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2012-20965

  • Federal Register, Volume 77 Issue 167 (Tuesday, August 28, 2012)[Federal Register Volume 77, Number 167 (Tuesday, August 28, 2012)]

    [Notices]

    [Pages 52137-52173]

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

    [FR Doc No: 2012-20965]

    [[Page 52137]]

    Vol. 77

    Tuesday,

    No. 167

    August 28, 2012

    Part II

    Commodity Futures Trading Commission

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    Proposed Order and Request for Comment on a Petition From Certain

    Independent System Operators and Regional Transmission Organizations To

    Exempt Specified Transactions Authorized by a Tariff or Protocol

    Approved by the Federal Energy Commission or the Public Utility

    Commission of Texas From Certain Provisions of the Commodity Exchange

    Act; Notice

    Federal Register / Vol. 77 , No. 167 / Tuesday, August 28, 2012 /

    Notices

    [[Page 52138]]

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    COMMODITY FUTURES TRADING COMMISSION

    Proposed Order and Request for Comment on a Petition From Certain

    Independent System Operators and Regional Transmission Organizations To

    Exempt Specified Transactions Authorized by a Tariff or Protocol

    Approved by the Federal Energy Commission or the Public Utility

    Commission of Texas From Certain Provisions of the Commodity Exchange

    Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Proposed Order and Request for Comment.

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

    ``Commission'') is requesting comment on a proposed exemption (the

    ``Proposed Exemption'') issued in response to a consolidated petition

    (``Petition'') \1\ from certain regional transmission organizations

    (``RTOs'') and independent system operators (``ISOs'') (collectively,

    ``Petitioners'') to exempt specified transactions from the provisions

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

    regulations. The Proposed Exemption would exempt the contracts,

    agreements and transactions for the purchase or sale of the limited

    electricity-related products that are specifically described within the

    proposed order from the provisions of the CEA and Commission

    regulations, with the exception of sections 2(a)(1)(B), 4b, 4c(b), 4o,

    4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13 of the

    Act and any implementing regulations promulgated thereunder including,

    but not limited to Commission regulations 23.410(a) and (b), 32.4 and

    part 180. To be eligible for the Proposed Exemption, the contract,

    agreement or transaction would be required to be offered or entered

    into in a market administered by a Petitioner pursuant to that

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

    Petitioner's physical resources; the relevant tariff or protocol would

    be required to have been approved or permitted to have taken effect by

    either the Federal Energy Commission (``FERC'') or the Public Utility

    Commission of Texas (``PUCT''), as applicable; and the contract,

    agreement or transaction would be required to be entered into by

    persons who are ``appropriate persons,'' as defined in section

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

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

    regulations.\4\ The exemption as proposed also would extend to any

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

    rendering other services with respect to such transactions. Finally,

    the exemption would be subject to other conditions set forth therein.

    Authority for issuing the exemption is found in section 4(c)(6) of the

    Act.\5\

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

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

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

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

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

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

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

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

    Exchange Act by Midwest Independent Transmission System Operator,

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

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

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

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

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

    2012).

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

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

    \4\ 7 U.S.C. 1a(18). ``Further Definition of `Swap Dealer,'

    `Security-Based Swap Dealer,' `Major Swap Participant,' `Major

    Security-Based Swap Participant' and `Eligible Contract

    Participant,' '' 77 FR 30596, May 23, 2012.

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

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    The Commission seeks comment on the Petition, the Proposed

    Exemption and related questions. A copy of the Petition requesting the

    exemption is available on the Commission's Web site at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/isorto4capplication.pdf, with Petition Attachments posted at

    http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/isorto4cappattach.pdf and an Order 741 Implementation

    Chart posted at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/isorto4cappfercchart.pdf.

    DATES: Comments must be received on or before September 27, 2012.

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

    The agency's Web site, at 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.

    Hand Delivery/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 may 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 Commission to consider information

    that may be exempt from disclosure under the Freedom of Information

    Act, a petition for confidential treatment of the exempt information

    may be submitted according to the established procedures in CFTC

    Regulation 145.9 (17 CFR 145.9).

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

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

    submission from 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 the

    rulemaking 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: Robert B. Wasserman, Chief Counsel,

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

    Counsel, 202-418-7622, lastrada@cftc.gov, or Jocelyn Partridge, Special

    Counsel, 202-418-5926, jpartridge@cftc.gov, Division of Clearing and

    Intermediary Oversight; Eve Gutman, Attorney-Advisor, 202-418-5141,

    egutman@cftc.gov, Division of Market Oversight; Gloria P. Clement,

    Assistant General Counsel, 202-418-5122, gclement@cftc.gov or Thuy

    Dinh, Counsel, 202-418-5128, tdinh@cftc.gov, Office of the General

    Counsel; or Robert Pease, 202-418-5863, rpease@cftc.gov, Division of

    Enforcement; Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. The Petition

    II. Statutory Background

    III. Background--FERC and PUCT

    A. Introduction

    B. FERC

    C. PUCT

    D. FERC & PUCT Oversight

    IV. Scope of the Exemption

    A. Transactions Subject to the Exemption

    B. Conditions

    C. Additional Limitations

    V. Section 4(c) Analysis

    A. Overview of CEA Section 4(c)

    B. Proposed CEA Section 4(c) Determinations

    [[Page 52139]]

    C. FERC Credit Reform Policy

    D. DCO Core Principle Analysis

    E. SEF Core Principle Analysis

    VIII. Proposed Exemption

    A. Discussion of Proposed Exemption

    B. Proposed Exemption

    IX. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Cost-Benefit Considerations

    X. Request for Comment

    I. The Petition

    On February 7, 2012, Petitioners collectively filed a Petition with

    the Commission requesting that the Commission exercise its authority

    under section 4(c)(6) of the CEA \6\ and section 712(f) of the Dodd-

    Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank

    Act'') \7\ to exempt contracts, agreements and transactions for the

    purchase or sale of specified electricity products, that are offered

    pursuant to a FERC- or PUCT-approved tariff, from most provisions of

    the Act.\8\ Petitioners include three RTOs (Midwest Independent

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

    (``ISO NE''); and PJM Interconnection, L.L.C. (``PJM'')), and two ISOs

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

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

    transmission utilities is subject to regulation by FERC; and the

    Electric Reliability Council of Texas, Inc. (``ERCOT''), an entity that

    performs the role of an ISO but whose central role as a transmission

    utility in the electric energy market is subject to regulation by PUCT,

    the authority with jurisdiction to regulate rates and charges for the

    sale of electric energy within the state of Texas.\9\ Petitioners

    represent that the roles, responsibilities and services of ISOs and

    RTOs are substantially similar.\10\ As described in greater detail

    below, FERC encouraged the formation of ISOs to consolidate and manage

    the operation of electricity transmission facilities in order to

    provide open, non-discriminatory transmission service for generators

    and transmission customers.\11\ FERC also encouraged the formation of

    RTOs to administer the transmission grid on a regional basis.\12\

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

    \7\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.

    \8\ See Petition at 2-3, 6.

    \9\ See Petition at 2-4. See 16 Tex. Admin. Code 25.1 (1998).

    \10\ See Petition at 2 n. 2.

    \11\ See FERC Order 888 Promoting Wholesale Competition Through

    Open Access Non-Discriminatory Transmission Facilities (``FERC Order

    888''), 61 FR 21540, April 24, 1996; See Petition at 2 n.2, 3.

    \12\ See Petition at 3.

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    Petitioners specifically request that the Commission exempt from

    most provisions of the CEA certain ``financial transmission rights,''

    ``energy transactions,'' ``forward capacity transactions,'' and

    ``reserve or regulation transactions,'' as those terms are defined in

    the Petition, if such transactions are offered or entered into pursuant

    to a tariff under which a Petitioner operates that has been approved by

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

    Petitioners, their members and their market participants) offering,

    entering into, rendering advice, or rendering other services with

    respect to such transactions.\13\ Petitioners assert that each of the

    transactions for which an exemption is requested is (a) subject to a

    long-standing, comprehensive regulatory framework for the offer and

    sale of such transactions established by FERC, or in the case of ERCOT,

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

    wholesale electricity markets that are subject to regulation and

    oversight of FERC or PUCT, as applicable.\14\ Petitioners expressly

    exclude from the Petition a request for relief from sections 4b, 4o,

    6(c) and 9(a)(2) of the Act \15\ and such provisions explicitly have

    been carved out of the exemption that would be provided by the Proposed

    Exemption. Petitioners assert that they are seeking the requested

    exemption in order to provide greater legal certainty with respect to

    the regulatory requirements that apply to the transactions that are the

    subject of the Petition.\16\ Petitioners request that, due to the

    commonalities in the Petitioners' markets, the exemption apply to all

    Petitioners and their respective market participants with respect to

    each category of electricity-related products described in the

    Petition, regardless of whether such products are offered or entered

    into at the current time pursuant to an individual Petitioner's

    tariff.\17\ Petitioners' assert that this uniformity would avoid an

    individual Petitioner being required to seek future amendments to the

    exemption in order to offer or enter into the same type of transactions

    currently offered by another Petitioner.\18\

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    \13\ See id. at 2-3.

    \14\ See id. at 11.

    \15\ See id. at 3.

    \16\ See id. at 3, 5-6.

    \17\ See id. at 6.

    \18\ See id.

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    II. Statutory background

    On July 21, 2010, President Obama signed the Dodd-Frank Act. Title

    VII of the Dodd-Frank Act amended the CEA \19\ and altered the scope of

    the Commission's exclusive jurisdiction.\20\ In particular, it expanded

    the Commission's exclusive jurisdiction, which had included futures

    traded, executed and cleared on CFTC-regulated exchanges and

    clearinghouses, to also cover swaps traded, executed, or cleared on

    CFTC-regulated exchanges or clearinghouses.\21\ As a result, the

    Commission's exclusive jurisdiction now includes swaps as well as

    futures, and is clearly expressed in CEA section 2(a)(1)(A), which

    reads:

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    \19\ 7 U.S.C. 1 et seq.

    \20\ Section 722(e) of the Dodd-Frank Act.

    \21\ See 7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added

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

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

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

    The Commission shall have exclusive jurisdiction, except to the

    extent otherwise provided in the Wall Street Transparency and

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

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

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

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

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

    of a commodity for future delivery (including significant price

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

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

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    exchange, or market * * *.\22\

    \22\ 7 U.S.C. 2(a)(1)(A).

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

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

    certain agreements, contracts, or transactions traded pursuant to the

    tariff of an RTO and ISO.\23\ Toward that end, paragraph (I) of CEA

    section 2(a)(1) repeats the Commission's exclusive jurisdiction and

    clarifies that the Commission retains its authorities over agreements,

    contracts or transactions traded pursuant to FERC- or state-approved

    tariff or rate schedules.\24\ The same paragraph (I) also explains that

    the FERC and state agencies preserve their existing authorities over

    agreements, contracts, or transactions ``entered into pursuant to a

    tariff or rate schedule approved by [FERC] or a State regulatory

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

    entity or trading facility subject to registration or ``(II) executed,

    traded, or cleared on a registered entity

    [[Page 52140]]

    or trading facility owned or operated by a [RTO] or [ISO].'' \25\

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    \23\ See 7 U.S.C. 2(a)(1)(I).

    \24\ See 7 U.S.C. 2(a)(1)(I)(i) and (ii).

    \25\ 7 U.S.C. 2(a)(1)(I)(i)(II). The savings clause in CEA

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

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

    authority of the Federal Energy Regulatory Commission or a State

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

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

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

    or rate schedule approved by the Federal Energy Regulatory

    Commission or a State regulatory authority and is--

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

    trading facility; or

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

    trading facility owned or operated by a regional transmission

    organization or independent system operator.

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

    Regulatory Commission or a State regulatory authority described in

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

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

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

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

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

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

    facility that is not owned or operated by a regional transmission

    organization or independent system operator (as defined by sections

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

    796(28)).

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

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

    statutory enforcement authority is not limited or affected by

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

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

    and Accountability Act of 2010 or the amendments to the Commodity

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

    enforcement authority of the Federal Energy Regulatory Commission

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

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

    the Wall Street Transparency and Accountability Act of 2010.

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    While the Dodd-Frank Act sets forth a clear statement of the

    Commission's exclusive jurisdiction and authorities as related to FERC

    and state regulatory authorities, the Dodd-Frank Act also granted the

    Commission specific powers to exempt certain contracts, agreements or

    transactions from duties otherwise required by statute or Commission

    regulation by adding a new section to the CEA, section 4(c)(6), that

    permits the Commission to exempt from its regulatory oversight, among

    other things, agreements, contracts, or transactions traded pursuant to

    an RTO or ISO tariff that has been approved or permitted to take effect

    by FERC or a State regulatory authority, as applicable.\26\ The

    Commission's charge, however, is not rote; the Commission must

    initially determine whether the exemption would be consistent with the

    public interest and the purposes of the CEA.\27\

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    \26\ See 7 U.S.C. 6(c)(6).

    \27\ See 7 U.S.C. 6(c)(6)(A) and (B).

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

    (2) of the CEA, when issuing an electricity exemption under section

    4(c)(6).\28\ Section 4(c)(1) authorizes the Commission, by rule,

    regulation, or order, to exempt any agreement, contract or transaction,

    or class thereof, from the exchange-trading requirements of section

    4(a) or any other requirements of the Act other than section

    2(a)(1)(C)(ii) and (D). The Commission may attach terms and conditions

    to any exemption it provides.

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    \28\ Section 4(c) was added to the CEA by the Futures Trading

    Practices Act of 1992, Public Law 102-564. The Commission's

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

    In granting exemptive authority to the Commission under new

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

    certainty for a number of existing categories of instruments which

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

    The provision included in the Conference substitute is designed

    to give the Commission broad flexibility in addressing these

    products

    * * * * *

    In this respect, the Conferees expect and strongly encourage the

    Commission to use its new exemptive power promptly upon enactment of

    this legislation in four areas where significant concerns of legal

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

    (4) bank deposits and accounts.

    The Commission is not required to ascertain whether a particular

    transaction would fall within its jurisdiction prior to exercising

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

    that they did:

    not intend that the exercise of exemptive authority by the

    Commission would require any determination before hand that the

    agreement, instrument, or transaction for which an exemption is

    sought is subject to the Act. Rather, this provision provides

    flexibility for the Commission to provide legal certainty to novel

    instruments where the determination as to jurisdiction is not

    straightforward * * *

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

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    Section 4(c)(2) of the CEA \29\ provides that the Commission may

    not approve an exemption from the execution requirements of the Act, as

    noted in section 4(a),\30\ unless the agreement, contract or

    transaction will be entered into solely between ``appropriate

    persons,'' as that term is defined in section 4(c)(3), which does not

    include retail customers (such as small businesses or individuals). In

    addition, the Commission must determine that the agreement, contract or

    transaction in question 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.\31\

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    \29\ Section 4(c)(2), 7 U.S.C. 6(c)(2), states:

    The Commission shall not grant any exemption * * * from any of

    the requirements of subsection (a) unless the Commission determines

    that (A) the requirement should not be applied to the agreement,

    contract, or transaction for which the exemption is sought and that

    the exemption would be consistent with the public interest and the

    purposes of this Act; and (B) the agreement, contract, or

    transaction--

    (i) Will be entered into solely between appropriate persons; and

    (ii) 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 this Act.

    \30\ 7 U.S.C. 6(a).

    \31\ See 7 U.S.C. 6(c)(2).

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    III. Background--FERC and PUCT

    A. Introduction

    Each Petitioner is subject to regulation by FERC, with the

    exception of ERCOT, which is regulated by PUCT.\32\ Petitioners assert

    that the regulatory frameworks administered by FERC or PUCT, as

    applicable to each particular RTO or ISO market, would apply to the

    transactions for which an exemption has been requested.\33\

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    \32\ See Petition at 4.

    \33\ See id. at 11.

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    B. FERC

    In 1920, Congress established the Federal Power Commission

    (``FPC'').\34\ The FPC was reorganized into FERC in 1977.\35\ FERC is

    an independent agency that regulates the interstate transmission of

    electricity, natural gas and oil.\36\ FERC's mission is to ``assist

    consumers in obtaining reliable, efficient and sustainable energy

    services at a reasonable cost through appropriate regulatory and market

    means.'' \37\ This mission is accomplished by pursuing two primary

    goals. First, FERC seeks to ensure that rates, terms and conditions for

    wholesale transactions and transmission of electricity and natural gas

    are just, reasonable and not unduly discriminatory or preferential.\38\

    Second, FERC seeks to promote the development of safe, reliable and

    efficient energy infrastructure that serves the public interest.\39\

    Both Congress and FERC, through a series of legislative acts and

    Commission orders, have sought to establish a system whereby wholesale

    electricity generation and transmission in the United States is

    governed by two guiding principles; regulation with respect to

    wholesale electricity

    [[Page 52141]]

    transmission,\40\ and competition when dealing with wholesale

    generation.\41\

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    \34\ Federal Power Act, 16 U.S.C. 791a et seq.

    \35\ The Department of Energy Organization Act, Public Law 95-

    91, section 401, 91 Stat. 565, 582 (1977) (codified as amended at 42

    U.S.C. 7171 (1988)).

    \36\ See 42 U.S.C. 7172.

    \37\ See FERC Strategic Plan for Fiscal Years 2009-2014, 3 (Feb.

    2012), http://www.ferc.gov/about/strat-docs/FY-09-14-strat-plan-print.pdf.

    \38\ Id.

    \39\ Id.

    \40\ The term ```wholesale transmission services' means the

    transmission of electric energy sold, or to be sold, at wholesale in

    interstate commerce.'' See 16 U.S.C. 796 (24)).

    \41\ See generally FERC Order 888. See also FERC's discussion of

    electric competition, available at http://www.ferc.gov/industries/electric/indus-act/competition.asp (stating that ``[FERC]'s core

    responsibility is to `guard the consumer from exploitation by non-

    competitive electric power companies.' '').

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    In 1996, FERC issued FERC Order 888, which promoted competition in

    the generation market by ensuring fair access and market treatment by

    transmission customers.\42\ Specifically, FERC Order 888 sought to

    ``remedy both existing and future undue discrimination in the industry

    and realize the significant customer benefits that will come with open

    access.'' \43\ FERC Order 888 encouraged the formation of ISOs as a

    potentially effective means for accomplishing non-discriminatory open

    access to the transmission of electrical power.\44\

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    \42\ See FERC Order 888.

    \43\ FERC Order 888 at 21541.

    \44\ FERC Order 888 at 21594. Under the old system, one party

    could own both generation and transmission resources, giving

    preferential treatment to its own and affiliated entities. See

    generally FERC Order 888.

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    In addition, FERC has issued orders that address areas such as

    increased RTO and ISO participation by transmission utilities,

    increased use of long-term firm transmission rights, increased

    investment in transmission infrastructure, reduced transmission

    congestion and the use of demand-response.\45\ The end result of this

    series of FERC orders is that a regulatory system has been established

    that requires ISOs and RTOs to comply with numerous FERC rules designed

    to improve both the reliability of the physical operations of electric

    transmission systems as well as the competitiveness of electricity

    markets. The requirements imposed by the various FERC Orders seek to

    ensure that FERC is able to accomplish its two main goals; ensuring

    that rates, terms and conditions are just, reasonable and not unduly

    discriminatory or preferential, while promoting the development of

    safe, reliable and efficient energy infrastructure that serves the

    public interest.

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    \45\ See, e.g., FERC Order 2000, 65 FR 809 (2000)(encouraging

    transmission utilities to join RTOs); FERC Order No. 681, 71 FR

    43294 (2006), FERC Stats. & Regs. ] 31,222 (2006), order on reh'g,

    Order No. 679-A, 72 FR 1152, Jan. 10, 2007, FERC Stats. & Regs. ]

    31,236, order on reh'g, 119 FERC ] 61,062 (2007) (finalizing

    guidelines for ISOs to follow in developing proposals to provide

    long-term firm transmission rights in organized electricity

    markets); FERC Order No. 679, 71 FR 43294 (2006) (finalizing rules

    to increase investment in the nation's aging transmission

    infrastructure, and to promote electric power reliability and lower

    costs for consumers, by reducing transmission congestion); FERC

    Order No. 890, 72 FR 12266 (2007)(modifying existing rules to

    promote the nondiscriminatory and just operation of transmission

    systems); and FERC Order No. 719-A, 74 FR 37776 (2009) (implementing

    the use of demand-response (the process of requiring electricity

    consumers to reduce their electricity use during times of heightened

    demand), encouraging the use of long-term power contracts and

    strengthening the role of market monitors).

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    C. PUCT

    In 1975, the Texas Legislature enacted the Public Utility

    Regulatory Act (``PURA'') and created PUCT to provide statewide

    regulation of the rates and services of electric and telecommunications

    utilities.\46\ PUCT's stated mission is to assure the availability of

    safe, reliable, high quality services that meet the needs of all Texans

    at just and reasonable rates.\47\ To this end, PUCT regulates electric

    and telecommunications utilities while facilitating competition,

    operation of the free market, and customer choice.\48\ Subchapter S of

    TAC Sec. 25 (``Wholesale Markets'') sets out the rules applicable to

    ERCOT, which operates a wholesale electricity market in Texas similar

    to the electricity markets run by the other Petitioners. As with the

    RTOs and ISOs regulated by FERC, ERCOT is required to have rules that

    address the regulatory requirements imposed by PUCT.\49\ These rules

    address issues similar to those rules imposed by FERC on RTOs and

    ISOs,\50\ including matters such as market design, pricing safeguards,

    market monitoring, monitoring for wholesale market power, resource

    adequacy and ERCOT emergency response services,\51\ and are aimed at

    developing electricity markets that are able to provide reliable, safe

    and efficient electric service to the people of Texas, while also

    maintaining rates at an affordable level through the operation of fair

    competition.\52\

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

    \46\ Public Utility Regulatory Act, TEX. UTIL. CODE ANN. 11.001

    et seq. (Vernon 1998 & Supp. 2005).

    \47\ 16 Texas Admin. Code (``TAC'') 25.1 (1998).

    \48\ Id.

    \49\ See generally 16 TAC 25.501-25.507.

    \50\ See generally id.

    \51\ See generally id.

    \52\ See generally 16 TAC 25.503.

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

    D. FERC & PUCT Oversight

    As discussed above, both FERC and PUCT assert that their primary

    goal in regulating their respective electricity markets is to ensure

    that consumers are able to purchase electricity on a safe, reliable and

    affordable basis.\53\

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

    \53\ See generally 16 TAC 25.1. See also FERC Strategic Plan for

    Fiscal Years 2009-2014, 3 (Feb. 2012), http://www.ferc.gov/about/strat-docs/FY-09-14-strat-plan-print.pdf.

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

    IV. Scope of the Exemption

    A. Transactions Subject to the Exemption

    After due consideration, the Commission proposes to exempt certain

    Financial Transmission Rights (``FTRs''), Energy Transactions, Forward

    Capacity Transactions, and Reserve or Regulation Transactions

    (collectively, the ``Transactions''), each as defined below, pursuant

    to section 4(c)(6) of the Act.

    An FTR is a transaction, however named, that entitles one party to

    receive, and obligates another party to pay, an amount based solely on

    the difference between the price for electricity, established on an

    electricity market administered by a Petitioner, at a specified source

    (i.e., where electricity is deemed injected into the grid of a

    Petitioner) and a specified sink (i.e., where electricity is deemed

    withdrawn from the grid of a Petitioner).\54\ The term ``FTR'' includes

    Financial Transmission Rights, and Financial Transmission Rights in the

    form of options (i.e., where one party has only the obligation to pay,

    and the other party only the right to receive, an amount as described

    above). As more fully described below, the Proposed Exemption applies

    only to FTRs where each FTR is linked to, and the aggregate volume of

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

    (after accounting for counterflow) of the electricity transmission

    system operated by the Petitioner offering the contract for such

    period: a Petitioner serves as the market administrator for the market

    on which the FTR is transacted; each party to the Transaction is a

    member of the particular Petitioner (or is the Petitioner itself) and

    the Transaction is executed on a market administered by that

    Petitioner; and the Transaction does not require any party to make or

    take physical delivery of electricity.\55\

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

    \54\ Petition at 6.

    \55\ Each FTR specifies a direction along a path from a

    specified source to a specified sink. Counterflow FTRs specify a

    path where congestion in the physical market is in the opposite

    direction from the prevailing flow. Holders of counterflow FTRs

    generally pay congestion revenues to the RTO or ISO. Because

    counterflow FTRs are expected to result in payment liability to the

    FTR holder, the price of counterflow FTRS are typically negative.

    That is, the RTO or ISO pays market participants to acquire them.

    However, counterflow FTRs may be profitable (and prevailing flow

    FTRs may result in a payment liability) where congestion in the

    physical market occurs in direction opposite to that expected. See

    generally PJM Interconnection, L.L.C., 122 FERC ] 61,279 (2008); see

    also PJM Interconnection, L.L.C, 121 FERC ] 61,089 (2007).

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

    ``Energy Transactions'' are transactions in a ``Day-Ahead Market''

    [[Page 52142]]

    or ``Real-Time Market,'' as those terms are defined in the Proposed

    Exemption, for the purchase or sale of a specified quantity of

    electricity at a specified location where the price of electricity is

    established at the time the transaction is executed.\56\ Performance

    occurs in the Real-Time Market by either the physical delivery or

    receipt of the specified electricity or a cash payment or receipt at

    the price established in the Real-Time Market; and the aggregate

    cleared volume of both physical and cash-settled energy transactions

    for any period of time is limited by the physical capability of the

    electricity transmission system operated by a Petitioner for that

    period of time.\57\ Energy Transactions are also referred to as Virtual

    Bids or Convergence Bids.\58\

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

    \56\ See Petition at 7. See also section VIII. below.

    \57\ See id. at 7. See also section VIII. below.

    \58\ See id. at 6.

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

    ``Forward Capacity Transactions'' fall into three distinct

    categories, Generation Capacity (``GC''), Demand Response (``DR''), and

    Energy Efficiency.\59\ GC refers to the right of a Petitioner to

    require certain sellers to maintain the interconnection of electric

    generation facilities to specific physical locations in the electric

    power transmission system during a future time period as specified in

    the Petitioner's Tariff.\60\ Furthermore, a GC contract requires a

    seller to offer specified amounts of electric energy into the Day-Ahead

    or Real-Time Markets for electricity transactions. A GC contract also

    requires a seller, subject to the terms and conditions of a

    Petitioner's Tariff, to inject electric energy into the electric power

    transmission system operated by the Petitioner.\61\ A DR Right gives

    Petitioners the right to require that certain sellers of such rights

    curtail their consumption of electricity from Petitioner's electricity

    transmission system during a future period of time as specified in the

    Petitioners' Tariffs.\62\ Energy Efficiency Rights (``EER'') provides

    Petitioners with the right to require specific performance of an action

    or actions on the part of the other party that will reduce the need for

    GC or DR capacity over the duration of a future period of time as

    specified in the Petitioner's Tariffs.\63\ Moreover, for a Forward

    Capacity Transaction to be eligible for exemption hereunder, the

    aggregate cleared volume of all such transactions for any period of

    time must be limited to the physical capability of the electric

    transmission system operated by the applicable Petitioner for that

    period of time.

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

    \59\ See id. at 7-8.

    \60\ See id. at 7.

    \61\ See id.

    \62\ See id. at 7.

    \63\ See id. at 8. Another example of an EER would be requiring

    an RTO or ISO member to change equipment in order to improve the

    efficiency of the system, and in turn, reduce the amount of

    electricity drawn from the system. See also section VIII. below.

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

    ``Reserve Regulation Transactions'' allow a Petitioner to purchase

    through auction, for the benefit of load serving entities (``LSEs'')

    and resources, the right, during a period of time specified in the

    Petitioner's Tariff, to require the seller to operate electric

    facilities in a physical state such that the facilities can increase or

    decrease the rate of injection or withdrawal of electricity to the

    electric power transmission system operated by the Petitioner with

    physical performance by the seller's facilities within a response

    interval specified in the Petitioner's tariff (Reserve Transaction), or

    prompt physical performance by the seller's facilities (Area Control

    Error Regulation Transaction).\64\ In consideration for such delivery,

    or withholding of delivery, the seller receives compensation of the

    type specified in section VIII below.\65\ In all cases, the quantity

    and specifications for such Transactions for a Petitioner for any

    period of time are limited by the physical capability of the electric

    transmission system operated by Petitioners.\66\ These Transactions are

    typically used to address unforeseen fluctuations in the level of

    electricity demand experienced on the electric transmission system.

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

    \64\ See id. at 8-9. See also section VIII. below.

    \65\ See id. at 8.

    \66\ See id. at 8-9.

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

    B. Conditions

    The Proposed Exemption would be subject to certain conditions.

    First, all parties to the agreements, contracts or transactions that

    are covered by the Proposed Exemption must be either ``appropriate

    persons,'' as such term is defined in sections 4(c)(3)(A) through (J)

    of the Act, or ``eligible contract participants,'' as such term is

    defined in section 1a(18)(A) of the Act and in Commission regulation

    1.3(m).\67\

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

    \67\ That is, the Commission is proposing to use its authority

    pursuant to CEA 4(c)(3)(K) to include eligible contract participants

    as appropriate persons for the purposes of this Order. See infra n.

    80 and accompanying text.

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

    Second, the agreements, contracts or transactions that are covered

    by the Proposed Exemption must be offered or sold pursuant to a

    Petitioner's tariff, which has been approved or permitted to take

    effect by:

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

    (2) In the case of all other Petitioners, FERC.

    Third, none of a Petitioner's tariffs or other governing documents

    may include any requirement that the Petitioner notify a member prior

    to providing information to the Commission in response to a subpoena or

    other request for information or documentation.

    Finally, information sharing arrangements that are satisfactory to

    the Commission between the Commission and FERC and between the

    Commission and PUCT must be in full force and effect.\68\

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

    \68\ As discussed in section VIII.A. below, the Commission and

    FERC have already entered into a Memorandum of Understanding, a copy

    of which is available at http://www.ferc.gov/legal/maj-ord-reg/mou/mou-33.pdf. In addition, the Commission intends on working with the

    PUCT on an MOU that is mutually satisfactory.

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

    C. Additional Limitations

    As discussed above, the Commission proposes to exempt the

    Transactions pursuant to section 4(c)(6) of the Act based, in part, on

    certain representations made by Petitioners as well as the additional

    limitations that are noted below. As represented in the Petition, the

    exemption requested by Petitioners relate to Transactions that are

    primarily entered into by commercial participants that are in the

    business of generating, transmitting and distributing electricity.\69\

    In addition, the Commission notes that it appears that Petitioners were

    established for the purpose of providing affordable, reliable

    electricity to consumers within their geographic region.\70\

    Critically, these Transactions are an essential means, designed by FERC

    and PUCT as an integral part of their statutory responsibilities, to

    enable the reliable delivery of affordable electricity.\71\ The

    Commission also notes that each of the Transactions taking place on

    Petitioners' markets is monitored by Market Monitoring Units (``MMU'')

    responsible to either FERC or, in the case of ERCOT, PUCT.\72\ Finally,

    as discussed above, each Transaction is directly tied to the physical

    capabilities of Petitioners' electricity grids.\73\ As more fully

    described below,\74\ and on the basis of the aforementioned

    representations, the Commission finds that the Proposed Exemption would

    be in the public interest for the specified Transactions.

    [[Page 52143]]

    To be clear, however, financial transactions that are not tied to the

    allocation of the physical capabilities of an electric transmission

    grid would not be suitable for exemption because such activity would

    not be inextricably linked to the physical delivery of electricity.

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

    \69\ See generally Petition at 20.

    \70\ See id. at 3-4.

    \71\ See generally FERC Order 888; FERC Order 2000; 18 CFR

    35.34(k)(2); and TAC 25.1. See also Petition at 11, 13-14.

    \72\ Petition at 15-18.

    \73\ See id. at 6-9.

    \74\ See the discussions in sections V.B., V.D., and V.E. below.

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

    V. Section 4(c)Analysis

    A. Overview of CEA Section 4(c)

    1. Sections 4(c)(6)(A) and (B)

    The Dodd-Frank Act amended CEA section 4(c) to add sections

    4(c)(6)(A) and (B), which provide for exemptions for certain

    transactions entered into (a) pursuant to a tariff or rate schedule

    approved or permitted to take effect by FERC, or (b) pursuant to a

    tariff or rate schedule establishing rates or charges for, or protocols

    governing, the sale of electric energy approved or permitted to take

    effect by the regulatory authority of the State or municipality having

    jurisdiction to regulate rates and charges for the sale of electric

    energy within the State or municipality, as eligible for exemption

    pursuant to the Commission's 4(c) exemptive authority.\75\ Indeed,

    4(c)(6) provides that ``[i]f the Commission determines that the

    exemption would be consistent with the public interest and the purposes

    of this chapter, the Commission shall'' issue such an exemption.

    However, any exemption considered under 4(c)(6)(A) and/or (B) must be

    done ``in accordance with [CEA section 4(c)(1) and (2)].'' \76\

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

    \75\ The exemption language in section 4(c)(6) reads:

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

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

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

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

    transaction that is entered into--

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

    to take effect by the Federal Energy Regulatory Commission;

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

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

    approved or permitted to take effect by the regulatory authority of

    the State or municipality having jurisdiction to regulate rates and

    charges for the sale of electric energy within the State or

    municipality; or

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

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

    \76\ CEA section 4(c)(6) explicitly directs the Commission to

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

    [CEA section 4(c)(1) and (2)].''

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

    2. Section 4(c)(1)

    CEA section 4(c)(1) requires that the Commission act ``by rule,

    regulation or order, after notice and opportunity for hearing.'' It

    also provides that the Commission may act ``either unconditionally or

    on stated terms or conditions or for stated periods and either

    retroactively or prospectively or both'' and that the Commission may

    provide exemption from any provisions of the CEA except subparagraphs

    (C)(ii) and (D) of section 2(a)(1).\77\

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

    \77\ Section 4(c)(1), 7 U.S.C. 6(c)(1), states:

    (c)(1) In order to promote responsible economic or financial

    innovation and fair competition, the Commission by rule, regulation,

    or order, after notice and opportunity for hearing, may (on its own

    initiative or on application of any person, including any board of

    trade designated or registered as a contract market or derivatives

    transaction execution facility for transactions for future delivery

    in any commodity under section 5 of this Act) exempt any agreement,

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

    subject to subsection (a) (including any person or class of persons

    offering, entering into, rendering advice or rendering other

    services with respect to, the agreement, contract, or transaction),

    either unconditionally or on stated terms or conditions or for

    stated periods and either retroactively or prospectively, or both,

    from any of the requirements of subsection (a), or from any other

    provision of this Act (except subparagraphs (C)(ii) and (D) of

    section 2(a)(1), except that--

    (A) Unless the Commission is expressly authorized by any

    provision described in this subparagraph to grant exemptions, with

    respect to amendments made by subtitle A of the Wall Street

    Transparency and Accountability Act of 2010--

    (i) With respect to--

    (I) Paragraphs (2), (3), (4), (5), and (7), paragraph

    (18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39),

    (41), (42), (46), (47), (48), and (49) of section 1a, and sections

    2(a)(13), 2(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a),

    5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and

    (II) Section 206(e) of the Gramm-Leach-Bliley Act (Pub. L. 106-

    102; 15 U.S.C. 78c note); and

    (ii) in sections 721(c) and 742 of the Dodd-Frank Wall Street

    Reform and Consumer Protection Act; and

    (B) The Commission and the Securities and Exchange Commission

    may by rule, regulation, or order jointly exclude any agreement,

    contract, or transaction from section 2(a)(1)(D)) if the Commissions

    determine that the exemption would be consistent with the public

    interest.

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

    3. Section 4(c)(2)

    CEA section 4(c)(2) requires the Commission to determine that: To

    the extent an exemption provides relief from any of the requirements of

    CEA section 4(a), the requirement should not be applied to the

    agreement, contract or transaction; the exempted agreement, contract,

    or transactions will be entered into solely between appropriate

    persons; \78\ and the exemption will not have a material adverse effect

    on the ability of the Commission or any contract market to discharge

    its regulatory or self-regulatory duties under the CEA.\79\

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

    \78\ See CEA 4(c)(2)(B)(i) and the discussion of CEA section

    4(c)(3) below.

    \79\ CEA section 4(c)(2)(A) also requires that the exemption

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

    CEA, but that requirement duplicates the requirement of section

    4(c)(6).

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

    4. Section 4(c)(3)

    CEA section 4(c)(3) outlines who may constitute an appropriate

    person for the purpose of a 4(c) exemption, including as relevant to

    this Notice: (a) Any person that fits in one of ten defined categories

    of appropriate persons; or (b) such other persons that the Commission

    determines to be appropriate in light of their financial or other

    qualifications, or the applicability of appropriate regulatory

    protections.\80\

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

    \80\ Section 4(c)(3), 7 U.S.C. 6(c)(3), provides that: the term

    ``appropriate person'' shall be limited to the following persons or

    classes thereof:

    (A) A bank or trust company (acting in an individual or

    fiduciary capacity).

    (B) A savings association.

    (C) An insurance company.

    (D) An investment company subject to regulation under the

    Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).

    (E) A commodity pool formed or operated by a person subject to

    regulation under this Act.

    (F) A corporation, partnership, proprietorship, organization,

    trust, or other business entity with a net worth exceeding

    $1,000,000 or total assets exceeding $5,000,000, or the obligations

    of which under the agreement, contract or transaction are guaranteed

    or otherwise supported by a letter of credit or keepwell, support,

    or other agreement by any such entity or by an entity referred to in

    subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph.

    (G) An employee benefit plan with assets exceeding $1,000,000,

    or whose investment decisions are made by a bank, trust company,

    insurance company, investment adviser registered under the

    Investment Advisers Act of 1940 (15 U.S.C. 80a-1 et seq.), or a

    commodity trading advisor subject to regulation under this Act.

    (H) Any governmental entity (including the United States, any

    state, 4-1 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.

    (I) A broker-dealer subject to regulation under the Securities

    Exchange Act of 1934 (15 U.S.C. 78a et seq.) acting on its own

    behalf or on behalf of another appropriate person.

    (J) A futures commission merchant, floor broker, or floor trader

    subject to regulation under this Act acting on its own behalf or on

    behalf of another appropriate person.

    (K) 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.

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

    B. Proposed CEA Section 4(c) Determinations

    In connection with the Proposed Exemption, the Commission has

    considered and proposes to determine that: (i) The Proposed Exemption

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

    (ii) CEA section 4(a) should not apply to the transactions or entities

    eligible for the Proposed Exemption, (iii) the persons eligible to rely

    on the Proposed Exemption are appropriate persons pursuant to 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.

    [[Page 52144]]

    1. Consistent with the Public Interest and the Purposes of the CEA

    As required by CEA section 4(c)(2)(A), as well as section 4(c)(6),

    the Commission proposes to determine that the Proposed Exemption is

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

    Section 3(a) of the CEA provides that transactions subject to the CEA

    affect the national public interest by providing a means for managing

    and assuming price risk, discovering prices, or disseminating pricing

    information through trading in liquid, fair and financially secure

    trading facilities. Section 3(b) of the CEA identifies the purposes of

    the CEA:

    It is the purpose of this Act to serve the public interests

    described in subsection (a) through a system of effective self-

    regulation of trading facilities, clearing systems, market

    participants and market professionals under the oversight of the

    Commission. To foster these public interests, it is further the

    purpose of this Act to deter and prevent price manipulation or any

    other disruptions to market integrity; to ensure the financial

    integrity of all transactions subject to this Act and the avoidance

    of systemic risk; to protect all market participants from fraudulent

    or other abusive sales practices and misuses of customer assets; and

    to promote responsible innovation and fair competition among boards

    of trade, other markets and market participants.

    The Petitioners assert that the Proposed Exemption would be

    consistent with the public interest and purposes of the CEA,\81\

    stating generally that: (a) The Transactions have been, and are,

    subject to a long-standing, comprehensive regulatory framework for the

    offer and sale of the Transactions established by FERC or PUCT; and (b)

    the Transactions administered by the RTOs/ISOs or ERCOT are part of,

    and inextricably linked to, the organized wholesale electricity markets

    that are subject to FERC and PUCT regulation and oversight.\82\ For

    example, Petitioners explain that FERC Order No. 2000 (which, along

    with FERC Order No. 888, encouraged the formation of RTOs/ISOs to

    operate the electronic transmission grid and to create organized

    wholesale electric markets) requires an RTO/ISO to demonstrate that it

    has four minimum characteristics: (1) Independence from any market

    participant; (2) a scope and regional configuration which enables the

    ISO/RTO to maintain reliability and effectively perform its required

    functions; (3) operational authority for its activities, including

    being the security coordinator for the facilities that it controls; and

    (4) short-term reliability.\83\ Petitioners highlight that an RTO/ISO

    must demonstrate to FERC that it performs certain self-regulatory and/

    or market monitoring functions,\84\ and the Petition describes the

    analogous requirements applicable to ERCOT under PUCT and the PURA.\85\

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

    \81\ See Petition at 11.

    \82\ See id.

    \83\ See id. at 13.

    \84\ See id. at 13-14 (explaining that each RTO/ISO must employ

    a transmission pricing system that promotes efficient use and

    expansion of transmission and generation facilities; develop and

    implement procedures to address parallel path flow issues within its

    region and with other regions; serve as a provider of last resort of

    all ancillary services required by FERC Order No. 888 including

    ensuring that its transmission customers have access to a real-time

    balancing market; be the single OASIS (Open-Access Same-Time

    Information System) site administrator for all transmission

    facilities under its control and independently calculate Total

    Transmission Capacity and Available Transmission Capability; provide

    reliable, efficient and not unduly discriminatory transmission

    service, it must provide for objective monitoring of markets it

    operates or administers to identify market design flaws, market

    power abuses and opportunities for efficiency improvements; be

    responsible for planning, and for directing or arranging, necessary

    transmission expansions, additions, and upgrades; and ensure the

    integration of reliability practices within an interconnection and

    market interface practices among regions).

    \85\ See id. at 14-15. Pursuant to PURA 39.151(a), ERCOT's roles

    and duties are to provide access to the transmission and

    distribution systems for all buyers and sellers of electricity on

    nondiscriminatory terms; ensure the reliability and adequacy of the

    regional electrical network; ensure that information relating to a

    customer's choice of retail electric provider is conveyed in a

    timely manner to the persons who need that information; and ensure

    that electricity production and delivery are accurately accounted

    for among the generators and wholesale buyers and sellers in the

    region.

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

    Of single importance, Petitioners are responsible for ``ensur[ing]

    the development and operation of market mechanisms to manage

    transmission congestion. * * * The market mechanisms must accommodate

    broad participation by all market participants, and must provide all

    transmission customers with efficient price signals that show the

    consequences of their transmission usage decisions.'' \86\

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

    \86\ See Petition at 14. See also 18 CFR 35.34(k)(2).

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

    Petitioners also explain that the Transactions are primarily

    entered into by commercial participants that are in the business of

    generating, transmitting, and distributing electricity,\87\ and that

    Petitioners were established for the purpose of providing affordable,

    reliable electricity to consumers within their geographic region.\88\

    Furthermore, the Transactions that take place on Petitioners' markets

    are overseen by a market monitoring function, required by FERC for each

    Petitioner, and by PUCT in the case of ERCOT, to identify manipulation

    of electricity on Petitioners' markets.\89\

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

    \87\ See generally Petition at 20.

    \88\ See id. at 3-4.

    \89\ See id. at 15-18.

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

    Fundamental to the Commission's ``public interest'' and ``purposes

    of the [Act]'' analysis is the fact that the Transactions are

    inextricably tied to the Petitioners' physical delivery of electricity,

    as represented in the Petition.\90\ An equally important factor is that

    the Proposed Exemption is explicitly limited to Transactions taking

    place on markets that are monitored by either an independent market

    monitor, a market administrator (the RTO/ISO, or ERCOT), or both, and a

    government regulator (FERC or PUCT). In contrast, an exemption for

    financial transactions that are not so monitored, or not related to the

    physical capacity of an electric transmission grid, or not directly

    linked to the physical generation and transmission of electricity, or

    not limited to appropriate persons,\91\ is unlikely to be in the public

    interest or consistent with the purposes of the CEA and would not be

    subject to this exemption.

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

    \90\ See id. at 6-9 (describing the Transactions and noting that

    each of them ``is part of, and inextricably linked to, the organized

    wholesale electricity markets that are subject to FERC and PUCT

    regulation and oversight'').

    \91\ See appropriate persons discussion, below, section V.B.3.

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

    Finally, and as discussed in detail below, the extent to which the

    Proposed Exemption is consistent with the public interest and the

    purposes of the Act can, in major part, be measured by the extent to

    which the tariffs and activities of the Petitioners, and supervision by

    FERC and PUCT, are congruent with, and sufficiently accomplish, the

    regulatory objectives of the relevant core principles set forth in the

    CEA for derivatives clearing organizations (``DCOs'') and swap

    execution facilities (``SEFs''). Specifically, providing a means for

    managing or assuming price risk and discovering prices, as well as

    prevention of price manipulation and other disruptions to market

    integrity, are addressed by the core principles for SEFs. Ensuring the

    financial integrity of the transactions and the avoidance of systemic

    risk, as well as protection from the misuse of participant assets, are

    addressed by the core principles for DCOs. Deterrence of price

    manipulation (or other disruptions to market integrity) and protection

    of market participants from fraudulent sales practices is achieved by

    the Commission retaining and exercising its jurisdiction over these

    matters. Therefore, the Commission has incorporated its DCO/SEF core

    principle analysis, set forth below, into its consideration of the

    Proposed

    [[Page 52145]]

    Exemption's consistency with the public interest and the purposes of

    the Act. In the same way, the Commission has considered how the public

    interest and the purposes of the CEA are also addressed by the manner

    in which Petitioners comply with FERC's Credit Reform Policy.\92\

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

    \92\ See FERC Credit Reform Policy discussion, below, at section

    V.C.

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

    Based on this review, the Commission proposes to determine that the

    Proposed Exemption is consistent with the public interest and the

    purposes of the CEA, and the Commission is specifically requesting

    comment on whether the Proposed Exemption is consistent with the public

    interest and the purposes of the Act.

    2. CEA Section 4(a) Should Not Apply to the Transactions or Entities

    Eligible for the Proposed Exemption

    CEA section 4(c)(2)(A) requires, in part, that the Commission

    determine that the Transactions covered under the Proposed Exemption

    should not be subject to CEA section 4(a)--generally, the Commission's

    exchange trading requirement for a contract for the purchase or sale of

    a commodity for future delivery. Based in major part on the

    Petitioners' representations, the Commission has examined the

    Transactions, the Petitioners, and their markets in the context of the

    CEA core principle requirements applicable to a DCO and to a SEF.\93\

    As further support for this determination, the Commission is also

    relying on the public interest and the purposes of the Act analysis in

    subsection 3 below. In so doing, the Commission can determine that, due

    to the FERC or PUCT regulatory scheme and the RTO/ISO or ERCOT market

    structure already applicable to the Transactions, the linkage between

    the Transactions and those regulatory schemes, and the unique nature of

    the market participants that would be eligible to rely on the Proposed

    Exemption,\94\ CEA section 4(a) should not apply to the Transactions

    under the Proposed Exemption.

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

    \93\ See DCO core principle analysis below, at section V.D.; see

    also SEF core principle analysis below, at section V.E.

    \94\ See appropriate persons analysis, below, at section V.B.3.

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

    The Commission is requesting comment on whether its Proposed

    Exemption of the Transactions from CEA section 4(a) is appropriate.

    3. Appropriate Persons

    CEA section 4a(c)(2)(B)(i) requires that the Commission determine

    that the Proposed Exemption is properly limited to transactions entered

    into between appropriate persons as described in CEA section 4(c)(3).

    The Petitioners assert that each Petitioner's market participants fit

    within the ``appropriate person'' requirement under CEA section

    4(c)(3), relying primarily on two categories of appropriate persons.

    The first category includes those entities that have a net worth

    exceeding $1,000,000 or total assets exceeding $5,000,000, as

    identified in CEA section 4(c)(3)(F).\95\ The second group of

    appropriate persons would fall within a grouping under CEA section

    4(c)(3)(K), which includes persons deemed appropriate by the Commission

    ``in light of their financial or other qualifications, or the

    applicability of appropriate regulatory protection.'' \96\

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    \95\ CEA section 4(c)(3)(F) provides that the following entities

    are ``appropriate persons'' that the Commission may exempt under CEA

    section 4(a). The relevant text of 4(c)(3)(F) provides: ``A

    corporation, partnership, proprietorship, organization, trust, or

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

    assets exceeding $5,000,000, or the obligations of which under the

    agreement, contract or transaction are guaranteed or otherwise

    supported by a letter of credit or keepwell, support, or other

    agreement by any such entity or by an entity referred to in

    subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph.''

    \96\ CEA 4(c)(3)(K).

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

    The Petitioners explain that FERC has instructed all RTOs and ISOs

    subject to FERC supervision \97\ to create minimum standards for market

    participants. The Petitioners state that:

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

    \97\ According to the Petition, ERCOT is reviewing its

    ``participants eligibility standards to ensure that they are

    consistent with the requirements of [CEA] Section 4(c).'' Petition

    at 27. See also Attachment C to Petition, beginning at Attachments

    at 27 (``Through its stakeholder process, ERCOT is in the process of

    developing new eligibility requirements that are comparable to those

    required by FERC Order No. 741.'').

    In Order No. 741, FERC directed each of the ISOs/RTOs to

    establish minimum criteria for market participants. FERC did not

    specify the criteria the ISOs/RTOs should apply, but rather directed

    them to establish criteria through their stakeholder processes.

    Accordingly, each of the FERC jurisdictional ISOs/RTOs submitted to

    FERC proposals to establish minimum criteria for participation in

    their markets. Although ERCOT is not subject to the requirements

    FERC's Credit Reform Orders, ERCOT is reviewing its participant

    eligibility standards to ensure that they are consistent with the

    requirements of Section 4(c). These proposals were accepted by FERC

    subject to a supplemental compliance filing to provide for

    verification of risk management policies and procedures.

    Although there is some variation among the minimum participation

    criteria adopted by each ISO/RTO, included in each is a baseline

    capitalization requirement that participants have net worth of at

    least $1 million or total assets of at least $10 million.\98\

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

    \98\ Petition at 26-27 (citations omitted).

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

    However, the Petitioners acknowledge that there are exceptions to this

    ``baseline capitalization requirement,'' that is, market participants

    who do not meet the minimum net worth or total assets criteria under

    the CEA who pursuant to Petitioners' Tariffs must post financial

    security because they are under-capitalized. Nonetheless, as the

    Petitioners explain, there is an exception to the posting requirement

    for market participants with small positions. The Petitioners provide

    the following explanation for the exception:

    The criteria of some ISOs/RTOs also reduce the financial

    security posting requirement for certain entities that maintain only

    small positions on the markets of the ISO/RTO and therefore expose

    the ISOs/RTOs to minimal risk. These entities are instead required

    to post additional financial security with the ISO/RTO in an amount

    that would depend on the size of their positions. In this regard, a

    notable number of participants in the markets of some ISOs/RTOs

    include cooperatives, municipalities or other forms of public

    corporate entities which are authorized to own, lease and operate

    electric generation, transmission or distribution facilities. [\99\]

    Such entities' participation in the ISO/RTO may be necessary to make

    electricity available within the entire grid for a region.

    Nevertheless, they are ``appropriate persons'' because of their

    active participation in the generation, transmission or distribution

    of electricity and the knowledge of the wholesale energy market that

    they have as a consequence of their participation in the physical

    markets. Moreover, the municipal entities are entitled to recover

    their costs for native load service through governmentally

    established retail rates and, accordingly, are able to provide a

    form of financial security (i.e., the ability to request a retail

    rate increase to cover increased costs) that is unavailable to other

    participants in the energy markets. As such, the risk of default by

    such entities is materially lower than it is for other Market

    Participants.\100\

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

    \99\ The Commission notes here that CEA 4(c)(3)(H) includes as

    eligible appropriate persons ``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.'' This appropriate persons category would cover the

    municipalities and other government owned market participants.

    \100\ Petition at 27 (citations omitted).

    The Commission is proposing to limit the Proposed Exemption to

    entities that meet one of the appropriate persons categories in CEA

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

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

    as that term has been defined.\101\ In this

    [[Page 52146]]

    connection, the Commission notes that the municipal entities discussed

    above appear to qualify as ``appropriate persons'' pursuant to CEA

    section 4(c)(3)(H).\102\

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

    \101\ See CEA 1(a)(12). 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.

    \102\ See 7 U.S.C. 6(c)(3)(H) (``Any governmental entity * * *

    including * * * any state * * * or political subdivision thereof * *

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

    foregoing.'')

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

    Based on representations contained in the Petition, the Commission

    can determine the Proposed Exemption is limited to appropriate persons

    for those market participants meeting the categories described defined

    in CEA section 4(c)(3)(A) through (J). The CFTC is requesting comment

    as to whether the entities defined in CEA section 4(c)(3)(A) through

    (J) are appropriate persons for the purpose of the Proposed Exemption.

    For those ECPs engaging in Transactions in markets administered by

    the Petitioner that do not fit within 4(c)(3)(A) through (J), the

    Commission is proposing to determine that they are appropriate persons

    pursuant to section 4c(3)(K), ``in light of their financial or other

    qualifications, or the applicability of appropriate regulatory

    protections'' to the extent that such persons are otherwise ECPs. The

    Commission can base this determination on the financial security

    posting schemes, described by the Petitioners, applicable to the

    entities engaging in the Transactions, as well as the market based

    protections applicable to the Transactions regardless of participant,

    as described in the Commission's public interest and purposes of the

    Act analysis, above. In addition, CEA section 2(e) permits all ECPs to

    engage in swaps transactions other than on a designated contract market

    (``DCM''), and so such entities should similarly be appropriate persons

    for the purpose of the Proposed Exemption. The Commission is requesting

    comment on whether the market participants entering into the

    Transactions in markets administered by the Petitioners, particularly

    those that do not fit within 4(c)(3)(A) through (J), but that are ECPs,

    may nonetheless be appropriate persons pursuant to CEA section

    4(c)(3)(K), in light of the financial posting scheme that applies to

    such participants, and in light of the regulatory and market oversight

    programs that apply to the Transactions in the Petitioners' markets.

    The Commission also requests comment as to whether there are

    currently entities engaging in the Transactions that are neither

    entities that fall within CEA section 4(c)(3)(A) through (J) entities

    nor ECPs. If there are such entities, on what basis may the Commission

    similarly conclude that such entities are, pursuant to CEA section

    4(c)(3)(K), appropriate persons for the purpose of the Proposed

    Exemption? In particular, the Commission seeks comment as to whether

    there any other of the Petitioners' market participants that

    ``active[ly] participat[e] in the generation, transmission or

    distribution of electricity'' that are not ECPs and do not fall within

    CEA section 4(c)(3)(A) through (J), who should nonetheless be included

    as appropriate persons pursuant to CEA section 4(c)(3)(K).

    4. 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

    CEA section 4(c)(2)(B)(ii) requires the Commission to determine

    that the Transactions subject to the Proposed Exemption will not have a

    material adverse effect on the ability of the Commission or any

    contract markets to perform regulatory or self-regulatory duties.\103\

    In making this determination, Congress indicated that the Commission is

    to consider such regulatory concerns as ``market surveillance,

    financial integrity of participants, protection of customers and trade

    practice enforcement.'' \104\ These considerations are similar to the

    purposes of the Act as defined in CEA section 3, initially addressed in

    the public interest discussion, above.

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

    \103\ CEA 4(c)(2)(B).

    \104\ See H.R. No. 978, 102d Cong. 2d Sess. 79 (1992).

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

    Petitioners contend that the Proposed Exemption will not have a

    material adverse effect on the Commission's or any contract market's

    ability to discharge its regulatory function,\105\ asserting that:

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

    \105\ See Petition at 28.

    Under Section 4(d) of the Act, the Commission will retain

    authority to conduct investigations to determine whether

    [Petitioners] are in compliance with any exemption granted in

    response to this request. * * * [T]he requested exemptions would

    also preserve the Commission's existing enforcement jurisdiction

    over fraud and manipulation. This is consistent with section 722 of

    the Dodd-Frank Act, the existing MOU between the FERC and the

    Commission and other protocols for inter-agency cooperation. The

    [Petitioners] will continue to retain records related to the

    Transactions, consistent with existing obligations under FERC and

    PUCT regulations.

    The regulation of exchange-traded futures contracts and

    significant price discovery contracts (``SPDCs'') will be unaffected

    by the requested exemptions. Futures contracts based on electricity

    prices set in the Petitioners' markets that are traded on a

    designated contract market and SPDCs will continue to be regulated

    by and subject to the requirements of the Commission. No current

    requirement or practice of the ISOs/RTOs or of a contract market

    will be affected by the Commission's granting the requested

    exemptions.\106\

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

    \106\ See id. at 28.

    These factors appear to support the Proposed Exemption. In

    addition, the limitation of the exemption to Transactions between

    certain ``appropriate persons'' as discussed above, avoids potential

    issues regarding financial integrity and customer protection. That is,

    this approach would appear to ensure that Transactions subject to this

    Proposed Exemption would be limited to sophisticated entities that are

    able to, from a financial standpoint, understand and manage risks

    associated with such Transactions.

    Moreover, the Proposed Exemption does not exempt Petitioners from

    CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c),

    6(d), 6(e), 6c, 6d, 8, 9, and 13, to the extent that those sections

    prohibit fraud or manipulation of the price of any swap, contract for

    the sale of a commodity in interstate commerce, or for future delivery

    on or subject to the rules of any contract market. Therefore, the

    Commission retains authority to pursue fraudulent or manipulative

    conduct.\107\

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

    \107\ Nor did the Petitioners seek an exemption from these

    provisions. See id. at 2-3.

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

    In addition, it appears that granting the exemption for the

    Transactions will not have a material adverse effect on the ability of

    any contract market to discharge its self-regulatory duties under the

    Act. With respect to FTRs, Forward Capacity Transactions, and Reserve

    or Regulation Transactions, these transactions do not appear to be used

    for price discovery or as settlement prices for other transactions in

    Commission regulated markets. Therefore, the Proposed Exemption should

    not have a material adverse effect on any contract market carrying out

    its self-regulatory function.

    With respect to Energy Transactions, these transactions do have a

    relationship to Commission regulated markets because they can serve as

    a source of settlement prices for other transactions within Commission

    jurisdiction. Granting the Proposed Exemption, however, should not pose

    regulatory burdens on a contract market because, as discussed in more

    detail below, Petitioners have market monitoring systems in place to

    detect

    [[Page 52147]]

    and deter manipulation that takes place on their markets. Also, as a

    condition of the Proposed Exemption, the Commission would be able to

    obtain data from FERC and PUCT with respect to activity on Petitioners'

    markets that may impact trading on Commission regulated markets.

    Finally, the Commission notes that if the Transactions ever could

    be used in combination with trading activity or a position in a DCM

    contract to work some market abuse, both the Commission and DCMs have

    sufficient independent authority over DCM market participants to

    monitor for such activity.\108\ Typically, cross-market abuse schemes

    will involve a reportable position in the DCM contract involved. In

    which case, Commission Regulation 18.05 requires the reportable trader

    to keep books and records evidencing all details concerning cash and

    over-the-counter positions and transactions in the underlying commodity

    and to provide such data to the Commission upon demand. Likewise,

    recently-adopted Commission regulation 38.254(a) requires that DCMs

    have rules that require traders to keep records of their trading,

    including records of their activity in the underlying commodity and

    related derivatives markets, and make such records available, upon

    request, to the DCM.\109\

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

    \108\ The Commission notes that its authority to prosecute

    market abuses involving Transactions would not be limited to

    instances where Transactions were part of some cross-market scheme

    involving DCM trading activity.

    \109\ Final Rulemaking--Core Principles and Other Requirements

    for Designated Contract Markets, 72 FR 36612 (June 19, 2012).

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

    The CFTC is requesting comment as to whether the Proposed Exemption

    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 Act, and, if so, what conditions can or should be

    imposed on the Order to mitigate such effects.

    C. FERC Credit Reform Policy

    On October 21, 2010, FERC amended its regulations to encourage

    clear and consistent risk and credit practices in the organized

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

    charged for the transmission or sale of electric energy in interstate

    commerce are just, reasonable, and not unduly discriminatory or

    preferential.'' \110\

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

    \110\ 75 FR 65942, 65942, Oct. 21, 2010 (the ``FERC Original

    Order 741''). These requirements were later slightly amended and

    clarified in an order on rehearing. See 76 FR 10492, Feb. 25, 2011

    (``FERC Revised Order 741'', and together with Original Order 741,

    ``FERC Order 741'').

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

    In effect, Order 741 requires those RTOs and ISOs that are subject

    to FERC supervision to implement the following reforms: ``shortened

    settlement timeframes, restrictions on the use of unsecured credit,

    elimination of unsecured credit in all [FTRs] or equivalent markets,

    adoption of steps to address the risk that RTOs and ISOs may not be

    allowed to use netting and set-offs, establishment of minimum criteria

    for market participation, clarification regarding the organized

    markets' administrators' ability to invoke `material adverse change'

    clauses to demand additional collateral from participants, and adoption

    of a two-day grace period for `curing' collateral calls.'' \111\ Unlike

    the other Petitioners, ERCOT is regulated by the PUCT, not FERC. As a

    result, ERCOT is not subject to the particular stringent credit and

    risk management standards set forth in Order 741. As discussed below

    regarding conditions precedent starting on page 103 infra, the

    Commission is proposing to require compliance with the standards of

    Order 741 by all Petitioners, including ERCOT, as a condition to

    issuing the Proposed Exemption.

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

    \111\ FERC Revised Order 741 at 10492-10493.

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

    As discussed in more detail below, particularly in section V.C.,

    the requirements set forth in Order 741 appear to achieve goals similar

    to the regulatory objectives of the Commission's DCO Core Principles.

    FERC regulation 35.47(c) calls for the elimination of unsecured

    credit in the financial transmission rights markets and equivalent

    markets.\112\ This requirement appears to be congruent with Core

    Principle D's requirement that each DCO limit its exposure to potential

    losses from defaults by clearing members. Because, according to FERC,

    risks arising out of the FTR markets are ``difficult to quantify,''

    \113\ eliminating the use of unsecured credit in these markets may help

    avoid the unforeseen and substantial costs for an RTO or ISO in the

    event of a default.\114\ Thus, the requirement set forth in regulation

    35.47(c) appears to advance the objectives of Core Principle D by

    reducing risk and minimizing the effect of defaults through the

    elimination of unsecured credit in the FTR and equivalent markets.

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

    \112\ 18 CFR 35.47(c).

    \113\ Specifically, FERC stated that ``the risk associated with

    the potentially rapidly changing value of FTRs warrants adoption of

    risk management measures, including the elimination of unsecured

    credit. Because financial transmission rights have a longer-dated

    obligation to perform which can run from a month to a year or more,

    they have unique risks that distinguish them from other wholesale

    electric markets, and the value of a financial transmission right

    depends on unforeseeable events, including unplanned outages and

    unanticipated weather conditions. Moreover, financial transmission

    rights are relatively illiquid, adding to the inherent risk in their

    valuation.'' FERC Original Order 741 at 65950.

    \114\ Id. at 65949.

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

    In addition, FERC regulation 35.47(a) requires RTOs and ISOs to

    have tariff provisions that ``[l]imit the amount of unsecured credit

    extended by [an RTO or ISO] to no more than $50 million for each market

    participant.'' \115\ This requirement appears to be congruent with one

    of the regulatory objectives of Core Principle D, as implemented by

    Commission Regulation 39.13, specifically the requirement that each DCO

    limit its exposure to potential losses from defaults by clearing

    members. In capping the use of unsecured credit at $50 million, FERC

    stated its belief that RTOs and ISOs ``could withstand a default of

    this magnitude by a single market participant,'' \116\ thereby limiting

    an RTO's or ISO's exposure to potential losses from defaults by its

    market participants. Thus, it seems both Core Principle D and FERC

    regulation 35.47(a) help protect the markets and their participants

    from unacceptable disruptions, albeit in different ways and to a

    different extent.

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

    \115\ In addition, FERC regulation 35.47(a) states that ``where

    a corporate family includes more than one market participant

    participating in the same [RTO or ISO], the limit on the amount of

    unsecured credit extended by that [RTO or ISO] shall be no more than

    $50 million for the corporate family.'' 18 CFR 35.47(a).

    \116\ FERC Original Order 741 at 65948.

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

    FERC regulation 35.47(b) mandates that RTOs and ISOs have billing

    periods and settlement periods of no more than seven days.\117\ While

    this mandate does not meet the standards applicable to registered

    DCOs,\118\ it supports Core Principle D's requirement that each DCO

    have appropriate tools and procedures to manage the risks associated

    with discharging its responsibilities. In promulgating FERC regulation

    35.47(b), FERC found a shorter cycle necessary to promote market

    liquidity and a necessary change ``to reduce default risk, the costs of

    which would be socialized across market participants and, in certain

    events, of market disruptions that could undermine overall market

    function.'' \119\ Recognizing the correlation between a reduction in

    the length of the ``settlement cycle'' and a reduction in costs

    attributed to a default, FERC stated that shorter cycles reduce the

    amount of unpaid debt left outstanding, which, in

    [[Page 52148]]

    turn, reduces ``the size of any default and therefore reduces the

    likelihood of the default leading to a disruption in the market such as

    cascading defaults and dramatically reduced market liquidity.'' \120\

    Thus, FERC regulation 35.47(b) appears to aid RTOs and ISOs in managing

    the risks associated with their responsibilities, which also appears to

    support Core Principle D's goals.

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

    \117\ 18 CFR 35.47(b).

    \118\ See 17 CFR 39.14(b) (requiring daily settlements).

    \119\ FERC Original Order 741 at 65946.

    \120\ Id.

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

    FERC regulation 35.47(d) requires RTOs and ISOs to ensure the

    enforceability of their netting arrangements in the event of the

    insolvency of a member by doing one of the following: (1) Establish a

    single counterparty to all market participant transactions, (2) require

    each market participant to grant a security interest in the receivables

    of its transactions to the relevant RTO or ISO, or (3) provide another

    method of supporting netting that provides a similar level of

    protection to the market that is approved by FERC.\121\ In the

    alternative, the RTOs and ISOs would be prohibited from netting market

    participants' transactions, and required to establish credit based on

    each market participant's gross obligations. Congruent to the

    regulatory objectives of Core Principles D and G, FERC regulation

    35.47(d) attempts to ensure that, in the event of a bankruptcy of a

    participant, ISOs/RTOs are not prohibited from offsetting accounts

    receivable against accounts payable. In effect, this requirement

    attempts to clarify an ISO's or RTO's legal status to take title to

    transactions in an effort to establish mutuality in the transactions as

    legal support for set-off in bankruptcy.\122\ This clarification, in

    turn, would appear to limit an RTO's or ISO's exposure to potential

    losses from defaults by market participants.

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

    \121\ 18 CFR 35.47(d).

    \122\ See 11 U.S.C. 553; see generally In re SemCrude, L.P., 399

    B.R. 388 (Bankr. D. Del. 2009), aff'd, 428 B.R. 590 (D. Del. 2010).

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

    FERC regulation 35.47(e) limits the time period within which a

    market participant must cure a collateral call to no more than two

    days.\123\ This requirement appears to be congruent with Core Principle

    D's requirement that each DCO limit its exposure to potential losses

    from defaults by clearing members. In Original Order 741, FERC stated

    that a two day time period for curing collateral calls balances (1) the

    need for granting market participants sufficient time to make funding

    arrangements for collateral calls with (2) the need to minimize

    uncertainty as to a participant's ability to participate in the market,

    as well as the risk and costs of a default by a participant. By

    requiring each ISO and RTO to include this two day cure period in the

    credit provisions of its tariff language, FERC regulation 35.47(e)

    appears to both promote the active management of risks associated with

    the discharge of an RTO's or ISO's responsibilities, while at the same

    time limiting the potential losses from defaults by market

    participants.

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

    \123\ 18 CFR 35.47(e).

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

    FERC regulation 35.47(f) imposes minimum market participant

    eligibility requirements that apply consistently to all market

    participants and, as set forth in the preamble to Original Order 741,

    requires RTOs and ISOs to engage in periodic verification of market

    participant risk management policies and procedures.\124\ The

    Commission believes that the requirements set forth in FERC regulation

    35.47(f) appear congruent with some of the regulatory objectives of DCO

    Core Principle C, as implemented by Commission regulation 39.12. In

    general, DCO Core Principle C requires each DCO to establish

    appropriate admission and continuing eligibility standards for members

    of, and participants in, a DCO that are objective, publicly disclosed,

    and permit fair and open access.\125\ In addition, Core Principle C

    also requires that each DCO establish and implement procedures to

    verify compliance with each participation and membership requirement,

    on an ongoing basis.\126\ Similarly, while FERC regulation 35.47(f)

    does not prescribe the particular participation standards that must be

    implemented, as suggested in the preamble to Original Order 741, these

    standards should address ``adequate capitalization, the ability to

    respond to ISO/RTO direction and expertise in risk management'' \127\

    and ensure that proposed tariff language ``is just and reasonable and

    not unduly discriminatory.'' \128\ Moreover, FERC specifically stated

    that these participation standards ``could include the capability to

    engage in risk management or hedging or to out-source this capability

    with periodic compliance verification, to make sure that each market

    participant has adequate risk management capabilities and adequate

    capital to engage in trading with minimal risk, and related costs, to

    the market as a whole.'' \129\ Thus, both DCO Core Principle C and

    Order 741 appear to promote fair and open access for market

    participants as well as impose compliance verification requirements.

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

    \124\ 18 CFR 35.47(f).

    \125\ 7 U.S.C. 7a-1(c)(2)(C).

    \126\ Id.

    \127\ FERC Original Order 741 at 65956.

    \128\ Id.

    \129\ Id.

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

    FERC regulation 35.47(g) requires ISOs and RTOs to specify in their

    tariffs the conditions under which they will request additional

    collateral due to a material adverse change.\130\ FERC, however, noted

    that the examples set forth in each ISO's or RTO's tariffs are not

    exhaustive and that ISOs and RTOs are permitted to use ``their

    discretion to request additional collateral in response to unusual or

    unforeseen circumstances.'' \131\ The Commission believes that the

    requirements set forth in FERC regulation 35.47(g) appear congruent

    with the following DCO Core Principle D requirements: (1) That DCOs

    have appropriate tools and procedures to manage the risks associated

    with discharging its responsibilities, and (2) that DCOs limit their

    exposure to potential losses from defaults by clearing members.\132\ By

    requiring ISOs and RTOs to actively consider the circumstances that

    could give rise to a material adverse change, FERC appears to be

    encouraging RTOs and ISO to actively manage their risks to ``avoid any

    confusion, particularly during times of market duress, as to when such

    a clause may be invoked.'' \133\ Moreover, such clarification could

    prevent a market participant's ability to ``exploit ambiguity as to

    when a market administrator may invoke a `material adverse change,' or

    a market administrator may be uncertain as to when it may invoke a

    `material adverse change,' '' \134\ thereby avoiding potentially

    harmful delays or disruptions that could subject the RTOs and ISOs to

    unnecessary damage.

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

    \130\ 18 CFR 35.47(g).

    \131\ FERC Original Order 741 at 65957.

    \132\ 7 U.S.C. 7a 1(c)(2)(D).

    \133\ FERC Original Order 741 at 65958.

    \134\ Id.

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

    As such, on the basis of the representations contained in the

    Petition, including the fact that, as discussed in further detail

    below, \135\ the Commission is considering whether to require each

    Petitioner, including ERCOT, to comply with, and fully implement, the

    requirements set forth in Order 741 as a prerequisite to the granting

    of a limited 4(c)(6) exemption for the Transactions. The Commission

    seeks comment with respect to this preliminary conclusion.

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

    \135\ See infra text at n. 398.

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

    [[Page 52149]]

    D. DCO Core Principle Analysis

    1. DCO Core Principle A: Compliance With Core Principles

    Core Principle A requires a DCO to comply with each core principle

    set forth in section 5b(c)(2) of the CEA, as well as any requirement

    that the Commission may impose by rule or regulation pursuant to

    section 8a(5) of the Act for a DCO to be registered and maintain its

    registration.\136\ In addition, Core Principle A states that a DCO

    shall have reasonable discretion in establishing the manner by which it

    complies with each core principle subject to any rule or regulation

    prescribed by the Commission.\137\

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

    \136\ 7 U.S.C. 7a-1(c)(2)(A)(i).

    \137\ 7 U.S.C. 7a-1(c)(2)(A)(ii).

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

    Petitioners represent that, although they are principally regulated

    by FERC and PUCT and that there are differences between Petitioners and

    registered DCOs, Petitioners' practices are consistent with the core

    principles for DCOs.\138\ Petitioners represent that, though their

    methods are different than those employed by a registered DCO, their

    practices achieve the goals of, and are consistent with, the policies

    of the Act.\139\ Based upon Petitioners' representations and the core

    principle discussions below, and in the context of the Petitioners'

    activities with respect to the Transactions within the scope of this

    Proposed Exemption, Petitioners' practices appear congruent with, and

    to accomplish sufficiently, the regulatory objectives of each DCO core

    principle. The Commission seeks comment with respect to this

    preliminary conclusion.

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

    \138\ Petition Attachments at 1.

    \139\ Id.

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

    2. DCO Core Principle B: Financial and Operational Resources

    Core Principle B requires a DCO to have adequate financial,

    operational, and managerial resources to discharge each of its

    responsibilities.\140\ In addition, a DCO must have financial resources

    that, at a minimum, exceed the total amount that would: (i) Enable the

    DCO to meet its financial obligations to its clearing members

    notwithstanding a default by the clearing member creating the largest

    financial exposure for the DCO in extreme but plausible market

    conditions; and (ii) enable the DCO to cover its operating costs for a

    period of 1 year, as calculated on a rolling basis.\141\

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

    \140\ 7 U.S.C. 7a-1(c)(2)(B)(i).

    \141\ 7 U.S.C. 7a-1(c)(2)(B)(ii).

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

    a. Financial Resources

    Petitioners represent that they maintain sufficient financial

    resources to meet their financial obligations to their members

    notwithstanding a default by the member creating the largest financial

    exposure for that organization in extreme but plausible market

    conditions.\142\ As an initial matter, Petitioners apply the defaulting

    market participant's collateral to the outstanding obligation.\143\

    Further, if the collateral is inadequate to cover the obligation,

    Petitioners' tariffs permit them to charge the loss to non-defaulting

    market participants.\144\ For some Petitioners, other resources are

    available. For example, one Petitioner represents that it has the

    ability to draw upon its working capital fund and/or its revolving

    credit facility to ensure that market participants are paid in

    full.\145\ Another Petitioner states that defaults are socialized after

    realizing any collateral specific to the defaulting participant, claims

    paid by third-party default insurance, funds from accrued collected

    penalties for Late Payment Accounts, and, for liquidity purposes,

    third-party financing.\146\

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

    \142\ See Petition Attachments at 3-20.

    \143\ See, e.g., id. at. 4, 8-9, 10, 15, 20.

    \144\ See id. at 4, 8, 10, 13, 15, 20.

    \145\ See id. at 15. The Commission notes Regulation 39.11(b)

    includes the following as financial resources eligible to satisfy a

    DCO's requirement to have sufficient financial resources to cover a

    default by the member creating the largest financial exposure: (a)

    Margin, (b) the DCO's own capital, (c) guaranty fund deposits, (d)

    default insurance, (e) potential assessments for additional guaranty

    fund contributions, if permitted by the DCO's rules, and (f) any

    other financial resource deemed acceptable by the Commission. See 17

    CFR 39.11(b)(1). The Commission notes that the revolving credit

    facility cited by NYISO would not satisfy the financial resource

    requirement, but would be considered in determining liquidity. See

    17 CFR 39.11(e)(1)(iii).

    \146\ See Petition Attachments at 10-11.

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

    In the event that a default occurs and there is inadequate

    collateral for a particular participant, the Petitioners' represent

    that the deficiencies would be addressed by mutualization among the

    non-defaulting participants to whom the Petitioner would otherwise be

    obligated, allocated pursuant to a pre-determined formula that is

    included in each Petitioner's tariff.\147\ This process is often

    referred to as ``short-paying.'' \148\ Once the amount of the default

    is deemed to be uncollectible [by the Petitioner], the short-pay would,

    in some cases, be ``uplifted'' or ``socialized'' across the market,

    with the losses reallocated among all non-defaulting participants.\149\

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

    \147\ See, e.g., id. at 9, 13.

    \148\ See, e.g., id. at 15.

    \149\ See, e.g., id. at 9, 13.

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

    On the basis of these representations, the Commission believes that

    each Petitioner's financial resource requirements appear to be

    congruent with, and to accomplish sufficiently, the regulatory

    objectives of DCO Core Principle B in the context of Petitioners'

    activities with respect to the Transactions. The Commission seeks

    comment with respect to this preliminary conclusion.

    b. Operational Resources

    Each Petitioner represents that it has sufficient operational

    resources to cover its operating costs through a charge allocated to

    its participants and set forth in its Tariffs, which are approved by

    FERC and PUCT, as applicable.\150\ Petitioners represent that the

    charge is based on expected costs for the following year.\151\ Under

    the regulatory structure in the wholesale electric industry, market

    participants are obligated to pay the fees required by the

    Petitioners,\152\ and are thus, in a sense, a ``captive audience.''

    Moreover, since market participant defaults are mutualized amongst the

    non-defaulting participants,\153\ Petitioners represent that such

    defaults would not impair their ability to cover their operating costs,

    because the Petitioners would continue to collect sufficient funds from

    all other market participants to pay such operating expenses.\154\

    Therefore, these policies and procedures appear to be consistent with,

    and to accomplish sufficiently, the regulatory objectives of DCO Core

    Principle B in the context of the Transactions. The Commission seeks

    comment with respect to this preliminary conclusion.

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

    \150\ See id. at 3-20. Some Petitioners state that the charge is

    allocated to their market participants based on the level of their

    usage of the Petitioner's services or on the volume of their market

    transactions. See, e.g., id. at 4, 13, and 20.

    \151\ See, e.g., id. at 4, 10, 16.

    \152\ See, e.g., id. at 16, 20.

    \153\ See id. at 4-20.

    \154\ See id. at 16.

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

    c. Managerial Resources

    Each of the Petitioners represents that it has adequate managerial

    resources to discharge its responsibilities as an organized wholesale

    electricity market.\155\ The Commission notes that FERC Order No. 888

    sets forth the principles used by FERC to assess ISO proposals and

    requires that ISOs have appropriate incentives for efficient management

    and administration.\156\ This requirement provides that ISOs should

    procure the services needed for such management and administration in

    an open competitive market, similar to how Core Principle B requires a

    DCO to possess managerial resources necessary

    [[Page 52150]]

    to discharge each responsibility of the DCO. Similarly, with respect to

    ERCOT, PUCT's Substantive Rules require that ERCOT's Enterprise Risk

    Management Group has adequate resources to perform its functions, which

    includes assessing market participant creditworthiness.\157\

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

    \155\ See id. at 3-20.

    \156\ See generally FERC Order 888 at 21540.

    \157\ P.U.C. SUBST. R. 25.361(b). See also Petition Attachments

    at 7-8.

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

    In addition, FERC Order No. 2000 requires that RTOs have an open

    architecture so that the RTO and its members have the flexibility to

    improve their organizations in the future in terms of structure,

    geographic scope, market support and operations in order to adapt to an

    environment that is rapidly changing and meet market needs.\158\

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

    \158\ Id. at 502.

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

    Petitioners represent that they maintain the staff and labor

    necessary to fulfill their obligations and responsibilities, and only

    employ persons who are appropriately qualified, skilled and experienced

    in their respective trades or occupations \159\ Based on these

    representations, the Petitioners managerial resources appear to be

    consistent with, and to accomplish sufficiently, the regulatory

    objectives of DCO Core Principle B in the context of the Transactions.

    The Commission seeks comment with respect to this preliminary

    conclusion.

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

    \159\ See Petition Attachments at 3-20.

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

    3. DCO Core Principle C: Participant and Product Eligibility

    DCO Core Principle C requires each DCO to establish appropriate

    admission and continuing eligibility standards for member and

    participants (including sufficient financial resources and operational

    capacity), as well as to establish procedures to verify, on an ongoing

    basis, member and participant compliance with such requirements.\160\

    The DCO's participant and membership requirements must also be

    objective, be publicly disclosed, and permit fair and open access.\161\

    In addition, Core Principle C obligates each DCO to establish

    appropriate standards for determining the eligibility of agreements,

    contracts, or transactions submitted to the DCO for clearing.\162\

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

    \160\ 7 U.S.C. 7a-1(c)(2)(C).

    \161\ Id.

    \162\ Id. As set forth above, the exemption that would be

    provided by the Proposed Exemption would be available only with

    respect to the transactions specifically delineated therein.

    Accordingly, the DCO Core Principle C analysis is limited to a

    discussion of the Petitioners' participant eligibility requirements.

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

    a. FERC Credit Policy Requirements

    As discussed above, the FERC Credit Policy appears to impose

    participant eligibility requirements that are consistent with

    regulatory objectives of DCO Core Principle C.\163\ In the FERC Credit

    Policy, FERC notes that ``[h]aving minimum criteria in place can help

    minimize the dangers of mutualized defaults posed by inadequately

    prepared or under-capitalized participants.'' \164\ Specifically, FERC

    regulation 35.47(f) requires organized wholesale electric markets to

    adopt tariff provisions that require minimum market participant

    eligibility criteria.\165\ Though the regulation does not prescribe the

    particular participation standards that must be implemented; in the

    rule's preamble, FERC suggests that such standards should address

    ``adequate capitalization, the ability to respond to ISO/RTO direction

    and expertise in risk management.'' \166\ Regarding risk management,

    FERC further suggests that minimum participant eligibility criteria

    should ``include the capability to engage in risk management or hedging

    or to out-source this capability with periodic compliance

    verification.'' \167\ Although market participant criteria may vary

    among different types of market participants, all market participants

    must be subject to some minimum criteria.\168\ An RTO or ISO subject to

    FERC's supervision is obligated to establish market participant

    criteria, even if the RTO or ISO applies vigorous standards in

    determining the creditworthiness of its market participants.\169\

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

    \163\ See, supra n. 127 and accompanying text.

    \164\ FERC Original Order 741 at 665955.

    \165\ 18 CFR 35.47(f).

    \166\ FERC Original Order 741 at 665956.

    \167\ Id.

    \168\ Although the FERC Credit Policy states that FERC ``directs

    that [the market participation criteria] apply to all market

    participants rather than only certain participants,'' FERC clarified

    this comment in its Order of Rehearing by stating that its intent

    ``was that there be minimum criteria for all market participants and

    not that all market participants necessarily be held to the same

    criteria'' based upon, for example, the size of the participant's

    positions. See FERC Revised Order 741 at n. 43. This approach

    appears to be consistent with Commission regulation 39.12, which

    implements Core Principle C and requires that participation

    requirements for DCO members be risk-based.

    \169\ See FERC Original Order 741 at 665956 (noting that ``An

    ISO or RTO's ``ability to accurately assess a market participant's

    creditworthiness is not infallible'' and ``[w]hile an analysis of

    creditworthiness may capture whether the market participant has

    adequate capital, it may not capture other risks, such as whether

    the market participant has adequate expertise to transact in an RTO/

    ISO market.'').

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

    Because the minimum participation criteria that will be adopted by

    Petitioners will be included in their respective tariffs, which are

    publicly available on each Petitioner's Web site, such criteria will be

    publicly disclosed. In addition, FERC notes that it reviews proposed

    tariff language ``to ensure that it is just and reasonable and not

    unduly discriminatory,'' \170\ which practice would appear to be

    consistent with DCO Core Principle C's directive that market

    participation standards permit fair and open access.

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

    \170\ Id.

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

    b. The Petitioners' Representations

    Each Petitioner represents that it either has adopted minimum

    participant eligibility criteria or is in the process of establishing

    minimum participant eligibility criteria \171\ that include

    capitalization requirements (which may provide for the posting of

    additional collateral by less-well-capitalized members). The

    capitalization requirements appear to be risk-based in that the

    requirements may vary by type of market and/or type or size of

    participant.\172\ In addition, some Petitioners require that

    participants in certain markets satisfy specified credit

    requirements,\173\ as well as standards related to risk

    management,\174\ training and testing,\175\ and the disclosure of

    material litigation or regulatory sanctions, bankruptcies, mergers,

    acquisitions, and activities in the wholesale electricity market.\176\

    Petitioners also represent that they impose operational capability

    requirements,\177\ and either maintain tariffs, or have filed proposed

    amendments to their existing tariffs, that incorporate requirements

    that would enable Petitioners to periodically verify the risk

    management standards and procedures of market participants.\178\ This

    verification may be required on either a random basis or based upon

    identified risks. Furthermore, some Petitioners require attestations of

    continued compliance with other elements of their participation

    eligibility criteria.\179\

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

    \171\ See Petition Attachments at 22-54.

    \172\ See id. at 22-54.

    \173\ See, e.g., id. at 22 (CAISO requires CRR holders to have a

    minimum amount of available credit in order to participate in a CRR

    auction).

    \174\ See id. at 23, 35, 44-45.

    \175\ See id. at 22, 35, 44.

    \176\ See id. at 33.

    \177\ See id. at 23, 37-38, 39, 48.

    \178\ See id. at 23, 35-36, 38, 44-45, 49.

    \179\ For example, CAISO requires market participants to attest

    annually that they satisfy CAISO's minimum participation

    requirements related to capitalization, training and the operational

    capability to comply with CAISO's direction. See id. at 23.

    Similarly, ISO NE requires that each market participant annually

    submit a certificate that attests that the participant has

    procedures to effectively communicate with ISO NE and that it has

    trained personnel related to its participation in the relevant

    markets. See id. at 35.

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

    [[Page 52151]]

    ERCOT asserts that it is in the process of developing new

    eligibility requirements through its stakeholder process, that, as

    proposed, would require relevant market participants to (i) satisfy

    minimum capitalization requirements or post additional security, (ii)

    have appropriate expertise in the market, (iii) maintain a risk

    management framework appropriate to the ERCOT markets in which it

    transacts, (iv) have appropriate operational capability to respond to

    ERCOT direction, and (v) have the market participant's officer certify,

    on an annual basis, that the participant eligibility requirements are

    met.\180\

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

    \180\ See Petition Attachments at 27. See also FERC Order 741

    Implementation Chart filed by petitioners as a supplement to the

    Petition (herein after, ``FERC Order 741 Implementation Chart''),

    available at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappfercchart.pdf.

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

    It appears from the foregoing that Petitioners' arrangements with

    respect to participant eligibility requirements are (or will be)

    congruent with, and sufficiently accomplish, the regulatory objectives

    of Core Principle C in the context of Petitioners' activities with

    respect to the Transactions. The Commission seeks comment with respect

    to this preliminary conclusion.

    4. DCO Core Principle D: Risk Management

    DCO Core Principle D requires each DCO to demonstrate the ability

    to manage the risks associated with discharging the responsibilities of

    a DCO through the use of appropriate tools and procedures.\181\ As

    amended by the Dodd-Frank Act, Core Principle D also requires a DCO to:

    (1) Measure and monitor its credit exposures to each clearing member

    daily; (2) through margin requirements and other risk control

    mechanisms, limit its exposure to potential losses from a clearing

    member default; (3) require sufficient margin from its clearing members

    to cover potential exposures in normal market conditions; and (4) use

    risk-based models and parameters in setting margin requirements that

    are reviewed on a regular basis.\182\

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

    \181\ 7 U.S.C. 7a-1(c)(2)(D).

    \182\ 7 U.S.C. 7a-1(c)(2)(D).

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

    a. Risk Management Framework

    Each Petitioner represents that it has established policies and

    procedures designed to minimize risk.\183\ As part of the tools and

    procedures that RTOs and ISOs use to manage the risks associated with

    their activities, FERC regulation 35.47(b) mandates that RTOs and ISOs

    have billing periods and settlement periods of no more than seven

    days.\184\ As discussed above, FERC found a shorter cycle necessary to

    promote market liquidity and a necessary change ``to reduce default

    risk, the costs of which would be socialized across market participants

    and, in certain events, of market disruptions that could undermine

    overall market function.'' \185\ Recognizing the correlation between a

    reduction in the ``settlement cycle'' and a reduction in costs

    attributed to a default, FERC stated that shorter cycles reduce the

    amount of unpaid debt left outstanding, which, in turn, reduces ``the

    size of any default and therefore reduces the likelihood of the default

    leading to a disruption in the market such as cascading defaults and

    dramatically reduced market liquidity.'' \186\ Most of the Petitioners

    represent that they have, or expect to have, final tariffs in place

    that limit billing periods and settlement periods to no more than seven

    days.\187\

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

    \183\ See Petition Attachments at 56-92.

    \184\ 18 CFR 35.47(b).

    \185\ FERC Original Order 741 at 65946.

    \186\ Id.

    \187\ See FERC Order 741 Implementation Chart. As stated above,

    ERCOT is not required, by law, to comply with Order 741.

    Nonetheless, Petitioners represent that ERCOT will shorten its

    payment and settlement cycle to no more than 15 days. See infra nn.

    212-213 and accompanying text.

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

    In addition, an ISO's or RTO's participation standards can include

    the supervision of a market participant's risk management program.\188\

    As discussed in section V.C., FERC Order 741 states that an ISO or RTO

    could include periodic verification of market participant's capability

    to engage in risk management or hedging or to out-source that

    capability ``to make sure each market participant has adequate risk

    management capabilities and adequate capital to engage in trading with

    minimal risk, and related costs, to the market as a whole.'' \189\ Each

    Petitioner regulated by FERC represents that it either has a

    verification program in place or has submitted necessary Tariffs for

    approval to establish a verification program.\190\ ERCOT also has

    proposed participant eligibility requirements that would subject

    participants' risk management framework to verification by ERCOT,

    unless that framework has been deemed sufficient for transacting in

    another U.S. RTO or ISO market in accordance with a FERC-approved

    tariff or in accordance with the Federal Reserve Bank Holding Company

    Supervision Manual. The proposed requirements currently are under

    review in the ERCOT stakeholder process.\191\ On the basis of the

    representations contained in the Petition, it appears that these

    policies and procedures, are (or will be, assuming they are

    implemented) congruent with, and will sufficiently accomplish, the

    regulatory objectives of DCO Core Principle D. The Commission seeks

    comment with respect to this conclusion.

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

    \188\ See n. 126 and accompanying text.

    \189\ See FERC Original Order 741 at 65946.

    \190\ See FERC Order 741 Implementation Chart at 11-12.

    \191\ Id.

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

    b. Measurement and Monitoring of Credit Exposure

    Petitioners represent that their risk management procedures

    measure, monitor, and mitigate their credit exposure to market

    participants.\192\ In addition, most Petitioners state that they

    calculate credit exposure daily.\193\ It appears that, for the most

    part, given the unique characteristics of the wholesale electric

    markets, and particularly those of the FTR and equivalent markets, the

    practices specified in the Petition appear congruent with, and to

    accomplish sufficiently, DCO Core Principle D's objective that a DCO

    measure its credit exposure to each of its clearing members. The

    Commission seeks comment with respect to this preliminary conclusion,

    including comment on whether any different or additional practices

    should be implemented as a condition of issuance of the Proposed

    Exemption.

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

    \192\ See Petition Attachments at 56-92.

    \193\ See id. Petitioners further represent that the value of

    exposure to FTRs is determined by the price of physical electricity

    during the days and hours for which the FTR is effective. See id. In

    addition, petitioners represent that CAISO- updates credit exposures

    for CRR's that are expected to generate a charge to the CRR holder

    on at least a monthly basis. See id. at 59-60. But see id. at 84-85

    (representing that PJM calculates credit exposure for FTRs on a

    monthly basis because daily measurement and intraday monitoring of

    credit exposure is not practical for FTRs due to the low liquidity

    and other unique attributes of the FTR markets).

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

    c. Unsecured Credit

    Petitioners represent that a market participant is required to

    obtain unsecured credit lines from an RTO or ISO (limited as discussed

    below) and/or post financial security that is sufficient to meet the

    participant's estimated aggregate liability \194\ or financial

    obligations.\195\ FERC regulation 35.47(a)

    [[Page 52152]]

    requires RTOs and ISOs to have tariff provisions that ``[l]imit the

    amount of unsecured credit extended by [an RTO or ISO] to no more than

    $50 million for each market participant.'' As mentioned above,\196\ in

    capping the use of unsecured credit at $50 million, FERC stated its

    belief that RTOs and ISOs ``could withstand a default of this magnitude

    by a single market participant,'' therein limiting an RTO's or ISO's

    exposure to potential losses from defaults by its market participants.

    Petitioners represent that they have tariff provisions that comply with

    FERC regulation 35.47(a).\197\ Moreover, FERC regulation 35.47(c)

    prohibits the use of unsecured credit in the FTR markets and equivalent

    markets because, according to FERC, risks arising out of the FTR

    markets are ``difficult to quantify,'' and eliminating the use of

    unsecured credit in these markets avoids the unforeseen and substantial

    costs for an RTO or ISO in the event of a default. Petitioners state

    that they have in place or have proposed tariff revisions to comply

    with FERC regulation 35.47(c).\198\

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

    \194\ A participant's estimated credit exposure to an RTO or ISO

    is called such participant's estimated aggregate liability or

    ``EAL.'' The EAL calculation is based on a number of variables,

    which vary among Petitioners. See id. at 56-92.

    \195\ The Commission notes that NYISO establishes separate

    credit requirements for each of its product and service categories

    and requires each Market Participant to maintain financial security

    (e.g., cash, letter of credit, or surety bond) that is sufficient at

    all times to meet each separate credit requirement. See id. at 84.

    \196\ See supra at n. 115.

    \197\ See FERC Order 741 Implementation Chart at 2-3.

    \198\ See id. at 4-5.

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

    Since FERC regulations 35.47(a) and 35.47(c) appear to manage risk

    and limit an RTO's or ISO's exposure to potential losses from a market

    participant, these requirements would appear to be congruent with, and,

    assuming Petitioners' proposed tariff revisions are implemented, to

    accomplish sufficiently, the regulatory objectives of Core Principle D

    in the context of Petitioners' activities with respect to the

    Transactions. The Commission seeks comment with respect to this

    preliminary conclusion.

    d. Limiting Exposure to Potential Losses Through Use of Risk Control

    Mechanisms and Grace Period To Cure

    Each Petitioner represents that it requires a market participant to

    post additional financial security (collateral) whenever the

    participant's estimated aggregate liability or credit exposure equals

    or exceeds that participant's unsecured credit and posted financial

    security.\199\ Moreover, FERC regulation 35.47(e) limits the time

    period by which a market participant must cure a collateral call to no

    more than two days. In Original Order 741, FERC stated that a two day

    time period for curing collateral calls balances the need for granting

    market participants sufficient time to make funding arrangements for

    collateral calls with the need to minimize uncertainty as to a

    participant's ability to participate in the market as well as the risk

    and costs of a default by a participant. By requiring each RTO and ISO

    to include this two day cure period in its tariff provisions, FERC

    regulation 35.47(e) appears to both promote the active management of

    risks associated with the discharge of an RTO's or ISO's

    responsibilities, while at the same time limiting the potential losses

    from defaults by market participants. Petitioners represent that each

    of them has implemented this requirement.\200\ In the event that a

    market participant fails to post additional financial security in

    response to a request from an RTO or ISO, or fails to do so within the

    requisite two day period, Petitioners represent that they have a wide

    array of remedies available, including bringing an enforcement action

    and assessing a variety of sanctions against the market

    participant.\201\ On the basis of these representations, it appears

    that the requirements to post additional financial security and cure

    collateral calls in no more than two days help Petitioners manage risk

    and limit their exposure against potential losses from a market

    participant. These requirements appear to be congruent with, and to

    accomplish sufficiently, the regulatory objectives of DCO Core

    Principle D in the context of Petitioners' activities with respect to

    the Transactions. The Commission seeks comment with respect to this

    preliminary conclusion.

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

    \199\ See Petition Attachments at 56-92.

    \200\ See FERC Order 741 Implementation Chart at 7.

    \201\ See, e.g., Petition Attachments at 56-57, 69-70, 76-77.

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

    e. Calls for Additional Collateral due to a Material Adverse Change

    FERC regulation 35.47(g) requires ISOs and RTOs to specify in their

    tariffs the conditions under which they will request additional

    collateral due to a material adverse change. However, as stated by

    FERC, this list of conditions is not meant to be exhaustive, and ISOs

    and RTOs are permitted to use ``their discretion to request additional

    collateral in response to unusual or unforeseen circumstances.'' \202\

    Petitioners represent that they have tariffs that comply with these

    requirements.\203\ Since Petitioners do not appear to be limited in

    their ability to call for additional collateral in unusual or

    unforeseen circumstances, FERC regulation 35.47(g) appears to support

    some of DCO Core Principle D's objectives, namely that a DCO have

    appropriate tools and procedures to manage the risks associated with

    discharging its responsibilities, and that a DCO limit its exposure to

    potential losses from defaults by clearing members. FERC has noted that

    information regarding when an ISO or RTO will request additional

    collateral due to a material adverse change may help to ``avoid any

    confusion, particularly during times of market duress, as to when such

    a clause may be invoked,'' \204\ while at the same time preventing a

    market participant from ``exploit[ing] ambiguity as to when a market

    administrator may invoke a `material adverse change.''' \205\ As such,

    this policy appears to help avoid potentially harmful delays or

    disruptions that could subject the RTOs and ISOs to unnecessary damage,

    and thus is congruent with, and to accomplish sufficiently, the

    regulatory objectives of Core Principle D in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

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

    \202\ FERC Original Order 741 at 65957.

    \203\ See FERC Order 741 Implementation Chart.

    \204\ FERC Original Order 741 at 65958.

    \205\ Id. at 65958.

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

    f. Margin Requirement and Use of Risk-Based Models and Parameters in

    Setting Margin

    As discussed previously, Petitioners represent that each Petitioner

    requires that market participants maintain unsecured credit and/or post

    financial security (collectively, ``margin'') that is sufficient to

    meet their estimated aggregate liability or financial obligations at

    all times,\206\ although estimated aggregate liability calculations

    appear to vary among Petitioners and among products within a particular

    Petitioner's markets.\207\ As represented by Petitioners, these

    practices seem to be congruent with, and to accomplish sufficiently,

    the regulatory objectives of DCO Core Principle D in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks

    [[Page 52153]]

    comment with respect to this preliminary conclusion.

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

    \206\ See Petition Attachments at 56-92.

    \207\ For example, one Petitioner states that its margin

    requirements are calculated using historical data and estimates of

    potential future exposure for the purposes of minimizing default

    exposure, but notes that the mechanics of the potential future

    exposure estimates ``vary depending on the market.'' See id. at 77.

    It maintains customized approaches to margining particular market

    activity, including separate and distinct margining models for the

    FTR Market and the Forward Capacity Market (both the buy side and

    the sell side). Id. at 77-78 Similarly, another Petitioner states

    that its credit requirements are derived from historical data from

    the past three years for FTRs, but from the past one year for other

    transactions. Id. at 91-92.

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

    g. Ability To Offset Market Obligations

    FERC regulation 35.47(d) requires RTOs and ISOs to either (1)

    establish a single counterparty to all market participant transactions,

    (2) require each market participant to grant a security interest in the

    receivables of its transactions to the relevant RTO or ISO, or (3)

    provide another method of supporting netting that provides a similar

    level of protection to the market that is approved by FERC. Otherwise,

    RTOs and ISOs are prohibited from netting market participants'

    transactions and required to establish credit based on market

    participants' gross obligations. FERC regulation 35.47(d), which

    attempts to ensure that, in the event of a bankruptcy, ISOs and RTOs

    are not prohibited from offsetting accounts receivable against accounts

    payable, is congruent with the regulatory objectives of Core Principle

    D. In effect, this requirement appears to attempt to clarify an ISO's

    or RTO's legal status to take title to transactions in an effort to

    establish mutuality in the transactions as legal support for set-off in

    bankruptcy.\208\ This clarification, in turn, would seem to limit an

    RTO's or ISO's exposure to potential losses from defaults by market

    participants.

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

    \208\ See supra n. 122.

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

    Petitioners have represented that they either are, or plan on

    becoming, central counterparties.\209\ Though there appears to be

    strong support for the proposition that the central counterparty

    structure \210\ would give rise to enforceable rights of setoff of the

    central counterparty, the Commission believes it would be in the public

    interest to have further clarity regarding whether a Petitioner's

    chosen approach to comply with FERC regulation 35.47(d) grants

    sufficient certainty regarding the ability to enforce setoff rights. As

    such, the Commission proposes that, as a prerequisite to the granting

    of the 4(c)(6) request, each Petitioner must submit a well-reasoned

    legal memorandum from, or a legal opinion of, outside counsel that, in

    the Commission's sole discretion, provides the Commission with adequate

    assurance that the approach selected by the Petitioner will in fact

    provide the Petitioner with set-off rights in a bankruptcy proceeding.

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

    \209\ See FERC Order 741 Implementation Chart at 5-6.

    \210\ A central counterparty is, within a particular market, the

    buyer to every seller and the seller to every buyer. See Principles

    for Financial Market Infrastructures ] 1.13 (CPSS-IOSCO 2012).

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

    Subject to this condition, compliance with FERC regulation 35.47(d)

    appears to be congruent with, and to accomplish sufficiently, Core

    Principle D's regulatory objectives in the context of Petitioners'

    activities with respect to the Transactions. The Commission seeks

    comment with respect to this preliminary conclusion. The Commission

    also seeks comment with respect to the proposed prerequisite of

    assurance that the Petitioners can in fact exercise setoff rights in

    the event of the bankruptcy of a participant.

    5. DCO Core Principle E: Settlement Procedures

    Among the requirements set forth by Core Principle E are the

    requirements that a DCO (a) have the ability to complete settlements on

    a timely basis under varying circumstances, and (b) maintain an

    adequate record of the flow of funds associated with each transaction

    that the DCO clears.\211\

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

    \211\ 7 U.S.C. 7a-1(d)(92)(i)-(ii).

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

    Petitioners represent that they have policies and procedures that

    contain detailed procedures regarding data and record-keeping, and

    that, with the exception of ERCOT, they have, or will soon have,

    billing periods and settlement periods of no more than seven days each

    (for a total of 14 days).\212\ ERCOT is in the process of implementing

    changes by which the weighted average billing and settlement cycle will

    be less than 15 days.\213\ While this approach does not meet the

    standards applicable to registered DCOs,\214\ it appears to be

    congruent with, and to accomplish sufficiently, the regulatory

    objectives of DCO Core Principle E in the context of Petitioners'

    activities with respect to the Transactions. The Commission seeks

    comment on this preliminary conclusion.

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

    \212\ See Petition Attachments at 94-103.

    \213\ Under these arrangements, the time between Operating Day

    and payment will be 13 days or less for all transactions in the Day-

    Ahead Market, and will be 15 days or less for 90% of transactions in

    the Real Time Market. See id. at 96.

    \214\ See 17 CFR 39.14(b) (requiring daily settlements).

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

    6. DCO Core Principle F: Treatment of Funds

    Core Principle F requires a DCO to have standards and procedures

    designed to protect and ensure the safety of member and participant

    funds, to hold such funds in a manner that would minimize the risk of

    loss or delay in access by the DCO to the funds, and to invest such

    funds in instruments with minimal credit, market, and liquidity

    risks.\215\

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

    \215\ 7 U.S.C. 7a-1(c)(2)(F).

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

    Petitioners represent that they have tariff provisions and related

    governing documents that accomplish the regulatory goals of DCO Core

    Principle F.\216\ For example, CAISO represents that its tariffs

    require it to maintain specified types of separate accounts for funds

    it receives or holds, including segregated and aggregated market

    clearing accounts.\217\ Similarly, MISO represents that its tariffs

    require MISO to hold all monies deposited by its participants (whom

    MISO refers to as ``Tariff Customers'') as financial assurance in a

    separate, interest-bearing money market account with one-hundred

    percent of the interest earned accruing to the benefit of the Tariff

    Customer.\218\ The other Petitioners represent that they have

    appropriate investment policies or practices, such as segregation

    requirements and/or limitations on investment options.\219\ As

    represented by Petitioners, these practices appear congruent with, and

    to accomplish sufficiently, the regulatory objectives of DCO Core

    Principle F in the context of Petitioners' activities with respect to

    the Transactions. The Commission seeks comment with respect to this

    preliminary conclusion.

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

    \216\ See Petition Attachments at 105-110.

    \217\ See id. at 105.

    \218\ See id. at 108.

    \219\ See id. at 105-110.

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

    7. DCO Core Principle G: Default Rules and Procedures

    Core Principle G requires a DCO to have rules and procedures

    designed to allow for the efficient, fair, and safe management of

    events when members or participants become insolvent or otherwise

    default on their obligations to the DCO.\220\ Core Principle G also

    requires a DCO to clearly state its default procedures, make publicly

    available its default rules, and ensure that it may take timely action

    to contain losses and liquidity pressures and to continue meeting each

    of its obligations.\221\

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

    \220\ 7 U.S.C. 7a-1(c)(2)(G)(i).

    \221\ 7 U.S.C. 7a-1(c)(2)(G)(ii).

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

    a. General Default Procedures

    Each Petitioner represents that it has procedures in its tariffs or

    other governing documents that address events surrounding the

    insolvency or default of a market participant.\222\ For example,

    Petitioners represent that such documents identify events of default

    (e.g. failure to make payments when due, failure to support an

    estimated liability with adequate security, events of insolvency, and

    failure to perform other obligations under the tariff), describe the

    cure period associated with

    [[Page 52154]]

    an event of default, and describe the actions to be taken in the event

    of default and/or detail each Petitioners' remedies--which may include,

    among other things, termination of services and/or agreements,

    initiation of debt collection procedures and levying financial

    penalties.\223\ As detailed above, in the event that the remedies

    outlined in each Petitioner's governing documents are insufficient to

    timely cure a default, Petitioners have the right to socialize losses

    from the default among other market participants by, for example,

    ``short-paying'' such other participants.\224\

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

    \222\ See generally Petition Attachments at 112-126.

    \223\ Id.

    \224\ See supra at n. 149 and accompanying text. See also, e.g.,

    Petition at 71.

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

    b. Setoff

    Generally speaking, it is a well-established tenet of clearing that

    a DCO acts as the buyer to every seller and as the seller to every

    buyer, thereby substituting the DCO's credit for bilateral counter-

    party risk. As such, when a DCO is involved, there is little question

    as to the identity of a counterparty to a given transaction. However,

    because ISOs and RTOs can act as agents for their participants, there

    could be ambiguity as to the identity of a counterparty to a given

    transaction. As a result, in the event of a bankruptcy of a market

    participant and in the event of a lack of the mutuality of obligation

    required by the Bankruptcy Code,\225\ an ISO or RTO may be liable to

    pay a bankrupt market participant for transactions in which that

    participant is owed funds, without the ability to offset amounts owed

    by that participant with respect to other transactions. Stated

    differently, although the defaulting market participant may owe money

    to the ISO or RTO, if the ISO or RTO also owes money to such

    participant, the ISO or RTO may be required to pay the defaulting

    participant the full amount owed without being able to offset the

    amounts owed by that participant to the ISO or RTO, which latter

    amounts may be relegated to claims in the bankruptcy proceedings. As

    more fully described in section V.D.4.g., the requirement that

    Petitioners provide memoranda or opinions of counsel as discussed

    therein is intended to address this issue.

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

    \225\ See 11 U.S.C. 553.

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

    The foregoing arrangements appear congruent to, and to accomplish

    sufficiently, the regulatory objectives of DCO Core Principle G in the

    context of Petitioners' activities with respect to the Transactions.

    The Commission seeks comment with respect to this preliminary

    conclusion.

    8. Core Principle H: Rule Enforcement

    Core Principle H requires a DCO to (1) maintain adequate

    arrangements and resources for the effective monitoring and enforcement

    of compliance with its rules and for resolution of disputes, (2) have

    the authority and ability to discipline, limit, suspend, or terminate a

    clearing member's activities for violations of those rules, and (3)

    report to the Commission regarding rule enforcement activities and

    sanctions imposed against members and participants.\226\

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

    \226\ 7 U.S.C. 7a-1(c)(2)(H).

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

    Each Petitioner represents that it maintains tariffs or procedures

    or is subject to a regulatory framework that accomplishes the

    regulatory goals of DCO Core Principle H. Petitioners have, e.g., the

    power to take a range of actions against participants that fail to pay,

    pay late, or fail to post financial security. \227\

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

    \227\ See generally, Petition Attachments at 128-150.

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

    Based on Petitioners' representations, it appears that these

    practices are congruent with, and sufficiently accomplish, the

    regulatory objectives of DCO Core Principle H in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    9. DCO Core Principle I: System Safeguards

    Core Principle I requires a DCO to demonstrate that: (1) It has

    established and will maintain a program of oversight and risk analysis

    to ensure that its automated systems function properly and have

    adequate capacity and security, and (2) it has established and will

    maintain emergency procedures and a plan for disaster recovery and will

    periodically test backup facilities to ensure daily processing,

    clearing and settlement of transactions.\228\ Core Principle I also

    requires that a DCO establish and maintain emergency procedures, backup

    facilities, and a plan for disaster recovery that allows for the timely

    recovery and resumption of the DCO's operations and the fulfillment of

    each of its obligations and responsibilities.\229\

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

    \228\ 7 U.S.C. 7a-1(c)(2)(I)(i)-(ii).

    \229\ 7 U.S.C. 7a-1(c)(2)(I)(iii).

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

    Petitioners represent that they have policies and procedures that

    accomplish the regulatory goals of DCO Core Principle I,\230\ albeit in

    a manner that is somewhat different than the way in which a DCO

    complies with DCO Core Principle I. This is because Petitioners are

    also responsible for managing power reliably and, thus, require

    additional operational safeguards to specifically address that

    function. For example, NYISO is subject to reliability rules

    established by the New York State Reliability Council, Northeast Power

    Coordinating Council, and the North American Electric Reliability

    Corporation.\231\ In order to comply with these rules, NYISO has

    procedures in place to address emergency situations and maintains an

    alternate control center and back-up computer systems and data centers

    at a separate location.\232\ NYISO also performs internal and external

    audits to ensure its internal controls, procedures, and business

    processes comply with accepted standards.\233\ The other Petitioners

    represent that they have similar procedures and practices such as,

    computer back-up systems, operate multiple control and data centers,

    dedicate resources to internal audit and security teams, and maintain

    disaster recovery plans designed to address operational, physical, and

    cyber security events.\234\

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

    \230\ See generally Petition Attachments at 152-158.

    \231\ See id. at 157.

    \232\ See id.

    \233\ See id.

    \234\ See id. at 152, 156, 158.

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

    Based on Petitioners' representations, it appears that these system

    safeguard practices are congruent with, and accomplish sufficiently,

    the regulatory objectives of DCO Core Principle I in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    10. DCO Core Principle J: Reporting

    Core Principle J requires a DCO to provide to the Commission all

    information that the Commission determines to be necessary to conduct

    oversight of the DCO.\235\ With the exception of ERCOT, Petitioners

    represent that, pursuant to their Tariffs and other FERC orders, FERC

    has access to the information that it would need to oversee the

    Petitioners.\236\ With respect to ERCOT, ERCOT represents that the PURA

    and PUCT Substantive Rules require it to provide information to the

    PUCT on request.\237\ ERCOT also represents that its Bylaws require

    ERCOT corporate members to provide information to ERCOT.\238\ In

    addition, according to ERCOT, the ERCOT Protocols require ERCOT to

    manage

    [[Page 52155]]

    confidential information, but enable ERCOT to release confidential

    information to government officials if required by law, regulation or

    order.\239\ As noted above, the Commission is proposing to condition

    this exemptive order on the completion of an appropriate information

    sharing agreement between the Commission and PUCT.

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

    \235\ 7 U.S.C. 7a-1(c)(2)(J).

    \236\ See generally Petition Attachments at 160-166.

    \237\ See id. at 161-162. PURA 39.151(d), P.U.C. SUBST. R.

    25.362(e)(1)(B) and 25.503(f)(8).

    \238\ See Petition Attachments at 161-162.

    \239\ See id.

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

    Based on the foregoing, including Petitioners' representations, it

    appears that these practices are congruent with, and sufficiently

    accomplish, the regulatory objectives of Core Principle J in the

    context of Petitioners' activities with respect to the Transactions.

    The Commission seeks comment with respect to this preliminary

    conclusion.

    11. Core Principle K: Recordkeeping

    Core Principle K requires a DCO to maintain records of all

    activities related to its business as a DCO in a form and manner

    acceptable to the Commission for a period of not less than five

    years.\240\

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

    \240\ 7 U.S.C. 7a-1(c)(2)(K).

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

    Petitioners represent that their practices satisfy the regulatory

    goals of DCO Core Principle K because they have adequate recordkeeping

    requirements or systems.\241\ In addition, Petitioners represent that

    FERC has comprehensive recordkeeping regulations that cover, among

    other things, protection and storage of records, record storage media,

    destruction of records, and premature destruction or loss of

    records.\242\ The record retention requirements for accounting records

    are, in the main, at or in excess of five years.\243\ In addition,

    ERCOT, which is not subject to FERC jurisdiction, represents that it

    has also adopted specific books and records requirements that

    accomplish the regulatory goals of DCO Core Principle K. Specifically,

    ERCOT represents that it has specific record retention rules

    established in the EROCT Protocols and is required to retain market

    accounting information for a period of seven years.\244\

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

    \241\ See generally Petition Attachments at 168-173.

    \242\ See 18 CFR 125.2-.3.

    \243\ See 18 CFR 125.3 at (6)-(9).

    \244\ See Petition Attachments at 169.

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

    Based on these regulations and Petitioners' representations, it

    appears that these practices are congruent with, and sufficiently

    accomplish, the regulatory objectives of DCO Core Principle K in the

    context of Petitioners' activities with respect to the Transactions.

    The Commission seeks comment with respect to this preliminary

    conclusion.

    12. DCO Core Principle L: Public Information

    Core Principle L requires a DCO to make information concerning the

    rules and operating procedures governing its clearing and settlement

    systems (including default procedures) available to market

    participants.\245\ Core Principle L also requires a DCO to provide

    market participants with sufficient information to enable them to

    identify and evaluate accurately the risks and costs associated with

    using the DCO's services, and to disclose publicly and to the

    Commission information concerning: (1) The terms and conditions of each

    contract, agreement, and transaction cleared and settled by the DCO;

    (2) the fees that the DCO charges its members and participants; (3) the

    DCO's margin-setting methodology, and the size and composition of its

    financial resources package; (4) daily settlement prices, volume, and

    open interest for each contract the DCO settles or clears; and (5) any

    other matter relevant to participation in the DCO's settlement and

    clearing activities.\246\

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

    \245\ 7 U.S.C. 7a-1(c)(2)(L)(i)-(ii).

    \246\ 7 U.S.C. 7a-1(c)(2)(L)(iii).

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

    Each Petitioner represents that it makes its tariff or related

    governing documents publicly available on its Web site, which, in turn,

    allows market participants (and the public) to access its rules and

    procedures regarding, among other things, participant and product

    eligibility requirements, risk management methodologies, settlement

    procedures, and other information that may impact prices, such as

    transmission system models, reserved transmission capacity, and similar

    information.\247\

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

    \247\ See generally Petition Attachments at 175-182.

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

    Based on Petitioners' representations, it appears that these

    practices are congruent with, and sufficiently accomplish, the

    regulatory objectives of DCO Core Principle L in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    13. DCO Core Principle M: Information Sharing

    Core Principle M requires a DCO to enter into and abide by the

    terms of all appropriate and applicable domestic and international

    information-sharing agreements, and use relevant information obtained

    from the agreements in carrying out the DCO's risk management

    program.\248\

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

    \248\ 7 U.S.C. 7a-1(c)(2)(M).

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

    Petitioners represent that they have policies and procedures that

    allow them to share information with and receive information from other

    entities as necessary to carry out their risk management

    functions.\249\ For example, ISO NE represents that its Information

    Policy sets out rules for sharing information with participants, FERC,

    and other Petitioners.\250\ Similarly, the NYISO represents that its

    tariff provides for information sharing with other ISOs and RTOs.\251\

    ERCOT represents that it is likewise subject to a comprehensive set of

    rules under the PURA, PUCT Rules, and the ERCOT Protocols that address

    information exchange obligations between ERCOT, the ERCOT Independent

    Market Monitor, ERCOT market participants, and the PUCT.\252\ MISO,

    PJM, and CAISO all claim to have similar information sharing policies

    and procedures--although, the entities with which each ISO/RTO shares

    information do vary.\253\

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

    \249\ See generally Petition Attachments at 184-190.

    \250\ See id. at 186.

    \251\ See id. at 188-189.

    \252\ See id. at 185.

    \253\ See id. at 184, 187, 190.

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

    Based on the foregoing and Petitioners' representations, it appears

    that these practices are congruent with, and sufficiently accomplish,

    the regulatory objectives of Core Principle M in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    14. DCO Core Principle N: Antitrust

    Core Principle N requires a DCO to avoid, unless necessary or

    appropriate to achieve the purposes of the CEA, adopting any rule or

    taking any action that results in any unreasonable restraint of trade,

    or imposing any material anticompetitive burden.\254\

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

    \254\ 7 U.S.C. 7a-1(c)(2)(N).

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

    As discussed above, the formation of the Petitioners (except for

    ERCOT) was encouraged by FERC (pursuant to FERC Order Nos. 888 and

    2000) in order to foster greater competition in the power generation

    sectors by allowing open access to transmission lines.\255\ In

    [[Page 52156]]

    addition, Petitioners represent that they are subject to continued

    oversight by FERC, PUCT or their market monitors, as appropriate, which

    oversight could detect activities such as undue concentrations or

    market power, discriminatory treatment of market participants or other

    anticompetitive behavior.\256\

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

    \255\ See FERC Order No. 888; FERC Order No. 2000. Moreover,

    Petitioners represent that their rules are typically subject to

    advance review by stakeholders and must be approved by FERC (except

    for ERCOT whose rules are approved by PUCT). These rules are, in

    turn, subject to review by the MMU, who attempt to detect, among

    other things, detect market power abuses. See generally Petition

    Attachments at 192-198. With respect to ERCOT, TAC 25.361(i)

    expressly states that ``The existence of ERCOT is not intended to

    affect the application of any state or federal anti-trust laws.'' In

    addition, ERCOT represents that it conducts antitrust training for

    its employees annually, holds open meetings to promote the

    transparent development of market rules, established a Corporate

    Standard to addresses antitrust issues, and that ``PURA, PUCT

    Substantive Rules and ERCOT Protocols also require that ERCOT allow

    access to the transmission system for all buyers and sellers of

    electricity on a nondiscriminatory basis, which facilitates actions

    consistent with the antitrust considerations of [DCO Core Principle

    N].'' See Petition Attachments at 193-194.

    \256\ See Petition Attachments at 192-198.

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

    Based on Petitioners' representations, it appears that Petitioners'

    existence and practices are congruent with, and sufficiently

    accomplish, the regulatory objectives of Core Principle N. The

    Commission seeks comment with respect to this preliminary conclusion.

    15. DCO Core Principle O: Governance and Fitness Standards

    Core Principle O requires a DCO to establish governance

    arrangements that are transparent to fulfill public interest

    requirements and to permit the consideration of the views of owners and

    participants.\257\ A DCO must also establish and enforce appropriate

    fitness standards for directors, members of any disciplinary committee,

    members of the DCO, any other individual or entity with direct access

    to the settlement or clearing activities of the DCO, and any party

    affiliated with any of the foregoing individuals or entities.\258\

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

    \257\ 7 U.S.C. 7a-1(c)(2)(O)(i).

    \258\ 7 U.S.C. 7a-1(c)(2)(O)(ii).

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

    Petitioners represent that their tariffs, organizational documents,

    and applicable state law set forth specific governance standards that

    are consistent with the regulatory goals which address, for example,

    director independence and fitness requirements.\259\ In addition,

    Petitioners assert that FERC Order Nos. 888 and 2000 set out certain

    minimum governance structures for ISOs and RTOs. Petitioners state that

    Order No. 888 requires the following: an ISO's governance should be

    structured in a fair and non-discriminatory manner; an ISO and its

    employees should have no financial interest in the economic performance

    of any power market participant; and an ISO should adopt and enforce

    strict conflict of interest standards.\260\ Petitioners assert that

    Order No. 2000 likewise identified minimum characteristics that RTOs

    must exhibit, including, independence from all market

    participants.\261\ Similarly, Petitioners represent that PURA mandates

    ERCOT to include unaffiliated directors and market segment

    representation in its governance structure.\262\

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

    \259\ See Petition Attachments at 200-208.

    \260\ See id. at 200 (citing to FERC Order No. 888).

    \261\ See Petition Attachments at 208 (citing to FERC Order No.

    2000).

    \262\ See id. at 202.

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

    Based on Petitioners' representations, it appears that Petitioner's

    governance structures are congruent with, and sufficiently accomplish,

    the regulatory objectives of DCO Core Principle O in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    16. DCO Core Principle P: Conflicts of Interest

    Pursuant to DCO Core Principle P, each DCO must establish and

    enforce rules to minimize conflicts of interest in the decision-making

    process of the DCO.\263\ In addition, each DCO must establish a process

    for resolving conflicts of interest.\264\

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

    \263\ 7 U.S.C. 7a-1(c)(2)(P)(i).

    \264\ 7 U.S.C. 7a-1(c)(2)(P)(ii).

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

    Each Petitioner represents that it has established a conflict of

    interest policy in a Code of Conduct or other corporate document that

    requires board members and employees to, among other things, avoid

    activities that are contrary to the interests of the Petitioner.\265\

    In addition, CAISO represents that Order No. 888 requires ISOs to

    implement strict conflict of interest policies.\266\ Similarly, ERCOT

    asserts that the PUCT Substantive Rules require it to adopt policies to

    mitigate conflicts of interest.\267\

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

    \265\ See Petition Attachments at 210-216.

    \266\ See id. at 210.

    \267\ See id. at 211.

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

    Based upon Petitioners' representations, it appears that the

    conflict of interest policies Petitioners have adopted and that the

    requirements Petitioners are subject to are congruent with, and

    sufficiently accomplish, the regulatory objectives of DCO Core

    Principle P in the context of Petitioners' activities with respect to

    the Transactions. The Commission seeks comment with respect to this

    preliminary conclusion.

    17. DCO Core Principle Q: Composition of Governing Boards

    DCO Core Principle Q provides that each DCO shall ensure that the

    composition of the governing board or committee of the derivatives

    clearing organization includes market participants.\268\

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

    \268\ 7 U.S.C. 7a-1(c)(2)(O).

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

    ERCOT represents that its governing board includes representatives

    from the market,\269\ CAISO, on the other hand, asserts that its board

    composition is mandated by California statute, wherein members are

    appointed by the Governor of California and confirmed by the California

    senate.\270\ ISO NE and MISO assert that they have active market

    participants who are involved in the nomination and selection of Board

    members, while NYISO asserts that its market participants provide input

    and feedback through market participant committees, and other

    subcommittees and working groups, and PJM has a Members Committee that

    elects the members of the PJM Board.\271\ FERC regulations require that

    an RTO ``must have a decision making process that is independent of

    control by any market participant or class of participants.'' \272\

    However, FERC also requires that each ISO and RTO ``adopt business

    practices and procedures that achieve Commission-approved independent

    system operator and regional transmission organization board of

    directors' responsiveness to customers and other stakeholders and

    satisfy [specified] criteria.'' \273\

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

    \269\ See Petition Attachments at 219.

    \270\ See id. at 218.

    \271\ See id. at 221-223.

    \272\ See 18 CFR 35.34(j)(1)(ii).

    \273\ See 18 CFR 35.28(g)(6).

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

    Based on Petitioner's representations, and the regulations and

    supervision of FERC, it appears that these practices are congruent

    with, and sufficiently accomplish, the regulatory objectives of DCO

    Core Principle Q in the context of Petitioners' activities with respect

    to the Transactions. The Commission seeks comment with respect to this

    preliminary conclusion.

    18. DCO Core Principle R: Legal Risk

    Core Principle R requires a DCO to have a well-founded,

    transparent, and enforceable legal framework for each aspect of its

    activities.\274\

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

    \274\ 7 U.S.C. 7a-1(c)(2)(R).

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

    Petitioners assert that they operate under a transparent and

    comprehensive legal framework that is grounded in the Federal Power Act

    or the Texas Public Utility Regulatory Act, as applicable, and

    administered by FERC or the PUCT, as applicable.\275\ Indeed,

    Petitioners assert that they are subject to FERC or PUCT orders rules

    and regulations and that each Petitioner operates pursuant to a tariff

    that has been reviewed and approved by FERC or the PUCT, as

    applicable.\276\ Moreover, with respect to

    [[Page 52157]]

    an area of particular concern (eligibility for setoff in bankruptcy),

    the CFTC is requiring independent confirmation.\277\

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

    \275\ See generally Petition Attachments at 225-235.

    \276\ See id.

    \277\ See the discussion in section V.D.4.g.

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

    Based on Petitioners' representations, it appears that this

    framework is congruent with, and sufficiently accomplishes, the

    regulatory objectives of Core Principle R in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    E. SEF Core Principles

    1. SEF Core Principle 1: Compliance With Core Principles

    SEF Core Principle 1 requires a SEF to comply with the Core

    Principles described in part 37 of the Commission's Regulations.\278\

    As demonstrated by the following analysis, the Commission has made a

    preliminary determination that in the context of the Petitioners'

    activities with respect to the Transactions within the scope of this

    Proposed Exemption, Petitioners' practices appear congruent with, and

    to accomplish sufficiently, the regulatory objectives of each SEF core

    principle. The Commission requests comment with respect to this

    preliminary determination.

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

    \278\ 7 U.S.C. 7b-3(f)(1)

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

    2. SEF Core Principle 2: Compliance With Rules

    SEF Core Principle 2 requires a SEF to establish and enforce

    compliance with any rule of the SEF.\279\ A SEF is also required to (1)

    establish and enforce rules with respect to trading, trade processing,

    and participation that will deter market abuses and (2) have the

    capacity to detect, investigate and enforce those rules, including a

    means to (i) provide market participants with impartial access to the

    market, and (ii) capture information that may be used in establishing

    whether rule violations have occurred.\280\

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

    \279\ 7 U.S.C. 7b-3(f)(2).

    \280\ SEF Core Principle 2 also requires a SEF to establish

    rules governing the operation of the facility, including trading

    procedures, and provide rules that, when a swap is subject to the

    mandatory clearing requirement, hold swap dealers and major swap

    participants responsible for compliance with the mandatory trading

    requirement under section 2(h)(8) of the Act.

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

    Petitioners represent that they have transparent rules for their

    market, including rules that govern market abuses and compliance

    enforcement.\281\ For instance, the independent market monitor

    established by statute for the ERCOT region oversees market behavior

    and reports any market compliance issues to the state regulator.\282\

    If a market participant violates ERCOT rules, depending on the nature

    of the offense, ERCOT and/or the state regulator may take appropriate

    action against the party, including, but not limited to, terminating,

    expelling, suspending, or sanctioning a member.\283\ The other

    Petitioners also represent that they have enforcement mechanisms that

    allow the Petitioners to, among other things, monitor their markets,

    investigate suspected tariff violations, take action against violators

    (including assessing fines or suspending or terminating a market

    participant's participation in market activities), and refer potential

    violations to FERC.\284\

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

    \281\ Petition Attachments at 238-245.

    \282\ See id. at 130. See also id. at 239-240.

    \283\ See id. at 129. See also id. at 239-240.

    \284\ See id. at 128, 131-150. See also id. at 238, 241-245.

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

    Based on the foregoing, it appears that the Petitioners' practices

    are consistent with, and sufficiently accomplish, the regulatory goals

    of SEF Core Principle 2 in the context of Petitioners' activities with

    respect to the Transactions. The Commission requests comment with

    respect to this preliminary determination.

    3. SEF Core Principle 3: Swaps Not Readily Susceptible to Manipulation

    SEF Core Principle 3 requires a SEF submitting a contract to the

    Commission for certification or approval to demonstrate that the swap

    is not readily susceptible to manipulation.\285\

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

    \285\ 7 U.S.C. 7b-3(f)(3).

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

    a. Energy Transactions

    Petitioners define Energy Transactions to include both physically-

    delivered as well as cash-settled contracts.\286\ For purposes of this

    Proposed Exemption, the Commission limits the analysis to Energy

    Transactions that are cash-settled.

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

    \286\ See Petition at 7.

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

    Petitioners have represented to the Commission that market

    participants use the cash-settled Energy Transactions to arbitrage

    between the Day-Ahead and Real-Time markets.\287\ The result is that

    prices between the Day-Ahead and Real-Time markets converge and reduce

    the price volatility normally found in electricity markets.\288\

    Indeed, the contracts were created with this very purpose in mind.\289\

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

    \287\ See Petition Attachments at 252-253.

    \288\ See id. at 142. See also id. at 253.

    \289\ FERC Order on Compliance Filing to PJM, 139 FERC ] 61,057

    issued April 19, 2012 in Docket No. ER09-1063-004.

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

    The Commission understands that MMUs operated by each of the

    Petitioners have been organized in such a way that both the Real-Time

    and Day-Ahead markets are monitored to identify suspicious trading

    activity.\290\ In the event the MMUs identify suspicious trading

    activity, FERC, or PUCT in the case of ERCOT, is notified so that

    further investigation may be done. An example of such suspicious

    trading activity would involve a market participant engaging in Energy

    Transactions that repeatedly incur a loss.\291\ Repeated losses in

    Energy Transactions would indicate that a market participant is

    sustaining losses to improve another position. For example, in the

    event a market participant tried to manipulate the price of electricity

    in the Day-Ahead or Real-Time markets to improve a different position,

    such as an FTR, they would have to submit bids that drove up the price

    of electricity for that specific node. In order to do this, however,

    the participant would have to submit a large dollar amount of offers at

    an inflated price. The Commission believes that this type of trading

    activity should be detectable by the MMUs. In addition to being

    difficult to effectuate simply because of the financial resources

    required, the Commission believes that any such activity should be

    apparent to not only MMUs using their ordinary oversight tools, but to

    market participants, who should have a self-interest in reporting such

    activity to the MMUs. Notably, such manipulative schemes have been

    identified and prosecuted by FERC in the past.\292\

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

    \290\ See generally Petition Attachments at 124-147.

    \291\ See generally id.

    \292\ On March 9, 2012 Constellation Energy and FERC's Office of

    Enforcement entered into a Stipulation and Consent Agreement in

    which Constellation neither admitted nor denied wrongdoing. FERC

    initially alleged that Constellation manipulated the price of

    electricity using virtual and physically-settled transactions on the

    markets of ISO NE and NYISO to benefit non-ISO swap positions. After

    receiving two anonymous hotline tips, FERC was alerted to

    potentially problematic trading after detecting successive losses by

    Constellation in their virtual and physical bids on the NYISO.

    Constellation agreed to pay a fine of $135,000,000 and disgorge

    $110,000,000 in unjust profits. See Order approving stipulation and

    agreement, Docket No. IN12-7-000, 138 FERC ] 61,168.

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

    Petitioners represent that they have adequate staff and IT

    resources to conduct market surveillance.\293\ Each Petitioner follows

    a similar market design which allows for price discovery at thousands

    of nodes and paths in short time intervals (every five to fifteen

    minutes) in both the Real-Time and Day-Ahead markets.\294\ The MMUs

    look

    [[Page 52158]]

    for manipulative behavior and market power, as well as market flaws

    (such as persistent non-convergence of Day-Ahead and Real-Time prices),

    which are fed back into a stakeholder process for changing the market

    structure and rules.\295\

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

    \293\ See Petition at 126-150.

    \294\ See generally Petition Attachments at 247-258.

    \295\ See generally id. at 126-150.

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

    Based on the Petitioners' representations regarding the

    surveillance carried out by the MMUs for each Petitioner and the method

    by which the Day-Ahead and Real-Time auctions are conducted, it appears

    that Petitioners' policies and procedures to mitigate the

    susceptibility of Energy Transactions to manipulation are congruent

    with, and sufficiently accomplish, the regulatory objectives of SEF

    Core Principle 3 in the context of Petitioners' activities with respect

    to the Energy Transactions. The Commission seeks comment with respect

    to this preliminary conclusion.

    b. Financial Transmission Rights (``FTRs'')

    Based upon the Petitioners' representations, the Commission

    understands FTRs to be cash-settled contracts that entitle the holder

    to a payment equal to the difference in the price of electricity

    between two specific nodes.\296\ The difference in price between the

    two nodes represents the settlement price. The price at each node is

    established through auctions conducted on the Day-Ahead market of each

    Petitioner.\297\ As discussed above, the Commission has made a

    preliminary determination that the Real-Time and Day-Ahead markets on

    Petitioners' platforms appear to be consistent with SEF Core Principle

    3.

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

    \296\ See Petition at 6.

    \297\ See, e.g., Petition Attachments at 252.

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

    As previously discussed, both the Petitioners and their respective

    MMUs conduct market surveillance of both the Real-Time and Day-Ahead

    markets to identify manipulation of the price of electricity. In the

    event unusual trading activity is detected by the Petitioners' MMUs,

    the MMUs will immediately contact FERC, or PUCT in the case of ERCOT,

    so that an investigation into the unusual activity may begin.\298\

    Although the price of FTRs may be altered by the manipulation of the

    Real-Time or Day-Ahead markets, FERC requires that the Petitioners have

    systems to monitor for such activity.

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

    \298\ See generally Petition Attachments at 128-150.

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

    The Commission believes that the Petitioners' policies and

    procedures should mitigate the susceptibility of FTRs to manipulation

    and that they are congruent with, and sufficiently accomplish, the

    regulatory objectives of SEF Core Principle 3 in the context of

    Petitioners' activities with respect to FTRs. The Commission seeks

    comment with respect to this preliminary conclusion.

    In addition to the Petitioners' policies and procedures for the

    detection of manipulative behavior in connection with FTRs, the

    Commission notes that since an FTR holder is entitled to a payment

    based on the price difference between two nodes, and not the physical

    delivery of electricity, it may be the case that FTRs are difficult to

    use to manipulate the price of electricity. For instance, the size of a

    participant's FTR position should not affect the price of electricity

    established on the Petitioners' Real-Time and Day-Ahead markets and

    holding an FTR does not provide a means to limit the deliverable supply

    of electricity. The Commission seeks comment on this evaluation and

    whether it should be considered in analyzing FTRs under SEF Core

    Principle 3.

    c. Capacity and Reserve Transactions

    Both Capacity and Reserve Transactions are entered into pursuant to

    auctions carried out by each of the Petitioners.\299\ However, unlike

    the auctions for the Real-Time and Day-Ahead markets, the auctions for

    capacity and reserve transactions simply allow each Petitioner to

    accept bids submitted by market participants that have the ability to

    inject electricity into the Petitioner's electricity transmission

    system.\300\

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

    \299\ See Petition at 7-9.

    \300\ See Petition at 7-9.

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

    The Commission notes that the Petitioners would apply the same

    oversight policies and procedures to Capacity and Reserve Transactions

    that they apply to Energy Transactions and FTRs. The Commission

    believes that these measures appear to be consistent with, and to

    accomplish sufficiently, the regulatory objectives of SEF Core

    Principle 3 in the context of Petitioners' activities with respect to

    Capacity and Reserve Transactions. The Commission seeks comment with

    respect to this preliminary conclusion.

    The Commission also seeks comment on whether the auction procedures

    used in connection with Capacity and Reserve Transactions could reduce

    the likelihood for manipulation of such agreements due to the fact that

    the Petitioners themselves are the only possible counterparty during

    each auction. For example, when CAISO conducts an auction for

    Generation Capacity, it is the only party that would enter into the

    agreement with a CAISO market participant capable of providing the

    contracted for electricity. CAISO would then call upon the Capacity and

    Reserve Transaction counterparties to inject electricity into the

    system when the technical requirements of operating the transmission

    system deem injection necessary. Accordingly, Capacity and Reserve

    Transactions seem to be distinguishable from FTRs or Energy

    Transactions in that they are used exclusively for operational

    maintenance of the electric transmission system, and not as a means of

    reducing exposure to price volatility, arbitrage or price discovery.

    The Commission seeks comment on this analysis of Capacity and Reserve

    Transactions and whether it should be considered in the Commission's

    review of these instruments under SEF Core Principle 3.

    4. SEF Core Principle 4: Monitoring of Trading and Trade Processing

    SEF Core Principle 4 requires a SEF to establish and enforce rules

    or terms and conditions defining trading procedures to be used in

    entering and executing orders traded on or through the SEF and

    procedures for the processing of swaps on or through the SEF.\301\ SEFs

    are also required to establish a system to monitor trading in swaps to

    prevent manipulation, price distortion and disruptions of the delivery

    or cash settlement process through surveillance, compliance and

    disciplinary practices and procedures. The main goal of this Core

    Principle is to monitor trading activity to detect or deter market

    participants from manipulating the price or deliverable supply of a

    commodity.

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

    \301\ 7 U.S.C. 7b-3(f)(4).

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

    a. Energy Transactions

    Generally, the Petitioners have tariffs in place that list how

    Energy Transactions are to be entered into the trading platform.\302\

    Using these procedures, MMUs are able to track the Energy Transactions

    submitted by market participants and identify trading activity that

    could be manipulative. As a result, Petitioners' policies and

    procedures regarding monitoring of trading and trade processing appear

    to be consistent with, and to accomplish sufficiently, the regulatory

    objectives of SEF Core Principle 4 in the context of Petitioners'

    activities with respect to Energy Transactions. The Commission

    [[Page 52159]]

    seeks comment with respect to this preliminary conclusion.

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

    \302\ See generally Petition Attachments at 260-269.

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

    b. FTRs

    The process by which the FTR allocation and auction takes place

    provides the Petitioners with a basic system that allows the

    Petitioners to determine which market participants hold FTRs. According

    to the Petitioners' tariffs, LSEs applying for FTRs during the

    allocation phase must first establish that they are in fact exposed to

    load levels for the transmission lines on which they will transmit

    electricity.\303\ Once an LSE has demonstrated such exposure, they will

    be allowed to participate in the FTR allocation. The FTRs are allocated

    to each LSE in direct relation to the level of exposure to which the

    LSEs are subject.\304\ This process of determining congestion exposure

    and allocating FTRs in relation to that exposure ensures that

    Petitioners will have a record of the number of FTRs held by each

    member.

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

    \303\ See generally id.

    \304\ See id.

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

    During the auction and secondary market phases, the Petitioners

    also have systems in place to track which participants hold FTRs.

    During the auction phase, any credit-worthy member of the RTO or ISO

    may bid on FTRs. Since the auctions are conducted on the Petitioners'

    platforms, they will have records of which market participants hold

    FTRs after the auctions. Once an auction is complete, credit-worthy

    members may then engage in bilateral transactions to trade FTRs. Again,

    Petitioners have implemented systems to track these bilateral

    transactions between FTR holders. Once a bilateral transaction is

    reported, the Petitioner then performs a credit check to ensure that

    the new owner of the FTR has the financial capability to assume the

    risk posed by ownership of the FTR.\305\ The Petitioners do not perform

    an analysis to determine whether a member is obtaining a large position

    in the secondary FTR market. The Petitioners only identify which

    members hold FTRs in the secondary market.

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

    \305\ See id. at 2-20.

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

    Based on the foregoing representations, it appears that the

    Petitioners' policies and procedures regarding the monitoring of

    trading and trade processing are consistent with, and to accomplish

    sufficiently, the regulatory objectives of SEF Core Principle 4 in the

    context of Petitioners' activities with respect to FTRs. The Commission

    seeks comment with respect to this preliminary conclusion.

    c. Capacity and Reserve Transactions

    As discussed above, the auction process used for Capacity and

    Reserve Transactions differs from the process used in the Real-Time and

    Day-Ahead markets. Furthermore, Capacity and Reserve Transactions are

    not used to limit exposure to price volatility, discover prices or

    engage in arbitrage. The transactions are predominantly bilateral

    agreements between each Petitioner and certain of that Petitioner's

    market participants for the provision of electricity in order to meet

    the technical requirements necessary to operate the electric

    transmission system. The contracts are not readily susceptible to

    manipulation and there is no market trading that must be monitored to

    prevent manipulation or congestion of the physical delivery market. As

    a result, the Petitioners' policies and procedures regarding the

    monitoring of trading and trade processing appear to be consistent

    with, and to accomplish sufficiently, the regulatory objectives of SEF

    Core Principle 4 in the context of Petitioners' activities with respect

    to Capacity and Reserve Transactions. The Commission seeks comment with

    respect to this preliminary conclusion.

    5. SEF Core Principle 5: Ability To Obtain Information

    SEF Core Principle 5 requires a SEF to establish and enforce rules

    that will allow it to obtain any necessary information to perform the

    functions described in section 733 of the Dodd-Frank Act, provide

    information to the Commission upon request, and have the capacity to

    carry-out such international information-sharing agreements as the

    Commission may require.\306\ As discussed above,\307\ each Petitioner

    represents that it has rules in place that require market participants

    to submit information to Petitioners upon request so that Petitioners

    may conduct investigations and provide or give access to such

    information to their market monitors and FERC or PUCT, as

    applicable.\308\ On the basis of these representations, it appears that

    Petitioners' practices are consistent with, and sufficiently

    accomplish, the regulatory goals of SEF Core Principle 5. The

    Commission seeks comment with respect to this preliminary

    determination.

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

    \306\ 7 U.S.C. 7b-3(f)(5).

    \307\ See generally the discussions in sections V.D.10. and

    V.D.13. supra.

    \308\ See generally Petition Attachments at 271-276.

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

    6. SEF Core Principle 6: Position Limits or Accountability

    SEF Core Principle 6 requires SEFs that are trading facilities, as

    that term is defined in CEA section 1a(51), to establish position

    limits or position accountability for speculators, as is necessary and

    appropriate, for each swap traded on the SEF in order to prevent or

    reduce the potential threat of market manipulation or congestion,

    especially during trading in the delivery month.\309\ While the markets

    administered by Petitioners are subject to MMUs (as discussed above in

    section IV.C.), Petitioners do not have position limits or position

    accountability thresholds for speculators in order to reduce the

    potential threat of market manipulation or congestion. The Commission

    specifically requests comment as to whether the lack of position limits

    or position accountability thresholds for speculators in Petitioners'

    markets, given the nature of their markets and market participants, and

    the other regulatory protections applicable to these markets as

    described herein, would prevent the Commission from determining that

    the Proposed Exemption is consistent with the public interest and the

    purposes of the CEA.

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

    \309\ 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.

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

    7. SEF Core Principle 7: Financial Integrity of Transactions

    SEF Core Principle 7 requires a SEF to establish and enforce rules

    and procedures for ensuring the financial integrity of swaps entered on

    or through the facilities of the SEF, including the clearance and

    settlement of swaps pursuant to section 2(h)(1) of the CEA.

    a. Risk Management Requirements and Credit Policies

    Petitioners represent that they ensure the financial integrity of

    transactions that are entered on or through their markets through the

    risk management requirements and credit policies that apply to their

    market participants.\310\ In addition to minimum capitalization

    requirements, Petitioners represent that they all have in place, or are

    in the process of implementing, risk management policies and procedures

    and internal controls appropriate to their trading activities in the

    RTO and ISO markets in which they

    [[Page 52160]]

    participate.\311\ Petitioners further represent that they require a

    responsible officer of the market participant to certify, on an annual

    basis, that the market participant has in place risk management

    policies, procedures and internal controls appropriate to its trading

    activities.\312\ Moreover, several Petitioners represent that they have

    proposed verification programs that confirm that participants who pose

    significant risks to the markets in which they participate have in

    place adequate risk management policies and internal controls.\313\

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

    \310\ See Petition at 18-21; see Petition Attachments at 285-

    291.

    \311\ See Petition at 20; see, e.g., Petition Attachments at 22-

    24, 27, 33, 37.

    \312\ See Petition at 20; see Petition Attachments at 22, 28,

    35, 37, 44, 47-48.

    \313\ See Petition at 20; see, e.g., Petition Attachments at 23,

    27, 44, 50.

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

    In terms of credit policies, Petitioners represent that they have

    established ``comprehensive and integrated'' credit policies to manage

    credit risk and protect the financial integrity of transactions with

    market participants.\314\ In addition, Petitioners represent that FERC

    Order 741 placed additional risk management and credit requirements on

    RTOs and ISOs.\315\

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

    \314\ See Petition at 18; see, e.g., Petition Attachments at 22,

    25, 30-31, 39-43, 283.

    \315\ See Petition at 19. Such additional requirements include

    (a) limiting the amount of unsecured credit extended to any market

    participant to no more than $50 million; (b) adopting a billing

    period of no more than seven days and allowing a settlement period

    of no more than seven days; (c) eliminating unsecured credit in the

    financial transmission rights market; (d) establishing a single

    counterparty to all market participant transactions, or requiring

    each market participant to grant a security interest to the RTO or

    ISO in the receivables of its transactions, or providing another

    method of supporting netting; (e) limiting the time period by which

    a market participant must cure a collateral call to no more than two

    days; (f) requiring minimum participant criteria for market

    participants to be eligible to participate in the markets; and (g)

    requiring additional collateral due to a material adverse change.

    See 18 CFR 35.47.

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

    b. Minimum Financial Standards and Ongoing Monitoring for Compliance

    In addition, based on Petitioners' representations, it appears that

    Petitioners' policies and procedures include minimum financial

    standards \316\ and creditworthiness standards \317\ for their market

    participants.\318\ Moreover, Petitioners represent that their policies

    and procedures, require Petitioners to monitor, on an ongoing basis,

    their market participants for compliance with such standards.\319\

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

    \316\ See, e.g., Petition Attachments at 30. Some Petitioners

    required market participants to demonstrate and maintain certain

    minimum financial requirements including an investment-grade credit

    rating documented by reports of a credit reporting agency, tangible

    net-worth threshold, total asset threshold, a certain current ratio,

    or a certain debt to total capitalization ratio. See, e.g., Petition

    Attachments at 26, 33-34, 37, 43. In certain instances, the minimum

    financial standards for market participants are scalable to the RTO

    and ISO markets in which they participate. See, e.g., Petition

    Attachments at 26, 31. The proposed rule regarding minimum financial

    standards also requires at a minimum, that members qualify as an

    eligible contract participant as defined by the CEA. The Commission

    notes that ISO NE has represented that it has market participants

    that may not meet the definition of eligible contract participant,

    but are ``appropriate persons'' for purposes of the 4(c) exemption.

    See Petition Attachments at 30. The Commission proposes to condition

    the granting of the 4(c) request on all parties to the agreement,

    contract or transaction being ``appropriate persons,'' as defined

    sections 4(c)(3)(A) through (J) of the Act or ``eligible contract

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

    Commission regulation 1.3(m). See provision 2.B. of the Proposed

    Exemption.

    \317\ See Petition at 18; see, e.g., Petition Attachments at 22,

    31, 39.

    \318\ See, e.g., Petition Attachments at 27, 30, 35, 84.

    \319\ See Petition Attachments at 56-92.

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

    c. Establishment of a Central Counterparty

    As discussed in section V.C. above, FERC regulation 35.47(d)

    requires RTOs and ISOs to (1) establish a single counterparty to all

    market participant transactions, (2) require each market participant to

    grant a security interest in the receivables of its transactions to the

    relevant RTO or ISO, or (3) provide another method of supporting

    netting that provides a similar level of protection to the market that

    is approved by FERC.\320\ Petitioners have represented that they either

    are, or plan on becoming, central counterparties.\321\

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

    \320\ 18 CFR 35.47(d).

    \321\ See FERC Order 741 Implementation Chart at 5-6; See

    generally Petition at 19.

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

    As described in section V.D.4.g. above, the Commission is proposing

    to require that each Petitioner submit a well-reasoned legal memorandum

    from, or a legal opinion of, outside counsel that, in the Commission's

    sole discretion, provides the Commission with adequate assurance that

    the approach selected by the Petitioner will in fact provide the

    Petitioner with set-off rights in a bankruptcy proceeding. In addition,

    the Commission is requesting comment on whether ERCOT should be

    obligated to comply with the requirements of FERC regulation 35.47(d).

    d. Conclusion

    Issues regarding risk management requirements, financial standards,

    and the use of a central counterparty are also addressed within the

    context of DCO Core Principle D. The Commission's preliminary

    conclusion that Petitioners policies and procedures are congruent with,

    and sufficiently accomplish, the regulatory objectives of Core

    Principle D in the context of the Petitioners' activities with respect

    to the Transactions is relevant in considering SEF Core Principle 7.

    Based on the foregoing analysis, including the representations of

    the Petitioners, Petitioners' policies and procedures appear to be

    consistent with, and to accomplish sufficiently, the regulatory

    objectives of SEF Core Principle 7 in the context of Petitioners'

    activities with respect to the Transactions. The Commission seeks

    comment with respect to this preliminary conclusion.

    8. SEF Core Principle 8: Emergency Authority

    SEF Core Principle 8 requires that SEFs adopt rules to provide for

    the exercise of emergency authority.\322\ A SEF should have procedures

    and guidelines for decision-making and implementation of emergency

    intervention in the market. A SEF should have the authority to perform

    various actions, including without limitation: liquidating or

    transferring open positions in the market, suspending or curtailing

    trading in any swap, and taking such market actions as the Commission

    may direct. In addition, SEFs must provide prompt notification and

    explanation to the Commission of the exercise of emergency

    authority.\323\

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

    \322\ 7 U.S.C. 7b-3(f)(8).

    \323\ Core Principles and Other Requirements for Swap Execution

    Facilities, 76 FR 1229, proposed Jan. 7, 2011.

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

    Petitioners represent that their Tariffs generally provide a wide

    range of authorities to address emergency situations.\324\ Certain

    Petitioners have the ability to close out and liquidate all of a market

    participant's current and forward FTR positions if the market

    participant no longer meets creditworthiness requirements, or fails to

    make timely payment when due, in each case following any opportunity

    given to cure the deficiency.\325\ Other Petitioners have the authority

    to suspend trading in their markets.\326\

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

    \324\ See Petition Attachments at 293-298.

    \325\ See, e.g., id. at 293-295, 298.

    \326\ See, e.g., id. at 296-297.

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

    Just as the SEFs have rules in place that require them to take

    emergency actions to protect the markets by ``including imposing or

    modifying position limits, imposing or modifying price limits, imposing

    or modifying intraday market restrictions, imposing special margin

    requirements, ordering the liquidation or transfer of open positions in

    any contract, ordering the fixing of a settlement price,'' one

    [[Page 52161]]

    Petitioner represents that it may take actions to protect its markets

    by postponing the closure of affected markets, removing bids that have

    previously resulted in market disruptions, setting an administrative

    price to settle metered supply, or demanding, suspending or limiting

    the ability of scheduling coordinators to submit Energy

    Transactions.\327\

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

    \327\ Petition Attachments at 293 (CAISO).

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

    Based on the foregoing representations, it appears that

    Petitioners' policies and procedures regarding the exercise of

    emergency authority are congruent with, and sufficiently accomplish,

    the regulatory objectives of SEF Core Principle 8 in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    9. SEF Core Principle 9: Timely Publication of Trading Information

    SEF Core Principle 9 requires a SEF to make public timely

    information on price, trading volume, and other data on swaps to the

    extent prescribed by the Commission.\328\ In addition, SEFs are

    required to have the capacity to electronically capture and transmit

    trade information with respect to transactions executed on the

    SEF.\329\

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

    \328\ 7 U.S.C. 7b-3f(9)(A).

    \329\ 7 U.S.C. 7b-3f(9)(B).

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

    Petitioners represent that their Tariffs generally require the

    timely publication of trading information.\330\ Petitioners regulated

    by FERC also assert that they are able to publicly release market

    operations and grid management information using their Open Access

    Same-Time Information System (OASIS) program.\331\ This system

    transmits information which includes market results, the market

    clearing price and volume.\332\ Similarly, ERCOT's protocols require

    them to disseminate information which relates to market operations,

    prices, availability of services and the terms and conditions of the

    FTRs.\333\

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

    \330\ See Petition Attachments at 300-305.

    \331\ See id. at 300, 302-305.

    \332\ See id.

    \333\ See Petition Attachments at 177-178.

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

    Based on the foregoing representations, it appears that

    Petitioners' policies and procedures regarding the publication of

    trading information are congruent with, and sufficiently accomplish,

    the regulatory objectives of SEF Core Principle 9 in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    10. SEF Core Principle 10: Recordkeeping and Reporting

    SEF Core Principle 10 requires a SEF to maintain records of all

    activity relating to the business of the SEF, report such information

    to the Commission and to keep swaps information open to inspection by

    the Commission.\334\ Petitioners represent that their Tariffs require

    their market participants to provide Petitioners with information on a

    regular and ad hoc basis.\335\ Petitioners further represent that they

    are required to comply with FERC or PUCT regulations, as applicable,

    regarding the maintenance of information by public utilities.\336\

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

    \334\ 7 U.S.C. 7b-3(f)(10).

    \335\ See generally Petition at 307-312.

    \336\ See, e.g., id. at 309.

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

    Based on the Petitioners representations and the discussion

    regarding DCO Core Principles J and K above,\337\ it appears that these

    practices are congruent with, and sufficiently accomplish the

    regulatory objectives of SEF Core Principle 10 in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

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

    \337\ See the discussions in sections V.D.10. and V.D.11. supra.

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

    11. SEF Core Principle 11: Antitrust Considerations

    SEF Core Principle 11 prevents a SEF from adopting any rule or

    taking any action that results in any unreasonable restraint of trade,

    or imposes any material anticompetitive burden, unless necessary or

    appropriate to achieve the purposes of the Act.\338\ As discussed

    above, FERC established the RTO/ISO system to promote competition in

    the electricity market.\339\ Petitioners represent that their rates,

    terms and conditions of service are subject to the oversight, review

    and acceptance of FERC or PUCT, as applicable.\340\ Petitioners further

    represent that FERC or PUCT and their MMUs review trading activity to

    identify anticompetitive behavior.\341\

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

    \338\ 7 U.S.C. 7b-3(f)(11).

    \339\ See FERC Order Nos. 888 and 2000. See also the discussion

    in section V.D.14. supra.

    \340\ See generally Petition Attachments at 192-198.

    \341\ See generally id.

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

    Based on Petitioners' representations and the discussion of DCO

    Core Principle N above,\342\ it appears that Petitioners' existence and

    practices are congruent with, and sufficiently accomplish, the

    regulatory objectives of SEF Core Principle 11 in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment on this preliminary conclusion.

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

    \342\ See also the discussion in section V.D.14. supra.

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

    12. SEF Core Principle 12: Conflicts of Interest

    SEF Core Principle 12 requires a SEF to establish and enforce rules

    to minimize conflicts of interest and establish a process for resolving

    conflicts of interest.\343\ As discussed above, FERC Order No. 888

    requires ISOs to adopt or enforce strict conflict of interest

    policies.\344\ Similarly, FERC Order No. 2000 requires RTOs to be

    independent of any market participant, and to include in their

    demonstration of independence that the RTO, its employees, and any non-

    stakeholder directors do not have financial interests in any market

    participant.\345\ Each Petitioner represents that it has either

    established codes of conduct, which include conflict of interest rules,

    for employees and members of the Board of Directors \346\ or

    implemented specific policies and procedures to mitigate conflicts of

    interest.\347\ Based on Petitioners' representations and the discussion

    of DCO Core Principle P above,\348\ it appears that Petitioners'

    conflict of interest policies and the requirements to which the

    Petitioners are subject are congruent with, and sufficiently

    accomplish, the regulatory objectives of SEF Core Principle 12 in the

    context of Petitioners' activities with respect to the Transactions.

    The Commission seeks comment with respect to this preliminary

    conclusion.

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

    \343\ 7 U.S.C. 7b-3(f)(12).

    \344\ See FERC Order No. 888 at 281.

    \345\ See FERC Order No. 2000 at 709; 18 CFR 35.34(j)(1).

    \346\ See Petition Attachments at 210, 213-216, 321, 324-326.

    \347\ See id. at 211, 322.

    \348\ See the discussion in section V.D.16. supra.

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

    13. SEF Core Principle 13: Financial Resources

    SEF Core Principle 13 requires a SEF to have adequate financial,

    operational and managerial resources to discharge each responsibility

    of the SEF.\349\ In addition, the financial resources of a SEF are

    considered to be adequate if the value of the financial resources

    exceeds the total amount that would enable the SEF to cover the

    operating costs of the SEF for a 1-year period, as calculated on a

    rolling basis.\350\

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

    \349\ 7 U.S.C. 7b-3(f)(13)(A).

    \350\ 7 U.S.C. 7b-3(f)(13)(B).

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

    Petitioners represent that they have rules in place that allow them

    to collect revenue from market participants

    [[Page 52162]]

    sufficient for each of their operations.\351\ Petitioners further

    represent to have adequate managerial resources to operate their

    systems.\352\ As discussed above, FERC Order No. 888 requires RTOs to

    have appropriate incentives for efficient management and

    administration.\353\ Each Petitioner represents that it has sufficient

    staff necessary for its operations.\354\

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

    \351\ See Petition Attachments at 3-4, 6, 8-10, 13, 16, 20, 328-

    333.

    \352\ See id. at 3, 7-8, 10, 13, 16, 18-19.

    \353\ See supra n. 86 and accompanying text.

    \354\ See Petition Attachments at 3, 7, 12, 13, 16-17, 18-19,

    335-340. See also analysis under DCO Core Principle B.

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

    Based on Petitioners' representations and the discussion regarding

    DCO Core Principle B above,\355\ it appears that Petitioners' practices

    are congruent with, and sufficiently accomplish, the regulatory

    objectives of SEF Core Principle 13 in the context of Petitioners'

    activities with respect to the Transactions. The Commission seeks

    comment with respect to this preliminary conclusion.

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

    \355\ See the discussion in section V.D.2. supra.

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

    14. SEF Core Principle 14: System Safeguards

    SEF Core Principle 14 requires a SEF to establish and maintain a

    program of risk analysis and oversight to identify and minimize sources

    of operational risk, through the development of appropriate controls

    and procedures, and automated systems, that are reliable and secure,

    and have adequate scalable capacity.\356\ Moreover, a SEF must

    establish and maintain emergency procedures, backup facilities, and a

    plan for disaster recovery that allows for the timely recovery and

    resumption of operations, and the fulfillment of the responsibilities

    and obligations of the SEF.\357\ The SEF must also conduct tests to

    verify that the backup resources of the SEF are sufficient to ensure

    continued order processing and trade matching, price reporting, market

    surveillance, and maintenance of a comprehensive and accurate audit

    trail.\358\

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

    \356\ 7 U.S.C. 7b-3(f)(14)(A).

    \357\ 7 U.S.C. 7b-3(f)(14)(B).

    \358\ 7 U.S.C. 7b-3(f)(14)(C).

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

    Petitioners represent that they have a program of risk analysis and

    oversight to identify and minimize sources of operational risk through

    the development of appropriate controls and procedures; reliable

    automated systems; and emergency procedures.\359\ Indeed, Petitioners

    are responsible for managing power reliably and, thus, require

    additional operational safeguards to specifically address that

    function.\360\

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

    \359\ See generally Petition Attachments at 152-158, 333-340.

    \360\ See supra n. 230 and accompanying text.

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

    Petitioners represent that they have computer systems that

    incorporate adequate business continuity and disaster recovery

    functionality.\361\ Some Petitioners state that they maintain offsite

    backup computer systems fully able to operate in the event the primary

    system fails \362\ whereas other Petitioners state that they operate

    two control centers and/or two data centers in which each center is

    functionally capable of operating as the primary center.\363\ Some

    Petitioners further state that they conduct testing of emergency

    procedures and system components on a regular basis to ensure that

    mission critical processes and vital records are recoverable, as well

    as the readiness of backup facilities and personnel.\364\

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

    \361\ See Petition Attachments at 152-158, 333-339.

    \362\ See id. at 152, 155-157.

    \363\ See id. at 153, 158. Certain Petitioners maintain

    alternate operational control centers in addition to offsite backup

    computer systems and data centers. See id. at 155-157.

    \364\ See id. at 152, 154, 156, 158.

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

    Based on Petitioners' representations and the discussion regarding

    DCO Core Principle I above,\365\ it appears that Petitioners' practices

    are congruent with, and sufficiently accomplish, the regulatory

    objectives of SEF Core Principle 14 in the context of Petitioners'

    activities with respect to the Transactions. The Commission seeks

    comment with respect to this preliminary conclusion.

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

    \365\ See also the discussion in section V.D.8. supra.

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

    15. SEF Core Principle 15: Designation of Chief Compliance Officer

    SEF Core Principle 15 requires that a SEF designate an individual

    as Chief Compliance Officer, with specific delineated duties.\366\ The

    Chief Compliance Officer for a SEF would be responsible for reporting

    to the board and ensuring that the SEF is in compliance with the SEF

    rules. Each Petitioner represents that it has a Chief Compliance

    Officer \367\ or the functional equivalent of such a position.\368\

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

    \366\ See 7 U.S.C. 7b-3(f)(15). designation of chief compliance

    officer.--

    (A) IN GENERAL.--Each swap execution facility shall designate an

    individual to serve as a chief compliance officer.

    (B) DUTIES.--The chief compliance officer shall--

    (i) report directly to the board or to the senior officer of the

    facility;

    (ii) review compliance with the core principles in this

    subsection;

    (iii) in consultation with the board of the facility, a body

    performing a function similar to that of a board, or the senior

    officer of the facility, resolve any conflicts of interest that may

    arise;

    (iv) be responsible for establishing and administering the

    policies and procedures required to be established pursuant to this

    section;

    (v) ensure compliance with this Act and the rules and

    regulations issued under this Act, including rules prescribed by the

    Commission pursuant to this section; and

    (vi) establish procedures for the remediation of noncompliance

    issues found during compliance office reviews, look backs, internal

    or external audit findings, self-reported errors, or through

    validated complaints.

    \367\ See Petition Attachments at 342-346.

    \368\ PJM has two compliance heads who coordinate closely but

    are separately responsible for compliance in the following two

    distinct areas: (1) compliance with regulatory and legal

    obligations; and (2) compliance with reliability standards as

    promulgated by the regional reliability counsels, NERC and FERC.

    Regulatory and legal compliance addresses legal obligations,

    including compliance with the PJM Tariff, FERC regulations and laws,

    and regulations governing other corporate matters, such as

    antitrust, human resources and procurement. Regulatory and legal

    compliance is handled in the Office of General Counsel, by an

    Assistant General Counsel and Director of Regulatory Oversight and

    Compliance. Reliability compliance addresses the security of the

    grid, both operationally and from any cyber threat. This function is

    handled in the area of operations and the Executive Director of

    Reliability and Compliance reports directly to the senior vice

    president for operations. All compliance functions (both reliability

    and regulatory) are coordinated through PJM's Regulatory Oversight &

    Compliance Committee (``ROCC''). The ROCC is chaired by the

    Assistant General Counsel who has reporting obligations to the CEO

    and a direct line to the Board's Governance Committee and Audit

    Committee. See Petition Attachments at 347.

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

    Based on the Petitioners' representations, it appears that

    Petitioners' practices are congruent with, and sufficiently accomplish,

    the regulatory objectives of SEF Core Principle 15 in the context of

    Petitioners' activities with respect to the Transactions. The

    Commission seeks comment with respect to this preliminary conclusion.

    VIII. Proposed Exemption

    A. Discussion of Proposed Exemption

    Pursuant to the authority provided by section 4(c)(6) of the

    CEA,\369\ in accordance with CEA sections 4(c)(1) and (2), and

    consistent with the Commission's determination that the statutory

    requirements for granting an exemption pursuant to section 4(c)(6) of

    the Act have been satisfied, the Commission is proposing to issue the

    exemption described in the Proposed Exemption set forth below. The

    Proposed Exemption would exempt, subject to the limitations and

    conditions contained therein, the purchase and sale of certain

    electricity-related products, including specifically-defined

    ``financial transmission rights,'' ``energy transactions,'' ``forward

    capacity transactions,'' and ``reserve or regulation transactions,''

    from most provisions of

    [[Page 52163]]

    the CEA. The Commission is proposing to explicitly exclude from the

    exemption relief 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, 4s(h)(1)(A), 4s(h)(4)(A), 6(c),

    6(d), 6(e), 6c, 6d, 8, 9 and 13 and any implementing regulations

    promulgated thereunder including, but not limited to Commission

    regulations 23.410(a) and (b), 32.4 \370\ and part 180.\371\ The

    preservation of the Commission's anti-fraud and anti-manipulation

    authority provided by these provisions generally is consistent with

    both the scope of the exemption requested in the Petition \372\ and

    recent Commission practice.\373\

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

    \369\ 7 U.S.C. 6(c).

    \370\ 17 CFR 23.410(a)-(b), 32.4 and part 180.

    \371\ 17 CFR part 180.

    \372\ See Petition at 33-34. Petitioners requested relief from

    ``all provisions of the Act and Commission regulations, except in

    each case sections 4b, 4o, 6(c) and 9(a)(3) of the Act to the extent

    that these sections prohibit fraud in connection with transactions

    subject to the Act, or manipulation of the price of any swap or

    contract for the sale of a commodity in interstate commerce or for

    future delivery on or subject to the rules of a registered entity,

    and from the requirement to provide information to the Commission as

    expressly permitted by their respective protocols or as provided

    under section 720 of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act.'' The Proposed Exemption simply would preserve the

    Commission's authority under the delineated provisions and their

    implementing regulations without caveat, in order to avoid ambiguity

    as to what conduct remains prohibited.

    \373\ See, e.g., Order (1) Pursuant to Section 4(c) of the

    Commodity Exchange Act, Permitting the Kansas City Board of Trade

    Clearing Corporation To Clear Over-the-Counter Wheat Calendar Swaps

    and (2) Pursuant to Section 4d of the Commodity Exchange Act,

    Permitting Customer Positions in Such Cleared-Only Swaps and

    Associated Funds To Be Commingled With Other Positions and Funds

    Held in Customer Segregated Accounts, 75 FR 34983, 34985 (2010).

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

    The particular categories of contracts, agreements and transactions

    to which the Proposed Exemption would apply correspond to the types of

    transactions for which relief was explicitly requested in the

    Petition.\374\ Petitioners requested relief for four specific types of

    transactions and the Proposed Exemption would exempt those

    transactions. With respect to those transactions, the Petition also

    included the parenthetical ``(including generation, demand response or

    convergence or virtual bids/transactions).'' \375\ The Commission notes

    that such transactions would be included within the scope of the

    exemption if they would qualify as the financial transmission rights,

    energy transactions, forward capacity transactions or reserve or

    regulation transactions for which relief is explicitly provided within

    the exemption. Petitioners also have requested relief for ``the

    purchase and sale of a product or service that is directly related to,

    and a logical outgrowth of, any [of Petitioner's] core functions as an

    ISO/RTO * * * and all services related thereto.'' \376\ The Commission

    has determined that it would be inappropriate, and, accordingly, has

    declined to propose that the exemption be extended beyond the scope of

    the transactions that are specifically defined in the Proposed

    Exemption. As noted above, the authority to issue an exemption from the

    CEA provided by section 4(c) of the Act may not be automatically or

    mechanically exercised. Rather, the Commission is required to

    affirmatively determine, inter alia, that the exemption would be

    consistent with the public interest and the purposes of the Act.\377\

    With respect to the four groups of transactions explicitly detailed in

    the Proposed Exemption, the Commission's proposed finding that the

    Proposed Exemption would be in the public interest and would be

    consistent with the purposes of the CEA was grounded, in part, on

    certain transaction characteristics and market circumstances described

    in the Petition that may or may not be shared by other, as yet

    undefined, transactions engaged in by the Petitioners or other RTO or

    ISO market participants.\378\ Similarly, unidentified transactions

    might include novel features or have market implications or risks that

    are not present in the specified transactions. Such elements may impact

    the Commission's required section CEA 4(c) public interest analysis or

    may warrant the attachment of additional or differing terms and

    conditions to any relief provided. Due to the potential for adverse

    consequences resulting from an exemption that includes transactions

    whose qualities and effect on the broader market cannot be fully

    appreciated absent further specification, it does not appear that the

    Commission can justify a conclusion that it would be in the public

    interest to provide an exemption of the full breadth requested. The

    Commission notes, however, that it has requested comment on whether the

    proposed scope of the exemption is sufficient to allow for innovation

    and, if not, how the scope could be expanded, without exempting

    products that may be substantially different from those reviewed by the

    Commission. The Commission also notes that it stands ready to review

    promptly any additional applications for an exemption pursuant to

    section 4(c)(6), in accordance with CEA sections 4(c)(1) and (2), of

    the CEA for other precisely defined products.\379\

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

    \374\ Petition at 5-9.

    \375\ Id. at 6.

    \376\ Id. at 9.

    \377\ 7 U.S.C. 6(c).

    \378\ For example, the transactions that included with the scope

    of the Proposed Exemption appear to be limited to those tied to the

    physical capacity of the Petitioners' electricity grids. Petition at

    6-8, 11.

    \379\ The Commission is currently reviewing two supplemental

    petitions. Specifically, ISO NE has filed a supplemental request for

    an exemption pursuant to section 4(c)(6) for ``IBT'' Transactions.

    See In the Matter of the Application for an Exemptive Order Under

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

    (Apr. 30, 2012), available at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-ne4crequest.pdf.

    CAISO has filed a similar request for ``inter-scheduling coordinator

    trades'' or ``inter-SC trades.'' See In the Matter of the

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

    Commodity Exchange Act by California Independent System Operator

    Corporation (May 30, 2012), available at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/caiso4crequest.pdf.

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

    The scope of the Proposed Exemption is limited by two additional

    factors. First, it is restricted to agreements, contracts or

    transactions where all parties thereto are either: (1) Entities

    described in section 4(c)(3)(A) through (J) of the CEA \380\ or (2)

    ``eligible contract participants,'' as defined in section 1a(18) of the

    Act \381\ or in Commission regulation 1.3(m).\382\ Although Petitioners

    have requested an exemption pursuant to section 4(c)(6) of the CEA, any

    exemption pursuant to this subsection must be issued in ``in accordance

    with'' sections 4(c)(1) and 4(c)(2).\383\ Section 4(c)(2) prohibits the

    Commission from issuing an exemption pursuant to section 4(c) unless

    the Commission determines that the agreement, contract or transaction

    ``will be entered into solely between `appropriate persons.' ''

    Appropriate persons include those entities explicitly delineated in

    sections 4(c)(3)(A) through (J) of the Act as well as others that the

    Commission, under the discretionary authority provided by section

    4(c)(3)(K), deems to be appropriate persons ``in light of their

    financial or other qualifications, or the applicability of appropriate

    regulatory protections.'' \384\ As noted above, the Commission has

    proposed to determine that eligible contract participants, as defined

    in section 1a(18) of the Act or in Commission regulation 1.3(m), should

    be considered appropriate persons for purposes of the Proposed

    Exemption.\385\ The Commission recognizes that the market participant

    eligibility standards

    [[Page 52164]]

    of an individual RTO or ISO may not be coextensive with the criteria

    required by sections 4(c)(3)(A) through (J) or section 1a(18) of the

    Act and, therefore, there may be certain RTO or ISO participants

    engaging in transactions of the type described in the Proposed

    Exemption that would not qualify for the Proposed Exemption. In

    particular, the Commission is interested in considering market

    participants that ``active[ly] participat[e] in the generation,

    transmission or distribution of electricity'' that are not ECPs and do

    not fall within CEA section 4(c)(3)(A) through (J), who should

    nonetheless be included as appropriate persons pursuant to CEA section

    4(c)(3)(K). Accordingly, the Commission has requested comment on

    whether the Commission should enlarge the list of appropriate persons

    for purposes of the exemption to include other types of entities

    identified in the Petition that satisfy alternative criteria. Any

    request to include additional entities should be accompanied by a

    description of the financial or other qualifications of such entities

    or the available regulatory protections that would render them

    comparable to the appropriate persons and eligible contract

    participants delineated in the Act. The Commission also is interested

    in receiving comments addressing whether and how market participants

    who satisfy substitute qualifications would be capable of bearing the

    risks associated with the relevant markets.

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

    \380\ 7 U.S.C. 6(c)(3)(A)-(J).

    \381\ 7 U.S.C. 1a(18).

    \382\ 17 CFR 1.3(m).

    \383\ 7 U.S.C. 6(c).

    \384\ 7 U.S.C. 6(c)(3).

    \385\ See discussion in section V.B.3. supra.

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

    In order to be eligible for the exemption that would be provided by

    the Proposed Exemption, the agreement, contract or transaction also

    must be offered or sold pursuant to the ``tariff'' of a ``requesting

    party'' and the tariff must have been approved or permitted to take

    effect by the PUCT (in the case of ERCOT) or by FERC (in the case of

    all other Petitioners). This requirement reflects the range of the

    Commission's authority as set forth in section 4(c)(6) \386\ of the CEA

    and is consistent with the scope of the relief requested.\387\

    ``Requesting Party'' is defined to include the six Petitioners (i.e.,

    CAISO, ERCOT, ISO NE., MISO, NYSO and PJM) and any of their respective

    successors in interest. To account for differences in terminology used

    by such entities and their respective regulators, the term ``tariff''

    is defined to include a ``tariff, rate schedule or protocol.''

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

    \386\ See the discussion in section V.A. supra.

    \387\ Petition at 2-3.

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

    Consistent with the range of the statutory authority explicitly

    provided by CEA section 4(c), the Proposed Exemption would extend the

    exemption to the agreements, contracts or transactions set forth

    therein and ``any person or class of persons offering, entering into,

    rendering advice or rendering other services with respect to'' such

    transactions. In addition, for as long as the Proposed Exemption would

    remain in effect, each of the six named Petitioners \388\ would be able

    to avail themselves of the Proposed Exemption with respect to all four

    expressly-identified groups of products, regardless of whether or not

    the particular Petitioner offers the particular product at the present

    time. That is, a Petitioner would not be required to request future

    supplemental relief for a product that it does not currently offer, but

    that qualifies as one of the four types of transactions in the Proposed

    Exemption. All six Petitioners that filed the consolidated Petition

    requested an exemption of the scope provided and the Petition was

    analyzed accordingly.\389\ The exemption would not extend, however, to

    any RTO or ISO that was not a party to the Petition under consideration

    because the Commission has not reviewed the tariffs or business

    practices of any other RTO or ISO and, therefore, cannot discern

    whether extending the Proposed Exemption to it would be equally

    congruent with the public interest and the purposes of the Act. The

    Commission has determined to issue one Proposed Exemption in lieu of

    the six separate orders requested by Petitioners.\390\ In light of the

    fact that there are ``[congruents] in [the Petitioners'] markets and

    operations,'' and the fact that the exemption for each will be

    coextensive, as requested by the Petitioners,\391\ it would appear that

    issuing six separate but identical Proposed Exemptions that raise the

    same issues and questions is unnecessary, could result in needlessly

    duplicative comments and would be an inefficient use of Commission

    resources. Any concerns that the public may have with respect to

    providing relief to any particular Petitioner can be adequately

    explained in a sole comment on the consolidated Proposed Exemption. The

    Commission disagrees with the Petitioners' assertion that distinct

    orders are necessary because a solitary order would require each

    Petitioner to submit an individual application to obtain supplemental

    relief or to amend the relief provided thereby. To the contrary, the

    Commission confirms that individual Petitioners (or other entities) may

    file individual requests for supplemental exemptions and the Commission

    may, consistent with the criteria under CEA section 4(c)(6), issue

    further exemptions either individually or in the collective, as

    necessary or appropriate and in accordance with the facts and

    circumstances presented.\392\ In fact, ISO NE and CAISO have filed

    individual requests for supplemental relief that currently are under

    review by Commission staff.\393\

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

    \388\ CAISO, ERCOT, ISO NE., MISO, NYSO and PJM.

    \389\ The Requestors note that it is ``reasonable to expect that

    each ISO/RTO will, over time, consider offering under its own

    individual tariff one or more classes of contract, agreement and

    transaction that is currently offered under any other ISO/RTO

    tariff,'' and accordingly request that exemption be granted to all

    requestors for transactions that are currently offered by any of

    them. Petition at 6.

    \390\ See Petition at 2.

    \391\ See Petition at 6:

    ``While the ISOs/RTOs operate pursuant to individual tariffs,

    they share many commonalities in their markets and operations.

    Although the current market structures of the individual ISOs/RTOs

    may vary, it is reasonable to expect that each ISO/RTO will, over

    time, consider offering under its own individual tariff one or more

    classes of contract, agreement or transaction that is currently

    offered under any other ISO/RTO tariff. We thus request that each

    individual exemptive Order apply collectively to each class of

    contract, agreement or transaction provided by the ISOs/RTOs. This

    will provide the appropriate breadth to the exemptive Order so that

    an individual Requestor will not be required to seek future

    amendments to offer or enter into contracts, agreements or

    transactions that are currently offered by any other Requestor.''

    \392\ Section 4(c) permits the Commission to issue an exemption

    ``on its own initiative or on application of any person.'' 7 U.S.C.

    4(c)(1).

    \393\ See In the Matter of the Application for an Exemptive

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

    England Inc. (Apr. 30, 2012), available at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-ne4crequest.pdf. CAISO has filed a similar request for ``inter-

    scheduling coordinator trades'' or ``inter-SC trades.'' See In the

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

    of the Commodity Exchange Act by California Independent System

    Operator Corporation (May 30, 2012), available at http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/caiso4crequest.pdf.

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

    The Proposed Exemption indicates that, when a final order is

    issued, it would be made effective immediately. The Commission

    proposes, however, three conditions precedent to the issuance of a

    final exemption that may be applicable to one or more specific

    Petitioners. First, the Commission proposes to refrain from issuing a

    final order to a specific RTO or ISO unless the RTO or ISO has adopted

    all of requirements set forth in FERC regulation 35.47; \394\ such

    tariff provisions have been approved or have been permitted to take

    effect by FERC or PUCT, as applicable; and such tariff provisions, have

    become effective and have been fully implemented by the particular RTO

    or ISO. That is, the Commission is considering requiring

    [[Page 52165]]

    that any policies and procedures that the RTO or ISO has adopted in

    order to comply with the obligations contained in FERC regulation 35.47

    be in actual practice. Petitioners note that their structure and

    operations are different from the DCOs registered with the

    Commission.\395\ However, FERC Regulation 35.47 is a set of credit

    policies purpose-built for RTOs and ISOs.

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

    \394\ 18 CFR 35.47.

    \395\ See Petition Attachments at 1.

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

    The Commission's statutorily required determination that the

    Proposed Exemption is consistent with the public interest and the

    purposes of the Act was supported, in considerable part, on the grounds

    that the credit reform policies mandated by FERC regulation 35.47 \396\

    were consistent with the regulatory objectives of several of the core

    principles applicable to DCOs and the expectation that the Petitioners

    regulated by FERC would put those mandates into practice prior to the

    issuance of the exemption. Moreover, while ERCOT is not subject to

    regulation by FERC, the fact that these mandates were developed

    specifically for RTOs and ISOs suggests that holding ERCOT to these

    standards may well be appropriate.

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

    \396\ 18 CFR 35.47.

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

    While all Petitioners have represented that they have fulfilled

    certain requirements of FERC regulation 35.47, it appears that material

    gaps in complete execution remain.\397\ For example, due to requested

    extensions of time for compliance, certain Petitioners have only

    recently submitted tariffs to comply with FERC regulation 35.47(d)

    (accordingly, the tariffs remain subject to FERC approval) and, in some

    cases, full implementation is not expected until 2013.\398\ Because the

    implementation of the FERC credit reform policies is central to the

    Commission's determination that this exemption is in the public

    interest, it may well be that requiring Petitioners to have fully

    implemented such reforms prior to the issuance of a final order is

    necessary and appropriate.

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

    \397\ See generally FERC Order 741 Implementation Chart.

    \398\ See, e.g., FERC Order 741 Implementation Chart at 6

    (stating that ISO NE submitted a package of tariff changes with FERC

    to establish itself as the central counterparty for market

    participant transactions. The filing was made with a requested

    effective date of January 1, 2013).

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

    Second, the Commission proposes as an additional prerequisite to

    the issuance of an exemption to an RTO or ISO that the RTO or ISO

    provide a well-reasoned legal opinion or memorandum from outside

    counsel that, in the Commission's sole discretion, provides the

    Commission with assurance that the netting arrangements contained in

    the approach selected by the particular Petitioner to satisfy the

    obligations contained in FERC regulation 35.47(d) will, in fact,

    provide the Petitioner with enforceable rights of setoff against any of

    its market participants under title 11 of the United States Code \399\

    in the event of the bankruptcy of the market participant.\400\

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

    \399\ See 11 U.S.C. 553.

    \400\ See text at n. 122 and text at n. 208 supra.

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

    There appears to be strong support for the proposition that a

    central counterparty structure would achieve the mutuality of

    obligation necessary for enforceable rights of setoff for the central

    counterparty, and Petitioners have represented that they either are, or

    plan on becoming, central counterparties.\401\ The Commission is

    concerned, however, that there is some ambiguity as to how individual

    Petitioners are interpreting the single counterparty requirement

    contained in FERC regulation 35.47(d) and whether the single

    counterparty structure chosen by individual Petitioners would provide

    enforceable setoff rights. For example, the Petition states that ERCOT

    ``expects to adopt the central counterparty structure; however, this

    structure will not involve clearing, as that term applies to a

    designated clearing organization or swaps execution facility (i.e., the

    central counterparty does not act as a financial intermediary, nor is

    there any novation of transactions to a central counterparty).'' \402\

    The Commission shares FERC's goal of ensuring that, in the event of

    bankruptcy of a participant, Petitioners are not prohibited from

    offsetting accounts receivable against accounts payable. Consistent

    with that goal and to mitigate any ambiguity regarding the bankruptcy

    protections provided by the central counterparty arrangements adopted

    by particular Petitioners, the Commission is proposing to require, as a

    prerequisite to the granting of the 4(c) request to a particular

    Petitioner, that the Commission be provided with a legal opinion or

    memoranda of counsel, applicable to the tariffs and operations of that

    Petitioner, that provides the Commission with assurance that the

    approach selected by the Petitioner to satisfy the obligations

    contained in FERC regulation 35.47(d) will provide the Petitioner with

    rights of setoff, enforceable against any of its market participants

    under title 11 of the United States Code in the event of the bankruptcy

    of the market participant. The Commission would retain sole discretion

    to accept or reject the adequacy of the legal opinion or memoranda for

    purposes of issuing the exemption. As noted above, the Commission is

    seeking comment on the preconditions set forth above and the costs and

    benefits thereof.

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

    \401\ The Commission also notes that not all of the central

    counterparty arrangements proposed by Petitioners have been approved

    by their respective regulators and/or become effective and,

    accordingly, are potentially subject to change. See, e.g., FERC

    Order 741 Implementation Chart at 5-6.

    \402\ Petition Attachments at 28.

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

    Third, the Proposed Exemption would be conditioned, as applicable

    to ERCOT, on the completion of an information sharing agreement,

    acceptable to the Commission, between the PUCT and the Commission. As

    with the 2005 Memorandum of Understanding (``MOU'') between the

    Commission and FERC, as discussed below, the Commission would expect

    the terms of a CFTC-PUCT MOU to provide that PUCT will furnish

    information in its possession to the CFTC upon its request and will

    notify the CFTC if any information requested by it is not in PUCT's

    possession. As noted above, the Commission is seeking comment on the

    preconditions set forth above and the costs and benefits thereof.

    The Proposed Exemption also contains certain information-sharing

    conditions. First, the Proposed Exemption is expressly conditioned upon

    the existing information sharing arrangement between the Commission and

    FERC, and, as noted above, the completion of an information sharing

    agreement between the Commission and PUCT. The Commission notes that

    the CFTC and FERC executed a MOU in 2005 pursuant to which the agencies

    have shared information successfully.\403\ The terms of the CFTC-FERC

    MOU provide that FERC will furnish information in its possession to the

    CFTC upon its request and will notify the CFTC if any information

    requested by it is not in FERC's possession.

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

    \403\ FERC MOU (Oct. 12, 2005) available at http://www.ferc.gov/legal/maj-ord-reg/mou/mou-33.pdf.

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

    The Petitioners recognize the need to be responsive to Commission

    requests for information and ``to assist the Commission as necessary in

    fulfilling its mission under the Act'' \404\ and Petitioners have

    indicated their intent to be responsive to requests for information by

    the Commission that will further enable the Commission to perform its

    regulatory and enforcement duties.\405\ Petitioners caveat this

    assistance, however, by stating that ``certain of the tariffs may

    require that

    [[Page 52166]]

    an ISO/RTO notify its members prior to providing information in

    response to a subpoena.'' \406\ This notice requirement could

    significantly compromise the Commission's enforcement efforts as there

    are likely to be situations where it would be neither prudent nor

    advisable for an entity under investigation by the Commission to learn

    of the investigation prior to Commission notification to the entity.

    Accordingly, the Proposed Exemption includes a second information-

    sharing condition that requires that neither the tariffs nor any other

    governing documents of the particular RTO or ISO pursuant to whose

    tariff the agreement, contract or transaction is to be offered or sold,

    shall include any requirement that the RTO or ISO notify its members

    prior to providing information to the Commission in response to a

    subpoena or other request for information or documentation. The

    Commission specifically requests comment on this condition and as to

    whether there may be an alternative condition that the Commission might

    use to achieve the same result.

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

    \404\ Petition at 25.

    \405\ Id. at 25-26.

    \406\ Id. at 26.

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

    Finally, the Proposed Exemption expressly notes that it is based

    upon the representations made in the Petition and in the supporting

    materials provided to the Commission by the Petitioners and their

    counsel and that any material change or omission in the facts and

    circumstances pursuant to which the Proposed Exemption is granted might

    require the Commission to reconsider its finding that the exemption

    contained therein is appropriate and/or in the public interest. The

    Commission has also explicitly reserved the discretionary authority, to

    suspend, terminate or otherwise modify or restrict the exemption

    provided. The reservation of these rights is consistent with prior

    Commission practice and is necessary to provide the Commission with the

    flexibility to address relevant facts or circumstances as they arise.

    B. Proposed Exemption

    Consistent with the determinations set forth above, the Commission

    hereby proposes to issue the following Order:

    Pursuant to its authority under section 4(c)(6), in accordance with

    CEA sections 4(c)(1) and (2), of the Commodity Exchange Act (``CEA'' or

    Act''), the Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'').

    1. Exempts, subject to the conditions and limitations specified

    herein, the purchase or sale of the electricity-related agreements,

    contracts, and transactions that are specified in paragraph 2 of this

    Order and any person or class of persons offering, entering into,

    rendering advice, or rendering other services with respect thereto,

    from all provisions of the CEA, except, in each case, the Commission's

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

    the CEA, including, but not limited to, CEA sections 2(a)(1)(B), 4b,

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

    13 and any implementing regulations promulgated thereunder including,

    but not limited to, Commission regulations 23.410(a) and (b), 32.4 and

    part 180.

    2. Scope. This exemption applies only to agreements, contracts and

    transactions that satisfy all of the following requirements:

    a. The agreement, contract or transaction is for the purchase and

    sale of one of the following electricity-related products:

    (1) The ``Financial Transmission Rights'' defined in paragraph 5(a)

    of this Order, except that the exemption shall only apply to such

    Financial Transmission Rights where:

    (a) Each Financial Transmission Right is linked to, and the

    aggregate volume of Financial Transmission Rights for any period of

    time is limited by, the physical capability (after accounting for

    counterflow) of the electricity transmission system operated by a

    Requesting Party offering the contract, for such period;

    (b) The Requesting Party serves as the market administrator for the

    market on which the Financial Transmission Rights are transacted;

    (c) Each party to the transaction is a member of the Requesting

    Party (or is the Requesting Party itself) and the transaction is

    executed on a market administered by that Requesting Party; and

    (d) The transaction does not require any party to make or take

    physical delivery of electricity.

    (2) ``Energy Transactions'' as defined in paragraph 5b of this

    Order.

    (3) ``Forward Capacity Transactions,'' as defined in paragraph 5c

    of this Order.

    (4) ``Reserve or Regulation Transactions'' as defined in paragraph

    5d of this Order.

    b. All parties to the agreement, contract or transaction are

    ``appropriate persons,'' as defined sections 4(c)(3)(A) through (J) of

    the CEA or ``eligible contract participants'' as defined in section

    1a(18)(A) of the CEA and in Commission regulation 1.3(m).

    c. The agreement, contract or transaction is offered or sold

    pursuant to a Requesting Party's tariff and that tariff has been

    approved or permitted to take effect by:

    (1) In the case of the Electricity Reliability Council of Texas

    (``ERCOT''), the Public Utility Commission of Texas (``PUCT'') or

    (2) In the case of all other Requesting Parties, the Federal Energy

    Regulatory Commission (``FERC'').

    3. Applicability to particular regional transmission organizations

    (``RTOs'') and independent system operators (``ISOs''). Subject to the

    conditions contained in the Order, the Order applies to all Requesting

    Parties with respect to the transactions described in paragraph 2 of

    this Order.

    4. Conditions. The exemption provided by this Order is expressly

    conditioned upon the following:

    a. Information sharing: With respect to ERCOT, information sharing

    arrangements between the Commission and PUCT that are acceptable to the

    Commission are executed and continue to be in effect. With respect to

    all other Requesting Parties, information sharing arrangements between

    the Commission and FERC that are acceptable to the Commission continue

    to be in effect.

    b. Notification of requests for information: With respect to each

    Requesting Party, neither the tariffs nor any other governing documents

    of the particular RTO or ISO pursuant to whose tariff the agreement,

    contract or transaction is to be offered or sold, shall include any

    requirement that the RTO or ISO notify its members prior to providing

    information to the Commission in response to a subpoena or other

    request for information or documentation.

    5. Definitions. The following definitions shall apply for purposes

    of this Order:

    a. A ``Financial Transmission Right'' is a transaction, however

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

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

    electricity, established on an electricity market administered by a

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

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

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

    Requesting Party). The term ``Financial Transmission Rights'' includes

    Financial Transmission Rights and Financial Transmission Rights in the

    form of options (i.e., where one party has only the obligation to pay,

    and the other party only the right to receive, an amount as described

    above).

    b. ``Energy Transactions'' are transactions in a ``Day-Ahead

    Market''

    [[Page 52167]]

    or ``Real-Time Market,'' as those terms are defined in paragraphs 5e

    and 5f of this Order, for the purchase or sale of a specified quantity

    of electricity at a specified location (including ``Demand Response,''

    as defined in paragraph 5c(2) of this Order, where:

    (1) The price of the electricity is established at the time the

    transaction is executed;

    (2) Performance occurs in the Real-Time Market by either

    (a) Delivery or receipt of the specified electricity, or

    (b) A cash payment or receipt at the price established in the Real-

    Time Market; and

    (3) The aggregate cleared volume of both physical and cash-settled

    energy transactions for any period of time is limited by the physical

    capability of the electricity transmission system operated by a

    Requesting Party for that period of time.

    c. ``Forward Capacity Transactions'' are transactions in which a

    Requesting Party, for the benefit of load-serving entities, purchases

    any of the rights described in subparagraphs (1), (2) and (3) below. In

    each case, to be eligible for the exemption, the aggregate cleared

    volume of all such transactions for any period of time shall be limited

    to the physical capability of the electricity transmission system

    operated by a Requesting Party for that period of time.

    (1) ``Generation Capacity,'' meaning the right of a Requesting

    Party to:

    (a) Require certain sellers to maintain the interconnection of

    electric generation facilities to specific physical locations in the

    electric-power transmission system during a future period of time as

    specified in the Requesting Party's Tariff;

    (b) Require such sellers to offer specified amounts of electric

    energy into the Day-Ahead or Real-Time Markets for electricity

    transactions; and

    (c) Require, subject to the terms and conditions of a Requesting

    Party's Tariff, such sellers to inject electric energy into the

    electric power transmission system operated by the Requesting Party;

    (2) ``Demand Response,'' meaning the right of a Requesting Party to

    require that certain sellers of such rights curtail consumption of

    electric energy from the electric power transmission system operated by

    a Requesting Party during a future period of time as specified in the

    Requesting Party's Tariff; or

    (3) ``Energy Efficiency,'' meaning the right of a Requesting Party

    to require specific performance of an action or actions that will

    reduce the need for Generation Capacity or Demand Response Capacity

    over the duration of a future period of time as specified in the

    Requesting Party's Tariff.

    d. ``Reserve or Regulation Transactions'' are transactions:

    (1) In which a Requesting Party, for the benefit of load-serving

    entities and resources, purchases, through auction, the right, during a

    period of time as specified in the Requesting Party's Tariff, to

    require the seller of such right to operate electric facilities in a

    physical state such that the facilities can increase or decrease the

    rate of injection or withdrawal of a specified quantity of electricity

    into or from the electric power transmission system operated by the

    Requesting Party with:

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

    response time interval specified in a Requesting Party's Tariff

    (Reserve Transaction); or

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

    Control Error Regulation Transaction);

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

    the following:

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

    Ahead or Real-Time Market, as those terms are defined in paragraphs 5f

    and 5g of this Order, price for electricity applicable whenever the

    Requesting Party exercises its right that electric energy be delivered

    (including Demand Response, '' as defined in paragraph 5c(2) of this

    Order);

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

    consuming electricity or other services during any period during which

    the Requesting Party requires that the seller not supply energy or

    other services;

    (c) An upfront payment determined through the auction administered

    by the Requesting Party for this service;

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

    other attributes of physical performance as specified in the Requesting

    Party's Tariff; and

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

    transactions for a Requesting Party for any period of time shall be

    limited to the physical capability of the electricity transmission

    system operated by the Requesting Party for that period of time.

    e. ``Day-Ahead Market'' means an electricity market administered by

    a Requesting Party on which the price of electricity at a specified

    location is determined, in accordance with the Requesting Party's

    Tariff, for specified time periods, none of which is later than the

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

    clears.

    f. ``Real-Time Market'' means an electricity market administered by

    a Requesting Party on which the price of electricity at a specified

    location is determined, in accordance with the Requesting Party's

    tariff, for specified time periods within the same 24-hour period.

    g. ``Requesting Party'' means California Independent Service

    Operator Corporation (``CAISO''); ERCOT; ISO New England Inc. (``ISO

    NE''); Midwest Independent Transmission System Operator, Inc.

    (``MISO''); New York Independent System Operator, Inc. (``NYISO'') or

    PJM Interconnection, L.L.C. (``PJM''), or any successor in interest to

    any of the foregoing.

    h. ``Tariff.'' Reference to a Requesting Party's ``tariff''

    includes a tariff, rate schedule or protocol.

    i. ``Petition'' means the consolidated petition for an exemptive

    order under 4(c)(6) of the CEA filed by CAISO, ERCOT, ISO NE., MISO, NY

    ISO and PJM on February 7, 2012, as later amended.

    6. Effective Date. This Order is effective immediately.

    This order is based upon the representations made in the

    consolidated petition for an exemptive order under 4(c) of the CEA

    filed by the Requesting Parties \407\ and supporting materials provided

    to the Commission by the Requesting Parties and their counsel. Any

    material change or omission in the facts and circumstances pursuant to

    which this order is granted might require the Commission to reconsider

    its finding that the exemption contained therein is appropriate and/or

    in the public interest. Further, the Commission reserves the right, in

    its discretion, to revisit any of the terms and conditions of the

    relief provided herein, including but not limited to, making a

    determination that certain entities and transactions described herein

    should be subject to the Commission's full

    [[Page 52168]]

    jurisdiction, and to condition, suspend, terminate or otherwise modify

    or restrict the exemption granted in this order, as appropriate, upon

    its own motion.

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

    \407\ In the Matter of the Petition for an Exemptive Order Under

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

    Service Operator Corporation (``CAISO''); In the Matter of the

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

    Exchange Act by the Electric Reliability Council of Texas, Inc.

    (``ERCOT''); In the Matter of the Petition for an Exemptive Order

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

    Inc. (``ISO NE''); In the Matter of the Petition for an Exemptive

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

    Independent Transmission System Operator, Inc. (``MISO''); In the

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

    the Commodity Exchange Act by New York Independent System Operator,

    Inc. (``NYISO''); and In the Matter of the Petition for an Exemptive

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

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

    2012).

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

    IX. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \408\ (``RFA'') requires that

    agencies consider whether the Proposed Exemption will have a

    significant economic impact on a substantial number of small entities

    and, if so, provide a regulatory flexibility analysis respecting the

    impact. The Commission believes that the Proposed Exemption will not

    have a significant economic impact on a substantial number of small

    entities. The Proposed Exemption detailed in this release would affect

    organizations including Petitioners and eligible contract participants

    (``ECPs'').\409\ The Commission has previously determined that ECPs are

    not ``small entities'' for purposes of the RFA.\410\ In addition, the

    Commission believes that Petitioners should not be considered small

    entities based on the central role they play in the operation of the

    electronic transmission grid and the creation of organized wholesale

    electric markets that are subject to FERC and PUCT regulatory

    oversight,\411\ analogous to functions performed by DCMs and DCOs,

    which the Commission has determined not to be small entities.\412\

    Accordingly, the Commission does not expect the Proposed Exemption

    to have a significant impact on a substantial number of entities.

    Therefore, the Chairman, on behalf of the Commission, hereby certifies,

    pursuant to 5 U.S.C. 605(b), that the Proposed Exemption would not have

    a significant economic impact on a substantial number of small

    entities. The Commission invites the public to comment on whether the

    entities covered by this Proposed Exemption should be considered small

    entities for purposes of the RFA, and, if so, whether there is a

    significant impact on a substantial number of entities.

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

    \408\ 5 U.S.C. 601 et seq.

    \409\ Under CEA section 2(e), only ECPs are permitted to

    participate in a swap subject to the end-user clearing exception.

    \410\ See Opting Out of Segregation, 66 FR 20740 at 20743, Apr.

    25, 2001.

    \411\ See RFA analysis as conducted by FERC regarding the 5

    Petitioners, CAISO, NYISO, PJM, MISO and ISO NE., https://www.federalregister.gov/articles/2011/10/26/2011-27626/enhancement-of-electricity-market-surveillance-and-analysis-through-ongoing-electronic-delivery-of#h-17.

    Commission staff also performed an independent RFA analysis

    based on Subsector 221 of Sector 22 (utilities companies) which

    defines any small utility corporation as one that does not generate

    more than 4 million of megawatts of electricity per year, and

    Subsector 523 of Sector 52 (Securities, Commodity Contracts, and

    Other Financial Investments and Related Activities) of the SBA, 13

    CFR 121.201 (1-1-11 Edition), which identifies a small business size

    standard of $7 million or less in annual receipts. Staff concludes

    that none of the Petitioners is a small entity, based on the

    following information:

    MISO reports 594 million megawatt hours per year, https://www.midwestiso.org/Library/Repository/Communication%20Material/Corporate/Corporate%20Fact%20Sheet.pdf;

    ERCOT reports 335 million megawatt hours per year, http://www.ercot.com/content/news/presentations/2012/ERCOT_Quick_Facts_June_%202012.pdf;

    CAISO reports 200 million megawatts per year, http://www.caiso.com/Documents/CompanyInformation_Facts.pdf;

    NYISO reports 17 million megawatts per month, which calculates

    to 204 megawatts per year, http://www.nyiso.com/public/about_nyiso/nyisoataglance/index.jsp;

    PJM reports $35.9 billion billed in 2011, http://pjm.com/markets-and-operations.aspx; and

    ISO NE reports 32,798 gigawatt hours in the first quarter of

    2011, which translates into almost 33 million megawatts for the

    first quarter of 2011, http://www.iso-ne.com/markets/mkt_anlys_rpts/qtrly_mktops_rpts/2012/imm_q1_2012_qmr_final.pdf.

    \412\ See A New Regulatory Framework for Clearing Organizations,

    66 FR 45604, 45609, Aug. 29, 2001(DCOs); Policy Statement and

    Establishment of Definitions of ``Small Entities'' for Purposes of

    the Regulatory Flexibility Act, 47 FR 18618, 18618-18619, Apr. 30,

    1982 (DCMs).

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    B. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501

    et seq. (``PRA'') are, among other things, to minimize the paperwork

    burden to the private sector, ensure that any collection of information

    by a government agency is put to the greatest possible uses, and

    minimize duplicative information collections across the government. The

    PRA applies to all information, ``regardless of form or format,''

    whenever the government is ``obtaining, causing to be obtained [or]

    soliciting'' information, and includes requires ``disclosure to third

    parties or the public, of facts or opinions,'' when the information

    collection calls for ``answers to identical questions posed to, or

    identical reporting or recordkeeping requirements imposed on, ten or

    more persons.'' The PRA would not apply in this case given that the

    exemption would not impose any new recordkeeping or information

    collection requirements, or other collections of information on ten or

    more persons that require approval of the Office of Management and

    Budget (``OMB'').

    C. Cost-Benefit Considerations

    1. Consideration of Costs and Benefits

    a. Introduction

    Section 15(a) of the CEA \413\ requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. In proposing this exemption,

    the Commission is required by section 4(c)(6) to ensure the same is

    consistent with the public interest. In much the same way, 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.

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

    \413\ 7 U.S.C. 19(a).

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

    As discussed above, in response to a Petition from certain regional

    transmission organizations and independent system operators, the

    Commission is proposing to exempt specified transactions from the

    provisions of the CEA and Commission regulations with the exception of

    those prohibiting fraud and manipulation (i.e., sections 2(a)(1)(B),

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

    and 13 and any implementing regulations promulgated thereunder

    including, but not limited to, Commission regulations 23.410(a) and

    (b), 32.4 and part 180). The Proposed Exemption is transaction-

    specific--that is, it would exempt contracts, agreements and

    transactions for the purchase or sale of the limited set of

    electricity-related products that are offered or entered into in a

    market administered by a Petitioner pursuant to that Petitioner's

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

    physical resources.

    More specifically, the Commission is proposing to exempt from most

    provisions of the CEA certain ``financial transmission rights,''

    ``energy transactions,'' ``forward capacity transactions,'' and

    ``reserve or regulation transactions,'' as those terms are defined in

    the proposed Order, if such transactions are offered or entered into

    pursuant to a tariff under which a Petitioner operates that has been

    approved by FERC or the Public Utility

    [[Page 52169]]

    Commission of Texas, as applicable. The Proposed Exemption extends to

    any persons (including Petitioners, their members and their market

    participants) offering, entering into, rendering advice, or rendering

    other services with respect to such transactions. Important to the

    Commission's Proposed Exemption is the Petitioners' representations

    that the aforementioned transactions are: (i) Tied to the physical

    capacity of the Petitioner's electricity grids; (ii) used to promote

    the reliable delivery of electricity; and (iii) are intended for use by

    commercial participants that are in the business of generating,

    transmitting and distributing electricity. In other words, these are

    not purely financial transactions; rather, they are inextricably linked

    to, and limited by, the capacity of the grid to physically deliver

    electricity.

    In the discussion that follows, the Commission considers the costs

    and benefits of the proposed Order to the public and market

    participants generally, including the costs and benefits of the

    conditions precedent that must be satisfied before a Petitioner may

    claim the exemption.

    b. Proposed Baseline

    The Commission's proposed baseline for consideration of the costs

    and benefits of this Proposed Exemption are the costs and benefits that

    the public and market participants (including Petitioners) would

    experience in the absence of this proposed regulatory action. In other

    words, the proposed baseline is an alternative situation in which the

    Commission takes no action, meaning that the transactions that are the

    subject of this Petition would be required to comply with all of the

    CEA and Commission regulations, as may be applicable. In such a

    scenario, the public and market participants would experience the full

    benefits and costs related to the CEA and Commission regulations, but

    as discussed in detail above, the transactions would still be subject

    to the congruent regulatory regimes of the FERC and PUCT. In areas

    where the Commission believed additional requirements were necessary to

    ensure the public interest, the Commission proposed additional

    requirements (e.g., the requirement that Petitioners submit a

    memorandum or opinion of counsel to the Commission confirming the

    enforceability of the Petitioners' netting arrangements in the event of

    a bankruptcy of a participant).

    The Commission also considers the regulatory landscape as it exists

    outside the context of the Dodd-Frank Act's enactment. Here too, it is

    important to highlight Petitioners' representations that each of the

    transactions for which an exemption is requested is already subject to

    a long-standing, comprehensive regulatory framework for the offer and

    sale of such transactions established by FERC, or in the case of ERCOT,

    the PUCT. For example, the costs and benefits attendant to the

    Commission's condition that transactions be entered into between

    ``appropriate persons'' as described in CEA section 4(c)(3) has an

    analog outside the context of the Dodd-Frank Act in FERC's minimum

    criteria for RTO market participants as set forth in FERC Order 741.

    In the discussion that follows, where reasonably feasible, the

    Commission endeavors to estimate quantifiable dollar costs of the

    Proposed Exemption. The benefits of the Proposed Exemption, as well as

    certain costs, however, are not presently susceptible to meaningful

    quantification. Most of the costs arise from limitations on the scope

    of the proposed Order, and many of the benefits arise from avoiding

    defaults and their implications that are clearly large in magnitude,

    but impracticable to estimate. Where it is unable to quantify, the

    Commission discusses proposed costs and benefits in qualitative terms.

    c. Costs

    The Proposed Order is exemptive and would provide potentially

    eligible transactions with relief from the requirements of the CEA and

    attendant Commission regulations. As with any exemptive rule or order,

    the proposal is permissive, meaning that Petitioners were not required

    to request it and are not required to rely on it. Accordingly, the

    Commission assumes that Petitioners required and would rely on the

    Proposed Exemption only if the anticipated benefits warrant the costs

    of the same. Here, the Proposed Exemption identifies certain conditions

    precedent to the grant of the Proposed Exemption. The Commission is of

    the view that, as a result of the conditions, Petitioners, market

    participants and the public would experience minimal, if any, ongoing,

    incremental costs as a result of these conditions. This is so because,

    as Petitioners certify pursuant to CFTC Rule 140.99(c)(3)(ii), the

    attendant conditions are substantially similar to requirements that

    Petitioners and their market participants already incur in complying

    with FERC or PUCT regulation.

    The first condition--that all parties to the agreements, contracts

    or transactions that are covered by the Proposed Exemption must be

    either ``appropriate persons,'' as such term is defined in sections

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

    participants,'' as such term is defined in section 1a(18)(A) of the Act

    and in Commission regulation 1.3(m)--should not impose any significant,

    incremental costs because Petitioners must already incur costs in

    complying with their existing legal and regulatory obligations under

    the FPA and FERC or PUCT regulations, which mandate that only eligible

    market participants may engage in the transactions that are the subject

    of this proposal, as explained in section V.B.3. above.

    The second is that the agreements, contracts or transactions that

    are covered by the Proposed Exemption must be offered or sold pursuant

    to a Petitioner's tariff, which has been approved or permitted to take

    effect by: (1) In the case of ERCOT, the PUCT or; (2) in the case of

    all other Petitioners, FERC. This is a statutory requirement for the

    exemption. See CEA 4(c)(6)(A), (B). Moreover, requiring that

    Petitioners' not operate outside their tariff requirements derives from

    existing legal requirements and is not a cost attributable to this

    proposal.

    Third, as described in section V.B.1. above, FERC and PUCT impose

    on their respective Petitioners, and their market monitors, various

    information management requirements. These existing requirements are

    not materially different from the condition that none of a Petitioner's

    tariffs or other governing documents may include any requirement that

    the Petitioner notify a member prior to providing information to the

    Commission in response to a subpoena or other request for information

    or documentation. However, certain existing tariffs (see footnote 406

    and accompanying text) may not currently meet the condition; therefore

    the Commission requests comment as to whether this condition imposes a

    significant burden or increase in cost on Petitioners with such

    tariffs, and whether there are alternative conditions that may be used

    to achieve a similar result. Further, Petitioners have agreed to

    provide any information to the Commission upon request that will

    further enable the Commission to perform its regulatory and enforcement

    duties. While the Commission is mindful that the process of responding

    to subpoenas or requests for information involves costs, such subpoenas

    and requests for information, and thus the associated costs, are

    independent of the current proposed Order.

    Fourth, information sharing arrangements that are satisfactory to

    the Commission between the Commission and FERC, and the Commission and

    PUCT, must be in full force and effect

    [[Page 52170]]

    is not a cost to Petitioners or to other members of the public but, in

    the case of FERC, has been an inter-agency norm since 2005. Moreover,

    and with respect to the proposed condition that would require the

    Commission and PUCT to enter into an information sharing arrangement,

    the sharing of information between government agencies is an efficient

    means of reducing governmental costs.

    Finally, the Commission is proposing to require, as a prerequisite

    to the granting of the 4(c)(6) request to a particular Petitioner, that

    the Petitioner provide the Commission with a legal opinion or memoranda

    of counsel that provides the Commission with assurance that the

    approach selected by the Petitioner to satisfy the obligations

    contained in FERC regulation 35.47(d) will provide the Petitioner with

    enforceable rights of setoff against any of its market participants

    under title 11 of the United States Code in the event of the bankruptcy

    of the market participant. For instance, for transactions in a DCO

    context, the DCO is clearly the central counterparty. In the case of

    most ISOs and RTOs, there has been some ambiguity in this regard. As a

    result of this ambiguity, in the event of the bankruptcy of a

    participant, there is a concern that ISOs and RTOs may be liable to pay

    a bankrupt participant for transactions in which that participant is

    owed funds, without the ability to net amounts owed by the market

    participant in a bankruptcy, despite the fact that the tariffs

    submitted by the Petitioners to FERC include explicit language

    permitting set-off and netting.\414\ As FERC expressed in the FERC

    Credit Rulemaking and the FERC Order on Rehearing, there is a risk that

    the explicit tariff language may be insufficient to protect the

    Petitioners in bankruptcy, and even if this risk were to be at a low

    probability of manifestation, there would be a high cost to market

    participants and the stability of the markets if it did so.\415\ The

    Commission would require that the opinions or memoranda would be

    addressed to the Commission and would be signed on behalf of the law

    firm that is issuing the opinion, rather than by specific partners and/

    or associates. The Commission also would require the text of the

    opinion or memoranda to satisfy certain enumerated criteria. Based on

    the Laffey Matrix for 2012, assuming the opinion is prepared by a

    seasoned attorney (with 20 plus years of legal practice), his/her

    hourly rate ($734 per hour) multiplied by the amount of hours taken to

    prepare the opinion, will be the basic cost of such an opinion.\416\

    The Commission estimates that the cost of such memoranda will range

    between $15,000 and $30,000, part of which depends on the complexity of

    the analysis necessary to support the conclusion that the Petitioner's

    setoff rights are enforceable, and assuming that the opinion will take

    20-40 hours to prepare.\417\

    d. Benefits

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

    \414\ See, e.g., In re Semcrude, 399 B.R. 388, 393 (Bank. D.

    Del. 2009) (stating that ``debts are considered `mutual' only when

    `they are due to and from the same persons in the same capacity.'

    '').

    \415\ See 75 FR at 65955.

    \416\ The Court in Laffey v. Northwest Airlines, Inc., 572

    F.Supp. 354, 371 (D.D.C. 1983) ruled that hourly rates for attorneys

    practicing civil law in the Washington, DC metropolitan area could

    be categorized by years in practice and adjusted yearly for

    inflation. For 2012 Laffey Matrix rates, see http://www.justice.gov/usao/dc/divisions/civil_Laffey_Matrix_2003-2012.pdf.

    \417\ There are possibilities of economies of scale if multiple

    Petitioners share the same counsel in preparing these memoranda or

    opinions.

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

    In proposing this exemption, the Commission is required by section

    4(c)(6) to ensure the same is consistent with the public interest. In

    much the same way, CEA section 15(a) requires that the Commission

    consider the benefits to the public of its action. In meeting its

    public interest obligations under both 4(c)(6) and 15(a), the

    Commission in sections V.B.1. and V.D. proposes a detailed

    consideration of the nature of the transactions and FERC and PUCT

    regulatory regimes, including whether the protections provided by those

    regimes are, at a minimum, congruent with the Commission's oversight of

    DCOs and SEFs.

    This exercise is not rote; rather, in proposing that this exemption

    is in the public interest, the Commission's comprehensive action

    benefits the public and market participants in several substantive

    ways, as discussed below. In addition, by considering a single

    application from all Petitioners at the same time, and proposing to

    allow all provisions of the exemption to apply to all Petitioners and

    their respective market participants with respect to each category of

    electricity-related products described in the Petition, regardless of

    whether such products are offered or entered into at the current time

    pursuant to an individual Petitioner's tariff, this proposal provides a

    cost-mitigating, procedural efficiency. The Commission's proposal also

    reduces the potential need for future amendments to the final exemption

    in order for one Petitioner to offer or enter into the same type of

    transactions currently offered by another.

    In more substantive terms, by requiring that the transactions at

    issue are, in fact, limited to those that are administered by the

    petitioning RTOs/ISOs, and are inextricably linked to the organized

    wholesale electricity markets that are subject to FERC and PUCT

    regulation and oversight, the Commission limits the scope of the

    proposed relief. In so doing, the proposal minimizes the potential that

    purely financial risk can accumulate outside the comprehensive regime

    for swaps regulation established by Congress in the Dodd-Frank Act and

    implemented by the Commission. The mitigation of such risk inures to

    the benefit of Petitioners, market participants and the public,

    especially Petitioners' members and electricity ratepayers.

    The condition that only ``appropriate persons'' may enter the

    transactions that are the subject of this proposal benefits the public

    and market participants by ensuring that (1) only persons with

    resources sufficient to understand and manage the risks of the

    transactions are permitted to engage in the same, and (2) persons

    without such resources do not impose credit costs on other participants

    (and the ratepayers for such other participants). Further, the

    condition requiring that the transactions only be offered or sold

    pursuant to a FERC or PUCT tariff benefits the public by, for example,

    ensuring that the transactions are subject to a regulatory regime that

    is focused on the physical provision of reliable electric power, and

    also has credit requirements that are designed to achieve risk

    management goals congruent with the regulatory objectives of the

    Commission's DCO Core Principles. Absent these and other similar

    limitations on participant- and financial-eligibility, the integrity of

    the markets at issue could be compromised and members and ratepayers

    left unprotected from potentially significant losses. Moreover, the

    Commission's requirement that Petitioner's file an opinion of counsel

    regarding the right of set-off in bankruptcy provides a benefit in that

    the analytical process necessary to formulate such an opinion would

    highlights risks faced by the Petitioners, and permit them to adapt

    their structure and procedures in a manner best calculated to mitigate

    such risks, and thus helps ensure the orderly handling of financial

    affairs in the event a participant fails as a result of these

    transactions.

    Finally, the Commission's retention of its authority to redress any

    fraud or manipulation in connection with the transactions at issue

    protects market participants and the public generally, as

    [[Page 52171]]

    well as the financial markets for electricity products. For example, a

    condition precedent to the Proposed Exemption is effective information

    sharing arrangements between the FERC and the Commission, and PUCT and

    the Commission. Through such an arrangement, the Commission expects

    that it will be able to request information necessary to examine

    whether activity on Petitioners' markets is adversely affecting the

    Commission regulated markets. Further, the condition precedent that

    Petitioners not notify a member prior to providing the Commission with

    information will help maximize the effectiveness of the Commission's

    enforcement program.

    e. Costs and Benefits as Compared to Alternatives

    The Commission considered alternatives to the proposed rulemaking.

    For instance, the Commission could have chosen: (i) Not to propose an

    exemption or (ii), as Petitioners' requested, to provide relief for

    ``the purchase and sale of a product or service that is directly

    related to, and a logical outgrowth of, any [of Petitioners'] core

    functions as an ISO/RTO * * * and all services related thereto.''

    Regarding this latter request, the Commission understands the Petition

    as requesting relief for transactions not yet in existence. In this

    Order, the Commission proposes what it considers a measured approach--

    in terms of the implicated costs and benefits of the exemption--given

    its current understanding of transactions at issue.

    Regarding the first alternative, the Commission considered that

    Congress, in the Dodd-Frank Act, required the Commission to exempt

    certain contracts, agreements or transactions from duties otherwise

    required by statute or Commission regulation by adding a new section

    that permits the Commission to exempt from its regulatory oversight

    agreements, contracts, or transactions traded pursuant to an RTO or ISO

    tariff that has been approved or permitted to take effect by FERC or a

    State regulatory authority, as applicable, where such exemption was in

    the public interest and consistent with the purposes of the CEA. Having

    concluded that the instant exemption meets those tests, the Commission

    proposes that a no exemption alternative would be inconsistent with

    Congressional intent and contrary to the public interest. At the same

    time, however, the Commission believes it would also be inappropriate

    to adopt the second alternative.

    The second alternative would extend the Proposed Exemption to all

    ``logical outgrowths'' of the transactions at issue. The Commission

    proposes that such an exemption would be contrary to the Commission's

    obligation under section 4(c) of the Act. As noted above, the authority

    to issue an exemption from the CEA provided by section 4(c) of the Act

    may not be automatically or mechanically exercised. Rather, the

    Commission is required to affirmatively determine, inter alia, that the

    exemption would be consistent with the public interest and the purposes

    of the Act.

    With respect to the four groups of transactions detailed in the

    Proposed Exemption, the Commission's finding that the Proposed

    Exemption would be in the public interest and would be consistent with

    the purposes of the CEA is grounded, in part, on known transaction

    characteristics and market circumstances described in the Petition that

    may or may not be shared by other, as yet undefined, transactions

    engaged in by the Petitioners or other RTO or ISO market participants.

    Similarly, unidentified transactions might include novel features or

    have market implications or risks that are beyond evaluation at the

    present time, and are not present in the specified transactions.

    2. Consideration of CEA Section 15(a) Factors with respect to the

    Proposed Order

    a. Protection of Market Participants and the Public

    In proposing the exemption as it did, the Commission endeavored to

    provide relief that was in the public interest. A key component of that

    consideration is the assessment of how the Proposed Exemption protects

    market participants and the public. As discussed above, market

    participants and the public are protected by the existing regulatory

    structure that includes congruent regulatory goals, and by the four

    conditions placed upon the proposed relief by requiring, inter alia,

    that: (i) Only those with the financial wherewithal are permitted to

    engage in the transactions; (ii) the transactions at issue must be

    within the scope of a Petitioner's FERC or PUCT tariff; (iii) no

    advance notice to members of information requests to Petitioners from

    the Commission; and (iv) the Commission and FERC, and PUCT and the

    Commission, must have an information sharing arrangement in full force

    and effect. Additionally, the requirement that Petitioners file and

    opinion of counsel regarding bankruptcy matters provides additional

    information from which the Commission may be assured that the netting

    that Petitioners rely upon as an integral part of their risk management

    is in fact enforceable.

    b. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    To the extent that the transactions at issue could have an indirect

    effect on the efficiency, competitiveness, and financial integrity of

    the markets subject to the Commission's jurisdiction, the relief is

    tailored in such a way as to mitigate any such effects. More

    specifically, the Proposed Exemption is limited to the transactions

    identified and defined herein. In this way, the Commission eliminates

    the potential that as-yet-unknown transactions not linked to the

    physicality of the electric system may be offered or sold under this

    Proposed Exemption. Further, the Commission's retention of its full

    enforcement authority will help ensure that any misconduct in

    connection with the exempted transactions does not jeopardize the

    financial integrity of the markets under the Commission's jurisdiction.

    c. Price Discovery

    As discussed above in section V.B.4, with respect to FTRs, Forward

    Capacity Transactions, and Reserve or Regulation Transactions, these

    transactions do not directly impact on transactions taking place on

    Commission regulated markets--they are not used for price discovery and

    are not used as settlement prices for other transactions in Commission

    regulated markets

    With respect to Energy Transactions, these transactions do have a

    relationship to Commission regulated markets because they can serve as

    a source of settlement prices for other transactions within Commission

    jurisdiction. Granting the Proposed Exemption, however, does not mean

    that these transactions will be unregulated. To the contrary, as

    explained in more detail above, Petitioners have market monitoring

    systems in place to detect and deter manipulation that takes place on

    their markets. Further, as noted above, the Commission retains all of

    its anti-fraud and anti-manipulation authority as a condition of the

    Proposed Exemption.

    d. Sound Risk Management Practices

    As with the other areas of cost-benefit consideration, the

    Commission's evaluation of sound risk management practices occurs

    throughout this release, notably in sections V.D.4.a. and V.E.7.a.

    which consider the Petitioners' risk

    [[Page 52172]]

    management policies and procedures, and the related requirements of

    FERC and PUCT (in particular, FERC Order 741 on Credit Policies), in

    light of the Commission's risk management requirements for DCOs and

    SEFs.

    e. Other Public Interest Considerations

    The Commission proposes that because these transactions are part

    of, and inextricably linked to, the organized wholesale, physical

    electricity markets that are subject to regulation and oversight of

    FERC or PUCT, as applicable, the Commission's Proposed Exemption, with

    its attendant conditions, requirements, and limitations, is in the

    public interest. In so considering, the Commission proposes that the

    public interest is best served if the Commission dedicates its

    resources to the day-to-day oversight of its registrants and the

    financial markets subject to the CEA.

    3. Request for Public Comment on Costs and Benefits

    The Commission invites public comment on its cost-benefit

    considerations and dollar cost estimates, including the consideration

    of reasonable alternatives. Commenters are invited to submit any data

    or other information that they may have quantifying or qualifying the

    costs and benefits of the proposal with their comment letters.

    X. Request for Comment

    The Commission requests comment on all aspects of its Proposed

    Exemption. In addition, the Commission specifically requests comment on

    the specific provisions and issues highlighted in the discussion above

    and on the issues presented in this section. For each comment

    submitted, please provide a detailed rationale supporting the response.

    1. Has the Commission used the appropriate standard in analyzing

    whether the Proposed Exemption is in the public interest?

    2. The Commission recognizes that there may be differences among

    the Petitioners with respect to size, scope of business, and underlying

    regulatory framework. Should any provisions of the Proposed Exemption

    be modified or adjusted, or should any conditions be added, to reflect

    such differences?

    3. Is the scope set forth for the Proposed Exemption sufficient to

    allow for innovation? Why or why not? If not, how should the scope be

    modified to allow for innovation without exempting products that may be

    materially different from those reviewed by the Commission? Should the

    Commission exempt such products without considering whether such

    exemption is in the public interest? Consider this question also with

    the understanding that any Petitioner (or any entity that is not a

    current petitioner) may separately petition the Commission for an

    amendment of any final order granted in this matter.

    4. Should the Commission exercise its authority pursuant to section

    4(c)(3)(K) of the CEA to extend the Proposed Exemption to agreements

    contracts or transactions that are entered into by parties other than

    ``appropriate persons'' as defined in sections 4(c)(3)(A) through (J)

    of the CEA, or ``eligible contract participants,'' as defined in

    section 1a(18)(A) or (B) of the Act and Commission regulation 1.3(m)?

    If so, please provide a description of the additional parties that

    should be included.

    a. The Commission specifically seeks comment regarding whether

    (and, if so, why) it is in the public interest to expand the list of

    such parties to include market participants who ``active[ly]

    participat[e] in the generation, transmission or distribution of

    electricity'' but who are neither ``appropriate persons,'' as defined

    in section 4(c)(3)(A) through (J) of the CEA, nor ``eligible contract

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

    Commission regulation 1.3(m)?

    b. If any additional parties should be added, please provide:

    (1) An explanation of the financial or other qualifications of such

    persons or the available regulatory protections that would render such

    persons ``appropriate persons.''

    (2) The basis for the conclusion that such parties could bear the

    financial risks of the agreements, contracts, and transactions to be

    exempted by the Proposed Exemption.

    (3) The basis for the conclusion that including such parties would

    not have any adverse effect on the relevant RTO or ISO.

    (4) The basis for the conclusion that failing to include such

    parties would have an adverse effect on any relevant RTO or ISO.

    5. Should the Commission require each Petitioner that is regulated

    by FERC to have fully implemented the requirements set forth in FERC

    Order 741 as a condition precedent to the issuance of a final order

    granting the Proposed Exemption to the particular Petitioner? Why or

    why not?

    6. Should ERCOT be required to comply with the requirements set

    forth in FERC Order 741 as a prerequisite to the issuance to ERCOT of a

    final order granting the Proposed Exemption as to ERCOT? Why or why

    not?

    a. The Commission specifically seeks comment upon whether and why

    ERCOT would or would not be able to comply with each of the

    requirements set forth in FERC Order 741. Are any of these requirements

    inapplicable for an RTO/ISO?

    b. Should ERCOT be permitted to adopt alternatives to any of the

    specific requirements set forth in FERC Order 741 (such as the seven

    day settlement period in FERC regulation 35.47(b))? What is the basis

    for the conclusion that the alternative measures would be the

    equivalents of the FERC requirements in terms of protecting the

    financial integrity of the transactions that are within the scope of

    the exemption?

    7. Should the Commission require, as a prerequisite to issuing a

    final order granting the Proposed Exemption to a particular Petitioner,

    that the Commission be provided with a legal opinion or memoranda of

    counsel, applicable to the tariffs and operations of that Petitioner,

    that provides the Commission with assurance that the approach selected

    by the Petitioner to satisfy the obligations contained in FERC

    regulation 35.47(d) will provide the Petitioner with rights of setoff,

    enforceable against any of its market participants under title 11 of

    the United States Code in the event of the bankruptcy of the market

    participant? Why or why not? Are there alternative ways to provide the

    requisite assurance regarding the bankruptcy protections provided by

    the approach to 35.47(d) compliance selected by Petitioners and the

    requisite assurance that the central counterparty structure selected by

    Petitioners will be consistent or contain elements commonly associated

    with central counterparties?

    8. Should the Commission require the execution of an acceptable

    information sharing arrangement between the Commission and PUCT as a

    condition precedent to the issuance to ERCOT of a final order granting

    the request for an exemption?

    9. Should the Proposed Exemption be conditioned upon the

    requirement that the Petitioners cooperate with the Commission in its

    conduct of special calls/further requests for information with respect

    to contracts, agreements or transactions that are, or are related to,

    the contracts, agreements, or transactions that are the subject of the

    Proposed Exemption?

    10. Should Petitioners be required to have the ability to obtain

    market data and other related information from their participants with

    respect to contracts, agreements or transactions in markets

    [[Page 52173]]

    for, or related to, the contracts, agreements or transactions that are

    the subject of the Proposed Exemption? The Commission specifically

    seeks comment on whether the Petitioners should capable of re-creating

    the Day-Ahead Market and Real-Time prices.

    11. What is the basis for the conclusion that Petitioners do, or do

    not, provide to the public sufficient timely information on price,

    trading volume, and other data with respect to the markets for the

    contracts, agreements and transactions that are the subject of the

    Proposed Exemption? What RTO or ISO tariff provisions, if any, require

    them to do so or preclude them from doing so?

    12. What is the basis for the conclusion that the Proposed

    Exemption will, or will not, have any material adverse effect on the

    Commission's ability to discharge its regulatory duties under the CEA,

    or on any contract market's ability to discharge its self-regulatory

    duties under the CEA?

    13. What are the bases for the conclusions that the Petitioners'

    tariffs, practices, and procedures do, or do not, appropriately address

    the regulatory goals of each of the DCO Core Principles?

    14. What factors support, or detract from, the Commission's

    preliminary conclusion that FTRs, Energy Transactions, Capacity and

    Reserve Transactions are not readily susceptible to manipulation for

    the reasons stated above? Could a market participant use an FTR to

    manipulate the price of electricity established on the Day-Ahead and

    Real-Time markets operated by Petitioners? If so, what is the basis for

    that conclusion? What is the basis for the conclusion that market

    participants can, or cannot, use Energy Transactions, Capacity or

    Reserve Transactions to manipulate electricity prices without detection

    by Independent Market Monitors?

    15. What is the basis for the conclusion that Petitioners have, or

    have not, satisfied applicable market monitoring requirements with

    respect to FTRs, Energy Transactions, Capacity and Reserve

    Transactions? What is the basis for the conclusion that the record-

    keeping functions performed by Petitioners are, or are not, appropriate

    to address any concerns raised by the market monitoring process? What

    is the basis for the conclusion that the market monitoring functions

    performed by Petitioners and their MMUs do, or do not, provide adequate

    safeguards to prevent the manipulation of Petitioners' markets?

    16. What is the basis for the conclusion that Petitioners, or their

    participants, should, or should not, be required to satisfy position

    limit requirements with respect to any of the contracts, agreements or

    transactions that are the subject of the Proposed Exemption?

    Specifically, what is the basis for the conclusion that it is, or is

    not, possible for Petitioners, or their participants, to violate

    position limits with FTRs or Virtual Bids? What is the basis for the

    conclusion that the nature of FTRs or Virtual Bids do, or do not,

    inherently limit the ability of market participants to engage in

    manipulative conduct?

    17. What are the bases for the conclusions that Petitioners do, or

    do not, adequately satisfy the SEF requirements for (a) recordkeeping

    and reporting, (b) preventing restraints on trade or imposing any

    material anticompetitive burden, (c) minimizing conflicts of interest,

    (d) providing adequate financial resources, (e) establishing system

    safeguards and (f) designating a CCO? Specifically, do the procedures

    and principles in place allow the Petitioners to meet the requirements

    of SEF core principles 10-15?

    18. What is the basis for the conclusion that the Petitioners'

    eligibility requirements for participants are, or are not, appropriate

    to ensure that market participants can adequately bear the risks

    associated with the Participants markets?

    19. What is the basis for the conclusion that Petitioners do, or do

    not, have adequate rules in place to allow them to deal with emergency

    situations as they arise? What deficiencies, if any, Are there with

    respect to their emergency procedures that would prevent any Petitioner

    from taking necessary action to address sudden market problems?

    20. The Commission invites comment on its consideration of the

    costs and benefits of the Proposed Exemption, including the costs of

    any information requirements imposed therein. The Commission also seeks

    comment on the costs and benefits of this Proposed Exemption,

    including, but not limited to, those costs and benefits specified

    within this proposal. Commenters are also are invited to submit any

    data or other information that they may have quantifying or qualifying

    the costs and benefits of the proposal with their comment letters.

    Issued in Washington, DC on August 21, 2012, by the Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Notice of Proposed Order and Request for Comment on a Petition From

    Certain Independent System Operators and Regional Transmission

    Organizations To Exempt Specified Transactions Authorized by a Tariff

    or Protocol Approved by the Federal Energy Commission or the Public

    Utility Commission of Texas From Certain Provisions of the Commodity

    Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of

    the Act--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.

    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-related transactions entered into on markets

    administered by regional transmission organizations (RTOs) or

    independent system operators (ISOs). The relief responds to a

    petition filed by a group of RTOs and ISOs.

    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 on markets administered by RTOs

    and ISOs.

    These entities were established for the purpose of providing

    affordable, reliable electricity to consumers within their

    geographic region. They are subject to extensive regulatory

    oversight by the Federal Energy Regulatory Commission (FERC), or in

    one instance, by the Public Utility Commission of Texas (PUCT). In

    addition, these markets administered by RTOs and ISOs are central to

    FERC and PUCT's regulatory missions to oversee wholesale sales and

    transmission of electricity.

    The scope of the proposed relief extends to the petitioners for

    four categories of transactions--financial transmission rights,

    energy transactions, forward capacity transactions, and reserve or

    regulation transactions. Each of these transactions are inextricably

    linked to the physical delivery of electricity.

    I look forward to receiving public comment on the proposed

    relief.

    [FR Doc. 2012-20965 Filed 8-27-12; 8:45 am]

    BILLING CODE P

    Last Updated: August 28, 2012