No-Action Relief with Respect to Certain Commodity Exchange Act Provisions That May Apply to Southwest Power Pool, Inc. and/or Its Participants

Summary: No-Action Relief with Respect to Certain Commodity Exchange Act Provisions That May Apply to Southwest Power Pool, Inc. and/or Its Participants

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

a

CFTC Letter No. 14-18

No-Action

February 20, 2014

Division of Clearing and Risk

Division of Market Oversight

Division of Swap Dealer and Intermediary Oversight

Nicholas A. Brown, President and Chief Executive Officer

Southwest Power Pool, Inc.

201 Worthen Drive

Little Rock, Arkansas 72223-4936

Re:

No-Action Relief with Respect to Certain Commodity Exchange Act Provisions That

May Apply to Southwest Power Pool, Inc. and/or Its Participants

Dear Mr. Brown:

This is in response to your letter dated October 7, 2013 (“No-Action Request

Letter”),1 to the Division of Market Oversight, Division of Swap Dealer and Intermediary

Oversight, and the Division of Clearing and Risk (“Divisions”) of the Commodity Futures

Trading Commission (“Commission”). In the No-Action Request Letter, you request that the

Divisions confirm that they will not recommend that the Commission take enforcement action

against Southwest Power Pool, Inc. (“Southwest Power Pool”) and its market participants

with respect to contracts, agreements and transactions for the purchase or sale of certain

electric energy products (as discussed below) for failure to comply with certain provisions of

the Commodity Exchange Act (“CEA” or “Act”) and the implementing regulations thereunder

(“Commission regulations”), as applicable.

Statement of Facts

Southwest Power Pool is a Regional Transmission Organization (“RTO”) approved by

the Federal Energy Regulatory Commission (“FERC”)

e of certain

electric energy products (as discussed below) for failure to comply with certain provisions of

the Commodity Exchange Act (“CEA” or “Act”) and the implementing regulations thereunder

(“Commission regulations”), as applicable.

Statement of Facts

Southwest Power Pool is a Regional Transmission Organization (“RTO”) approved by

the Federal Energy Regulatory Commission (“FERC”). On October 1, 2013, Southwest

Power Pool submitted an exemption application (“Exemption Application”)2 to the

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

CEA3 and section 712(f)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection

1 No-Action Request Letter dated October 7, 2013 from Southwest Power Pool to the Divisions.

2 In the Matter of the Application for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act

by Southwest Power Pool, Inc. (filed on Oct. 17, 2013).

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

Mr. Nicholas A. Brown

February 20, 2014

Page 2

Act4 to exempt certain contracts, agreements, and transactions for the purchase or sale of

certain electric energy products, that are offered pursuant to a FERC-approved tariff, 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), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9

and 13 of the Act and any implementing regulations promulgated thereunder including, but

not limited to Commission regulations 23.410(a) and (b), 32.4, and part 180 (collectively, the

“Enforcement Provisions”)

eneral anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under

CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9

and 13 of the Act and any implementing regulations promulgated thereunder including, but

not limited to Commission regulations 23.410(a) and (b), 32.4, and part 180 (collectively, the

“Enforcement Provisions”).

The Commission issued a final order (“RTO-ISO Order”) that exempts specified

transactions of particular RTOs and Independent System Operators (“ISOs”) from certain

provisions of the CEA and Commission regulations.5 Under the RTO-ISO Order, a

transaction may be exempt so long as the transaction falls within the definitions of “Financial

Transmission Rights,” “Energy Transactions,” “Forward Capacity Transactions,” or “Reserve

or Regulation Transactions,” is offered or sold in a market administered by one of the

petitioning RTOs or ISOs6 pursuant to a tariff or protocol that has been approved or permitted

to take effect by FERC or the Public Utility Commission of Texas, and complies with all

other enumerated terms and conditions in the RTO-ISO Order.7 For example, the RTO-ISO

Order requires that, to be eligible for the exemption, the transactions must be entered into by

persons who are: (1) “appropriate persons,” as defined in section 4(c)(3)(A) through (J) of the

CEA; (2) “eligible contract participants,” as defined in section 1a(18) of the CEA and in

Commission regulation 1.3(m); or (3) 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 (collectively, “Appropriate Persons

Requirement”).8

Southwest Power Pool represents that it has requested exemptive relief that is

substantially similar to the exemptive relief granted in the RTO-ISO Order

(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 (collectively, “Appropriate Persons

Requirement”).8

Southwest Power Pool represents that it has requested exemptive relief that is

substantially similar to the exemptive relief granted in the RTO-ISO Order. Specifically,

Southwest Power Pool requests that the Commission exempt from most CEA provisions

certain “transmission congestion rights,” “energy transactions,” and “operating reserve

4 See Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be

accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.

5 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, 78 FR 19880 (April 2, 2013). The

RTO-ISO Order does not, however, provide an exemption from the Enforcement Provisions.

6 Southwest Power Pool was not one of the RTOs or ISOs that petitioned for the RTO-ISO Order.

7 While the RTO-ISO Order included “Forward Capacity Transactions” in the scope of transactions for which

the exemption was granted, Southwest Power Pool’s Integrated Marketplace does not include such transactions.

8 78 FR at 19913.

ot, however, provide an exemption from the Enforcement Provisions.

6 Southwest Power Pool was not one of the RTOs or ISOs that petitioned for the RTO-ISO Order.

7 While the RTO-ISO Order included “Forward Capacity Transactions” in the scope of transactions for which

the exemption was granted, Southwest Power Pool’s Integrated Marketplace does not include such transactions.

8 78 FR at 19913.

Mr. Nicholas A. Brown

February 20, 2014

Page 3

transactions,” as those terms are defined in the Exemption Application,9 if such transactions

are offered or entered into pursuant to Southwest Power Pool’s FERC-approved tariff

(“Subject Transactions”), as well as any persons (including Southwest Power Pool, its

members, and its market participants) offering, entering into, rendering advice, or rendering

other services with respect to such transactions.10 According to Southwest Power Pool, the

Integrated Marketplace will consist of the Subject Transactions and is scheduled to commence

operations on March 1, 2014. Southwest Power Pool further states that its markets and the

associated Subject Transactions are substantially similar to those of the RTOs and ISOs that

are subject to the RTO-ISO Order.11 Finally, Southwest Power Pool represents that FERC

has accepted its tariff revisions, which become effective March 1, 2014 and require a market

participant to demonstrate to Southwest Power Pool that such participant meets the

Appropriate Persons Requirement in order to be eligible to participate in the Integrated

Marketplace.12

On October 7, 2013, Southwest Power Pool submitted the No-Action Request Letter

pending the Commission’s final action on the Exemption Application. As noted above, the

Integrated Marketplace is expected to commence on March 1, 2014. Southwest Power Pool

also has stated that certain preliminary activities related to its transmission congestion right

market are necessary in order to support the launch of the Integrated Marketplace (“Pre-

Launch Activities”)

Request Letter

pending the Commission’s final action on the Exemption Application. As noted above, the

Integrated Marketplace is expected to commence on March 1, 2014. Southwest Power Pool

also has stated that certain preliminary activities related to its transmission congestion right

market are necessary in order to support the launch of the Integrated Marketplace (“Pre-

Launch Activities”). Such activities include the first allocation of auction revenue rights

(“ARRs”),13 which the Commission understands took place on November 1, 2013, and the

first transmission congestion right auction, which the Commission understands took place on

9 Southwest Power Pool represents that the terms “transmission congestion right,” “energy transactions,” and

“operating reserve transactions” are Southwest Power Pool’s equivalent of the following terms set forth in the

RTO-ISO Order issued by the Commission on April 2, 2013: “Financial Transmission Right,” “Energy

Transactions,” and “Reserve or Regulation Transactions,” respectively. Southwest Power Pool also avers that

the Subject Transactions are defined in a manner consistent with the terms set forth in the RTO-ISO Order.

However, Southwest Power Pool notes that its definition of transmission congestion right does not include

transmission congestion right options whereas the RTO-ISO Order’s definition of financial transmission right

includes financial transmission rights in the form of options. See No-Action Request Letter at 6-8; Exemption

Application at 4, 11-13; supra note 5.

10 See No-Action Request Letter at 5-6.

11 See id.

12 See Sw. Power Pool, Inc., FERC Letter Order (Nov. 22, 2013).

13 ARRs are allocated to transmission customers based on historical network load or transmission service

reservations (or equivalent service taken under a grandfathered agreement between a Southwest Power Pool

transmission owner and a customer)

ion at 4, 11-13; supra note 5.

10 See No-Action Request Letter at 5-6.

11 See id.

12 See Sw. Power Pool, Inc., FERC Letter Order (Nov. 22, 2013).

13 ARRs are allocated to transmission customers based on historical network load or transmission service

reservations (or equivalent service taken under a grandfathered agreement between a Southwest Power Pool

transmission owner and a customer). ARRs are granted exclusively to transmission service customers (i.e., not

to other market participants or speculators) based on their transmission service (or grandfathered service) and are

subject to Southwest Power Pool's simultaneous feasibility analysis of the capability of the Southwest Power

Pool Transmission System. ARRs are not traded in the Integrated Marketplace; instead, ARRs entitle the holder

to a share of revenues from Southwest Power Pool-administered transmission congestion right auctions or may

be "self-converted" at the customer's election into a transmission congestion right. See Exemption Application at

11 n.47.

Mr. Nicholas A. Brown

February 20, 2014

Page 4

December 3, 2013.14 In the No-Action Request Letter, Southwest Power Pool requested that

no-action relief be granted to it and all of its members and other market participants under its

FERC-approved tariff with respect to these Pre-Launch Activities in order to enable it to

continue to develop and implement its Integrated Marketplace during the pendency of its

Exemption Application.15

Discussion and Grant of No-Action Relief

The Commission is currently considering the Exemption Application submitted by

Southwest Power Pool on October 1, 2013. As a result, the Divisions believe that it is

appropriate to take a no-action position with respect to Southwest Power Pool’s Pre-Launch

Activities and the associated Subject Transactions when transactions are offered or entered

into pursuant to Southwest Power Pool’s FERC-approved tariff

is currently considering the Exemption Application submitted by

Southwest Power Pool on October 1, 2013. As a result, the Divisions believe that it is

appropriate to take a no-action position with respect to Southwest Power Pool’s Pre-Launch

Activities and the associated Subject Transactions when transactions are offered or entered

into pursuant to Southwest Power Pool’s FERC-approved tariff. However, the Divisions

believe that this no-action relief should be limited in scope to match the scope of the RTO-

ISO Order. The Divisions note that Southwest Power Pool’s Integrated Marketplace is not

expected to commence until March 1, 2014 and, since this market is not in operation, there is

no need to preserve the status quo. In addition, the Divisions note that Southwest Power Pool

has represented that its Integrated Marketplace and the transactions covered thereon will fit

within the scope of the RTO-ISO Order. Thus, the Divisions believe it appropriate to limit

this no-action relief, in a manner consistent with the scope of the RTO-ISO Order, to

Southwest Power Pool and all of its members and other market participants who meet the

Appropriate Persons Requirement (each an “Exempted Person”) with respect to Southwest

Power Pool’s Pre-Launch Activities and the associated Subject Transactions.

This no-action position will be effective on the date that this letter is issued (the

“Effective Date”). This no-action position will expire on the earlier of August 31, 2014 or the

date on which the Commission takes final action on the Exemption Application (the

“Termination Date”)

rson”) with respect to Southwest

Power Pool’s Pre-Launch Activities and the associated Subject Transactions.

This no-action position will be effective on the date that this letter is issued (the

“Effective Date”). This no-action position will expire on the earlier of August 31, 2014 or the

date on which the Commission takes final action on the Exemption Application (the

“Termination Date”).

Accordingly, the Divisions will not recommend that the Commission take enforcement

action against any Exempted Person, with respect to any of the Subject Transactions or Pre-

Launch Activities, for failure to comply with any of the provisions of the CEA and

14 See generally No-Action Request Letter at 9 (stating that these Pre-Launch Activities would be taking place on

the specified dates). In addition, Southwest Power Pool has represented to the Commission that these Pre-

Launch Activities occurred on the specified dates.

15 No-Action Request Letter at 9-10. Southwest Power Pool also noted that the Divisions granted no-action

relief to the other RTOs and ISOs prior to issuance of the RTO-ISO Order. CFTC Letter No. 12-11 (Oct. 11,

2012) (granting no-action relief to preserve the regulatory status quo to allow the Commission time to consider

public comments filed in response to a proposed order). See also 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, 77 FR 52137 (Aug. 28, 2012).

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, 77 FR 52137 (Aug. 28, 2012).

Mr. Nicholas A. Brown

February 20, 2014

Page 5

Commission regulations, other than the Enforcement Provisions, during the period between

the Effective Date and the Termination Date.

Conclusion

This letter, and the positions taken herein, represent the views of the Divisions only,

and do not necessarily represent the positions or views of the Commission or of any other

office or division of the Commission. The relief issued by this letter concerns enforcement

action only and does not excuse persons relying on this letter from compliance with any other

applicable requirements contained in the CEA or in the Regulations issued thereunder.

Further, this letter, and the relief contained herein, is based upon the representations made to

the Divisions. Any different, changed, or omitted material facts or circumstances might

render this no-action relief void. As with all no-action letters, the Divisions retain the

authority to condition further, modify, suspend, terminate, or otherwise restrict the terms of

the no-action relief provided herein, in their discretion. In addition, this no-action relief is

without prejudice to any decision by the Commission, following consideration of the

Exemption Application, to take final action on the Exemption Application that is, in any

respect, the same as, narrower than, or broader than, that which was in the RTO-ISO Order.

Should you have any questions, please do not hesitate to contact M

in, in their discretion. In addition, this no-action relief is

without prejudice to any decision by the Commission, following consideration of the

Exemption Application, to take final action on the Exemption Application that is, in any

respect, the same as, narrower than, or broader than, that which was in the RTO-ISO Order.

Should you have any questions, please do not hesitate to contact M. Laura Astrada at

lastrada@cftc.gov or (202) 418-7622, Alicia Lewis at alewis@cftc.gov or (202) 418-5862, or

Riva Spear Adriance at radriance@cftc.gov or (202) 418-5494.

Very truly yours,

__________________

Ananda Radhakrishnan

Director, DCR

_________________

Gary Barnett

Director, DSIO

__________________

Vincent McGonagle

Director, DMO