Daily Rules, Proposed Rules, and Notices of the Federal Government


Proposal To Exempt Certain Transactions Involving Not-for-Profit Electric Utilities; Request for Comments

AGENCY: Commodity Futures Trading Commission.
ACTION: Notice.
SUMMARY: The Commodity Futures Trading Commission ("CFTC" or the "Commission") is proposing to exempt certain transactions between not-for-profit utilities (entities described in section 201(f) of the Federal Power Act ("FPA")), and other electric utility cooperatives, from the provisions of the Commodity Exchange Act ("CEA" or "Act") and the regulations there under, subject to certain antifraud, anti-manipulation, and recordkeeping conditions. Authority for this exemption is found in section 4(c) of the CEA. The Commission is requesting comment on every aspect of this Notice of Proposed Order ("Notice").
DATES: Comments must be received on or before September 24, 2012.
ADDRESSES: *Agency Web site, via its Comments Online process: Follow the instructions for submitting comments through the Web site.

*Mail:David A. Stawick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

*Courier:Same as mail above.

*Federal eRulemaking Portal: Follow the instructions for submitting comments.

Please submit your comments using only one method.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to You should submit only information that you wish to make available publicly. If you wish the CFTC to consider information that you believe is exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the procedures established in SS 145.9 of the CFTC's regulations.1

117 CFR 145.9.

The CFTC reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission fromhttp://www.cftc.govthat it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of this action will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: David Van Wagner, Chief Counsel, (202) 418-5481,,or Graham McCall, Attorney Advisor, (202) 418-6150,,Division of Market Oversight, Commodity Futures Trading Commission, Three LafayetteCentre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. CEA Section 4(c) B. FPA Section 201(f) II. Petition A. Relief Requested B. Definition and Scope of Electric Operations-Related Transactions 1. Electric Energy Delivered 2. Generation Capacity 3. Transmission Services 4. Fuel Delivered 5. Cross-Commodity Transaction 6. Other Goods and Services Agreements, Contracts and Transactions 7. Environmental Rights, Allowances or Attributes C. Definition and Scope of NFP Electric Entities 1. FPA 201(f) Entities a. Government and Cooperatively Owned Electric Utilities Described by FPA Section 201(f) b. Federally-Recognized Indian Tribes 2. Non-FPA 201(f) Electric Cooperatives III. Commission Determinations A. Scope of the Proposed Order 1. Exempt Entities a. Electric Utilities Owned by Federal, State, or Local Government b. Electric Utilities Owned by an Indian Tribe c. Electric Utilities Owned as Cooperative Organizations 2. Exempt Non-Financial Energy Transactions 3. Conditions B. CEA Section 4(c) Considerations 1. Responsible Economic or Financial Innovation and Fair Competition 2. Applicability of CEA Section 4(a) 3. Public Interest and Purposes of the CEA a. Public Interest b. Purposes of the CEA 4. Appropriate Persons 5. Ability to Discharge Regulatory or Self-Regulatory Duties IV. Proposed Order V. Request for Comment VI. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Consideration of Costs and Benefits I. Introduction

On June 8, 2012, the Commission received a petition (“Petition”)2 from a group of trade associations that represent government and/or cooperatively-owned electric utilities requesting relief from the requirements of the CEA3 and Commission's regulations thereunder,4 pursuant to CEA section 4(c),5 for certain electric energy-related transactions between not-for-profit electric energy utilities. In this Notice, after summarizing and reviewing the representations made in the Petition, the Commission proposes conditional relief pursuant to CEA section 4(c) for non-financial energy transactions between not-for-profit utilities described in FPA section 201(f) and other electric cooperatives.

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

37 U.S.C. 1et seq.

4The Commission's regulations are set forth in title 17 of the Code of Federal Regulations (“CFR”).

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

A. CEA Section 4(c)

Section 4(c) of the CEA provides the Commission with broad authority to exempt certain transactions and market participants from the requirements of the Act. When adding section 4(c) to the CEA, Congress noted that the goal of the provision “is to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.”6 The House-Senate Conference Committee reconciling the provision's language noted that:

6House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213 (“4(c) Conf. Report”).

The Conferees do not intend that the exercise of exemptive authority by the Commission would require any determination beforehand that the agreement, instrument, or transaction for which an exemption is sought is subject to the [CEA]. Rather, this provision provides flexibility for the Commission to provide legal certainty to novel instruments where the determination as to jurisdiction is not straightforward. Rather than making a finding as to whether a product is or is not a futures contract, the Commission in appropriate cases may proceed directly to issuing an exemption.7

74(c) Conf. Report at 3214-3215.

Specifically, CEA section 4(c)(1) empowers the CFTC to “promote responsible economic or financial innovation and fair competition” by exempting any transaction (or class thereof) that otherwise would be subject to CEA section 4(a), or any person (or class thereof) dealing in such transaction(s), from any or all of the provisions of the CEA where the Commission determines that the exemption would be consistent with the public interest.8 The Commission may grant such an exemption by rule, regulation or order, after notice and opportunity for hearing, and may do so on application of any person9 or on its own initiative.

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

In order to promote responsible economic or financial innovation and fair competition, the Commission by rule, regulation, or order, after notice and opportunity for hearing, may (on its own initiative or on application of any person, including any board of trade designated or registered as a contract market or derivatives transaction execution facility for transactions for future delivery in any commodity under section 7 of this title) exempt any agreement, contract, or transaction (or class thereof) that is otherwise subject to subsection (a) of this section (including any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement, contract, or transaction), either unconditionally or on stated terms or conditions or for stated periods and either retroactively or prospectively, or both, from any of the requirements of subsection (a) of this section, or from any other provision of this chapter * * * if the Commission determines that the exemption would be consistent with the public interest.

9CEA section 1a(38) defines “person” to include “individuals, associations, partnerships, corporations, and trusts.” 7 U.S.C. 1a(38).

CEA section 4(c)(2) provides that the Commission shall not grant any exemption under section 4(c)(1) from any of the requirements of section 4(a) unless the Commission determines, among other things, that: (i) the exemption would be consistent with the public interest and the purposes of the CEA; (ii) the exempt agreement, contract, or transactions will be entered into solely between “appropriate persons;” and (iii) the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.10

10 See7 U.S.C. 6(c)(2).

CEA section 4(c)(3) outlines which entities may constitute “appropriate person[s]” for purposes of a CEA section 4(c) exemption, including (as relevant to this Notice): (i) Any governmental entity (including the United States, any State, or any foreign government) or political subdivision thereof, or any multinational or supranational entity or any instrumentality, agency, or department of any of the foregoing;11 or (ii) such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.12

11 See7 U.S.C. 6(c)(3)(H).

12 See7 U.S.C. 6(c)(3)(K).

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)13 added new subparagraph4(c)(6)(C) to the CEA.14 CEA section 4(c)(6)(C) builds upon the Commission's general exemptive authority in section 4(c)(1) as follows:

13Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at Title VII of the Dodd-Frank Act amended the CEA to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) providing for the registration and comprehensive regulation of swap dealers (“SDs”) and major swap participants (“MSPs”); (2) imposing clearing and trade execution requirementson standardized derivative products; (3) creating robust recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight.

147 U.S.C. 6(c)(6)(C) (as added by section 722(f) of the Dodd-Frank Act).

(6) If the Commission determines that the exemption would be consistent with the public interest and the purposes of this Act, the Commission shall, in accordance with [CEA sections 4(c)(1) and 4(c)(2)], exempt from the requirements of this Act an agreement, contract, or transaction that is entered into—

[* * *]

(C) between entities described in section 201(f) of the Federal Power Act (16 U.S.C. 824(f)).

Thus, section 4(c)(6)(C) explicitly spotlights transactions between entities within the scope of FPA section 201(f) as being eligible for exemption pursuant to the Commission's 4(c) authority. However, whether an exemption is considered under 4(c)(1), 4(c)(6)(C), or both,15 the CFTC must first determine that the proposed exemption meets certain threshold criteria including, for example, that the exemption would be consistent with the public interest and the purposes of the Act.

15For any exemption involving CEA section 4(c)(6), the Commission believes “both” is the correct characterization because CEA section 4(c)(6) explicitly directs the Commission to consider any exemption proposed under 4(c)(6) “in accordance with [sections 4(c)(1) and 4(c)(2)].”

B. FPA Section 201(f)

The FPA16 authorizes and, along with other statutes, governs the Federal Energy Regulatory Commission (“FERC”), the federal agency that regulates the interstate transmission and sale at wholesale in interstate commerce of electric energy by public utilities, as well as natural gas and hydropower projects.17 Section 201(f) of the FPA, which Congress referenced in new CEA section 4(c)(6)(C), provides broad-based relief from most provisions of Part II18 of the FPA for certain government and cooperatively-owned electric utility companies and states that:

1616 U.S.C. 791aet seq.

17 See

18Part II of the FPA governs the transmission and sale at wholesale of electric energy in interstate commerce, including the facilities used for such transmission or sale.See16 U.S.C. 824et seq.Section 201(f) does not, however, provide an exemption from FPA parts I or III. Part I of the FPA deals with the establishment and functioning of FERC and the regulation of hydroelectric resources.See16 U.S.C. 792et seq.Part III of the FPA deals with recordkeeping and reporting requirements and FERC's procedural rules concerning complaints, investigations, and hearings.See16 U.S.C. 825et seq.Additionally, section 201(f) does not provide an exemption from FERC's refund authority, 16 U.S.C. 824e, reliability standards, 16 U.S.C. 824o(b)(1), or jurisdiction over transmission facilities and services, 16 U.S.C. 824(i)-(j).

[n]o provision in this subchapter [Part II of the FPA] shall apply to, or be deemed to include, the United States, a State or any political subdivision of a State, an electric cooperative that receives financing under the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.) or that sells less than 4,000,000 megawatt hours of electricity per year, or any agency, authority, or instrumentality of any one or more of the foregoing, or any corporation which is wholly owned, directly or indirectly, by any one or more of the foregoing, or any officer, agent, or employee of any of the foregoing acting as such in the course of his official duty, unless such provision makes specific reference thereto.19

1916 U.S.C. 824(f).

II. Petition A. Relief Requested

As noted above, on June 8, 2012, the Commission received the Petition20 from a group of trade associations representing government and/or cooperatively-owned electric utilities. Those Petitioners consisted of the National Rural Electric Cooperative Association (“NRECA”),21 the American Public Power Association (“APPA”),22 the Large Public Power Council (“LPPC”),23 the Transmission Access Policy Study Group (“TAPS”),24 and the Bonneville Power Administration (“BPA”)25 (collectively, the “Petitioners”). The Petition requests that the Commission provide categorical exemptive relief from the requirements of the CEA, pursuant to CEA section 4(c)(6), in accordance with CEA sections 4(c)(1) and 4(c)(2), forall“Electric Operations-Related Transactions” between “NFP Electric Entities,” retroactive to the enactment of Dodd-Frank, outstanding now, or that may be developed and executed in the future.26 The Petitioner's definition and scope of the terms “Electric Operations-Related Transactions” and “NFP Electric Entities” is summarized below.27

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

21According to the Petition, NRECA is the national service organization for more than 900 not-for-profit rural electric cooperatives and government-owned power districts. NRECA's members provide electric energy to approximately 42 million consumers in 47 states, or thirteen percent of the nation's population.SeePetition at 3.

22According to the Petition, APPA is the national trade association that represents the interests of government-owned electric utilities in the United States. APPA's member utilities are not-for-profit utility systems that were created by state or local governments to serve the public interest. Approximately 2,000 government-owned electric utilities provide over fifteen percent of all kilowatt hour (“KWh”) sales to retail electric customers.SeePetition at 3-4.

23According to the Petition, LPPC is an organization representing 24 of the largest government-owned electric utilities in the nation. LPPC members own and operate over 86,000 megawatts of generation capacity and nearly 35,000 circuit miles of high voltage transmission lines, representing nearly 90 percent of the transmission investment owned by non-Federal government-owned electric utilities in the United States.SeePetition at 4.

24According to the Petition, TAPS is an association of transmission dependent electric utilities located in more than 30 states. All of TAPS member electric utilities except one are FPA section 201(f) entities.SeePetition at 4.

25According to the Petition, BPA is a self-financed, non-profit Federal agency created in 1937 by Congress that primarily markets electric power from 31 federally owned and operated projects, and supplies 35 percent of the electricity used in the Pacific Northwest. BPA also owns and operates 75 percent of the high-voltage transmission in the Pacific Northwest. BPA's primary statutory responsibility is to market its Federal system power at cost-based rates to its “preference customers.” Per the Petition, BPA has 130 preference customers made up of electric utilities which are not subject to the jurisdiction of FERC, including Indian tribes, electric cooperatives, and state and municipally chartered electric utilities, and other Federal agencies located in the Pacific Northwest.SeePetition at 4.

26 SeePetition at 1-2; 4 (emphasis added). The Petition also requests that the Commission determine that no Electric Operations-Related Transaction will affect any NFP Electric Entity's regulatory status under the CEA (e.g.,as a swap dealer or major swap participant) 28. The Petition specifically asks that, if the Commission declines to provide the categorical relief as requested, the Commission would i) include an additional category of approved Electric Operations-Related Transactions that includes all “trade options” referencing the goods or services described in the categories of transactions currently outstanding between Exempt Entities (see infrasections II.B.1-7), and ii) delegate to Commission staff the authority to review on an expedited basis and approve as eligible for the benefit of the exemptive order any new Electric Operations-Related Transactions between NFP Electric 13. Finally, the Petition invites the Commission to determine that any Electric Operations-Related Transaction described in the Petition does not need an exemption because such transaction is not a “swap,” is a “commercial merchandising arrangement” or “trade option,” or is not an agreement, contract or transaction involving a “commodity.”See 13, note 26.

27In this Notice, the Commission describes the Petition by referencing Petitioners' defined terms. Such references, however, are not to be interpreted as the Commission proposing to adopt such terms for the purpose of the exemption proposed herein. Rather, the proposed exemption establishes its own defined entities and transactions for which relief is being provided.

B. Definition and Scope of Electric Operations-Related Transactions

The Petition defines Electric Operations-Related Transactions to mean:

Any agreement, contract or transaction involving a “commodity” (as such term is defined in the CEA) and whether or not such agreement, contract or transaction is a“swap,” so long as the NFP Electric Entity is entering into any such agreement, contract or transaction “to hedge or mitigate commercial risks” (as such phrase is used in CEA Section 2(h)(7)(A)(ii)) intrinsically related to the electric facilities or electric operations (or anticipated facilities or operations) of the NFP Electric Entity, or intrinsically related to the NFP Electric Entity's public service obligation to deliver reliable, affordable electric energy service to electric customers. For the avoidance of doubt, “intrinsically related” shall include all transactions related to (i) the generation, purchase or sale, and transmission of electric energy by the NFP Electric Entity, or the delivery of reliable, affordable electric energy service to the NFP Electric Entity's electric customers, (ii) all fuel supply for the NFP Electric Entity's electric facilities or operations, (iii) compliance with electric system reliability obligations applicable to the NFP Electric Entity, its electric facilities or operations, (iv) compliance with energy, conservation or renewable energy or environmental statutes, regulations or government orders applicable to the NFP Electric Entity, its electric facilities or operations, or (v) any other electric operations-related agreement, contract or transaction to which the NFP Electric Entity is a party. Electric Operations-Related Transactions shallnotinclude agreements, contracts or transactions executed, traded, or cleared on a registered entity, nor shall such defined term include an agreement, contract or transaction based or derived on, or referencing, a “commodity” in the interest rate, credit, equity or currency asset class, or of a product type or category in the “Other Commodity” asset class that is based or derived on, or referencing, metals, or agricultural commodities or crude oil or gasoline commodities of any grade not used as fuel for electric generation.28

28Petition at 4-5.

In general, the Petitioners represent that all Electric Operations-Related Transactions covered by the proposed definition are intrinsically related to the needs of both NFP Electric Entities engaged in a transaction “to hedge or mitigate commercial risks” which arise from their respective electric facilities and ongoing electric operations and public service obligations.29 The Petitioners state that, at the time two NFP Electric Entities enter into an Electric Operations-Related Transaction, the terms of the transaction contemplate performance of an electric operations-related obligation by one party, in exchange for payment or reciprocal performance of an electric operations-related function by the other party.30

29 SeePetition at 12.

30 See id.The Petition notes that the terms “physically-settled,” “financially-settled,” and “cash-settled,” as such terms are used in the futures industry, do not translate easily into a commercial context where NFP Electric Entities enter into bilateral contracts governed by state law or by FERC, PUCT or state public utility tariffs to buy and sell goods and services. It is not readily apparent to the Commission why the terms do not translate conceptually. Nevertheless, as previously noted, the Petition represents that Electric Operations-Related Transactions between NFP Electric Entities are always intrinsically related to the electric facilities and operations, and/or the public service obligations, of each of the NFP Electric Entities involved.See 12, n. 24.

The Petition, which is summarized herein, specifically describes seven categories of transactions that currently occur between NFP Electric Entities, and which are covered by the Petition's proposed definition.31

31The following transaction category descriptions come from the Petition at 6-12.

1. Electric Energy Delivered

In these transactions, NFP Electric Entities agree for one such entity to provide another such entity with electric energy delivered to an identified geographic service territory, load,32 or electric system. Petitioners note that since electric energy is not currently storable in commercial quantities, the delivery location is critical to the transaction—electric energy delivered elsewhere is not usable or valuable for the receiving entity's operational needs.

32The Commission understands that “load” is an energy industry term for “demand.”See, e.g.,Current Energy, Supply of and Demand for Electricity in California,available at<last visited July 9, 2012> (explaining that “[t]he current demand (or `load') depends on how much power consumers are using right now”).

As described by the Petitioners, this transaction type includes the most prevalent type of Exempt Electric Operations-Related Transaction between NFP Electric Entities,i.e.,the “full requirements” contract, or “all requirements” agreement or arrangement33 that is often executed between a generation and transmission (“G&T”) cooperative (i.e.,a cooperative that generates and transmits electricity) and each of its constituent NFP Electric Entity members/owners, or between a Joint Action Agency (an agency formed under state law to provide wholesale power supply and transmission service to member entities) and each of its constituent NFP Electric Entity members. In some instances, the G&T cooperative or the Joint Action Agency is formed by its constituent members for the singular purpose of providing its constituent members with their “full requirements” obligations to deliver electric energy over an agreed delivery period at one or multiple delivery points or locations to their retail electric customers).

33Per the Petition, the “full” or “all” requirements contract is a bilateral commercial arrangement that is customized to the two NFP Electric Entities that are parties thereto.

In such an arrangement, the provider NFP Electric Entity agrees by bilateral contract or, in some long-standing relationships established by governing or legal documents of the G&T cooperative or Joint Action Agency as the provider NFP Electric Entity, that it will provide for a recipient NFP Electric Entity's “full requirements” to provide reliable electric service to the recipient's fluctuating electric energy load over an agreed delivery period at one or multiple delivery points or locations. In some cases, the delivery period, term, or “tenor” of such agreements can be for thirty years or more.

In addition to providing the recipient's full requirements for electric energy, the arrangement may also include providing services that are ancillary to the delivery of the electric energy, such as operating or dispatching one or more of the recipient's owned generation units, generation capacity or balancing services, or any of the other goods, services, or commodities required by the recipient described under other categories below.

The Petition notes that quantities of electric energy will also vary during the delivery period. If a recipient NFP Electric Entity owns some generation itself, the quantity of supplemental electric energy or capacity to meet its “full requirements” during some seasons, months, or days of the year (net of its owned generation) may be zero. Some ancillary services or “commodities” under such a transaction may be optional. Pricing may vary on a seasonal, monthly, daily or on-peak/off-peak basis, or may be tied to the cost at which the provider NFP Electric Entity can generate or purchase electric energy. Alternatively, the price may be tied to the fuel that the provider uses for generating the electric energy provided.

2. Generation Capacity

In describing this transaction category, the Petition initially notes that the term “capacity,” in connection with generation capacity transactions, has varying meanings across the electric industry, and that electric operations professionals may reference any of a number of “capacity” agreements, contracts, transactions, or arrangements.34 More generally, the

Petition notes that when two NFP Electric Entities agree that one will provide “generation capacity” or “capacity” for another, either a mutual understanding of the engineering context or a customized bilateral commercial contract further defines the parties' respective rights and obligations. Generation capacity is always location-specific and is monitored by the regional transmission organization (“RTO”) or independent system operator (“ISO”)35 or, outside the RTO/ISO regions, by balancing authorities or reliability coordinators under the supervision of the North American Electric Reliability Corporation (“NERC”) and FERC.36 Deliverability of generation capacity to a particular geographic point or electric system interface is such an important concept that FERC requires each RTO, ISO, and balancing authority to establish a framework of engineering studies to demonstrate/confirm that a particular generation unit's electrical energy output is deliverable. If generation capacity from a particular unit does not satisfy the relevant RTO, ISO or balancing authority's deliverability requirements, that generation capacity has no value in meeting reliability requirements in that reliability area. If generation capacity is purchased from a generation unit located outside the relevant reliability area, the correlated electric energy (which, if “called on,” must be delivered) nonetheless must be deliverable to the relevant reliability area.

34Counsel for Petitioners represented in subsequent conversations that generation capacity, generally, can mean the capability or adequacy of specific owned generation units to supply fluctuating load requirements within a defined geographic region (e.g.,an RTO region or an electric utility system) at an estimated or capacity rating level measured in megawatts. The basic concept of generation capacity can be understood as a separate “commodity” from electric energy delivered (or other ancillary service or reserve), such that the purchase and sale of generation capacity may existas a stand-alone transaction or as one component of a “bundled energy” service or transaction, such as a full requirements contract. When viewed as an “option-like” commodity transaction, generation capacity can be “delivered” if the “holder” (or relevant reliability authority) calls on the corollary electric energy to be delivered. In some circumstances, the “premium” component can be priced separately and referred to as a “demand charge.” In others, the generation capacity component can be a contingent or option-like aspect of a seller's obligation to provide the “full requirements” that a load serving entity (“LSE”) needs to serve the electric consumers and businesses in its regions, including fulfillment of any generation capacity obligations that the LSE has to its local reliability authority.

35More information is available at The current ISO/RTO entities operating in North America are PJM Interconnection, Midwest Independent Transmission System Operator, Southwest Power Pool, ISO New England, California ISO, New York Independent System Operator and the Electric Reliability Council of Texas (ERCOT). Each of these entities, other than ERCOT, was either formed at the direction of FERC or designated by FERC to direct the operation of the regional electric transmission grid in its specific geographic area. ERCOT is fully regulated by the Public Utility Commission of Texas (the “PUCT”).

36Counsel for Petitioners in subsequent conversations represented that generation capacity can be a reliability requirement that, in some areas, owners of generation units must maintain in order to provide voltage and frequency support to the electric grid for reliability purposes. In other areas, generation capacity reliability requirements may be imposed on LSEs that must, if they own no generation assets, purchase generating capacity from third-party generators to fulfill the LSEs' reliability requirements.

Some generation capacity agreements or arrangements among NFP Electric Entities may include operational reserves attributable to the identified generation unit. A generation capacity arrangement or transaction also may be called a “shared resources agreement,” whereby NFP Electric Entities agree conditionally to share capacity resources as needed. The contract may relate to multiple identified units owned or operated by both NFP Electric Entities. For example, some state or regional programs to manage limited generation capacity and maintain voltage support for the electric grid in a geographic area may allow NFP Electric Entities subject to such program to utilize “demand-side resources” as part of the generation capacity required by the specific balancing authority, or to meet the reliability authority's requirements in the relevant geographic region.

In general, a generation capacity transaction between two NFP Electric Entities in one region cannot be presumed to be fungible with any other generation capacity transaction between two other NFP Electric Entities, even in the same region.

3. Transmission Services

As with the other transaction categories described by the Petitioners, the Petition notes that electric transmission services transactions between NFP Electric Entities will vary by geographic region and by assets owned and transmission services required by the operations of different NFP Electric Entities. In some cases, these transmission services agreements include congestion management services, system losses, and ancillary services.37 Some NFP Electric Entities own significant transmission facilities (e.g.,BPA owns 75 percent of the transmission lines in the Pacific Northwest). In some cases, Federal law and the regulations pursuant to which the Federal power agencies are formed and operate require a particular Federal power agency to allocate a portion of the transmission to particular electric entities, including NFP Electric Entities, located within its geographic area.

37The Petition notes that the concept of generation capacity is distinguishable from “transmission capacity,” which relates to the limited amount of electric energy transmission available over the interconnected electric transmission grid, and which is generally defined as a measure of the transfer capability or “capacity” remaining in the physical electric energy transmission network for further commercial activity over and above already committed uses. Additionally, Exhibit 2 of the Petition provides the following example:

Federal power agency K sells to G&T cooperative J 100 MWs of monthly “firm point-to-point transmission service” from location X to location Y in the southeast U.S. for a term of 3 months at the tariff rate of $2,000/MW-Month for a total transaction value of $600,000. The geographic area in which such transmission service takes place is outside the “footprint” of an RTO, and therefore the transmission service is reserved on the Open Access Same Time Information System (“OASIS”) Web site of the transmission owner, K. J intends to use the transmission service to deliver wholesale electric power to its distribution cooperative member-owners to supply a portion of its distribution cooperative constituents' retail electric load.

Petition Exhibit 2 at 3.

In certain areas of the country, the RTOs/ISOs control allocation of transmission assets, rights and services, and the individual owners of transmission assets do not have the ability to engage in bilateral services arrangements involving those transmission assets, which are under RTO/ISO management and control. In other areas of the country, historical transmission services agreements, including those between NFP Electric Entities, are “grandfathered” from the RTO/ISO rules and procedures otherwise applicable to electric transmission services in that region.

4. Fuel Delivered

The Petition describes a fourth category of transactions in which one NFP Electric Entity delivers to another NFP Electric Entity fuel to power electric generation facilities. The electric facilities owned and operated by NFP Electric Entities vary widely in terms of the fuel used by such facilities for generation. Fuel types may include nonfinancial commodities such as coal, natural gas, uranium products, heating oil, and biomass or waste products including wood chips, tires, and manure. In addition to the fuel, one NFP Electric Entity may provide to another NFP Electric Entity other services related to the fuel commodity, such as fuel procurement, fuel transportation over pipeline, rail, barge and truck, fuel storage, or fuel waste handling and storage services.38

38Petitioners also described a scenario in which one NFP Electric Entity may agree to manage for another NFP Electric Entity the operational basis or exchange (location/time of delivery) risk that arises from the recipient's NFP Electric Entity's location-specific, seasonal, or otherwise variable operational need for fuel delivered. Another example from Exhibit 2 of the Petition provides that:

Joint power agency L supplies to municipal utility M a long-term supply of natural gas from a natural gas project (Project Entity Z) developed by L and other NFP Electric Entities for the purposeof fueling L's and M's (and other NFP Electric Entity owners of Project Entity Z's) natural gas-fired electric generating facilities in the California ISO market. M pays L for the cost of acquiring, developing and improving the natural gas Project Entity Z through direct “capital contributions” to Project Entity Z. In addition M pays L a monthly fee for the natural gas supplied from the natural gas project, composed of an operating cost fee component, an interstate pipeline transportation cost fee component and an operating reserve cost fee component. The natural gas-fired electric generating facility is to be used by M to supply a portion of its expected retail electric load.

Petition Exhibit 2 at 3-4.

5. Cross-Commodity Transactions

The Petition describes such transactions as commercial agreements entered into between two NFP Electric Entities, including options, heat rate transactions and tolling arrangements, whereby the electric energy delivered to the recipient NFP Electric Entity is priced by reference to the fuel source used or useable by the provider NFP Electric Entity for generating such electric energy. Alternatively, the price paid for the fuel by the recipient NFP Electric Entity may be calculated by reference to the amount of electricity that the recipient NFP Electric Entity generates using such fuel.

6. Other Goods and Services

The Petition notes that these agreements may involve sharing property rights, equipment, supplies and services, including construction, operation, and maintenance agreements, facilities management, construction management, energy management or other energy-related services tied to the electric facilities owned by, or operations of, one or both of the NFP Electric Entities, including emergency assistance or “mutual aid” arrangements.

In some regions of the country, state regulators or RTOs/ISOs have established “demand side management programs” to assist utilities in managing the supply/demand balance that is essential to delivering reliable electric energy (which is not currently storable in commercial quantities). Therefore, some NFP Electric Entities engage in joint demand-side management programs with their retail electric customers whereby the customers agree to reduce service/load requirements during certain weather or emergency conditions. NFP Electric Entities may agree with each other to engage in joint demand-side management programs to conserve their collective generation resources and reduce costs, and to comply with their collective obligations to RTOs/ISOs, regional balancing authorities, and state or local regulators.

The Petition also notes that NFP Electric Entities may provide each other with services related to the generation, transmission, and/or distribution facilities owned by each, or with respect to the maintenance (ongoing, outage, or emergency) or dispatch of generation units. Especially when there is a weather event or other unexpected outage which interrupts electric energy service to an NFP Electric Entity's customers, other NFP Electric Entities (and other electric utilities) in the geographic area will provide goods and services on an immediate basis, often without the opportunity of negotiating pricing or payment terms until the electric energy service has been restored to retail electric energy customers. These agreements between NFP Electric Entities may involve operating each other's facilities, sharing equipment, supplies and employees (e.g.,line crews), and interfacing on each other's behalf with suppliers/vendors, regulators and reliability authorities and customers.

7. Environmental Rights, Allowances or Attributes

The last category of transactions described in the Petition relates to a wide variety of Federal, regional, state, and local environmental rights, allowances or attributes required to operate a particular NFP Electric Entity's electric facilities or operations, or to fulfill a particular NFP Electric Entity's regulatory requirements. NFP Electric Entities may transact among themselves in environmental emissions allowances, offsets or credits (including carbon), renewable energy, distributed generation, clean energy or energy efficiency credits or attributes (which can be regional or state specific in nature, including “green tags”). NFP Electric Entities in a particular geographic region, whose available allowances may be directly useable to fulfill the needs of another NFP Electric Entity in the same region, often will directly transact with each other, rather than go to a non-NFP Electric Entity to negotiate a particular transaction.

C. Definition and Scope of NFP Electric Entities

The Petition defines NFP Electric Entities as:

(i) The United States, a State or any political subdivision of a State, or (ii) an “electric cooperative” that receives financing under the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.) or that sells less than 4,000,000 megawatt hours of electricity per year, or [(iii) any other electric cooperative, whether or not such electric cooperative meets the requirements of clause (ii) above,]1or (iv) any agency, authority, instrumentality or department of any one or more of the foregoing, or a federally-recognized Indian tribe, or (v) any entity which is wholly owned, directly or indirectly, by any one or more of the foregoing. For purposes of this definition, an “electric cooperative” shall mean an “electric membership corporation” or an “electric power association” organized under State law, a “rural electric cooperative,” “cooperative providing electric services to consumers and farmers” or any similar entity referenced in other Federal, State and local laws and regulations, so long as any such entity is formed and continues to operate for the primary purpose of providing electric service to its members on a not-for-profit, cooperative basis, and is treated as a cooperative under the Federal tax law.39

39Petition at 14 (internal citations omitted).

Generally, the Petition represents that all NFP Electric Entities are “nonfinancial end users of Electric Operations-Related Transactions, and enter into such transactions only to hedge or mitigate commercial risks.”40 Summarized herein, the Petition describes in detail the specific classes of entities it believes fall within its proposed NFP Electric Entity definition, and justifies inclusion of each specific class based upon a common public interest rationale.

40Petition at 33. Petitioners explain that the term “nonfinancial end users” means an NFP Electric Entity that does not fall within the definition of a “financial entity” in CEA 2(h)(7)(C)(i) and that no NFP Electric Entity falls within that definition.See 33-34.

1. FPA 201(f) Entities

“FPA 201(f) entities” is the first class of NFP Electric Entities defined by Petitioners. These entities include i) certain government and cooperatively-owned electric utilities (as described in FPA section 201(f)) and ii) federally-recognized Indian tribes that own or operate electric facilities (as determined by FERC case law).

a. Government and Cooperatively-Owned Electric Utilities Described by FPA Section 201(f)

Petitioners seek relief from the CEA and Commission regulations there under for those entities explicitly described by FPA section 201(f)41 as being exempt from the plenary jurisdiction of FERC. Per the Petition, the first category of these entities includes certain government-owned electric utilities, including Federal electric utilities such as BPA and other Federal agencies that operate electric generating or transmission facilities,42 and state-chartered electric utilities such as the New York Power Authority. Other examples of government-owned electric utilities include state or county utility boards or public utility districts formed under state or local law, joint action agencies or joint power agencies formed under state law to provide wholesale power supply and transmission services to member entities (each a Joint Action Agency), and other political subdivisions of a state.43 Finally, municipal utilities ranging in size from LPPC members such as the Los Angeles Department of Water and Power and the Sacramento Municipal Utility District, to the smallest municipal electric utilities with fewer than 500 electric meters, are also contemplated as government electric utilities under FPA section 201(f).44

41 See supranote 19 and accompanying text.

42Per the Petition, there are nine Federal electric utilities in the United States, which are part of several agencies of the United States Government:

• The Army Corps of Engineers;

• The Bureau of Indian Affairs and the Bureau of Reclamation in the Department of the Interior,

• The International Boundary and Water Commission in the Department of State,

• The Power Marketing Administrations in the Department of Energy (BPA, Western Area Power Administration, Southwestern Area Power Administration, and Southeastern Area Power Administration), and

• The Tennessee Valley Authority (TVA).

In addition, three Federal agencies operate electric generating facilities:

• TVA, the largest Federal power producer;

• The U.S. Army Corps of Engineers; and

• The U.S. Bureau of Reclamation.

43Per the Petition, a public power district or public utility district may be owned and operated by a city, county, state or regional agency.See, e.g.,Public Utility District No. 1 of Chelan County, Washington ( An irrigation district is a utility organized under state law which generates electricity in the course of supplying water. For example, Imperial Irrigation District in California was formed in 1911 under the California Irrigation District Act, as described at Government-owned utilities are accountable to elected and/or appointed officials and focus on providing reliable and safe electricity service, keeping costs low and predictable for its customers, while practicing good environmental stewardship.

44Per the Petition, a government owned or operated electric utility may be a department of the governmental entity, or may be organized as a separate agency, authority or instrumentality thereof.

Per the Petition, the second category of entities described by FPA section 201(f) are electric cooperatives that either are financed by the U.S. Department of Agriculture's Rural Utilities Service (“RUS”), sell less than 4,000,000 megawatt hours of electricity per year, or meet the requirements of an “aggregated FPA 201(f) entity.” These electric cooperatives generally consist of (i) distribution cooperatives, which distribute electric energy service directly to their owner/member customers, and (ii) G&T cooperatives, which are owned by distribution cooperatives and generate or purchase electricity and transmit it to their constituent distribution cooperatives for delivery to the distribution cooperatives' owner/member customers. Aggregated entities most commonly consist of a G&T cooperative formed by its constituent distribution cooperative (NFP Electric Entity) members or, comparably, a Joint Action Agency which is formed by its constituent government-owned (NFP Electric Entity) utility members.

As background, Petitioners explain that the FPA originally was enacted “to remedy rampant abuses in theinvestor-ownedelectric utility industry”45 but that cooperatively-owned electric utilities are easily distinguishable from investor-owned electric utilities because they are “effectively self-regulating.”46 More importantly, of the major abuses considered by Congress as the impetus for the FPA legislation, “virtually none could be associated with the [electric] cooperative structure where ownership and control is vested in the consumer-owners.”47 Based on this understanding of the legislative history, FERC's predecessor, the Federal Power Commission (“FPC”), concluded that electric cooperatives financed under the Rural Electrification Act of 1936 (“REA”)48 were intended by Congress to be FPA 201(f) entities and exempt from the FPC's jurisdiction over “public utilities.”49 The FPC made such a determination in the 1960s notwithstanding the fact that, at that time, electric cooperatives were not expressly described in FPA section 201(f).50

45 Salt River Project Agric. Improvement and Power Districtv.Fed. Power Comm'n,391 F. 2d 470, 475 (D.C. Cir. 1968) (emphasis added by Petitioners).

46 473 (elaborating that electric cooperatives are “completely owned and controlled by their consumer-members and only consumers can become members. They are non-profit. Each member has a single vote in the affairs of the cooperative, and services are essentially limited to members. No officer receives a salary for his services[,] and officers and directors are prohibited from engaging in any transactions with the cooperative from which they can earn any profit.”) (citation omitted).

47 475.

487 U.S.C. 901 et seq. The REA established the RUS as the body to administer financing to rural utilities.

49 See Dairyland Power Coop. et al,v.Fed. Power Comm'n,37 F.P.C. 12, 27 (1967).

50As part of the Energy Policy Act of 2005 (“EPAct 2005”), Congress codified the previous interpretation by FERC inDairyland, id.,(affirmed by the D.C. Circuit Court inSalt River,391 F. 2d 470) that electric cooperatives that receive financing under the REA should be considered FPA 201(f) entities. At the same time, Congress also expanded the FPA 201(f) exemption to electric cooperatives that sell less than 4 million megawatt hours per year, even if those electric cooperatives do not receive any financing from the RUS.SeePublic Law 109-58, 1291, 119 Stat. 594, 985 (2005), amending FPA 201(f) “by striking “political subdivision of a state,” and inserting “political subdivision of a State, an electric cooperative that receives financing under the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.) or that sells less than 4,000,000 megawatt hours of electricity per year.”

b. Federally-Recognized Indian Tribes

Federally-recognized Indian tribes that own or operate electric facilities are not described by FPA section 201(f), and thus would be subject to regulation as public utilities under the FPA. The Petition notes, however, that FERC and its predecessor, the FPC, and at least one court have determined such federally-recognized Indian tribes are to be treated as entities described in FPA section 201(f).51 To identify eligible Indian tribes, the Petition recommends that the Commission rely on determinations made by the Secretary of the Interior, periodically listed in theFederal Register, of Indian tribes to be recognized by the U.S. government pursuant to Section 104 of the Act of November 2, 1994.52

51Per the Petition,see City of Paris, KYvs.Fed. Power Comm'n,399 F.2d 983 (D.C. Cir. 1968);Sovereign Power Inc.,84 FERC ¶ 61,014 (1998);Confederated Tribes of the Warm Springs Reservation of Or., a Federally Recognized Indian Tribe, and Warm Springs Power Enterprises, a Chartered Enter. of the Confederated Tribes of the Warm Springs Reservation of Or.,93 FERC ¶ 61,182 at 61,599 (2000) (concluding that “the Tribes are an instrumentality of the `United States, a State or any political subdivision of a state'” and that Warm Springs Power Enterprises, a Chartered Enterprise of the Tribes, was entitled to Tribes' Section 201(f) exemption.).

52Public Law 103-454, 108 Stat. 4791, 4792 (codified at 25 U.S.C. 479a-1).

Petitioners note that FERC's determination that such Indian tribes should be treated as FPA 201(f) entities was based on the fact that, in operating such electric facilities, the Indian tribes perform government functions—the funds generated by such electric operations would be used for governmental purposes and would decrease the need for federal funding. Additionally, Indian tribes are subject to Interior Department oversight. Finally, like the other government or government-owned electric entities described in FPA section 201(f), the Indian tribes are tax exempt or “not-for-profit” entities.

2. Non-FPA 201(f) Electric Cooperatives

The Petition also requests relief for the very small number of cooperatively-owned electric utilities that do not meet the criteria of FPA section 201(f), either because they do not receive funding from RUS, sell more than 4,000,000 megawatt hours of electricity in a given year, or are not an “aggregated NFPElectric Entity.”53 FERC has estimated that there were approximately fifteen electric cooperatives (of more than 900) which do not meet the requirements set forth in FPA section 201(f).54 Petitioners request that the Commission recognize such cooperatives as “appropriate persons,” in accordance with CEA sections 4(c)(1), 4(c)(2)(B), and 4(c)(3)(K), for purposes of an exemption under CEA section 4(c)(6). Petitioners represent as a threshold matter that, regardless of whether an electric cooperative meets the specific criteria of FPA section 201(f), all cooperatively-owned electric utilities share certain distinguishing features—a common not-for-profit public service mission and self-regulating governance model—that form the underlying rationale for the FPA section 201(f) exemption.55

53 SeePetition at 23. The Petitioners note that under various state laws, cooperatively owned electric utilities, or electric cooperatives, are sometimes called “electric membership corporations” or “electric power associations.” In addition, Petitioners note that under certain sections of tax laws, state public utility laws or regulations, the FPA or the FERC's regulations, electric cooperatives are sometimes called “rural electric cooperatives” or “cooperatives providing electric services to consumers and farmers,” or by similar, but not identical, entity names.SeePetition at 2, note 5. In this Notice, as the Petitioners did in their Petition, the Commission uses the term “electric cooperatives” to encompass all of these entities, which are formed for the primary purpose of providing electric energy service to their owners/member customers on a not-for-profit basis, and which are treated as cooperatives under Federal tax laws.

54 Statement of Cynthia A. Marlette, General Counsel of FERC, before the Committee on Agriculture, Subcommittee on Conservation, Credit, Energy, and Research, United States House of Representatives(July 30, 2008) (available at NRECA believes that, of its current members, the following six entities are non-FPA 201(f) electric cooperatives: Pacific Northwest Generating Cooperative (PNGC Power), Golden Spread Electric Cooperative, Old Dominion Electric Cooperative, Wabash Valley Power Association, Wolverine Power Cooperative, and Deseret Power Electric Cooperative.

55Similarly, to be treated as a “cooperative” under Federal tax law, regardless of 201(f) status, an electric cooperative must operate on a cooperative basis.See26 U.S.C. 501(c)(12), 1381(a)(2)(C). As explained by the United States Tax Court in the seminal case ofPuget Sound Plywood, Inc.v.Commissioner of Internal Revenue,operating on a cooperative basis means operating according to the cooperative principles of i) democratic member control, ii) operation at cost, and iii) subordination of capital.See44 T.C. 305 (1965);seealso Internal Revenue Manual § (2006) (elaborating on the cooperative principles by explaining that each member of a cooperative has one vote, a cooperative must allocate any excess operating revenue to its members in proportion to the amount of business it did with each, and that members share their interest, risk, and burden to obtain services or benefits rather than invest as equity owners). Additionally, for any electric cooperative to be exempt from Federal income taxation pursuant to IRC 501(c)(12), it must collect annually “85 percent or more of [its] income * * * from members for the sole purpose of meeting losses and expenses.” 26 U.S.C. 501(c)(12)(A). Accordingly, Petitioners argue that an electric cooperative, regardless of FPA section 201(f) status, lacks incentive or motivation to manipulate prices, disrupt market integrity, engage in fraudulent or abusive sales practices, or misuse customer assets because it: (1) Is a consumer cooperative; (2) is controlled by its members; (3) must operate at cost and “not operate either for profit or below cost;” (4) may not benefit its individual members financially; and (5) if exempt from Federal income taxation, must collect at least 85 percent of its income from members.

In analyzing whether an entity qualifies as an appropriate person under CEA section 4(c)(3), Petitioners note that past Commission determinations have focused on the financial strength and sophistication of the persons for