basis and are not-for-profit entities.

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    [[Page 51006]]

    Thus, Petitioners argue that there is no implication under any of

    the FPA section 201(f) criteria for electric cooperatives that non-

    201(f) electric cooperatives are more or less creditworthy or

    financially sound, or more or less deserving of operational deference

    or regulatory preference, than electric cooperatives that meet one of

    the FPA section 201(f) criteria.\60\

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    \60\ Petitioners note that non-FPA 201(f) electric cooperatives

    likely own more or larger generation and transmission assets, and

    therefore are arguably at least as financially sound and

    operationally qualified as electric cooperatives described in FPA

    section 201(f). Furthermore, these non-FPA 201(f) electric

    cooperatives may meet the financial criteria established in CEA

    section 4(c)(3)(F) for an ``appropriate person'' by having a net

    worth exceeding $1,000,000 or total assets exceeding $5,000,000.

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    III. Commission Determinations

    A. Scope of the Proposed Order

    In the exemptive order proposed herein (the ``Proposed

    Order''),\61\ the Commission is providing for a narrower scope of

    eligibility than requested by Petitioners. While the proposed exemptive

    relief is structured in a manner similar to the Petition's suggested

    approach and incorporates many of the same parameters,\62\ the Proposed

    Order uses different terminology to describe the pertinent categories

    of affected entities and transactions, and limits the exempted

    transactions to certain enumerated categories.\63\ The Proposed Order

    identifies (i) the entities eligible to rely on the exemption for

    purpose of entering into an exempt transaction (``Exempt Entities'');

    (ii) the agreement, contract, or transaction for which the exemption

    may be relied upon (``Exempt Non-Financial Energy Transactions''); and

    (iii) the provisions of the CEA that will continue to apply to Exempt

    Entities engaging in Exempt Non-Financial Energy Transactions.

    Accordingly, relief from the requirements of the CEA and Commission

    regulations provided in the Proposed Order will be available for only

    an Exempt Entity entering into an Exempt Non-Financial Energy

    Transaction with another Exempt Entity, subject to certain conditions.

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

    \61\ The text of the Proposed Order is set forth in section IV

    of this Notice.

    \62\ See Petition Exhibit 3.

    \63\ The Commission believes that the open-ended relief sought

    by the Petitioners makes it difficult to evaluate the full range of

    transactions that would be subject to exemption and, thus, to

    conduct legitimate public interest and CEA purpose determinations as

    required under CEA section 4(c). As the Commission is not providing

    the categorical relief requested by Petitioners at this time, it

    considered the Petition's secondary requests to provide i) an

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

    authority to Commission staff to review and approve new categories

    of exempted transactions for purposes of being eligible for the

    relief provided herein. See supra note 26. Given Congressional

    intent that the Commission need not determine the nature of a

    product when providing 4(c) relief, the Commission does not believe

    it would be appropriate to provide specific relief to trade options

    as a category of transactions in the context of this proposed

    relief. See supra note 7 and accompanying text. While it is possible

    that the scope of the transactions eligible for the relief proposed

    herein may include transactions that otherwise would qualify as

    trade options, the Commission need not make such a finding in the

    context of the proposed 4(c) exemption. Rather, the Commission has

    determined to limit the scope of the proposed exemption to Exempt

    Non-Financial Energy Transactions, as described in the Proposed

    Order, and the Commission is requesting comment on this description.

    As for the Petitioner's request regarding delegated authority to

    CFTC staff, the Commission has never in the past delegated authority

    to staff to make ad-hoc 4(c) determinations, and does not propose

    such a delegation herein. Additionally, the Commission is not

    providing relief retroactive to the enactment of Dodd-Frank, as

    requested by Petitioners. The Commission specifically requests

    comment as to whether it should provide such relief, and as to

    whether such relief would be necessary to provide any relief beyond

    that which has already been available via the Commission's Dodd-

    Frank implementation program, related exemptive orders, and staff

    no-action letters. The Commission also declines to propose, as was

    requested by Petitioners, that the transactions subject to the

    relief provided herein will not affect any entity's regulatory

    status under the CEA and Commission regulations. The Commission

    requests comment as to how the relief provided by the Proposed Order

    would be incomplete without such a provision and as to whether the

    Commission should include such a provision in the final exemptive

    order.

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    1. Exempt Entities

    The Commission is proposing to include three general categories of

    electric utilities as Exempt Entities in the relief provided herein:

    (i) Government-owned electric utilities described by FPA section

    201(f); (ii) electric utilities owned by Federally-recognized Indian

    tribes, otherwise subject to regulation as public utilities under the

    FPA; and (iii) cooperatively-owned electric utilities, regardless of

    whether such utilities are described by FPA section 201(f), so long as

    they are treated as cooperative organizations under the Internal

    Revenue Code (``IRC'').\64\ Given the unique public service mission and

    governance structure of government, Indian tribe, and cooperatively-

    owned electric utilities (as compared to investor-owned public

    utilities), the Commission believes that such Exempt Entities, when

    engaged in Exempt Non-Financial Energy Transactions, have less

    financial incentive to engage in market manipulation or other types of

    abusive trade practices that may implicate the public interest and/or

    purposes of the CEA and therefore are appropriate for section 4(c)

    relief.\65\

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

    \64\ The Proposed Order also includes as an Exempt Entity any

    not-for-profit entity that is wholly owned, directly or indirectly,

    by any one or more of the entities included within the three general

    categories above.

    \65\ The potential for manipulation described here differs from

    the situation in CFTC v. Dairy Farmers of America. In this case, a

    dairy cooperative was able to have a direct effect on a small

    illiquid spot cheese market that was a pricing component in the U.S.

    Department of Agriculture formula used to calculate milk prices

    under the Federal Milk Marketing Orders in an attempt to manipulate

    the price of Class III milk futures. The electric energy market

    situation is different because Exempt Entities do not report prices

    of Exempt Non-Financial Energy Transactions to indexes used to

    settle other derivative products that could benefit an Exempt Entity

    cooperative's members.

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

    Generally, Exempt Entities are limited to nonfinancial commercial

    end users that operate on a not-for-profit basis. The Proposed Order

    defines Exempt Entities as those entities that do not meet the

    definition of a ``financial entity'' in CEA section 2(h)(7)(C). The

    purpose of this criterion is to prevent a cooperative that exists

    primarily in order to provide financing for its members, and thus

    enters into a significant number of derivative transactions to hedge

    financial price risks, such as movements in interest rates, from

    benefiting from the relief provided in the Proposed Order.\66\

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

    \66\ The Commission also is proposing, in a separate 4(c) order,

    to extend the end-user exception found in CEA section 2(h)(7) to

    cooperatives that are financial entities as defined in CEA section

    2(h)(7)(C) (``Financial Cooperative 4(c) Order). The purpose of this

    4(c) relief is to extend the benefits of the end-user exception to

    cooperatives that meet the definition of a financial entity, but

    whose members otherwise would qualify for the end-user exception but

    choose to take advantage of the cooperative's low-cost access to

    financing. See 77 FR 41940 (July 17, 2012). The Commission notes,

    however, that for the policy reasons described herein as well as in

    the Financial Cooperative 4(c) Order, the extension of the end-user

    exception to financial cooperatives still requires reporting of swap

    transactions, whereas the relief provided in this Proposed Order

    does not.

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    a. Electric Utilities Owned by Federal, State, or Local Government

    Pursuant to the mandate in CEA section 4(c)(6)(C) and subject to

    the determinations described in Section III.B below, the Commission is

    proposing to include as Exempt Entities in its Proposed Order all

    government-owned electric utilities that are described by FPA section

    201(f). FPA section 201(f) exempts from the plenary jurisdiction of

    FERC ``any agency, authority, or instrumentality of'' or ``any

    corporation which is wholly owned, directly or indirectly, by'' the

    federal government or a state or local government. These entities

    include, but are not limited to, all federal agency-owned electric

    generation and

    [[Page 51007]]

    transmission facilities,\67\ state-chartered electric utilities,\68\

    utility boards or public utility districts formed under state or local

    law,\69\ and joint action or joint power agencies formed under state

    law to provide wholesale power supply and transmission services to

    member entities.\70\

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

    \67\ See supra note 42.

    \68\ These utilities include, but are not limited to, entities

    such as the New York Power Authority.

    \69\ These utilities include, but are not limited to, municipal

    electric utilities, regardless of size.

    \70\ These utilities include government-owned public power and

    public utility districts such as an irrigation district organized

    under state law that generates electric energy during the course of

    supplying water.

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

    b. Electric Utilities Owned by an Indian Tribe

    Based on the determinations described in Section III.B below and

    pursuant to CEA section 4(c)(1), the Commission is proposing to include

    as Exempt Entities in its Proposed Order all electric facilities owned

    by federally-recognized Indian tribes that otherwise would be subject

    to FERC's plenary jurisdiction. For purposes of the Proposed Order,

    ``federally-recognized'' means that the Indian tribe has been

    documented by the Secretary of the Interior in the Federal Register as

    having been recognized by the U.S. government, pursuant to section 104

    of the Act of November 2, 1994.\71\

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    \71\ Public Law 103-454, 108 Stat. 4791, 4792, as codified at 25

    U.S.C. 479a-1.

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

    The Commission has determined that electric utilities owned by

    federally-recognized Indian tribes are no different substantively than

    government-owned electric utilities described immediately above for

    purposes of benefiting from the relief provided in the Proposed Order.

    Like government-owned electric utilities, electric utilities owned by a

    federally-recognized Indian tribe use funds generated from electric

    energy sales for purposes of running a tribal government. That is,

    instead of accruing profits for the benefit of private investors or

    shareholders, any excess operating revenues related to the generation

    or transmission of electricity are used by the Indian tribe to support

    the tribal governing body and reduce dependence on federal funding.

    Additionally, Indian tribes are tax-exempt or not-for-profit entities.

    Finally, the Commission notes that for many of the same reasons just

    noted, FERC has interpreted ``instrumentalities'' of government to

    include federally-recognized Indian tribes, thus treating electric

    facilities owned by these Indian tribes as FPA section 201(f)

    entities.\72\

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    \72\ See supra note 51.

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

    c. Electric Utilities Owned as Cooperative Organizations

    Pursuant to CEA section 4(c)(6)(C), and subject to the

    determinations described in Section III.B below, the Commission is

    proposing to include as Exempt Entities in its Proposed Order all

    cooperatively-owned electric utilities that are described by FPA

    section 201(f).\73\ Additionally, pursuant to the exemptive authority

    provided in CEA section 4(c)(1) and subject to the determination

    described in Section III.B below, the Commission is proposing to

    include as Exempt Entities all other electric cooperatives that are not

    described by FPA section 201(f).\74\ By reference to the IRC in the

    Proposed Order, an ``electric cooperative'' means a non-profit or not-

    for-profit entity that is organized and continues to operate primarily

    to provide its members with electric energy services at the lowest cost

    possible and is taxed as an electric cooperative pursuant to IRC

    section 501(c)(12) or 1381(a)(2)(C).\75\ In order for an electric

    utility to be taxed as a cooperative, the electric utility must

    demonstrate that it operates in accordance with three principles: (i)

    Democratic member control; (ii) operation at cost (i.e., allocating any

    excess revenue, less cost of producing the revenue, among members in

    proportion to the amount of business done with each); and (iii)

    subordination of capital (i.e., no single contributor of capital to the

    cooperative can control the operations or receive most of the pecuniary

    benefits of operations, setting a cooperative apart from an

    investor).\76\

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    \73\ FPA section 201(f) exempts from the plenary jurisdiction of

    FERC any electric cooperative that either is funded by the RUS,

    sells less than 4,000,000 megawatt hours per year of electricity, or

    qualifies as an aggregated FPA 201(f) entity. An aggregated FPA

    201(f) entity consists of ``any corporation which is wholly owned,

    directly or indirectly, by any one or more [FPA 201(f) entity].''

    These entities include Joint Action Agencies that are formed by

    constituent government-owned electric utilities described by FPA

    section 201(f).

    \74\ See infra Section III.B.4 for the Commission's analysis of

    why non-201(f) electric cooperatives are deemed to be appropriate

    persons for purposes of CEA section 4(c)(1) relief.

    \75\ 26 U.S.C. 501(c)(12), 1381(a)(2)(C). For purposes of the

    definition, the term ``electric cooperative'' includes a ``rural

    electric cooperative.'' The Commission understands that while not

    required for federal income tax status, many electric cooperatives

    are organized under state cooperative statutes as well. To the

    extent such laws impose requirements that conflict with those in IRC

    501(c)(12), state law governs without jeopardizing 501(c)(12)

    status. See Internal Revenue Manual Sec. 4.76.20.8 (2006).

    \76\ The term ``cooperative'' is not defined in IRC 501(c)(12)

    or 1381(a)(2)(C). Rather, common law has interpreted operation on a

    cooperative basis to mean the organization demonstrates the three

    principles noted above. See Puget Sound Plywood v. Commissioner, 44

    T.C. 305, 307-308 (1965). Electric cooperatives receive tax-exempt

    status if they meet the additional criteria of receiving at least 85

    percent of revenue from their members for the sole purpose of

    meeting losses and expenses. See IRC 501(c)(12)(A). Otherwise,

    electric cooperatives are subject to federal income tax. See IRC

    1381(a)(2)(C); Rev. Rul. 83-135.

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    Exempt Entity electric cooperatives generally conform to one of two

    structures. First, a G&T cooperative generates or purchases and

    transmits electric energy at wholesale prices to its constituent

    distribution cooperatives, which are members/owners.\77\ Second, a

    distribution cooperative sells electric energy to member/owner retail

    customers.\78\ Both structures are consumer cooperatives, meaning that

    they were formed by consumers for the ``benefit of [such] members in

    their capacity as consumers.'' \79\ As noted above, Exempt Entities do

    not include cooperatives that qualify as financial entities pursuant to

    CEA section 2(h)(7)(C), regardless of whether they are recognized as

    FPA section 201(f) entities.\80\

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

    \77\ G&T cooperatives may also transmit electric energy to other

    G&T cooperatives that are members based on ``generation capacity''

    agreements as described by Petitioners. See supra Section II.B.2.

    \78\ Retail customers, in turn, use the electric energy to power

    everyday activities, whether commercial or residential in nature.

    \79\ See Puget Sound Plywood, 44 T.C. at 306. Alternatively,

    producer cooperatives, such as large farming cooperatives, exist for

    the ``benefit of the members in their capacity as producers.'' See

    id. The Commission notes that the public interest rationale for

    exempting consumer electric cooperatives articulated herein would

    not necessarily apply to other producer cooperatives, given

    differences in operational purposes and motivations behind forming

    such cooperatives.

    \80\ Additionally, financial cooperatives are not tax-exempt

    entities pursuant to IRC 501(c)(12). See Internal Revenue Manual

    Sec. 4.76.20.5 (2006). The Commission intends for financial

    cooperatives that finance electric cooperatives, such as the CFC, to

    rely on the exemptive relief provided in the recently-proposed

    financial cooperative 4(c) order. See supra note 66.

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    2. Exempt Non-Financial Energy Transactions

    The Proposed Order defines Exempt Non-Financial Energy Transactions

    as those agreements, contracts, or transactions entered into between

    Exempt Entities primarily in order ``to satisfy existing or anticipated

    contractual obligations to facilitate the generation, transmission,

    and/or delivery of electric energy service to customers at the lowest

    cost possible, and the agreement, contract, or transaction is intended

    for making or taking physical delivery of the commodity upon which the

    agreement, contract, or transaction is based.'' \81\

    [[Page 51008]]

    Exempt Non-Financial Energy Transactions are limited to six categories

    of agreements, contracts, or transactions, as described in further

    detail in the Proposed Order,\82\ which facilitate: (i) The generation

    of electric energy by an Exempt Entity, including fuel supply; (ii) the

    purchase or sale and transmission of electric energy by/to an Exempt

    Entity; and (iii) compliance with electric system reliability

    obligations applicable to the Exempt Entity and its facilities or

    operations.

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

    \81\ The Petition asserts that the purpose of all transactions

    for which relief is sought (as described therein) must be `` `to

    hedge or mitigate commercial risks' (as such phrase is used in CEA

    Section 2(h)(7)(A)(ii)).'' See Petition at 4. The Commission

    believes, however, that based on the general descriptions and

    accompanying examples of Electric Operations-Related Transactions

    provided in Petition, some types of transactions may not be

    agreements, contracts, or transactions that the Commission

    traditionally has viewed to ``hedge or mitigate commercial risk'' as

    such phrase is used in CEA section 2(h)(7)(A)(ii). Due to the

    breadth and vagueness of some of the Petition's descriptions, it is

    unpractical for the Commission to identify every manifestation of an

    Electric Operations-Related Transaction that does not come within

    the Commission's jurisdiction, although it has attempted to do so to

    the extent that the Commission has already made an affirmative

    determination elsewhere as to the nature of a product described in

    the Petition. See infra notes 86-90 and accompanying text. In any

    case, in order to provide Exempt Entities with regulatory certainty

    pursuant to CEA section 4(c), the Commission is defining Exempt Non-

    Financial Energy Transactions to include all agreements, contracts,

    or transactions entered into for the primary purpose of satisfying

    existing or anticipated contractual obligations to fulfill an Exempt

    Entity's public service mission that are intended for making or

    taking physical delivery of the underlying commodity. The Commission

    is seeking comments on the merits to this approach in defining

    Exempt Non-Financial Energy Transactions.

    \82\ The descriptions of the categories of exempted transactions

    in the Proposed Order are based on the Commission's understanding of

    the transaction types as commonly known to the electric industry, as

    informed by the descriptions provided in the Petition and the

    Commission's past experience in these markets. While the categories

    are identified with the same terminology used in the Petition, the

    Commission notes that these categories are not described in

    identical terms and therefore do not necessarily describe the same

    scope of transactions as contemplated in the Petition for exemption.

    The Commission understands that many of the terms used to identify

    categories of transactions in the Petition are terms of art,

    commonly understood by the electric energy industry (including by

    Exempt Entities).

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

    When combined with the requirements for Exempt Entities described

    above, the Commission believes that Exempt Non-Financial Energy

    Transactions, as defined under the Proposed Order, will not be used for

    speculative purposes. That is, Exempt Entity counterparties to Exempt

    Non-Financial Energy Transactions must contemplate ``delivery'' of the

    underlying good or service at the time they enter into the agreement,

    contract, or transaction, whether that be for electric energy,

    generation capacity, access to transmission lines, fuel, or some

    combination of the foregoing.\83\ Furthermore, these transactions

    generally are not used by Exempt Entities for the primary purpose of

    hedging fluctuations in the price of electric energy or any other

    commodity related to the generation, transmission, and/or delivery of

    electric energy to customers.\84\ Finally, the majority of Exempt Non-

    Financial Energy Transactions are not suitable for trading on an

    exchange such as a registered DCM or SEF due to their highly bespoke

    nature, and cannot include transactions based on, derived from, or

    referencing any financial commodity or any metal, agricultural, crude

    oil or gasoline commodity that cannot be used as fuel to generate

    electric energy. For these reasons, and for the reasons discussed in

    the 4(c) analysis provided in Section III.B below, the Commission

    believes that these transactions are unlikely to have an impact on

    price discovery or the functioning of markets regulated by the

    Commission, and thus are appropriate for conditional relief from the

    requirements of the CEA and regulations thereunder, pursuant to CEA

    section 4(c).

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

    \83\ Although some agreements may be settled through a book-out

    transaction, the transaction may never be entered into for

    speculative purposes.

    \84\ A key component of bona fide hedging, as defined in the

    Commission's regulations, is reducing the risk of fluctuations in

    price. In contrast, Exempt Non-Financial Energy Transactions

    primarily are used for making or taking delivery of electric energy

    in the physical marketing channel.

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

    The unique nature of the electric energy industry, including the

    unique nature of the not-for-profit utility structure, influenced the

    Commission's choice of the transactions within the scope of the

    exemption in the Proposed Order. Supply of reliable, affordable

    electric energy has long been constrained by a limited amount of

    generation and transmission capacity, particularly in rural regions,

    that is capable of meeting peak demand. Unlike many physical

    commodities, electric energy is not capable of being purchased in large

    commercial quantities ahead of time, delivered, and stored for later

    consumption or use. That is, electric energy must be used or consumed

    on an as-needed basis.

    Demand, on the other hand, can be subject to unpredictable

    fluctuations due to emergency situations and changes in weather

    patterns, usage trends, and larger macroeconomic conditions. Thus,

    electric utilities, including Exempt Entities, negotiate highly

    customized commercial arrangements in order to fulfill these constantly

    fluctuating retail electric energy needs while still complying with

    national and regional environmental and reliability standards. Each

    category of Exempt Non-Financial Energy Transactions described in the

    Proposed Order represents a component of these larger bespoke

    commercial transactions used to fulfill an Exempt Entity's public

    service mission.\85\

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

    \85\ Each category represents a factor in the ultimate price

    paid by retail customers for electric energy. For example,

    ``generation capacity'' transactions represent the cost component of

    acquiring and maintaining the generation assets used to produce the

    electric energy. ``Electric energy delivered'' represents the actual

    cost of using the generation assets to produce the electric energy.

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

    The Commission notes that not every transaction described by the

    Petition is being included in the Commission's definition of Exempt

    Non-Financial Energy Transaction. Due to the Commission's recent joint

    final rule and interpretation with the SEC in which it further defined

    what is (and is not) a swap (``Products Release''),\86\ the Commission

    believes it would not be appropriate to provide 4(c) relief from the

    requirements of the CEA and Commission regulations thereunder for

    certain transactions that are not swaps.\87\

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    \86\ 77 FR 48208 (August 13, 2012).

    \87\ The Commission has determined to interpret the forward

    exclusion from the swap definition consistently with the forward

    exclusion from the ``future delivery'' definition. Id. at 48227.

    Therefore, the forward exclusion from the swap definition applies

    equally to the forward exclusion from the ``future delivery''

    definition. See id. at 48233, note 271.

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

    Specifically, the Commission notes that, consistent with an example

    provided in the Products Release, the example of a Fuel Delivered

    transaction provided in Exhibit B of the Petition would be covered by

    the forward exclusion from the swap definition.\88\ Additionally, the

    Commission notes that, consistent with the general description provided

    in the Products Release, agreements, contracts, and transactions

    involving the category of Environmental Rights, Allowances or

    Attributes as specifically described by the Petition are covered by the

    forward exclusion from the swap definition.\89\ Accordingly, while

    these agreements, contracts, and transactions are not covered by the

    relief in the Proposed Order, they nonetheless are not subject to the

    requirements of the CEA and Commission regulations thereunder otherwise

    applicable to swaps, such as

    [[Page 51009]]

    clearing, trade execution, and reporting.\90\

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

    \88\ Compare Petition Exhibit 2 at 3 with 77 FR 48236.

    \89\ Compare Petition at 12 and Petition Exhibit 2 at 6 with 77

    FR 48233-234.

    \90\ However, any agreement, contract, or transaction that is a

    swap referencing one of these agreements, contracts, and

    transactions may be subject to the jurisdiction of the CEA (e.g., an

    option or other swap on or related to the price of an environmental

    allowance).

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

    Finally, the descriptions of the categories of Exempt Non-Financial

    Energy Transactions in the Proposed Order do not constitute official

    Commission determinations as to those transactions' legal status as a

    product subject to the jurisdiction of the CEA.\91\ To the extent

    overlap exists between transactions described as being subject to the

    forward exclusion from the swaps definition in the Products Release and

    transactions described by the categories of Exempt Non-Financial Energy

    Transactions in the Proposed Order, the Commission is requesting public

    comment as to whether the Proposed Order should provide relief for such

    transactions.

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    \91\ As noted above, CEA section 4(c) does not compel the

    Commission to make such a determination prior to issuing 4(c)

    relief. See supra note 7 and accompanying text. In contrast, and in

    addition to providing per se determinations as to the product

    classification of certain transactions, the Products Release

    provides interpretive guidance as to how the Commission would

    analyze certain categories of transactions for purposes of

    determining whether a particular transaction is a swap. Accordingly,

    certain transactions covered by the categories of Exempt Non-

    Financial Energy Transactions in the Proposed Order may not be

    swaps. See, e.g., 77 FR 48238 (noting that the Commission will

    interpret a ``full requirements'' contract with embedded volumetric

    optionality as a forward and not an option if the contract exhibits

    the features described in the Products Release in section

    II.B.2.(b)(ii)).

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    3. Conditions

    Under the Proposed Order, Exempt Entities would remain subject to

    certain conditions. First, the Commission's general anti-fraud, anti-

    manipulation, and enforcement authority found in CEA sections

    2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and

    Commission rules 32.4 and Part 180, which have application to both

    derivative and cash market transactions, will still apply. This

    condition will allow the Commission to initiate enforcement proceedings

    against Exempt Entities found to be engaged in manipulative,

    fraudulent, or otherwise abusive trading schemes when executing Exempt

    Non-Financial Energy Transactions with other Exempt Entities.

    Additionally, the Commission reserves its authority to inspect the

    books and records of Exempt Non-Financial Energy Transactions already

    kept in the normal course of business pursuant to the Commission's

    regulatory inspection authorities, in the event that circumstances

    warrant the need to gain greater visibility with respect to Exempt Non-

    Financial Energy Transactions as they relate to Exempt Entities'

    overall market positions and to ensure compliance with the terms of the

    Proposed Order.

    B. CEA Section 4(c) Considerations

    The Commission is issuing the Proposed Order pursuant to authority

    found in CEA sections 4(c)(1) and 4(c)(6), among other reasons, because

    it believes that the proposed exemption will promote responsible

    economic or financial innovation and fair competition. In addition to

    criteria found in those provisions, both sources of exemptive relief

    require the Commission to make certain determinations based on criteria

    found in section 4(c)(2), as well.\92\ Accordingly, the Commission

    considers and proposes to determine that: (i) CEA section 4(a) should

    not apply to the transactions eligible for the proposed exemption (as

    transacted by the entities eligible for the proposed exemption), (ii)

    providing section 4(c) relief from the CEA for Exempt Non-Financial

    Energy Transactions (as entered into between Exempt Entities) is

    consistent with the public interest and the purposes of the CEA, (iii)

    Exempt Entities are ``appropriate persons'' within the meaning of the

    term as defined in CEA section 4(c)(3), and (iv) the proposed 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.

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

    \92\ The Commission interprets the phrase, ``the Commission

    shall, in accordance with [CEA section 4(c)(1) and 4(c)(2)], exempt

    from the requirements of [the CEA] * * *,'' to mean that the

    Commission must make the determinations required under CEA sections

    4(c)(1) and 4(c)(2) prior to providing the mandated relief.

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

    1. Responsible Economic or Financial Innovation and Fair Competition

    The Commission believes that the exemption provided in the Proposed

    Order will promote financial innovation in electric energy markets

    facilitated by government and cooperatively-owned utilities. Government

    and cooperatively-owned electric utilities are not-for-profit entities

    whose sole purpose and mission is ``to provide reliable electric energy

    to retail electric customers every hour of the day and every season of

    the year, keeping costs low and supply predictable, while practicing

    cost-effective environmental stewardship.'' \93\ The consumer-as-owner

    cooperative model of electric utility, in partnership with municipal

    utilities and federal power agencies, has proven to be well-suited in

    developing innovative solutions to a complex array of issues related to

    extending electric energy generation and transmission resources into

    geographic areas of the United States where economies of scale do not

    exist, particularly those rural areas where traditional investor-owned

    utilities have chosen not to invest.\94\ In order to meet these

    electric energy challenges, however, the Exempt Entity business model

    has depended on a flexible operating environment, facilitated over time

    by other regulatory relief such as the exemption from FERC's plenary

    jurisdiction provided by FPA section 201(f).

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

    \93\ Petition at 22.

    \94\ For instance, investor-owned, private utilities lacked a

    profit incentive early on to invest the vast sums of capital

    necessary to expand electric energy service into rural areas where

    the requisite infrastructure was not already in place. With support

    from the RUS, as established under the FPA, electric cooperatives

    were first established in order to serve these rural communities.

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

    Due to factors largely beyond the control of Exempt Entities, the

    production, distribution, and usage needs of each Exempt Entity are

    constantly changing and have the potential to create the substantial

    commercial risk of not having enough generation, transmission, or

    distribution capacity for Exempt Entities to meet peak demand. Normally

    without the benefit of size and customer density, Petitioners contend

    that Exempt Entities have evolved to rely largely on each other in

    order to fulfill their public service mission of providing electric

    energy to their member-owners and retail customers at the lowest cost

    possible.\95\ The transactions listed in the Proposed Order reflect

    this type of innovation. Going forward, due to the limitations of

    standardized derivative contracts in providing the same type of highly

    customized resources to unique energy needs, it is important that

    Exempt Entities continue to have the flexibility to negotiate

    innovative new arrangements bilaterally for the purpose of achieving

    their mission.

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

    \95\ For example, many G&T cooperatives are formed exclusively

    by distribution cooperatives for the purpose of providing each

    distribution cooperative with its full requirements.

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

    Additionally, the Commission notes that, under current Commission

    regulations and guidance, it is unclear whether all Exempt Entities

    would qualify as eligible contract participants (``ECPs''), as such

    term is defined under CEA section 1a(18).\96\ Therefore, absent

    [[Page 51010]]

    relief such as that proposed herein, there is a risk that some Exempt

    Non-Financial Energy Transactions meeting the definition of a swap that

    involve non-ECP counterparties could not be traded away from a

    designated contract market.\97\ As described elsewhere in this release,

    Exempt Entities engage in Exempt Non-Financial Energy Transactions with

    one another on only a bilateral basis because such transactions are not

    replicable on an exchange (whether due to transaction size, customized

    terms, or other reasons). Therefore, the Commission is proposing the

    exemption in the Proposed Order to ensure that Exempt Entities have the

    regulatory certainty necessary to continue negotiating highly

    customized, physically-settled agreements, contracts, and transactions

    that serve their unique public service mission of providing reliable,

    affordable electric energy to customers.

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

    \96\ 7 U.S.C. 1a(18). In a recent final interpretive rule

    further defining entities under the CEA, as amended by the Dodd-

    Frank Act (``Entities Release''), the Commission declined to

    recognize certain entities such as not-for-profit natural gas

    utilities as having per se ECP status. See Further Definition of

    ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap

    Participant,'' ``Major Security-Based Swap Participant'' and

    ``Eligible Contract Participant,'' 77 FR 30596, 30657 (May 23,

    2012). The Commission noted that it was, however, considering

    granting relief to FPA section 201(f) entities, pursuant to new

    authority under CEA section 4(c)(6), which ``[might] address the

    concerns of some commenters'' such as entities similarly situated to

    the utilities represented by Petitioners. See id. The relief

    provided in the Proposed Order is consistent with the Commission's

    Entities Release.

    \97\ See CEA section 2(e).

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

    The Commission also believes that the relief provided in the

    Proposed Order will not distort the competitive landscape. First, the

    transactions covered by the Proposed Order relate, in many instances,

    to longstanding and exclusive agreements between Exempt Entities. As

    such, the Commission does not believe that granting an exemption from

    the requirements of the CEA either would change the nature of these

    transactions, or cause an Exempt Entity to enter into an arrangement

    with another Exempt Entity instead of an investor owned utility or some

    other counterparty solely because the agreement would be covered by the

    exemption in the Proposed Order. The benefits of the relief provided in

    the Proposed Order to government utilities and electric cooperatives

    will maintain the current competitive landscape, thus permitting Exempt

    Entities to continue using Exempt Non-Financial Energy Transactions to

    fulfill their public service mission, as opposed to providing an unfair

    advantage to one group over another group.\98\

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

    \98\ The Commission notes that certain non-Exempt Entity

    electric utilities also may qualify for the end-user exception from

    the clearing and trade execution requirements for swaps under CEA

    section 2(h)(7) when engaged in bona fide hedging transactions. See

    7 U.S.C. 2(h)(7)-(8).

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

    The CFTC is requesting comment on whether the Proposed Order may

    foster both financial or economic innovation and fair competition.

    2. Applicability of CEA Section 4(a)

    The Commission does not believe that CEA section 4(a), the

    exchange-trading requirement for futures contracts, should apply to

    Exempt Non-Financial Energy Transactions as defined in the Proposed

    Order. When transacted between Exempt Entities, these transactions are

    highly negotiated and bespoke in nature, cater specifically to the

    Exempt Entities' respective electricity, fuel, or other needs, and are

    intrinsically related to the Exempt Entities' public-service mission.

    Accordingly, the Commission does not view Exempt Non-Financial Energy

    Transactions as being suitable for on-exchange trading, in large part

    because, as noted above, these transactions and markets are unlikely to

    have an impact on price discovery or the functioning of markets

    regulated by the Commission. Thus, CEA section 4(a) should not apply.

    3. Public Interest and the Purposes of the CEA

    Exempting certain physical transactions between entities described

    in FPA section 201(f), and certain other electric cooperatives, from

    the provisions of the CEA and the regulations there under, subject to

    certain anti-fraud, anti-manipulation, and recordkeeping conditions, is

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

    reasons discussed below.

    a. Public Interest

    CEA section 3(a) describes Congress' findings as to certain

    national public interests facilitated by transactions subject to the

    Act. These public interests include ``providing a means for managing

    and assuming price risks, discovering prices, or disseminating pricing

    information through trading in liquid, fair and financially secure

    trading facilities.'' \99\

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

    \99\ CEA 3(a), 7 U.S.C. 5(a).

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

    Given the unique nature of each Exempt Non-Financial Energy

    Transaction conducted between Exempt Entities, such transactions are

    generally non-fungible and therefore cannot be traded as standardized

    products on an exchange. Accordingly, the universe of Exempt Non-

    Financial Energy Transactions generally occurs between Exempt Entities,

    thus constituting a mostly closed-loop of bilateral transactions. These

    bilateral transactions do not, by and large, face markets in which non-

    Exempt Entities such as investor-owned utilities engage in similar

    transactions, and therefore pose little (if any) threat of negatively

    affecting the liquidity, fairness, or financial security of trading

    derivative products on a registered designated contract market or swap

    execution facility in a material way.

    Exempt Non-Financial Energy Transactions, as they are defined and

    conditioned in the Proposed Order, are not susceptible to being used as

    a means for ``assuming price risk,'' or speculative activity. Rather,

    Exempt Entities may engage in these transactions for purposes of

    ``managing'' commercial risks that arise from electric operations in

    which the Exempt Entity engages to fulfill its public service mission

    of providing the most affordable and reliable electric energy possible

    to its members. Most of these commercial risks, however, are not

    directly related to fluctuations in the price of a commodity. Rather,

    Exempt Entities' main concern is a possible inability to satisfy

    contractual obligations to supply electric energy service to customers,

    which may arise from somewhat unpredictable fluctuations in demand for

    electric energy. These fluctuations, in turn, make it difficult for

    Exempt Entities to forecast their exact needs for generation and

    transmission capacity, the exact amount of fuel to be used for the

    generation of electric energy, and related activities necessary to

    facilitate the Exempt Entity's public service mission. Exempt Non-

    Financial Energy Transactions generally use variable pricing, as

    opposed to fixed pricing, meaning that they are entered into primarily

    to ensure that Exempt Entities are able to meet their production,

    transmission, and/or distribution obligations, as opposed to serving a

    traditional hedging function against the risk of price fluctuations of

    electricity or some other commodity.

    It is unlikely that an exchange could or would model a standardized

    derivative contract to duplicate the highly-customized economic terms

    of a bilaterally-negotiated Exempt Non-Financial Energy Transaction.

    Accordingly, such transactions between Exempt Entities are not

    susceptible to serving a price discovery function for any broader

    market or markets. A market participant seeking pricing information for

    a product or transaction involving the same underlying commodity would

    look to a standardized product or contract traded

    [[Page 51011]]

    on a regulated exchange involving that commodity.\100\

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

    \100\ The Commission notes that FERC recently has proposed

    requiring entities described in FPA 201(f) to be subject to limited

    reporting requirements concerning the availability and prices of

    wholesale electric energy. In EPAct 2005, Congress added Section 220

    to the FPA (16 U.S.C. 824t) directing FERC to ``facilitate price

    transparency in markets for the sale and transmission of electric

    energy in interstate commerce'' with ``due regard for the public

    interest, the integrity of those markets, fair competition, and the

    protection of consumers.'' See Electricity Market Transparency

    Provisions of Section 220 of the Federal Power Act, 135 FERC ]

    61,053 at PP 21-23 (Notice of Proposed Rulemaking) (2011)

    (collection of information from ``any market participant''

    interpreted to include entities described in FPA 201(f)). The

    Commission specifically seeks comment on whether, in light of this

    proposal, the relief provided in the Proposed Order should be

    revised in the future to require reporting to an SDR for certain

    transactions.

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

    The CFTC is requesting comment on whether the Proposed Order is

    consistent with the public interest.

    b. Purposes of the CEA

    Under section 3(b), in order to foster the public interests, it is

    the purpose of the CEA ``to deter and prevent price manipulation or any

    other disruptions to market integrity; to ensure the financial

    integrity of all transactions subject to [the CEA] and the avoidance of

    systemic risk; to protect all market participants from fraudulent or

    other abusive sales practices and misuses of customer assets; and to

    promote responsible innovation and fair competition among boards of

    trade, other markets and market participants.'' \101\ The Commission

    believes that the exemptive relief provided in the Proposed Order is

    consistent with these purposes.\102\

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

    \101\ CEA 3(b); 7 U.S.C. 5(b).

    \102\ As noted in section III(B)(1) above, the Commission

    believes that the exemption will promote financial innovation and

    fair competition.

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

    Exempt Entities are either government or cooperatively-owned

    electric utilities organized under Federal tax laws as nonprofit or

    not-for-profit entities. All Exempt Entities share a public service

    mission of providing reliable electric energy to retail electric

    customers at all times, keeping costs low and supply predictable, while

    practicing cost-effective environmental stewardship. Elected or

    appointed government officials or citizens, or cooperative members or

    consumers, are directly involved in the day-to-day governance and

    management of an Exempt Entity's facilities and operations. There are

    no shareholders or outside investors to profit from the Exempt Non-

    Financial Energy Transactions, and any revenues accruing from

    operational risk management activities related to the electric

    facilities and operations are used to reduce the cost of electric

    service provided to cooperative members and retail customers.

    Accordingly, the Commission believes that Exempt Non-Financial

    Energy Transactions between Exempt Entities are less vulnerable to

    fraudulent or manipulative trading activity. Congress affirmatively

    recognized this in the context of wholesale electric energy markets

    when it exempted government and cooperatively-owned electric utilities

    from FERC's plenary jurisdiction under FPA section 201(f).\103\

    Furthermore, the Proposed Order retains the Commission's general anti-

    fraud, anti-manipulation, and enforcement authority,\104\ and all

    Exempt Entities, regardless of status under FPA section 201(f), remain

    subject to FERC's market manipulation authority.\105\ Therefore, the

    relief provided in the Proposed Order does not interfere with the

    Commission's ability to police markets for manipulation and fraudulent

    trade practices.

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

    \103\ See supra notes 45-50 and accompanying text for a

    discussion of the FPC's findings in its Dairyland decision, affirmed

    by the federal court in Salt River, explaining the underlying

    rationale for exempting non-investor owned public utilities from the

    plenary jurisdiction of the FPC.

    \104\ See CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d),

    6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4 and Part 180.

    \105\ See FPA 222v; 16 U.S.C. 824v.

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

    Finally, the Commission does not view Exempt Non-Financial Energy

    Transactions between Exempt Entities as posing a systemic risk to the

    financial integrity or stability of markets. By definition, Exempt

    Entities do not consist of interconnected ``financial institutions''

    subject to prudential regulation because they are ``systemically

    important.'' \106\ Exempt Non-Financial Energy Transactions do not

    involve financial market professionals, intermediaries, or any other

    entity registered with the Commission. Rather, Exempt Non-Financial

    Energy Transactions involve counterparty credit risk between only

    Exempt Entities, which share a common not-for-profit public service

    mission and are obligated to pursue operational, not financial,

    performance mandates. The Commission does not believe that imposing the

    requirements of the CEA on these transactions would reduce systemic

    risk or bolster the financial stability and soundness of the markets

    that the Commission does regulate. Accordingly, the Commission does not

    view the relief provided in the Proposed Order as being contrary to

    this purpose of the CEA.

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

    \106\ Additionally, Exempt Entities do not consist of

    ``financial entities'' as the term is defined in CEA 2(h)(7)(C)(i).

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

    The CFTC is requesting comment on whether the Proposed Order is

    consistent with the purposes of the CEA.

    4. Appropriate Persons

    Exempt Entities entering into Exempt Non-Financial Energy

    Transaction are ``appropriate persons'' for purposes of satisfying CEA

    section 4(c)(2) for different reasons, depending on the type of

    electric utility and the corresponding section of the CEA pursuant to

    which the relief in the Proposed Order is being granted. The Commission

    believes that Congress, in enacting CEA section 4(c)(6)(C), implicitly

    identified entities described by FPA section 201(f) as appropriate

    persons for purposes of qualifying for an exemption pursuant to CEA

    section 4(c)(6); otherwise, Congress would not have mandated that the

    Commission ``shall * * * exempt'' such entities upon making the

    required findings.\107\

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

    \107\ Alternatively, the Commission notes that many FPA section

    201(f) entities are government-owned or sponsored, and therefore

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

    ``Any governmental entity * * * or political subdivision thereof, *

    * * or any instrumentality, agency, or department of any of the

    foregoing.''

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

    Next, for the reasons just noted, the Commission believes that

    federally-recognized Indian tribes that own electric facilities are

    analogous to government entities that sponsor electric facilities, and

    therefore qualify as appropriate persons pursuant to CEA section

    4(c)(3)(H).\108\

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

    \108\ See id.

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

    Finally, the Commission believes that non-FPA 201(f) electric

    cooperatives are appropriate persons for the reasons articulated in the

    Petition with respect to such cooperatives. Under CEA section

    4(c)(3)(K), the Commission may determine other persons not enumerated

    elsewhere in section 4(c)(3) to be appropriate in light of their

    financial or other qualifications, or the applicability of appropriate

    regulatory protections. As previously noted, the Commission believes

    that Congress implicitly deemed FPA 201(f) entities to be appropriate

    persons, thus indicating that FPA 201(f) entities have the requisite

    financial soundness and operational capabilities to execute

    transactions that are exempt from the requirements of the CEA.

    For the purposes of a 4(c) exemption, the Commission believes that

    there is no material difference in an electric cooperative's financial

    soundness or operational capability based upon

    [[Page 51012]]

    whether or not the electric cooperative meets the criteria of FPA

    section 201(f).\109\ As Petitioners note, an electric cooperative that

    receives financing from a source other than the RUS or sells more than

    4,000,000 megawatt hours of electricity per year is at least as

    financially sound and operationally qualified as electric cooperatives

    described in FPA section 201(f).\110\ The Commission notes that non-

    201(f) electric cooperatives arguably are more financially sound and

    operationally capable, as they likely maintain greater generation and

    transmission assets capable of facilitating the excess electric energy

    sales.\111\ Additionally, non-FPA 201(f) electric cooperatives that

    sell more than the threshold amount of electric energy per year often

    are in a position to benefit from better financing terms than those

    offered by the RUS based on having greater financial assets to post as

    collateral.

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

    \109\ As previously noted, non-FPA 201(f) electric cooperatives

    are governed by the same public service mission as FPA 201(f)

    electric cooperatives (i.e., providing members with electric energy

    at the lowest cost possible).

    \110\ In expanding the FPA 201(f) exemption to include RUS-

    financed electric cooperatives, Congress went a step further in

    EPAct 2005 by also including electric cooperatives that sold less

    than 4,000,000 megawatt hours of electricity per year. According to

    counsel for Petitioners, this provision was meant to capture certain

    small, distribution-only cooperatives that did not receive financing

    from the RUS.

    \111\ Alternatively, certain non-FPA 201(f) electric

    cooperatives may qualify as appropriate persons based on their net

    worth exceeding $1,000,000 or total assets exceeding $5,000,000. See

    CEA section 4(c)(3)(F).

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

    The CFTC is requesting comment as to whether the Exempt Entities

    identified in the Proposed Order are appropriate persons.

    5. Ability to Discharge Regulatory or Self-Regulatory Duties

    The exemptive relief contained in the Proposed Order 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. Nothing in the Proposed Order will prevent the

    Commission or any contract market from carrying out regulatory or self-

    regulatory duties for markets in a commodity that may also be involved

    in an Exempt Non-Financial Energy Transaction. As previously discussed,

    given the bespoke nature of these transactions, they are not connected

    to the pricing and market characteristics of other related derivative

    products that trade on exchange. The Commission is less concerned about

    the regulatory oversight of Exempt Entities as they are ``effectively

    self-regulating'' bodies subject to government or cooperative-member

    management.

    The CFTC is requesting comment as to whether the Proposed Order

    will 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.

    IV. Proposed Order

    The Commission has determined, pursuant to Commodity Exchange Act

    (``CEA'') sections 4(c)(1) and 4(c)(6), to exempt from all requirements

    of the CEA and Commission regulations issued there under any Exempt

    Non-Financial Energy Transaction entered into solely between Exempt

    Entities, subject to the following definitions and conditions:

    A. Exempt Entity shall mean (i) any government-owned electric

    facility recognized under Federal Power Act (``FPA'') section 201(f),

    16 U.S.C. 824(f); (ii) any electric facility otherwise subject to

    regulation as a ``public utility'' under the FPA that is owned by an

    Indian tribe recognized by the U.S. government pursuant to section 104

    of the Act of November 2, 1994, 25 U.S.C. 479a-1; (iii) any

    cooperatively-owned electric utility, regardless of status pursuant to

    FPA section 201(f), so long as the utility is treated as a

    ``cooperative'' organization under Internal Revenue Code section

    501(c)(12) or 1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C), and

    exists for the primary purpose of providing electric energy service to

    its member/owner customers at the lowest cost possible; or (iv) any

    not-for-profit entity that is wholly owned, directly or indirectly, by

    any one or more of the foregoing. The term ``Exempt Entity'' does not

    include any ``financial entity,'' as defined in CEA section 2(h)(7)(C).

    B. Exempt Non-Financial Energy Transaction means any agreement,

    contract, or transaction based upon a ``commodity,'' as such term is

    defined and interpreted by the CEA and regulations there under, so long

    as the primary purpose of the agreement, contract, or transaction is to

    satisfy existing or anticipated contractual obligations to facilitate

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

    service to customers at the lowest cost possible, and the agreement,

    contract, or transaction is intended for making or taking physical

    delivery of the commodity upon which the agreement, contract, or

    transaction is based. The term ``Exempt Non-Financial Energy

    Transaction'' excludes agreements, contracts, and transactions based

    upon, derived from, or referencing any interest rate, credit, equity or

    currency asset class, or any grade of a metal, agricultural product,

    crude oil or gasoline that is not used as fuel for electric energy

    generation. Exempt Non-Financial Energy Transactions are limited to the

    following categories, which may exist as stand-alone agreements or as

    components of larger agreements that combine only the following

    categories of transactions:

    1. Electric Energy Delivered transactions consist of arrangements

    in which a provider Exempt Entity agrees to deliver a specified amount

    of electric energy to a recipient Exempt Entity within a defined

    geographic service territory, load, or electric system over the course

    of an agreed period of time. Such transactions include ``full

    requirements'' contracts, under which one Exempt Entity becomes

    obligated to provide, and the recipient Exempt Entity becomes obligated

    to take, all of the electric energy the recipient needs to provide

    reliable electric service to its fluctuating electric load over a

    specified delivery period at one or multiple delivery points or

    locations, net of any electric energy the recipient is able to produce

    through generation assets that it owns.

    2. Generation Capacity transactions consist of agreements in which

    a recipient Exempt Entity purchases from a provider Exempt Entity the

    right to call upon a specified amount of the provider Exempt Entity's

    electric energy generation assets to supply electric energy within a

    defined geographic area, regardless of whether such right is ever

    exercised for the purposes of the recipient Exempt Entity meeting its

    location-specific reliability obligations. Such transactions also may

    specify certain conditions that must exist prior to exercising the

    right to use an Exempt Entity's generation assets, or establish an

    agreement between Exempt Entities to share pooled electric generation

    assets in order to satisfy regionally-imposed demand side management

    program requirements.

    3. Transmission Services transactions consist of arrangements in

    which a provider Exempt Entity owning transmission lines sells to a

    recipient Exempt Entity the right to deliver a specified amount of the

    recipient Exempt Entity's electric energy from one designated point on

    the transmission lines to another, at a set price per wattage and over

    a certain time period, in order for the recipient Exempt Entity to

    provide electric energy to its customers. Such transactions may include

    ancillary services related to transmission such as congestion

    management and system losses.

    [[Page 51013]]

    4. Fuel Delivered transactions include arrangements used to buy,

    sell, transport, deliver, or store fuel used in the generation of

    electric energy by an Exempt Entity. Additionally, Fuel Delivered

    transactions may include an agreement to manage the operational basis

    or exchange (i.e., location or time of delivery) risk of an Exempt

    Entity that arises from its location-specific, seasonal or otherwise

    variable operational need for fuel to be delivered.

    5. Cross-Commodity Pricing transactions include arrangements such

    as heat rate transactions and tolling agreements in which the price of

    electric energy delivered is based upon the price of the fuel source

    used to generate the electric energy. Cross-Commodity transactions also

    include fuel delivered agreements in which the price paid for fuel used

    to generate electric energy is based upon the amount of electric energy

    produced.

    6. Other Goods and Services

    Other Goods and Services transactions consist of arrangements in

    which the Exempt Entities enter into an agreement to share the costs

    and economic benefits related to construction, operation, and

    maintenance of facilities for the purposes of generation, transmission,

    and delivery of electric energy to customers. In a full requirements

    contract between Exempt Entities that share ownership of generation

    assets, the provider Exempt Entity may determine how generation to meet

    the recipient Exempt Entity's full requirements will be allocated among

    the provider's independent generation assets, the jointly-owned

    generation assets, and the recipient's independent generation assets.

    Other Goods and Services transactions also may include agreements

    between Exempt Entities to operate each other's facilities, share

    equipment and employees, and interface on each other's behalf with

    third parties such as suppliers, regulators and reliability

    authorities, and customers, regardless of whether such agreements are

    triggered as contingencies in emergency situations only or are

    applicable during the normal course of operations of an Exempt Entity.

    C. Conditions. The relief provided herein is subject to the

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

    authority under the CEA, including but not limited to CEA sections

    2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and

    Commission rules 32.4 and Part 180. Additionally, the Commission

    reserves its authority to inspect books and records kept in the normal

    course of business that relate to Exempt Non-Financial Energy

    Transactions between Exempt Entities pursuant to the Commission's

    regulatory inspection authorities. The relief provided herein does not

    affect the jurisdiction of FERC or any other government agency over the

    entities and transactions described herein. Furthermore, the Commission

    reserves the right to revisit any of the terms and conditions of the

    relief provided herein and alter or revoke such terms and conditions as

    necessary in order for the Commission to execute its duties and advance

    the public interests and purposes under the CEA, including a

    determination that certain entities and transactions described herein

    should be subject to the Commission's full jurisdiction.

    V. Request for Comment

    The Commission requests comment on all aspects of the issues

    presented by this proposed order. The Commission specifically requests

    comment on the scope of both the (a) transactions and (b) entities

    which would be eligible to rely upon the exemption provided in the

    proposed order. In addition, the Commission requests comment on the

    following questions:

    1. Should the Commission limit the scope of Exempt Entities to only

    those electric utilities described by FPA section 201(f), given that

    Congress limited CEA section 4(c)(6)(C) thereto (or, is it an

    appropriate use of the Commission's general exemptive authority

    pursuant to CEA section 4(c)(1) to exempt the non-FPA 201(f) electric

    cooperatives)? If it is appropriate to expand the scope beyond FPA

    201(f) entities, should the Commission still limit the scope of

    electric cooperatives included as Exempt Entities to only those

    cooperatives with tax exempt status under the IRC (i.e., those that

    receive at least 85 percent of revenue from the cooperative

    membership)?

    2. In light of other exemptive authority that was added to the CEA

    by the Dodd-Frank Act, such as the end-user exception in CEA section

    2(h)(7)(A), is relief pursuant to CEA section 4(c) necessary and/or

    appropriate for Exempt Non-Financial Energy Transactions between Exempt

    Entities as described herein?

    3. Should the Commission require that any Exempt Entity that is

    described by FPA section 201(f) relying on the relief provided herein

    notify the Commission of its change in status under FPA section 201(f)

    as a condition of such relief? If so, what purpose(s) would this serve?

    4. For the purpose of issuing this Proposed Order, the Commission

    concluded that Exempt Non-Financial Energy Transactions do not serve a

    price discovery purpose. Please comment on the Commission's assessment.

    What facts and circumstances would require the Commission to revisit

    its analysis and alter the relief proposed herein such that reporting

    to an SDR should be required for certain transactions? \112\

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

    \112\ Commenters should consider what impact, if any, it would

    have on the response to the question posed if FERC finalizes its

    recent proposal to require price transparency reporting in electric

    wholesale markets, even by FPA 201(f) entities. See supra note 100.

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

    5. The Commission believes that the Proposed Order's definition of

    ``Exempt Non-Financial Energy Transaction,'' in combination with the

    definition of ``Exempt Entity'', should ensure that Exempt Non-

    Financial Energy Transactions cannot be used for speculative purposes.

    Please comment on whether the Proposed Order would so foreclose the

    possibility for speculative trading and, if not, how the Proposed Order

    should be modified to achieve such a goal.

    6. The Commission has proposed that electric facilities owned by

    only federally-recognized Indian tribes be included as Exempt Entities

    for purposes of the relief provided in the Proposed Order. The

    Commission specifically requests comment on every aspect of the

    Proposed Order as it relates to Indian tribes.

    7. The Commission has limited its definition of Exempt Non-

    Financial Energy Transaction to six categories. Do any of the

    transactions described by or covered under these categories fail to

    come under the Commission's jurisdiction, such that relief pursuant to

    CEA section 4(c) is unnecessary and/or inappropriate, either due to an

    interpretation in the Products Release or otherwise?

    8. Per the Petition's request, should the Commission stipulate that

    the relief provided in the Proposed Order (i) applies retroactively to

    the enactment of the Dodd-Frank Act and (ii) that transactions covered

    by the relief will not be considered by the Commission for any purpose

    which affects or may affect an Exempt Entity's regulatory status under

    the CEA (e.g., in determining status as a swap dealer or major swap

    participant)?

    9. The Petition requested that the Commission provide categorical

    relief by including ``any other agreement, contract, or transaction to

    which an Exempt Entity is a party.'' Should the Commission provide such

    categorical relief, so long as the primary purpose of

    [[Page 51014]]

    the agreement, contract, or transaction is to satisfy existing or

    anticipated contractual obligations to facilitate the generation,

    transmission, and/or delivery of electric energy service to customers

    at the lowest cost possible, and the contract is intended to be settled

    through physical delivery of the underlying commodity?

    10. Can any Exempt Non-Financial Energy Transaction, as defined in

    the Proposed Order, or any component of an Exempt Non-Financial Energy

    Transaction, be used to hedge price risk in an underlying commodity? If

    so, should the Commission explicitly exclude such price-hedging

    transactions from the definition of Exempt Non-Financial Energy

    Transaction?

    VI. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that Federal

    agencies consider whether proposed rules will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis on the impact. The relief

    provided in the Proposed Order may be available to some small entities,

    because they may fall within standards established by the Small

    Business Administration (``SBA'') defining entities with electric

    energy output of less than 4,000,000 megawatt hours per year as a

    ``small entity.'' \113\

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    \113\ U.S. Small Business Administration, Table of Small

    Business Size Standards Matched to North American Industry

    Classification System Codes, footnote 1 (effective March 26, 2012),

    available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.

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

    The Commission has considered carefully the potential effect of

    this Proposed Order on small entities and has determined that the

    proposed order will not have a significant economic impact on any

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

    Proposed Order relieves the economic impact that the Exempt Entities,

    including any small entities that may opt to take advantage of it, by

    exempting certain of their transactions from the application of

    substantive regulatory compliance requirements of the CEA and

    Commission regulations there under. Significantly, the Proposed Order

    prevents new requirements for swaps, such as clearing, trade execution

    and regulatory reporting, from affecting transactions that Exempt

    Entities traditionally have engaged in to serve their unique public

    service mission of providing reliable, affordable electric energy

    service to customers. Absent such relief and to the extent Exempt Non-

    Financial Energy Transactions would qualify as swaps, small entities

    covered by the Proposed Order could be subject to compliance with all

    aspects of the CEA and its implementing regulations. Accordingly, the

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that the Proposed Order will not have a significant

    economic impact on a substantial number of small entities.

    B. Paperwork Reduction Act

    Under the Paperwork Reduction Act (``PRA''), an agency may not

    conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a currently valid control

    number from the Office of Management and Budget (``OMB''). The Proposed

    Order does not contain any new information collection requirements that

    would require approval of OMB under the PRA.\114\ While the Commission

    reserves its authority to inspect books and records kept in the normal

    course of business that relate to Exempt Non-Financial Energy

    Transactions between Exempt Entities pursuant to the Commission's

    regulatory inspection authorities, the Commission is not imposing a

    recordkeeping burden with respect to the books and records of Exempt

    Non-Financial Energy Transactions that already are kept in the normal

    course of business. Moreover, any inspection of books and records

    typically only will occur in the event that circumstances warrant the

    need to gain greater visibility with respect to Exempt Non-Financial

    Energy Transactions as they relate to Exempt Entities' overall market

    positions and to ensure compliance with the terms of this Proposed

    Order. Accordingly, each inquiry would be specific to the facts

    triggering the inquiry, and thus will not involve ``answers to

    identical questions posed to * * * ten or more persons,'' as the term

    ``collection of information'' is defined in the PRA in pertinent

    part.\115\

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    \114\ 44 U.S.C. 3501 et seq.

    \115\ 44 U.S.C. 3502(3)(a)(1). See also 44 U.S.C.

    3518(c)(1)(B)(i) and (ii) (excluding collections of information

    related to administrative investigations against specific

    individuals or entities, and any subsequent civil actions).

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    C. Consideration of Costs and Benefits

    1. Introduction

    Section 15(a) of the CEA \116\ 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.

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    \116\ 7 U.S.C. 19(a).

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

    Prior to the passage of the Dodd-Frank Act, swap market activity

    was not regulated. In the wake of the financial crisis of 2008,

    Congress adopted the Dodd-Frank Act, in part, to address conditions

    with respect to swap market activities.\117\ Among other things, the

    Dodd-Frank Act amends the CEA to establish a comprehensive regulatory

    framework for swaps.\118\ In amending the CEA, however, the Dodd-Frank

    Act preserved the Commission's authority under CEA section 4(c)(1) to

    ``promote responsible economic or financial innovation and fair

    competition'' by exempting any transaction or class of transactions,

    including swaps, from select provisions of the CEA.\119\ It also added

    new subparagraph 4(c)(6)(C) to the CEA specifically directing the

    Commission, in accordance with 4(c)(1) and (2), to exempt agreements,

    contracts, or transactions entered into between FPA 201(f) entities if

    doing so ``is consistent with the public interest and the purposes of''

    the CEA.\120\ For reasons explained above,\121\ the Commission proposes

    to exercise its

    [[Page 51015]]

    authority under CEA section 4(c)(1) and 4(c)(6) with regard to Exempt

    Non-Financial Energy Transactions \122\ engaged in between Exempt

    Entities,\123\ subject to the Commission's general anti-fraud, anti-

    manipulation, and enforcement authority pursuant to CEA sections

    2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and

    Commission rules 32.4 and Part 180. Additionally, the Commission has

    reserved its authority to inspect the books and records of Exempt Non-

    Financial Energy Transactions already kept in the normal course of

    business pursuant to the Commission's regulatory inspection

    authorities, in the event that circumstances warrant the need to gain

    greater visibility with respect to Exempt Non-Financial Energy

    Transactions as they relate to Exempt Entities' overall market

    positions and to ensure compliance with the terms of this Proposed

    Order.

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    \117\ As the Financial Crisis Inquiry Commission explained:

    The scale and nature of the [OTC] derivatives market created

    significant systemic risk throughout the financial system and helped

    fuel the panic in the fall of 2008: millions of contracts in this

    opaque and deregulated market created interconnections among a vast

    web of financial institutions through counterparty credit risk, thus

    exposing the system to a contagion of spreading losses and defaults.

    Financial Crisis Inquiry Commission, ``The Financial Crisis

    Inquiry Report: Final Report of the National Commission on the

    Causes of the Financial and Economic Crisis in the United States,''

    Jan. 2011, at 386, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

    \118\ See discussion above at note [13]. Dodd-Frank Act section

    721 (amending the CEA to add new section 1a(47)) defines the term

    ``swap'' to include ``[an] option of any kind that is for the

    purchase or sale, or based on the value, of 1 or more * * *

    commodities * * *'').

    \119\ Section 4(c)(1) of the CEA.

    \120\ As discussed above in section I.A., CEA sections 4(c)(2)

    and 4(c)(3) further articulate the conditions precedent to granting

    an exemption under 4(c)(1) and 4(c)(6)(C), including that the

    exempted agreements, contracts, or transactions be entered into

    between ``appropriate persons,'' as that term is defined in

    4(c)(6)(3).

    \121\ See section III.B. above.

    \122\ As discussed and further described above in section

    III.A.2., these consist of: any agreement, contract, or transaction

    based upon a ``commodity,'' as such term is defined and interpreted

    by the CEA and regulations there under, so long as the primary

    purpose of the agreement, contract, or transaction is to satisfy

    existing or anticipated contractual obligations to facilitate the

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

    to customers at the lowest cost possible. When entered into, Exempt

    Non-Financial Energy Transactions shall always be intended for

    making or taking physical delivery of the commodity upon which the

    transaction is based, and such commodity shall never be based upon,

    derived from, or reference any interest rate, credit, equity or

    currency asset class, or any grade of a metal, agricultural product,

    crude oil or gasoline that is not used as fuel for electric

    generation. Exempt Non-Financial Energy Transactions are limited to

    the following categories: electric energy delivered, generation

    capacity, transmission services, fuel delivered, cross-commodity

    pricing, and other goods and services.

    \123\ As discussed and further described above in section

    III.A.1, these are: (i) Any government-owned electric facility

    recognized under Federal Power Act (``FPA'') section 201(f), 16

    U.S.C. 824(f); (ii) any electric facility otherwise subject to

    regulation as a ``public utility'' under the FPA that is owned by an

    Indian tribe recognized by the U.S. government pursuant to section

    104 of the Act of November 2, 1994, 25 U.S.C. 479a-1; (iii) any

    cooperatively-owned electric utility, regardless of status pursuant

    to FPA section 201(f), so long as the utility is treated as a

    ``cooperative'' organization under Internal Revenue Code section

    501(c)(12) or 1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C),

    and exists for the primary purpose of providing electric energy

    service to its members at the lowest possible cost; or iv) any not-

    for-profit entity that is wholly owned, directly or indirectly, by

    any one or more of the foregoing.

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

    In the discussion that follows, the Commission considers the costs

    and benefits of the exemptive order proposed herein (the ``Proposed

    Order'') to the public and market participants generally, and to Exempt

    Entities specifically. As earlier discussed in sections I.A. and

    III.A.2., to exempt transactions under CEA section 4(c), the Commission

    need not first determine--and is not determining--whether the

    transactions subject to the exemption fall within the CEA. However, to

    capture all potential costs and benefits, this consideration assumes

    that the transactions may now or in the future be swaps.\124\ In the

    event the subject transactions would not be subject to the Commission's

    jurisdiction, the costs and benefits of this Proposed Order relative to

    the baseline scenario discussed below would be zero.

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    \124\ Accord note 81, supra.

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    2. Baseline

    The Commission considers the costs and benefits of this Proposed

    Order against a baseline scenario of non-action. In other words, the

    proposed baseline is the alternative situation that would result if the

    Commission declines to exercise its exemptive authority under CEA 4(c).

    This means that to the extent Exempt Non-Financial Energy Transactions

    engaged in between Exempt Entities qualify as a transaction subject to

    regulation under the CEA, they are subject to the regulatory regime

    that the CEA, as amended by the Dodd-Frank Act, and Commission

    regulations prescribes.

    Under the post-Dodd-Frank Act regulatory regime for swaps, Exempt

    Entity swap counterparties that, as represented in the Petition, are

    ``nonfinancial end-users of [Exempt Non-Financial Energy Transactions

    entered into] only to hedge or mitigate commercial risks'' \125\ are

    subject to the Commission's general anti-fraud, anti-manipulation, and

    enforcement authority,\126\ as well as requirements for swap data

    reporting \127\ and recordkeeping.\128\ CEA section 2(h)(7) (the ``end-

    user exception''), excepts a swap from swap clearing \129\ and trade

    execution,\130\ requirements if one counterparty is ``not a financial

    entity; * * * is using swaps to hedge or mitigate commercial risk; and

    * * * notifies the Commission, in a manner set forth by the Commission,

    how it generally meets its financial obligations associated with

    entering into non-cleared swaps.'' However, unless both Exempt Entity

    counterparties are ``eligible contract participants'' (``ECPs''),\131\

    CEA section 2(e) prohibits them from executing a swap other than on a

    registered DCM, including directly transacting the swap

    bilaterally.\132\ Against this baseline scenario, with respect to an

    Exempt Non-Financial Energy Transaction that is a swap, the public and

    market participants, including Exempt Entities, would experience the

    costs and benefits related to the regulations, noted above, for them as

    swaps. As considered below, the Proposed Order could alter these costs

    and benefits.

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

    \125\ Petition at 33.

    \126\ See CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d),

    6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4 and Part 180.

    \127\ The CEA as amended by the Dodd-Frank Act contemplates two

    types of reporting to swap data repositories (``SDRs''). First, is

    real-time reporting: For every swap executed, certain transaction

    information, including price and volume, is to be reported to an

    SDR'') ``as soon as technologically practicable.'' CEA section

    2(a)(13)(A) & (C); see also Real-Time Public Reporting of Swap

    Transaction Data, 77 FR 1182 (Jan. 9, 2012) (adopting 17 CFR part 43

    regulations to implement real-time reporting). For swaps executed

    off of a DCM or SEF and for which neither counterparty is a swap

    dealer or major swap participant--as the Commission expects Exempt

    Non-Financial Energy Transactions engaged in between Exempt Entities

    would be--the real-time reporting obligation for the transaction

    falls to one of the counterparties, as agreed between themselves. 17

    CFR Sec. 43.3(a)(3) Second, for each swap, additional information

    beyond that required in real-time reports must be reported to an SDR

    in a ``timely manner as may be prescribed by the Commission.'' CEA

    section 2(a)(13)(G); see also Swap Data Recordkeeping and Reporting

    Requirements 77 FR 2136 (Jan. 13, 2012) (adopting 17 CFR part 45);

    Swap Data Recordkeeping and Reporting Requirements: Pre-enactment

    and Transition Swaps 77 FR 35200 (June 12, 2012) (adopting 17 CFR

    part 46).

    \128\ Swap Data Recordkeeping and Reporting Requirements 77 FR

    2136 (Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data

    Recordkeeping and Reporting Requirements: Pre-enactment and

    Transition Swaps 77 FR 35200 (June 12, 2012) (adopting 17 CFR part

    46).

    \129\ CEA section 2(h)(1)(A)(it ``shall be unlawful for any

    person to engage in a swap unless that person submits such swap for

    clearing * * * if the swap is required to be cleared'').

    \130\ Transactions subject to the clearing requirement of CEA

    section 2(h)(1) must be executed on either a designated contract

    market (``DCM'') or a swap execution facility (``SEF''). CEA section

    2(h)(8).

    \131\ The term is defined in CEA section 1a(18). See also

    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).

    \132\ CEA section 2(e).

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

    Also, the post-Dodd-Frank Act regulatory regime retains

    requirements applicable to ``contract[s] of sale of a commodity for

    future delivery'' within the meaning of CEA section 4(a) (commonly

    referred to as futures contracts), including that section's exchange-

    trading requirement for such contracts. Though the Commission need not

    first determine whether the transactions subject to exemption under CEA

    section 4(c) are futures or swaps, it has defined the boundaries for

    inclusion within the Exempt Non-Financial Energy Transaction category

    in a way that comports with the distinctions between futures contracts

    subject to CEA section 4(a) and non-

    [[Page 51016]]

    futures transactions.\133\ For this reason, the Commission foresees no

    costs or benefits relative to the baseline attributable to exempting

    Exempt Non-Financial Energy Transactions as proposed from CEA section

    4(a).

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

    \133\ See, e.g., Statement of Policy Concerning Swap

    Transactions, 54 Fed. Reg. 30694 (CFTC July 21, 1989). For example,

    the transactions encompassed by this proposed exemption would be

    limited to those that are highly bespoke and thus not suitable for

    exchange trading, executed exclusively bilaterally, off-exchange

    between counterparties, and undertaken with the intent of making or

    taking physical delivery of the commodity upon which the transaction

    is based.

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

    The Commission is also cognizant of the regulatory landscape as it

    existed before the Dodd-Frank Act's enactment. Any Exempt Non-Financial

    Energy Transactions engaged in between Exempt Entities that now would

    qualify as swaps (excluding options) were not regulated prior to Dodd-

    Frank. Thus, measured against a pre-Dodd-Frank Act reference point,

    Exempt Entities engaging in such swaps could experience costs

    attributable to the conditions placed upon the Proposed Order. For

    example, Exempt Entities were not subject to the Commission's

    regulatory inspection authorities with respect to swap transaction

    records prior to the enactment and effectiveness of the Dodd-Frank Act.

    As a general matter, in its cost-benefit considerations, where

    reasonably feasible, the Commission endeavors to estimate quantifiable

    dollar costs. The costs and benefits of the Proposed Order, however,

    are not presently susceptible to meaningful quantification.

    Accordingly, the Commission discusses proposed costs and benefits in

    qualitative terms.

    3. Costs

    To Exempt Entities

    The proposed rule is exemptive and would provide Exempt Entities

    with relief from regulatory requirements of the CEA for the narrow

    category of Exempt Non-Financial Energy Transactions engaged in between

    them. As with any exemptive rule or order, the proposed rule is

    permissive, meaning that potentially eligible affiliates are not

    required to elect it. Accordingly, the Commission assumes that an

    entity would rely on the Proposed Order only if the anticipated

    benefits warrant the costs. Here, the Proposed Order provides for the

    continued application of the anti-fraud, anti-manipulation, and

    enforcement provisions of the CEA and its implementing regulations, and

    additionally reserves the Commission inspection authority for books and

    records that the Exempt Entities currently prepare and retain \134\--

    all continuations of the baseline regulatory scheme established in the

    CEA. Accordingly, they generate no incremental costs.

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

    \134\ For example, Exempt Entities that receive financing from

    the Rural Utilities Service (``RUS'') are required to keep records

    of all master agreements and term contracts for the procurement of

    goods and services. See 18 CFR 125.3 (Schedule of records and

    periods of retention); RUS Bulletin 180-2. Under the books and

    records inspection authority contained in the Proposed Order, the

    Commission could request any of these procurement agreements that

    document an Exempt Non-Financial Energy Transaction for the purchase

    or sale of ``electric energy delivered,'' as such term is defined in

    the Proposed Order.

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

    To Market Participants and the Public

    The Commission has considered whether an exemption from the CEA as

    proposed for Exempt Non-Financial Energy Transactions engaged in

    between Exempt Entities will expose market participants and the public

    to the risks that the CEA guards against--a potential cost. For a

    variety of reasons, the Commission believes that it does not. These

    reasons include the following:

    The highly bespoke nature of Exempt Non-Financial Energy

    Transactions, as well as the fact that they are used to manage unique

    electricity industry operational risks, rather than price risk of an

    underlying commodity, make them ill-suited for exchange trading and/or

    to serve a useful price discovery function.\135\

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

    \135\ As explained in section III.B.3.d, above, the commercial

    risks that Exempt Non-Financial Energy Transactions face generally

    are not related to fluctuations in the price of a commodity, but are

    rather related to electricity retail demand fluctuations. Exempt

    Entities engage in Exempt Non-Financial Energy Transactions

    primarily to assure their ability to meet production, transmission,

    and/or distribution obligations, not to hedge against the risk of

    electricity prices rising or falling.

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

    The incentive structure for Exempt Entities--as limited to

    not-for-profit governmental, tribal, and IRC section 501(c)(12) or

    section 1381(a)(2)(c) electric cooperative entities--is substantially

    different than that of investor-owned entities and poses a low risk for

    fraud, manipulation, or other abusive practices.\136\

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

    \136\ See section II.A.1. above.

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

    Exempt Non-Financial Energy Transactions are executed

    bilaterally within a closed-loop of non-financial, not-for-profit

    electric utility entities, are not market facing, and therefore have

    little, if any, ability to materially impact liquidity, fairness or

    financial security of derivative product trading on DCMs or SEFs.\137\

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

    \137\ See section III.B.3.a. above.

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

    This closed-loop trading characteristic, combined with the

    nonfinancial nature of the transacting parties, also limits the ability

    of Exempt Non-Financial Energy Transactions to create systemic

    risk.\138\

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

    \138\ See section III.B.3.b. above.

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

    Moreover, besides carefully defining the boundaries for Exempt Non-

    Financial Energy Transactions between Exempt Entities, the Commission's

    Proposed Order incorporates conditions designed to protect the markets

    subject to the Commission's jurisdiction. Specifically, the Commission

    proposes to retain the general anti-fraud, anti-manipulation, and

    enforcement authority contained in the CEA and its implementing

    regulations. Additionally, the Commission is also retaining authority

    to inspect books and records, pursuant to its regulatory inspection

    authorities, in the event that circumstances warrant the need to gain

    greater visibility with respect to Exempt Non-Financial Energy

    Transactions as they relate to Exempt Entities' overall market

    positions and compliance with this Proposed Order. Accordingly, based

    on the expectations that--for the narrow subset of electric industry

    transactions covered by this Proposed Order--the risk potential, at

    most, is remote and the prescribed conditions appropriate to contain

    them to the extent they may emerge, the Commission foresees no material

    costs attributable to risk associated with the Proposed Order.

    The Commission has also considered the potential for the Proposed

    Order to exact a competitive cost by affording Exempt Entities an

    advantage vis-[agrave]-vis other market participants that may not be

    entitled to the exemption. As not-for-profit governmental, tribal, and

    cooperative entities as defined in the Proposed Order, the Commission

    understands that the mandate for Exempt Entities is to provide

    reliable, affordable electricity for their customers. While the

    Proposed Order will afford Exempt Entities flexibility and/or reduced

    compliance burden to manage their operational risks relative to non-

    Exempt Entities, the Commission has no basis to expect that in so doing

    the Proposed Order will impose a competitive cost on the markets

    subject to its jurisdiction.

    4. Benefits

    To Exempt Entities

    Measured against the baseline scenario, the Proposed Order

    expectedly will benefit Exempt Entities by lessening the likelihood

    that CEA compliance would diminish their ability and/or incentive to

    continue to engage in Exempt Non-Financial Energy Transactions that, as

    described in the

    [[Page 51017]]

    Petition and above,\139\ are an operational tool relied upon by Exempt

    Entities to effectively execute their public service mission. It will

    also benefit them by avoiding regulatory costs to comply with CEA swap

    requirements whether or not any Exempt Non-Financial Energy Transaction

    actually constitutes a swap.\140\

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

    \139\ Petition at 12 (transactions for which exemption requested

    ``are intrinsically related to the needs of * * * the [not-for-

    profit] Electric Entities * * * which arise from their respective

    electric facilities and ongoing electric operations and public

    service obligations'' (citation omitted)); section III.A.2, above

    (the proposed order defines Exempt Non-Financial Energy Transactions

    as any agreement, contract, or transaction entered into primarily

    ``to satisfy existing or anticipated contractual obligations to

    facilitate the generation, transmission, and/or delivery of electric

    energy service to customers at the lowest cost possible * * * .'').

    \140\ As discussed below with respect to benefits to market

    participants and the public, Exempt Entities' members and other

    customers should be the indirect beneficiaries of these avoided

    costs.

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

    To the extent any Exempt Non-Financial Energy Transactions are

    swaps, as a threshold matter Exempt Entities could not execute them off

    of a registered DCM unless both Exempt-Entity counterparties qualify as

    ECPs.\141\ The relevant criteria for determining ECP status varies for

    Exempt Entities that are governmental entities (or political

    subdivisions of governmental entities) and those that are not. For the

    former, governmental Exempt Entities must meet certain line of business

    requirements,\142\ or ``own * * * and invest * * * on a discretionary

    basis $50,000,000 or more in investments.\143\ For the latter, non-

    governmental Exempt Entities either must have: (a) Assets exceeding

    $10,000,000; (b) a guarantee for obligations; or, (c) greater than

    $1,000,000 net worth and ``enter * * * into an agreement, contract, or

    transaction in connection with the conduct of the entity's business or

    to manage the risk associated with an asset or liability owned or

    incurred or reasonably likely to be owned or incurred by the entity in

    the conduct of the entity's business.'' \144\ While some of the larger

    Exempt Entities in particular may meet the definitional requirements to

    be ECPs, the Petition does not provide information evidencing that all

    Exempt Entities for all types of Exempt Non-Financial Energy

    Transaction clearly would.\145\

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

    \141\ CEA section 2(e).

    \142\ That is, have ``a demonstrable ability, directly or

    through separate contractual arrangements, to make or take delivery

    of the underlying commodity [or] incur * * * risks, in addition to

    price risk, related to the commodity.'' CEA section 1a(17)(A)(i) &

    (2) (as referenced in CEA section 1a(18)(A)(vii)(aa)). CEA section

    1a(18)(A)(vii) specifies alternative criteria to qualify for

    governmental-entity ECP status that do not appear relevant given

    that Exempt Entities are not SDs, MSPs, or financial entities.

    \143\ CEA section 1a(18)(A)(vii)(bb).

    \144\ CEA section 1a(18)(A)(v).

    \145\ Furthermore, a comment letter submitted by two of the

    Petitioners in connection with the Commission rulemaking on the

    Further Definition of ``Swap Dealer,'' ``Security-Based Swap

    Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap

    Participant,'' and ``Eligible Contract Participant,'' states that

    some not-for-profit consumer-owned electric utilities ``may not meet

    the financial tests listed in the definition of ECP due to the

    relatively small size of their physical assets.'' Letter from NRECA,

    APPA and LPPC dated February 22, 2011, RIN 3235-AK65, at 12.

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

    If Exempt Entities are not ECPs, and given that Exempt Non-

    Financial Energy Transactions, as proposed, are bespoke to an extent

    that makes them incapable of exchange trading, absent Commission action

    non-ECP Exempt Entities would be unable to engage bilaterally in any

    Exempt Non-Financial Energy Transactions that are swaps. Relative to a

    circumstance that would preclude non-ECP Exempt Entities from

    continuing to engage in Exempt Non-Financial Energy Transactions that

    are swaps, the Proposed Order would afford the benefit of allowing the

    use of transactions that are closely related to Exempt Entities' public

    service mission to provide affordable, reliable electricity. The

    Proposed Order would also save Exempt Entities the time and expense

    that would be necessitated to determine if they were ECPs. For, with

    the Proposed Order, ECP status becomes largely irrelevant, while

    without it, Exempt Entities may have to concern themselves with ECP

    status determinations as a threshold for engaging in certain

    transactions.

    The Proposed Order would also avoid potential costs that Exempt

    Entities might incur to comply with swap data reporting and

    recordkeeping requirements as articulated in Commission regulations for

    any Exempt Non-Financial Energy Transactions that were swaps.\146\

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

    \146\ See Real-Time Public Reporting of Swap Transaction Data,

    77 FR 1182, 1232-40 (Jan. 9, 2012) (adopting 17 CFR part 43

    regulations to implement real-time reporting). Swap Data

    Recordkeeping and Reporting Requirements 77 FR 2136, 2176-93 (Jan.

    13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping and

    Reporting Requirements: Pre-enactment and Transition Swaps 77 FR

    35200, 35217-25 (June 12, 2012) (adopting 17 CFR part 46).

    Swap Data Recordkeeping and Reporting Requirements 77 FR 2136

    (Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping

    and Reporting Requirements: Pre-enactment and Transition Swaps 77 FR

    35200 (June 12, 2012) (adopting 17 CFR part 46).

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

    Even for Exempt Non-Financial Energy Transactions ultimately

    determined not to be swaps, if Exempt Entities perceived some potential

    that they could be swaps (now or as evolved in the future), Exempt

    Entities would likely need to expend resources to monitor contemplated

    transactions and make status determinations as to them. Moreover, the

    bespoke nature of these transactions could complicate the ability to

    generalize conclusions across transactions, potentially resulting in a

    need for more frequent, individualized assessments that could multiply

    determination costs. While the Commission lacks a basis to meaningfully

    project any such benefit in dollar terms, qualitatively it expects that

    the benefit would include the avoided costs of training staff to

    differentiate between swap and non-swap transactions and, in some cases

    at least, to obtain an expert legal opinion to support a determination.

    Additionally, uncertainty about whether a certain transaction would or

    would not be deemed a swap could prompt an Exempt Entity to forego a

    beneficial transaction or to substitute a transaction that served the

    operational needs less effectively. Avoiding a result that would

    diminish the use of operationally-efficient Exempt Non-Financial Energy

    Transactions is another benefit.

    To Market Participants and the Public

    For reasons similar to those discussed above in the Commission's

    analysis of the Proposed Order under CEA sections 4(c)(1) and (6), the

    Commission expects that this Proposed Order will benefit the public

    generally.\147\

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

    \147\ In that the impacted transactions are undertaken

    exclusively in a closed-loop environment from which financial

    participants are absent, the Commission does not foresee that

    derivative market participants beyond Exempt Entities will realize

    either a cost (as earlier discussed) or benefit impact.

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

    First, the Commission believes that the Proposed Order aligns with

    the beneficial public interests served by the FPA, which--in addition

    to granting comprehensive jurisdiction over the electric industry to

    FERC--reflects, through FPA section 201(f)'s exemption, Congress'

    implicit view that, with respect to certain activities, a regulatory

    light-touch and avoidance of overlapping regulatory regimes for

    governmental and small cooperative electric utilities serves the

    public-interest objectives of the FPA.\148\ The

    [[Page 51018]]

    Commission interprets CEA section 4(c)(6)(C), directing the Commission

    to provide an exemption for FPA 201(f) entities to the extent

    consistent with the public interest and the CEA, as an extension of

    that view. Accordingly, by tailoring the Proposed Order for FPA section

    201(f) entities (as well as others deemed equally suitable) in a

    careful manner intended to preserve the public interests protected

    under the CEA, the Proposed Order accommodates the public interests of

    both statutes.

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

    \148\ See Salt River Project Agricultural Improvement and Power

    District v. Federal Power Commission, 391 F. 2d 470, 475 (D.C. Cir.

    1968) (``But of the 19 major abuses summarized [in a Federal Trade

    Commission report to Congress on the electric utility industry],

    virtually none could be associated with the cooperative structure

    where ownership and control is vested in the consumer-owners* * *

    Consequently, the attention of the 74th Congress, in enacting the

    Federal Power Act, was focused on the sorts of evils associated

    exclusively with investor-owned utilities'') In Salt River, the

    court considered whether the FPA 201(f) exemption, which at the time

    did not expressly encompass REA-financed cooperatives--entities

    subject to ``extensive [REA] supervision over the planning,

    construction and operation of the facilities [REA] finances''--fell

    within the exemption, as the FPC had interpreted that it did. Id. at

    473. The court found that, among other factors, the Congressional

    inaction in the face of 30 years of administrative practice

    extending FPA 201(f) exemptive treatment to REA-financed

    cooperatives reinforced the FPC's interpretation that REA-financed

    cooperatives were exempt from FPA coverage as instrumentalities of

    the Government under Section 201(f). Id. at 476.

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

    Second, in that the proposed Exempt Entities share the same public-

    service mission of providing affordable, reliable electricity to their

    customers, those aspects of the Proposed Order that benefit Exempt

    Entities directly should indirectly benefit their customers as well.

    For example, the Proposed Order would enable non-ECP Exempt Entities to

    engage in swap Exempt Non-Financial Energy Transactions that would be

    barred to them under CEA section 2(e), or facilitate the likelihood

    that they would continue to engage in Exempt Non-Financial Energy

    Transactions that they might choose to forego for regulatory

    uncertainty or costs reasons absent the exemption. In these

    circumstances, Exempt Entity customers should be the ultimate

    beneficiaries (via supply reliability and affordability) of the

    operational risk-management and efficiencies that Exempt Non-Financial

    Energy Transactions afford. Similarly, to the extent that the Proposed

    Order enables Exempt Entities to avoid compliance and/or monitoring

    costs they would otherwise incur, the non-profit structure, compliance

    with requisite Internal Revenue Code conditions, and public service

    mission that Exempt Entities share means that the cost savings should

    be passed through to members and other customers proportionately in the

    form of lower electricity prices and/or higher revenue distributions to

    members.

    And third, the public also benefits by the promotion of economic

    and financial innovation that, as explained above,\149\ the Commission

    expects this Proposed Order will further. For, the unique environment

    in which these electric utilities must operate to reliably serve their

    customer load in the face of constantly fluctuating demand--compounded

    by the fact that many of these Exempt Entities do not enjoy the same

    scale economies as investor-owned utilities--places a premium on

    innovative solutions to operational issues. Exempt Non-Financial Energy

    Transactions represent one such innovation. The Commission envisions

    the Proposed Order, as contemplated by Congress,\150\ will provide

    Exempt Entities regulatory certainty important to their ability to

    continue to utilize and develop innovative solutions through the use of

    highly bespoke, physically settled agreements, contracts, and

    transactions. Accordingly, the Commission expects the Proposed Order to

    benefit the public.

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

    \150\ See HOUSE CONF. REPORT NO. 102-978, 1992 U.S.C.C.A.N.

    3179, 3213 (``4(c) Conf. Report''), noted in section I.A. above.

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

    5. Costs and Benefits as Compared to Alternatives

    The chief alternatives to this Proposed Order are for the

    Commission to: (1) Decline to exercise its exemptive authority, or (2)

    to exercise its exemptive authority more broadly and without conditions

    as requested in the Petition.

    With respect to the first alternative--decline to exempt--the costs

    and benefit consideration is the mirror-image of that discussed above

    relative to the baseline scenario. A decision not to exercise exemptive

    authority in this circumstance would preserve the current post-Dodd-

    Frank regulatory environment.

    Relative to the second alternative of exercising its exemptive

    authority more broadly and in a manner that would provide categorical

    relief from all of the requirements of the CEA as requested in the

    Petition, the Commission has purposefully proposed to define the

    categories of exempt entities and transactions more narrowly, and to

    preserve certain aspects of CEA jurisdiction for them. A potentially

    material difference between the entities that the Petition sought to

    exempt and how the Commission proposes to define the term Exempt

    Entities is the Commission's explicit requirement that an Exempt Entity

    not be a ``financial entity'' within the meaning of CEA section

    2(h)(7)(C). Given, however, that the Petition expressly represents that

    the not-for-profit electric entities that would be encompassed by the

    requested exemption ``are all nonfinancial end users,'' \151\ the

    Commission does not foresee a material cost of expressly stating this

    requirement relative to the Petitioned-for alternative. Conversely, the

    requirement delineates what the Commission considers an important

    gating principle for the exemption's appropriateness, and stating it

    explicitly reduces ambiguity that could fuel future disputes over the

    issue--a benefit.

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

    \151\ Petition at 33.

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

    Also, compared to the Petition's description of transactions for

    which exemption was sought, the proposed definition of Exempt Non-

    Financial Energy Transactions incorporates limiting language \152\ and

    articulates additional definitional elements (e.g., intent at execution

    to make or take physical delivery of the commodity upon which the

    transaction is based). The more open-ended, Petitioned-for transaction

    description theoretically could save Exempt Entities effort that they

    might otherwise need to expend to determine whether a transaction

    engaged in between them is or is not exempted compared to the more

    refined and limited definition of Exempt Non-Financial Energy

    Transactions that the Commission proposes. That said, an equally, if

    not more, persuasive case might be made that the greater certitude that

    the proposed definition's more bounded approach provides should

    mitigate determination costs. More importantly, given the inability to

    foresee how these transactions may develop, the Commission considers it

    prudent and in the public interest to ring-fence the definition within

    stated parameters to restrict the potential for the transactions to

    evolve in a manner incompatible with the purposes of the CEA.

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

    \152\ It explicitly limits covered transactions to six

    articulated categories, while the Petition proposed a more open-

    ended approach that would have included all transactions relating to

    particular categories, but not others. See Petition at 4-5.

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

    Finally, as proposed, the exemption retains the Commission's

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

    well as the Commission's authority to review books and records already

    kept in the ordinary course of business in the event that circumstances

    warrant the need to gain greater visibility with respect to Exempt Non-

    Financial Energy Transactions as they relate to Exempt Entities'

    overall market positions and to ensure compliance with the terms of

    this Proposed Order, in contrast to the Petition's request for a

    wholesale exemption from the CEA. The Commission believes that the

    first two conditions serve important beneficial ends to ensure the

    integrity of commodity and commodity derivatives markets within its

    jurisdiction. To the

    [[Page 51019]]

    extent Exempt Entities incur some cost to remain compliant with the

    CEA's anti-fraud, anti-manipulation, and enforcement regime, the

    Commission considers such costs warranted by the importance of

    maintaining commodity market and price discovery integrity. The

    Commission also believes that authority to inspect books and records

    kept in the ordinary course of business, pursuant to its regulatory

    inspection authority, as they relate to Exempt Non-Financial Energy

    Transactions is important to assure visibility into activity in such

    transactions on an as-needed basis. Further, as a general matter, the

    Commission expects infrequently to exert its regulatory inspection

    authority with respect to Exempt Non-Financial Energy Transactions and,

    as proposed, such authority would involve only records that Exempt

    Entities keep in the ordinary course of business, only in the event

    that circumstances warrant the need to gain greater visibility with

    respect to Exempt Non-Financial Energy Transactions as they relate to

    Exempt Entities' overall market positions, and only to ensure

    compliance with the terms of this Proposed Order. The Commission

    anticipates that any costs occasioned by this condition are relatively

    insignificant.

    6. 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

    Proposed Order will have any effect on the protection of market

    participants and the public. More specifically, Exempt Non-Financial

    Energy Transactions as transacted bilaterally and in a closed loop

    between Exempt Entities in the highly specialized and unique electric-

    industry circumstances proposed for exemption do not appear to the

    Commission to generate risks of the nature addressed by the CEA. The

    Commission has attempted to delineate the definitional boundaries for

    Exempt Entities and Exempt Non-Financial Energy Transactions in a

    manner that appropriately ring-fences against the possibility that they

    could generating such risks, either now or as they may evolve in the

    future. Moreover, the exemption incorporates conditions to counter

    residual risk that conceivably, though unexpectedly, might survive

    notwithstanding the Proposed Order's careful definitional crafting.

    b. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    The Commission foresees no negative impact from the Proposed Order

    on the efficiency, competitiveness, and financial integrity of markets

    regulated under the CEA. As narrowly limited to highly bespoke

    transactions, executed bilaterally between non-financial entities

    primarily in order to satisfy existing or expected operations-related

    contractual obligations, as opposed to speculating or hedging against

    the price risk of an underlying commodity, the Commission foresees

    little to no capability for Exempt Non-Financial Energy Transactions,

    to the extent any are swaps, to directly impact swap market efficiency,

    competitiveness, or financial integrity. Also, the Proposed Order

    incorporates definitional attributes that largely eliminate the

    potential for any futures market impact.

    Further, as an exercise of the Commission's CEA section 4(c)

    authority to provide legal certain for novel instruments as Congress

    intended, the Proposed Order affords Exempt Entities transactional

    flexibility that the Commission understands to be valuable to their

    ability to efficiently deploy their limited resources.

    c. Price Discovery

    The Commission does not foresee that the Proposed Order will

    directly impact price discovery. As discussed above, the highly bespoke

    nature of Exempt Non-Financial Energy Transactions, as well as the fact

    that they are used to manage unique electric industry operational risks

    rather than price risk of an underlying commodity, 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 expects that the Proposed Order will promote the

    ability of Exempt Entities to manage the operational risks posed by

    unique electric market characteristics, including the non-storable

    nature of electricity and demand that can and frequently does fluctuate

    dramatically within a short time-span. As discussed above, the

    Commission understands that Exempt Non-Financial Energy Transactions

    are an important tool facilitating the ability of Exempt Entities to

    efficiently manage operational risk in fulfillment of their public

    service mission to provide affordable, reliable electricity.

    Also, the Commission does not anticipate that the Proposed Order

    will compromise systemic risk management. The transactions proposed for

    exemption are not market facing, but are executed exclusively within

    closed-loops that do not include financial entities. These

    characteristics, among others, limit the ability of Exempt Non-

    Financial Energy Transactions to create systemic risk.

    e. Other Public Interest Considerations

    In utilizing its section 4(c)(1) and (6)(C) exemptive authority as

    proposed herein, the Commission believes it is acting to promote the

    broader public interest in an affordable, reliable electric supply as

    Congress contemplated.

    7. Request for Public Comment on Costs and Benefits

    The Commission invites public comment on its cost-benefit

    considerations, including the consideration of reasonable alternatives.

    The Commission invites public comment on the magnitude of specific

    costs and benefits that would result from the Proposed Order, including

    data or other information to estimate the dollar value of such costs

    and benefits.

    The Commission invites public comment on any cost or benefit

    impact, direct or indirect, that the Proposed Order may have with

    respect to the factors the Commission considers under CEA section

    15(a), specifically: (a) Protection of market participants and the

    public; (b) efficiency, competitiveness and financial integrity of the

    markets subject to the Commission's jurisdiction; (c) price discovery;

    (d) sound risk management; and (e) other public interest

    considerations.

    Issued in Washington, DC, on August 16, 2012 by the Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Appendices to Request for comment on a proposal to exempt, pursuant to

    authority in section 4(c) of the Commodity Exchange Act, certain

    transactions between entities described in section 201(f) of the

    Federal Power Act, and other electric cooperatives --Commission Voting

    Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations

    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.

    [[Page 51020]]

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed relief from the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (Dodd-Frank Act) swaps provisions

    for certain electricity and electricity-related energy transactions

    between rural electric cooperatives; state, municipal, and tribal

    power authorities; and federal power authorities.

    Congress directed the CFTC, when it is in the public interest,

    to provide relief from the Dodd-Frank Act's swaps market reform

    provisions for certain transactions between these entities.

    For decades, these entities have been recognized as performing a

    public service mission, a fundamentally different function than

    investor-owned utilities. The purpose of these entities is to

    provide their customers or cooperative members with reliable

    electric energy at the lowest cost possible. They have been largely

    exempt from regulation by the Federal Energy Regulatory Commission

    because of their government entity status or their not-for-profit

    cooperative status.

    The scope of the proposed relief extends only to non-financial

    electricity and electricity-related energy transactions for the

    generation, transmission and delivery of electric energy to

    customers. Such transactions must be intended for making or taking

    physical delivery of the underlying commodity.

    I look forward to receiving public comment on the proposed

    relief.

    [FR Doc. 2012-20589 Filed 8-22-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 23, 2012



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