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COMMODITY FUTURES TRADING COMMISSION

Proposed Order and Request for Comment on a Petition From Certain Independent System Operators and Regional Transmission Organizations To Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Proposed Order and Request for Comment.
SUMMARY: 1In the Matter of the Petition for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by California Independent Service Operator Corporation; In the Matter of the Petition for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by the Electric Reliability Council of Texas, Inc.; In the matter of the Petition for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by ISO New England Inc.; In the Matter of the Petition for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by Midwest Independent Transmission System Operator, Inc.; In the Matter of the Petition for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by New York Independent System Operator, Inc.; and In the Matter of the Petition for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by PJM Interconnection, L.L.C. (Feb. 7, 2012, as amended June 11, 2012).

27 U.S.C. 1et seq.

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

47 U.S.C. 1a(18). "Further Definition of `Swap Dealer,' `Security-Based Swap Dealer,' `Major Swap Participant,' `Major Security-Based Swap Participant' and `Eligible Contract Participant,' " 77 FR 30596, May 23, 2012.

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

The Commission seeks comment on the Petition, the Proposed Exemption and related questions. A copy of the Petition requesting the exemption is available on the Commission's Web site athttp://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/isorto4capplication.pdf,with Petition Attachments posted athttp://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/isorto4cappattach.pdfand an Order 741 Implementation Chart posted athttp://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/isorto4cappfercchart.pdf.

DATES: Comments must be received on or before September 27, 2012.
ADDRESSES: * The agency's Web site, athttp://comments.cftc.gov.Follow the instructions for submitting comments through the Web site.

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

*Hand Delivery/Courier:Same as mail above.

*Federal eRulemaking Portal: http://www.regulations.gov.Follow the instructions for submitting comments.

Please submit your comments using only one method.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments may be posted as received tohttp://www.cftc.gov.You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that may be exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the established procedures in CFTC Regulation 145.9 (17 CFR 145.9).

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission fromwww.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 the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel, 202-418-5092,rwasserman@cftc.gov,or Laura Astrada, Associate Chief Counsel, 202-418-7622,lastrada@cftc.gov,or Jocelyn Partridge, Special Counsel, 202-418-5926,jpartridge@cftc.gov,Division of Clearing and Intermediary Oversight; Eve Gutman, Attorney-Advisor, 202-418-5141,egutman@cftc.gov,Division of Market Oversight; Gloria P. Clement, Assistant General Counsel, 202-418-5122,gclement@cftc.govor Thuy Dinh, Counsel, 202-418-5128,tdinh@cftc.gov,Office of the General Counsel; or Robert Pease, 202-418-5863,rpease@cftc.gov,Division of Enforcement; Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION: Table of Contents I. The Petition II. Statutory Background III. Background—FERC and PUCT A. Introduction B. FERC C. PUCT D. FERC & PUCT Oversight IV. Scope of the Exemption A. Transactions Subject to the Exemption B. Conditions C. Additional Limitations V. Section 4(c) Analysis A. Overview of CEA Section 4(c) B. Proposed CEA Section 4(c) Determinations C. FERC Credit Reform Policy D. DCO Core Principle Analysis E. SEF Core Principle Analysis VIII. Proposed Exemption A. Discussion of Proposed Exemption B. Proposed Exemption IX. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations X. Request for Comment I. The Petition

On February 7, 2012, Petitioners collectively filed a Petition with the Commission requesting that the Commission exercise its authority under section 4(c)(6) of the CEA6 and section 712(f) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)7 to exempt contracts, agreements and transactions for the purchase or sale of specified electricity products, that are offered pursuant to a FERC- or PUCT-approved tariff, from most provisions of the Act.8 Petitioners include three RTOs (Midwest Independent Transmission System Operator Inc. (“MISO”); ISO New England, Inc. (“ISO NE”); and PJM Interconnection, L.L.C. (“PJM”)), and two ISOs (California Independent System Operator (“CAISO”) and New York Independent System Operator (“NYISO”)), whose central role as transmission utilities is subject to regulation by FERC; and the Electric Reliability Council of Texas, Inc. (“ERCOT”), an entity that performs the role of an ISO but whose central role as a transmission utility in the electric energy market is subject to regulation by PUCT, the authority with jurisdiction to regulate rates and charges for the sale of electric energy within the state of Texas.9 Petitioners represent that the roles, responsibilities and services of ISOs and RTOs are substantially similar.10 As described in greater detail below, FERC encouraged the formation of ISOs to consolidate and manage the operation of electricity transmission facilities in order to provide open, non-discriminatory transmission service for generators and transmission customers.11 FERC also encouraged the formation of RTOs to administer the transmission grid on a regional basis.12

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

7 SeeDodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed athttp://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.

8 SeePetition at 2-3, 6.

9 SeePetition at 2-4.See16 Tex. Admin. Code 25.1 (1998).

10 SeePetition at 2 n. 2.

11 SeeFERC Order 888 Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Facilities (“FERC Order 888”), 61 FR 21540, April 24, 1996;SeePetition at 2 n.2, 3.

12 SeePetition at 3.

Petitioners specifically request that the Commission exempt from most provisions of the CEA certain “financial transmission rights,” “energy transactions,” “forward capacity transactions,” and “reserve or regulation transactions,” as those terms are defined in the Petition, if such transactions are offered or entered into pursuant to a tariff under which a Petitioner operates that has been approved by FERC or PUCT, as applicable, as well as any persons (including Petitioners, their members and their market participants) offering, entering into, rendering advice, or rendering other services with respect to such transactions.13 Petitioners assert that each of the transactions for which an exemption is requested is (a) subject to a long-standing, comprehensive regulatory framework for the offer and sale of such transactions established by FERC, or in the case of ERCOT, the PUCT, and (b) part of, and inextricably linked to, the organized wholesale electricity markets that are subject to regulation and oversight of FERC or PUCT, as applicable.14 Petitioners expressly exclude from the Petition a request for relief from sections 4b, 4o,6(c) and 9(a)(2) of the Act15 and such provisions explicitly have been carved out of the exemption that would be provided by the Proposed Exemption. Petitioners assert that they are seeking the requested exemption in order to provide greater legal certainty with respect to the regulatory requirements that apply to the transactions that are the subject of the Petition.16 Petitioners request that, due to the commonalities in the Petitioners' markets, the exemption apply to all Petitioners and their respective market participants with respect to each category of electricity-related products described in the Petition, regardless of whether such products are offered or entered into at the current time pursuant to an individual Petitioner's tariff.17 Petitioners' assert that this uniformity would avoid an individual Petitioner being required to seek future amendments to the exemption in order to offer or enter into the same type of transactions currently offered by another Petitioner.18

13 See id.at 2-3.

14 See id.at 11.

15 See id.at 3.

16 See id.at 3, 5-6.

17 See id.at 6.

18 See id.

II. Statutory background

On July 21, 2010, President Obama signed the Dodd-Frank Act. Title VII of the Dodd-Frank Act amended the CEA19 and altered the scope of the Commission's exclusive jurisdiction.20 In particular, it expanded the Commission's exclusive jurisdiction, which had included futures traded, executed and cleared on CFTC-regulated exchanges and clearinghouses, to also cover swaps traded, executed, or cleared on CFTC-regulated exchanges or clearinghouses.21 As a result, the Commission's exclusive jurisdiction now includes swaps as well as futures, and is clearly expressed in CEA section 2(a)(1)(A), which reads:

197 U.S.C. 1et seq.

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

21 See7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added section 2(h)(1)(A), which requires swaps to be cleared if required to be cleared and not subject to a clearing exception or exemption.See7 U.S.C. 2(h)(1)(A).

The Commission shall have exclusive jurisdiction, except to the extent otherwise provided in the Wall Street Transparency and Accountability Act of 2010 (including an amendment made by that Act) and subparagraphs (C), (D), and (I) of this paragraph and subsections (c) and (f), with respect to accounts, agreements (including any transaction which is of the character of * * * an “option”), and transactions involving swaps or contracts of sale of a commodity for future delivery (including significant price discovery contracts) traded or executed on a contract market * * * or a swap execution facility * * * or any other board of trade, exchange, or market * * *.22

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

The Dodd-Frank Act also added a savings clause that addresses the roles of the Commission, FERC, and state agencies as they relate to certain agreements, contracts, or transactions traded pursuant to the tariff of an RTO and ISO.23 Toward that end, paragraph (I) of CEA section 2(a)(1) repeats the Commission's exclusive jurisdiction and clarifies that the Commission retains its authorities over agreements, contracts or transactions traded pursuant to FERC- or state-approved tariff or rate schedules.24 The same paragraph (I) also explains that the FERC and state agencies preserve their existing authorities over agreements, contracts, or transactions “entered into pursuant to a tariff or rate schedule approved by [FERC] or a State regulatory agency,” that are: “(I) not “executed, traded, or cleared on” an entity or trading facility subject to registration or “(II) executed, traded, or cleared on a registered entityor trading facility owned or operated by a [RTO] or [ISO].”25

23 See7 U.S.C. 2(a)(1)(I).

24 See7 U.S.C. 2(a)(1)(I)(i) and (ii).

257 U.S.C. 2(a)(1)(I)(i)(II). The savings clause in CEA section 2(a)(1)(I) provides that:

(I)(i) Nothing in this Act shall limit or affect any statutory authority of the Federal Energy Regulatory Commission or a State regulatory authority (as defined in section 3(21) of the Federal Power Act (16 U.S.C. 796(21)) with respect to an agreement, contract, or transaction that is entered into pursuant to a tariff or rate schedule approved by the Federal Energy Regulatory Commission or a State regulatory authority and is—

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

(II) Executed, traded, or cleared on a registered entity or trading facility owned or operated by a regional transmission organization or independent system operator.

(ii) In addition to the authority of the Federal Energy Regulatory Commission or a State regulatory authority described in clause (i), nothing in this subparagraph shall limit or affect—

(I) Any statutory authority of the Commission with respect to an agreement, contract, or transaction described in clause (i); or

(II) The jurisdiction of the Commission under subparagraph (A) with respect to an agreement, contract, or transaction that is executed, traded, or cleared on a registered entity or trading facility that is not owned or operated by a regional transmission organization or independent system operator (as defined by sections 3(27) and (28) of the Federal Power Act (16 U.S.C. 796(27), 796(28)).

In addition, Dodd-Frank Act section 722(g) (not codified in the United States Code) expressly states that FERC's pre-existing statutory enforcement authority is not limited or affected by amendments to the CEA. Section 722(g) states:

(g) AUTHORITY OF FERC.—Nothing in the Wall Street Transparency and Accountability Act of 2010 or the amendments to the Commodity Exchange Act made by such Act shall limit or affect any statutory enforcement authority of the Federal Energy Regulatory Commission pursuant to section 222 of the Federal Power Act and section 4A of the Natural Gas Act that existed prior to the date of enactment of the Wall Street Transparency and Accountability Act of 2010.

While the Dodd-Frank Act sets forth a clear statement of the Commission's exclusive jurisdiction and authorities as related to FERC and state regulatory authorities, the Dodd-Frank Act also granted the Commission specific powers to exempt certain contracts, agreements or transactions from duties otherwise required by statute or Commission regulation by adding a new section to the CEA, section 4(c)(6), that permits the Commission to exempt from its regulatory oversight, among other things, agreements, contracts, or transactions traded pursuant to an RTO or ISO tariff that has been approved or permitted to take effect by FERC or a State regulatory authority, as applicable.26 The Commission's charge, however, is not rote; the Commission must initially determine whether the exemption would be consistent with the public interest and the purposes of the CEA.27

26 See7 U.S.C. 6(c)(6).

27 See7 U.S.C. 6(c)(6)(A) and (B).

The Commission must act “in accordance with” section 4(c)(1) and (2) of the CEA, when issuing an electricity exemption under section 4(c)(6).28 Section 4(c)(1) authorizes the Commission, by rule, regulation, or order, to exempt any agreement, contract or transaction, or class thereof, from the exchange-trading requirements of section 4(a) or any other requirements of the Act other than section 2(a)(1)(C)(ii) and (D). The Commission may attach terms and conditions to any exemption it provides.

28Section 4(c) was added to the CEA by the Futures Trading Practices Act of 1992, Public Law 102-564. The Commission's authority under section 4(c) was explained by the Conferees:

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

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

* * * * *

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

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

not intend that the exercise of exemptive authority by the Commission would require any determination before hand that the agreement, instrument, or transaction for which an exemption is sought is subject to the Act. Rather, this provision provides flexibility for the Commission to provide legal certainty to novel instruments where the determination as to jurisdiction is not straightforward * * *

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

Section 4(c)(2) of the CEA29 provides that the Commission may not approve an exemption from the execution requirements of the Act, as noted in section 4(a),30 unless the agreement, contract or transaction will be entered into solely between “appropriate persons,” as that term is defined in section 4(c)(3), which does not include retail customers (such as small businesses or individuals). In addition, the Commission must determine that the agreement, contract or transaction in question will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties.31

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

The Commission shall not grant any exemption * * * from any of the requirements of subsection (a) unless the Commission determines that (A) the requirement should not be applied to the agreement, contract, or transaction for which the exemption is sought and that the exemption would be consistent with the public interest and the purposes of this Act; and (B) the agreement, contract, or transaction—

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

(ii) Will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under this Act.

307 U.S.C. 6(a).

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

III. Background—FERC and PUCT A. Introduction

Each Petitioner is subject to regulation by FERC, with the exception of ERCOT, which is regulated by PUCT.32 Petitioners assert that the regulatory frameworks administered by FERC or PUCT, as applicable to each particular RTO or ISO market, would apply to the transactions for which an exemption has been requested.33

32 SeePetition at 4.

33 See id.at 11.

B. FERC

In 1920, Congress established the Federal Power Commission (“FPC”).34 The FPC was reorganized into FERC in 1977.35 FERC is an independent agency that regulates the interstate transmission of electricity, natural gas and oil.36 FERC's mission is to “assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means.”37 This mission is accomplished by pursuing two primary goals. First, FERC seeks to ensure that rates, terms and conditions for wholesale transactions and transmission of electricity and natural gas are just, reasonable and not unduly discriminatory or preferential.38 Second, FERC seeks to promote the development of safe, reliable and efficient energy infrastructure that serves the public interest.39 Both Congress and FERC, through a series of legislative acts and Commission orders, have sought to establish a system whereby wholesale electricity generation and transmission in the United States is governed by two guiding principles; regulation with respect to wholesale electricitytransmission,40 and competition when dealing with wholesale generation.41

34Federal Power Act, 16 U.S.C. 791aet seq.

35The Department of Energy Organization Act, Public Law 95-91, section 401, 91 Stat. 565, 582 (1977) (codified as amended at 42 U.S.C. 7171 (1988)).

36 See42 U.S.C. 7172.

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

38 Id.

39 Id.

40The term “`wholesale transmission services' means the transmission of electric energy sold, or to be sold, at wholesale in interstate commerce.”See16 U.S.C. 796 (24)).

41 See generallyFERC Order 888.See alsoFERC's discussion of electric competition,available at http://www.ferc.gov/industries/electric/indus-act/competition.asp(stating that “[FERC]'s core responsibility is to `guard the consumer from exploitation by non-competitive electric power companies.' ”).

In 1996, FERC issued FERC Order 888, which promoted competition in the generation market by ensuring fair access and market treatment by transmission customers.42 Specifically, FERC Order 888 sought to “remedy both existing and future undue discrimination in the industry and realize the significant customer benefits that will come with open access.”43 FERC Order 888 encouraged the formation of ISOs as a potentially effective means for accomplishing non-discriminatory open access to the transmission of electrical power.44

42 SeeFERC Order 888.

43FERC Order 888 at 21541.

44FERC Order 888 at 21594. Under the old system, one party could own both generation and transmission resources, giving preferential treatment to its own and affiliated entities.See generally FERC Order 888.

In addition, FERC has issued orders that address areas such as increased RTO and ISO participation by transmission utilities, increased use of long-term firm transmission rights, increased investment in transmission infrastructure, reduced transmission congestion and the use of demand-response.45 The end result of this series of FERC orders is that a regulatory system has been established that requires ISOs and RTOs to comply with numerous FERC rules designed to improve both the reliability of the physical operations of electric transmission systems as well as the competitiveness of electricity markets. The requirements imposed by the various FERC Orders seek to ensure that FERC is able to accomplish its two main goals; ensuring that rates, terms and conditions are just, reasonable and not unduly discriminatory or preferential, while promoting the development of safe, reliable and efficient energy infrastructure that serves the public interest.

45 See, e.g.,FERC Order 2000, 65 FR 809 (2000)(encouraging transmission utilities to join RTOs); FERC Order No. 681, 71 FR 43294 (2006), FERC Stats. & Regs. ¶ 31,222 (2006), order on reh'g, Order No. 679-A, 72 FR 1152, Jan. 10, 2007, FERC Stats. & Regs. ¶ 31,236, order on reh'g, 119 FERC ¶ 61,062 (2007) (finalizing guidelines for ISOs to follow in developing proposals to provide long-term firm transmission rights in organized electricity markets); FERC Order No. 679, 71 FR 43294 (2006) (finalizing rules to increase investment in the nation's aging transmission infrastructure, and to promote electric power reliability and lower costs for consumers, by reducing transmission congestion); FERC Order No. 890, 72 FR 12266 (2007)(modifying existing rules to promote the nondiscriminatory and just operation of transmission systems); and FERC Order No. 719-A, 74 FR 37776 (2009) (implementing the use of demand-response (the process of requiring electricity consumers to reduce their electricity use during times of heightened demand), encouraging the use of long-term power contracts and strengthening the role of market monitors).

C. PUCT

In 1975, the Texas Legislature enacted the Public Utility Regulatory Act (“PURA”) and created PUCT to provide statewide regulation of the rates and services of electric and telecommunications utilities.46 PUCT's stated mission is to assure the availability of safe, reliable, high quality services that meet the needs of all Texans at just and reasonable rates.47 To this end, PUCT regulates electric and telecommunications utilities while facilitating competition, operation of the free market, and customer choice.48 Subchapter S of TAC § 25 (“Wholesale Markets”) sets out the rules applicable to ERCOT, which operates a wholesale electricity market in Texas similar to the electricity markets run by the other Petitioners. As with the RTOs and ISOs regulated by FERC, ERCOT is required to have rules that address the regulatory requirements imposed by PUCT.49 These rules address issues similar to those rules imposed by FERC on RTOs and ISOs,50 including matters such as market design, pricing safeguards, market monitoring, monitoring for wholesale market power, resource adequacy and ERCOT emergency response services,51 and are aimed at developing electricity markets that are able to provide reliable, safe and efficient electric service to the people of Texas, while also maintaining rates at an affordable level through the operation of fair competition.52

46Public Utility Regulatory Act, TEX. UTIL. CODE ANN. 11.001et seq.(Vernon 1998 & Supp. 2005).

4716 Texas Admin. Code (“TAC”) 25.1 (1998).

48 Id.

49 See generally16 TAC 25.501-25.507.

50 See generally id.

51 See generally id.

52 See generally16 TAC 25.503.

D. FERC & PUCT Oversight

As discussed above, both FERC and PUCT assert that their primary goal in regulating their respective electricity markets is to ensure that consumers are able to purchase electricity on a safe, reliable and affordable basis.53

53 See generally16 TAC 25.1.See alsoFERC Strategic Plan for Fiscal Years 2009-2014, 3 (Feb. 2012),http://www.ferc.gov/about/strat-docs/FY-09-14-strat-plan-print.pdf.

IV. Scope of the Exemption A. Transactions Subject to the Exemption

After due consideration, the Commission proposes to exempt certain Financial Transmission Rights (“FTRs”), Energy Transactions, Forward Capacity Transactions, and Reserve or Regulation Transactions (collectively, the “Transactions”), each as defined below, pursuant to section 4(c)(6) of the Act.

An FTR is a transaction, however named, that entitles one party to receive, and obligates another party to pay, an amount based solely on the difference between the price for electricity, established on an electricity market administered by a Petitioner, at a specified source (i.e.,where electricity is deemed injected into the grid of a Petitioner) and a specified sink (i.e.,where electricity is deemed withdrawn from the grid of a Petitioner).54 The term “FTR” includes Financial Transmission Rights, and Financial Transmission Rights in the form of options (i.e.,where one party has only the obligation to pay, and the other party only the right to receive, an amount as described above). As more fully described below, the Proposed Exemption applies only to FTRs where each FTR is linked to, and the aggregate volume of FTRs for any period of time is limited by, the physical capability (after accounting for counterflow) of the electricity transmission system operated by the Petitioner offering the contract for such period: a Petitioner serves as the market administrator for the market on which the FTR is transacted; each party to the Transaction is a member of the particular Petitioner (or is the Petitioner itself) and the Transaction is executed on a market administered by that Petitioner; and the Transaction does not require any party to make or take physical delivery of electricity.55

54Petition at 6.

55Each FTR specifies a direction along a path from a specified source to a specified sink. Counterflow FTRs specify a path where congestion in the physical market is in the opposite direction from the prevailing flow. Holders of counterflow FTRs generally pay congestion revenues to the RTO or ISO. Because counterflow FTRs are expected to result in payment liability to the FTR holder, the price of counterflow FTRS are typically negative. That is, the RTO or ISO pays market participants to acquire them. However, counterflow FTRs may be profitable (and prevailing flow FTRs may result in a payment liability) where congestion in the physical market occurs in direction opposite to that expected.See generallyPJM Interconnection, L.L.C., 122 FERC ¶ 61,279 (2008);see alsoPJM Interconnection, L.L.C, 121 FERC ¶ 61,089 (2007).

“Energy Transactions” are transactions in a “Day-Ahead Market”or “Real-Time Market,” as those terms are defined in the Proposed Exemption, for the purchase or sale of a specified quantity of electricity at a specified location where the price of electricity is established at the time the transaction is executed.56 Performance occurs in the Real-Time Market by either the physical delivery or receipt of the specified electricity or a cash payment or receipt at the price established in the Real-Time Market; and the aggregate cleared volume of both physical and cash-settled energy transactions for any period of time is limited by the physical capability of the electricity transmission system operated by a Petitioner for that period of time.57 Energy Transactions are also referred to as Virtual Bids or Convergence Bids.58

56 SeePetition at 7.See alsosection VIII. below.

57 See id.at 7.See alsosection VIII. below.

58 See id.at 6.

“Forward Capacity Transactions” fall into three distinct categories, Generation Capacity (“GC”), Demand Response (“DR”), and Energy Efficiency.59 GC refers to the right of a Petitioner to require certain sellers to maintain the interconnection of electric generation facilities to specific physical locations in the electric power transmission system during a future time period as specified in the Petitioner's Tariff.60 Furthermore, a GC contract requires a seller to offer specified amounts of electric energy into the Day-Ahead or Real-Time Markets for electricity transactions. A GC contract also requires a seller, subject to the terms and conditions of a Petitioner's Tariff, to inject electric energy into the electric power transmission system operated by the Petitioner.61 A DR Right gives Petitioners the right to require that certain sellers of such rights curtail their consumption of electricity from Petitioner's electricity transmission system during a future period of time as specified in the Petitioners' Tariffs.62 Energy Efficiency Rights (“EER”) provides Petitioners with the right to require specific performance of an action or actions on the part of the other party that will reduce the need for GC or DR capacity over the duration of a future period of time as specified in the Petitioner's Tariffs.63 Moreover, for a Forward Capacity Transaction to be eligible for exemption hereunder, the aggregate cleared volume of all such transactions for any period of time must be limited to the physical capability of the electric transmission system operated by the applicable Petitioner for that period of time.

59 See id.at 7-8.

60 See id.at 7.

61 See id.

62 See id.at 7.

63 See id.at 8. Another example of an EER would be requiring an RTO or ISO member to change equipment in order to improve the efficiency of the system, and in turn, reduce the amount of electricity drawn from the system.See alsosection VIII. below.

“Reserve Regulation Transactions” allow a Petitioner to purchase through auction, for the benefit of load serving entities (“LSEs”) and resources, the right, during a period of time specified in the Petitioner's Tariff, to require the seller to operate electric facilities in a physical state such that the facilities can increase or decrease the rate of injection or withdrawal of electricity to the electric power transmission system operated by the Petitioner with physical performance by the seller's facilities within a response interval specified in the Petitioner's tariff (Reserve Transaction), or prompt physical performance by the seller's facilities (Area Control Error Regulation Transaction).64 In consideration for such delivery, or withholding of delivery, the seller receives compensation of the type specified in section VIII below.65 In all cases, the quantity and specifications for such Transactions for a Petitioner for any period of time are limited by the physical capability of the electric transmission system operated by Petitioners.66 These Transactions are typically used to address unforeseen fluctuations in the level of electricity demand experienced on the electric transmission system.

64 See id.at 8-9.See alsosection VIII. below.

65 See id.at 8.

66 See id.at 8-9.

B. Conditions

The Proposed Exemption would be subject to certain conditions. First, all parties to the agreements, contracts or transactions that are covered by the Proposed Exemption must be either “appropriate persons,” as such term is defined in sections 4(c)(3)(A) through (J) of the Act, or “eligible contract participants,” as such term is defined in section 1a(18)(A) of the Act and in Commission regulation 1.3(m).67

67That is, the Commission is proposing to use its authority pursuant to CEA 4(c)(3)(K) to include eligible contract participants as appropriate persons for the purposes of this Order.See infran. 80 and accompanying text.

Second, the agreements, contracts or transactions that are covered by the Proposed Exemption must be offered or sold pursuant to a Petitioner's tariff, which has been approved or permitted to take effect by:

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

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

Third, none of a Petitioner's tariffs or other governing documents may include any requirement that the Petitioner notify a member prior to providing information to the Commission in response to a subpoena or other request for information or documentation.

Finally, information sharing arrangements that are satisfactory to the Commission between the Commission and FERC and between the Commission and PUCT must be in full force and effect.68

68As discussed in section VIII.A. below, the Commission and FERC have already entered into a Memorandum of Understanding, a copy of which is available athttp://www.ferc.gov/legal/maj-ord-reg/mou/mou-33.pdf. In addition, the Commission intends on working with the PUCT on an MOU that is mutually satisfactory.

C. Additional Limitations

As discussed above, the Commission proposes to exempt the Transactions pursuant to section 4(c)(6) of the Act based, in part, on certain representations made by Petitioners as well as the additional limitations that are noted below. As represented in the Petition, the exemption requested by Petitioners relate to Transactions that are primarily entered into by commercial participants that are in the business of generating, transmitting and distributing electricity.69 In addition, the Commission notes that it appears that Petitioners were established for the purpose of providing affordable, reliable electricity to consumers within their geographic region.70 Critically, these Transactions are an essential means, designed by FERC and PUCT as an integral part of their statutory responsibilities, to enable the reliable delivery of affordable electricity.71 The Commission also notes that each of the Transactions taking place on Petitioners' markets is monitored by Market Monitoring Units (“MMU”) responsible to either FERC or, in the case of ERCOT, PUCT.72 Finally, as discussed above, each Transaction is directly tied to the physical capabilities of Petitioners' electricity grids.73 As more fully described below,74 and on the basis of the aforementioned representations, the Commission finds that the Proposed Exemption would be in the public interest for the specified Transactions.To be clear, however, financial transactions that are not tied to the allocation of the physical capabilities of an electric transmission grid would not be suitable for exemption because such activity would not be inextricably linked to the physical delivery of electricity.

69 See generallyPetition at 20.

70 See id.at 3-4.

71 See generallyFERC Order 888; FERC Order 2000; 18 CFR 35.34(k)(2); and TAC 25.1.See alsoPetition at 11, 13-14.

72Petition at 15-18.

73 See id.at 6-9.

74 Seethe discussions in sections V.B., V.D., and V.E. below.

V. Section 4(c)Analysis A. Overview of CEA Section 4(c) 1. Sections 4(c)(6)(A) and (B)

The Dodd-Frank Act amended CEA section 4(c) to add sections 4(c)(6)(A) and (B), which provide for exemptions for certain transactions entered into (a) pursuant to a tariff or rate schedule approved or permitted to take effect by FERC, or (b) pursuant to a tariff or rate schedule establishing rates or charges for, or protocols governing, the sale of electric energy approved or permitted to take effect by the regulatory authority of the State or municipality having jurisdiction to regulate rates and charges for the sale of electric energy within the State or municipality, as eligible for exemption pursuant to the Commission's 4(c) exemptive authority.75 Indeed, 4(c)(6) provides that “[i]f the Commission determines that the exemption would be consistent with the public interest and the purposes of this chapter, the Commission shall” issue such an exemption. However, any exemption considered under 4(c)(6)(A) and/or (B) must be done “in accordance with [CEA section 4(c)(1) and (2)].”76

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

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

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

(B) Pursuant to a tariff or rate schedule establishing rates or charges for, or protocols governing, the sale of electric energy approved or permitted to take effect by the regulatory authority of the State or municipality having jurisdiction to regulate rates and charges for the sale of electric energy within the State or municipality; or

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

76CEA section 4(c)(6) explicitly directs the Commission to consider any exemption proposed under 4(c)(6) “in accordance with [CEA section 4(c)(1) and (2)].”

2. Section 4(c)(1)

CEA section 4(c)(1) requires that the Commission act “by rule, regulation or order, after notice and opportunity for hearing.” It also provides that the Commission may act “either unconditionally or on stated terms or conditions or for stated periods and either retroactively or prospectively or both” and that the Commission may provide exemption from any provisions of the CEA except subparagraphs (C)(ii) and (D) of section 2(a)(1).77

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

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

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

(i) With respect to—

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

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

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

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

3. Section 4(c)(2)

CEA section 4(c)(2) requires the Commission to determine that: To the extent an exemption provides relief from any of the requirements of CEA section 4(a), the requirement should not be applied to the agreement, contract or transaction; the exempted agreement, contract, or transactions will be entered into solely between appropriate persons;78 and the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.79

78 SeeCEA 4(c)(2)(B)(i) and the discussion of CEA section 4(c)(3) below.

79CEA section 4(c)(2)(A) also requires that the exemption would be consistent with the public interest and the purposes of the CEA, but that requirement duplicates the requirement of section 4(c)(6).

4. Section 4(c)(3)

CEA section 4(c)(3) outlines who may constitute an appropriate person for the purpose of a 4(c) exemption, including as relevant to this Notice: (a) Any person that fits in one of ten defined categories of appropriate persons; or (b) such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.80

80Section 4(c)(3), 7 U.S.C. 6(c)(3), provides that: the term “appropriate person” shall be limited to the following persons or classes thereof:

(A) A bank or trust company (acting in an individual or fiduciary capacity).

(B) A savings association.

(C) An insurance company.

(D) An investment company subject to regulation under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).

(E) A commodity pool formed or operated by a person subject to regulation under this Act.

(F) A corporation, partnership, proprietorship, organization, trust, or other business entity with a net worth exceeding $1,000,000 or total assets exceeding $5,000,000, or the obligations of which under the agreement, contract or transaction are guaranteed or otherwise supported by a letter of credit or keepwell, support, or other agreement by any such entity or by an entity referred to in subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph.

(G) An employee benefit plan with assets exceeding $1,000,000, or whose investment decisions are made by a bank, trust company, insurance company, investment adviser registered under the Investment Advisers Act of 1940 (15 U.S.C. 80a-1 et seq.), or a commodity trading advisor subject to regulation under this Act.

(H) Any governmental entity (including the United States, any state, 4-1 or any foreign government) or political subdivision thereof, or any multinational or supranational entity or any instrumentality, agency, or department of any of the foregoing.

(I) A broker-dealer subject to regulation under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) acting on its own behalf or on behalf of another appropriate person.

(J) A futures commission merchant, floor broker, or floor trader subject to regulation under this Act acting on its own behalf or on behalf of another appropriate person.

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

B. Proposed CEA Section 4(c) Determinations

In connection with the Proposed Exemption, the Commission has considered and proposes to determine that: (i) The Proposed Exemption is consistent with the public interest and the purposes of the CEA; (ii) CEA section 4(a) should not apply to the transactions or entities eligible for the Proposed Exemption, (iii) the persons eligible to rely on the Proposed Exemption are appropriate persons pursuant to CEA section 4(c)(3); and (iv) the Proposed Exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.

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

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

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

The Petitioners assert that the Proposed Exemption would be consistent with the public interest and purposes of the CEA,81 stating generally that: (a) The Transactions have been, and are, subject to a long-standing, comprehensive regulatory framework for the offer and sale of the Transactions established by FERC or PUCT; and (b) the Transactions administered by the RTOs/ISOs or ERCOT are part of, and inextricably linked to, the organized wholesale electricity markets that are subject to FERC and PUCT regulation and oversight.82 For example, Petitioners explain that FERC Order No. 2000 (which, along with FERC Order No. 888, encouraged the formation of RTOs/ISOs to operate the electronic transmission grid and to create organized wholesale electric markets) requires an RTO/ISO to demonstrate that it has four minimum characteristics: (1) Independence from any market participant; (2) a scope and regional configuration which enables the ISO/RTO to maintain reliability and effectively perform its required functions; (3) operational authority for its activities, including being the security coordinator for the facilities that it controls; and (4) short-term reliability.83 Petitioners highlight that an RTO/ISO must demonstrate to FERC that it performs certain self-regulatory and/or market monitoring functions,84 and the Petition describes the analogous requirements applicable to ERCOT under PUCT and the PURA.85

81 SeePetition at 11.

82 See id.

83 See id.at 13.

84 See id.at 13-14 (explaining that each RTO/ISO must employ a transmission pricing system that promotes efficient use and expansion of transmission and generation facilities; develop and implement procedures to address parallel path flow issues within its region and with other regions; serve as a provider of last resort of all ancillary services required by FERC Order No. 888 including ensuring that its transmission customers have access to a real-time balancing market; be the single OASIS (Open-Access Same-Time Information System) site administrator for all transmission facilities under its control and independently calculate Total Transmission Capacity and Available Transmission Capability; provide reliable, efficient and not unduly discriminatory transmission service, it must provide for objective monitoring of markets it operates or administers to identify market design flaws, market power abuses and opportunities for efficiency improvements; be responsible for planning, and for directing or arranging, necessary transmission expansions, additions, and upgrades; and ensure the integration of reliability practices within an interconnection and market interface practices among regions).

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

Of single importance, Petitioners are responsible for “ensur[ing] the development and operation of market mechanisms to manage transmission congestion. * * * The market mechanisms must accommodate broad participation by all market participants, and must provide all transmission customers with efficient price signals that show the consequences of their transmission usage decisions.”86

86 SeePetition at 14.See also18 CFR 35.34(k)(2).

Petitioners also explain that the Transactions are primarily entered into by commercial participants that are in the business of generating, transmitting, and distributing electricity,87 and that Petitioners were established for the purpose of providing affordable, reliable electricity to consumers within their geographic region.88 Furthermore, the Transactions that take place on Petitioners' markets are overseen by a market monitoring function, required by FERC for each Petitioner, and by PUCT in the case of ERCOT, to identify manipulation of electricity on Petitioners' markets.89

87 See generallyPetition at 20.

88 See id.at 3-4.

89 See id.at 15-18.

Fundamental to the Commission's “public interest” and “purposes of the [Act]” analysis is the fact that the Transactions are inextricably tied to the Petitioners' physical delivery of electricity, as represented in the Petition.90 An equally important factor is that the Proposed Exemption is explicitly limited to Transactions taking place on markets that are monitored by either an independent market monitor, a market administrator (the RTO/ISO, or ERCOT), or both, and a government regulator (FERC or PUCT). In contrast, an exemption for financial transactions that are not so monitored, or not related to the physical capacity of an electric transmission grid, or not directly linked to the physical generation and transmission of electricity, or not limited to appropriate persons,91 is unlikely to be in the public interest or consistent with the purposes of the CEA and would not be subject to this exemption.

90 See id.at 6-9 (describing the Transactions and noting that each of them “is part of, and inextricably linked to, the organized wholesale electricity markets that are subject to FERC and PUCT regulation and oversight”).

91 Seeappropriate persons discussion, below, section V.B.3.

Finally, and as discussed in detail below, the extent to which the Proposed Exemption is consistent with the public interest and the purposes of the Act can, in major part, be measured by the extent to which the tariffs and activities of the Petitioners, and supervision by FERC and PUCT, are congruent with, and sufficiently accomplish, the regulatory objectives of the relevant core principles set forth in the CEA for derivatives clearing organizations (“DCOs”) and swap execution facilities (“SEFs”). Specifically, providing a means for managing or assuming price risk and discovering prices, as well as prevention of price manipulation and other disruptions to market integrity, are addressed by the core principles for SEFs. Ensuring the financial integrity of the transactions and the avoidance of systemic risk, as well as protection from the misuse of participant assets, are addressed by the core principles for DCOs. Deterrence of price manipulation (or other disruptions to market integrity) and protection of market participants from fraudulent sales practices is achieved by the Commission retaining and exercising its jurisdiction over these matters. Therefore, the Commission has incorporated its DCO/SEF core principle analysis, set forth below, into its consideration of the ProposedExemption's consistency with the public interest and the purposes of the Act. In the same way, the Commission has considered how the public interest and the purposes of the CEA are also addressed by the manner in which Petitioners comply with FERC's Credit Reform Policy.92

92 SeeFERC Credit Reform Policy discussion, below, at section V.C.

Based on this review, the Commission proposes to determine that the Proposed Exemption is consistent with the public interest and the purposes of the CEA, and the Commission is specifically requesting comment on whether the Proposed Exemption is consistent with the public interest and the purposes of the Act.

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

CEA section 4(c)(2)(A) requires, in part, that the Commission determine that the Transactions covered under the Proposed Exemption should not be subject to CEA section 4(a)—generally, the Commission's exchange trading requirement for a contract for the purchase or sale of a commodity for futu