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On June 8, 2012, the Commission received a petition (“Petition”)
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.”
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.
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.
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.
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.
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;
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“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,
As noted above, on June 8, 2012, the Commission received the Petition
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
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.
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,
As described by the Petitioners, this transaction type includes the most prevalent type of Exempt Electric Operations-Related Transaction between NFP Electric Entities,
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.
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.
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.
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.
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.
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.
Joint power agency L supplies to municipal utility M a long-term supply of natural gas from a natural gas project (Project Entity Z) developed by L and other NFP Electric Entities for the purpose
Petition Exhibit 2 at 3-4.
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.
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 (
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.
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,]
“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).
Petitioners seek relief from the CEA and Commission regulations there under for those entities explicitly described by FPA section 201(f)
• 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.
Per the Petition, the second category of entities described by FPA section 201(f) are electric cooperatives that either are financed by the U.S. Department of Agriculture's Rural Utilities Service (“RUS”), sell less than 4,000,000 megawatt hours of electricity per year, or meet the requirements of an “aggregated FPA 201(f) entity.” These electric cooperatives generally consist of (i) distribution cooperatives, which distribute electric energy service directly to their owner/member customers, and (ii) G&T cooperatives, which are owned by distribution cooperatives and generate or purchase electricity and transmit it to their constituent distribution cooperatives for delivery to the distribution cooperatives' owner/member customers. Aggregated entities most commonly consist of a G&T cooperative formed by its constituent distribution cooperative (NFP Electric Entity) members or, comparably, a Joint Action Agency which is formed by its constituent government-owned (NFP Electric Entity) utility members.
As background, Petitioners explain that the FPA originally was enacted “to remedy rampant abuses in the
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).
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.
The Petition also requests relief for the very small number of cooperatively-owned electric utilities that do not meet the criteria of FPA section 201(f), either because they do not receive funding from RUS, sell more than 4,000,000 megawatt hours of electricity in a given year, or are not an “aggregated NFP
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