Final Order in Response to a Petition From Certain Independent System Operators and Regional Transmission Organizations To Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in the Act

Federal RegisterApr 2, 2013

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COMMODITY FUTURES TRADING COMMISSION

RIN 3038-AE02

Final Order in Response to a Petition From Certain Independent System Operators and Regional Transmission Organizations To Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in the Act

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final order.

SUMMARY:

The Commodity Futures Trading Commission (“CFTC” or “Commission”) is issuing a final order (“Final Order”) in response to a consolidated petition (“Petition”)

from certain regional transmission organizations (“RTOs”) and independent system operators (“ISOs”) (collectively, “Requesting Parties”) to exempt specified transactions (“Covered Transactions”) from the provisions of the Commodity Exchange Act (“CEA” or “Act”),

and Commission regulations. The Final Order exempts contracts, agreements, and transactions for the purchase or sale of the limited electric energy-related products that are specifically described within the Final Order from the provisions of the CEA and Commission regulations, with the exception of the Commission's general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4

4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13 of the Act and any implementing regulations promulgated under these sections including, but not limited to Commission regulations 23.410(a) and (b), 32.4, and part 180. To be eligible for the exemption contained in the Final Order, the contract, agreement, or transaction must be offered or entered into in a market administered by a Requesting Party pursuant to that Requesting Party's tariff, rate schedule, or protocol (collectively, “Tariff”), and the relevant Tariff must have been approved or permitted to have taken effect by either the Federal Energy Regulatory Commission (“FERC”) or the Public Utility Commission of Texas (“PUCT”), as applicable. In addition, the contract, agreement, or transaction must be entered into by persons who are “appropriate persons,” as defined in sections 4(c)(3)(A) through (J) of the Act,

“eligible contract participants,” as defined in section 1a(18) of the Act and Commission regulations,

or persons who are in the business of: (i) Generating, transmitting, or distributing electric energy, or (ii) providing electric energy services that are necessary to support the reliable operation of the transmission system. The Final Order also extends to any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to the Covered Transactions. Finally, the Final Order is subject to other conditions set forth therein. Authority for issuing the exemption is found in section 4(c)(6) of the Act.

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).

7 U.S.C. 1

et seq.

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

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.

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

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

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

; the attachments to the Petition are posted at

http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappattach.pdf

. A chart submitted by the Requesting Parties that sets forth the status of their respective implementation of the standards set forth in FERC Order No. 741 (“FERC Order No. 741 Implementation Chart”) is posted at

http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/iso-rto4cappfercchart.pdf

, and a revised version of the chart (“Revised FERC Order No. 741 Implementation Chart”) is posted at

http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rtoisoltr011813.pdf

. A copy of the “Notice of Proposed Order and Request for Comment on a Petition from Certain Independent System Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of the Act” (“Proposed Order”) is available at 77 FR 52138, Aug. 28, 2012, and on the Commission's Web site at

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-20965a.pdf

. A copy of the comment file is also available on the Commission's Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1265

DATES:

Effective date:

April 2, 2013.

FOR FURTHER INFORMATION CONTACT:

Robert B. Wasserman, Chief Counsel, 202-418-5092,

rwasserman@cftc.gov

, Laura Astrada, Associate Chief Counsel, 202-418-7622,

lastrada@cftc.gov

, Nadia Zakir, Associate Director, 202-418-5720,

nzakir@cftc.gov

, Jocelyn Partridge, Special Counsel, 202-418-5926,

jpartridge@cftc.gov

, or Kirsten Robbins, Attorney-Advisor, 202-418-5313,

krobbins@cftc.gov

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

dvanwagner@cftc.gov

, or W. Graham McCall, Attorney-Advisor, 202-418-6150,

gmccall@cftc.gov

, Division of Market Oversight; Mark Higgins, Counsel, 202-418-5864,

mhiggins@cftc.gov

, or Thuy Dinh, Counsel, 202-418-5128,

tdinh@cftc.gov

, Office of the General Counsel; or Robert Pease, 202-418-5863,

rpease@cftc.gov

, Division of Enforcement in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Relevant Dodd-Frank Provisions

II. Background—Proposed Order

A. The Petition

B. The Proposal

1. Transactions Proposed To Be Exempted

2. Conditions to the Proposed Order

3. Additional Limitations

III. Summary of the Comments

IV. Determinations

A. Scope of the Final Order

1. Covered Transactions Subject to the Final Order

2. Additional Definitions and Provisions in the Final Order

3. Conditions to the Final Order

B. Section 4(c) Analysis

1. Overview of CEA Section 4(c)

2. CEA Section 4(c) Determinations

C. Issuance of a Separate or a Collective Order

D. Additional Limitations

E. Effectiveness of the Exemption

V. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost-Benefit Considerations

1. Background

2. The Statutory Mandate To Consider the Costs and Benefits of the Commission's Action: Section 15(a) of the CEA

3. Proposed Order and Request for Comment on the Commission's Proposed Consideration of Costs and Benefits

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

5. Summary of the Final Order—Determinations and Conditions

6. Costs of the Final Order

7. Benefits

8. Consideration of Alternatives

9. Consideration of CEA Section 15(a) Factors

VI. Order

I. Relevant Dodd-Frank Provisions

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Title VII of the Dodd-Frank Act amended the CEA

and altered the scope of the Commission's exclusive jurisdiction.

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.

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:

See

Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at

http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.htm

7 U.S.C. 1

et seq.

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

See

7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added section 2(h)(1)(A), which requires swaps to be cleared if required to be cleared and not subject to a clearing exception or exemption.

See

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

The Commission shall have exclusive jurisdiction, except to the extent otherwise provided in the Wall Street Transparency and Accountability Act of 2010 (including an amendment made by that Act) and subparagraphs (C), (D), and (I) of this paragraph and subsections (c) and (f), with respect to accounts, agreements (including any transaction which is of the character of * * * an “option”), and transactions involving swaps or contracts of sale of a commodity for future delivery (including significant price discovery contracts) traded or executed on a contract market * * * or a swap execution facility * * * or any other board of trade, exchange, or market * * *.

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

The Dodd-Frank Act also added a savings clause that addresses the roles of the Commission, FERC, and state agencies as they relate to certain agreements, contracts, or transactions traded pursuant to the tariff or rate schedule of an RTO or ISO.

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.

The same paragraph (I) also explains that the FERC and state agencies preserve their existing authorities over agreements, contracts, or transactions “entered into pursuant to a tariff or rate schedule approved by [FERC] or a State regulatory agency,” that are: “(I) not executed, traded, or cleared on” an entity or trading facility subject to registration or “(II) executed, traded, or cleared on a registered entity or trading facility owned or operated by a[n RTO] or [ISO].”

See

7 U.S.C. 2(a)(1)(I).

See

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

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.

The Dodd-Frank Act granted the Commission specific powers to exempt certain contracts, agreements, or transactions from duties otherwise required by statute or Commission regulation by adding new sections to the CEA, sections 4(c)(6)(A) and (B). Specifically, sections 4(c)(6)(A) and (B) provide for exemptions for certain transactions entered into (a) pursuant to a tariff or rate schedule approved or permitted to take effect by FERC, or (b) pursuant to a tariff or rate schedule establishing rates or charges for, or protocols governing, the sale of electric energy approved or permitted to take effect by the regulatory authority of the State or municipality having jurisdiction to regulate rates and charges for the sale of electric energy within the State or municipality.

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

The Commission must act “in accordance with” sections 4(c)(1) and (2) of the CEA, when issuing an exemption under section 4(c)(6).

Section 4(c)(1) of the CEA grants the Commission the authority to exempt any transaction or class of transactions, including swaps, from certain provisions of the CEA, in order to “promote responsible economic or financial innovation and fair competition.”

Section 4(c)(2)

of the Act further provides that the Commission may not grant exemptive relief unless it determines that: (1) The exemption would be consistent with the public interest and the purposes of the CEA; (2) the transaction will be entered into solely between “appropriate persons;”

and (3) the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory responsibilities under the CEA.

In enacting section 4(c), Congress noted that the purpose of the provision is to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.

Section 4(c) was added to the CEA by the Futures Trading Practices Act of 1992, Pub. L. 102-564. The Commission's authority under section 4(c) was explained by the Conferees:

In granting exemptive authority to the Commission under new section 4(c), the Conferees recognize the need to create legal certainty for a number of existing categories of instruments which trade today outside of the forum of a designated contract market.

The provision included in the Conference substitute is designed to give the Commission broad flexibility in addressing these products

*****

In this respect, the Conferees expect and strongly encourage the Commission to use its new exemptive power promptly upon enactment of this legislation in four areas where significant concerns of legal uncertainty have arisen: (1) Hybrids, (2) swaps, (3) forwards, and (4) bank deposits and accounts.

The Commission is not required to ascertain whether a particular transaction would fall within its jurisdiction prior to exercising its exemptive authority under section 4(c). The Conferees stated that they did:

not intend that the exercise of exemptive authority by the Commission would require any determination beforehand that the agreement, instrument, or transaction for which an exemption

is sought is subject to the Act. Rather, this provision provides flexibility for the Commission to provide legal certainty to novel instruments where the determination as to jurisdiction is not straightforward * * *

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

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

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

Section 4(c)(3) of the CEA further outlines who may constitute an appropriate person for the purpose of a particular 4(c) exemption and includes, as relevant to this Final Order:

(a) Any person that qualifies for one of ten defined categories of appropriate persons; or

(b) such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.

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

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

II. Background

A. The Petition

On February 7, 2012, the Requesting Parties

filed a joint Petition

with the Commission requesting that the Commission exercise its authority under section 4(c)(6) of the CEA

and section 712(f) of the Dodd-Frank Act

to exempt certain contracts, agreements and transactions for the purchase or sale of specified electric energy

products, that are offered pursuant to a FERC- or PUCT-approved Tariff,

from most provisions of the Act.

The Requesting Parties include three RTOs (Midwest Independent Transmission System Operator, Inc. (“MISO”); ISO New England, Inc. (“ISO NE”); and PJM Interconnection, L.L.C. (“PJM”)), and two ISOs (California Independent System Operator Corporation (“CAISO”) and New York Independent System Operator, Inc. (“NYISO”)), whose central role as transmission utilities is subject to regulation by FERC. The Requesting Parties also include the Electric Reliability Council of Texas, Inc. (“ERCOT”), an entity that performs the role of an ISO, but whose central role as a transmission utility in the electric energy market is subject to regulation by PUCT, the authority with jurisdiction to regulate rates and charges for the sale of electric energy within the state of Texas.

The Requesting Parties represented that the roles, responsibilities and services of ISOs and RTOs are substantially similar.

As described in the Proposed Order, the Requesting Parties represented that FERC encouraged the formation of ISOs to consolidate and manage the operation of electric energy transmission facilities in order to provide open, non-discriminatory transmission service for generators and transmission customers.

The Requesting Parties also represented that FERC encouraged the formation of RTOs to administer the transmission grid on a regional basis.

In the preamble to the Proposed Order, the Requesting Parties were also referred to as “Petitioners.” For consistency with the Final Order, the term “Requesting Parties” is used throughout the preamble to the Final Order.

Requesting Parties submitted an amended Petition on June 11, 2012. Citations herein to “Petition” are to the amended Petition.

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

See

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

In the Proposed Order, “electric energy” was also referred to as “electricity” and “electric power.” For the sake of consistency in the Final Order, the term “electric energy” is used throughout the Final Order.

“Tariff” collectively refers to a tariff, rate schedule, or protocol, to account for differences in terminology used by the Requesting Parties and their respective regulators.

See

77 FR 52139.

See also

Petition at 2-3, 6.

See

77 FR 52139.

See also

Petition at 2-4; 16 Tex. Admin. Code (“TAC”) 25.1 (1998).

See

77 FR 52139.

See also

Petition at 2 n.2.

See

77 FR 52139.

See also

FERC Order No. 888 Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Facilities (“FERC Order No. 888”), 61 FR 21540, April 24, 1996.

See

77 FR 52139.

See also

Petition at 3.

The Requesting Parties specifically petitioned the Commission to exempt from most provisions of the CEA certain “financial transmission rights,” “energy transactions,” “forward capacity transactions,” and “reserve or regulation transactions,” as defined in the Petition, if such transactions are offered or entered into pursuant to a Tariff under which a Requesting Party operates that has been approved by FERC or PUCT, as applicable, as well as any persons (including the Requesting Parties, their members and their market participants) offering, entering into, rendering advice, or rendering other services with respect to such transactions.

The Requesting Parties asserted that each of the transactions for which an exemption was requested is (a) subject to a long-standing, comprehensive regulatory framework for the offer and sale of such transactions established by FERC, or in the case of ERCOT, PUCT, and (b) part of, and inextricably linked to, the organized wholesale electric energy markets that are subject to the regulation and oversight of FERC or PUCT, as applicable.

The Requesting Parties expressly excluded from the Petition a request for relief from sections 4b, 4

6(c), and 9(a)(2) of the Act,

and such provisions explicitly have been carved out of the exemption set forth in the Final Order.

The Requesting Parties asked that, due to the commonalities in the Requesting Parties' markets, the exemption apply to all Requesting Parties and their respective market participants with respect to each category of electric energy-related transactions described in the Petition, regardless of whether such transactions are offered or entered into at the current time pursuant to an individual Requesting Party's Tariff.

The Requesting Parties asserted that this uniformity would avoid an individual Requesting Party being required to seek future amendments to the exemption in order to offer or enter into the same type of transactions currently offered by another Requesting Party.

See

77 FR 52139.

See also

Petition

at 2-3.

See

77 FR 52139.

See also

Petition

at 11.

See

77 FR 52139.

See also

Petition

at 3.

See

discussion in section IV.D.

infra.

See

77 FR 52139.

See also

Petition

at 6.

See id.

B. The Proposal

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

77 FR 52138.

1. Transactions Proposed to Be Exempted

The Commission proposed to exempt the purchase and sale of four types of transactions

defined within the Proposed Order: (1) Financial Transmission Rights (“FTRs”), (2) Energy Transactions, (3) Forward Capacity Transactions, and (4) Reserve

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

In the preamble to the Proposed Order, the term “Transactions” was used to collectively refer to the transactions covered by the Proposed Order. For clarity, the term “Covered Transactions” is used throughout the preamble to the Final Order to refer collectively to the transactions covered by the Final Order.

Id.

at 52141, 52166-67.

An “FTR” was proposed to be defined as “a transaction, however named, that entitles one party to receive, and obligates another party to pay, an amount based solely on the difference between the price for electricity, established on an electricity market administered by a Requesting Party at a specified source (

i.e.,

where electricity is deemed injected into the grid of a Requesting Party) and a specified sink (

i.e.,

where electricity is deemed withdrawn from the grid of a Requesting Party).”

As set forth in the Proposed Order, FTRs would be exempt only where each FTR is linked to, and the aggregate volume of FTRs for any period of time is limited by, the physical capability (after accounting for counterflow) of the electric energy transmission system operated by the Requesting Party offering the contract for such period; a Requesting Party serves as the market administrator for the market on which the FTR is transacted; each party to the FTR is a member of a particular Requesting Party (or is the Requesting Party itself); the FTR is executed on a market administered by that Requesting Party; and the FTR does not require any party to make or take physical delivery of electric energy.

Id.

at 52166. The proposed definition of FTRs included such rights “in the form of options (

i.e.,

where one party has only the obligation to pay, and the other party only the right to receive, an amount as described above).”

Id.

at 52166.

See also

id.

at 52141.

“Energy Transactions” were proposed to be defined as transactions in a “Day-Ahead Market”

or “Real-Time Market” (“RTM”)

as those terms were defined in the Proposed Order, for the purchase or sale of a specified quantity of electric energy at a specified location, including “Demand Response,”

as defined in the Proposed Order, where: (1) The price of electric energy is established at the time the Energy Transaction is executed;

(2) performance occurs in the RTM by either the physical delivery or receipt of the specified electric energy or a cash payment or receipt at the price established in the RTM; and (3) the aggregate cleared volume of both physical and cash-settled Energy Transactions for any period of time is limited by the physical capability of the electric energy transmission system operated by a Requesting Party for that period of time.

“`Day-Ahead Market' ” was defined in the Proposed Order as “an electricity market administered by a Requesting Party on which the price of electricity at a specified location is determined, in accordance with the Requesting Party's Tariff, for specified time periods, none of which is later than the second operating day following the day on which the Day-Ahead Market clears.”

Id.

at 52167.

“`Real-Time Market' ” was defined in the Proposed Order as “an electricity market administered by a Requesting Party on which the price of electricity at a specified location is determined, in accordance with the Requesting Party's Tariff, for specified time periods within the same 24-hour period.”

Id.

“ `Demand Response' ” was defined in the Proposed Order as “the right of a Requesting Party to require that certain sellers of such rights curtail their consumption of electric energy from the electric power transmission system operated by a Requesting Party during a future period of time as specified in the Requesting Party's Tariff.”

Id.

The definition of Demand Response, as adopted in this Order, should be read to be consistent with FERC's definition of demand response, and thus any demand response rights recognized under this Order must comport with the definition provided by FERC.

See

18 CFR 35.28(b)(4) (2012) (providing that demand response means a reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy).

See id.

at 52141-42, 52166-67. For purposes of the Final Order, the Commission is clarifying that Energy Transactions include virtual and convergence bids and offers, as they are methods of conducting such Energy Transactions.

See

section IV.A.1.c.

infra.

See

77 FR 52167.

See also

id.

at 52142; Petition at 7.

“Forward Capacity Transactions” were proposed to include transactions in which a Requesting Party, for the benefit of load-serving entities (“LSEs”) purchases the rights described in the Proposed Order.

The Commission proposed to limit eligibility of Forward Capacity Transactions for the exemption by requiring that the aggregate cleared volume of all such transactions for any period of time must be limited to the physical capability of the electric energy transmission system operated by the applicable Requesting Party for that period of time.

See

77 FR at 52167.

See id.

“Reserve Regulation Transactions” were defined in the Proposed Order as transactions:

(1) In which a Requesting Party, for the benefit of [LSEs] and resources, purchases, through auction, the right, during a period of time specified in the Requesting Party's Tariff, to require the seller to operate electric facilities in a physical state such that the facilities can increase or decrease the rate of injection or withdrawal of electricity to the electric power transmission system operated by the Requesting Party with:

(a) Physical performance by the seller's facilities within a response interval specified in the Requesting Party's Tariff (Reserve Transaction); or

(b) Prompt physical performance by the seller's facilities (Area Control Error Regulation Transaction);

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

(a) Payment at the price established in the Requesting Party's Day-Ahead or Real-Time Market, as those terms are defined in the Proposed Order, price for electricity applicable whenever the Requesting Party exercises its right that electric energy be delivered (including Demand Response, as defined [in the Proposed] Order);

(b) Compensation for the opportunity cost of not supplying or consuming electricity or other services during any period during which the Requesting Party requires that the seller not supply energy or other services;

(d) An additional amount indexed to the frequency, duration, or other attributes of physical performance as specified in the Requesting Party's Tariff; and

(3) In which the value, quantity and specifications for such Transactions for a Requesting Party for any period of time are limited by the physical capability of the electric transmission system operated by Requesting Parties.

See id.

See also

id.

at 52145.

Finally, in the Proposed Order, the Commission clarified that financial transactions that are not tied to the allocation of the physical capabilities of an electric energy transmission grid would not be suitable for exemption, and were therefore not covered by the Proposed Order, because such activity would not be inextricably linked to the physical delivery of electric energy.

See id.

at 52143.

The Commission proposed to limit the exemption to the transactions described in the Proposed Order in which all parties thereto fall within one of the appropriate persons categories in CEA sections 4(c)(3)(A) through (J), or, pursuant to CEA section 4(c)(3)(K), that otherwise qualify as an eligible contract participant (“ECP”), as such term is defined in section 1a(18)(A) of the Act and in Commission regulation 1.3(m).

The Proposed Order also required that the delineated “Transactions be offered or sold pursuant to a Requesting Party's Tariff, which has been approved or permitted to take effect by: (1) In the case of ERCOT, the PUCT or (2) In the

case of all other Requesting Parties, FERC.”

For those ECPs engaging in the transactions delineated in the Proposed Order in markets administered by a Requesting Party that do not fit within the categories of “appropriate persons” set forth in sections 4(c)(3)(A) through (J), the Commission proposed to determine that they are appropriate persons pursuant to section 4(c)(3)(K), “in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.” The Commission also noted that CEA section 2(e) permits all ECPs to engage in swaps transactions other than on a designated contract market (“DCM”) and that such entities should similarly be appropriate persons for the purpose of the Proposed Order.

See id.

at 52145-46.

See id.

2. Conditions to the Proposed Order

a. Conditions Precedent to the Proposed Order

In the Proposed Order, the Commission proposed two conditions precedent to the issuance of a final exemption. First, the Commission proposed that it would not issue a final order to a specific RTO or ISO until (i) such time as the Requesting Parties had adopted in their Tariffs all of the requirements set forth in FERC regulation 35.47;

(ii) such Tariff provisions have been approved or have been permitted to take effect by FERC or PUCT, as applicable; and (iii) such Tariff provisions, have become effective and have been fully implemented by the particular RTO or ISO.

Second, as an additional prerequisite to the issuance of a final order, the Commission proposed to require that each Requesting Party provide a well-reasoned legal opinion or memorandum from outside counsel that, in the Commission's sole discretion, provides the Commission with assurance that the netting arrangements contained in the approach selected by the particular Requesting Party to satisfy the obligations contained in FERC regulation 35.47(d) will, in fact, provide the Requesting Party with enforceable rights of set off against any of its market participants under title 11 of the United States Code

in the event of the bankruptcy of the market participant.

18 CFR 35.47.

See

detailed discussion in section IV.3.a.i.

infra

regarding the requirements set forth in FERC regulation 35.47.

See

77 FR 52164.

See

11 U.S.C. 553.

See

77 FR 52165.

b. Conditions Subsequent to the Proposed Order

The Proposed Order included two information-sharing conditions subsequent. First, the Commission proposed that, after promulgation of the order, none of a Requesting Party's Tariffs or other governing documents may include any requirement that the Requesting Party notify a member prior to providing information to the Commission in response to a subpoena or other request for information or documentation.

See id.

at 52142.

Second, the Commission proposed that the exemption be conditioned upon information sharing arrangements that are satisfactory to the Commission between the Commission and FERC and between the Commission and PUCT being in full force and effect.

See id.

When the Proposed Order was published, the Commission and FERC had already entered into a Memorandum of Understanding,

available at

http://www.ferc.gov/legal/maj-ord-reg/mou/mou-33.pdf

3. Additional Limitations

In the Proposed Order, the Commission expressly noted that the proposed exemption was based upon the representations made in the Petition and in the supporting materials provided by the Requesting Parties and their counsel, and that any material change or omission in the facts and circumstances that alter the grounds for the Proposed Order might require the Commission to reconsider its finding that the exemption contained therein is appropriate and/or in the public interest and consistent with the purposes of the CEA.

The Commission highlighted several of the Requesting Parties' representations of particular importance, including: (1) The exemption sought by the Requesting Parties relates to the transactions described in the Proposed Order, which are primarily entered into by commercial participants that are in the business of generating, transmitting, and distributing electric energy;

(2) the Requesting Parties were established for the purpose of providing affordable, reliable electric energy to consumers within their geographic region;

(3) the transactions described in the Proposed Order are an essential means, designed by FERC and PUCT as an integral part of their statutory responsibilities, to enable the reliable delivery of affordable electric energy;

(4) each of the transactions defined in the Proposed Order taking place on the Requesting Parties' markets is monitored by Market Monitoring Units (“MMUs”) responsible to either FERC or, in the case of ERCOT, PUCT;

and (5) each transaction defined in the Proposed Order is directly tied to the physical capabilities of the Requesting Parties' electric energy grids.

In the Proposed Order, the Commission explicitly reserved the authority to, in its discretion, revisit any of the terms of the relief provided by the Proposed Order including, but not limited to, making a determination that certain entities should be subject to the Commission's jurisdiction.

The Commission also explicitly reserved the authority to, in its discretion, suspend, terminate, or otherwise modify or restrict the Proposed Order.

Finally, the Commission announced its intention to exclude from the exemptive relief its general anti-fraud, anti-manipulation, and enforcement authority under the CEA over the Requesting Parties and the transactions defined in the Proposed Order, including, but not limited to, sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13 of the CEA and any implementing regulations promulgated thereunder including, but not limited to, Commission regulations 23.410(a) and (b), 32.4, and part 180.

See id.

at 52167.

See also

id.

at 52142, 52165.

See id.

at 52142.

See also

Petition at 20.

See

77 FR 52142.

See id.

See also

generally

FERC Order No. 888; FERC Order No. 2000; 18 CFR 35.34(k)(2); TAC 25.1; Petition at 11, 13-14.

See

77 FR 52142.

See also

Petition at 15-18.

See

77 FR 52142.

See id.

at 52167.

See

also

id.

at 52142.

See id.

at 52167-68.

See also

id.

at 52142; Petition at 15-18.

See

77 FR at 52166.

See also

id.

at 52163.

II. Summary of the Comments

The public comment period on the Proposed Order ended on September 27, 2012. The Commission received twenty-three (23) comment letters on the Proposed Order,

the majority of which provided general support for the proposed exemption.

The comment

letters addressed a variety of issues including: the scope of the transactions set forth in the Proposed Order; the scope of the definition of appropriate persons for purposes of the exemption; the use of the derivatives clearing organization (“DCO”) and swap execution facility (“SEF”) Core Principles in the public interest and purposes of the CEA analysis; both proposed conditions precedent (

i.e.,

—the requirements that the Requesting Parties fully comply with the standards set forth in FERC regulation 35.47 and submit a legal opinion or memorandum providing assurances regarding the netting arrangements in their respective approach to satisfying the standard set forth in FERC regulation 35.47(d)); the proposed information sharing agreement between the Commission and PUCT; the proposed condition subsequent that the Requesting Parties revise their Tariffs to remove requirements to notify their members upon receipt of requests for information by the Commission; whether other conditions should be imposed; the Commission's jurisdiction; the Commission's reservation of anti-fraud, anti-manipulation, and enforcement authority; the effectiveness of the exemption

; the issuance of a separate or collective Final Order; the extension of supplemental relief to all Requesting Parties; and other considerations regarding the costs and benefits of the exemptive relief. In determining the scope and content of the Final Order, the Commission has taken into account issues raised by commenters, including those issues with respect to the costs and benefits associated with the exemption.

All comment letters are available through the Commission's Web site at:

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1265

. Comments addressing the Proposed Order were received from: AB Energy; American Public Power Association (“APPA”); Coalition of Physical Energy Companies (“COPE”); The Commercial Energy Working Group (“Commercial Working Group”); DC Energy, LLC (“DC Energy”); Staff of the Federal Energy Regulatory Commission (“FERC Staff”); Financial Institutions Energy Group (“FIEG”); Financial Marketers Coalition; the Industrial Coalitions (collectively referring to PJM Industrial Customer Coalition, NEPOOL Industrial Customer Coalition, and Coalition of Midwest Transmission Customers); Joint Trade Associations (collectively referring to Electric Power Supply Association, Edison Electric Institute; National Rural Electric Cooperative Association, APPA, and Large Public Power Council); New England Power Pool Participants Committee (“NEPOOL”); New York Public Service Commission (“NYPSC”); New York Transmission Owners (“NYTOs”) (collectively referring to Central Hudson Gas & Electric Corporation, Consolidated Edison Company of New York, Inc., Long Island Power Authority, New York Power Authority, New York State Electric & Gas Corporation, Niagara Mohawk Power Corporation d/b/a National Grid, Orange and Rockland Utilities, Inc., and Rochester and Electric Corporation); PUCT; Tarachand Enterprises, Inc. (“Tarachand”); and Texas Energy Association and Alliance for Retail Markets (collectively, “TEAM/ARM”). The Requesting Parties jointly submitted a comment letter, which contained a supplement pertaining solely to NYISO (“NYISO Supplement to Requesting Parties' Comment Letter, Attachment B”). In addition, CAISO and ISO NE jointly submitted two supplemental comment letters (“CAISO/ISO NE January” and “CAISO/ISO NE March”), NYISO and PJM each submitted supplemental comment letters on their own behalf, and ERCOT submitted two supplemental comment letters (“ERCOT October” and “ERCOT December”).

See, e.g.,

APPA at 1; Commercial Working Group at 1; DC Energy at 1; FIEG at 1; Financial

Marketers Coalition at 1; Industrial Coalitions at 1, 3; Joint Trade Associations at 1, 3, 5; NEPOOL at 2; NYTOs at 1, 3; PUCT at 2.

See

section IV.E.

infra.

IV. Determinations

A. Scope of the Final Order

1. Covered Transactions Subject to the Final Order

The Commission received multiple comments regarding the scope of the transactions that are covered by the exemption set forth in the Final Order, including comments requesting: (1) Clarification of the types of transactions that the Commission intended to include within the definitions of the transactions proposed for exemption; (2) a broad expansion of the Covered Transactions in the Final Order to include, for example, additional transactions that are “logical outgrowths” of a Requesting Party's core function as an RTO or ISO; (3) expansion of the exemptive relief specifically to include virtual and convergence bids and offers; and (4) an expedited process for expanding the exemption to include additional transactions.

a. Determinations With Respect to Types of Transactions

Some commenters requested that the Commission confirm that the exemption is not limited to products currently traded in their respective markets, and that modifications to existing products and new products, however named, that fall within the definitions of the Covered Transactions and that are offered pursuant to the Requesting Parties' Tariffs would be covered by the Final Order.

On the other hand, one commenter requested that the Commission identify, and provide notice and an opportunity to comment on, any specific categories of transactions that the Commission intends to exclude from the Final Order.

See

NYTOs at 5; Requesting Parties at 9-10.

See

Joint Trade Associations at 3 n.3.

The Commission confirms that the definitions of the Covered Transactions included in the Final Order do not limit the exemption to those products that are currently traded in a Requesting Party's markets. Any products that are offered by a Requesting Party, presently or in the future, pursuant to a FERC- or PUCT-approved Tariff and that fall within these definitions, as well as any modifications to existing products that are offered by a Requesting Party pursuant to a FERC- or PUCT-approved Tariff and that do not alter the characteristics of the Covered Transactions in a way that would cause such products to fall outside these definitions, are intended to be included within the Final Order. Accordingly, with respect to the request to expressly specify transactions that are excluded from the exemption, the Commission notes that a Requesting Party would not be required to request or to obtain future supplemental relief for a product that is modified as described above or a product that it subsequently (but does not currently) offer, if the product qualifies as one of the four types of Covered Transactions in the Final Order.

The Commission notes that the definitions of the Covered Transactions set forth in the Final Order are sufficiently broad to include modifications to existing products and new products that fall within such definitions. These definitions are substantially similar to the specific definitions that were requested in the Petition. Moreover, commenters have had the opportunity to identify and comment upon instances, if any, of existing transactions that fall outside the scope of the Proposed Order. In addition, the Commission is concerned that providing lists of excluded transactions may limit the Requesting Parties' flexibility, may require more frequent requests for supplemental relief (possibly incurring inadvertent delays), and may add market confusion. As such, consistent with the confirmation set forth above, the Commission believes it would be inappropriate and inefficient to set forth all transactions that would be excluded from the scope of the Final Order.

b. Determinations With Respect to Requests to Broadly Expand the Covered Transactions in the Final Order

Multiple commenters requested that the scope of transactions eligible for the exemption in the Final Order be expanded to include (a) transactions and services that are logical outgrowths of the Requesting Parties' functions as RTOs or ISOs,

(b) transactions that are directly related to, and a natural outgrowth of, the four categories of transactions set forth in the Proposed Order,

or (c) transactions and services that are “economically comparable” in substance to the four types of transactions described in the Proposed Order.

Commenters generally argued that such expansion was necessary to allow flexibility in the adaption and development of the transactions and services of the RTOs and ISOs, which flexibility is necessary for reliable and cost-effective distribution of electric energy services.

In addition, one

commenter specifically asked whether `logical outgrowth' “transactions [should] be viewed as Commission-regulated until a future exemption is issued * * *”

See, e.g.,

FERC Staff at 5; FIEG at 2; Joint Trade Associations at 9; NEPOOL at 5.

See, e.g.,

PUCT at 7-8.

See, e.g.,

Requesting Parties at 10-11; NYTOs at 5.

See, e.g.,

FERC Staff at 5 (stating that the products and services offered by the RTOs and ISOs are an “essential means for carrying out FERC's statutory responsibilities” and that the failure to expand the scope of the exemption as requested could “unduly inhibit or delay innovation by RTOs and ISOs”); Joint Trade Associations at 9-10 (arguing that the product restrictions contained in the Proposed Order “could have a chilling effect” on the development of “more efficient or innovative market structures which, in turn, will affect the efficient operation of the markets”); NEPOOL at 4-5 (arguing that absent an expansion, market participants may need additional exemptions from the Commission for relatively minor modifications regardless of whether such modifications are designed to ensure reliability and cost-effective electric energy services); PUCT at 7-8 (asserting that requiring supplemental relief for products that are directly related to, and a natural outgrowth of, the four categories of transactions specified in the

Final Order “could have a chilling effect on innovation and overall market efficiency.”).

COPE at 5.

Nonetheless, one commenter agreed that a modification to the Final Order should be required for new products that do not logically fit within the Final Order's specified categories, noting that the Commission should have the opportunity to evaluate whether exempting such products would be consistent with the public interest.

The Requesting Parties also stated that they “have not requested a blanket exemption and agree that they should seek to supplement the Proposed Order if they develop new products that are potentially within the Commission's jurisdiction and that present significantly different economic characteristics from those products covered by the Proposed Order.”

PUCT at 7.

Requesting Parties at 11.

As set forth above, the Commission re-affirms that the exemption extends to any transaction that falls within the Covered Transactions set forth in this Final Order, whether currently existing or later included in a Requesting Party's Tariff. The Commission declines, however, to magnify the Final Order to include the expansive terms requested by the specified commenters. Section 4(c)(6) of the CEA, by its terms, was not intended to permit a blanket exemption for all transactions entered into pursuant to a FERC- or PUCT- approved Tariff. Moreover, section 4(c)(6) expressly prohibits the Commission from issuing an exemption for such transactions unless it affirmatively determines that exempting them would be consistent with the public interest and the purposes of the CEA. While the Commission has been able to perform this evaluation for the Covered Transactions delineated in the Final Order, phrases such as “logical outgrowth,” “natural outgrowth,” and “economically comparable” are too vague and potentially too far reaching to permit meaningful analysis under the statutory standard of review. Commenters have not provided, by way of explanation or example, sufficient insight as to what, if any, boundaries an exemption would have if it were extended to the degrees requested.

Moreover, the Commission's determination that this exemption is in the public interest and consistent with the purposes of the CEA is grounded, in part, on certain characteristics of the Covered Transactions and market circumstances described by the Requesting Parties including, for example, that the Covered Transactions are “part of, and inextricably linked to, the organized wholesale electricity markets that are subject to FERC or PUCT regulation and oversight.”

Such qualities may or may not be shared by other, as yet undefined, transactions. Additionally, it is impossible for the Commission to determine whether unidentified transactions include novel features or have market implications or risks that are not present in the Covered Transactions, which could, in turn, impact the Commission's public interest and purposes of the CEA analysis or necessitate the inclusion of additional or differing terms and conditions in a final order.

77 FR 52144.

See also

Petition at 11.

Finally, there may be differences in opinion among the Requesting Parties with respect to the expansion of relief beyond the Covered Transactions. Indeed, the Requesting Parties themselves request that future supplemental relief not be automatically granted to all Requesting Parties and the Commission notes that it has already received supplemental requests for relief that would apply only to certain Requesting Parties, and might be objected to by other Requesting Parties.

See

In the Matter of the Application for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by ISO New England Inc. (April 30, 2012); In the Matter of the Application for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by California Independent System Operator Corporation (May 30, 2012).

In light of these considerations and the potential for adverse consequences that may result from an exemption that includes transactions whose qualities and effect on the broader market cannot be fully appreciated absent further specification, a virtually unlimited exemption would be contrary to the public interest and purposes of the CEA. In addition, consideration of new categories of transactions could be aided by the public notice and comment process. Furthermore, the Commission notes that it is prepared to review requests for supplemental relief from the Requesting Parties.

See

77 FR 52163.

c. Determinations With Regards to Scope of “Energy Transactions” Definition

In discussing the scope of “Energy Transactions” included in the Proposed Order, the Commission stated that such transactions “are also referred to as Virtual Bids or Convergence Bids.”

Commenters noted,

however, that, in a later discussion of the categories of transactions to which the exemption would apply, the Commission stated that “virtual and convergence bids/transactions” would be included within the scope of the exemption only to the extent that they would qualify under one of the four categories of transactions explicitly defined in the Proposed Order.

Multiple commenters requested that the Commission clarify that virtual and convergence bids and offers are explicitly included within the scope of the Covered Transactions that qualify for an exemption under the Final Order.

Specifically, the Requesting Parties asked that the Final Order define “Energy Transactions” to include “virtual and convergence bids and offers.”

77 FR 52142 (citing Petition at 6).

See, e.g.,

DC Energy at 2; PUCT at 5-6; Requesting Parties at 12.

Specifically, the Proposed Order explained:

The particular categories of contracts, agreements and transactions to which the Proposed Exemption would apply correspond to the types of transactions for which relief was explicitly requested in the Petition. Petitioners requested relief for four specific types of transactions and the Proposed Exemption would exempt those transactions. With respect to those transactions, the Petition also included the parenthetical “(including generation, demand response or convergence or virtual bids/transactions).” The Commission notes that such transactions would be included within the scope of the exemption if they would qualify as the financial transmission rights, energy transactions, forward capacity transactions or reserve or regulation transactions for which relief is explicitly provided within the exemption.

77 FR 52163 (internal citations omitted).

Commercial Working Group at 2; DC Energy at 2; FIEG at 2; NEPOOL at 10; Requesting Parties at 12; PUCT at 5.

Requesting Parties at 13.

Several commenters expressed concerns that certain statements regarding the physical nature of transactions proposed to be exempt, and the role of market participants as physical generators, transmitters, and distributors of electric energy, cast further doubt as to whether the Commission intended to include virtual and convergence bids and offers within the scope of the Proposed Order. One commenter noted that the Commission's statement that the transactions proposed to be exempt are “primarily entered into by commercial participants that are in the business of generating, transmitting and distributing electricity” suggested that virtual and convergence bids and offers may not qualify as Covered Transactions because both traditional and non-traditional utilities engage in such transactions, yet many do not own physical generation or wholesale

transmission facilities.

Similarly, the Requesting Parties requested the removal of the statement in the Proposed Order that provided “[t]o be eligible for the proposed exemption, the contract, agreement, or transaction would be required to be offered or entered into in a market administered by a Petitioner pursuant to that Petitioner's tariff or protocol for the purposes of allocating such Petitioner's physical resources.”

Finally, other commenters noted concern with the Commission's qualification that “financial transactions that are not tied to the allocation of the physical capabilities of an electric transmission grid would not be suitable for exemption because such activity would not be inextricably linked to the physical delivery of electricity,”

suggesting that the phrase potentially excluded virtual and convergence bids and offers from the scope of Covered Transactions, depending upon the interpretation of the relationship between virtual transactions and the physical delivery of electricity.

See

Financial Marketers Coalition at 3-4 (quoting 77 FR 52144). The Commission notes that the statement referenced by this commenter was intended to summarize a representation made by the Requesting Parties.

See

77 FR 52144 (“Petitioners also explain that the Transactions are primarily entered into by commercial participants that are in the business of generating, transmitting, and distributing electricity”).

Requesting Parties at 13 (citing 77 FR 52138).

77 FR 52143.

See

Financial Marketers Coalition at 7-8; FIEG at 2; NEPOOL at 3.

Despite their uncertainty with respect to particular statements, multiple commenters contended that virtual and convergence bids and offers fell within the transactions described in the Proposed Order.

Commenters posited that virtual and convergence bids and offers, like all other transactions described in the Proposed Order, are entered into pursuant to FERC- or PUCT-approved Tariffs, and thus are subject to the oversight of the Requesting Parties' MMUs. In addition, certain commenters argued that virtual and convergence bids and offers are inextricably linked to the physical delivery of electric energy by being tied to the allocation of the physical capabilities of the electric energy transmission grid.

See, e.g.,

Requesting Parties at 12 (noting that virtual transactions fall into the category of “Energy Transactions,” specifically, as such term was defined in the Proposed Order). The Commercial Working Group noted that, in addition to virtual transactions, “financial schedules” and “internal bilateral transactions” can appropriately be placed in one of the four enumerated categories of transactions defined in the Proposed Order, and as such, should be explicitly included in the Final Order as Covered Transactions.

See

Commercial Working Group at 2. The Commission notes that financial schedules and internal bilateral transactions are the subject of a separate request for supplemental relief filed by CAISO and ISO NE and, therefore, the Commission is taking no position in this Final Order with respect to those products.

See

note 82

supra.

Requesting Parties at 14 (“On a net basis, Virtual Transactions in the RTOs and ISOs are modeled identically to generation and load; therefore, the net cleared amount of all bids and offers (including virtual bids and offers) cannot exceed the physical capability of the grid to flow electricity.”); PUCT at 6; DC Energy at 2 (“[V]irtual energy transactions also serve to converge the Day-Ahead and Real-Time markets as well as provide liquidity and price discovery, all of which are inextricably linked to the physical capabilities of an efficient electricity market and grid.”); FIEG at 2 (“While virtual bids are indeed financial, they do not exist in isolation from the capabilities of the electric grid. Indeed, RTOs significantly restrict virtual bids based in large part on their potential to tangibly impact the electric grid itself.”); Financial Marketers Coalition at 8-9 (“Virtual Transactions cannot be entered into unless the selected node and the grid are capable of supporting the transaction. If the physical node is not available, the transaction is rejected. Thus the aggregate cleared volume of Virtual Transactions for any period is limited by the physical capability of the electricity system operated by the RTOs/ISOs and is based on the projected physical power needs of the system for the specific hour, day, month or year.”).

Commenters represented that virtual and convergence bids and offers were established as a means by which to improve efficiency and competitiveness in the electric energy markets through the convergence of Day-Ahead Market and RTM prices,

and have been promoted by FERC and PUCT.

The Requesting Parties further explained that “[a] Virtual Transaction is a cleared offer to sell energy in the day-ahead market (an `incremental offer' or `inc') or a cleared bid to buy energy in the day-ahead market (a `decremental bid' or `dec'),” and “may be submitted by market participants that do not have a physical position in the ISO/RTO markets, which is to say, they do not own generation or serve load.”

Day-Ahead Market transactions are not, however, limited to non-generating or non-LSEs, as “owners of physical generating units that are capacity resources in the ISO/RTO must submit an offer to sell the energy output of their units into the day-ahead market,” and “[s]imilarly, participants that serve load in an ISO/RTO market may additionally submit bids into the day-ahead market.”

The Requesting Parties asserted that, because the Day-Ahead Market is cleared by modeling all bids and offers without distinction as to whether they are virtual or physical in nature, virtual and convergence bids and offers satisfy the proposed criteria that the aggregate cleared volume of Energy Transactions be limited by the physical capability of the electric energy transmission system in order for an Energy Transaction to be subject to the exemption.

PUCT at 6 (“The [Day-Ahead Market] was instituted in the ERCOT market to provide opportunities for increased efficiency in the market for physical energy transactions,” and “would not exist but for its direct linkage to the real-time market for energy and ancillary services necessary to operate the electric system.”); Financial Marketers Coalition at 8 (noting that Day-Ahead Market modeling “results in both price and operational efficiency because it allows the system operator to determine which units to dispatch based on the best price and projected demands considering all offers and bids including virtuals.”); NEPOOL at 3 (“Virtual bidding allows virtual traders to supply power to service areas where physical competition is constrained due to insufficient transmission and to increase market efficiency by making pricing less volatile as day-ahead prices converge with real-time prices.”).

PUCT at 6; Financial Marketers Coalition at 3-4, 12 (noting that FERC has encouraged, and in some cases even required, unbundling of services, and promoted market entry by non-traditional utilities lacking physical resources in order to enhance competition).

Requesting Parties at 14. PUCT explained that, “in the ERCOT market, Virtual Transactions are limited to transactions in the Day Ahead Market (DAM).” PUCT at 6. The Financial Marketers Coalition defined a “virtual transaction” as “a purchase or sale of energy in the day-ahead market that is settled against real-time energy prices.” Financial Marketers Coalition at 2 n.2.

Requesting Parties at 14.

See id.

In response to commenters' concerns, the Commission has added language to the Energy Transactions definition to clarify in the Final Order that Energy Transactions “includ[e] * * * Virtual and Convergence Bids and Offers.”

100

This clarification is based on Requesting Parties' and other regulators' representations that virtual and convergence bids and offers are “Energy Transactions” in the “Day-Ahead Market,” as such terms are defined in the Final Order,

101

that enable market participants to buy and sell electric energy without physically producing or consuming it.

102

Although there is an apparent financial settlement nature of virtual and convergence bids and offers transacted in the Day-Ahead Market, Requesting Parties represented that they are inextricably linked to the physical delivery of electric energy due to their being subject to the same aggregate physical capabilities of the electric energy transmission grid as other

physical Energy Transactions.

103

Requesting Parties also represented that virtual and convergence bids and offers are integral to achieving increased efficiency, and ultimately lower consumer costs, through the convergence of Day-Ahead Market and RTM prices.

104

Accordingly, based on these representations, the Commission confirms that the inclusion of virtual and convergence bids and offers that are Energy Transactions within the scope of the Covered Transactions in the Final Order is consistent with the public interest and purposes of the CEA.

100

See

paragraph 5(b) of the Order. Additionally, in response to the Requesting Parties' comment, the Commission has not included any reference in the Final Order suggesting that the purpose of a Covered Transaction must be to allocate a Requesting Party's physical resources.

101

Consistent with the Commission's understanding of industry practice as reflected in the Requesting Parties' current Tariffs, “the day on which the Day-Ahead Market clears” in the Order definition of “Day-Ahead Market” shall mean the same day that the relevant transaction in the Day-Ahead Market is entered into.

See

paragraph 5(e) of the Order.

102

Requesting Parties at 14.

See also

PUCT at 6.

103

Requesting Parties at 14.

104

See, e.g.,

NYISO at 3-4.

Finally, CAISO and ISO NE requested that the proposed definition of “Energy Transactions” be amended to allow for cash settlement based upon the Day-Ahead Market price (in addition to the Real-Time Market price), due to the fact that for both CAISO and ISO NE., the Day-Ahead Market may be preferable to the Real-Time Market as a source of settlement prices for certain energy transactions.

105

CAISO and ISO NE requested such a change to account for certain energy transactions in their markets that otherwise might not be included within the scope of the Energy Transactions definition, but nonetheless are settled “under tariff provisions which have been approved by the FERC” and that “[o]nce entered into the settlement system * * *, are operationally treated the same as any other Energy Transaction included in the Commission's Proposed Order.”

106

Accordingly, the Commission has amended the definition to provide that the requisite performance of an energy transaction may occur in the Real-Time Market through “[a] cash payment or receipt at the price established in the

Day-Ahead Market

Real-Time Market

(as permitted by each Requesting Party in its Tariff).”

107

The Commission stresses that any Energy Transaction settling based upon the Day-Ahead Market price must be inextricably linked to the physical delivery of electric energy.

105

See

CAISO/ISO NE March at 2-3.

106

Id.

at 3.

107

See

paragraph 5(b) of the Order (emphasis added).

d. Determinations With Regards to the Process for Expanding the Transactions Covered by the Final Order

Several commenters requested a streamlined or expedited process for Commission review of supplemental requests for related exemptions submitted by the Requesting Parties.

108

Specifically, some commenters argued that Commission action is not necessary where a “FERC- or PUCT-approved change was made to an already exempted transaction”

109

and where Tariff changes that are related to core RTO and ISO market functions are filed and accepted by FERC.

110

108

See generally

Joint Trade Associations at 10; NEPOOL at 4; PUCT at 8; Requesting Parties at 10-11.

109

See generally

Joint Trade Associations at 10.

110

See generally

NEPOOL at 4.

Another commenter generally noted that “the Commission * * * should provide an efficient process for Petitioners to confirm the applicability of the exemptive relief to new or modified products in a timely manner,”

111

while the Requesting Parties asked “the Commission [to] adopt a process whereby a Petitioner could simultaneously provide the Commission a copy of its FERC filing (or in the case of ERCOT, the Protocol revisions)* * * .”

112

The Requesting Parties proposed that, for FERC-regulated RTOs and ISOs, “if, during the 60-day FERC review period, the Commission informs the Petitioners that the new or modified product is not covered by the exemption or that the Commission needs additional time to review the product, the Petitioner would delay offering the new product until such time as the Commission completes its review or grants supplemental relief.”

113

111

PUCT at 8.

112

Requesting Parties at 10-11.

113

Id.

As discussed above, the Commission notes that that there is no need to review new or revised Tariffs that are limited to transactions that fall within the definitions of the Covered Transactions set forth in the Final Order. A supplemental exemption is not necessary in such instances. The Commission declines to adopt a streamlined or expedited process for the review of supplemental requests to expand the exemption to additional transactions. As noted above, section 4(c)(6) of the CEA mandates that the Commission, in granting any exemption thereunder, must act in accordance with CEA sections 4(c)(1) and (2). The Commission will strive to address any requests for supplemental relief as expeditiously as possible.

2. Additional Definitions and Provisions in the Final Order

The Commission proposed to exempt any persons (including the Requesting Parties, their members and their market participants) offering, entering into,

114

rendering advice, or rendering other services with respect to the transactions defined in the Proposed Order.

115

The Commission also proposed that, in order to be eligible for exemptive relief, “[t]he agreement, contract or transaction must be offered or sold pursuant to a Requesting Party's tariff and that tariff must have been approved or permitted to take effect by: (1) [i]n the case of [ERCOT], the [PUCT] or (2) in the case of all other Requesting Parties, [FERC].”

116

The Commission did not receive any comments with respect to this requirement. In addition, this requirement is consistent with the range of the Commission's authority as set forth in section 4(c)(6) of the CEA and with the scope of the relief requested,

117

and therefore the Commission has not altered the requirement in the Final Order.

114

The Commission clarifies that the exemption is only available to persons “entering into” the Covered Transactions if such persons satisfy the criteria set forth in paragraph 2(b) of the Order (

i.e.,

such persons are “appropriate persons,” as defined in sections 4(c)(3)(A) through (J) of the CEA; “eligible contract participants,” as defined in section 1a(18)(A) of the CEA and in Commission regulation 1.3(m); or “persons who actively participate in the generation, transmission, or distribution of electric energy” as defined in paragraph 5(g) of the Order.

115

77 FR at 52166.

116

Id.

117

See id.

at 52142, 521664; Petition at 2-3.

In the Proposed Order, the term “Requesting Party” was defined to include the six Requesting Parties (

i.e.,

CAISO, ERCOT, ISO NE., MISO, NYISO, and PJM) and any of their respective successors in interest.

118

The Commission has incorporated this definition into the Final Order without alteration. In the Proposed Order, “[r]eference to a Requesting Party's `tariff' includes a tariff, rate schedule or protocol,”

119

in order to account for differences in terminology used by such entities and their respective regulators.

120

The Commission did not receive any comment on this definition and, accordingly, has incorporated this definition into the Final Order unchanged.

118

77 FR 52167.

119

Id.

120

See id.

at 52164.

3. Conditions to the Final Order

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

i. FERC Regulation 35.47

On October 21, 2010, FERC adopted FERC regulation 35.47

121

to encourage

clear and consistent risk and credit practices in the organized wholesale electric energy markets to, inter alia, “ensure that all rates charged for the transmission or sale of electric energy in interstate commerce are just, reasonable, and not unduly discriminatory or preferential.”

122

As more fully described in the Proposed Order,

123

FERC regulation 35.47 directs each of the RTOs and ISOs within its jurisdiction to adopt Tariffs that implement specified credit practice reforms.

124

These credit reforms include limitations on the amount of credit an RTO or ISO may extend for each market participant; shortened billing and settlement periods of no more than seven days; the elimination of unsecured credit in FTR or equivalent markets; requiring RTOs and ISOs to ensure the enforceability of their netting arrangements in the event of the insolvency of a member by (1) establishing a single counterparty to all market participant transactions, (2) requiring each market participant to grant a security interest in the receivables of its transactions to the relevant RTO or ISO, or (3) providing another method that supports netting that is approved by FERC and that provides a similar level of protection to the market; adoption of a two-day grace period for curing collateral calls; establishment of minimum market participation eligibility requirements that apply consistently to all market participants and that require RTOs and ISOs to engage in periodic verification of market participant risk management policies and procedures; and Tariff clarifications regarding the conditions under which RTOs and ISOs will request additional collateral due to a material adverse change.

125

In the Proposed Order, the Commission stated that these credit requirements appear to achieve goals that are similar to the regulatory objectives of the Commission's DCO Core Principles,

126

and set forth a detailed analysis of each credit requirement and DCO Core Principle supporting such assertion.

127

Due, in part, to the consistency in regulatory objectives between FERC regulation 35.47 and several of the Commission's DCO Core Principles, the Commission proposed requiring each Requesting Party, including ERCOT, to comply with FERC regulation 35.47 as a condition precedent to the granting of a 4(c)(6) exemption for the transactions described in the Proposed Order.

128

The Commission requested comment on this proposal.

129

121

The Proposed Order referred to FERC Order 741 to collectively describe 75 FR 65942 (“FERC Original Order 741”) and 76 FR 10492 (“FERC

Revised Order 741”) (slightly amending and clarifying FERC Original Order 741). The standards set forth in these FERC Orders are codified as FERC regulation 35.47 and, therefore, for clarity, reference herein is to the regulation.

122

75 FR 65942, 65942, Oct. 21, 2010. These requirements were later amended and clarified in an order on rehearing.

See

76 FR 10492, Feb. 25, 2011.

123

See

77 FR at 52147-48.

124

See id.

125

See id.

at 52147-48, 52150-53.

126

See id.

at 52147.

127

See id.

at 52147-48; 52150-53.

128

See

77 FR 52164-65. The Commission noted that, while ERCOT is not subject to FERC regulation, the fact that these mandates were developed specifically for RTOs and ISOs suggests that holding ERCOT to these standards may well be appropriate.

See id.

at 52165.

129

See id.

at 52172.

Several commenters argued against this prerequisite, citing FERC's authority over the implementation of FERC regulation 35.47,

130

while others proposed that the Commission rely on FERC's determination that the Requesting Parties have complied with FERC regulation 35.47.

131

Further, commenters requested clarification from the Commission as to “what will constitute a finding that an RTO or ISO is fully compliant with” FERC regulation 35.47,

132

with one commenter suggesting that the Requesting Parties' ongoing efforts to comply with FERC regulation 35.47 are a sufficient demonstration of compliance.

133

In addition, several commenters proposed that a final order from FERC, or, with respect to ERCOT, PUCT, is adequate to demonstrate compliance and the Commission need not do any further analysis upon receipt of such a final order.

134

130

See, e.g.,

Joint Trade Associations at 15; COPE at 7.

131

See generally

Commercial Working Group at 4.

132

See, e.g.,

Joint Trade Associations at 14-15; Commercial Working Group at 4.

133

See, e.g.,

Joint Trade Associations at 15.

134

See, e.g.,

id.

With respect to ERCOT, several commenters objected to the condition precedent because ERCOT is subject to PUCT's jurisdiction and not that of FERC,

135

and further asserted ERCOT should be evaluated on its compliance with PUCT regulations.

136

One commenter cited the successful operation of the ERCOT market over the past decade as support for its position.

137

In addition, commenters noted that ERCOT has, in part, voluntarily and, in part, in conjunction with regulations set forth by PUCT, implemented protocols that are comparable to those identified in FERC regulation 35.47.

138

Indeed, these commenters argued that some of these efforts are more conservative than those required by FERC regulation 35.47, and thus these commenters expressed concern that the condition precedent will require ERCOT to adopt less stringent practices.

139

135

See, e.g.,

COPE at 7-8; Joint Trade Associations at 14; PUCT at 3, 11; Requesting Parties at 19.

136

See, e.g.,

COPE at 7-8; Joint Trade Associations at 14.

137

See

COPE at 8.

138

See

PUCT at 11; Requesting Parties at 19.

139

See

PUCT at 11-12; Requesting Parties at 19-22.

ERCOT has represented that it implemented protocols that are comparable to

140

all of the standards set forth in FERC regulation 35.47, with the sole exception of the billing period requirement in the RTM.

141

FERC regulation 35.47(b) requires that RTO and ISO Tariffs “[a]dopt a billing period of no more than seven days and allow a settlement period of no more than seven days.”

142

ERCOT represented that its rules applicable to the Day-Ahead Market are more conservative than FERC regulation 35.47(b) obligations with respect to both the statement issuance and payment deadlines.

143

ERCOT's RTM settlement rules have a longer issuance period of nine days, but a shorter payment period of two bank business days within issuance of the statement and invoice.

144

ERCOT asserted that its “RTM settlement timeline is consistent with the goals of FERC” regulation 35.47 because RTM transactions are paid within eleven and thirteen days (shorter than the fourteen-day time frame established by FERC regulation 35.47(b)) for 92% of operating days and within the fourteen-day period for 98% of operating days.

145

ERCOT claimed that ERCOT RTM transactions that are paid beyond the fourteen days from the operating day are paid on the fifteenth day.

146

ERCOT also

contended that any incremental risk related to ERCOT's RTM nine-day statement issuance period is mitigated because RTM positions in the ERCOT market are known and fully collateralized subsequent to the relevant operating day and prior to the FERC-required seven day statement issuance period.

147

140

See

Revised FERC Order No. 741 Implementation Chart at 1 n.1, 3.

See also

Requesting Parties at 19 (“ERCOT has adopted credit standards that are either the same as or substantially equivalent to those set forth in FERC Order No. 741.”).

141

See

Requesting Parties at 19-22; Revised FERC Order No. 741 Implementation Chart. ERCOT indicates that it has implemented these practices “with the approval of PUCT,” Requesting Parties at 19, and that all applicable changes became effective on or before January 1, 2013, with the exception of a protocol that “will further reduce the [Real-Time] settlement cycle in phases by an additional two days,” which was in the stakeholder process” as of January 18, 2012. Revised FERC Order No. 741 Implementation Chart.

142

18 CFR 35.47(b).

143

See

Requesting Parties at 20.

144

See id.

145

Id.

146

See id.

at 20-21. ERCOT represents that longer payment and settlement timelines are “expected to be primarily due to weekend and holiday schedules.” Revised FERC Order No. 741 Implementation Chart at 3.

See also

Requesting Parties at 21.

147

See id.

at 21.

As discussed in detail below in section IV.B.2.e.ii., the Commission believes that the DCO Core Principles provide a useful framework to help measure the extent to which the exemption is in the public interest and consistent with the purposes of the CEA. Because substantial compliance with the standards set forth in FERC regulation 35.47 forms the basis for the determination that the Tariffs and activities of the Requesting Parties are congruent with, and—in the context of the Covered Transactions—sufficiently accomplish, the regulatory objectives of the DCO Core Principles, such compliance is necessary for the Commission's public interest and purposes of the CEA determination.

148

Nonetheless, the Commission notes that each Requesting Party has represented to the Commission that its Tariffs have been revised to substantially meet the standards set forth in FERC regulation 35.47.

149

Indeed, the Commission notes that the Requesting Parties have represented that several of those Tariff revisions have already been approved or permitted to take effect by FERC or PUCT, as applicable.

150

As such, and after careful consideration of the comments, the Commission believes that for each Requesting Party that is regulated by FERC, full compliance with FERC regulation 35.47, as measured by FERC's acceptance and approval of all of that Requesting Party's Tariffs necessary to implement the standards set forth in FERC regulation 35.47, is a necessary prerequisite to the effectiveness of the exemption in the Final Order with respect to that Requesting Party.

148

In the case of ERCOT, which is regulated by PUCT, what is necessary is compliance with standards that are the same as those set forth in FERC regulation 35.47.

149

See

FERC Order No. 741 Implementation Chart; Revised FERC Order No. 741 Implementation Chart.

150

See

Revised FERC Order No. 741 Implementation Chart.

With respect to ERCOT, the Commission has considered the comments regarding ERCOT's efforts to reform its market protocols in a manner that is the same as or substantially similar to the credit requirements of FERC regulation 35.47. The Commission believes, on the basis of ERCOT's representations, as set forth above, that ERCOT's market protocols differ from the standards set forth in FERC regulation 35.47 in a manner that is sufficiently minor as to permit the Commission to accept them for the purpose of determining that the requested exemption with respect to ERCOT is in the public interest and consistent with the purposes of the CEA. Thus, for ERCOT, adopting measures that are substantially similar to standards that are the same as those set forth in FERC regulation 35.47, as measured by PUCT's permitting all of the ERCOT protocols that are discussed above and as set forth in the Revised FERC Order No. 741 Implementation Chart to take effect, is a necessary prerequisite to the effectiveness of the exemption in the Final Order with respect to ERCOT.

ii. Legal Memorandum or Legal Opinion of Counsel

The Proposed Order contemplated requiring, as a condition precedent to the issuance of a Final Order, that each Requesting Party provide a well-reasoned legal opinion or memorandum from outside counsel that, in the Commission's sole discretion, provides the Commission with assurance that the netting arrangements contained in the approach selected by the particular Requesting Party to satisfy the obligations contained in FERC regulation 35.47(d)

151

will provide the Requesting Party with legally enforceable rights of set off against any of its market participants under title 11 of the United States Bankruptcy Code in the event of a bankruptcy of the market participant. This condition precedent was proposed in light of diversity among the Requesting Parties surrounding the interpretation of the single counterparty requirement and whether a Requesting Party's adopted practices would provide enforceable set-off rights.

152

The Commission requested comment on this proposal.

153

151

FERC regulation 35.47(d) was adopted as part of the “Credit Reforms in the Wholesale Electricity Market” established by FERC Order No. 741. It requires an organized electric energy market to have tariff provisions that establish a single counterparty to all market participant transactions, or require each market participant in an organized wholesale electric energy market to grant a security interest to the organized wholesale electric market in the receivables of its transactions, or provide another method of supporting netting that provides a similar level of protection to the market and is approved by the Commission. In the alternative, the organized wholesale electric energy market is not permitted to net market participants' transactions and must establish credit based on market participants' gross obligations. 18 CFR 35.47(d).

152

77 FR 52165. Requesting Parties have defined the term “single counterparty” differently. In addition, each Requesting Party plans on implementing a central counterparty structure based on its individual views. Because of these differing views, the legal opinion or memorandum requirement is meant to provide comfort to the Commission that the single counterparty structure chosen by each Requesting Party provides enforceable set off rights, without having the Commission specify what would be an acceptable central counterparty structure, which could contrast with what FERC and PUCT have permitted.

153

See id.

at 52172.

The Commission received three types of comments on this requirement: (1) Comments that opposed the condition precedent; (2) comments that did not opine on the propriety of the requirement, but expressed concern with respect to the possible unintended and adverse tax consequences the obligation may have for the Requesting Parties; and (3) a comment that objected to the specific requirement that the memorandum or opinion of counsel be signed by the law firm as opposed to an individual partner of the law firm.

Commenters that opposed the condition precedent generally did so on the basis that the Commission “should not be the arbiter of whether a FERC-approved RTO regime consistent with” FERC regulation 35.47 “meets bankruptcy goals,”

154

and that “the existence of FERC regulation should be the premise upon which an exemption is granted.”

155

154

COPE at 8.

155

Id.

In addition, two commenters urged the Commission to avoid taking any action that could undermine a Requesting Party's tax-exempt status and continued ability to use tax-exempt financing to finance its operations,

156

while the Requesting Parties asked the Commission to “clarify that any memorandum or opinion of counsel need not be signed by a law firm that provides it, as opposed to any individual partner.”

157

156

See generally

APPA at 4; Joint Trade Associations at 15.

157

Requesting Parties at 16-17.

With respect to the comments opposing the condition precedent, the Commission reiterates that this requirement is designed to permit the Commission to avoid being the arbiter of whether a Requesting Party has satisfied the requirements of FERC regulation 35.47(d). The Commission notes that no Requesting Party has asserted that it would be unable to obtain such a document. In addition, the Commission notes that the ambiguities discussed in the Proposed Order with respect to some Requesting Parties' interpretations

of the single counterparty requirement have not been clarified.

158

The Commission continues to believe that the legal memorandum requirement will provide the Commission with assurance that the netting arrangements contained in the approach selected by each Requesting Party to satisfy the standards set forth in FERC regulation 35.47(d) (or in the case of ERCOT, standards that are the same as those set forth in FERC regulation 35.47(d)) will, in fact, provide the Requesting Party with enforceable rights of set off against any of its market participants under title 11 of the United States Bankruptcy Code, in the event of the bankruptcy of a market participant. However, the Commission believes that this condition may be met subsequent to the issuance of this Final Order, provided that as a condition to the effectiveness of the exemption set forth in this Final Order, the Commission must receive, from each Requesting Party, a legal memorandum or opinion of outside counsel that is satisfactory to the Commission. In addition, the Commission clarifies that it retains discretion as to whether the legal opinion or memorandum provides the Commission with the assurances desired, and may elect not to require that a memorandum or opinion be signed by the law firm if the circumstances so warrant. Moreover, as discussed further in section IV.E. below, the Commission is delegating its authority to review and accept the legal memoranda or opinions to the Director of the Division of Clearing and Risk and to his designees, in consultation with the General Counsel or the General Counsel's designees,

159

which will expedite the process by which the Requesting Parties are able to satisfy this condition.

158

See

77 FR 52165.

159

See

paragraph 7 of the Order.

With respect to the comment that the condition precedent requiring a legal memorandum or opinion of outside counsel may create adverse tax consequences, the Commission notes that such tax issues are beyond the scope of this Final Order.

b. Conditions Subsequent to the Final Order

i. Notification of Requests for Information

The Proposed Order included a condition requiring that “neither the tariffs nor any other governing documents of the particular RTO or ISO pursuant to whose tariff the agreement, contract, or transaction is to be offered or sold, shall include any requirement that the RTO or ISO notify its members prior to providing information to the Commission in response to a subpoena or other request for information or documentation.”

160

As noted in the Proposed Order, a “notice requirement could significantly compromise the Commission's enforcement efforts as there are likely to be situations where it would be neither prudent nor advisable for an entity under investigation by the Commission to learn of the investigation prior to Commission notification to the entity.”

161

The Commission requested comment on this proposal and as to whether there may be an alternative condition that the Commission might use to achieve the same result.

162

160

Id.

at 52166.

161

Id.

162

See id.

One commenter asked “[d]oes the Commission's subpoena secrecy requirement described in the Proposed Order mandate that FERC approve tariff changes that are required by the Commission regardless of whether FERC views them to be `just and reasonable' as required by the Federal Power Act?”

163

Another commenter opposed this condition, arguing that “[r]eopening a tariff could result in multiple issues arising, many of which have nothing to do with the notice of inquiry, and may result in undue delay.”

164

163

COPE at 4 (internal footnote omitted).

164

Commercial Working Group at 3 n.4.

In response to the comments, the Commission recognizes that while this condition may require a Tariff change for some Requesting Parties, this is a necessary condition to the exemptive relief. As an initial matter, RTOs and ISOs amend their Tariffs on a regular basis. Thus, amending one Tariff provision would not necessarily result in opening unrelated Tariff provisions.

165

The Commission notes that none of the Requesting Parties have indicated in their comment letters that they need to revise their Tariffs to comply with this condition. Moreover, the Commission notes that RTOs and ISOs have proposed, and FERC has approved,

166

similar changes to RTO and ISO Tariffs enabling FERC Enforcement staff to issue subpoenas or requests for information without notification to RTO or ISO members.

167

This requirement provides the same protections to CFTC Enforcement investigations. Commenters have not explained why doing so would not be “just and reasonable.” In addition, the Commission notes that, in their respective comment letters, neither FERC staff nor the PUCT opposed the inclusion of this condition. Therefore, the Commission has determined that the removal of notice requirements from the Requesting Party's Tariffs will remain a condition to the Final Order.

165

See e.g.,

18 CFR 35.9(c), 35.10(b)-(c) (providing procedures for amending individual tariff provisions, and requiring that OATT and other open access documents filed by ISOs or RTOs must be filed either as individual sheets or sections).

166

In the absence of evidence to the contrary, the Commission would anticipate that PUCT would act similarly with respect to ERCOT.

167

See, e.g.,

PJM Interconnection, L.L.C. Open Access Transmission Tariff, Sixth Revised Volume No. 1, Attachment M, Market Monitoring Plan (permitting the MMU to provide information to FERC on a confidential basis without notice to any party).

ii. Information Sharing Agreements

The Proposed Order contemplated two conditions that addressed the Commission's ability to obtain information from the Requesting Parties.

168

First, with respect to ERCOT, the Proposed Order required that an information sharing arrangement acceptable to the Commission be executed between PUCT and the Commission and continue to be in effect. Second, for all FERC-regulated Requesting Parties, the Proposed Order required that information sharing arrangements between FERC and the Commission that are acceptable to the Commission continue to be in effect. The Commission specifically sought comment as to whether the information sharing arrangement to be executed between PUCT and the Commission should be a condition precedent to the effectiveness of a final exemption for ERCOT, and whether all Requesting Parties should be required, as a condition of any final exemption, to cooperate with the Commission's requests for information with respect to agreements, contracts, or transactions that are, or are related to, the agreements, contracts, or transactions that were the subject of the Proposed Order.

169

168

See

77 FR 52166.

169

See id.

at 52172.

Of those commenters that addressed the information sharing condition precedent for ERCOT, all viewpoints received requested that the Commission refrain from requiring that an information sharing agreement between PUCT and the Commission be in place prior to a final exemption becoming effective for ERCOT. The Requesting Parties and PUCT noted that fulfillment of such a requirement is beyond the control of ERCOT in terms of timing and terms, and therefore would be more appropriate as a condition subsequent to the effectiveness of the exemption in

order to avoid uncertainty.

170

Similarly, another commenter suggested that the Commission grant preliminary approval of the exemption for ERCOT while discussions between the Commission and PUCT remained ongoing due to ERCOT's comparable market position with respect to the other Requesting Parties, and the lack of any specific timeline under which the information sharing agreement must be completed.

171

Another commenter objected to the condition precedent, noting that “[a] one-way information sharing requirement acceptable to the CFTC is beyond what is necessary and implies that the Commission does not trust PUCT regulation.”

172

Finally, notwithstanding its objection to the condition precedent, PUCT expressed full support of working with the Commission to develop and execute an appropriate information sharing arrangement on a timely basis.

173

170

Requesting Parties at 15; PUCT at 13.

171

Commercial Working Group at 4.

172

COPE at 8.

173

PUCT at 13.

Regarding the Commission's contemplation of affirmatively requiring all Requesting Parties to cooperate with requests for information as a condition of the exemption, commenters did not respond directly, although one commenter suggested that the imposition of additional requirements upon the Requesting Parties for purposes of obtaining information through FERC or PUCT as the Requesting Parties' primary regulator amounts to indirect regulation.

174

COPE at 8.

In response to the comments opposing an information sharing agreement between PUCT and the Commission as a condition precedent to the effectiveness of relief for ERCOT, the Commission has determined not to pursue such a condition, and thus has stricken the execution of an information-sharing agreement with PUCT as a condition of the Final Order. Rather, with respect to ERCOT, the Final Order conditions the exemption upon “the Commission's ability to request, and obtain, on an as-needed basis from ERCOT, concurrently with the provision of written notice to PUCT and in connection with an inquiry consistent with the CEA and Commission regulations, positional and transactional data within ERCOT's possession for products in ERCOT's markets that are related to markets that are subject to the Commission's jurisdiction, including any pertinent information concerning such data, and ERCOT's compliance with such requests by sharing the requested information.”

175

This revision dispels any concerns regarding potential delay to the effectiveness of the Final Order with respect to ERCOT that could result from the time it might take for PUCT and the Commission to complete an acceptable information sharing arrangement. This revision also responds to competitiveness concerns that ERCOT and the other Requesting Parties should be treated comparably with respect to conditions that could affect the timing of the effectiveness of the Final Order due to their comparable market positions.

175

See

paragraph 4(a)(2) of the Order. The Commission is finalizing this condition under authority in CEA section 4(c)(1) to issue 4(c) relief conditionally with respect to those entities requesting/benefiting from the relief.

See

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

Consistent with the revised language noted above requiring ERCOT to comply with the Commission's requests for related market data on an as-needed basis, the Commission has revised the information sharing condition applicable to the FERC-regulated Requesting Parties. The Final Order conditions the exemption with respect to FERC-regulated Requesting Parties upon: (1) Information sharing arrangements between the Commission and FERC that are acceptable to the Commission and that continue to be in effect

176

and (2) “those Requesting Parties' compliance with the Commission's requests through FERC to share, on an as-needed basis and in connection with an inquiry consistent with the CEA and Commission regulations, positional and transactional data within the Requesting Parties' possession for products in Requesting Parties' markets that are related to markets that are subject to the Commission's jurisdiction, including any pertinent information concerning such data.”

177

The Commission notes that the Proposed Order only provided for information sharing arrangements. Thus, to qualify for the exemption provided by the Final Order, the Requesting Parties must comply with the Commission's requests for related market data, regardless of whether the request is made directly (in the case of ERCOT) or through FERC (in the case of all other Requesting Parties).

178

176

As discussed in the Proposed Order, the Commission notes that the CFTC and FERC executed a Memorandum of Understanding in 2005 pursuant to which the agencies have shared information successfully. 77 FR 52165.

177

See

paragraph 4(a)(1) of the Order.

178

The Commission has delegated to the Director of the Division of Market Oversight and to such members of the Division's staff acting under his or her direction as he or she may designate, in consultation with the General Counsel or such members of the General Counsel's staff acting under his or her direction as he or she may designate, the authority to request information from Requesting Parties pursuant to sections 4(a)(1) and 4(a)(2) of the Order.

See

paragraph 7 of the Order.

The Commission notes that any contemplated request for related market data would not be an attempt to indirectly regulate the Requesting Parties or their markets, contrary to some commenters' suggestion. In order for the Commission to determine that the Final Order is consistent with the public interest and the purposes of the CEA, the terms of the Final Order cannot adversely affect the ability of the Commission to discharge its regulatory duties under the CEA in monitoring energy markets under its jurisdiction.

179

Therefore, conditioning the exemption provided in the Final Order upon the Commission's ability to obtain related transactional and positional data from the Requesting Parties, and the Requesting Parties' compliance with such requests by sharing the requested information, is meant to enable the Commission to continue discharging its regulatory duties under the Act as set forth in CEA section 3.

180

The Commission notes that such requested information should already be in the possession of the Requesting Parties.

179

See

7 U.S.C. 6(c)(2)(B)(ii).

180

7 U.S.C. 5.

B. Section 4(c) Analysis

1. Overview of CEA Section 4(c)

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

As discussed above in section I., the Dodd-Frank Act amended CEA section 4(c) to add sections 4(c)(6)(A) and (B), which provide for exemptions for certain transactions entered into (a) pursuant to a tariff or rate schedule approved or permitted to take effect by FERC, or (b) pursuant to a tariff or rate schedule establishing rates or charges for, or protocols governing, the sale of electric energy approved or permitted to take effect by the regulatory authority of the State or municipality having jurisdiction to regulate rates and charges for the sale of electric energy within the State or municipality, as eligible for exemption pursuant to the Commission's 4(c) exemptive authority.

181

Indeed, 4(c)(6) provides

that “[i]f the Commission determines that the exemption would be consistent with the public interest and the purposes of this chapter, the Commission

shall”

issue such an exemption.

182

However, any exemption considered under 4(c)(6)(A) and/or (B) must be done “in accordance with [CEA section 4(c)(1) and (2)].”

183

181

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

(A) pursuant to a tariff or rate schedule approved or permitted to take effect by the Federal Energy Regulatory Commission;

182

Id.

(emphasis added).

183

CEA section 4(c)(6) explicitly directs the Commission to consider any exemption proposed under 4(c)(6) “in accordance with [CEA sections 4(c)(1) and (2)].”

b. Section 4(c)(1)

As described above in section I., CEA section 4(c)(1) requires that the Commission act “by rule, regulation or order, after notice and opportunity for hearing.” It also provides that the Commission may act “either unconditionally or on stated terms or conditions or for stated periods and either retroactively or prospectively or both” and that the Commission may provide an exemption from any provisions of the CEA except subparagraphs (C)(ii) and (D) of section 2(a)(1).

184

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

(c)(1) In order to promote responsible economic or financial innovation and fair competition, the Commission by rule, regulation, or order, after notice and opportunity for hearing, may (on its own initiative or on application of any person, including any board of trade designated or registered as a contract market or derivatives transaction execution facility for transactions for future delivery in any commodity under section 5 of this Act) exempt any agreement, contract, or transaction (or class thereof) that is otherwise subject to subsection (a) (including any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement, contract, or transaction), either unconditionally or on stated terms or conditions or for stated periods and either retroactively or prospectively, or both, from any of the requirements of subsection (a), or from any other provision of this Act (except subparagraphs (C)(ii) and (D) of section 2(a)(1), except that—

(A) unless the Commission is expressly authorized by any provision described in this subparagraph to grant exemptions, with respect to amendments made by subtitle A of the Wall Street Transparency and Accountability Act of 2010—

(i) with respect to—

(I) paragraphs (2), (3), (4), (5), and (7), paragraph (18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39), (41), (42), (46), (47), (48), and (49) of section 1a, and sections 2(a)(13), 2(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a), 5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and

(II) section 206(e) of the Gramm-Leach-Bliley Act (Public Law 106-102; 15 U.S.C. 78c note); and

(ii) in sections 721(c) and 742 of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and

(B) the Commission and the Securities and Exchange Commission may by rule, regulation, or order jointly exclude any agreement, contract, or transaction from section 2(a)(1)(D)) if the Commissions determine that the exemption would be consistent with the public interest.

c. Section 4(c)(2)

As set forth above in section I., CEA section 4(c)(2) requires the Commission to determine that: to the extent an exemption provides relief from any of the requirements of CEA section 4(a), the requirement should not be applied to the agreement, contract or transaction; the exempted agreement, contract, or transactions will be entered into solely between appropriate persons;

185

and the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.

186

185

See

CEA 4(c)(2)(B)(i) and the discussion of CEA section 4(c)(3) in sections I.

supra

and IV.B.1.d.

infra.

186

CEA section 4(c)(2)(A) also requires that the exemption would be consistent with the public interest and the purposes of the CEA, but that requirement duplicates the requirement of section 4(c)(6).

d. Section 4(c)(3)

As explained in section I. above, CEA section 4(c)(3) outlines who may constitute an appropriate person for the purpose of a 4(c) exemption, including as relevant to this Final Order: (a) Any person that fits in one of ten defined categories of appropriate persons; or (b) such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.

2. CEA Section 4(c) Determinations

a. Commission Jurisdiction

Subject to the limitations set forth in the CEA, sections 4(c)(6)(A) and (B) of the Act grant the Commission the authority to exempt certain electric energy transactions provided that the Commission determines, among other things, that such exemption is consistent with the public interest and purposes of the CEA.

187

The Commission received several comments relating to the Commission's interpretation of its jurisdiction pursuant to section 4(c)(6).

187

See

discussion regarding CEA section 4(c)(6) in sections I.

supra

and IV.B.1.a.

infra.

Two commenters argued that, the Commission should “interpret the Dodd-Frank Act as not applying to any contract or agreement traded in an RTO or ISO market pursuant to a FERC-accepted or approved rate schedule or tariff” and that the Commission should exclude RTO or ISO contracts or instruments from the definition of swap.

188

One of these commenters further argued that “Congress did not intend for Petitioners to be subject to such regulation under the Dodd-Frank Act. Congress recognized the impropriety of imposing duplicative regulation over entities such as Petitioners and instructed the Commission and FERC to `appl[y] their respective authorities in a manner so as to ensure the effective and efficient regulation in the public interest' and to `[avoid], to the extent possible, conflicting or duplicative regulation.' ”

189

188

Joint Trade Associations at 5.

See also

id.

at 3, 8; FERC Staff at 4.

189

Joint Trade Associations at 5 (alterations in original).

A different commenter claimed that the Commission should not regulate “[a]ccess to physical electricity markets.”

190

This commenter argued that the Proposed Order is “more of a delegation of authority (to FERC and the PUCT) than an exemption,” which “establishes a sort of joint regulation going forward with the CFTC setting minimum RTO participation standards, approving new transactions or `material modifications,' and, through its ability to alter or withdraw the exemption, indirectly regulating RTOs.”

191

190

COPE at 10.

191

Id.

(arguing that the Commission in fact proposed to retain jurisdiction over RTOs and ISOs because it did not propose to issue a blanket exemption and rather proposed to: (1) Refrain from issuing a final order until two preconditions have been met; (2) require information sharing agreements while failing to negotiate a Congressionally-mandated memorandum of understanding with PUCT; (3) require Requesting Parties to change their Tariffs to remove member notification requirements in the event of Commission requests for information; (4) retain the authority to alter or revoke the exemption upon a change of material facts; (5) require Requesting Parties to submit supplemental filings; (6) reject that `logical extensions” of exempted transactions also be subject to the order; and (7) impose limitations on participation the Requesting Parties' market through the Commission's application of the appropriate person standard).

Another commenter recognized the Commission's exemptive authority under section 4(c)(6), but requested that the Commission affirmatively state in any final order that it makes no determination as to whether the transactions included in the final order fall within the Commission's jurisdiction because the absence of such statement “could actually undermine the very regulatory certainty being requested by Petitioners, and potentially

give rise to unnecessary jurisdictional disputes.”

192

PUCT at 4.

In response to the comments, the Commission notes that the definition of a “swap” set forth in Commission regulations is beyond the scope of this Final Order. The Commission further notes that the interpretation of the Dodd-Frank Act proffered by the commenters is contrary to the express language of that statute. The Dodd-Frank Act added a savings clause to the CEA that addresses the roles of the Commission, FERC, and state agencies as they relate to transactions traded pursuant to FERC- or state-approved tariffs or rate schedules. Section 2(a)(1)(I) of the Act repeats the Commission's exclusive jurisdiction and clarifies that the Commission retains its authority over transactions that are within its jurisdiction. Moreover, while, section 4(c)(6) of the CEA, added by the Dodd-Frank Act, empowers the Commission to exempt contracts, agreements or transactions traded pursuant to a Tariff or rate schedule that has been approved or permitted to take effect by FERC or a state regulatory authority, it does not permit the Commission to automatically or mechanically apply the exemption. Instead, section 4(c)(6) mandates that the Commission initially determine that the exemption would be in the public interest and consistent with the purposes of the CEA, that the exemption would be applied only to agreements, contracts, or transactions that are entered into solely between appropriate persons, and that the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.

b. Consistent With the Public Interest and the Purposes of the CEA

As required by CEA section 4(c)(2)(A), as well as section 4(c)(6), the Commission determines that the Final Order is consistent with the public interest and the purposes of the CEA. Section 3(a) of the CEA provides that transactions subject to the CEA affect the national public interest by providing a means for managing and assuming price risk, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.

193

Section 3(b) of the CEA identifies the purposes of the CEA:

193

7 U.S.C. 5(a).

It is the purpose of this Act to serve the public interests described in subsection (a) through a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission. To foster these public interests, it is further the purpose of this Act to deter and prevent price manipulation or any other disruptions to market integrity; to ensure the financial integrity of all transactions subject to this Act and the avoidance of systemic risk; to protect all market participants from fraudulent or other abusive sales practices and misuses of customer assets; and to promote responsible innovation and fair competition among boards of trade, other markets and market participants.

194

7 U.S.C. 5(b).

Consistent with the proposed determinations set forth in the Proposed Order,

195

the Commission finds that: (a) The Covered Transactions have been, and are, subject to a long-standing, regulatory framework for the offer and sale of the Transactions established by FERC or PUCT; and (b) the Covered Transactions administered by the RTOs, ISOs, or ERCOT are part of, and inextricably linked to, the organized wholesale electric energy markets that are subject to FERC and PUCT regulation and oversight. For example, FERC Order No. 2000 (which, along with FERC Order No. 888, encouraged the formation of RTOs and ISOs to operate the electronic transmission grid and to create organized wholesale electric energy markets) requires an RTO or ISO to demonstrate that it has four minimum characteristics: (1) Independence from any market participant; (2) a scope and regional configuration which enables the RTO or ISO to maintain reliability and effectively perform its required functions; (3) operational authority for its activities, including being the security coordinator for the facilities that it controls; and (4) short-term reliability.

196

In addition, the Requesting Parties stated that an RTO or ISO must demonstrate to FERC that it performs certain self-regulatory and/or market monitoring functions,

197

and analogous requirements are applicable to ERCOT under PUCT and the Public Utility Regulatory Act

198

(“PURA”).

199

Requesting Parties also represented that they are responsible for “ensur[ing] the development and operation of market mechanisms to manage transmission congestion * * * The market mechanisms must accommodate broad participation by all market participants, and must provide all transmission customers with efficient price signals that show the consequences of their transmission usage decisions.”

200

195

See

77 FR 52144-45.

196

See id.

197

See id.

(explaining that, according to the Requesting Parties, each RTO and ISO must employ a transmission pricing system that promotes efficient use and expansion of transmission and generation facilities; develop and implement procedures to address parallel path flow issues within its region and with other regions; serve as a provider of last resort of all ancillary services required by FERC Order No. 888 including ensuring that its transmission customers have access to a Real-Time balancing market; be the single OASIS (Open-Access Same-Time Information System) site administrator for all transmission facilities under its control and independently calculate Total Transmission Capacity and Available Transmission Capability; provide reliable, efficient, and not unduly discriminatory transmission service, it must provide for objective monitoring of markets it operates or administers to identify market design flaws, market power abuses and opportunities for efficiency improvements; be responsible for planning, and for directing or arranging, necessary transmission expansions, additions, and upgrades; and ensure the integration of reliability practices within an interconnection and market interface practices among regions).

See also

Petition at 13-14.

198

TEX. UTIL. CODE ANN. 11.001

et seq.

(Vernon 1998 & Supp. 2005).

199

See id.;

Petition at 14-15. ERCOT represented that, pursuant to PURA 39.151(a), its roles and duties are to provide access to the transmission and distribution systems for all buyers and sellers of electric energy on nondiscriminatory terms; ensure the reliability and adequacy of the regional electric energy network; ensure that information relating to a customer's choice of retail electric energy provider is conveyed in a timely manner to the persons who need that information; and ensure that electric energy production and delivery are accurately accounted for among the generators and wholesale buyers and sellers in the region.

See

77 FR 52144-45; Petition at 14-15.

200

See

77 FR 52144 (quoting Petition at 14).

See also

18 CFR 35.34(k)(2).

Furthermore, as explained by the Requesting Parties and discussed in the Proposed Order, the Commission notes that the Covered Transactions are entered into primarily by commercial participants that are in the business of generating, transmitting, and distributing electric energy,

201

and the Requesting Parties were established for the purpose of providing affordable, reliable electric energy to consumers within their geographic region.

202

Additionally, the Covered Transactions that take place on the Requesting Parties' markets are overseen by an MMU, required by FERC for each Requesting Party under its jurisdiction and by PUCT in the case of ERCOT, to identify manipulation of electric energy on the Requesting Parties' markets.

203

201

See

77 FR 52144.

See also

Petition at 3-4.

203

See

77 FR 52144.

See also

Petition at 15-18.

Moreover, fundamental to this “public interest” and “purposes of the [Act]” analysis is the fact that the Covered Transactions are inextricably tied to the Requesting Parties' physical delivery of electric energy.

204

Another

important factor is that the Final Order is explicitly limited to Covered Transactions taking place on markets that are monitored by either an independent MMU, a market administrator (the RTO, ISO, or ERCOT), or both, and a government regulator (FERC or PUCT). In contrast, an exemption for transactions that are not so monitored, or not related to the physical capacity of an electric transmission grid, or not directly linked to the physical generation and transmission of electric energy, or not limited to appropriate persons,

205

is unlikely to be in the public interest or consistent with the purposes of the CEA, taking such transactions outside the scope of the Final Order.

204

See id.

See also

Petition at 6-9 (describing the transactions for which an exemption was requested

and noting that each of them “is part of, and inextricably linked to, the organized wholesale electricity markets that are subject to FERC and PUCT regulation and oversight”).

205

See

77 FR 52145-47.

Finally, the extent to which the Final Order is consistent with the public interest and the purposes of the Act can, in major part, be assessed by the extent to which the Tariffs and activities of the Requesting Parties, and supervision by FERC and PUCT, are congruent with, and sufficiently accomplish, the regulatory objectives of the relevant Core Principles set forth in the CEA for DCOs and SEFs. Specifically, providing a means for managing or assuming price risk and discovering prices, as well as prevention of price manipulation and other disruptions to market integrity, are addressed by the Core Principles for SEFs. Ensuring the financial integrity of the Covered Transactions and the avoidance of systemic risk, as well as protection from the misuse of participant assets, are addressed by the Core Principles for DCOs. Deterrence of price manipulation (or other disruptions to market integrity) and protection of market participants from fraudulent sales practices is achieved by the Commission retaining and exercising its jurisdiction over these matters. Therefore, the Commission has incorporated its DCO and SEF Core Principle analyses, set forth in the Proposed Order, into its consideration of the Final Order's consistency with the public interest and the purposes of the Act.

206

In the same way, the Commission has considered how the public interest and the purposes of the CEA are also addressed by the manner in which the Requesting Parties comply with FERC's credit reform policy.

207

206

See

sections IV.B.2.e.ii.-iii.

infra;

77 FR at 52149-62. The Commission received several comments regarding the use of the DCO and SEF Core Principles as a measure for the Commission's public interest and purposes of the CEA determination. These comments are addressed in sections IV.B.2.e.ii.-iii.

infra.

207

See

sections IV.A.3.a.i.

infra

and IV B.2.e.ii.

infra;

77 FR at 52147-48.

The Commission specifically requested comment on whether it used the appropriate standard in making its section 4(c) determination. The Commission received comments with respect to compliance with FERC's credit reform policy as a precondition to the issuance of a Final Order, which are discussed in sections IV.A.3.a.i. and IV.B.2.e.i., and on the Commission's use of the DCO and SEF Core Principles, which are discussed in sections IV.B.2.e.i.-ii. below.

The Commission received a number of comments regarding the appropriateness of the public interest and purposes of the CEA standard outlined above.

208

One commenter stated that the standard set forth in the Proposed Order, and in particular compliance with FERC regulation 35.47, “sufficiently demonstrates that the proposed exemption is consistent with the public interest and the purposes of the Act.”

209

However, another commenter argued that the Commission did not use the appropriate standard in analyzing whether the exemption is in the public interest and consistent with the purposes of the Act, because the Requesting Parties are “physical electricity transmission and market operators pervasively regulated by either FERC or the PUCT,” and “[t]he existence of such regulation should be the premise upon which an exemption is granted.”

210

208

See, e.g.,

COPE at 6; Commercial Working Group at 4.

209

Commercial Working Group at 4.

210

COPE at 6.

The Commission has considered the comments, and believes that it has used the appropriate standard in making its public interest and purpose of the CEA determination for purposes of this Final Order. The Commission disagrees that the existence of pervasive FERC and PUCT regulations is, by itself, a sufficient standard to analyze that the requested exemptive relief is consistent with the public interest and the purposes of the CEA, because, as set forth above,

211

section 4(c)(6) of the CEA, added by the Dodd-Frank Act, does not permit the Commission to automatically or mechanically apply an exemption.

211

See

sections I. and IV.B.1.a.

supra.

After consideration of the comments received and for the reasons set forth in this Final Order, the Commission has determined that the exemption set forth in this Final Order is consistent with the public interest and the purposes of the CEA.

c. CEA Section 4(a) Should Not Apply to the Transactions or Entities Eligible for the Exemption

CEA section 4(c)(2)(A) requires, in part, that the Commission determine that the Covered Transactions described in the Final Order should not be subject to CEA section 4(a)—generally, the Commission's exchange trading requirement for a contract for the purchase or sale of a commodity for future delivery. As set forth in the Proposed Order, the Commission has examined the Covered Transactions, the Requesting Parties, and their markets using the CEA Core Principle requirements applicable to a DCO and to a SEF as a framework for its public interest and purposes of the CEA determination.

212

As further support for this determination, the Commission also is relying on the public interest and the purposes of the Act analysis in subsection IV.B.2.f. below. In so doing, the Commission has determined that, due to the FERC or PUCT regulatory scheme and the RTO or ISO market structure already applicable to the Covered Transactions, the linkage between the Covered Transactions and those regulatory schemes, and the unique nature of the market participants that would be eligible to rely on the exemption,

213

CEA section 4(a) should not apply to the Covered Transactions under the Final Order.

212

See

sections IV.B.2.e.i.-ii.

infra;

77 FR at 52149-62.

213

See

appropriate persons analysis, section IV.B.2.d.

infra;

77 FR at 52147-48.

d. Appropriate Persons

Section 4(c)(2)(B)(i) of the CEA

214

requires, for an exemption to be granted, that the Commission make a determination that the exemption is restricted to Covered Transactions entered into solely between “appropriate persons,” as that term is defined in section 4(c)(3) of the Act.

215

Section 4(c)(3) defines the term “appropriate person” to include: (1) Any person that falls within one of the ten categories of persons delineated in sections 4(c)(3)(A) through (J) of the Act or (2) such other persons that the Commission determines to be appropriate pursuant to the limited authority provided by section 4(c)(3)(K).

216

The Commission may determine that persons that do not meet the requirements of sections 4(c)(3)(A) through (J) are “appropriate persons” for

purposes of section 4(c) only if it determines that such persons “are appropriate in light of their financial or other qualifications, or the applicability of regulatory protections.”

217

214

7 U.S.C. 6(c)(2)(B)(i).

215

7 U.S.C. 6(c)(3).

216

Id.

217

Id.

The Commission proposed to limit the exemption to transactions where all parties thereto either (a) satisfy the appropriate persons criteria set forth in sections 4(c)(3)(A) through (J) or, (using its authority under section 4(c)(3)(K)) (b) qualify as ECPs, as defined in section 1a(18)(A) of the CEA and in Commission regulation 1.3(m).

218

The Commission requested comment as to whether ECPs should be considered appropriate persons for purposes of the Final Order.

219

The Commission recognized, however, that “the market participant eligibility standards of an individual RTO or ISO may not be coextensive with the criteria required by sections 4(c)(3)(A) through (J) or section 1a(18) of the Act”

220

and that, therefore, there may be certain RTO or ISO market participants engaging in the transactions proposed for exemption that would not qualify for the exemption as set forth in the Proposed Order. Accordingly, the Commission requested comment as to whether there are any entities currently engaging in the transactions delineated in the Proposed Order, and in the markets administered by the Requesting Parties that are neither appropriate persons under sections 4(c)(3)(A)-(J) of the CEA nor ECPs, and on what basis the Commission should exercise its authority under section 4(c)(3)(K) with respect to such entities to conclude that such parties should be appropriate persons for purposes of the Final Order.

221

The Commission also requested descriptions of the additional parties that should be included in the scope of the term appropriate persons for these purposes,

222

and expressed particular interest in considering the inclusion of market participants who actively participate in the generation, transmission, or distribution of electric energy.

223

Finally, the Commission requested that any comments seeking to include additional parties within the scope of the appropriate person definition for purposes of the Final Order be accompanied by an explanation of the financial or other qualifications of such persons or the available regulatory protections that would render such persons appropriate persons and the bases for determining that (1) such parties could bear the financial risks of the transactions,

224

(2) the inclusion of such parties would not have any adverse effect on the relevant RTO or ISO, and (3) failing to include such parties would have an adverse effect on the relevant RTO or ISO.

225

218

77 FR 52166.

See also

Petition at 27.

ii. Determinations Regarding the Inclusion of All RTO and ISO Market Participants as Appropriate Persons for Purposes of the Final Order

Several commenters advocated that the Commission use the authority provided by section 4(c)(3)(K) of the CEA to expand the definition of appropriate persons for purposes of the Final Order to include all entities that satisfy the market participant eligibility requirements established by the RTOs and ISOs.

247

Commenters generally supported their positions by: (1) Citing to the capitalization, financial security and/or other requirements that RTO and ISO market participants must satisfy;

248

(2) alleging potential adverse effects of the exit from the RTO and ISO markets of current participants that would be unable to meet the proposed appropriate person criteria;

249

and/or (3) asserting a perceived lack of risk to the overall

economy from a default in an RTO or ISO market.

250

247

See, e.g.,

AB Energy at 1; Commercial Working Group at 2-4; COPE at 7; ERCOT October at 1-11; ERCOT December at 2, 10; FERC Staff at 6; Financial Marketers Coalition at 2, 11-16; Industrial Coalitions at 1, 3-5; Joint Trade Associations at 11-13; NEPOOL at 2-3; NYISO Supplement to Requesting Parties' Comment, Attachment B at 1; NYTOs at 3-4; NYPSC at 2; Requesting Parties at 2-5; PJM at 1, 4; PUCT at 9; Tarachand at 1-2.

248

See, e.g.,

AB Energy at 1; ERCOT October at 2-11; Industrial Coalitions at 5; NEPOOL at 2; NYISO Supplement to Requesting Parties' Comment, Attachment B at 1-4; NYPSC at 2; NYTOs at 4; PUCT at 10; Requesting Parties at 2-5; Tarachand at 1-2; TEAM/ARM at 2.

249

See, e.g.,

Commercial Working Group at 3; ERCOT December at 7; FERC Staff at 6; Financial Marketers Coalition at 11-12; Industrial Coalitions at 5; NYPSC at 3; PJM at 4; PUCT at 11; Tarachand at 2.

250

See, e.g.,

AB Energy at 1-2; FERC Staff at 6; Financial Marketers Coalition at 15; NYTOs at 4; PUCT at 11; Requesting Parties at 4; Tarachand at 2.

Multiple commenters asserted that the Commission should deem all RTO and ISO market participants as appropriate persons for purposes of the Final Order by referencing specific types of participation standards established by the RTOs and ISOs.

251

Certain of those commenters claimed that such requirements minimize the risks in the applicable markets

252

and help to ensure that only sophisticated players enter the markets.

253

Commenters cited, for example, the RTO and ISO market participant obligations to either satisfy a baseline capitalization requirement and/or to post participation-based financial security

254

as well as credit,

255

disclosure,

256

training,

257

risk management,

258

personnel,

259

and/or technical capability requirements

260

that may apply to market participants. Multiple commenters noted that RTO- and ISO-established market participation criteria have been approved by FERC or PUCT, as applicable.

261

Other commenters cited the regulatory oversight and/or market monitoring to which the RTOs and ISOs are subject

262

and/or certain mechanisms employed by RTOs and ISOs to support the financial integrity of the market.

263

Multiple commenters also expressed concern with potential conflicts between the appropriate persons determinations being made by the Commission and the determinations made by an RTO or ISO and its regulator with respect to market participation eligibility.

264

One commenter questioned whether, through the appropriate persons limitations, the Commission intended to regulate minimum RTO participation standards

265

and another asserted that it is “unnecessary” and “burdensome” for the Commission to duplicate the efforts of the RTOs and ISOs and their regulators in establishing market participation requirements.

266

251

See, e.g.,

AB Energy at 2; CAISO/ISO NE January at 6; ERCOT October at 4-11; ERCOT December at 7; Financial Marketers Coalition at 13-14; Industrial Coalitions at 5; NEPOOL at 2; NYISO Supplement to Requesting Parties' Comment, Attachment B at 1-4; NYPSC at 2; NYTOs at 4; Requesting Parties at 3-6, 8; PJM at 4; PUCT at 9; Tarachand at 2.

252

See, e.g.,

AB Energy at 2; CAISO/ISO NE January at 6-7; Financial Markets Coalition at 13-15; PUCT at 10.

253

See generally

CAISO/ISO NE January at 7.

254

See, e.g.,

ERCOT October at 2-5; Financial Marketers Coalition at 14, 15; NYPSC at 3; PUCT at 10; Requesting Parties at 3-5, 8.

255

See, e.g.,

ERCOT October at 2-3, 6-9; ERCOT December at 7; Financial Marketers Coalition at 15; NYISO Supplement to Requesting Parties' Comment, Attachment B at 2-4; NYPSC at 2; PUCT at 10; Requesting Parties at 4; TEAM/ARM at 2.

256

See, e.g.,

Financial Marketers Coalition at 15-16; NYPSC at 2.

257

See, e.g.,

CAISO/ISO NE January at 7; Requesting Parties at 4.

258

See, e.g.,

Commercial Working Group at 4; ERCOT October at 5-6; NYPSC at 2; Requesting Parties at 4.

259

See generally

Requesting Parties at 4.

260

See generally id.

261

See, e.g.,

AB Energy at 1; CAISO/ISO NE January at 3; Commercial Working Group at 3; Financial Marketers Coalition at 4; COPE at 10; Joint Trade Associations at 11; NYISO Supplement to Requesting Parties' Comment, Attachment B at 6; Tarachand at 1; TEAM/ARM at 2.

262

See, e.g.,

CAISO/ISO NE January at 3, 8; ERCOT October at 2; Financial Marketers Coalition at 11-12; Joint Trade Associations at 11-13; NYISO Supplement to Requesting Parties' Comment, Attachment B at 5-6; NYPSC at 2; NYTOs at 4; Requesting Parties at 2-5.

263

NYISO Supplement to Requesting Parties' Comment, Attachment B at 4-5; Requesting Parties at 5.

264

See, e.g.,

NEPOOL at 2-3; PJM at 4; PUCT at 9; Requesting Parties at 2-5.

265

See generally

COPE at 5.

266

See generally

AB Energy at 2.

Certain commenters claimed that some entities that currently participate in the RTO and ISO markets might not be able to satisfy the appropriate person standard set forth in the Proposed Order and would exit the market.

267

While some commenters did not name the specific types of entities that they believed would be excluded,

268

others identified particular groups of market participants that could be eliminated, including municipalities and electric cooperatives,

269

REPs,

270

emergency load providers,

271

LSEs,

272

special case resources,

273

demand response providers,

274

marketers,

275

and generators.

276

One commenter asserted that exempting some market participants, but not others, would create an artificial distinction between market participants that conflicts with the Federal Power Act and would create an unfairly discriminatory regulatory scheme.

277

Commenters also expressed concern that market participants who fall outside the exemption would be subject to duplicative regulation,

278

with some questioning the efficiency or operational workability of a dual regulatory structure.

279

267

See, e.g.,

AB Energy at 2; Commercial Working Group at 3-4; Financial Marketers Coalition at 11-12, 13-16; NYPSC at 3; NYTOs at 4.

268

See, e.g.,

Commercial Working Group at 4; NYPSC at 2.

269

See, e.g.,

FERC Staff at 6; Joint Trade Associations at 11-13; NEPOOL at 2-3; PUCT at 11.

But see

ERCOT December at 6 (“The proposed `Appropriate Persons' limitation would not affect any * * * electric cooperatives.”).

270

See, e.g.,

PUCT at 9; TEAM/ARM at 2-3.

271

See, e.g.,

PJM at 2.

272

See, e.g.,

Financial Marketers Coalition at 14; NYISO Supplement to Requesting Parties' Comment, Attachment B at 6; Requesting Parties at 6; PJM at 2.

273

See, e.g.,

Requesting Parties at 6; Tarachand at 2.

274

See, e.g.,

PJM at 2; Requesting Parties at 6; Tarachand at 2.

275

See, e.g.,

Financial Marketers Coalition at 14; NYISO at 2-10; NYISO Supplement to Requesting Parties' Comment, Attachment B at 6; Requesting Parties at 6.

276

See, e.g.,

Financial Marketers Coalition at 14; NYISO Supplement to Requesting Parties' Comment, Attachment B at 6; Requesting Parties at 6; PJM at 2.

277

See, e.g.,

Financial Marketers Coalition at 10-11 (alleging that “[t]he Federal Power Act states that `[n]o public utility shall, with respect to any transmission or sale subject to the jurisdiction of [FERC], make or grant any undue preference or advantage of any person or subject any person to any undue prejudice or disadvantage * * *.' ”) (citing 16 U.S.C. 824d(b)); NYISO at 9-10.

278

See, e.g.,

NYPSC at 3.

279

See, e.g.,

CAISO/ISO NE January at 3; Financial Marketers Coalition at 3, 11, 16-18.

Several commenters alleged that the exit of existing market participants would have a negative impact on the functioning of the RTO and ISO markets.

280

Certain commenters claimed that reduced participation would result in volatility

281

or reduced liquidity,

282

including one commenter that noted the effect of liquidity on the price discovery process.

283

In addition, certain commenters asserted that decreased participation would result in increased market concentration and diminished competition,

284

including one commenter who alleged that the increased market concentration that could result from the forced exit of small market participants is “at cross-purposes to the legislative spirit” of the Dodd-Frank Act, which was intended to end “too-big-to-fail.”

285

One commenter also noted that the high barriers to entry and high concentration of ownership in the RTO and ISO markets make such markets more susceptible to abuse when smaller entities are forced out,

286

while another commenter stated that reduced competition would result in higher electric energy prices, causing harm to rate payers.

287

One commenter claimed

that the departure of market participants would cause remaining participants who serve the load of the withdrawing participants to face higher prices to procure the additional electric energy and would cause existing load forecasts to be inaccurate as new customers would not factor into the remaining participants' forecast models and would limit the available electric energy in instances of unplanned outages, thereby increasing the risks posed to remaining providers, the RTOs and ISOs, and the marketplace as a whole.

288

Another commenter alleged that a “chilling effect on the development of technologies to provide renewable energies and the systems that complement the integration of renewable resources” would result if certain small market participants that are the “vanguard of innovation” are removed.

289

Some commenters also stated that reduced market participation would eliminate jobs and reduce tax revenue.

290

Certain commenters asserted that the exclusion of certain market participants would create regulatory uncertainty.

291

Others claimed that the exclusion of participants would violate the Congressional intent behind section 4(c)(3)(K) of the CEA

292

or the competitive principles underlying the administration of electric energy competition in the relevant area.

293

280

See, e.g.,

CAISO/ISO NE January at 3; Commercial Working Group at 3-4; FERC Staff at 6; Tarachand at 2.

281

See generally

Commercial Working Group at 3.

282

See, e.g.,

CAISO/ISO NE January at 3, 6, 8; Commercial Working Group at 3-; Financial Marketers Coalition at 11-12; NYPSC at 2-3; Tarachand at 2.

But see

ERCOT December at 6 (“[I]t does not appear that the proposed Appropriate Person limitation would have a significant impact on market liquidity in ERCOT.”).

283

See generally

Tarachand at 2.

284

See, e.g.,

Commercial Working Group at 4; Financial Marketers Coalition at 11-12, 14, 16; Industrial Coalitions at 5; NYPSC at 3; Tarachand at 2.

285

Tarachand at 2.

286

Industrial Coalitions at 4-5.

287

See generally

Financial Marketers Coalition at 12.

288

See generally

Commercial Working Group at 3-4.

289

Tarachand at 2.

290

See, e.g.,

AB Energy at 2; Tarachand at 2.

291

See, e.g.,

FERC Staff at 6; PUCT at 9; Requesting Parties at 3, 8.

292

See, e.g.,

CAISO/ISO NE January at 7-8; Requesting Parties at 3.

293

See generally

ERCOT December at 8-9.

Certain commenters supported the inclusion of all RTO and ISO market participants in the appropriate persons definition for purposes of the Final Order by claiming that recently increased collateral requirements have reduced the default risks of particular RTOs

294

and/or that the mutualized risk of market participants for participant defaults

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