Vol. 78 Tuesday, 

No. 63 April 2, 2013 

Part III 

Commodity Futures Trading Commission 

Final Order in Response to a Petition From Certain Independent System 

Operators and Regional Transmission Organizations to Exempt Specified 

Transactions Authorized by a Tariff or Protocol Approved by the Federal 

Energy Regulatory Commission or the Public Utility Commission of Texas 

From Certain Provisions of the Commodity Exchange Act Pursuant to the 

Authority Provided in the Act; Notice 


tkelley on DSK3SPTVN1PROD with NOTICES2
19880 Federal Register / Vol. 78, No. 63 / Tuesday, April 2, 2013 / Notices 

1 In the Matter of the Petition for an Exemptive 

Order Under Section 4(c) of the Commodity 

Exchange Act by California Independent Service 

Operator Corporation; In the Matter of the Petition 

for an Exemptive Order Under Section 4(c) of the 

Commodity Exchange Act by the Electric Reliability 

Council of Texas, Inc.; In the Matter of the Petition 

for an Exemptive Order Under Section 4(c) of the 

Commodity Exchange Act by ISO New England 

Inc.; In the Matter of the Petition for an Exemptive 

Order Under Section 4(c) of the Commodity 

Exchange Act by Midwest Independent 

Transmission System Operator, Inc.; In the Matter 

of the Petition for an Exemptive Order Under 

Section 4(c) of the Commodity Exchange Act by 

New York Independent System Operator, Inc.; and 

In the Matter of the Petition for an Exemptive Order 

Under Section 4(c) of the Commodity Exchange Act 

by PJM Interconnection, L.L.C. (Feb. 7, 2012, as 

amended June 11, 2012). 

2 7 U.S.C. 1 et seq. 

3 7 U.S.C. 6(c)(3)(A)–(J). 

4 7 U.S.C. 1a(18). ‘‘Further Definition of ‘Swap 

Dealer,’ ‘Security-Based Swap Dealer,’ ‘Major Swap 

Participant,’ ‘Major Security-Based Swap 

Participant,’ and ‘Eligible Contract Participant,’ ’’ 77 

FR 30596, May 23, 2012. 

5 7 U.S.C. 6(c)(6). 

COMMODITY FUTURES TRADING 

COMMISSION 

RIN 3038–AE02 

Final Order in Response to a Petition 

From Certain Independent System 

Operators and Regional Transmission 

Organizations To Exempt Specified 

Transactions Authorized by a Tariff or 

Protocol Approved by the Federal 

Energy Regulatory Commission or the 

Public Utility Commission of Texas 

From Certain Provisions of the 

Commodity Exchange Act Pursuant to 

the Authority Provided in the Act 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final order. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is issuing a final order 

(‘‘Final Order’’) in response to a 

consolidated petition (‘‘Petition’’) 1 from 

certain regional transmission 

organizations (‘‘RTOs’’) and 

independent system operators (‘‘ISOs’’) 

(collectively, ‘‘Requesting Parties’’) to 

exempt specified transactions (‘‘Covered 

Transactions’’) from the provisions of 

the Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’),2 and Commission regulations. 

The Final Order exempts contracts, 

agreements, and transactions for the 

purchase or sale of the limited electric 

energy-related products that are 

specifically described within the Final 

Order from the provisions of the CEA 

and Commission regulations, with the 

exception of the Commission’s general 

anti-fraud and anti-manipulation 

authority, and scienter-based 

prohibitions, under CEA sections 

2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 

4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, 

and 13 of the Act and any implementing 

regulations promulgated under these 

sections including, but not limited to 

Commission regulations 23.410(a) and 

(b), 32.4, and part 180. To be eligible for 

the exemption contained in the Final 

Order, the contract, agreement, or 

transaction must be offered or entered 

into in a market administered by a 

Requesting Party pursuant to that 

Requesting Party’s tariff, rate schedule, 

or protocol (collectively, ‘‘Tariff’’), and 

the relevant Tariff must have been 

approved or permitted to have taken 

effect by either the Federal Energy 

Regulatory Commission (‘‘FERC’’) or the 

Public Utility Commission of Texas 

(‘‘PUCT’’), as applicable. In addition, 

the contract, agreement, or transaction 

must be entered into by persons who are 

‘‘appropriate persons,’’ as defined in 

sections 4(c)(3)(A) through (J) of the 

Act,3 ‘‘eligible contract participants,’’ as 

defined in section 1a(18) of the Act and 

Commission regulations,4 or persons 

who are in the business of: (i) 

Generating, transmitting, or distributing 

electric energy, or (ii) providing electric 

energy services that are necessary to 

support the reliable operation of the 

transmission system. The Final Order 

also extends to any person or class of 

persons offering, entering into, 

rendering advice, or rendering other 

services with respect to the Covered 

Transactions. Finally, the Final Order is 

subject to other conditions set forth 

therein. Authority for issuing the 

exemption is found in section 4(c)(6) of 

the Act.5

A copy of the Petition is available on 

the Commission’s Web site at http:// 

www.cftc.gov/stellent/groups/public/ 

@requestsandactions/documents/ifdocs/ 

iso-rto4capplication.pdf; the 

attachments to the Petition are posted at 

http://www.cftc.gov/stellent/groups/ 

public/@requestsandactions/ 

documents/ifdocs/isorto4cappattach.pdf. A chart submitted 

by the Requesting Parties that sets forth 

the status of their respective 

implementation of the standards set 

forth in FERC Order No. 741 (‘‘FERC 

Order No. 741 Implementation Chart’’) 

is posted at http://www.cftc.gov/stellent/ 

groups/public/@requestsandactions/ 

documents/ifdocs/isorto4cappfercchart.pdf, and a revised 

version of the chart (‘‘Revised FERC 

Order No. 741 Implementation Chart’’) 

is posted at http://www.cftc.gov/stellent/ 

groups/public/@rulesandproducts/ 

documents/ifdocs/rtoisoltr011813.pdf. 

A copy of the ‘‘Notice of Proposed Order 

and Request for Comment on a Petition 

from Certain Independent System 

Operators and Regional Transmission 

Organizations to Exempt Specified 

Transactions Authorized by a Tariff or 

Protocol Approved by the Federal 

Energy Commission or the Public Utility 

Commission of Texas From Certain 

Provisions of the Commodity Exchange 

Act Pursuant to the Authority Provided 

in Section 4(c)(6) of the Act’’ (‘‘Proposed 

Order’’) is available at 77 FR 52138, 

Aug. 28, 2012, and on the Commission’s 

Web site at http://www.cftc.gov/ucm/ 

groups/public/@lrfederalregister/ 

documents/file/2012-20965a.pdf. A 

copy of the comment file is also 

available on the Commission’s Web site 

at http://comments.cftc.gov/ 

PublicComments/ 

CommentList.aspx?id=1265. 

DATES: Effective date: April 2, 2013. 

FOR FURTHER INFORMATION CONTACT: 

Robert B. Wasserman, Chief Counsel, 

202–418–5092, rwasserman@cftc.gov, 

Laura Astrada, Associate Chief Counsel, 

202–418–7622, lastrada@cftc.gov, Nadia 

Zakir, Associate Director, 202–418– 

5720, nzakir@cftc.gov, Jocelyn Partridge, 

Special Counsel, 202–418–5926, 

jpartridge@cftc.gov, or Kirsten Robbins, 

Attorney-Advisor, 202–418–5313, 

krobbins@cftc.gov, Division of Clearing 

and Risk; David P. Van Wagner, Chief 

Counsel, 202–418–5481, 

dvanwagner@cftc.gov, or W. Graham 

McCall, Attorney-Advisor, 202–418– 

6150, gmccall@cftc.gov, Division of 

Market Oversight; Mark Higgins, 

Counsel, 202–418–5864, 

mhiggins@cftc.gov, or Thuy Dinh, 

Counsel, 202–418–5128, tdinh@cftc.gov, 

Office of the General Counsel; or Robert 

Pease, 202–418–5863, rpease@cftc.gov, 

Division of Enforcement in each case at 

the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1151 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Relevant Dodd-Frank Provisions 

II. Background—Proposed Order 

A. The Petition 

B. The Proposal 

1. Transactions Proposed To Be Exempted 

2. Conditions to the Proposed Order 

3. Additional Limitations 

III. Summary of the Comments 

IV. Determinations 

A. Scope of the Final Order 

1. Covered Transactions Subject to the 

Final Order 

2. Additional Definitions and Provisions in 

the Final Order 

3. Conditions to the Final Order 

B. Section 4(c) Analysis 

1. Overview of CEA Section 4(c) 

2. CEA Section 4(c) Determinations 

C. Issuance of a Separate or a Collective 

Order 


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6See Dodd-Frank Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ucm/ 

groups/public/@swaps/documents/file/ 

hr4173_enrolledbill.htm. 

7 7 U.S.C. 1 et seq. 

8Section 722(e) of the Dodd-Frank Act. 

9See 7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also 

added section 2(h)(1)(A), which requires swaps to 

be cleared if required to be cleared and not subject 

to a clearing exception or exemption. See 7 U.S.C. 

2(h)(1)(A). 

10 7 U.S.C. 2(a)(1)(A). 

11See 7 U.S.C. 2(a)(1)(I). 

12See 7 U.S.C. 2(a)(1)(I)(i) and (ii). 

13 7 U.S.C. 2(a)(1)(I)(i)(II). The savings clause in 

CEA section 2(a)(1)(I) provides that: 

(I)(i) Nothing in this Act shall limit or affect any 

statutory authority of the Federal Energy Regulatory 

Commission or a State regulatory authority (as 

defined in section 3(21) of the Federal Power Act 

(16 U.S.C. 796(21)) with respect to an agreement, 

contract, or transaction that is entered into pursuant 

to a tariff or rate schedule approved by the Federal 

Energy Regulatory Commission or a State regulatory 

authority and is— 

(I) not executed, traded, or cleared on a registered 

entity or trading facility; or 

(II) executed, traded, or cleared on a registered 

entity or trading facility owned or operated by a 

regional transmission organization or independent 

system operator. 

(ii) In addition to the authority of the Federal 

Energy Regulatory Commission or a State regulatory 

authority described in clause (i), nothing in this 

subparagraph shall limit or affect— 

(I) any statutory authority of the Commission 

with respect to an agreement, contract, or 

transaction described in clause (i); or 

(II) the jurisdiction of the Commission under 

subparagraph (A) with respect to an agreement, 

contract, or transaction that is executed, traded, or 

cleared on a registered entity or trading facility that 

is not owned or operated by a regional transmission 

organization or independent system operator (as 

defined by sections 3(27) and (28) of the Federal 

Power Act (16 U.S.C. 796(27), 796(28)). 

In addition, Dodd-Frank Act section 722(g) (not 

codified in the United States Code) expressly states 

that FERC’s pre-existing statutory enforcement 

authority is not limited or affected by amendments 

to the CEA. Section 722(g) states: 

(g) AUTHORITY OF FERC.—Nothing in the Wall 

Street Transparency and Accountability Act of 2010 

or the amendments to the Commodity Exchange Act 

made by such Act shall limit or affect any statutory 

enforcement authority of the Federal Energy 

Regulatory Commission pursuant to section 222 of 

the Federal Power Act and section 4A of the Natural 

Gas Act that existed prior to the date of enactment 

of the Wall Street Transparency and Accountability 

Act of 2010. 

14The 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)). 

15Section 4(c) was added to the CEA by the 

Futures Trading Practices Act of 1992, Pub. L. 102– 

564. The Commission’s authority under section 4(c) 

was explained by the Conferees: 

In granting exemptive authority to the 

Commission under new section 4(c), the Conferees 

recognize the need to create legal certainty for a 

number of existing categories of instruments which 

trade today outside of the forum of a designated 

contract market. 

The provision included in the Conference 

substitute is designed to give the Commission broad 

flexibility in addressing these products 

***** 

In this respect, the Conferees expect and strongly 

encourage the Commission to use its new 

exemptive power promptly upon enactment of this 

legislation in four areas where significant concerns 

of legal uncertainty have arisen: (1) Hybrids, (2) 

swaps, (3) forwards, and (4) bank deposits and 

accounts. 

The Commission is not required to ascertain 

whether a particular transaction would fall within 

its jurisdiction prior to exercising its exemptive 

authority under section 4(c). The Conferees stated 

that they did: 

not intend that the exercise of exemptive 

authority by the Commission would require any 

determination beforehand that the agreement, 

instrument, or transaction for which an exemption 

Continued 

D. Additional Limitations 

E. Effectiveness of the Exemption 

V. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost-Benefit Considerations 

1. Background 

2. The Statutory Mandate To Consider the 

Costs and Benefits of the Commission’s 

Action: Section 15(a) of the CEA 

3. Proposed Order and Request for 

Comment on the Commission’s Proposed 

Consideration of Costs and Benefits 

4. Summary of Comments on the Costs and 

Benefits of the Proposed Order 

5. Summary of the Final Order— 

Determinations and Conditions 

6. Costs of the Final Order 

7. Benefits 

8. Consideration of Alternatives 

9. Consideration of CEA Section 15(a) 

Factors 

VI. Order 

I. Relevant Dodd-Frank Provisions 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).6 Title VII of the 

Dodd-Frank Act amended the CEA 7 and 

altered the scope of the Commission’s 

exclusive jurisdiction.8 In particular, it 

expanded the Commission’s exclusive 

jurisdiction, which had included futures 

traded, executed and cleared on CFTCregulated exchanges and clearinghouses, 

to also cover swaps traded, executed, or 

cleared on CFTC-regulated exchanges or 

clearinghouses.9 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: 

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 * * *.10

The Dodd-Frank Act also added a 

savings clause that addresses the roles 

of the Commission, FERC, and state 

agencies as they relate to certain 

agreements, contracts, or transactions 

traded pursuant to the tariff or rate 

schedule of an RTO or ISO.11 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 FERCor state-approved tariff or rate 

schedules.12 The same paragraph (I) also 

explains that the FERC and state 

agencies preserve their existing 

authorities over agreements, contracts, 

or transactions ‘‘entered into pursuant 

to a tariff or rate schedule approved by 

[FERC] or a State regulatory agency,’’ 

that are: ‘‘(I) not executed, traded, or 

cleared on’’ an entity or trading facility 

subject to registration or ‘‘(II) executed, 

traded, or cleared on a registered entity 

or trading facility owned or operated by 

a[n RTO] or [ISO].’’ 13

The Dodd-Frank Act granted the 

Commission specific powers to exempt 

certain contracts, agreements, or 

transactions from duties otherwise 

required by statute or Commission 

regulation by adding new sections to the 

CEA, sections 4(c)(6)(A) and (B). 

Specifically, sections 4(c)(6)(A) and (B) 

provide for exemptions for certain 

transactions entered into (a) pursuant to 

a tariff or rate schedule approved or 

permitted to take effect by FERC, or (b) 

pursuant to a tariff or rate schedule 

establishing rates or charges for, or 

protocols governing, the sale of electric 

energy approved or permitted to take 

effect by the regulatory authority of the 

State or municipality having 

jurisdiction to regulate rates and charges 

for the sale of electric energy within the 

State or municipality.14

The Commission must act ‘‘in 

accordance with’’ sections 4(c)(1) and 

(2) of the CEA, when issuing an 

exemption under section 4(c)(6).15


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19882 Federal Register / Vol. 78, No. 63 / Tuesday, April 2, 2013 / Notices 

is sought is subject to the Act. Rather, this provision 

provides flexibility for the Commission to provide 

legal certainty to novel instruments where the 

determination as to jurisdiction is not 

straightforward * * * 

H.R. Rep. No. 102–978, 102d Cong. 2d Sess. at 

82–83 (1992). 

16 7 U.S.C. 6(c)(1). 

17 7 U.S.C. 6(c)(2). 

18Section 4(c)(3) of the CEA further outlines who 

may constitute an appropriate person for the 

purpose of a particular 4(c) exemption and 

includes, as relevant to this Final Order: 

(a) Any person that qualifies for one of ten 

defined categories of appropriate persons; or 

(b) such other persons that the Commission 

determines to be appropriate in light of their 

financial or other qualifications, or the applicability 

of appropriate regulatory protections. 

19 7 U.S.C. 6(c)(2). 

20H.R. Rep. No. 102–978, 102d Cong. 2d Sess. at 

82–83 (1992). 

21 In the preamble to the Proposed Order, the 

Requesting Parties were also referred to as 

‘‘Petitioners.’’ For consistency with the Final Order, 

the term ‘‘Requesting Parties’’ is used throughout 

the preamble to the Final Order. 

22Requesting Parties submitted an amended 

Petition on June 11, 2012. Citations herein to 

‘‘Petition’’ are to the amended Petition. 

23 7 U.S.C. 6(c)(6). 

24See section 712(f) of the Dodd-Frank Act. 

25 In the Proposed Order, ‘‘electric energy’’ was 

also referred to as ‘‘electricity’’ and ‘‘electric 

power.’’ For the sake of consistency in the Final 

Order, the term ‘‘electric energy’’ is used 

throughout the Final Order. 

26 ‘‘Tariff’’ collectively refers to a tariff, rate 

schedule, or protocol, to account for differences in 

terminology used by the Requesting Parties and 

their respective regulators. 

27See 77 FR 52139. See also Petition at 2–3, 6. 

28See 77 FR 52139. See also Petition at 2–4; 16 

Tex. Admin. Code (‘‘TAC’’) 25.1 (1998). 

29See 77 FR 52139. See also Petition at 2 n.2. 

30See 77 FR 52139. See also FERC Order No. 888 

Promoting Wholesale Competition Through Open 

Access Non-Discriminatory Transmission Facilities 

(‘‘FERC Order No. 888’’), 61 FR 21540, April 24, 

1996. 

31See 77 FR 52139. See also Petition at 3. 

32See 77 FR 52139. See also Petition at 2–3. 

33See 77 FR 52139. See also Petition at 11. 

34See 77 FR 52139. See also Petition at 3. 

35See discussion in section IV.D. infra. 

36See 77 FR 52139. See also Petition at 6. 

37See id. 

38 77 FR 52138. 

39 In the preamble to the Proposed Order, the term 

‘‘Transactions’’ was used to collectively refer to the 

transactions covered by the Proposed Order. For 

clarity, the term ‘‘Covered Transactions’’ is used 

throughout the preamble to the Final Order to refer 

collectively to the transactions covered by the Final 

Order. 

Section 4(c)(1) of the CEA grants the 

Commission the authority to exempt 

any transaction or class of transactions, 

including swaps, from certain 

provisions of the CEA, in order to 

‘‘promote responsible economic or 

financial innovation and fair 

competition.’’ 16 Section 4(c)(2) 17 of the 

Act further provides that the 

Commission may not grant exemptive 

relief unless it determines that: (1) The 

exemption would be consistent with the 

public interest and the purposes of the 

CEA; (2) the transaction will be entered 

into solely between ‘‘appropriate 

persons;’’ 18 and (3) the exemption will 

not have a material adverse effect on the 

ability of the Commission or any 

contract market to discharge its 

regulatory or self-regulatory 

responsibilities under the CEA.19 In 

enacting section 4(c), Congress noted 

that the purpose of the provision is to 

give the Commission a means of 

providing certainty and stability to 

existing and emerging markets so that 

financial innovation and market 

development can proceed in an effective 

and competitive manner.20

II. Background 

A. The Petition 

On February 7, 2012, the Requesting 

Parties 21 filed a joint Petition 22 with 

the Commission requesting that the 

Commission exercise its authority under 

section 4(c)(6) of the CEA 23 and section 

712(f) of the Dodd-Frank Act 24 to 

exempt certain contracts, agreements 

and transactions for the purchase or sale 

of specified electric energy 25 products, 

that are offered pursuant to a FERC- or 

PUCT-approved Tariff,26 from most 

provisions of the Act.27 The Requesting 

Parties include three RTOs (Midwest 

Independent Transmission System 

Operator, Inc. (‘‘MISO’’); ISO New 

England, Inc. (‘‘ISO NE’’); and PJM 

Interconnection, L.L.C. (‘‘PJM’’)), and 

two ISOs (California Independent 

System Operator Corporation (‘‘CAISO’’) 

and New York Independent System 

Operator, Inc. (‘‘NYISO’’)), whose 

central role as transmission utilities is 

subject to regulation by FERC. The 

Requesting Parties also include the 

Electric Reliability Council of Texas, 

Inc. (‘‘ERCOT’’), an entity that performs 

the role of an ISO, but whose central 

role as a transmission utility in the 

electric energy market is subject to 

regulation by PUCT, the authority with 

jurisdiction to regulate rates and charges 

for the sale of electric energy within the 

state of Texas.28 The Requesting Parties 

represented that the roles, 

responsibilities and services of ISOs and 

RTOs are substantially similar.29 As 

described in the Proposed Order, the 

Requesting Parties represented that 

FERC encouraged the formation of ISOs 

to consolidate and manage the operation 

of electric energy transmission facilities 

in order to provide open, nondiscriminatory transmission service for 

generators and transmission 

customers.30 The Requesting Parties 

also represented that FERC encouraged 

the formation of RTOs to administer the 

transmission grid on a regional basis.31

The Requesting Parties specifically 

petitioned the Commission to exempt 

from most provisions of the CEA certain 

‘‘financial transmission rights,’’ ‘‘energy 

transactions,’’ ‘‘forward capacity 

transactions,’’ and ‘‘reserve or regulation 

transactions,’’ as defined in the Petition, 

if such transactions are offered or 

entered into pursuant to a Tariff under 

which a Requesting Party operates that 

has been approved by FERC or PUCT, as 

applicable, as well as any persons 

(including the Requesting Parties, their 

members and their market participants) 

offering, entering into, rendering advice, 

or rendering other services with respect 

to such transactions.32 The Requesting 

Parties asserted that each of the 

transactions for which an exemption 

was requested is (a) subject to a longstanding, comprehensive regulatory 

framework for the offer and sale of such 

transactions established by FERC, or in 

the case of ERCOT, PUCT, and (b) part 

of, and inextricably linked to, the 

organized wholesale electric energy 

markets that are subject to the regulation 

and oversight of FERC or PUCT, as 

applicable.33 The Requesting Parties 

expressly excluded from the Petition a 

request for relief from sections 4b, 4o, 

6(c), and 9(a)(2) of the Act,34 and such 

provisions explicitly have been carved 

out of the exemption set forth in the 

Final Order.35 The Requesting Parties 

asked that, due to the commonalities in 

the Requesting Parties’ markets, the 

exemption apply to all Requesting 

Parties and their respective market 

participants with respect to each 

category of electric energy-related 

transactions described in the Petition, 

regardless of whether such transactions 

are offered or entered into at the current 

time pursuant to an individual 

Requesting Party’s Tariff.36 The 

Requesting Parties asserted that this 

uniformity would avoid an individual 

Requesting Party being required to seek 

future amendments to the exemption in 

order to offer or enter into the same type 

of transactions currently offered by 

another Requesting Party.37

B. The Proposal 

On August 28, 2012, the Commission 

issued the Proposed Order.38

1. Transactions Proposed to Be 

Exempted 

The Commission proposed to exempt 

the purchase and sale of four types of 

transactions 39 defined within the 

Proposed Order: (1) Financial 

Transmission Rights (‘‘FTRs’’), (2) 

Energy Transactions, (3) Forward 

Capacity Transactions, and (4) Reserve 


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40 Id. at 52141, 52166–67. 

41 Id. at 52166. The proposed definition of FTRs 

included such rights ‘‘in the form of options (i.e., 

where one party has only the obligation to pay, and 

the other party only the right to receive, an amount 

as described above).’’ Id. 

42 Id. at 52166. See also id. at 52141. 

43 ‘‘‘Day-Ahead Market’ ’’ was defined in the 

Proposed Order as ‘‘an electricity market 

administered by a Requesting Party on which the 

price of electricity at a specified location is 

determined, in accordance with the Requesting 

Party’s Tariff, for specified time periods, none of 

which is later than the second operating day 

following the day on which the Day-Ahead Market 

clears.’’ Id. at 52167. 

44 ‘‘‘Real-Time Market’ ’’ was defined in the 

Proposed Order as ‘‘an electricity market 

administered by a Requesting Party on which the 

price of electricity at a specified location is 

determined, in accordance with the Requesting 

Party’s Tariff, for specified time periods within the 

same 24-hour period.’’ Id. 

45 ‘‘ ‘Demand Response’ ’’ was defined in the 

Proposed Order as ‘‘the right of a Requesting Party 

to require that certain sellers of such rights curtail 

their consumption of electric energy from the 

electric power transmission system operated by a 

Requesting Party during a future period of time as 

specified in the Requesting Party’s Tariff.’’ Id. The 

definition of Demand Response, as adopted in this 

Order, should be read to be consistent with FERC’s 

definition of demand response, and thus any 

demand response rights recognized under this 

Order must comport with the definition provided 

by FERC. See 18 CFR 35.28(b)(4) (2012) (providing 

that demand response means a reduction in the 

consumption of electric energy by customers from 

their expected consumption in response to an 

increase in the price of electric energy or to 

incentive payments designed to induce lower 

consumption of electric energy). 

46See id. at 52141–42, 52166–67. For purposes of 

the Final Order, the Commission is clarifying that 

Energy Transactions include virtual and 

convergence bids and offers, as they are methods of 

conducting such Energy Transactions. See section 

IV.A.1.c. infra. 

47See 77 FR 52167. See also id. at 52142; Petition 

at 7. 

48See 77 FR at 52167. 

49See id. 

50See id. See also id. at 52145. 

51See id. at 52143. 

52For those ECPs engaging in the transactions 

delineated in the Proposed Order in markets 

administered by a Requesting Party that do not fit 

within the categories of ‘‘appropriate persons’’ set 

forth in sections 4(c)(3)(A) through (J), the 

Commission proposed to determine that they are 

appropriate persons pursuant to section 4(c)(3)(K), 

‘‘in light of their financial or other qualifications, 

or the applicability of appropriate regulatory 

protections.’’ The Commission also noted that CEA 

section 2(e) permits all ECPs to engage in swaps 

transactions other than on a designated contract 

market (‘‘DCM’’) and that such entities should 

similarly be appropriate persons for the purpose of 

the Proposed Order. See id. at 52145–46. 

or Regulation Transactions, pursuant to 

section 4(c)(6) of the CEA.40

An ‘‘FTR’’ was proposed to be defined 

as ‘‘a transaction, however named, that 

entitles one party to receive, and 

obligates another party to pay, an 

amount based solely on the difference 

between the price for electricity, 

established on an electricity market 

administered by a Requesting Party at a 

specified source (i.e., where electricity 

is deemed injected into the grid of a 

Requesting Party) and a specified sink 

(i.e., where electricity is deemed 

withdrawn from the grid of a Requesting 

Party).’’ 41 As set forth in the Proposed 

Order, FTRs would be exempt only 

where each FTR is linked to, and the 

aggregate volume of FTRs for any period 

of time is limited by, the physical 

capability (after accounting for 

counterflow) of the electric energy 

transmission system operated by the 

Requesting Party offering the contract 

for such period; a Requesting Party 

serves as the market administrator for 

the market on which the FTR is 

transacted; each party to the FTR is a 

member of a particular Requesting Party 

(or is the Requesting Party itself); the 

FTR is executed on a market 

administered by that Requesting Party; 

and the FTR does not require any party 

to make or take physical delivery of 

electric energy.42

‘‘Energy Transactions’’ were proposed 

to be defined as transactions in a ‘‘DayAhead Market’’ 43 or ‘‘Real-Time 

Market’’ (‘‘RTM’’) 44 as those terms were 

defined in the Proposed Order, for the 

purchase or sale of a specified quantity 

of electric energy at a specified location, 

including ‘‘Demand Response,’’ 45 as 

defined in the Proposed Order, where: 

(1) The price of electric energy is 

established at the time the Energy 

Transaction is executed; 46 (2) 

performance occurs in the RTM by 

either the physical delivery or receipt of 

the specified electric energy or a cash 

payment or receipt at the price 

established in the RTM; and (3) the 

aggregate cleared volume of both 

physical and cash-settled Energy 

Transactions for any period of time is 

limited by the physical capability of the 

electric energy transmission system 

operated by a Requesting Party for that 

period of time.47

‘‘Forward Capacity Transactions’’ 

were proposed to include transactions 

in which a Requesting Party, for the 

benefit of load-serving entities (‘‘LSEs’’) 

purchases the rights described in the 

Proposed Order.48 The Commission 

proposed to limit eligibility of Forward 

Capacity Transactions for the exemption 

by requiring that the aggregate cleared 

volume of all such transactions for any 

period of time must be limited to the 

physical capability of the electric energy 

transmission system operated by the 

applicable Requesting Party for that 

period of time.49

‘‘Reserve Regulation Transactions’’ 

were defined in the Proposed Order as 

transactions: 

(1) In which a Requesting Party, for the 

benefit of [LSEs] and resources, purchases, 

through auction, the right, during a period of 

time specified in the Requesting Party’s 

Tariff, to require the seller to operate electric 

facilities in a physical state such that the 

facilities can increase or decrease the rate of 

injection or withdrawal of electricity to the 

electric power transmission system operated 

by the Requesting Party with: 

(a) Physical performance by the seller’s 

facilities within a response interval specified 

in the Requesting Party’s Tariff (Reserve 

Transaction); or 

(b) Prompt physical performance by the 

seller’s facilities (Area Control Error 

Regulation Transaction); 

(2) For which the seller receives, in 

consideration, one or more of the following: 

(a) Payment at the price established in the 

Requesting Party’s Day-Ahead or Real-Time 

Market, as those terms are defined in the 

Proposed Order, price for electricity 

applicable whenever the Requesting Party 

exercises its right that electric energy be 

delivered (including Demand Response, as 

defined [in the Proposed] Order); 

(b) Compensation for the opportunity cost 

of not supplying or consuming electricity or 

other services during any period during 

which the Requesting Party requires that the 

seller not supply energy or other services; 

(c) An upfront payment determined 

through the auction administered by the 

Requesting Party for this service; 

(d) An additional amount indexed to the 

frequency, duration, or other attributes of 

physical performance as specified in the 

Requesting Party’s Tariff; and 

(3) In which the value, quantity and 

specifications for such Transactions for a 

Requesting Party for any period of time are 

limited by the physical capability of the 

electric transmission system operated by 

Requesting Parties.50

Finally, in the Proposed Order, the 

Commission clarified that financial 

transactions that are not tied to the 

allocation of the physical capabilities of 

an electric energy transmission grid 

would not be suitable for exemption, 

and were therefore not covered by the 

Proposed Order, because such activity 

would not be inextricably linked to the 

physical delivery of electric energy.51

The Commission proposed to limit 

the exemption to the transactions 

described in the Proposed Order in 

which all parties thereto fall within one 

of the appropriate persons categories in 

CEA sections 4(c)(3)(A) through (J), or, 

pursuant to CEA section 4(c)(3)(K), that 

otherwise qualify as an eligible contract 

participant (‘‘ECP’’), as such term is 

defined in section 1a(18)(A) of the Act 

and in Commission regulation 1.3(m).52

The Proposed Order also required that 

the delineated ‘‘Transactions be offered 

or sold pursuant to a Requesting Party’s 

Tariff, which has been approved or 

permitted to take effect by: (1) In the 

case of ERCOT, the PUCT or (2) In the 


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53See id. 

54 18 CFR 35.47. See detailed discussion in 

section IV.3.a.i. infra regarding the requirements set 

forth in FERC regulation 35.47. 

55See 77 FR 52164. 

56See 11 U.S.C. 553. 

57See 77 FR 52165. 

58See id. at 52142. 

59See id. When the Proposed Order was 

published, the Commission and FERC had already 

entered into a Memorandum of Understanding, 

available at http://www.ferc.gov/legal/maj-ord-reg/ 

mou/mou-33.pdf. 

60See id. at 52167. See also id. at 52142, 52165. 

61See id. at 52142. See also Petition at 20. 

62See 77 FR 52142. 

63See id. See also generally FERC Order No. 888; 

FERC Order No. 2000; 18 CFR 35.34(k)(2); TAC 

25.1; Petition at 11, 13–14. 

64See 77 FR 52142. See also Petition at 15–18. 

65See 77 FR 52142. 

66See id. at 52167. See also id. at 52142. 

67See id. at 52167–68. See also id. at 52142; 

Petition at 15–18. 68See 77 FR at 52166. See also id. at 52163. 69All comment letters are available through the 

Commission’s Web site at: http:// 

comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=1265. Comments addressing 

the Proposed Order were received from: AB Energy; 

American Public Power Association (‘‘APPA’’); 

Coalition of Physical Energy Companies (‘‘COPE’’); 

The Commercial Energy Working Group 

(‘‘Commercial Working Group’’); DC Energy, LLC 

(‘‘DC Energy’’); Staff of the Federal Energy 

Regulatory Commission (‘‘FERC Staff’’); Financial 

Institutions Energy Group (‘‘FIEG’’); Financial 

Marketers Coalition; the Industrial Coalitions 

(collectively referring to PJM Industrial Customer 

Coalition, NEPOOL Industrial Customer Coalition, 

and Coalition of Midwest Transmission Customers); 

Joint Trade Associations (collectively referring to 

Electric Power Supply Association, Edison Electric 

Institute; National Rural Electric Cooperative 

Association, APPA, and Large Public Power 

Council); New England Power Pool Participants 

Committee (‘‘NEPOOL’’); New York Public Service 

Commission (‘‘NYPSC’’); New York Transmission 

Owners (‘‘NYTOs’’) (collectively referring to Central 

Hudson Gas & Electric Corporation, Consolidated 

Edison Company of New York, Inc., Long Island 

Power Authority, New York Power Authority, New 

York State Electric & Gas Corporation, Niagara 

Mohawk Power Corporation d/b/a National Grid, 

Orange and Rockland Utilities, Inc., and Rochester 

and Electric Corporation); PUCT; Tarachand 

Enterprises, Inc. (‘‘Tarachand’’); and Texas Energy 

Association and Alliance for Retail Markets 

(collectively, ‘‘TEAM/ARM’’). The Requesting 

Parties jointly submitted a comment letter, which 

contained a supplement pertaining solely to NYISO 

(‘‘NYISO Supplement to Requesting Parties’ 

Comment Letter, Attachment B’’). In addition, 

CAISO and ISO NE jointly submitted two 

supplemental comment letters (‘‘CAISO/ISO NE 

January’’ and ‘‘CAISO/ISO NE March’’), NYISO and 

PJM each submitted supplemental comment letters 

on their own behalf, and ERCOT submitted two 

supplemental comment letters (‘‘ERCOT October’’ 

and ‘‘ERCOT December’’). 

70See, e.g., APPA at 1; Commercial Working 

Group at 1; DC Energy at 1; FIEG at 1; Financial 

case of all other Requesting Parties, 

FERC.’’ 53

2. Conditions to the Proposed Order 

a. Conditions Precedent to the Proposed 

Order 

In the Proposed Order, the 

Commission proposed two conditions 

precedent to the issuance of a final 

exemption. First, the Commission 

proposed that it would not issue a final 

order to a specific RTO or ISO until (i) 

such time as the Requesting Parties had 

adopted in their Tariffs all of the 

requirements set forth in FERC 

regulation 35.47; 54 (ii) such Tariff 

provisions have been approved or have 

been permitted to take effect by FERC or 

PUCT, as applicable; and (iii) such 

Tariff provisions, have become effective 

and have been fully implemented by the 

particular RTO or ISO.55 Second, as an 

additional prerequisite to the issuance 

of a final order, the Commission 

proposed to require that each 

Requesting Party provide a wellreasoned legal opinion or memorandum 

from outside counsel that, in the 

Commission’s sole discretion, provides 

the Commission with assurance that the 

netting arrangements contained in the 

approach selected by the particular 

Requesting Party to satisfy the 

obligations contained in FERC 

regulation 35.47(d) will, in fact, provide 

the Requesting Party with enforceable 

rights of set off against any of its market 

participants under title 11 of the United 

States Code 56 in the event of the 

bankruptcy of the market participant.57

b. Conditions Subsequent to the 

Proposed Order 

The Proposed Order included two 

information-sharing conditions 

subsequent. First, the Commission 

proposed that, after promulgation of the 

order, none of a Requesting Party’s 

Tariffs or other governing documents 

may include any requirement that the 

Requesting Party notify a member prior 

to providing information to the 

Commission in response to a subpoena 

or other request for information or 

documentation.58

Second, the Commission proposed 

that the exemption be conditioned upon 

information sharing arrangements that 

are satisfactory to the Commission 

between the Commission and FERC and 

between the Commission and PUCT 

being in full force and effect.59

3. Additional Limitations 

In the Proposed Order, the 

Commission expressly noted that the 

proposed exemption was based upon 

the representations made in the Petition 

and in the supporting materials 

provided by the Requesting Parties and 

their counsel, and that any material 

change or omission in the facts and 

circumstances that alter the grounds for 

the Proposed Order might require the 

Commission to reconsider its finding 

that the exemption contained therein is 

appropriate and/or in the public interest 

and consistent with the purposes of the 

CEA.60 The Commission highlighted 

several of the Requesting Parties’ 

representations of particular 

importance, including: (1) The 

exemption sought by the Requesting 

Parties relates to the transactions 

described in the Proposed Order, which 

are primarily entered into by 

commercial participants that are in the 

business of generating, transmitting, and 

distributing electric energy; 61 (2) the 

Requesting Parties were established for 

the purpose of providing affordable, 

reliable electric energy to consumers 

within their geographic region; 62 (3) the 

transactions described in the Proposed 

Order are an essential means, designed 

by FERC and PUCT as an integral part 

of their statutory responsibilities, to 

enable the reliable delivery of affordable 

electric energy; 63 (4) each of the 

transactions defined in the Proposed 

Order taking place on the Requesting 

Parties’ markets is monitored by Market 

Monitoring Units (‘‘MMUs’’) responsible 

to either FERC or, in the case of ERCOT, 

PUCT; 64 and (5) each transaction 

defined in the Proposed Order is 

directly tied to the physical capabilities 

of the Requesting Parties’ electric energy 

grids.65 In the Proposed Order, the 

Commission explicitly reserved the 

authority to, in its discretion, revisit any 

of the terms of the relief provided by the 

Proposed Order including, but not 

limited to, making a determination that 

certain entities should be subject to the 

Commission’s jurisdiction.66 The 

Commission also explicitly reserved the 

authority to, in its discretion, suspend, 

terminate, or otherwise modify or 

restrict the Proposed Order.67 Finally, 

the Commission announced its 

intention to exclude from the exemptive 

relief its general anti-fraud, antimanipulation, and enforcement 

authority under the CEA over the 

Requesting Parties and the transactions 

defined in the Proposed Order, 

including, but not limited to, sections 

2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 

4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, 

and 13 of the CEA and any 

implementing regulations promulgated 

thereunder including, but not limited to, 

Commission regulations 23.410(a) and 

(b), 32.4, and part 180.68

II. Summary of the Comments 

The public comment period on the 

Proposed Order ended on September 27, 

2012. The Commission received twentythree (23) comment letters on the 

Proposed Order,69 the majority of which 

provided general support for the 

proposed exemption.70 The comment 


tkelley on DSK3SPTVN1PROD with NOTICES2
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Marketers Coalition at 1; Industrial Coalitions at 1, 

3; Joint Trade Associations at 1, 3, 5; NEPOOL at 

2; NYTOs at 1, 3; PUCT at 2. 

71See section IV.E. infra. 

72See NYTOs at 5; Requesting Parties at 9–10. 

73See Joint Trade Associations at 3 n.3. 

74See, e.g., FERC Staff at 5; FIEG at 2; Joint Trade 

Associations at 9; NEPOOL at 5. 

75See, e.g., PUCT at 7–8. 

76See, e.g., Requesting Parties at 10–11; NYTOs 

at 5. 

77See, e.g., FERC Staff at 5 (stating that the 

products and services offered by the RTOs and ISOs 

are an ‘‘essential means for carrying out FERC’s 

statutory responsibilities’’ and that the failure to 

expand the scope of the exemption as requested 

could ‘‘unduly inhibit or delay innovation by RTOs 

and ISOs’’); Joint Trade Associations at 9–10 

(arguing that the product restrictions contained in 

the Proposed Order ‘‘could have a chilling effect’’ 

on the development of ‘‘more efficient or innovative 

market structures which, in turn, will affect the 

efficient operation of the markets’’); NEPOOL at 4– 

5 (arguing that absent an expansion, market 

participants may need additional exemptions from 

the Commission for relatively minor modifications 

regardless of whether such modifications are 

designed to ensure reliability and cost-effective 

electric energy services); PUCT at 7–8 (asserting 

that requiring supplemental relief for products that 

are directly related to, and a natural outgrowth of, 

the four categories of transactions specified in the 

Continued 

letters addressed a variety of issues 

including: the scope of the transactions 

set forth in the Proposed Order; the 

scope of the definition of appropriate 

persons for purposes of the exemption; 

the use of the derivatives clearing 

organization (‘‘DCO’’) and swap 

execution facility (‘‘SEF’’) Core 

Principles in the public interest and 

purposes of the CEA analysis; both 

proposed conditions precedent (i.e.,— 

the requirements that the Requesting 

Parties fully comply with the standards 

set forth in FERC regulation 35.47 and 

submit a legal opinion or memorandum 

providing assurances regarding the 

netting arrangements in their respective 

approach to satisfying the standard set 

forth in FERC regulation 35.47(d)); the 

proposed information sharing agreement 

between the Commission and PUCT; the 

proposed condition subsequent that the 

Requesting Parties revise their Tariffs to 

remove requirements to notify their 

members upon receipt of requests for 

information by the Commission; 

whether other conditions should be 

imposed; the Commission’s jurisdiction; 

the Commission’s reservation of antifraud, anti-manipulation, and 

enforcement authority; the effectiveness 

of the exemption 71; the issuance of a 

separate or collective Final Order; the 

extension of supplemental relief to all 

Requesting Parties; and other 

considerations regarding the costs and 

benefits of the exemptive relief. In 

determining the scope and content of 

the Final Order, the Commission has 

taken into account issues raised by 

commenters, including those issues 

with respect to the costs and benefits 

associated with the exemption. 

IV. Determinations 

A. Scope of the Final Order 

1. Covered Transactions Subject to the 

Final Order 

The Commission received multiple 

comments regarding the scope of the 

transactions that are covered by the 

exemption set forth in the Final Order, 

including comments requesting: (1) 

Clarification of the types of transactions 

that the Commission intended to 

include within the definitions of the 

transactions proposed for exemption; (2) 

a broad expansion of the Covered 

Transactions in the Final Order to 

include, for example, additional 

transactions that are ‘‘logical 

outgrowths’’ of a Requesting Party’s core 

function as an RTO or ISO; (3) 

expansion of the exemptive relief 

specifically to include virtual and 

convergence bids and offers; and (4) an 

expedited process for expanding the 

exemption to include additional 

transactions. 

a. Determinations With Respect to 

Types of Transactions 

Some commenters requested that the 

Commission confirm that the exemption 

is not limited to products currently 

traded in their respective markets, and 

that modifications to existing products 

and new products, however named, that 

fall within the definitions of the 

Covered Transactions and that are 

offered pursuant to the Requesting 

Parties’ Tariffs would be covered by the 

Final Order.72 On the other hand, one 

commenter requested that the 

Commission identify, and provide 

notice and an opportunity to comment 

on, any specific categories of 

transactions that the Commission 

intends to exclude from the Final 

Order.73

The Commission confirms that the 

definitions of the Covered Transactions 

included in the Final Order do not limit 

the exemption to those products that are 

currently traded in a Requesting Party’s 

markets. Any products that are offered 

by a Requesting Party, presently or in 

the future, pursuant to a FERC- or 

PUCT-approved Tariff and that fall 

within these definitions, as well as any 

modifications to existing products that 

are offered by a Requesting Party 

pursuant to a FERC- or PUCT-approved 

Tariff and that do not alter the 

characteristics of the Covered 

Transactions in a way that would cause 

such products to fall outside these 

definitions, are intended to be included 

within the Final Order. Accordingly, 

with respect to the request to expressly 

specify transactions that are excluded 

from the exemption, the Commission 

notes that a Requesting Party would not 

be required to request or to obtain future 

supplemental relief for a product that is 

modified as described above or a 

product that it subsequently (but does 

not currently) offer, if the product 

qualifies as one of the four types of 

Covered Transactions in the Final 

Order. 

The Commission notes that the 

definitions of the Covered Transactions 

set forth in the Final Order are 

sufficiently broad to include 

modifications to existing products and 

new products that fall within such 

definitions. These definitions are 

substantially similar to the specific 

definitions that were requested in the 

Petition. Moreover, commenters have 

had the opportunity to identify and 

comment upon instances, if any, of 

existing transactions that fall outside the 

scope of the Proposed Order. In 

addition, the Commission is concerned 

that providing lists of excluded 

transactions may limit the Requesting 

Parties’ flexibility, may require more 

frequent requests for supplemental relief 

(possibly incurring inadvertent delays), 

and may add market confusion. As 

such, consistent with the confirmation 

set forth above, the Commission 

believes it would be inappropriate and 

inefficient to set forth all transactions 

that would be excluded from the scope 

of the Final Order. 

b. Determinations With Respect to 

Requests to Broadly Expand the Covered 

Transactions in the Final Order 

Multiple commenters requested that 

the scope of transactions eligible for the 

exemption in the Final Order be 

expanded to include (a) transactions 

and services that are logical outgrowths 

of the Requesting Parties’ functions as 

RTOs or ISOs,74 (b) transactions that are 

directly related to, and a natural 

outgrowth of, the four categories of 

transactions set forth in the Proposed 

Order,75 or (c) transactions and services 

that are ‘‘economically comparable’’ in 

substance to the four types of 

transactions described in the Proposed 

Order.76 Commenters generally argued 

that such expansion was necessary to 

allow flexibility in the adaption and 

development of the transactions and 

services of the RTOs and ISOs, which 

flexibility is necessary for reliable and 

cost-effective distribution of electric 

energy services.77 In addition, one 


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Final Order ‘‘could have a chilling effect on 

innovation and overall market efficiency.’’). 

78COPE at 5. 

79PUCT at 7. 

80Requesting Parties at 11. 

81 77 FR 52144. See also Petition at 11. 

82See In the Matter of the Application for an 

Exemptive Order Under Section 4(c) of the 

Commodity Exchange Act by ISO New England Inc. 

(April 30, 2012); In the Matter of the Application 

for an Exemptive Order Under Section 4(c) of the 

Commodity Exchange Act by California 

Independent System Operator Corporation (May 30, 

2012). 

83See 77 FR 52163. 

84 77 FR 52142 (citing Petition at 6). 

85See, e.g., DC Energy at 2; PUCT at 5–6; 

Requesting Parties at 12. 

86Specifically, the Proposed Order explained: 

The particular categories of contracts, agreements 

and transactions to which the Proposed Exemption 

would apply correspond to the types of transactions 

for which relief was explicitly requested in the 

Petition. Petitioners requested relief for four 

specific types of transactions and the Proposed 

Exemption would exempt those transactions. With 

respect to those transactions, the Petition also 

included the parenthetical ‘‘(including generation, 

demand response or convergence or virtual bids/ 

transactions).’’ The Commission notes that such 

transactions would be included within the scope of 

the exemption if they would qualify as the financial 

transmission rights, energy transactions, forward 

capacity transactions or reserve or regulation 

transactions for which relief is explicitly provided 

within the exemption. 

77 FR 52163 (internal citations omitted). 

87Commercial Working Group at 2; DC Energy at 

2; FIEG at 2; NEPOOL at 10; Requesting Parties at 

12; PUCT at 5. 

88Requesting Parties at 13. 

commenter specifically asked whether 

‘logical outgrowth’ ‘‘transactions 

[should] be viewed as Commissionregulated until a future exemption is 

issued * * *’’ 78

Nonetheless, one commenter agreed 

that a modification to the Final Order 

should be required for new products 

that do not logically fit within the Final 

Order’s specified categories, noting that 

the Commission should have the 

opportunity to evaluate whether 

exempting such products would be 

consistent with the public interest.79

The Requesting Parties also stated that 

they ‘‘have not requested a blanket 

exemption and agree that they should 

seek to supplement the Proposed Order 

if they develop new products that are 

potentially within the Commission’s 

jurisdiction and that present 

significantly different economic 

characteristics from those products 

covered by the Proposed Order.’’ 80

As set forth above, the Commission 

re-affirms that the exemption extends to 

any transaction that falls within the 

Covered Transactions set forth in this 

Final Order, whether currently existing 

or later included in a Requesting Party’s 

Tariff. The Commission declines, 

however, to magnify the Final Order to 

include the expansive terms requested 

by the specified commenters. Section 

4(c)(6) of the CEA, by its terms, was not 

intended to permit a blanket exemption 

for all transactions entered into 

pursuant to a FERC- or PUCT- approved 

Tariff. Moreover, section 4(c)(6) 

expressly prohibits the Commission 

from issuing an exemption for such 

transactions unless it affirmatively 

determines that exempting them would 

be consistent with the public interest 

and the purposes of the CEA. While the 

Commission has been able to perform 

this evaluation for the Covered 

Transactions delineated in the Final 

Order, phrases such as ‘‘logical 

outgrowth,’’ ‘‘natural outgrowth,’’ and 

‘‘economically comparable’’ are too 

vague and potentially too far reaching to 

permit meaningful analysis under the 

statutory standard of review. 

Commenters have not provided, by way 

of explanation or example, sufficient 

insight as to what, if any, boundaries an 

exemption would have if it were 

extended to the degrees requested. 

Moreover, the Commission’s 

determination that this exemption is in 

the public interest and consistent with 

the purposes of the CEA is grounded, in 

part, on certain characteristics of the 

Covered Transactions and market 

circumstances described by the 

Requesting Parties including, for 

example, that the Covered Transactions 

are ‘‘part of, and inextricably linked to, 

the organized wholesale electricity 

markets that are subject to FERC or 

PUCT regulation and oversight.’’ 81 Such 

qualities may or may not be shared by 

other, as yet undefined, transactions. 

Additionally, it is impossible for the 

Commission to determine whether 

unidentified transactions include novel 

features or have market implications or 

risks that are not present in the Covered 

Transactions, which could, in turn, 

impact the Commission’s public interest 

and purposes of the CEA analysis or 

necessitate the inclusion of additional 

or differing terms and conditions in a 

final order. 

Finally, there may be differences in 

opinion among the Requesting Parties 

with respect to the expansion of relief 

beyond the Covered Transactions. 

Indeed, the Requesting Parties 

themselves request that future 

supplemental relief not be automatically 

granted to all Requesting Parties and the 

Commission notes that it has already 

received supplemental requests for 

relief that would apply only to certain 

Requesting Parties, and might be 

objected to by other Requesting 

Parties.82

In light of these considerations and 

the potential for adverse consequences 

that may result from an exemption that 

includes transactions whose qualities 

and effect on the broader market cannot 

be fully appreciated absent further 

specification, a virtually unlimited 

exemption would be contrary to the 

public interest and purposes of the CEA. 

In addition, consideration of new 

categories of transactions could be aided 

by the public notice and comment 

process. Furthermore, the Commission 

notes that it is prepared to review 

requests for supplemental relief from 

the Requesting Parties.83

c. Determinations With Regards to 

Scope of ‘‘Energy Transactions’’ 

Definition 

In discussing the scope of ‘‘Energy 

Transactions’’ included in the Proposed 

Order, the Commission stated that such 

transactions ‘‘are also referred to as 

Virtual Bids or Convergence Bids.’’ 84

Commenters noted,85 however, that, in 

a later discussion of the categories of 

transactions to which the exemption 

would apply, the Commission stated 

that ‘‘virtual and convergence bids/ 

transactions’’ would be included within 

the scope of the exemption only to the 

extent that they would qualify under 

one of the four categories of transactions 

explicitly defined in the Proposed 

Order.86 Multiple commenters 

requested that the Commission clarify 

that virtual and convergence bids and 

offers are explicitly included within the 

scope of the Covered Transactions that 

qualify for an exemption under the 

Final Order.87 Specifically, the 

Requesting Parties asked that the Final 

Order define ‘‘Energy Transactions’’ to 

include ‘‘virtual and convergence bids 

and offers.’’ 88

Several commenters expressed 

concerns that certain statements 

regarding the physical nature of 

transactions proposed to be exempt, and 

the role of market participants as 

physical generators, transmitters, and 

distributors of electric energy, cast 

further doubt as to whether the 

Commission intended to include virtual 

and convergence bids and offers within 

the scope of the Proposed Order. One 

commenter noted that the Commission’s 

statement that the transactions proposed 

to be exempt are ‘‘primarily entered into 

by commercial participants that are in 

the business of generating, transmitting 

and distributing electricity’’ suggested 

that virtual and convergence bids and 

offers may not qualify as Covered 

Transactions because both traditional 

and non-traditional utilities engage in 

such transactions, yet many do not own 

physical generation or wholesale 


tkelley on DSK3SPTVN1PROD with NOTICES2
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89See Financial Marketers Coalition at 3–4 

(quoting 77 FR 52144). The Commission notes that 

the statement referenced by this commenter was 

intended to summarize a representation made by 

the Requesting Parties. See 77 FR 52144 

(‘‘Petitioners also explain that the Transactions are 

primarily entered into by commercial participants 

that are in the business of generating, transmitting, 

and distributing electricity’’). 

90Requesting Parties at 13 (citing 77 FR 52138). 

91 77 FR 52143. 

92See Financial Marketers Coalition at 7–8; FIEG 

at 2; NEPOOL at 3. 

93See, e.g., Requesting Parties at 12 (noting that 

virtual transactions fall into the category of ‘‘Energy 

Transactions,’’ specifically, as such term was 

defined in the Proposed Order). The Commercial 

Working Group noted that, in addition to virtual 

transactions, ‘‘financial schedules’’ and ‘‘internal 

bilateral transactions’’ can appropriately be placed 

in one of the four enumerated categories of 

transactions defined in the Proposed Order, and as 

such, should be explicitly included in the Final 

Order as Covered Transactions. See Commercial 

Working Group at 2. The Commission notes that 

financial schedules and internal bilateral 

transactions are the subject of a separate request for 

supplemental relief filed by CAISO and ISO NE 

and, therefore, the Commission is taking no 

position in this Final Order with respect to those 

products. See note 82 supra. 

94Requesting Parties at 14 (‘‘On a net basis, 

Virtual Transactions in the RTOs and ISOs are 

modeled identically to generation and load; 

therefore, the net cleared amount of all bids and 

offers (including virtual bids and offers) cannot 

exceed the physical capability of the grid to flow 

electricity.’’); PUCT at 6; DC Energy at 2 (‘‘[V]irtual 

energy transactions also serve to converge the DayAhead and Real-Time markets as well as provide 

liquidity and price discovery, all of which are 

inextricably linked to the physical capabilities of an 

efficient electricity market and grid.’’); FIEG at 2 

(‘‘While virtual bids are indeed financial, they do 

not exist in isolation from the capabilities of the 

electric grid. Indeed, RTOs significantly restrict 

virtual bids based in large part on their potential to 

tangibly impact the electric grid itself.’’); Financial 

Marketers Coalition at 8–9 (‘‘Virtual Transactions 

cannot be entered into unless the selected node and 

the grid are capable of supporting the transaction. 

If the physical node is not available, the transaction 

is rejected. Thus the aggregate cleared volume of 

Virtual Transactions for any period is limited by the 

physical capability of the electricity system 

operated by the RTOs/ISOs and is based on the 

projected physical power needs of the system for 

the specific hour, day, month or year.’’). 

95PUCT at 6 (‘‘The [Day-Ahead Market] was 

instituted in the ERCOT market to provide 

opportunities for increased efficiency in the market 

for physical energy transactions,’’ and ‘‘would not 

exist but for its direct linkage to the real-time 

market for energy and ancillary services necessary 

to operate the electric system.’’); Financial 

Marketers Coalition at 8 (noting that Day-Ahead 

Market modeling ‘‘results in both price and 

operational efficiency because it allows the system 

operator to determine which units to dispatch based 

on the best price and projected demands 

considering all offers and bids including virtuals.’’); 

NEPOOL at 3 (‘‘Virtual bidding allows virtual 

traders to supply power to service areas where 

physical competition is constrained due to 

insufficient transmission and to increase market 

efficiency by making pricing less volatile as dayahead prices converge with real-time prices.’’). 

96PUCT at 6; Financial Marketers Coalition at 3– 

4, 12 (noting that FERC has encouraged, and in 

some cases even required, unbundling of services, 

and promoted market entry by non-traditional 

utilities lacking physical resources in order to 

enhance competition). 97Requesting Parties at 14. PUCT explained that, 

‘‘in the ERCOT market, Virtual Transactions are 

limited to transactions in the Day Ahead Market 

(DAM).’’ PUCT at 6. The Financial Marketers 

Coalition defined a ‘‘virtual transaction’’ as ‘‘a 

purchase or sale of energy in the day-ahead market 

that is settled against real-time energy prices.’’ 

Financial Marketers Coalition at 2 n.2. 

98Requesting Parties at 14. 

99See id. 

100See paragraph 5(b) of the Order. Additionally, 

in response to the Requesting Parties’ comment, the 

Commission has not included any reference in the 

Final Order suggesting that the purpose of a 

Covered Transaction must be to allocate a 

Requesting Party’s physical resources. 

101Consistent with the Commission’s 

understanding of industry practice as reflected in 

the Requesting Parties’ current Tariffs, ‘‘the day on 

which the Day-Ahead Market clears’’ in the Order 

definition of ‘‘Day-Ahead Market’’ shall mean the 

same day that the relevant transaction in the DayAhead Market is entered into. See paragraph 5(e) of 

the Order. 

102Requesting Parties at 14. See also PUCT at 6. 

transmission facilities.89 Similarly, the 

Requesting Parties requested the 

removal of the statement in the 

Proposed Order that provided ‘‘[t]o be 

eligible for the proposed exemption, the 

contract, agreement, or transaction 

would be required to be offered or 

entered into in a market administered 

by a Petitioner pursuant to that 

Petitioner’s tariff or protocol for the 

purposes of allocating such Petitioner’s 

physical resources.’’ 90 Finally, other 

commenters noted concern with the 

Commission’s qualification that 

‘‘financial transactions that are not tied 

to the allocation of the physical 

capabilities of an electric transmission 

grid would not be suitable for 

exemption because such activity would 

not be inextricably linked to the 

physical delivery of electricity,’’ 91

suggesting that the phrase potentially 

excluded virtual and convergence bids 

and offers from the scope of Covered 

Transactions, depending upon the 

interpretation of the relationship 

between virtual transactions and the 

physical delivery of electricity.92

Despite their uncertainty with respect 

to particular statements, multiple 

commenters contended that virtual and 

convergence bids and offers fell within 

the transactions described in the 

Proposed Order.93 Commenters posited 

that virtual and convergence bids and 

offers, like all other transactions 

described in the Proposed Order, are 

entered into pursuant to FERC- or 

PUCT-approved Tariffs, and thus are 

subject to the oversight of the 

Requesting Parties’ MMUs. In addition, 

certain commenters argued that virtual 

and convergence bids and offers are 

inextricably linked to the physical 

delivery of electric energy by being tied 

to the allocation of the physical 

capabilities of the electric energy 

transmission grid.94

Commenters represented that virtual 

and convergence bids and offers were 

established as a means by which to 

improve efficiency and competitiveness 

in the electric energy markets through 

the convergence of Day-Ahead Market 

and RTM prices,95 and have been 

promoted by FERC and PUCT.96 The 

Requesting Parties further explained 

that ‘‘[a] Virtual Transaction is a cleared 

offer to sell energy in the day-ahead 

market (an ‘incremental offer’ or ‘inc’) or 

a cleared bid to buy energy in the dayahead market (a ‘decremental bid’ or 

‘dec’),’’ and ‘‘may be submitted by 

market participants that do not have a 

physical position in the ISO/RTO 

markets, which is to say, they do not 

own generation or serve load.’’ 97 DayAhead Market transactions are not, 

however, limited to non-generating or 

non-LSEs, as ‘‘owners of physical 

generating units that are capacity 

resources in the ISO/RTO must submit 

an offer to sell the energy output of their 

units into the day-ahead market,’’ and 

‘‘[s]imilarly, participants that serve load 

in an ISO/RTO market may additionally 

submit bids into the day-ahead 

market.’’ 98 The Requesting Parties 

asserted that, because the Day-Ahead 

Market is cleared by modeling all bids 

and offers without distinction as to 

whether they are virtual or physical in 

nature, virtual and convergence bids 

and offers satisfy the proposed criteria 

that the aggregate cleared volume of 

Energy Transactions be limited by the 

physical capability of the electric energy 

transmission system in order for an 

Energy Transaction to be subject to the 

exemption.99

In response to commenters’ concerns, 

the Commission has added language to 

the Energy Transactions definition to 

clarify in the Final Order that Energy 

Transactions ‘‘includ[e] * * * Virtual 

and Convergence Bids and Offers.’’ 100

This clarification is based on Requesting 

Parties’ and other regulators’ 

representations that virtual and 

convergence bids and offers are ‘‘Energy 

Transactions’’ in the ‘‘Day-Ahead 

Market,’’ as such terms are defined in 

the Final Order,101 that enable market 

participants to buy and sell electric 

energy without physically producing or 

consuming it.102 Although there is an 

apparent financial settlement nature of 

virtual and convergence bids and offers 

transacted in the Day-Ahead Market, 

Requesting Parties represented that they 

are inextricably linked to the physical 

delivery of electric energy due to their 

being subject to the same aggregate 

physical capabilities of the electric 

energy transmission grid as other 


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103Requesting Parties at 14. 

104See, e.g., NYISO at 3–4. 

105See CAISO/ISO NE March at 2–3. 

106 Id. at 3. 

107See paragraph 5(b) of the Order (emphasis 

added). 

108See generally Joint Trade Associations at 10; 

NEPOOL at 4; PUCT at 8; Requesting Parties at 

10–11. 

109See generally Joint Trade Associations at 10. 

110See generally NEPOOL at 4. 

111PUCT at 8. 

112Requesting Parties at 10–11. 

113 Id. 

114The Commission clarifies that the exemption 

is only available to persons ‘‘entering into’’ the 

Covered Transactions if such persons satisfy the 

criteria set forth in paragraph 2(b) of the Order (i.e., 

such persons are ‘‘appropriate persons,’’ as defined 

in sections 4(c)(3)(A) through (J) of the CEA; 

‘‘eligible contract participants,’’ as defined in 

section 1a(18)(A) of the CEA and in Commission 

regulation 1.3(m); or ‘‘persons who actively 

participate in the generation, transmission, or 

distribution of electric energy’’ as defined in 

paragraph 5(g) of the Order. 

115 77 FR at 52166. 

116 Id. 

117See id. at 52142, 521664; Petition at 2–3. 

118 77 FR 52167. 

119 Id. 

120See id. at 52164. 

121The Proposed Order referred to FERC Order 

741 to collectively describe 75 FR 65942 (‘‘FERC 

Original Order 741’’) and 76 FR 10492 (‘‘FERC 

physical Energy Transactions.103

Requesting Parties also represented that 

virtual and convergence bids and offers 

are integral to achieving increased 

efficiency, and ultimately lower 

consumer costs, through the 

convergence of Day-Ahead Market and 

RTM prices.104 Accordingly, based on 

these representations, the Commission 

confirms that the inclusion of virtual 

and convergence bids and offers that are 

Energy Transactions within the scope of 

the Covered Transactions in the Final 

Order is consistent with the public 

interest and purposes of the CEA. 

Finally, CAISO and ISO NE requested 

that the proposed definition of ‘‘Energy 

Transactions’’ be amended to allow for 

cash settlement based upon the DayAhead Market price (in addition to the 

Real-Time Market price), due to the fact 

that for both CAISO and ISO NE., the 

Day-Ahead Market may be preferable to 

the Real-Time Market as a source of 

settlement prices for certain energy 

transactions.105 CAISO and ISO NE 

requested such a change to account for 

certain energy transactions in their 

markets that otherwise might not be 

included within the scope of the Energy 

Transactions definition, but nonetheless 

are settled ‘‘under tariff provisions 

which have been approved by the 

FERC’’ and that ‘‘[o]nce entered into the 

settlement system * * *, are 

operationally treated the same as any 

other Energy Transaction included in 

the Commission’s Proposed Order.’’ 106

Accordingly, the Commission has 

amended the definition to provide that 

the requisite performance of an energy 

transaction may occur in the Real-Time 

Market through ‘‘[a] cash payment or 

receipt at the price established in the 

Day-Ahead Market or Real-Time Market 

(as permitted by each Requesting Party 

in its Tariff).’’ 107 The Commission 

stresses that any Energy Transaction 

settling based upon the Day-Ahead 

Market price must be inextricably 

linked to the physical delivery of 

electric energy. 

d. Determinations With Regards to the 

Process for Expanding the Transactions 

Covered by the Final Order 

Several commenters requested a 

streamlined or expedited process for 

Commission review of supplemental 

requests for related exemptions 

submitted by the Requesting Parties.108

Specifically, some commenters argued 

that Commission action is not necessary 

where a ‘‘FERC- or PUCT-approved 

change was made to an already 

exempted transaction’’ 109 and where 

Tariff changes that are related to core 

RTO and ISO market functions are filed 

and accepted by FERC.110

Another commenter generally noted 

that ‘‘the Commission * * * should 

provide an efficient process for 

Petitioners to confirm the applicability 

of the exemptive relief to new or 

modified products in a timely 

manner,’’ 111 while the Requesting 

Parties asked ‘‘the Commission [to] 

adopt a process whereby a Petitioner 

could simultaneously provide the 

Commission a copy of its FERC filing (or 

in the case of ERCOT, the Protocol 

revisions)* * * .’’ 112 The Requesting 

Parties proposed that, for FERCregulated RTOs and ISOs, ‘‘if, during the 

60-day FERC review period, the 

Commission informs the Petitioners that 

the new or modified product is not 

covered by the exemption or that the 

Commission needs additional time to 

review the product, the Petitioner 

would delay offering the new product 

until such time as the Commission 

completes its review or grants 

supplemental relief.’’ 113

As discussed above, the Commission 

notes that that there is no need to 

review new or revised Tariffs that are 

limited to transactions that fall within 

the definitions of the Covered 

Transactions set forth in the Final 

Order. A supplemental exemption is not 

necessary in such instances. The 

Commission declines to adopt a 

streamlined or expedited process for the 

review of supplemental requests to 

expand the exemption to additional 

transactions. As noted above, section 

4(c)(6) of the CEA mandates that the 

Commission, in granting any exemption 

thereunder, must act in accordance with 

CEA sections 4(c)(1) and (2). The 

Commission will strive to address any 

requests for supplemental relief as 

expeditiously as possible. 

2. Additional Definitions and Provisions 

in the Final Order 

The Commission proposed to exempt 

any persons (including the Requesting 

Parties, their members and their market 

participants) offering, entering into,114

rendering advice, or rendering other 

services with respect to the transactions 

defined in the Proposed Order.115 The 

Commission also proposed that, in order 

to be eligible for exemptive relief, ‘‘[t]he 

agreement, contract or transaction must 

be offered or sold pursuant to a 

Requesting Party’s tariff and that tariff 

must have been approved or permitted 

to take effect by: (1) [i]n the case of 

[ERCOT], the [PUCT] or (2) in the case 

of all other Requesting Parties, 

[FERC].’’116 The Commission did not 

receive any comments with respect to 

this requirement. In addition, this 

requirement is consistent with the range 

of the Commission’s authority as set 

forth in section 4(c)(6) of the CEA and 

with the scope of the relief requested,117

and therefore the Commission has not 

altered the requirement in the Final 

Order. 

In the Proposed Order, the term 

‘‘Requesting Party’’ was defined to 

include the six Requesting Parties (i.e., 

CAISO, ERCOT, ISO NE., MISO, NYISO, 

and PJM) and any of their respective 

successors in interest.118 The 

Commission has incorporated this 

definition into the Final Order without 

alteration. In the Proposed Order, 

‘‘[r]eference to a Requesting Party’s 

‘tariff’ includes a tariff, rate schedule or 

protocol,’’ 119 in order to account for 

differences in terminology used by such 

entities and their respective 

regulators.120 The Commission did not 

receive any comment on this definition 

and, accordingly, has incorporated this 

definition into the Final Order 

unchanged. 

3. Conditions to the Final Order 

a. Conditions to the Effectiveness of the 

Exemption Set Forth in the Final Order 

i. FERC Regulation 35.47 

On October 21, 2010, FERC adopted 

FERC regulation 35.47 121 to encourage 


tkelley on DSK3SPTVN1PROD with NOTICES2
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Revised Order 741’’) (slightly amending and 

clarifying FERC Original Order 741). The standards 

set forth in these FERC Orders are codified as FERC 

regulation 35.47 and, therefore, for clarity, reference 

herein is to the regulation. 122 75 FR 65942, 65942, Oct. 21, 2010. These 

requirements were later amended and clarified in 

an order on rehearing. See 76 FR 10492, Feb. 25, 

2011. 

123See 77 FR at 52147–48. 

124See id. 

125See id. at 52147–48, 52150–53. 

126See id. at 52147. 

127See id. at 52147–48; 52150–53. 

128See 77 FR 52164–65. The Commission noted 

that, while ERCOT is not subject to FERC 

regulation, the fact that these mandates were 

developed specifically for RTOs and ISOs suggests 

that holding ERCOT to these standards may well be 

appropriate. See id. at 52165. 

129See id. at 52172. 

130See, e.g., Joint Trade Associations at 15; COPE 

at 7. 

131See generally Commercial Working Group at 4. 

132See, e.g., Joint Trade Associations at 14–15; 

Commercial Working Group at 4. 

133See, e.g., Joint Trade Associations at 15. 

134See, e.g., id. 

135See, e.g., COPE at 7–8; Joint Trade 

Associations at 14; PUCT at 3, 11; Requesting 

Parties at 19. 

136See, e.g., COPE at 7–8; Joint Trade 

Associations at 14. 

137See COPE at 8. 

138See PUCT at 11; Requesting Parties at 19. 

139See PUCT at 11–12; Requesting Parties at 19– 

22. 

140See Revised FERC Order No. 741 

Implementation Chart at 1 n.1, 3. See also 

Requesting Parties at 19 (‘‘ERCOT has adopted 

credit standards that are either the same as or 

substantially equivalent to those set forth in FERC 

Order No. 741.’’). 

141See Requesting Parties at 19–22; Revised FERC 

Order No. 741 Implementation Chart. ERCOT 

indicates that it has implemented these practices 

‘‘with the approval of PUCT,’’ Requesting Parties at 

19, and that all applicable changes became effective 

on or before January 1, 2013, with the exception of 

a protocol that ‘‘will further reduce the [Real-Time] 

settlement cycle in phases by an additional two 

days,’’ which was in the stakeholder process’’ as of 

January 18, 2012. Revised FERC Order No. 741 

Implementation Chart. 

142 18 CFR 35.47(b). 

143See Requesting Parties at 20. 

144See id. 

145 Id. 

146See id. at 20–21. ERCOT represents that longer 

payment and settlement timelines are ‘‘expected to 

be primarily due to weekend and holiday 

schedules.’’ Revised FERC Order No. 741 

Implementation Chart at 3. See also Requesting 

Parties at 21. 

clear and consistent risk and credit 

practices in the organized wholesale 

electric energy markets to, inter alia, 

‘‘ensure that all rates charged for the 

transmission or sale of electric energy in 

interstate commerce are just, reasonable, 

and not unduly discriminatory or 

preferential.’’ 122 As more fully 

described in the Proposed Order,123

FERC regulation 35.47 directs each of 

the RTOs and ISOs within its 

jurisdiction to adopt Tariffs that 

implement specified credit practice 

reforms.124 These credit reforms include 

limitations on the amount of credit an 

RTO or ISO may extend for each market 

participant; shortened billing and 

settlement periods of no more than 

seven days; the elimination of 

unsecured credit in FTR or equivalent 

markets; requiring RTOs and ISOs to 

ensure the enforceability of their netting 

arrangements in the event of the 

insolvency of a member by (1) 

establishing a single counterparty to all 

market participant transactions, (2) 

requiring each market participant to 

grant a security interest in the 

receivables of its transactions to the 

relevant RTO or ISO, or (3) providing 

another method that supports netting 

that is approved by FERC and that 

provides a similar level of protection to 

the market; adoption of a two-day grace 

period for curing collateral calls; 

establishment of minimum market 

participation eligibility requirements 

that apply consistently to all market 

participants and that require RTOs and 

ISOs to engage in periodic verification 

of market participant risk management 

policies and procedures; and Tariff 

clarifications regarding the conditions 

under which RTOs and ISOs will 

request additional collateral due to a 

material adverse change.125 In the 

Proposed Order, the Commission stated 

that these credit requirements appear to 

achieve goals that are similar to the 

regulatory objectives of the 

Commission’s DCO Core Principles,126

and set forth a detailed analysis of each 

credit requirement and DCO Core 

Principle supporting such assertion.127

Due, in part, to the consistency in 

regulatory objectives between FERC 

regulation 35.47 and several of the 

Commission’s DCO Core Principles, the 

Commission proposed requiring each 

Requesting Party, including ERCOT, to 

comply with FERC regulation 35.47 as 

a condition precedent to the granting of 

a 4(c)(6) exemption for the transactions 

described in the Proposed Order.128 The 

Commission requested comment on this 

proposal.129

Several commenters argued against 

this prerequisite, citing FERC’s 

authority over the implementation of 

FERC regulation 35.47,130 while others 

proposed that the Commission rely on 

FERC’s determination that the 

Requesting Parties have complied with 

FERC regulation 35.47.131 Further, 

commenters requested clarification from 

the Commission as to ‘‘what will 

constitute a finding that an RTO or ISO 

is fully compliant with’’ FERC 

regulation 35.47,132 with one 

commenter suggesting that the 

Requesting Parties’ ongoing efforts to 

comply with FERC regulation 35.47 are 

a sufficient demonstration of 

compliance.133 In addition, several 

commenters proposed that a final order 

from FERC, or, with respect to ERCOT, 

PUCT, is adequate to demonstrate 

compliance and the Commission need 

not do any further analysis upon receipt 

of such a final order.134

With respect to ERCOT, several 

commenters objected to the condition 

precedent because ERCOT is subject to 

PUCT’s jurisdiction and not that of 

FERC,135 and further asserted ERCOT 

should be evaluated on its compliance 

with PUCT regulations.136 One 

commenter cited the successful 

operation of the ERCOT market over the 

past decade as support for its 

position.137 In addition, commenters 

noted that ERCOT has, in part, 

voluntarily and, in part, in conjunction 

with regulations set forth by PUCT, 

implemented protocols that are 

comparable to those identified in FERC 

regulation 35.47.138 Indeed, these 

commenters argued that some of these 

efforts are more conservative than those 

required by FERC regulation 35.47, and 

thus these commenters expressed 

concern that the condition precedent 

will require ERCOT to adopt less 

stringent practices.139

ERCOT has represented that it 

implemented protocols that are 

comparable to 140 all of the standards set 

forth in FERC regulation 35.47, with the 

sole exception of the billing period 

requirement in the RTM.141 FERC 

regulation 35.47(b) requires that RTO 

and ISO Tariffs ‘‘[a]dopt a billing period 

of no more than seven days and allow 

a settlement period of no more than 

seven days.’’ 142 ERCOT represented that 

its rules applicable to the Day-Ahead 

Market are more conservative than 

FERC regulation 35.47(b) obligations 

with respect to both the statement 

issuance and payment deadlines.143

ERCOT’s RTM settlement rules have a 

longer issuance period of nine days, but 

a shorter payment period of two bank 

business days within issuance of the 

statement and invoice.144 ERCOT 

asserted that its ‘‘RTM settlement 

timeline is consistent with the goals of 

FERC’’ regulation 35.47 because RTM 

transactions are paid within eleven and 

thirteen days (shorter than the fourteenday time frame established by FERC 

regulation 35.47(b)) for 92% of 

operating days and within the fourteenday period for 98% of operating days.145

ERCOT claimed that ERCOT RTM 

transactions that are paid beyond the 

fourteen days from the operating day are 

paid on the fifteenth day.146 ERCOT also 


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147See id. at 21. 

148 In the case of ERCOT, which is regulated by 

PUCT, what is necessary is compliance with 

standards that are the same as those set forth in 

FERC regulation 35.47. 

149See FERC Order No. 741 Implementation 

Chart; Revised FERC Order No. 741 Implementation 

Chart. 

150See Revised FERC Order No. 741 

Implementation Chart. 

151FERC regulation 35.47(d) was adopted as part 

of the ‘‘Credit Reforms in the Wholesale Electricity 

Market’’ established by FERC Order No. 741. It 

requires an organized electric energy market to have 

tariff provisions that establish a single counterparty 

to all market participant transactions, or require 

each market participant in an organized wholesale 

electric energy market to grant a security interest to 

the organized wholesale electric market in the 

receivables of its transactions, or provide another 

method of supporting netting that provides a 

similar level of protection to the market and is 

approved by the Commission. In the alternative, the 

organized wholesale electric energy market is not 

permitted to net market participants’ transactions 

and must establish credit based on market 

participants’ gross obligations. 18 CFR 35.47(d). 

152 77 FR 52165. Requesting Parties have defined 

the term ‘‘single counterparty’’ differently. In 

addition, each Requesting Party plans on 

implementing a central counterparty structure 

based on its individual views. Because of these 

differing views, the legal opinion or memorandum 

requirement is meant to provide comfort to the 

Commission that the single counterparty structure 

chosen by each Requesting Party provides 

enforceable set off rights, without having the 

Commission specify what would be an acceptable 

central counterparty structure, which could contrast 

with what FERC and PUCT have permitted. 

153See id. at 52172. 

154COPE at 8. 

155 Id. 

156See generally APPA at 4; Joint Trade 

Associations at 15. 

157Requesting Parties at 16–17. 

contended that any incremental risk 

related to ERCOT’s RTM nine-day 

statement issuance period is mitigated 

because RTM positions in the ERCOT 

market are known and fully 

collateralized subsequent to the relevant 

operating day and prior to the FERCrequired seven day statement issuance 

period.147

As discussed in detail below in 

section IV.B.2.e.ii., the Commission 

believes that the DCO Core Principles 

provide a useful framework to help 

measure the extent to which the 

exemption is in the public interest and 

consistent with the purposes of the 

CEA. Because substantial compliance 

with the standards set forth in FERC 

regulation 35.47 forms the basis for the 

determination that the Tariffs and 

activities of the Requesting Parties are 

congruent with, and—in the context of 

the Covered Transactions—sufficiently 

accomplish, the regulatory objectives of 

the DCO Core Principles, such 

compliance is necessary for the 

Commission’s public interest and 

purposes of the CEA determination.148

Nonetheless, the Commission notes that 

each Requesting Party has represented 

to the Commission that its Tariffs have 

been revised to substantially meet the 

standards set forth in FERC regulation 

35.47.149 Indeed, the Commission notes 

that the Requesting Parties have 

represented that several of those Tariff 

revisions have already been approved or 

permitted to take effect by FERC or 

PUCT, as applicable.150 As such, and 

after careful consideration of the 

comments, the Commission believes 

that for each Requesting Party that is 

regulated by FERC, full compliance with 

FERC regulation 35.47, as measured by 

FERC’s acceptance and approval of all 

of that Requesting Party’s Tariffs 

necessary to implement the standards 

set forth in FERC regulation 35.47, is a 

necessary prerequisite to the 

effectiveness of the exemption in the 

Final Order with respect to that 

Requesting Party. 

With respect to ERCOT, the 

Commission has considered the 

comments regarding ERCOT’s efforts to 

reform its market protocols in a manner 

that is the same as or substantially 

similar to the credit requirements of 

FERC regulation 35.47. The Commission 

believes, on the basis of ERCOT’s 

representations, as set forth above, that 

ERCOT’s market protocols differ from 

the standards set forth in FERC 

regulation 35.47 in a manner that is 

sufficiently minor as to permit the 

Commission to accept them for the 

purpose of determining that the 

requested exemption with respect to 

ERCOT is in the public interest and 

consistent with the purposes of the 

CEA. Thus, for ERCOT, adopting 

measures that are substantially similar 

to standards that are the same as those 

set forth in FERC regulation 35.47, as 

measured by PUCT’s permitting all of 

the ERCOT protocols that are discussed 

above and as set forth in the Revised 

FERC Order No. 741 Implementation 

Chart to take effect, is a necessary 

prerequisite to the effectiveness of the 

exemption in the Final Order with 

respect to ERCOT. 

ii. Legal Memorandum or Legal Opinion 

of Counsel 

The Proposed Order contemplated 

requiring, as a condition precedent to 

the issuance of a Final Order, that each 

Requesting Party provide a wellreasoned legal opinion or memorandum 

from outside counsel that, in the 

Commission’s sole discretion, provides 

the Commission with assurance that the 

netting arrangements contained in the 

approach selected by the particular 

Requesting Party to satisfy the 

obligations contained in FERC 

regulation 35.47(d) 151 will provide the 

Requesting Party with legally 

enforceable rights of set off against any 

of its market participants under title 11 

of the United States Bankruptcy Code in 

the event of a bankruptcy of the market 

participant. This condition precedent 

was proposed in light of diversity 

among the Requesting Parties 

surrounding the interpretation of the 

single counterparty requirement and 

whether a Requesting Party’s adopted 

practices would provide enforceable setoff rights.152 The Commission requested 

comment on this proposal.153

The Commission received three types 

of comments on this requirement: (1) 

Comments that opposed the condition 

precedent; (2) comments that did not 

opine on the propriety of the 

requirement, but expressed concern 

with respect to the possible unintended 

and adverse tax consequences the 

obligation may have for the Requesting 

Parties; and (3) a comment that objected 

to the specific requirement that the 

memorandum or opinion of counsel be 

signed by the law firm as opposed to an 

individual partner of the law firm. 

Commenters that opposed the 

condition precedent generally did so on 

the basis that the Commission ‘‘should 

not be the arbiter of whether a FERCapproved RTO regime consistent with’’ 

FERC regulation 35.47 ‘‘meets 

bankruptcy goals,’’ 154 and that ‘‘the 

existence of FERC regulation should be 

the premise upon which an exemption 

is granted.’’ 155

In addition, two commenters urged 

the Commission to avoid taking any 

action that could undermine a 

Requesting Party’s tax-exempt status 

and continued ability to use tax-exempt 

financing to finance its operations,156

while the Requesting Parties asked the 

Commission to ‘‘clarify that any 

memorandum or opinion of counsel 

need not be signed by a law firm that 

provides it, as opposed to any 

individual partner.’’ 157

With respect to the comments 

opposing the condition precedent, the 

Commission reiterates that this 

requirement is designed to permit the 

Commission to avoid being the arbiter of 

whether a Requesting Party has satisfied 

the requirements of FERC regulation 

35.47(d). The Commission notes that no 

Requesting Party has asserted that it 

would be unable to obtain such a 

document. In addition, the Commission 

notes that the ambiguities discussed in 

the Proposed Order with respect to 

some Requesting Parties’ interpretations 


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158See 77 FR 52165. 

159See paragraph 7 of the Order. 

160 Id. at 52166. 

161 Id. 

162See id. 

163COPE at 4 (internal footnote omitted). 

164Commercial Working Group at 3 n.4. 

165See e.g., 18 CFR 35.9(c), 35.10(b)–(c) 

(providing procedures for amending individual 

tariff provisions, and requiring that OATT and other 

open access documents filed by ISOs or RTOs must 

be filed either as individual sheets or sections). 

166 In the absence of evidence to the contrary, the 

Commission would anticipate that PUCT would act 

similarly with respect to ERCOT. 

167See, e.g., PJM Interconnection, L.L.C. Open 

Access Transmission Tariff, Sixth Revised Volume 

No. 1, Attachment M, Market Monitoring Plan 

(permitting the MMU to provide information to 

FERC on a confidential basis without notice to any 

party). 

168See 77 FR 52166. 

169See id. at 52172. 

of the single counterparty requirement 

have not been clarified.158 The 

Commission continues to believe that 

the legal memorandum requirement will 

provide the Commission with assurance 

that the netting arrangements contained 

in the approach selected by each 

Requesting Party to satisfy the standards 

set forth in FERC regulation 35.47(d) (or 

in the case of ERCOT, standards that are 

the same as those set forth in FERC 

regulation 35.47(d)) will, in fact, 

provide the Requesting Party with 

enforceable rights of set off against any 

of its market participants under title 11 

of the United States Bankruptcy Code, 

in the event of the bankruptcy of a 

market participant. However, the 

Commission believes that this condition 

may be met subsequent to the issuance 

of this Final Order, provided that as a 

condition to the effectiveness of the 

exemption set forth in this Final Order, 

the Commission must receive, from each 

Requesting Party, a legal memorandum 

or opinion of outside counsel that is 

satisfactory to the Commission. In 

addition, the Commission clarifies that 

it retains discretion as to whether the 

legal opinion or memorandum provides 

the Commission with the assurances 

desired, and may elect not to require 

that a memorandum or opinion be 

signed by the law firm if the 

circumstances so warrant. Moreover, as 

discussed further in section IV.E. below, 

the Commission is delegating its 

authority to review and accept the legal 

memoranda or opinions to the Director 

of the Division of Clearing and Risk and 

to his designees, in consultation with 

the General Counsel or the General 

Counsel’s designees,159 which will 

expedite the process by which the 

Requesting Parties are able to satisfy this 

condition. 

With respect to the comment that the 

condition precedent requiring a legal 

memorandum or opinion of outside 

counsel may create adverse tax 

consequences, the Commission notes 

that such tax issues are beyond the 

scope of this Final Order. 

b. Conditions Subsequent to the Final 

Order 

i. Notification of Requests for 

Information 

The Proposed Order included a 

condition requiring that ‘‘neither the 

tariffs nor any other governing 

documents of the particular RTO or ISO 

pursuant to whose tariff the agreement, 

contract, or transaction is to be offered 

or sold, shall include any requirement 

that the RTO or ISO notify its members 

prior to providing information to the 

Commission in response to a subpoena 

or other request for information or 

documentation.’’ 160 As noted in the 

Proposed Order, a ‘‘notice requirement 

could significantly compromise the 

Commission’s enforcement efforts as 

there are likely to be situations where it 

would be neither prudent nor advisable 

for an entity under investigation by the 

Commission to learn of the investigation 

prior to Commission notification to the 

entity.’’ 161 The Commission requested 

comment on this proposal and as to 

whether there may be an alternative 

condition that the Commission might 

use to achieve the same result.162

One commenter asked ‘‘[d]oes the 

Commission’s subpoena secrecy 

requirement described in the Proposed 

Order mandate that FERC approve tariff 

changes that are required by the 

Commission regardless of whether FERC 

views them to be ‘just and reasonable’ 

as required by the Federal Power 

Act?’’ 163 Another commenter opposed 

this condition, arguing that ‘‘[r]eopening 

a tariff could result in multiple issues 

arising, many of which have nothing to 

do with the notice of inquiry, and may 

result in undue delay.’’ 164

In response to the comments, the 

Commission recognizes that while this 

condition may require a Tariff change 

for some Requesting Parties, this is a 

necessary condition to the exemptive 

relief. As an initial matter, RTOs and 

ISOs amend their Tariffs on a regular 

basis. Thus, amending one Tariff 

provision would not necessarily result 

in opening unrelated Tariff 

provisions.165 The Commission notes 

that none of the Requesting Parties have 

indicated in their comment letters that 

they need to revise their Tariffs to 

comply with this condition. Moreover, 

the Commission notes that RTOs and 

ISOs have proposed, and FERC has 

approved,166 similar changes to RTO 

and ISO Tariffs enabling FERC 

Enforcement staff to issue subpoenas or 

requests for information without 

notification to RTO or ISO members.167

This requirement provides the same 

protections to CFTC Enforcement 

investigations. Commenters have not 

explained why doing so would not be 

‘‘just and reasonable.’’ In addition, the 

Commission notes that, in their 

respective comment letters, neither 

FERC staff nor the PUCT opposed the 

inclusion of this condition. Therefore, 

the Commission has determined that the 

removal of notice requirements from the 

Requesting Party’s Tariffs will remain a 

condition to the Final Order. 

ii. Information Sharing Agreements 

The Proposed Order contemplated 

two conditions that addressed the 

Commission’s ability to obtain 

information from the Requesting 

Parties.168 First, with respect to ERCOT, 

the Proposed Order required that an 

information sharing arrangement 

acceptable to the Commission be 

executed between PUCT and the 

Commission and continue to be in 

effect. Second, for all FERC-regulated 

Requesting Parties, the Proposed Order 

required that information sharing 

arrangements between FERC and the 

Commission that are acceptable to the 

Commission continue to be in effect. 

The Commission specifically sought 

comment as to whether the information 

sharing arrangement to be executed 

between PUCT and the Commission 

should be a condition precedent to the 

effectiveness of a final exemption for 

ERCOT, and whether all Requesting 

Parties should be required, as a 

condition of any final exemption, to 

cooperate with the Commission’s 

requests for information with respect to 

agreements, contracts, or transactions 

that are, or are related to, the 

agreements, contracts, or transactions 

that were the subject of the Proposed 

Order.169

Of those commenters that addressed 

the information sharing condition 

precedent for ERCOT, all viewpoints 

received requested that the Commission 

refrain from requiring that an 

information sharing agreement between 

PUCT and the Commission be in place 

prior to a final exemption becoming 

effective for ERCOT. The Requesting 

Parties and PUCT noted that fulfillment 

of such a requirement is beyond the 

control of ERCOT in terms of timing and 

terms, and therefore would be more 

appropriate as a condition subsequent to 

the effectiveness of the exemption in 


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170Requesting Parties at 15; PUCT at 13. 

171Commercial Working Group at 4. 

172COPE at 8. 

173PUCT at 13. 

174COPE at 8. 

175See paragraph 4(a)(2) of the Order. The 

Commission is finalizing this condition under 

authority in CEA section 4(c)(1) to issue 4(c) relief 

conditionally with respect to those entities 

requesting/benefiting from the relief. See 7 U.S.C. 

6(c)(1). 

176As discussed in the Proposed Order, the 

Commission notes that the CFTC and FERC 

executed a Memorandum of Understanding in 2005 

pursuant to which the agencies have shared 

information successfully. 77 FR 52165. 

177See paragraph 4(a)(1) of the Order. 

178The Commission has delegated to the Director 

of the Division of Market Oversight and to such 

members of the Division’s staff acting under his or 

her direction as he or she may designate, in 

consultation with the General Counsel or such 

members of the General Counsel’s staff acting under 

his or her direction as he or she may designate, the 

authority to request information from Requesting 

Parties pursuant to sections 4(a)(1) and 4(a)(2) of the 

Order. See paragraph 7 of the Order. 

179See 7 U.S.C. 6(c)(2)(B)(ii). 

180 7 U.S.C. 5. 

181The 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— 

order to avoid uncertainty.170 Similarly, 

another commenter suggested that the 

Commission grant preliminary approval 

of the exemption for ERCOT while 

discussions between the Commission 

and PUCT remained ongoing due to 

ERCOT’s comparable market position 

with respect to the other Requesting 

Parties, and the lack of any specific 

timeline under which the information 

sharing agreement must be 

completed.171 Another commenter 

objected to the condition precedent, 

noting that ‘‘[a] one-way information 

sharing requirement acceptable to the 

CFTC is beyond what is necessary and 

implies that the Commission does not 

trust PUCT regulation.’’ 172 Finally, 

notwithstanding its objection to the 

condition precedent, PUCT expressed 

full support of working with the 

Commission to develop and execute an 

appropriate information sharing 

arrangement on a timely basis.173

Regarding the Commission’s 

contemplation of affirmatively requiring 

all Requesting Parties to cooperate with 

requests for information as a condition 

of the exemption, commenters did not 

respond directly, although one 

commenter suggested that the 

imposition of additional requirements 

upon the Requesting Parties for 

purposes of obtaining information 

through FERC or PUCT as the 

Requesting Parties’ primary regulator 

amounts to indirect regulation.174

In response to the comments opposing 

an information sharing agreement 

between PUCT and the Commission as 

a condition precedent to the 

effectiveness of relief for ERCOT, the 

Commission has determined not to 

pursue such a condition, and thus has 

stricken the execution of an 

information-sharing agreement with 

PUCT as a condition of the Final Order. 

Rather, with respect to ERCOT, the 

Final Order conditions the exemption 

upon ‘‘the Commission’s ability to 

request, and obtain, on an as-needed 

basis from ERCOT, concurrently with 

the provision of written notice to PUCT 

and in connection with an inquiry 

consistent with the CEA and 

Commission regulations, positional and 

transactional data within ERCOT’s 

possession for products in ERCOT’s 

markets that are related to markets that 

are subject to the Commission’s 

jurisdiction, including any pertinent 

information concerning such data, and 

ERCOT’s compliance with such requests 

by sharing the requested 

information.’’ 175 This revision dispels 

any concerns regarding potential delay 

to the effectiveness of the Final Order 

with respect to ERCOT that could result 

from the time it might take for PUCT 

and the Commission to complete an 

acceptable information sharing 

arrangement. This revision also 

responds to competitiveness concerns 

that ERCOT and the other Requesting 

Parties should be treated comparably 

with respect to conditions that could 

affect the timing of the effectiveness of 

the Final Order due to their comparable 

market positions. 

Consistent with the revised language 

noted above requiring ERCOT to comply 

with the Commission’s requests for 

related market data on an as-needed 

basis, the Commission has revised the 

information sharing condition 

applicable to the FERC-regulated 

Requesting Parties. The Final Order 

conditions the exemption with respect 

to FERC-regulated Requesting Parties 

upon: (1) Information sharing 

arrangements between the Commission 

and FERC that are acceptable to the 

Commission and that continue to be in 

effect 176 and (2) ‘‘those Requesting 

Parties’ compliance with the 

Commission’s requests through FERC to 

share, on an as-needed basis and in 

connection with an inquiry consistent 

with the CEA and Commission 

regulations, positional and transactional 

data within the Requesting Parties’ 

possession for products in Requesting 

Parties’ markets that are related to 

markets that are subject to the 

Commission’s jurisdiction, including 

any pertinent information concerning 

such data.’’ 177 The Commission notes 

that the Proposed Order only provided 

for information sharing arrangements. 

Thus, to qualify for the exemption 

provided by the Final Order, the 

Requesting Parties must comply with 

the Commission’s requests for related 

market data, regardless of whether the 

request is made directly (in the case of 

ERCOT) or through FERC (in the case of 

all other Requesting Parties).178

The Commission notes that any 

contemplated request for related market 

data would not be an attempt to 

indirectly regulate the Requesting 

Parties or their markets, contrary to 

some commenters’ suggestion. In order 

for the Commission to determine that 

the Final Order is consistent with the 

public interest and the purposes of the 

CEA, the terms of the Final Order 

cannot adversely affect the ability of the 

Commission to discharge its regulatory 

duties under the CEA in monitoring 

energy markets under its jurisdiction.179

Therefore, conditioning the exemption 

provided in the Final Order upon the 

Commission’s ability to obtain related 

transactional and positional data from 

the Requesting Parties, and the 

Requesting Parties’ compliance with 

such requests by sharing the requested 

information, is meant to enable the 

Commission to continue discharging its 

regulatory duties under the Act as set 

forth in CEA section 3.180 The 

Commission notes that such requested 

information should already be in the 

possession of the Requesting Parties. 

B. Section 4(c) Analysis 

1. Overview of CEA Section 4(c) 

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

As discussed above in section I., the 

Dodd-Frank Act amended CEA section 

4(c) to add sections 4(c)(6)(A) and (B), 

which provide for exemptions for 

certain transactions entered into (a) 

pursuant to a tariff or rate schedule 

approved or permitted to take effect by 

FERC, or (b) pursuant to a tariff or rate 

schedule establishing rates or charges 

for, or protocols governing, the sale of 

electric energy approved or permitted to 

take effect by the regulatory authority of 

the State or municipality having 

jurisdiction to regulate rates and charges 

for the sale of electric energy within the 

State or municipality, as eligible for 

exemption pursuant to the 

Commission’s 4(c) exemptive 

authority.181 Indeed, 4(c)(6) provides 


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(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)). 

182 Id. (emphasis added). 

183CEA section 4(c)(6) explicitly directs the 

Commission to consider any exemption proposed 

under 4(c)(6) ‘‘in accordance with [CEA sections 

4(c)(1) and (2)].’’ 

184Section 4(c)(1), 7 U.S.C. 6(c)(1), states: 

(c)(1) In order to promote responsible economic 

or financial innovation and fair competition, the 

Commission by rule, regulation, or order, after 

notice and opportunity for hearing, may (on its own 

initiative or on application of any person, including 

any board of trade designated or registered as a 

contract market or derivatives transaction execution 

facility for transactions for future delivery in any 

commodity under section 5 of this Act) exempt any 

agreement, contract, or transaction (or class thereof) 

that is otherwise subject to subsection (a) (including 

any person or class of persons offering, entering 

into, rendering advice or rendering other services 

with respect to, the agreement, contract, or 

transaction), either unconditionally or on stated 

terms or conditions or for stated periods and either 

retroactively or prospectively, or both, from any of 

the requirements of subsection (a), or from any 

other provision of this Act (except subparagraphs 

(C)(ii) and (D) of section 2(a)(1), except that— 

(A) unless the Commission is expressly 

authorized by any provision described in this 

subparagraph to grant exemptions, with respect to 

amendments made by subtitle A of the Wall Street 

Transparency and Accountability Act of 2010— 

(i) with respect to— 

(I) paragraphs (2), (3), (4), (5), and (7), paragraph 

(18)(A)(vii)(III), paragraphs (23), (24), (31), (32), 

(38), (39), (41), (42), (46), (47), (48), and (49) of 

section 1a, and sections 2(a)(13), 2(c)(1)(D), 4a(a), 

4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a), 5b(b), 5(d), 5(g), 

5(h), 5b(c), 5b(i), 8e, and 21; and 

(II) section 206(e) of the Gramm-Leach-Bliley Act 

(Public Law 106–102; 15 U.S.C. 78c note); and 

(ii) in sections 721(c) and 742 of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act; 

and 

(B) the Commission and the Securities and 

Exchange Commission may by rule, regulation, or 

order jointly exclude any agreement, contract, or 

transaction from section 2(a)(1)(D)) if the 

Commissions determine that the exemption would 

be consistent with the public interest. 

185See CEA 4(c)(2)(B)(i) and the discussion of 

CEA section 4(c)(3) in sections I. supra and 

IV.B.1.d. infra. 

186CEA 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). 

187See discussion regarding CEA section 4(c)(6) 

in sections I. supra and IV.B.1.a. infra. 

188 Joint Trade Associations at 5. See also id. at 

3, 8; FERC Staff at 4. 

189 Joint Trade Associations at 5 (alterations in 

original). 

190COPE at 10. 

191 Id. (arguing that the Commission in fact 

proposed to retain jurisdiction over RTOs and ISOs 

because it did not propose to issue a blanket 

exemption and rather proposed to: (1) Refrain from 

issuing a final order until two preconditions have 

been met; (2) require information sharing 

agreements while failing to negotiate a 

Congressionally-mandated memorandum of 

understanding with PUCT; (3) require Requesting 

Parties to change their Tariffs to remove member 

notification requirements in the event of 

Commission requests for information; (4) retain the 

authority to alter or revoke the exemption upon a 

change of material facts; (5) require Requesting 

Parties to submit supplemental filings; (6) reject 

that ‘logical extensions’’ of exempted transactions 

also be subject to the order; and (7) impose 

limitations on participation the Requesting Parties’ 

market through the Commission’s application of the 

appropriate person standard). 

that ‘‘[i]f the Commission determines 

that the exemption would be consistent 

with the public interest and the 

purposes of this chapter, the 

Commission shall’’ issue such an 

exemption.182 However, any exemption 

considered under 4(c)(6)(A) and/or (B) 

must be done ‘‘in accordance with [CEA 

section 4(c)(1) and (2)].’’ 183

b. Section 4(c)(1) 

As described above in section I., CEA 

section 4(c)(1) requires that the 

Commission act ‘‘by rule, regulation or 

order, after notice and opportunity for 

hearing.’’ It also provides that the 

Commission may act ‘‘either 

unconditionally or on stated terms or 

conditions or for stated periods and 

either retroactively or prospectively or 

both’’ and that the Commission may 

provide an exemption from any 

provisions of the CEA except 

subparagraphs (C)(ii) and (D) of section 

2(a)(1).184

c. Section 4(c)(2) 

As set forth above in section I., CEA 

section 4(c)(2) requires the Commission 

to determine that: to the extent an 

exemption provides relief from any of 

the requirements of CEA section 4(a), 

the requirement should not be applied 

to the agreement, contract or 

transaction; the exempted agreement, 

contract, or transactions will be entered 

into solely between appropriate 

persons; 185 and the exemption will not 

have a material adverse effect on the 

ability of the Commission or any 

contract market to discharge its 

regulatory or self-regulatory duties 

under the CEA.186

d. Section 4(c)(3) 

As explained in section I. above, CEA 

section 4(c)(3) outlines who may 

constitute an appropriate person for the 

purpose of a 4(c) exemption, including 

as relevant to this Final Order: (a) Any 

person that fits in one of ten defined 

categories of appropriate persons; or (b) 

such other persons that the Commission 

determines to be appropriate in light of 

their financial or other qualifications, or 

the applicability of appropriate 

regulatory protections. 

2. CEA Section 4(c) Determinations 

a. Commission Jurisdiction 

Subject to the limitations set forth in 

the CEA, sections 4(c)(6)(A) and (B) of 

the Act grant the Commission the 

authority to exempt certain electric 

energy transactions provided that the 

Commission determines, among other 

things, that such exemption is 

consistent with the public interest and 

purposes of the CEA.187 The 

Commission received several comments 

relating to the Commission’s 

interpretation of its jurisdiction 

pursuant to section 4(c)(6). 

Two commenters argued that, the 

Commission should ‘‘interpret the 

Dodd-Frank Act as not applying to any 

contract or agreement traded in an RTO 

or ISO market pursuant to a FERCaccepted or approved rate schedule or 

tariff’’ and that the Commission should 

exclude RTO or ISO contracts or 

instruments from the definition of 

swap.188 One of these commenters 

further argued that ‘‘Congress did not 

intend for Petitioners to be subject to 

such regulation under the Dodd-Frank 

Act. Congress recognized the 

impropriety of imposing duplicative 

regulation over entities such as 

Petitioners and instructed the 

Commission and FERC to ‘appl[y] their 

respective authorities in a manner so as 

to ensure the effective and efficient 

regulation in the public interest’ and to 

‘[avoid], to the extent possible, 

conflicting or duplicative 

regulation.’ ’’ 189

A different commenter claimed that 

the Commission should not regulate 

‘‘[a]ccess to physical electricity 

markets.’’ 190 This commenter argued 

that the Proposed Order is ‘‘more of a 

delegation of authority (to FERC and the 

PUCT) than an exemption,’’ which 

‘‘establishes a sort of joint regulation 

going forward with the CFTC setting 

minimum RTO participation standards, 

approving new transactions or ‘material 

modifications,’ and, through its ability 

to alter or withdraw the exemption, 

indirectly regulating RTOs.’’191

Another commenter recognized the 

Commission’s exemptive authority 

under section 4(c)(6), but requested that 

the Commission affirmatively state in 

any final order that it makes no 

determination as to whether the 

transactions included in the final order 

fall within the Commission’s 

jurisdiction because the absence of such 

statement ‘‘could actually undermine 

the very regulatory certainty being 

requested by Petitioners, and potentially 


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192PUCT at 4. 

193 7 U.S.C. 5(a). 

194 7 U.S.C. 5(b). 

195See 77 FR 52144–45. 

196See id. 

197See id. (explaining that, according to the 

Requesting Parties, each RTO and ISO must employ 

a transmission pricing system that promotes 

efficient use and expansion of transmission and 

generation facilities; develop and implement 

procedures to address parallel path flow issues 

within its region and with other regions; serve as 

a provider of last resort of all ancillary services 

required by FERC Order No. 888 including ensuring 

that its transmission customers have access to a 

Real-Time balancing market; be the single OASIS 

(Open-Access Same-Time Information System) site 

administrator for all transmission facilities under its 

control and independently calculate Total 

Transmission Capacity and Available Transmission 

Capability; provide reliable, efficient, and not 

unduly discriminatory transmission service, it must 

provide for objective monitoring of markets it 

operates or administers to identify market design 

flaws, market power abuses and opportunities for 

efficiency improvements; be responsible for 

planning, and for directing or arranging, necessary 

transmission expansions, additions, and upgrades; 

and ensure the integration of reliability practices 

within an interconnection and market interface 

practices among regions). See also Petition at 13– 

14. 

198TEX. UTIL. CODE ANN. 11.001 et seq. 

(Vernon 1998 & Supp. 2005). 

199See id.; Petition at 14–15. ERCOT represented 

that, pursuant to PURA 39.151(a), its roles and 

duties are to provide access to the transmission and 

distribution systems for all buyers and sellers of 

electric energy on nondiscriminatory terms; ensure 

the reliability and adequacy of the regional electric 

energy network; ensure that information relating to 

a customer’s choice of retail electric energy 

provider is conveyed in a timely manner to the 

persons who need that information; and ensure that 

electric energy production and delivery are 

accurately accounted for among the generators and 

wholesale buyers and sellers in the region. See 77 

FR 52144–45; Petition at 14–15. 

200See 77 FR 52144 (quoting Petition at 14). See 

also 18 CFR 35.34(k)(2). 

201See 77 FR 52144. See also generally Petition 

at 20. 

202See 77 FR 52144. See also Petition at 3–4. 

203See 77 FR 52144. See also Petition at 15–18. 

204See id. See also Petition at 6–9 (describing the 

transactions for which an exemption was requested 

give rise to unnecessary jurisdictional 

disputes.’’ 192

In response to the comments, the 

Commission notes that the definition of 

a ‘‘swap’’ set forth in Commission 

regulations is beyond the scope of this 

Final Order. The Commission further 

notes that the interpretation of the 

Dodd-Frank Act proffered by the 

commenters is contrary to the express 

language of that statute. The DoddFrank Act added a savings clause to the 

CEA that addresses the roles of the 

Commission, FERC, and state agencies 

as they relate to transactions traded 

pursuant to FERC- or state-approved 

tariffs or rate schedules. Section 

2(a)(1)(I) of the Act repeats the 

Commission’s exclusive jurisdiction and 

clarifies that the Commission retains its 

authority over transactions that are 

within its jurisdiction. Moreover, while, 

section 4(c)(6) of the CEA, added by the 

Dodd-Frank Act, empowers the 

Commission to exempt contracts, 

agreements or transactions traded 

pursuant to a Tariff or rate schedule that 

has been approved or permitted to take 

effect by FERC or a state regulatory 

authority, it does not permit the 

Commission to automatically or 

mechanically apply the exemption. 

Instead, section 4(c)(6) mandates that 

the Commission initially determine that 

the exemption would be in the public 

interest and consistent with the 

purposes of the CEA, that the exemption 

would be applied only to agreements, 

contracts, or transactions that are 

entered into solely between appropriate 

persons, and that the exemption will not 

have a material adverse effect on the 

ability of the Commission or any 

contract market to discharge its 

regulatory or self-regulatory duties 

under the CEA. 

b. Consistent With the Public Interest 

and the Purposes of the CEA 

As required by CEA section 4(c)(2)(A), 

as well as section 4(c)(6), the 

Commission determines that the Final 

Order is consistent with the public 

interest and the purposes of the CEA. 

Section 3(a) of the CEA provides that 

transactions subject to the CEA affect 

the national public interest by providing 

a means for managing and assuming 

price risk, discovering prices, or 

disseminating pricing information 

through trading in liquid, fair and 

financially secure trading facilities.193

Section 3(b) of the CEA identifies the 

purposes of the CEA: 

It is the purpose of this Act to serve the 

public interests described in subsection (a) 

through a system of effective self-regulation 

of trading facilities, clearing systems, market 

participants and market professionals under 

the oversight of the Commission. To foster 

these public interests, it is further the 

purpose of this Act to deter and prevent price 

manipulation or any other disruptions to 

market integrity; to ensure the financial 

integrity of all transactions subject to this Act 

and the avoidance of systemic risk; to protect 

all market participants from fraudulent or 

other abusive sales practices and misuses of 

customer assets; and to promote responsible 

innovation and fair competition among 

boards of trade, other markets and market 

participants.194

Consistent with the proposed 

determinations set forth in the Proposed 

Order,195 the Commission finds that: (a) 

The Covered Transactions have been, 

and are, subject to a long-standing, 

regulatory framework for the offer and 

sale of the Transactions established by 

FERC or PUCT; and (b) the Covered 

Transactions administered by the RTOs, 

ISOs, or ERCOT are part of, and 

inextricably linked to, the organized 

wholesale electric energy markets that 

are subject to FERC and PUCT 

regulation and oversight. For example, 

FERC Order No. 2000 (which, along 

with FERC Order No. 888, encouraged 

the formation of RTOs and ISOs to 

operate the electronic transmission grid 

and to create organized wholesale 

electric energy markets) requires an 

RTO or ISO to demonstrate that it has 

four minimum characteristics: (1) 

Independence from any market 

participant; (2) a scope and regional 

configuration which enables the RTO or 

ISO to maintain reliability and 

effectively perform its required 

functions; (3) operational authority for 

its activities, including being the 

security coordinator for the facilities 

that it controls; and (4) short-term 

reliability.196 In addition, the 

Requesting Parties stated that an RTO or 

ISO must demonstrate to FERC that it 

performs certain self-regulatory and/or 

market monitoring functions,197 and 

analogous requirements are applicable 

to ERCOT under PUCT and the Public 

Utility Regulatory Act 198 (‘‘PURA’’).199

Requesting Parties also represented that 

they are responsible for ‘‘ensur[ing] the 

development and operation of market 

mechanisms to manage transmission 

congestion * * * The market 

mechanisms must accommodate broad 

participation by all market participants, 

and must provide all transmission 

customers with efficient price signals 

that show the consequences of their 

transmission usage decisions.’’ 200

Furthermore, as explained by the 

Requesting Parties and discussed in the 

Proposed Order, the Commission notes 

that the Covered Transactions are 

entered into primarily by commercial 

participants that are in the business of 

generating, transmitting, and 

distributing electric energy,201 and the 

Requesting Parties were established for 

the purpose of providing affordable, 

reliable electric energy to consumers 

within their geographic region.202

Additionally, the Covered Transactions 

that take place on the Requesting 

Parties’ markets are overseen by an 

MMU, required by FERC for each 

Requesting Party under its jurisdiction 

and by PUCT in the case of ERCOT, to 

identify manipulation of electric energy 

on the Requesting Parties’ markets.203

Moreover, fundamental to this 

‘‘public interest’’ and ‘‘purposes of the 

[Act]’’ analysis is the fact that the 

Covered Transactions are inextricably 

tied to the Requesting Parties’ physical 

delivery of electric energy.204 Another 


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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’’). 

205See 77 FR 52145–47. 

206See sections IV.B.2.e.ii.–iii. infra; 77 FR at 

52149–62. The Commission received several 

comments regarding the use of the DCO and SEF 

Core Principles as a measure for the Commission’s 

public interest and purposes of the CEA 

determination. These comments are addressed in 

sections IV.B.2.e.ii.–iii. infra. 

207See sections IV.A.3.a.i. infra and IV B.2.e.ii. 

infra; 77 FR at 52147–48. 

208See, e.g., COPE at 6; Commercial Working 

Group at 4. 

209Commercial Working Group at 4. 

210COPE at 6. 

211See sections I. and IV.B.1.a. supra. 

212See sections IV.B.2.e.i.–ii. infra; 77 FR at 

52149–62. 

213See appropriate persons analysis, section 

IV.B.2.d. infra; 77 FR at 52147–48. 

214 7 U.S.C. 6(c)(2)(B)(i). 

215 7 U.S.C. 6(c)(3). 

216 Id. 

important factor is that the Final Order 

is explicitly limited to Covered 

Transactions taking place on markets 

that are monitored by either an 

independent MMU, a market 

administrator (the RTO, ISO, or 

ERCOT), or both, and a government 

regulator (FERC or PUCT). In contrast, 

an exemption for transactions that are 

not so monitored, or not related to the 

physical capacity of an electric 

transmission grid, or not directly linked 

to the physical generation and 

transmission of electric energy, or not 

limited to appropriate persons,205 is 

unlikely to be in the public interest or 

consistent with the purposes of the 

CEA, taking such transactions outside 

the scope of the Final Order. 

Finally, the extent to which the Final 

Order is consistent with the public 

interest and the purposes of the Act can, 

in major part, be assessed by the extent 

to which the Tariffs and activities of the 

Requesting Parties, and supervision by 

FERC and PUCT, are congruent with, 

and sufficiently accomplish, the 

regulatory objectives of the relevant 

Core Principles set forth in the CEA for 

DCOs and SEFs. Specifically, providing 

a means for managing or assuming price 

risk and discovering prices, as well as 

prevention of price manipulation and 

other disruptions to market integrity, are 

addressed by the Core Principles for 

SEFs. Ensuring the financial integrity of 

the Covered Transactions and the 

avoidance of systemic risk, as well as 

protection from the misuse of 

participant assets, are addressed by the 

Core Principles for DCOs. Deterrence of 

price manipulation (or other disruptions 

to market integrity) and protection of 

market participants from fraudulent 

sales practices is achieved by the 

Commission retaining and exercising its 

jurisdiction over these matters. 

Therefore, the Commission has 

incorporated its DCO and SEF Core 

Principle analyses, set forth in the 

Proposed Order, into its consideration 

of the Final Order’s consistency with 

the public interest and the purposes of 

the Act.206 In the same way, the 

Commission has considered how the 

public interest and the purposes of the 

CEA are also addressed by the manner 

in which the Requesting Parties comply 

with FERC’s credit reform policy.207

The Commission specifically 

requested comment on whether it used 

the appropriate standard in making its 

section 4(c) determination. The 

Commission received comments with 

respect to compliance with FERC’s 

credit reform policy as a precondition to 

the issuance of a Final Order, which are 

discussed in sections IV.A.3.a.i. and 

IV.B.2.e.i., and on the Commission’s use 

of the DCO and SEF Core Principles, 

which are discussed in sections 

IV.B.2.e.i.–ii. below. 

The Commission received a number 

of comments regarding the 

appropriateness of the public interest 

and purposes of the CEA standard 

outlined above.208 One commenter 

stated that the standard set forth in the 

Proposed Order, and in particular 

compliance with FERC regulation 35.47, 

‘‘sufficiently demonstrates that the 

proposed exemption is consistent with 

the public interest and the purposes of 

the Act.’’ 209 However, another 

commenter argued that the Commission 

did not use the appropriate standard in 

analyzing whether the exemption is in 

the public interest and consistent with 

the purposes of the Act, because the 

Requesting Parties are ‘‘physical 

electricity transmission and market 

operators pervasively regulated by 

either FERC or the PUCT,’’ and ‘‘[t]he 

existence of such regulation should be 

the premise upon which an exemption 

is granted.’’ 210

The Commission has considered the 

comments, and believes that it has used 

the appropriate standard in making its 

public interest and purpose of the CEA 

determination for purposes of this Final 

Order. The Commission disagrees that 

the existence of pervasive FERC and 

PUCT regulations is, by itself, a 

sufficient standard to analyze that the 

requested exemptive relief is consistent 

with the public interest and the 

purposes of the CEA, because, as set 

forth above,211 section 4(c)(6) of the 

CEA, added by the Dodd-Frank Act, 

does not permit the Commission to 

automatically or mechanically apply an 

exemption. 

After consideration of the comments 

received and for the reasons set forth in 

this Final Order, the Commission has 

determined that the exemption set forth 

in this Final Order is consistent with the 

public interest and the purposes of the 

CEA. 

c. CEA Section 4(a) Should Not Apply 

to the Transactions or Entities Eligible 

for the Exemption 

CEA section 4(c)(2)(A) requires, in 

part, that the Commission determine 

that the Covered Transactions described 

in the Final Order should not be subject 

to CEA section 4(a)—generally, the 

Commission’s exchange trading 

requirement for a contract for the 

purchase or sale of a commodity for 

future delivery. As set forth in the 

Proposed Order, the Commission has 

examined the Covered Transactions, the 

Requesting Parties, and their markets 

using the CEA Core Principle 

requirements applicable to a DCO and to 

a SEF as a framework for its public 

interest and purposes of the CEA 

determination.212 As further support for 

this determination, the Commission also 

is relying on the public interest and the 

purposes of the Act analysis in 

subsection IV.B.2.f. below. In so doing, 

the Commission has determined that, 

due to the FERC or PUCT regulatory 

scheme and the RTO or ISO market 

structure already applicable to the 

Covered Transactions, the linkage 

between the Covered Transactions and 

those regulatory schemes, and the 

unique nature of the market participants 

that would be eligible to rely on the 

exemption,213 CEA section 4(a) should 

not apply to the Covered Transactions 

under the Final Order. 

d. Appropriate Persons 

Section 4(c)(2)(B)(i) of the CEA 214

requires, for an exemption to be granted, 

that the Commission make a 

determination that the exemption is 

restricted to Covered Transactions 

entered into solely between 

‘‘appropriate persons,’’ as that term is 

defined in section 4(c)(3) of the Act.215

Section 4(c)(3) defines the term 

‘‘appropriate person’’ to include: (1) 

Any person that falls within one of the 

ten categories of persons delineated in 

sections 4(c)(3)(A) through (J) of the Act 

or (2) such other persons that the 

Commission determines to be 

appropriate pursuant to the limited 

authority provided by section 

4(c)(3)(K).216 The Commission may 

determine that persons that do not meet 

the requirements of sections 4(c)(3)(A) 

through (J) are ‘‘appropriate persons’’ for 


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217 Id. 

218 77 FR 52166. See also id. at 52145–46, 52163– 

64. 

219See generally id. at 52146. The Commission 

proposed to deem ECPs as ‘‘appropriate persons’’ 

pursuant to the authority set forth in section 

4(c)(3)(K) of the CEA. 

220 Id. at 52163–64. 

221See id. at 52146, 52166, 52172. 

222See id. at 52172. 

223See id. at 52164, 52172. 

224See id. 

225See id. at 52172. 

226See generally Industrial Coalitions at 4–5. 

227See, e.g., APPA at 3; FERC Staff at 6; Joint 

Trade Associations at 11–13; PUCT at 11. The Joint 

Trade Associations also requested, in the 

alternative, that the Commission determine that 

electric cooperatives are ECPs. See generally Joint 

Trade Associations at 3. 

228See, e.g., TEAM/ARM at 2–3; PUCT at 10. 

229See, e.g., Industrial Coalitions at 4; NYISO 

Supplement to Requesting Parties’ Comment, 

Attachment B at 6–7. 

230See, e.g., Industrial Coalitions at 4. 

231See, e.g., Financial Marketers Coalition at 2– 

13; NYISO at 2–10. 

232See, e.g., APPA at 3, FERC Staff at 6; Joint 

Trade Associations at 11–13; PUCT at 11. 

233See generally Joint Trade Associations at 11– 

12. 

234See generally APPA at 3; Joint Trade 

Association at 12. 

purposes of section 4(c) only if it 

determines that such persons ‘‘are 

appropriate in light of their financial or 

other qualifications, or the applicability 

of regulatory protections.’’ 217

The Commission proposed to limit 

the exemption to transactions where all 

parties thereto either (a) satisfy the 

appropriate persons criteria set forth in 

sections 4(c)(3)(A) through (J) or, (using 

its authority under section 4(c)(3)(K)) (b) 

qualify as ECPs, as defined in section 

1a(18)(A) of the CEA and in 

Commission regulation 1.3(m).218 The 

Commission requested comment as to 

whether ECPs should be considered 

appropriate persons for purposes of the 

Final Order.219 The Commission 

recognized, however, that ‘‘the market 

participant eligibility standards of an 

individual RTO or ISO may not be 

coextensive with the criteria required by 

sections 4(c)(3)(A) through (J) or section 

1a(18) of the Act’’ 220 and that, therefore, 

there may be certain RTO or ISO market 

participants engaging in the transactions 

proposed for exemption that would not 

qualify for the exemption as set forth in 

the Proposed Order. Accordingly, the 

Commission requested comment as to 

whether there are any entities currently 

engaging in the transactions delineated 

in the Proposed Order, and in the 

markets administered by the Requesting 

Parties that are neither appropriate 

persons under sections 4(c)(3)(A)–(J) of 

the CEA nor ECPs, and on what basis 

the Commission should exercise its 

authority under section 4(c)(3)(K) with 

respect to such entities to conclude that 

such parties should be appropriate 

persons for purposes of the Final 

Order.221 The Commission also 

requested descriptions of the additional 

parties that should be included in the 

scope of the term appropriate persons 

for these purposes,222 and expressed 

particular interest in considering the 

inclusion of market participants who 

actively participate in the generation, 

transmission, or distribution of electric 

energy.223 Finally, the Commission 

requested that any comments seeking to 

include additional parties within the 

scope of the appropriate person 

definition for purposes of the Final 

Order be accompanied by an 

explanation of the financial or other 

qualifications of such persons or the 

available regulatory protections that 

would render such persons appropriate 

persons and the bases for determining 

that (1) such parties could bear the 

financial risks of the transactions,224 (2) 

the inclusion of such parties would not 

have any adverse effect on the relevant 

RTO or ISO, and (3) failing to include 

such parties would have an adverse 

effect on the relevant RTO or ISO.225

The Commission did not receive any 

comment objecting to its proposed 

determination, pursuant to section 

4(c)(3)(K) of the Act, that ECPs be 

included within the definition of 

appropriate persons for purposes of the 

Final Order. Accordingly, and pursuant 

to the authority set forth in section 

4(c)(3)(K) of the CEA, the Commission 

has determined that ECPs, as defined in 

section 1a(18)(A) of the CEA and in 

Commission regulation 1.3(m), are 

appropriate persons for purposes of the 

Final Order in light of their financial or 

other qualifications, or the applicability 

of regulatory protections. In addition, in 

response to confusion regarding 

whether market participants are 

required to establish compliance with 

section 4(c)(3)(F) or demonstrate their 

ECP status for purposes of this Final 

Order through the use of audited 

financial statements, the Commission 

also is clarifying that market 

participants that qualify as appropriate 

persons under section 4(c)(3)(F) of the 

CEA or on the grounds that they are 

ECPs as defined in section 1a(18)(A) of 

the Act and Commission regulation 

1.3(m), are not required to prove such 

qualification through the use of audited 

financial statements. 

The Commission also received several 

comments requesting that it exercise its 

statutory authority under section 

4(c)(3)(K) to expand further the 

definition of appropriate person for 

purposes of the Final Order. These 

comments generally fell into three 

categories: requests to extend the 

definition to specific subsets of market 

participants; requests to expand the 

definition more broadly to include, for 

example, all market participants that 

satisfy the participant eligibility criteria 

established by the Requesting Parties; 

and requests to clarify that certain 

market participants are included in the 

definition of appropriate person set 

forth in CEA sections 4(c)(3)(F) and (H). 

Several commenters also requested that 

all market participants who engage in 

particular types of transactions (such as 

virtual and demand response 

transactions) be included in the 

definition of appropriate person for the 

purpose of the Final Order. 

i. Determinations Regarding the 

Inclusion of Specifically Identified 

Market Participants as Appropriate 

Persons for Purposes of the Final Order 

The Commission received multiple 

requests to include various categories of 

market participants within the scope of 

appropriate person for purposes of the 

Final Order. One commenter urged the 

Commission to expand the definition to 

include all persons who actively 

participate in the generation, 

transmission, or distribution of electric 

energy, noting that the proposed 

definition of appropriate person could 

exclude traditionally active market 

participants whose participation 

facilitates demand response activities, 

and reduces costs.226 Other commenters 

requested the inclusion of specifically 

identifiable groups of market 

participants such as electric 

cooperatives,227 retail electric providers 

(‘‘REPs’’),228 load serving entities 

(‘‘LSEs’’),229 curtailment service 

providers (‘‘CSPs’’),230 and persons who 

engage in virtual and convergence bids 

and offers.231

Multiple commenters requested that 

electric cooperatives be deemed 

appropriate persons for purposes of the 

Final Order.232 One commenter asserted 

that electric cooperatives, by their 

nature, ‘‘actively participate in the 

generation, transmission or distribution 

of electricity.’’ 233 Certain commenters 

asserted that electric cooperatives may 

be required to obtain transmission and 

other services from RTOs and ISOs and 

that the participation of electric 

cooperatives in the RTO and ISO 

markets assists in ensuring the 

availability of electric energy, 

transmission, or capacity to their 

consumers.234 One commenter 

additionally noted the operational 

qualifications and non-profit status of 

electric cooperatives in support of their 


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235See generally Joint Trade Associations at 12. 

236See, e.g., TEAM/ARM at 2–3; PUCT at 10. 

237See, e.g., TEAM/ARM at 2–3. 

238 Id. 

239PUCT at 10. 

240See, e.g., Industrial Coalitions at 4; NYISO 

Supplement to Requesting Parties’ Comment, 

Attachment B at 6–7. 

241See generally NYISO Supplement to 

Requesting Parties’ Comment, Attachment B at 6– 

7. 

242See generally Industrial Coalitions at 4–5. 

243See, e.g., Financial Marketers Coalition at 2– 

13; NYISO at 2–10. 

244See generally Financial Marketers Coalition at 

2–10. 

245Accordingly, the exemption provided by the 

Final Order will apply to agreements, contracts or 

transactions where (1) each party thereto is an 

‘‘appropriate person,’’ as defined in sections 

4(c)(3)(A) through (J) of the CEA; an ‘‘eligible 

contract participant,’’ as defined in section 

1a(18)(A) of the CEA and in Commission regulation 

1.3(m); or a ‘‘person who actively participates in the 

generation, transmission, or distribution of electric 

energy,’’ as defined in Final Order and (2) that 

satisfy the additional parameters for inclusion in 

the exemption set forth in the Final Order. 

246See generally CAISO/ISO NE January at 4 

(noting that ‘‘the Petitioners’ wholesale electricity 

markets mainly cater to Load Serving Entities, their 

suppliers, and others whose primary business is the 

physical generation of electricity and most 

transactions on the market involve the actual 

supply and demand of electricity’’). See also 

Petition at 27. 

247See, e.g., AB Energy at 1; Commercial Working 

Group at 2–4; COPE at 7; ERCOT October at 1–11; 

ERCOT December at 2, 10; FERC Staff at 6; 

Financial Marketers Coalition at 2, 11–16; Industrial 

Coalitions at 1, 3–5; Joint Trade Associations at 11– 

13; NEPOOL at 2–3; NYISO Supplement to 

Requesting Parties’ Comment, Attachment B at 1; 

NYTOs at 3–4; NYPSC at 2; Requesting Parties at 

2–5; PJM at 1, 4; PUCT at 9; Tarachand at 1–2. 

248See, e.g., AB Energy at 1; ERCOT October at 

2–11; Industrial Coalitions at 5; NEPOOL at 2; 

NYISO Supplement to Requesting Parties’ 

Comment, Attachment B at 1–4; NYPSC at 2; 

NYTOs at 4; PUCT at 10; Requesting Parties at 2– 

5; Tarachand at 1–2; TEAM/ARM at 2. 

249See, e.g., Commercial Working Group at 3; 

ERCOT December at 7; FERC Staff at 6; Financial 

Marketers Coalition at 11–12; Industrial Coalitions 

at 5; NYPSC at 3; PJM at 4; PUCT at 11; Tarachand 

at 2. 

consideration as appropriate persons.235

Some commenters requested that the 

Commission designate all REPs that 

have been certified by PUCT as 

appropriate persons for purposes of the 

Final Order.236 One commenter asserted 

that REP transactions ‘‘are generally 

conducted for the narrow purposes of 

purchasing electricity for provision to 

retail customers and for hedging the 

dynamic risks of purchasing supply to 

meet demand’’ and that ‘‘the relatively 

small scale’’ of these transactions makes 

it ‘‘unlikely that the transactions will 

result in market harm.’’ 237 This 

commenter also noted that REPs are 

subject to certification requirements in 

addition to the capital requirements set 

forth in applicable market protocols.238

Another commenter argued that the 

inclusion of REPs would further the 

public interest in a ‘‘vibrant, diverse 

market.’’ 239 Multiple commenters also 

requested the inclusion of LSEs.240 One 

of the Requesting Parties stated that at 

least ten percent of the LSEs in its 

market may not qualify as appropriate 

persons under the proposed standard 

and maintained that the loss of these 

market participants could undermine a 

program through which the LSEs 

compete to offer end-use customers 

competitive energy prices and 

services.241 Another commenter 

suggested that certain LSEs and CSPs 

could participate in the market in a 

manner that facilitates demand response 

and reduces costs.242 Certain 

commenters requested that market 

participants who engage in virtual and 

convergence bids and offers be deemed 

appropriate persons for purposes of the 

exemption.243 Finally, one commenter 

requested confirmation that market 

participants ‘‘do not have to own 

physical assets, such as transmission 

lines or generating facilities,’’ in order to 

qualify for the exemption set forth in the 

Proposed Order.244

After consideration of the comments 

described above, the Commission is 

using the authority provided by section 

4(c)(3)(K) of the CEA to determine that 

a ‘‘person who actively participates in 

the generation, transmission, or 

distribution of electric energy,’’ as 

defined within the Final Order, is an 

appropriate person for purposes of the 

exemption provided therein.245 The 

Final Order defines a ‘‘person who 

actively participates in the generation, 

transmission, or distribution of electric 

energy’’ as ‘‘a person that is in the 

business of: (1) Generating, transmitting 

or distributing electric energy or (2) 

providing electric energy services that 

are necessary to support the reliable 

operation of the transmission system.’’ 

The Commission has determined that 

the inclusion of transactions entered 

into by such persons is proper because 

such persons’ active participation in the 

physical markets provide them with the 

requisite ‘‘qualifications’’ necessary to 

be deemed an ‘‘appropriate person’’ 

under section 4(c)(3)(K) for purposes of 

the Final Order. 

Although the Commission expects 

that the definition of a ‘‘person who 

actively participates in the generation, 

transmission, or distribution of electric 

energy’’ will capture many of the market 

participants referenced in the comments 

that the Commission received,246 the 

Commission has chosen to define the 

phrase generally by reference to the 

relevant person’s business activities, 

rather than referencing or delineating 

particular market participant labels or 

terms that may have different meanings 

in different markets and that may be 

subject to change over time. By way of 

example, however, the Commission 

notes that the definition would include 

an entity that is in the business of 

providing demand response services in 

the markets as they are currently 

operated by the Requesting Parties. In 

response to the request for clarification 

of this issue, the Commission confirms 

that, to be eligible for the exemption set 

forth in this Final Order, a transaction 

(including a virtual or convergence bid 

or offer) need not be entered into by 

market participants who own physical 

transmission or generation assets, as 

long as the transaction is entered into by 

persons who satisfy the criteria set forth 

in the Final Order. The Final Order 

would not, however, extend to 

agreements, contracts, or transactions 

that are entered into by individuals and 

entities that are engaged in the business 

of entering into or facilitating financial 

transactions (such as virtual and 

convergence bids and offers), and that 

(1) do not actively participate in the 

generation, distribution and 

transmission of electric energy, (2) are 

not ECPs, or (3) do not satisfy any of the 

criteria set forth in sections 4(c)(3)(A) 

through (J) of the CEA. The Commission 

is concerned that a person or entity that 

is engaged in purely financial 

transactions in the RTO or ISO markets, 

but that does not meet either the ECP or 

the CEA sections 4(c)(3)(A) through (J) 

appropriate person criteria may be 

operating on inadequate resources and 

may pose inappropriate risks to itself 

and other market participants. 

ii. Determinations Regarding the 

Inclusion of All RTO and ISO Market 

Participants as Appropriate Persons for 

Purposes of the Final Order 

Several commenters advocated that 

the Commission use the authority 

provided by section 4(c)(3)(K) of the 

CEA to expand the definition of 

appropriate persons for purposes of the 

Final Order to include all entities that 

satisfy the market participant eligibility 

requirements established by the RTOs 

and ISOs.247 Commenters generally 

supported their positions by: (1) Citing 

to the capitalization, financial security 

and/or other requirements that RTO and 

ISO market participants must satisfy; 248

(2) alleging potential adverse effects of 

the exit from the RTO and ISO markets 

of current participants that would be 

unable to meet the proposed appropriate 

person criteria; 249 and/or (3) asserting a 

perceived lack of risk to the overall 


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250See, e.g., AB Energy at 1–2; FERC Staff at 6; 

Financial Marketers Coalition at 15; NYTOs at 4; 

PUCT at 11; Requesting Parties at 4; Tarachand at 

2. 251See, e.g., AB Energy at 2; CAISO/ISO NE 

January at 6; ERCOT October at 4–11; ERCOT 

December at 7; Financial Marketers Coalition at 13– 

14; Industrial Coalitions at 5; NEPOOL at 2; NYISO 

Supplement to Requesting Parties’ Comment, 

Attachment B at 1–4; NYPSC at 2; NYTOs at 4; 

Requesting Parties at 3–6, 8; PJM at 4; PUCT at 9; 

Tarachand at 2. 252See, e.g., AB Energy at 2; CAISO/ISO NE 

January at 6–7; Financial Markets Coalition at 13– 

15; PUCT at 10. 253See generally CAISO/ISO NE January at 7. 254See, e.g., ERCOT October at 2–5; Financial 

Marketers Coalition at 14, 15; NYPSC at 3; PUCT 

at 10; Requesting Parties at 3–5, 8. 255See, e.g., ERCOT October at 2–3, 6–9; ERCOT 

December at 7; Financial Marketers Coalition at 15; 

NYISO Supplement to Requesting Parties’ 

Comment, Attachment B at 2–4; NYPSC at 2; PUCT 

at 10; Requesting Parties at 4; TEAM/ARM at 2. 256 See, e.g., Financial Marketers Coalition at 15– 

16; NYPSC at 2. 257See, e.g., CAISO/ISO NE January at 7; 

Requesting Parties at 4. 258See, e.g., Commercial Working Group at 4; 

ERCOT October at 5–6; NYPSC at 2; Requesting 

Parties at 4. 259See generally Requesting Parties at 4. 260See generally id. 261See, e.g., AB Energy at 1; CAISO/ISO NE 

January at 3; Commercial Working Group at 3; 

Financial Marketers Coalition at 4; COPE at 10; 

Joint Trade Associations at 11; NYISO Supplement 

to Requesting Parties’ Comment, Attachment B at 6; 

Tarachand at 1; TEAM/ARM at 2. 

262See, e.g., CAISO/ISO NE January at 3, 8; 

ERCOT October at 2; Financial Marketers Coalition 

at 11–12; Joint Trade Associations at 11–13; NYISO 

Supplement to Requesting Parties’ Comment, 

Attachment B at 5–6; NYPSC at 2; NYTOs at 4; 

Requesting Parties at 2–5. 

263NYISO Supplement to Requesting Parties’ 

Comment, Attachment B at 4–5; Requesting Parties 

at 5. 

264See, e.g., NEPOOL at 2–3; PJM at 4; PUCT at 

9; Requesting Parties at 2–5. 

265See generally COPE at 5. 

266See generally AB Energy at 2. 

267See, e.g., AB Energy at 2; Commercial Working 

Group at 3–4; Financial Marketers Coalition at 11– 

12, 13–16; NYPSC at 3; NYTOs at 4. 

268See, e.g., Commercial Working Group at 4; 

NYPSC at 2. 

269See, e.g., FERC Staff at 6; Joint Trade 

Associations at 11–13; NEPOOL at 2–3; PUCT at 11. 

But see ERCOT December at 6 (‘‘The proposed 

‘Appropriate Persons’ limitation would not affect 

any * * * electric cooperatives.’’). 

270See, e.g., PUCT at 9; TEAM/ARM at 2–3. 

271See, e.g., PJM at 2. 

272See, e.g., Financial Marketers Coalition at 14; 

NYISO Supplement to Requesting Parties’ 

Comment, Attachment B at 6; Requesting Parties at 

6; PJM at 2. 

273See, e.g., Requesting Parties at 6; Tarachand at 

2. 

274See, e.g., PJM at 2; Requesting Parties at 6; 

Tarachand at 2. 

275See, e.g., Financial Marketers Coalition at 14; 

NYISO at 2–10; NYISO Supplement to Requesting 

Parties’ Comment, Attachment B at 6; Requesting 

Parties at 6. 

276 See, e.g., Financial Marketers Coalition at 14; 

NYISO Supplement to Requesting Parties’ 

Comment, Attachment B at 6; Requesting Parties at 

6; PJM at 2. 

277See, e.g., Financial Marketers Coalition at 10– 

11 (alleging that ‘‘[t]he Federal Power Act states that 

‘[n]o public utility shall, with respect to any 

transmission or sale subject to the jurisdiction of 

[FERC], make or grant any undue preference or 

advantage of any person or subject any person to 

any undue prejudice or disadvantage * * *.’ ’’) 

(citing 16 U.S.C. 824d(b)); NYISO at 9–10. 

278See, e.g., NYPSC at 3. 

279See, e.g., CAISO/ISO NE January at 3; 

Financial Marketers Coalition at 3, 11, 16–18. 

280See, e.g., CAISO/ISO NE January at 3; 

Commercial Working Group at 3–4; FERC Staff at 

6; Tarachand at 2. 

281See generally Commercial Working Group at 3. 

282See, e.g., CAISO/ISO NE January at 3, 6, 8; 

Commercial Working Group at 3-; Financial 

Marketers Coalition at 11–12; NYPSC at 2–3; 

Tarachand at 2. But see ERCOT December at 6 (‘‘[I]t 

does not appear that the proposed Appropriate 

Person limitation would have a significant impact 

on market liquidity in ERCOT.’’). 

283See generally Tarachand at 2. 

284See, e.g., Commercial Working Group at 4; 

Financial Marketers Coalition at 11–12, 14, 16; 

Industrial Coalitions at 5; NYPSC at 3; Tarachand 

at 2. 

285Tarachand at 2. 

286 Industrial Coalitions at 4–5. 

287See generally Financial Marketers Coalition 

at 12. 

economy from a default in an RTO or 

ISO market.250

Multiple commenters asserted that the 

Commission should deem all RTO and 

ISO market participants as appropriate 

persons for purposes of the Final Order 

by referencing specific types of 

participation standards established by 

the RTOs and ISOs.251 Certain of those 

commenters claimed that such 

requirements minimize the risks in the 

applicable markets 252 and help to 

ensure that only sophisticated players 

enter the markets.253 Commenters cited, 

for example, the RTO and ISO market 

participant obligations to either satisfy a 

baseline capitalization requirement 

and/or to post participation-based 

financial security 254 as well as 

credit,255 disclosure,256 training,257 risk 

management,258 personnel,259 and/or 

technical capability requirements 260

that may apply to market participants. 

Multiple commenters noted that RTOand ISO-established market 

participation criteria have been 

approved by FERC or PUCT, as 

applicable.261 Other commenters cited 

the regulatory oversight and/or market 

monitoring to which the RTOs and ISOs 

are subject 262 and/or certain 

mechanisms employed by RTOs and 

ISOs to support the financial integrity of 

the market.263 Multiple commenters 

also expressed concern with potential 

conflicts between the appropriate 

persons determinations being made by 

the Commission and the determinations 

made by an RTO or ISO and its regulator 

with respect to market participation 

eligibility.264 One commenter 

questioned whether, through the 

appropriate persons limitations, the 

Commission intended to regulate 

minimum RTO participation 

standards 265 and another asserted that it 

is ‘‘unnecessary’’ and ‘‘burdensome’’ for 

the Commission to duplicate the efforts 

of the RTOs and ISOs and their 

regulators in establishing market 

participation requirements.266

Certain commenters claimed that 

some entities that currently participate 

in the RTO and ISO markets might not 

be able to satisfy the appropriate person 

standard set forth in the Proposed Order 

and would exit the market.267 While 

some commenters did not name the 

specific types of entities that they 

believed would be excluded,268 others 

identified particular groups of market 

participants that could be eliminated, 

including municipalities and electric 

cooperatives,269 REPs,270 emergency 

load providers,271 LSEs,272 special case 

resources,273 demand response 

providers,274 marketers,275 and 

generators.276 One commenter asserted 

that exempting some market 

participants, but not others, would 

create an artificial distinction between 

market participants that conflicts with 

the Federal Power Act and would create 

an unfairly discriminatory regulatory 

scheme.277 Commenters also expressed 

concern that market participants who 

fall outside the exemption would be 

subject to duplicative regulation,278

with some questioning the efficiency or 

operational workability of a dual 

regulatory structure.279

Several commenters alleged that the 

exit of existing market participants 

would have a negative impact on the 

functioning of the RTO and ISO 

markets.280 Certain commenters claimed 

that reduced participation would result 

in volatility 281 or reduced liquidity,282

including one commenter that noted the 

effect of liquidity on the price discovery 

process.283 In addition, certain 

commenters asserted that decreased 

participation would result in increased 

market concentration and diminished 

competition,284 including one 

commenter who alleged that the 

increased market concentration that 

could result from the forced exit of 

small market participants is ‘‘at crosspurposes to the legislative spirit’’ of the 

Dodd-Frank Act, which was intended to 

end ‘‘too-big-to-fail.’’ 285 One commenter 

also noted that the high barriers to entry 

and high concentration of ownership in 

the RTO and ISO markets make such 

markets more susceptible to abuse when 

smaller entities are forced out,286 while 

another commenter stated that reduced 

competition would result in higher 

electric energy prices, causing harm to 

rate payers.287 One commenter claimed 


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288See generally Commercial Working Group at 

3–4. 289Tarachand at 2. 290See, e.g., AB Energy at 2; Tarachand at 2. 291See, e.g., FERC Staff at 6; PUCT at 9; 

Requesting Parties at 3, 8. 292See, e.g., CAISO/ISO NE January at 7–8; 

Requesting Parties at 3. 293See generally ERCOT December at 8–9. 294See generally Tarachand at 2. 295See, e.g., AB Energy at 2; Commercial Working 

Group at 3; Tarachand at 2. 296See, e.g., AB Energy at 2; Tarachand at 2; 

PUCT at 11. 

297For example, one Requesting Party stated that 

‘‘past experience has shown that many market 

participants, when faced with modestly higher 

capitalization requirements, will meet these 

requirements in order to remain active market 

participants.’’ See generally PJM at 3. The 

commenter further noted that, although the number 

of entities potentially affected by the proposed 

appropriate person limitations ‘‘appear[s] to 

compromise a very large percentage of the 

Petitioners’ market participants,’’ such entities 

‘‘account for minimal transactional activity’’ in 

comparison to the Requesting Party’s ‘‘market 

transactions as a whole’’ and, thus, the appropriate 

persons limitation ‘‘would likely not have a 

significant impact on Petitioners’ market liquidity.’’ 

Id. Similarly, another Requesting Party stated that, 

if the Commission were to add LSEs to the 

definition of appropriate persons pursuant to 

section 4(c)(3)(K) of the Act, only three financial 

traders would be excluded from its markets when 

taking into account its own revised market 

participant eligibility requirements, which ‘‘is 

arguably insignificant when viewed solely from the 

impact to the number of eligible market 

participants.’’ ERCOT December at 4–5. According 

to this Requesting Party, the appropriate persons 

limitation ‘‘would appear to have an immaterial 

incremental liquidity impact’’ above that associated 

with the effects of its own eligibility standards and 

‘‘no impact on the competitive retail market.’’ Id. 

at 5. 

298Paragraph 5(g) of the Order. 

299 7 U.S.C. 6(c)(A)–(J). 

300 7 U.S.C. 6(c)(F). 

301CAISO/ISO NE January at 7. 

302See, e.g., Petition at 27–28. 

that the departure of market participants 

would cause remaining participants 

who serve the load of the withdrawing 

participants to face higher prices to 

procure the additional electric energy 

and would cause existing load forecasts 

to be inaccurate as new customers 

would not factor into the remaining 

participants’ forecast models and would 

limit the available electric energy in 

instances of unplanned outages, thereby 

increasing the risks posed to remaining 

providers, the RTOs and ISOs, and the 

marketplace as a whole.288 Another 

commenter alleged that a ‘‘chilling 

effect on the development of 

technologies to provide renewable 

energies and the systems that 

complement the integration of 

renewable resources’’ would result if 

certain small market participants that 

are the ‘‘vanguard of innovation’’ are 

removed.289 Some commenters also 

stated that reduced market participation 

would eliminate jobs and reduce tax 

revenue.290 Certain commenters 

asserted that the exclusion of certain 

market participants would create 

regulatory uncertainty.291 Others 

claimed that the exclusion of 

participants would violate the 

Congressional intent behind section 

4(c)(3)(K) of the CEA 292 or the 

competitive principles underlying the 

administration of electric energy 

competition in the relevant area.293

Certain commenters supported the 

inclusion of all RTO and ISO market 

participants in the appropriate persons 

definition for purposes of the Final 

Order by claiming that recently 

increased collateral requirements have 

reduced the default risks of particular 

RTOs 294 and/or that the mutualized risk 

of market participants for participant 

defaults has reduced the risk of a 

financial default in an RTO or ISO 

market spreading to the rest of the 

economy.295 Some of those commenters 

specifically noted that market 

participant failures have not posed a 

significant threat to the health of the 

RTO or ISO or other market 

participants.296

However, certain commenters who 

contended that the Commission should 

invoke the authority provide by section 

4(c)(3)(K) of the CEA to include all RTO 

and ISO market participants in the 

definition of appropriate persons for 

purposes of the Final Order nonetheless 

suggested that the market impact of the 

participation limitations imposed by the 

proposed appropriate persons definition 

could be minimal.297

As set forth above, the Commission 

considered requests from the 

commenters to categorize particular 

types of entities as appropriate persons 

for purposes of the Final Order and, 

pursuant to the authority provided by 

section 4(c)(3)(K) of the CEA, is 

expanding the definition to include a 

‘‘person who actively participates in the 

generation, transmission, or distribution 

of electric energy.’’ 298 The Commission 

believes that this expansion, when 

combined with the ‘‘appropriate 

persons’’ definition delineated in 

sections 4(c)(3)(A) through (J) of the 

CEA and the determination, as 

proposed, to include ECPs, as defined in 

section 1a(18)(A) of the CEA and in 

Commission regulation 1.3(m), would 

appear to strike the appropriate balance. 

It would not exempt only those RTO 

and ISO market participants that can 

demonstrate neither the financial 

wherewithal nor the requisite business 

activities and congruent expertise to 

qualify as appropriate persons under 

section 4(c)(3)(K) of the CEA. 

The Commission declines to generally 

and broadly extend the exemption 

contained in the Final Order to 

transactions involving all persons that 

satisfy the market participant eligibility 

criteria established by the RTOs and 

ISOs. The Commission notes that the 

definition of appropriate person set 

forth in sections 4(c)(3)(A) through (J) of 

the CEA explicitly defines the types of 

qualified entities that Congress intended 

to be eligible for an exemption under 

section 4(c).299 Certain of these 

categories reflect an intention to limit a 

section 4(c) exemption to entities of 

reasonably significant financial means, 

while others apply to entities that have 

regulatory status that implies functional 

expertise. For example, section 

4(c)(3)(F) defines ‘‘appropriate person’’ 

to include ‘‘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 is guaranteed by 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 subparagraphs (A), (B), 

(C), (H), (I), or (K) of [section 

4(c)(3)].’’ 300 Moreover, section 4(c)(3)(K) 

of the CEA expressly restricts the 

Commission’s authority to expand the 

definition of appropriate person beyond 

persons whom the Commission 

determines are ‘‘appropriate in light of 

[such persons’] financial or other 

qualifications, or the applicability of 

appropriate regulatory protections.’’ As 

noted by one of the commenters, the 

RTO and ISO ‘‘markets are complex and 

not geared to unsophisticated traders 

* * * . [T]hey are designed as 

wholesale * * * markets.’’ 301 The 

Commission believes that the ability of 

persons who fail to satisfy an RTO’s or 

ISO’s capitalization criteria to 

nonetheless participate in the RTO’s or 

ISO’s market by providing financial 

security in an amount below the 

standard established in section 

4(c)(3)(F), as indicated in the 

Petition,302 would render the section 

4(c)(3)(K) determination difficult to 

make on a wholesale basis. While the 

Commission understands that the 

Requesting Parties, with the oversight of 

FERC or PUCT, as applicable, have 

established participation standards that 

they believe are sufficient to protect 

their own markets, the Commission 

notes that those participation standards 

are not directed to meeting the language 

of section 4(c)(3)(K), which is focused 

on protecting market participants. As set 

forth in the Proposed Order, the 

Commission’s preliminary 


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303 77 FR 52146. 

304APPA at 3. 

305 Id. In support of this position, APPA noted 

that, in the preamble to the Proposed Order, the 

Commission observed that ‘‘municipal entities 

* * * appear to qualify as ‘appropriate persons’ 

pursuant to CEA section 4(c)(3)(H)’’ and that the 

definition would cover ‘‘municipalities and other 

government owned market participants.’’ Id. at 2 

(citing 77 FR 52145 n.99). 

306 Id. 

307E.g., municipal utilities such as the Los 

Angeles Department of Water and Power and the 

Sacramento Municipal Utility District, or a PUD 

(‘‘public utility district’’) organized under state law 

and operated by a city, county, state, or regional 

agency. ‘‘Proposal to Exempt Certain Transactions 

Involving Not-For-Profit Electric Utilities,’’ 77 FR 

50998 at 51004 nn.43–44, Aug. 23, 2012. 

308 Id. at 51004–05 (Commission determination 

that electric utilities owned by federally-recognized 

Indian tribes are no different substantively than 

government-owned electric utilities for purposes of 

the relief provided). The Commission’s 

interpretation is also informed by CEA section 

4s(h)(2), which directs the Commission (albeit in 

another context) to look to section 3 of ERISA (29 

U.S.C. 1002) for the purposes of defining ‘‘special 

entity,’’ including ‘‘any governmental plan.’’ ERISA 

includes Indian tribes within the meaning of 

‘‘governmental plan.’’ Further, the Commission 

incorporates by reference the list of Indian tribes 

recognized by the Department of Interior’s Bureau 

of Indian Affairs (BIA) as set forth in, ‘‘Indian 

Entities Recognized and Eligible To Receive 

Services From the Bureau of Indian Affairs,’’ 77 FR 

47868, Aug. 10, 2012, or any successor to that 

document issued by the BIA. 

309 7 U.S.C. 6(c)(3)(F) (emphasis added). 

310As described by Requesting Parties, 

‘‘appropriate person’’ in this context would include 

only those market participants that are defined 

under the Commission’s regulations as ‘‘appropriate 

persons’’ or ‘‘eligible contract participants.’’ 

Requesting Parties at 7–8. 

311 Id. 

312As described by Requesting Parties, 

‘‘appropriate person’’ in this context would include 

only those market participants that are defined 

under the Commission’s regulations as ‘‘appropriate 

persons’’ or ‘‘eligible contract participants.’’ Id. 

313 Id. 

314Financial Marketers Coalition at 15–16. 

315 Id. 

316As described by the Requesting Parties, 

‘‘appropriate person’’ in this context would include 

only those market participants that are defined 

under the Commission’s regulations as ‘‘appropriate 

person’’ or ‘‘eligible contract participants.’’ 

Requesting Parties at 7–8. 

317See section IV.A.3.i. infra. 

determination that the exemption would 

not have a material adverse effect on the 

ability of the Commission or any 

contract market to discharge its duties 

under the CEA was based on the 

reasoning that ‘‘the limitation of the 

exemption to Transactions between 

certain ‘appropriate persons’ * * * 

avoids potential issues regarding 

financial integrity and customer 

protection. That is, this approach would 

appear to ensure that Transactions 

subject to the Final Order would be 

limited to sophisticated entities that are 

able to, from a financial standpoint, 

understand and manage the risks 

associated with such Transactions.’’ 303

Notwithstanding the comments 

received, the Commission has 

determined to limit the exemption set 

forth in the Final Order to Covered 

Transactions in which each party to the 

Covered Transaction is: (1) An 

‘‘appropriate person’’ as defined in 

sections 4(c)(3)(A) through (J) of the 

CEA; (2) an ‘‘eligible contract 

participant,’’ as defined in section 

1a(18)(A) of the CEA and in 

Commission regulation 1.3(m); or (3) a 

‘‘person who actively participates in the 

generation, transmission, or distribution 

of electric energy,’’ as that term is 

defined in the Final Order. 

iii. Determinations Regarding the 

Inclusion of Public Power Systems and 

Tribal Governments as Appropriate 

Persons Pursuant to Section 4(c)(3)(H) of 

the CEA 

One commenter asked that the 

Commission affirm that public power 

systems, and that units or 

instrumentalities of tribal governments 

are ‘‘appropriate persons’’ under section 

4(c)(3)(H) of the CEA.304 This 

commenter asserted that, because public 

power systems are ‘‘units of state or 

local governments, or agencies or 

instrumentalities of the foregoing,’’ they 

properly are within the scope of 

‘‘appropriate persons,’’ as defined by 

section 4(c)(3)(H).305 In addition, the 

commenter argued that because units or 

instrumentalities of tribal governments 

are governmental entities, they too fall 

within the definition of ‘‘appropriate 

persons’’ set forth in section 

4(c)(3)(H).306

The Commission interprets section 

4(c)(3)(H) to include public power 

systems and the units or 

instrumentalities of tribal governments 

within the meaning of ‘‘governmental 

entities.’’ This interpretation is 

consistent with both the Commission’s 

approach to public power entities, 

which are operated by local 

governments for the benefit of its 

citizens 307 and Indian tribes in the 

exemption for 201(f) entities.308

iv. Clarifications with Respect to Certain 

Language in Section 4(c)(3)(F) of the 

CEA for Purposes of the Final Order 

Section 4(c)(3)(F) of the CEA defines 

‘‘appropriate person’’ to include ‘‘[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 sections 4(c)(3)(A), 

(B),(C), (H), (I) or (K)] of the CEA].’’ 309

One commenter argued that the 

language ‘‘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’’ 

can be interpreted to mean that a market 

participant that provides an RTO or ISO 

with a letter of credit that has been 

issued by an appropriate person 310 in 

the amount of the RTO or ISO-specific 

credit requirements (i.e., the amount of 

its estimated obligations to the RTO or 

ISO) satisfies the ‘‘appropriate person’’ 

standard set forth in section 4(c)(3)(F) of 

the CEA.311 This commenter also 

interpreted the quoted language to mean 

that a market participant that provides 

to the RTO or ISO an unlimited 

guaranty that has been issued by an 

appropriate person 312 thereby supports 

its obligation to the RTO or ISO and, 

thus, satisfies the section 4(c)(3)(F) 

criteria.313

In addition, one commenter requested 

that the Commission provide guidance 

as to what would be acceptable as a 

‘‘keepwell, support, or other agreement’’ 

for purposes of section 4(c)(3)(F),314 and 

specifically asked whether a parental 

guaranty would be sufficient and 

whether audited financial statements 

would be required. This commenter also 

asked how the Commission would 

quantify the obligations of a business 

entity for purposes of this provision.315

The Commission clarifies that a 

market participant that provides to the 

RTO or ISO an unlimited guaranty or 

other support in the form of a ‘‘letter of 

credit or keepwell, support, or other 

agreement,’’ which guarantee or other 

support has been issued by an 

appropriate person, thereby supports its 

obligation to the RTO or ISO and, thus, 

satisfies the section 4(c)(3)(F) criteria. 

The guaranteeing or supporting entity 

will not be required by the Final Order 

to demonstrate its status as an 

‘‘appropriate person’’ 316 through the 

use of audited financial statements. 

e. Public Interest and Purposes of the 

CEA 

i. FERC Credit Reform Policy 

As discussed in greater detail 

above,317 the standards set forth in 

FERC regulation 35.47 appear to achieve 

goals similar to the regulatory objectives 

of the Commission’s DCO Core 

Principles, and substantial compliance 

with such requirements is key to the 

Commission’s determination that the 

Tariffs and activities of the Requesting 


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318See 77 FR 52148–57. 

319See id. 

320See, e.g., Joint Trade Associations at 4, 6; 

COPE at 6, 9; Commercial Working Group at 4. 

321 Joint Trade Associations at 6 (noting in 

particular Requesting Parties’ credit-worthiness 

provisions and financial integrity rules). 

322 Id. at 4. 

323COPE at 6, 9. 

324Commercial Working Group at 4. 

325See 77 FR 524149–57. 

326See 77 FR 52157–62. 

327See id. 

328Commercial Working Group at 4. 

329COPE at 6. Additionally, in response to the 

Commission asking whether ‘‘the procedures and 

principles in place allow the Requesting Parties to 

meet the requirements of SEF core principles 10– 

15,’’ 77 FR 52173, COPE questioned why FERC and 

PUCT regulation in those areas would not be 

sufficient. Id. at 10. 

330 Joint Trade Associations at 6. 

331 Id. at 7. 

Parties and supervision by FERC and 

PUCT are congruent with, and—in the 

context of the Covered Transactions— 

sufficiently accomplish, the regulatory 

objectives of each DCO Core Principle. 

ii. Use of the DCO Core Principles in the 

Public Interest and Purposes of the CEA 

Analysis 

In the Proposed Order, in determining 

whether an exemption for the 

transactions defined therein was 

consistent with the public interest and 

the purposes of CEA, the Commission 

preliminarily determined, based upon 

the Requesting Parties’ representations 

and in the context of the Requesting 

Parties’ activities with respect to the 

transactions within the scope of the 

Proposed Order, that the Requesting 

Parties’ practices or Tariffs and 

supervision by FERC and PUCT 

appeared to be congruent with, and 

sufficiently accomplish, the regulatory 

objectives of the Core Principles set 

forth in the CEA for DCOs.318 Following 

the analysis of each DCO Core Principle, 

the Commission expressly sought 

comment with respect to its preliminary 

conclusions.319

The Commission received several 

comments regarding the use of the DCO 

Core Principles as part of the public 

interest and purposes of the CEA 

analysis.320 One commenter expressly 

‘‘support[ed] the Commission’s 

determination that the Petitioners’ 

tariffs and market rules are consistent 

with the spirit of the DCO Core 

Principles[.]’’ 321 However, this 

commenter requested clarification that 

the Commission’s DCO Core Principle 

analysis ‘‘does not equate to a finding 

on Petitioners’ status as a * * * DCO or 

the transactions executed on or through 

the Petitioners’ markets as swaps.’’ 322

Another commenter stated that the DCO 

Core Principle analysis is not an 

appropriate standard in analyzing 

whether the exemption is in the public 

interest because ‘‘RTOs are physical 

electricity transmission and market 

operators pervasively regulated by 

either FERC or the PUCT’’ and are not 

DCOs,323 while a different commenter 

asserted that the Commission ‘‘should 

not require RTOs and ISOs to comply 

with the’’ DCO Core Principles.324

The Commission believes that the 

analysis drawing from the DCO Core 

Principles contained in the Proposed 

Order should be used to determine 

whether the exemption is consistent 

with the public interest and the 

purposes of the CEA. The Commission 

is not using the analysis to determine 

whether the Requesting Parties are 

DCOs. The Commission is not holding 

the Requesting Parties to the same 

standards as DCOs, and is not 

concluding that the Requesting Parties 

would meet the standards set forth in 

section 5b(c)(2) of the CEA and part 39 

of the Commission’s regulations. 

Nonetheless, the Commission believes 

that the DCO Core Principles provide a 

useful framework by which to measure 

the extent to which the Tariffs and 

activities of the Requesting Parties, and 

supervision by FERC and PUCT, are 

congruent with, and—in the context of 

the Covered Transactions—sufficiently 

accomplish, the regulatory objectives of 

the CEA. As discussed herein, 

particularly in sections IV.A.3.a.i. and 

IV.B.2.e.i., the Commission believes that 

the standards set forth in FERC 

regulation 35.47 appear to achieve goals 

similar to the regulatory objectives of 

the Commission’s DCO Core Principles. 

Moreover, as set forth in the 

Commission’s DCO Core Principle 

analysis in the Proposed Order,325 the 

Commission determines that the 

Requesting Parties’ policies and 

procedures appear to be consistent with, 

and to accomplish sufficiently for 

purposes of this Final Order, the 

regulatory objectives of the DCO Core 

Principles in the context of the Covered 

Transactions. 

iii. Use of the SEF Core Principles in the 

Public Interest and Purposes of the CEA 

Analysis 

In the Proposed Order, in determining 

whether the proposed exemption was 

consistent with the public interest and 

the purposes of CEA, the Commission 

preliminarily determined, based upon 

the Requesting Parties’ representations 

and in the context of the Requesting 

Parties’ activities with respect to the 

transactions within the scope of the 

Proposed Order, that the Requesting 

Parties’ practices or Tariffs, and 

supervision by FERC and PUCT, 

appeared to be congruent with, and 

sufficiently accomplish, the regulatory 

objectives of the Core Principles set 

forth in the CEA for SEFs.326 Following 

the analysis of each SEF Core Principle, 

the Commission expressly sought 

comment with respect to its preliminary 

conclusions.327

One commenter implored the 

Commission to allow the RTO and ISO 

markets to continue to exist largely as 

they currently do by not requiring 

compliance with the SEF Core 

Principles.328 Similarly, another 

commenter contended that, because the 

Requesting Parties are neither DCMs nor 

SEFs, ‘‘the application of [DCM or SEF] 

core principles to such markets provides 

little value,’’ and the existence of [FERC 

or PUCT] regulation should be the 

premise upon which an exemption is 

granted.329

Regarding the Commission’s 4(c) 

public interest analysis, one commenter 

agreed ‘‘that rules and regulations under 

the Petitioners’ [Open Access 

Transmission Tariffs] in general satisfy 

the Core Principles and regulatory 

requirements that would apply to 

entities seeking designation as a 

SEF.’’ 330 Notwithstanding this 

agreement, however, the commenter 

also requested that the Commission 

clarify that its public interest analysis 

and determinations regarding SEF Core 

Principles does not constitute a finding 

that the Requesting Parties are SEFs or 

that the transactions executed on their 

markets constitute swaps.331

Similar to its view of the DCO Core 

Principles analysis and comment 

received thereon, the Commission 

believes its analysis drawing from the 

SEF Core Principles contained in the 

Proposed Order should be used to 

determine whether the exemption is 

consistent with the public interest and 

purposes of the Act—not as a 

determination that the Requesting 

Parties are SEFs themselves, or that the 

products traded in their markets are 

swaps. To the contrary, and consistent 

with the legislative history behind CEA 

section 4(c), the Commission takes no 

position as to the jurisdictional status of 

any Requesting Party or Covered 

Transaction in the Final Order. 

Furthermore, in making its public 

interest and purposes of the CEA 

determination based upon, in part, the 

SEF Core Principle analysis, the 

Commission is not holding the 

Requesting Parties to the same standards 

as SEFs, nor is it concluding that the 


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332 77 FR 52157–62. 

333 77 FR 52159. 

334 77 FR 52173. 

335Requesting Parties at 17; Joint Trade 

Associations at 8; FIEG at 3. 

336 Joint Trade Associations at 8. 

337FIEG at 3. 

338COPE at 10. 

339Requesting Parties at 17; see DC Energy at 3 

(noting in particular that FTRs and virtual bids are 

constrained by the natural physical limits of RTO 

and ISO market design, due to the products’ 

relation to the deliverable capacity of each RTO and 

ISO system). 

340Requesting Parties at 17–18. 

341The Final Order explicitly includes ‘‘Virtual 

and Convergence Bids and Offers’’ as a type of 

Energy Transaction. Consistent with DC Energy’s 

comments, such transactions are also limited to the 

physical capabilities of the physical transmission 

grid, as required by the definition in the Final 

Order. See section IV.A.1.c. supra. 

342 77 FR 52173. 

343Requesting Parties at 18 (citing several FERC 

decisions and related RTO and ISO filings that 

‘‘unequivocally reject the market re-run concept’’). 

344PUCT at 13. 

345 DC Energy at 3. 

346See PUCT at 13–14. PUCT also noted that its 

enforcement approach, as implemented by ERCOT, 

‘‘makes remediation a matter of enforcement rather 

than of disrupting markets by using post-hoc 

resettlement tools.’’ PUCT at 14. 

347COPE at 8. 

348Requesting Parties at 18–19 (listing such costs 

as entailing development of a user interface to vary 

price inputs that kept track of changes in market 

rules and data formats over time, as well as the 

Requesting Parties would meet the 

standards set forth in section 5h(f) of the 

CEA. 

Nonetheless, the Commission views 

the SEF Core Principles as a useful way 

of measuring the extent to which the 

Tariffs and activities of the Requesting 

Parties, and supervision by FERC and 

PUCT, are congruent with, and—in the 

context of the Covered Transactions— 

sufficiently accomplish, the regulatory 

objectives of the CEA. As set forth in the 

Commission’s SEF Core Principles 

analysis in the Proposed Order,332 the 

Commission has determined that the 

Requesting Parties’ policies and 

procedures appear to be consistent with, 

and to accomplish sufficiently for 

purposes of the Final Order, the 

regulatory objectives of the SEF Core 

Principles in the context of the Covered 

Transactions. 

iv. Imposition of Position Limits 

In the Proposed Order, the 

Commission requested comment as to 

whether ‘‘the lack of position limits or 

position accountability thresholds for 

speculators in Petitioners’ markets, 

given the nature of their markets and 

market participants, and the other 

regulatory protections applicable to 

these markets as described [in the 

Proposed Exemption], would prevent 

the Commission from determining that 

the Proposed Exemption is consistent 

with the public interest and the 

purposes of the CEA.’’ 333 The 

Commission also specifically requested 

comment on the basis for concluding 

that market participants should or 

should not have to satisfy position limit 

requirements, particularly with respect 

to FTRs or virtual bids.334

Generally, commenters responded 

that the Commission should not impose 

position limits on the Covered 

Transactions. Several commenters 

objected on the ground that, because the 

Commission had not determined that 

the transactions subject to the Proposed 

Order were subject to the jurisdiction of 

the Commission, the imposition of an 

existing regulatory regime on such 

transactions would be unreasonable.335

Another commenter argued that the 

transactions set forth in the Proposed 

Order are not based on any reference 

contract within the Requesting Parties’ 

markets, and that imposition of position 

limits would be impractical and 

unnecessary because the Federal Power 

Act already requires rates to be just and 

reasonable.336 Commenters also posited 

that the application of position limits 

would be a duplication of the currently 

applicable financial assurance 

requirements in FERC-approved RTO 

and ISO Tariffs 337 and, similarly, that 

FERC and PUCT regulation should be 

the only factor considered in issuing the 

exemption, even assuming position 

limits were relevant to RTO and ISO 

electric energy markets.338

Commenters also highlighted that the 

Requesting Parties’ markets are 

administrated so that the total amount 

of energy represented by instruments 

created on the markets is related to the 

deliverable capacity of the physical 

transmission systems, making them a 

more effective limitation than position 

limits since, as currently constructed 

under the Commission’s rules, position 

limits do not cap overall open 

interest.339 Finally, the Requesting 

Parties pointed out the fact that the 

Commission developed speculative 

position limits on cash-settled contracts 

to ensure that no single trader can exert 

enough market power to influence the 

cash settlement price of that contract, 

whereas generators and LSEs are 

required to use the Requesting Parties’ 

electric energy markets for the purpose 

of delivering electric energy, which 

effectively ensures the same result.340

Without making any determinations 

regarding the merits of the commenters’ 

concerns regarding position limits, the 

Commission’s Final Order does not 

impose position limits on the Covered 

Transactions. The Commission accepts 

the Requesting Parties’ representations 

that the physical capability of their 

transmission grids limits the size of 

positions that any single market 

participant can take at a given time. 

Moreover, based upon the 

representations made in the Petition, the 

Proposed Order provided that each 

category of exempted transaction, 

including FTRs, would be limited by the 

physical capability of the electric energy 

transmission system. Accordingly, as 

the Final Order continues to limit each 

Covered Transaction category to the 

physical capability of the transmission 

grid,341 the Commission believes that 

imposing position limits on the Covered 

Transactions is not necessary at this 

time in order to make the requisite 

public interest and purposes of the CEA 

determinations. 

v. Ability To Re-Create the Day-Ahead 

Market and Real-Time Prices 

The Proposed Exemption specifically 

sought public comment as to whether 

the Requesting Parties ‘‘should [be] 

capable of re-creating the Day-Ahead 

Market and Real-Time prices.’’ 342

Some commenters contested the 

underlying utility of being able to recreate the market. The Requesting 

Parties argued that it is impossible to 

predict how other market participants 

would have reacted to a hypothetical 

situation.343 One commenter argued that 

claiming an ability to re-create market 

prices would ‘‘create the misimpression 

that such recreations can be done 

accurately,’’ and thus would negatively 

affect market certainty.344 Similarly, 

another commenter opposed any 

requirement that the RTO and ISOs be 

able to ‘‘re-create, re-state or in any way 

change prices,’’ believing that it would 

negatively affect confidence in the 

integrity of markets if prices could be 

altered after-the-fact.345 Another 

commenter argued that the ability to recreate the Day-Ahead Market and RealTime prices was unnecessary because 

MMUs already have substantial tools 

and broad authority to obtain and 

analyze market data in order ‘‘to address 

potential market flaws, as well as 

instances of potential fraudulent market 

activity.’’ 346 Finally, one commenter 

questioned the relevance of such a 

requirement for transactions that are 

being exempted.347

Regardless of underlying utility, 

necessity, or relevance, the Requesting 

Parties noted that building the 

capability to re-run a market (other than 

a straight reproduction of what 

occurred) would be extremely expensive 

in all cases, and in some cases, 

impossible to do.348


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physical maintenance of the hardware and software 

involved with all trading and clearing over time). 

349See 17 CFR 38.552(c). The SEF proposed rules 

contained a similar requirement in section 37.406. 

See ‘‘Core Principles and Other Requirements for 

Swap Execution Facilities,’’ 76 FR 1214 at 1247, 

Jan. 7, 2011. 

350See 77 FR 52158–59. 

351 7 U.S.C. 6(c)(2)(B). 

352See H.R. Rep. No. 102–978, 102d Cong. 2d 

Sess. at 79 (1992). 

353 77 FR at 52146 (quoting Petition at 28). 

354See id. 

355See id. at 52143. 

356Nor did the Requesting Parties seek an 

exemption from these provisions. See 77 FR at 

52146; Petition at 2–3. See section IV.D. infra for 

a detailed discussion regarding the comments the 

Commission received regarding this reservation of 

authority. 

357See 77 FR at 52147. 

358See id. at 52146. 

359See id. at 52148, 52151, 52157–58. 

360See id. at 52146–47. 

Generally, the Commission notes that 

the ability to re-create market prices 

entails simulating what price outcomes 

in a market auction would have 

occurred, but for certain bids and offers 

being placed. This ability is required of 

Commission-regulated DCMs 349 in 

order to allow the Commission’s 

Division of Enforcement to determine 

the magnitude of loss caused by any 

fraudulent or manipulative trading 

scheme that may have occurred, as 

opposed to providing an initial means of 

detecting fraud or manipulation, or 

enabling third parties to contest market 

outcomes through private rights of 

action. Therefore, the Commission 

disagrees with the assertions that it is 

impossible to retroactively predict 

market outcomes based upon 

hypothetical price inputs, or that the 

ability to re-create prices would result 

in market uncertainty or loss of 

confidence in the integrity of prices. 

Nevertheless, due to the potentially 

significant costs for the Requesting 

Parties that could be associated with 

building the capability to re-run their 

markets, the Commission is not 

requiring such a capability as a 

condition of the Final Order. While the 

Commission encourages FERC and 

PUCT to continue contemplating 

requiring the Requesting Parties to 

implement the ability to re-run their 

markets, the Commission does not 

believe that such a capability is 

necessary at this time to its 

determination that the Final Order is 

consistent with the public interest and 

purposes of the Act.350

f. Effect on the Commission’s or Any 

Contract Market’s Ability To Discharge 

Its Regulatory or Self-Regulatory Duties 

Under the CEA 

CEA section 4(c)(2)(B)(ii) requires the 

Commission to make a determination 

regarding whether exempting the 

Covered Transactions will have a 

material adverse effect on the ability of 

the Commission or any contract markets 

to perform regulatory or self-regulatory 

duties.351 In making this determination, 

the Commission should consider such 

regulatory concerns as ‘‘market 

surveillance, financial integrity of 

participants, protection of customers 

and trade practice enforcement.’’ 352

These considerations are similar to the 

purposes of the CEA as defined in 

section 3, initially addressed in the 

public interest and purposes of the CEA 

discussion. 

The Commission proposed to 

determine that the exemption would not 

have a material adverse effect on the 

Commission’s or any contract market’s 

ability to discharge its regulatory 

function. In the Proposed Order, the 

Commission noted the following 

assertion by the Requesting Parties as 

support for its determination: 

Under Section 4(d) of the Act, the 

Commission will retain authority to conduct 

investigations to determine whether 

Petitioners are in compliance with any 

exemption granted in response to this 

request. * * * [T]he requested exemptions 

would also preserve the Commission’s 

existing enforcement jurisdiction over fraud 

and manipulation. This is consistent with 

section 722 of the Dodd-Frank Act, the 

existing MOU between the FERC and the 

Commission and other protocols for interagency cooperation. The Petitioners will 

continue to retain records related to the 

Transactions, consistent with existing 

obligations under FERC and PUCT 

regulations. 

The regulation of exchange-traded futures 

contracts and significant price discovery 

contracts (‘‘SPDCs’’) will be unaffected by the 

requested exemptions. Futures contracts 

based on electricity prices set in Petitioners’ 

markets that are traded on a designated 

contract market and SPDCs will continue to 

be regulated by and subject to the 

requirements of the Commission. No current 

requirement or practice of the ISOs/RTOs or 

of a contract market will be affected by the 

Commission’s granting the requested 

exemptions.353

In addition, the Commission stated 

that the limitation of the exemption to 

transactions delineated in the Proposed 

Order between certain appropriate 

persons avoids potential issues 

regarding financial integrity and 

customer protection.354

Moreover, the Commission did not 

propose to exempt the Requesting 

Parties from certain CEA provisions, 

including, but not limited to, sections 

2(a)(1)(B), 4b, 4c(b), 4o, 4s(h)(1)(A), 

4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, 

and 13 or and any implementing 

regulations promulgated thereunder 

including, but not limited to, 

Commission regulations 23.410(a) and 

(b), 32.4, and part 180, to the extent that 

those sections prohibit fraud or 

manipulation of the price of any swap, 

contract for the sale of a commodity in 

interstate commerce, or for future 

delivery on or subject to the rules of any 

contract market.355 As such, the 

Commission proposed to expressly 

retain authority to pursue fraudulent or 

manipulative conduct.356

In addition, the Commission proposed 

that granting the exemption for the 

transactions delineated in the Proposed 

Order would not have a material 

adverse effect on the ability of any 

contract market to discharge its selfregulatory duties under the Act.357

Specifically, with respect to FTRs, 

Forward Capacity Transactions, and 

Reserve or Regulation Transactions, the 

Commission found that the exemption 

would not have a material adverse effect 

on any contract market carrying out its 

self-regulatory function because these 

transactions did not appear to be used 

for price discovery or as settlement 

prices for other transactions in 

Commission regulated markets.358 With 

respect to Energy Transactions, the 

Commission proposed that, while these 

transactions did have a relationship to 

Commission regulated markets because 

they can serve as a source of settlement 

prices for other transactions within 

Commission jurisdiction, they should 

not pose regulatory burdens on a 

contract market because the Requesting 

Parties have market monitoring systems 

in place to detect and deter 

manipulation that takes place on their 

markets.359 In addition, the Commission 

noted that, as a condition to the 

exemption, the Commission would be 

able to obtain data from FERC and 

PUCT with respect to activity on the 

Requesting Parties’ markets that may 

impact trading on Commission 

regulated markets.360

Finally, the Commission noted that if 

the transactions described in the 

Proposed Order could ever be used in 

combination with trading activity or in 

a position in a DCM contract to conduct 

market abuse, both the Commission and 

DCMs have sufficient independent 

authority over DCM market participants 

to monitor for such activity. 

While the Commission did not receive 

any comments on its proposed 

determination that the exemption would 

not have a material adverse effect on the 

Commission’s ability to discharge its 


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361See note 359 and accompanying text supra. 

362See section IV.A.3.b.ii. supra. 

363 77 FR 52164 (alterations in original). 

364 Id. C.f. section IV.B.2.a. supra. 

365 77 FR 52164. 

366See, e.g., Requesting Parties at 14–15; Joint 

Trade Associations at 14–15. 

367See, e.g., PUCT at 4. 

368See, e.g., Requesting Parties at 15. 

369 Id. at 15–16. 

370See 77 FR 52164. 

371See discussion regarding effectiveness of the 

exemption, section IV.E. infra. 

372See section II.B.3. supra. 

373See 77 FR at 52142, 52165. 

374See id. at 52142. See also Petition at 20. 

375See 77 FR 52142. 

376See id. See also generally FERC Order No. 888; 

FERC Order No. 2000; 18 CFR 35.34(k)(2); TAC 

25.1; Petition at 11, 13–14. 

377See 77 FR 52142. See also Petition at 15–18. 

378See 77 FR 52142. 

regulatory duties, important caveats 

should be made. With regard to the SEF 

Core Principle 3 analysis and general 

statements regarding the Requesting 

Parties’ MMUs’ ability to detect and 

deter manipulation,361 the Commission 

notes that such statements were not 

meant to be construed as a final and 

irrevocable approval of the integrity of 

reference prices derived from the 

Requesting Parties’ markets. The 

Commission retains the authority to 

question and obtain additional 

information in a timely manner 

regarding the underlying prices to 

which FTRs and other electric energy 

contracts, which are subject to the 

Commission’s jurisdiction, settle. As 

previously discussed, the Commission 

maintains the responsibility of ensuring 

that exchange-traded and cleared 

financial electric energy contracts are 

constructed such that the settlement 

mechanism produces prices that 

accurately reflect the underlying supply 

and demand fundamentals of the RTO 

and ISO markets and are not readily 

susceptible to manipulation. For this 

reason, the Commission has conditioned 

the Final Order upon access to related 

transactional and positional data from 

the Requesting Parties’ markets.362

For the reasons set forth herein and in 

the Proposed Order, the Commission 

determines that the exemption for the 

Covered Transactions in this Final 

Order would not have a material 

adverse effect on the Commission’s or 

any contract market’s ability to 

discharge its regulatory function. 

C. Issuance of Separate or a Collective 

Order 

The Commission proposed to issue a 

single exemptive order for all 

Requesting Parties in lieu of the six 

separate exemptive orders requested by 

the Requesting Parties because, as 

explained in the Proposed Order, there 

are ‘‘ ‘[congruents] in [the Petitioners’] 

markets and operations,’ ’’ 363 and ‘‘it 

would appear that issuing six separate 

but identical * * * [e]xemptions that 

raise the same issues and questions is 

unnecessary, could result in needlessly 

duplicative comments, and would be an 

inefficient use of Commission 

resources.’’ 364 The Commission further 

‘‘disagree[d] with the Requesting 

Parties’ assertion that separate orders 

are necessary because a solitary order 

would require each Requesting Party to 

submit an individual application to 

obtain supplemental relief or to amend 

the relief provided thereby.’’ 365

Several commenters urged the 

Commission to adopt separate final 

orders for particular Requesting Parties 

because of concerns surrounding the 

delays and regulatory uncertainty that 

may be caused by requiring compliance 

by all Requesting Parties with the 

proposed conditions precedent.366 One 

commenter specifically asked the 

Commission to grant ERCOT’s 

exemption pursuant to a separate order 

that recognizes the differences between 

the ERCOT regulatory regime and the 

regime applicable to the other RTOs and 

ISOs.367

Another commenter requested that 

the Commission clarify that any 

supplemental relief requested by one 

Requesting Party would not, if granted, 

apply to any other Requesting Party, 

unless specifically requested by that 

Requesting Party.368 The commenter 

claimed that the Requesting Parties’ 

respective operations are not identical 

and that ‘‘[i]t is necessary for each 

Petitioner to have the ability to evaluate 

whether any supplemental relief 

requested by another Petitioner should 

apply to its market and whether the 

Petitioner is willing to be bound by 

conditions, if any, set forth in such 

supplemental relief.’’ 369

After careful consideration of these 

comments, the Commission has 

determined, for the same reasons set 

forth in the Proposed Order,370 to issue 

a single final order on the basis of 

administrative economy. The 

Commission notes that the issuance of 

a single final order should not delay any 

particular Requesting Party’s relief as 

the relief will become effective for any 

particular Requesting Party upon that 

party’s compliance with the conditions 

in the Final Order.371

The Commission also confirms that 

individual Requesting Parties may file 

individual requests for supplemental 

exemptions. Future requests for 

supplemental relief will be dealt with as 

expeditiously as practicable based upon 

the petition submitted, the facts and 

circumstances at the time of the 

submission, and the Commission’s 

resources at the time. The Requesting 

Parties have noted the importance of 

quick action, and the Commission notes 

that certain efficiencies may stem from 

coordinated action for relief. 

D. Additional Limitations 

As described in detail above,372 the 

Commission expressly noted in the 

Proposed Order 373 that the proposed 

exemption was based upon the 

representations made in the Petition and 

in the supporting materials provided by 

the Requesting Parties and their 

counsel, and that any material change or 

omission in the facts and circumstances 

that alter the grounds for the Proposed 

Order might require the Commission to 

reconsider its finding that the 

exemption contained therein is 

appropriate and/or in the public interest 

and consistent with the purposes of the 

CEA. The Commission did not receive 

any comments on this proposal. As 

such, the Final Order is based on the 

representations made by the Requesting 

Parties and their counsel in the Petition, 

the supplemental information, and 

supporting materials filed with the 

Commission. In particular, the 

Commission notes that the following 

representations are of particular 

importance and integral to the 

Commission’s decision to grant the 

exemption set forth in this Final Order: 

(1) The exemption requested by the 

Requesting Parties relate to Covered 

Transactions that are primarily entered 

into by commercial participants that are 

in the business of generating, 

transmitting and distributing electric 

energy; 374 (2) the Requesting Parties 

were established for the purpose of 

providing affordable, reliable electric 

energy to consumers within their 

geographic region; 375 (3) the Covered 

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 electric energy; 376

(4) each of the Covered Transactions 

taking place on the Requesting Parties’ 

markets is monitored by MMUs 

responsible to either FERC or, in the 

case of ERCOT, PUCT; 377 and (5) each 

Covered Transaction is directly tied to 

the physical capabilities of the 

Requesting Parties’ electric energy 

grids.378 Therefore, the Commission 

affirms that any material change or 

omission in the facts and circumstances 

that alter the grounds for the Final 


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379See id. at 52163, 52166. 

380See, e.g., Industrial Coalitions at 3; Joint Trade 

Associations at 10–11; FERC Staff at 5. 

381See, e.g., Industrial Coalitions at 3. 

382See, e.g., Joint Trade Associations at 10–11. 

383See, e.g., FERC Staff at 5. 

384See 7 U.S.C. 6(d). 

385See 77 FR at 52167. 

386Commercial Working Group at 2; DC Energy 

at 2. 

387 DC Energy at 2. 388Requesting Parties at 15. 389 Id. 390 Id. 391 Id. 392CFTC Staff Letter 12–11. 393See Revised FERC Order No. 741 

Implementation Chart. 

Order might require the Commission to 

reconsider its finding that the 

exemption contained therein is 

appropriate and consistent with the 

public interest and purposes of the CEA. 

The Commission reiterates that Covered 

Transactions must be tied to the 

allocation of the physical capabilities of 

an electric energy transmission grid in 

order to be suitable for exemption 

because such activity would be 

inextricably linked to the physical 

delivery of electric energy. 

In addition, the Commission proposed 

to exclude from the exemptive relief its 

general anti-fraud, anti-manipulation, 

and enforcement authority over the 

Requesting Parties and the transactions 

described in the Proposed Order under 

the CEA, including, but not limited to, 

sections 2(a)(1)(B), 4b, 4c(b), 4o, 

4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 

6c, 6d, 8, 9, and 13 of the CEA and any 

implementing regulations promulgated 

thereunder including, but not limited to, 

Commission regulations 23.410(a) and 

(b), 32.4, and part 180.379 The 

Commission received several comments 

regarding this reservation of 

authority.380

One commenter expressed full 

support for this reservation of authority 

because ‘‘the Commission’s continued 

oversight in these vital areas protects 

the markets, market participants, and 

the customers they serve.’’ 381 Another 

commenter noted that CEA section 4c(b) 

and regulation 32.4 are not part of the 

Commission’s anti-fraud and antimanipulation enforcement authority, 

but rather ‘‘articulate the Commission’s 

jurisdiction over option transaction[s]’’ 

and requested that section 4c(b) and 

regulation 32.4 be removed from the 

carve-out in the final order.382

Additionally, one commenter stated that 

it had no issue with the Commission’s 

retention of anti-manipulation 

jurisdiction generally, but cautioned 

that the Commission cannot use an 

exemption order to extend the CFTC’s 

anti-manipulation jurisdiction beyond 

that which the Dodd-Frank Act 

provides.383

After consideration of the comments, 

the Commission believes it prudent to 

reserve in the Final Order its anti-fraud 

and anti-manipulation authority, as well 

as those scienter-based prohibitions in 

the specified provisions of the Act and 

Commission regulations (without 

finding it necessary in this particular 

context to preserve other enforcement 

authority). The Commission notes that 

reservation of enforcement authority is 

standard practice with exemptive orders 

issued pursuant to CEA section 4(c). 

While the commenter is correct that 

section 4c(b) and regulation 32.4 do not 

articulate the Commission’s general 

anti-fraud, anti-manipulation, and 

enforcement authority directly, these 

provisions exemplify a possible 

statutory basis for bringing an 

enforcement action, should there be a 

need for the Commission to do so, and 

notes that the inclusion of these 

provisions is not intended to bring any 

transactions under CFTC jurisdiction for 

purposes other than enforcement. In 

addition, these carve-outs are consistent 

with past exemptive orders and do not 

expand the Commission’s jurisdiction. 

The Commission also is adding CEA 

section 4(d) to the non-exclusive list of 

reserved enforcement authority. The 

Commission believes it is important to 

highlight that, as with all exemptions 

issued pursuant to CEA section 4(c), the 

exemption ‘‘shall not affect the 

authority of the Commission under any 

other provision of [the CEA] to conduct 

investigations in order to determine 

compliance with the requirements or 

conditions of such exemption or to take 

enforcement action for any violation of 

any provision of [the CEA] or any rule, 

regulation or order thereunder caused 

by the failure to comply with or satisfy 

such conditions or requirements.’’ 384

E. Effectiveness of the Exemption 

The Commission proposed to make 

the exemption effective immediately.385

In response to the Commission’s general 

request for comments, the Commission 

received two types of comments with 

respect to the effectiveness of the 

exemption: (1) Comments requesting 

that the Commission issue a final order 

rapidly, and (2) one comment asking for 

clarification as to when the exemption 

will become effective with respect to 

individual Requesting Parties in light of 

the conditions precedent. 

Several commenters requested that 

the Commission issue a final order as 

quickly as possible or practical, 

respectively.386 Of these, one 

commenter also requested that the 

Commission issue an interim or 

temporary order to make it clear that the 

RTO and ISO transactions are 

‘‘temporarily exempt’’ and not subject to 

the Commission’s jurisdiction until a 

final order is issued.387

Another commenter stated that, if the 

Commission determines not to issue 

separate exemption orders, it should 

specify how and when a single order 

will take effect for each Requesting 

Party.388 This commenter noted that 

‘‘[e]ach Petitioner’s ability to satisfy the 

proposed conditions precedent depends 

on the terms of the final exemption and 

the individual Petitioner’s stakeholder 

process for amending its tariff or 

protocol.’’ 389 As a result, each 

Requesting Party is likely to satisfy the 

proposed conditions precedent at a 

different time.390 This commenter also 

asserted that it would be unreasonable 

for the Commission to delay the 

effectiveness of a final order until all of 

the Requesting Parties have satisfied all 

of the conditions precedent.391

The Commission notes that it is not 

anticipated that any individual 

Requesting Party will be in need of a 

final order to continue its present 

business until the date by which all 

Requesting Parties have satisfied the 

conditions precedent described in the 

Proposed Order. Indeed, the 

Commission also notes that the 

Commission’s Divisions of Clearing and 

Risk, Market Oversight, and Swap and 

Intermediary Oversight issued a noaction letter preserving the regulatory 

status quo of the transactions that are 

the subject of the Proposed Order until 

the earlier of March 31, 2013, or such 

earlier date as the Commission may 

establish in taking final action on the 

Proposed Order.392 Nonetheless, the 

Commission recognizes the concerns 

raised by the commenters with respect 

to the market uncertainty that may be 

caused if publication of a final order is 

delayed until all Requesting Parties 

have satisfied the conditions precedent. 

Moreover, with one exception, all 

Requesting Parties have represented that 

all of the necessary Tariffs and other 

documents have been submitted to, and 

have either already been approved or 

permitted to take effect or are currently 

being reviewed by, FERC or PUCT, as 

applicable.393 Accordingly, the 

Commission has decided to publish this 

Final Order in advance of the full 

satisfaction by each Requesting Party of 

the prerequisites to the exemption set 

forth therein, so as to provide market 

participant with sufficient notice of the 


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394See 11 U.S.C. 553. 

395See section IV.A.3.a.ii. supra. 

396See section IV.A.3.a.i. supra. 

397See id. 

398See sections IV.A.3.a.i. and IV.B.2.e.i. supra. 399See id. 400 5 U.S.C. 601 et seq. 401See RFA analysis as conducted by FERC 

regarding five of the Requesting Parties, CAISO, 

NYISO, PJM, MISO, and ISO NE., https://

www.federalregister.gov/articles/2011/10/26/2011-

27626/enhancement-of-electricity-marketsurveillance-and-analysis-through-ongoingelectronic-delivery-of#h-17. 

Commission staff also performed an independent 

RFA analysis based on Subsector 221 of sector 22 

(utilities companies), which defines any small 

utility corporation as one that does not generate 

more than 4 million of megawatts of electric energy 

per year, and Subsector 523 of Sector 52 (Securities 

Commodity Contracts, and Other Financial 

Investments and Related Activities) of the SBA 

standards, 13 CFR 121.201 (1–1–11 Edition), which 

identifies a small business size standard of $7 

million or less in annual receipts. Staff concluded 

that none of the Requesting Parties is a small entity, 

based on the following information: 

MISO reports 594 million megawatt hours per 

year, https://www.midwestiso.org/Library/

Repository/Communication%20Material/Corporate/

Corporate%20Fact%20Sheet.pdf. 

ERCOT reports 335 million megawatt hours per 

year, http://www.ercot.com/content/news/

presentations/2012/ERCOT_Quick_Facts_June_

%202012.pdf. 

CAISO reports 200 million megawatts per year, 

http://www.caiso.com/Documents/Company

Information_Facts.pdf. 

NYISO reports 17 million megawatts per month, 

which calculates to 204 megawatts per year, http:// 

www.nyiso.com/public/about_nyiso/

nyisoataglance/index.jsp. 

PJM reports $35.9 billion billed in 2011, http:// 

pjm.com/markets-and-operations.aspx. 

ISO NE reports 32,798 gigawatt hours in the first 

quarter of 2011, which translates into almost 33 

million megawatts for the first quarter of 2011, 

http://www.iso-ne.com/markets/mkt_anlys_rpts/

qtrly_mktops_rpts/2012/imm_q1_2012_qmr_

final.pdf. 

402See A New Regulatory Framework for Clearing 

Organizations, 66 FR 45604 at 45609, Aug. 29, 2001 

(DCOs); Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618 at 18618– 

19, April 30, 1982 (DCMs). 

403See 77 FR at 52145. Under CEA section 2(e), 

only ECPs are permitted to participate in a swap, 

subject to the end-user clearing exception. 

404See Opting Out of Segregation, 66 FR 20740 

at 20743, April 25, 2001. 

405See 77 FR at 52168. 

406See discussion in section IV.b.2.d. supra. 

407See 77 FR at 52164, 52172. 

408See, e.g., Industrial Coalitions at 4–5. See 

section IV.B.2.d.ii. supra. 

prerequisites and conditions attendant 

to the Final Order. The Commission 

notes, however, that the exemption 

provided under the Final Order will not 

become effective with respect to a 

particular Requesting Party until that 

Requesting Party has complied with all 

of the specified prerequisites provided 

in the Final Order. That is, the 

conditions precedent are now 

prerequisites to the effectiveness of the 

exemption contained in the Final Order 

and not to the issuance of the Final 

Order. Specifically, a Requesting Party 

and its participants will not benefit from 

the exemption described in the Final 

Order unless and until: (1) Submission 

and acceptance of a legal opinion or 

memorandum of outside counsel that is 

satisfactory to the Commission, in the 

Commission’s sole discretion, and that 

provides the Commission with 

assurance that the netting arrangements 

contained in the approach selected by 

the particular Requesting Party to satisfy 

the standards set forth in FERC 

regulation 35.47(d) (or in the case of 

ERCOT, standards that are the same as 

those set forth in FERC regulation 

35.47(d)) will, in fact, provide the 

Requesting Party with enforceable rights 

of set off against any of its market 

participants under title 11 of the United 

States Code 394 in the event of the 

bankruptcy of the market participant,395

and (2) in the case of Requesting Parties 

that are subject to regulation by FERC, 

the Requesting Party is in full 

compliance with FERC regulation 

35.47 396 or, in the case of ERCOT, 

which is subject to regulation by PUCT, 

ERCOT is in substantial compliance 

with standards that are the same as 

those set forth in FERC regulation 

35.47.397

With respect to the required legal 

memorandum or opinion of counsel, the 

Commission is delegating to the Director 

of the Division of Clearing and Risk and 

to his designees, in consultation with 

the General Counsel or the General 

Counsel’s designees, the authority to 

accept or reject the legal memorandum 

or opinion. The Director of Clearing and 

Risk will affirmatively communicate to 

the Requesting Party when the 

Requesting Party’s legal memorandum 

or opinion has been accepted or 

rejected. 

With respect to the condition 

requiring compliance with the standards 

set forth in FERC regulation 35.47, 

Requesting Parties governed by FERC 

will be deemed to have satisfied this 

condition upon FERC’s acceptance and 

approval of all of the Requesting Parties’ 

Tariffs that are necessary to implement 

such standards.398 ERCOT will be 

deemed to have satisfied this condition 

upon PUCT permitting all of the 

necessary ERCOT protocol revisions to 

take effect, except that the Commission 

will accept a demonstration that ERCOT 

has protocols in effect that substantially 

meet the settlement and billing 

standards set forth in FERC regulation 

35.47(b).399

V. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the exemption set forth in the 

Final Order will have a significant 

economic impact on a substantial 

number of small entities and, if so, 

provide a regulatory flexibility analysis 

respecting the impact.400 In the 

Proposed Order, the Commission found 

that the Requesting Parties should not 

be considered small entities based on 

the central role they play in the 

operation of the electronic transmission 

grid and the creation of organized 

wholesale electric markets that are 

subject to FERC and PUCT regulatory 

oversight,401 analogous to functions 

performed by DCMs and DCOs, which 

the Commission has previously 

determined not to be small entities.402

The Proposed Order included entities 

that qualify as ‘‘appropriate persons’’ 

pursuant to CEA sections 4(c)(3)(A) 

through (J), or 4(c)(3)(K) that otherwise 

qualify as ECPs, as defined in CEA 

section 1a(18)(A) and Commission 

regulation 1.3 (m).403 The Commission 

previously determined that ECPs are not 

‘‘small entities’’ for purposes of the 

RFA.404 As a result, the Commission 

certified that the Proposed Order would 

not have a significant economic impact 

on a substantial number of small entities 

for purposes of the RFA, and requested 

written comments regarding this 

certification.405 After further 

consideration of the comments received, 

the Commission has again determined 

that the Final Order would not have a 

significant economic impact on a 

substantial number of small entities for 

purposes of the RFA. 

In response to its request for 

comments on the Proposed Order, the 

Commission received comment letters 

relevant to the RFA that primarily 

focused on the scope of the term 

‘‘appropriate persons.’’ 406 Specifically, 

the Commission requested comments on 

whether to expand the list of 

appropriate persons to include those 

entities that ‘‘actively participate in the 

generation, transmission or distribution 

of electricity,’’ but that are not ECPs and 

do not fall within CEA sections 

4(c)(3)(A) through (J).407 Multiple 

commenters urged the Commission to 

expand the definition to include all 

persons who actively participate in the 

generation, transmission, or distribution 

of electric energy or specified types of 

entities that do so, noting that the 

proposed definition of an appropriate 

person was not sufficiently inclusive 

and could exclude traditionally active 

market participants whose participation 

facilitates demand response activities 

and reduces costs.408 The Commission 


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409Accordingly, the exemption provided by the 

Final Order will apply to agreements, contracts, and 

transactions where (1) each party thereto is an 

‘‘appropriate person,’’ as defined in sections 

4(c)(3)(A) through (J) of the CEA; an ‘‘eligible 

contract participant,’’ as defined in section 

1a(18)(A) of the CEA and in Commission regulation 

1.3(m); or a ‘‘person who actively participates in the 

generation, transmission, or distribution of electric 

energy,’’ as defined in Final Order and (2) that 

satisfy the additional parameters for inclusion in 

the exemption set forth in the Final Order. See 

paragraph 2 of the Order. 

410See section IV.B.2.d.ii. supra (citing 77 FR at 

52146). 

411See note 401 supra (citing 13 CFR 121.201). 

412PJM indicates that 55 of its 588 market 

participants may not be appropriate persons 

because they might not meet the requirements in 

CEA sections 4(c)(3)(A) through (J). However, PJM 

states that this number accounts for less than 10% 

of the total number of participants and thus is not 

considered significant. See PJM at 2. Similarly, in 

the CAISO market, 74 participants are authorized to 

purchase or hold FTRs. Of those, 13 are estimated 

to be market participants that actively participate in 

the generation, transmission, or distribution of 

electric energy, but that may not be appropriate 

persons because they might not meet the 

requirements in CEA sections 4(c)(3)(A) through (J) 

or qualify as ECPs (‘‘Additional Participants’’). In 

terms of total dollar volume, approximately 6.5% of 

the FTR payments and charges are with Additional 

Participants. See CAISO/ISO NE January at 5. With 

respect to ISO NE., as of September 20, 2012, there 

were 392 market participants that actively 

participated in the generation, transmission, or 

distribution of electric energy. However, while ISO 

NE did not provide financials on which to make a 

determination as to whether 169 of the 392 active 

market participants would be Additional 

Participants, in each instance, such active market 

participants are required to post sufficient collateral 

to cover the risk of their positions. Among the 

participants that have filed financial statements 

with ISO NE., 23 would be active market 

participants. These active market participants 

constitute 3.2% of the gross invoices billed to the 

392 active market participants across all ISO NE 

markets in 2011. Of these 23 participants, ten (10) 

representing 2.8% of the total invoices billed to the 

392 market participants in 2011 have met their 

participation qualification by posting supplemental 

collateral. Id. 

413The Commission notes that to the extent that 

market participants are required to meet 

capitalization requirement totaling $1 million net 

worth or $10 million total assets and are 

sophisticated entities that are able to, from a 

financial standpoint, understand and manage the 

risks associated with the exempted transactions, 

they are not considered ‘‘small entities’’ for RFA 

purposes. See, e.g., Industrial Coalitions at 4 n.12 

(citing FERC regulation 35.47 and stating that ‘‘all 

market participants are required to meet a baseline 

capitalization requirement totaling $1 million net 

worth or $10 million total assets’’). 

414 77 FR at 52166. 

415Paragraph 4(a) of the Order. 

has carefully considered the comments 

and, using the authority provided by 

section 4(c)(3)(K) of the CEA, has 

determined that a ‘‘person who actively 

participates in the generation, 

transmission, or distribution of electric 

energy’’ as defined in the Final Order, 

is an appropriate person for purposes of 

the exemption provided therein.409 The 

Commission has based its 

determination, in part, on the view that 

the Covered Transactions ‘‘subject to the 

Final Order would be limited to 

sophisticated entities that are able to, 

from a financial standpoint, understand 

and manage the risks associated with 

such Transactions.’’ 410 The relief 

provided in the Final Order to a person 

who actively participates in the 

generation, transmission, or distribution 

of electric energy may impact some 

small entities to the extent they may fall 

within standards established by the 

Small Business Administration (‘‘SBA’’) 

regulations defining entities with 

electric energy output of less than 

4,000,000 megawatt hours per year as a 

‘‘small entity.’’ 411 However, based on 

the Commission’s existing information 

about the RTO and ISO markets and the 

comments received, market participants 

consist mostly of entities exceeding the 

thresholds defining ‘‘small entities’’ set 

out above. 412 Therefore, based on the 

comments received and industry 

feedback, the Commission is of the view 

that the Final Order would not affect a 

substantial number of small entities.413

The Commission is further of the view 

that the Final Order relieves the 

economic impact that the exempt 

entities, including any small entities 

that may opt to take advantage of the 

exemption set forth in the Final Order 

otherwise would be subjected to by 

exempting certain of their transactions 

from the application of substantive 

regulatory compliance requirements of 

the CEA and Commission regulations 

thereunder. Indeed, pursuant to section 

4(c)(3)(K) of the CEA, the Final Order 

expands the category of persons that are 

‘‘appropriate persons’’ that may avail 

themselves of the exemption. 

Accordingly, the Commission does not 

expect the Final Order to have a 

significant impact on a substantial 

number of small entities. Therefore, the 

Chairman, on behalf of the Commission, 

hereby certifies, pursuant to 5 U.S.C. 

605(b), that the exemption set forth in 

the Final Order would not have a 

significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The purposes of the Paperwork 

Reduction Act of 1995, 44 U.S.C. 3501 

et seq. (‘‘PRA’’) are, among other things, 

to minimize the paperwork burden to 

the private sector, ensure that any 

collection of information by a 

government agency is put to the greatest 

possible uses, and minimize duplicative 

information collections across the 

government. The PRA applies to all 

information, ‘‘regardless of form or 

format,’’ whenever the government is 

‘‘obtaining, causing to be obtained [or] 

soliciting’’ information, and includes 

and requires ‘‘disclosure to third parties 

or the public, of facts or opinions,’’ 

when the information collection calls 

for ‘‘answers to identical questions 

posed to, or identical reporting or 

recordkeeping requirements imposed 

on, ten or more persons.’’ The Proposed 

Order provided that the exemption 

would be expressly conditioned upon 

information sharing: ‘‘With respect to 

ERCOT, information sharing 

arrangements between the Commission 

and PUCT that are acceptable to the 

Commission are executed and continue 

to be in effect. With respect to all other 

Requesting Parties, information sharing 

arrangements between the Commission 

and FERC that are acceptable to the 

Commission continue to be in 

effect.’’ 414 The Commission determined 

that the Proposed Order did not impose 

any new recordkeeping or information 

requirements, or other collections of 

information on ten or more persons that 

require approval of the Office of 

Management and Budget (‘‘OMB’’), and 

did not receive any comments regarding 

this determination. 

The Final Order has amended the 

information sharing conditions to 

provide that the exemption is expressly 

conditioned upon information sharing: 

(1) With respect to all Requesting Parties 

subject to the jurisdiction of FERC, 

information sharing arrangements between 

the Commission and FERC that are 

acceptable to the Commission continue to be 

in effect, and those Requesting Parties’ 

compliance with the Commission’s requests 

through FERC to share, on an as-needed basis 

and in connection with an inquiry consistent 

with the CEA and Commission regulations, 

positional and transactional data within the 

Requesting Parties’ possession for products 

in the Requesting Parties’ markets that are 

related to markets that are subject to the 

Commission’s jurisdiction, including any 

pertinent information concerning such data. 

(2) With respect to ERCOT, the 

Commission’s ability to request, and obtain, 

on an as-needed basis from ERCOT, 

concurrently with the provision of written 

notice to PUCT and in connection with an 

inquiry consistent with the CEA and 

Commission regulations, positional and 

transactional data within ERCOT’s 

possession for products in ERCOT’s markets 

that are related to markets that are subject to 

the Commission’s jurisdiction, including any 

pertinent information concerning such data, 

and ERCOT’s compliance with such requests 

by sharing the requested information.415

Nevertheless, the PRA would not apply 

in this case, given that the information 

sharing conditions in the Final Order 

would not impose any new 

recordkeeping or information collection 

requirements, or other collections of 


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416See more detailed discussion in section I. 

supra. 417As noted above, the Requesting Parties 

amended their Petition on June 11, 2012 and 

citations to Petition herein are to the amended 

Petition. See note 22 supra. 418See 77 FR 52139. See also Petition at 2–3, 6. 

419See 77 FR 52139. See also Petition at 3. 

420See paragraph 1 of the Order. 

421See 77 FR 52139. See also Petition at 6. 

422 7 U.S.C. 19(a). 

423 77 FR 52166–67. See also section II.B.1. supra. 

424For those ECPs engaging in the transactions 

delineated in the Proposed Order in markets 

administered by a Requesting Party that do not fit 

within the categories of ‘‘appropriate persons’’ set 

forth in sections 4(c)(3)(A) through (J), the 

Commission proposed to determine that they are 

appropriate persons pursuant to section 4(c)(3)(K), 

‘‘in light of their financial or other qualifications, 

or the applicability of appropriate regulatory 

protections.’’ The Commission also noted that CEA 

section 2(e) permits all ECPs to engage in swaps 

transactions other than on a DCM and that such 

entities should similarly be appropriate persons for 

the purpose of the Proposed Order. See 77 FR 

52145–46. 425 Id. 426See id. at 52143. 427See id. at 52172. As a general matter, in 

considering the costs and benefits of its actions, the 

Commission endeavors to quantify estimated costs 

and benefits where reasonably feasible. Here, 

however, the Commission considers the costs and 

benefits of this Final Order mostly in qualitative 

terms because the commenters, including the 

Requesting Parties, provided no such data or 

information to assist the Commission in doing so 

despite the Proposed Order’s request. 

428COPE at 2, 5. 

429 Id. at 11. 

430 Joint Trade Associations at 5. 

information on ten or more persons that 

require OMB approval. 

C. Consideration of Costs and Benefits 

1. Background 

As discussed in section I. above, the 

Dodd-Frank Act amended CEA section 

4(c) to add sections 4(c)(6)(A) and (B), 

which permit 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 pursuant to the 

Commission’s 4(c) exemptive authority. 

However, the Commission must act ‘‘in 

accordance with’’ sections 4(c)(1) and 

(2) of the CEA.416

On February 7, 2012, the Requesting 

Parties filed a joint Petition 417 with the 

Commission requesting that the 

Commission exercise its authority under 

section 4(c)(6) of the CEA and section 

712(f) of the Dodd-Frank Act to exempt 

certain contracts, agreements and 

transactions for the purchase or sale of 

specified electric energy products, that 

are offered pursuant to a FERC- or 

PUCT-approved Tariff, from most 

provisions of the Act.418 The Requesting 

Parties asserted that each of the 

transactions for which an exemption is 

requested is (a) subject to a longstanding, comprehensive regulatory 

framework for the offer and sale of such 

transactions established by FERC, or in 

the case of ERCOT, PUCT, and (b) part 

of, and inextricably linked to, the 

organized wholesale electric energy 

markets that are subject to regulation 

and oversight of FERC or PUCT, as 

applicable. The Requesting Parties 

expressly excluded from the Petition a 

request for relief from sections 4b, 4o, 

6(c), and 9(a)(2) of the Act,419 and such 

provisions, among others, explicitly 

have been carved out of the Final 

Order.420

The Requesting Parties requested that, 

due to the commonalities in their 

markets, the exemption apply to all 

Requesting Parties and their respective 

market participants with respect to each 

category of electricity energy 

transactions described in the Petition, 

regardless of whether such transactions 

are offered or entered into at the current 

time pursuant to an individual RTO or 

ISO’s Tariff. The Requesting Parties 

asserted that this uniformity would 

avoid an individual RTO or ISO 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 RTO or 

ISO.421

2. The Statutory Mandate To Consider 

the Costs and Benefits of the 

Commission’s Action: Section 15(a) of 

the CEA 

Section 15(a) of the CEA 422 requires 

the Commission to ‘‘consider the costs 

and benefits’’ of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

3. Proposed Order and Request for 

Comment on the Commission’s 

Proposed Consideration of Costs and 

Benefits 

Upon consideration of the Petition, 

the Commission issued the Proposed 

Order which proposed to exempt certain 

transactions pursuant to section 4(c)(6) 

of the CEA.423 The Commission 

proposed to limit the exemption set 

forth in the Proposed Order to entities 

that meet one of the appropriate persons 

categories in CEA sections 4(c)(3)(A) 

through (J), or, pursuant to CEA section 

4(c)(3)(K), that otherwise qualify as an 

ECP.424 Furthermore, under the 

Proposed Order, ‘‘the covered 

agreements, contracts or transactions 

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.’’ 425

In the Proposed Order, the 

Commission clarified that financial 

transactions that are not tied to the 

allocation of the physical capabilities of 

an electric energy transmission grid 

would not be suitable for exemption, 

and were therefore not covered by the 

Proposed Order because such activity 

would not be inextricably linked to the 

physical delivery of electric energy.426

The Proposed Order expressly 

requested public comment on the 

Commission’s proposed cost-benefit 

consideration, including with respect to 

reasonable alternatives; the magnitude 

of specific costs and benefits, and data 

or other information to estimate a dollar 

valuation; and any impact on the public 

interest factors specified in CEA section 

15(a).427

4. Summary of Comments on the Costs 

and Benefits of the Proposed Order 

The Commission requested, but 

received no comments providing data or 

other information to enable the 

Commission to better quantify the 

expected costs and benefits attributable 

to the Final Order. In terms of 

qualitative cost and benefit comments, 

COPE stated that the Commission’s 

Proposed Order creates confusion and 

inefficient, duplicative regulation, thus, 

imposing unnecessary costs.428 COPE 

also stated that the Commission should 

recognize the regulation of FERC and 

the PUCT and limit to the degree 

possible any regulatory burden imposed 

on RTOs, ISOs, and their members.429

The Joint Trade Associations stated that 

any additional regulation by the 

Commission would be duplicative and 

would lead to increased costs passed on 

to consumers.430

Another commenter, NYSIO, asserted 

that the benefit of Commission 


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431NYISO Supplement to Requesting Parties’ 

Comment, Attachment B at 7. 

432NYISO at 9. 

433 Id. 

434 Id. (citing 16 U.S.C. 824d). 

435Financial Marketers Coalition at 11–12. 

436 Id. 

437PUCT at 9. 

438Tarachand at 2. 

439Requesting Parties at 8. 

440 Industrial Coalitions at 3. 

441Commercial Working Group at 2. 

442Requesting Parties at 3. 

443NEPOOL at 4. 

444Requesting Parties at 16. 

445 Id. at 18. 

446See sections II.A.1.a.–c. supra. 

447See section II.A.1.d. supra. 

regulation of smaller NYSIO market 

participants was unclear, but stated that 

costs of such regulation were certain.431

NYSIO noted that consequence of the 

Commission’s possible conclusion that 

all authorized participants in NYSIO’s 

markets were not ‘‘appropriate persons’’ 

would result in regulatory uncertainty 

and would result in potential exclusion 

of significant number of market 

participants from the NYSIO’s markets. 

NYSIO also noted that, as a result, 

NYSIO would have to increase its 

resources to respond to the new 

regulatory and compliance 

requirements. NYSIO pointed out that 

this increase in their operating costs 

would be passed on to New York 

electricity consumers. More specifically, 

NYISO noted that the decision not to 

expand the scope of the Final Order to 

encompass all current market 

participants that otherwise qualify to 

participate in NYISO’s markets would 

result in one of two consequences: ‘‘(1) 

NYISO would be subject to Commission 

regulation by virtue of the ongoing 

participation by market participants that 

do not qualify as Appropriate Persons; 

or (2) NYISO would have to seek to 

amend its tariffs with FERC to change 

its participation criteria to effectively 

exclude these market participants.’’ 432

Under the first scenario, ‘‘[t]he potential 

for inconsistent regulatory requirements 

would significantly weaken the 

regulatory certainty that is the intended 

benefit of the Exemption,’’ and ‘‘[s]uch 

additional and potentially conflicting 

regulation would be certain to lead to 

increased costs to the NYISO, its market 

participants, and ultimately electric 

ratepayers.’’ 433 Under the second 

scenario, NYISO would have ‘‘to seek 

approval to amend its tariffs to make its 

minimum participation criteria 

consistent with the Commission’s 

definition of Appropriate Persons,’’ 

which requires showing ‘‘that the 

proposed tariff amendments are ‘just 

and reasonable’ and do not ‘grant any 

undue preference or advantage to any 

person or subject any person to any 

undue prejudice or disadvantage.’ ’’ 434

The Financial Marketers Coalition 

stated that excluding one set of market 

participants (i.e., those that do not own 

physical assets) from the exemption 

delineated in the Proposed Order would 

cause many market participants to exit 

the market because they could not 

operate based on the requirements of a 

dual regulatory structure.435 Such an 

outcome, according the Financial 

Marketers Coalition, would decrease 

competition, harm liquidity in the 

markets and allow the continued 

exercise of market power.436 The PUCT 

stated that excluding persons currently 

authorized to participate in ERCOT 

would introduce significant negative 

implications on the competitive 

(wholesale and retail) electric energy 

markets.437 Similarly, Tarachand 

commented that the exit of small market 

participants could adversely affect 

liquidity and the price discovery 

process.438 The Requesting Parties 

expressed similar concerns regarding 

the potential detrimental impact on the 

robustness of their markets.439

The Industrial Coalitions generally 

supported the Proposed Order, stating 

that the Commission’s continued 

jurisdiction over fraud and 

manipulation in the ISO and RTO 

markets provides crucial ongoing 

market oversight necessary for market 

transparency and customer 

protection.440 The Commercial Working 

Group stated that the Commission’s 

Proposed Order offers legal certainty, 

and it commended the Commission for 

eliminating an unnecessary layer of 

regulation in an area that is highly 

complex and highly regulated.441 The 

Requesting Parties commented that 

regulatory certainty is the primary 

benefit of the exemption set forth in the 

Proposed Order.442

Regarding whether the Commission 

should extend the definitions of the 

transactions set forth in the Proposed 

Order to include ‘‘logical outgrowths’’ of 

the same, NEPOOL stated that absent 

such an inclusion, market participants 

and Requesting Parties would be 

required to seek additional exemptions 

from the Commission for relatively 

minor modifications to existing Tariffs 

and/or transactions, which in turn could 

dramatically increase the Commission’s 

workload.443

Regarding the proposed requirement 

related to the memorandum of counsel 

stating that their netting arrangements 

satisfy FERC regulation 35.47(d), the 

Requesting Parties stated that the 

Commission should forego that 

requirement as redundant with their 

existing obligations to FERC.444

In response to a request for comment, 

the Requesting Parties stated that the 

Commission should not require RTOs 

and ISOs to have the ability to recreate 

Day-Ahead and RTM prices.445

5. Summary of Final Order— 

Determinations and Conditions 

As discussed above, the Final Order 

makes certain determinations with 

respect to the scope of relief, including 

the scope of the Covered 

Transactions 446 and the process for 

expanding the Covered Transactions.447

The Commission determined that any 

products that are offered by a 

Requesting Party, presently or in the 

future, pursuant to a Tariff that has been 

approved or permitted to take effect by 

FERC or PUCT and that fall within the 

provided definitions of the Covered 

Transactions, as well as any 

modifications to existing products that 

are offered by a Requesting Party 

pursuant to a Tariff that has been 

approved or permitted to take effect by 

FERC and PUCT and that do not alter 

the characteristics of the Covered 

Transactions in a way that would cause 

such products to fall outside these 

definitions are intended to be included 

within the Final Order. In this way, the 

Commission’s Final Order provides 

beneficial flexibility and efficiency in 

that, if the product qualifies as one of 

the four Covered Transactions in the 

Final Order, the Requesting Party would 

not be required to request or to obtain 

future supplemental relief for a 

modified product. At the same time, 

however, the Commission declined to 

include phrases such as ‘‘logical 

outgrowth,’’ ‘‘natural outgrowth,’’ and 

‘‘economically comparable’’ in the 

definitions of the Covered Transactions 

because such phrases are too vague and 

too potentially far reaching to permit 

meaningful analysis under the 

Commission’s statutory standard of 

review. 

The Final Order also sets forth certain 

conditions subsequent and conditions to 

the effectiveness of the exemption set 

forth therein. More specifically, two 

conditions subsequent relate to 

information requests by the 

Commission. First, the Commission 

must be able to obtain, either directly 

from ERCOT, or through FERC with 

respect to the other Requesting Parties, 

positional and transactional data within 

the Requesting Parties’ possession for 

products in the Requesting Parties’ 

markets that are related to markets 

subject to the Commission’s 


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448Paragraph 4(b) of the Order. 

449Paragraph 6(a) of the Order. 450Paragraph 6(b) of the Order. 

451See section IV.B.2.d. supra. While not 

compelled to, if a Requesting Party decided to 

amend its Tariff to conform with the Final Order’s 

participant criteria for purposes of securing 

regulatory certainty—and assuming FERC would 

approve such an amendment—the Commission 

believes that a minimal cost would be imposed, 

mitigated to the extent that the Requesting Party 

already is required to amend its Tariff to comply 

with other terms of the Final Order. Alternatively, 

the Commission does not believe it is likely that the 

Requesting Parties themselves would become 

dually regulated by virtue of market participants 

not qualifying under the scope of the Final Order 

continuing to transact in the Requesting Parties’ 

markets. To the extent that any Covered Transaction 

would be subject to the Commission’s jurisdiction, 

the potential dual-regulatory requirements resulting 

from other Dodd-Frank rulemakings would be most 

likely to affect the market participants that do not 

qualify for the exemption set forth in the Final 

Order. 

452See 7 U.S.C. 6(c)(6)(A), (B). 

jurisdiction, including any pertinent 

information concerning such data. 

Second, the exemption is expressly 

conditioned upon the requirement, that 

with respect to each Requesting Party, 

neither the Tariffs nor any other 

governing documents of the particular 

RTO or ISO pursuant to whose Tariff the 

agreement, contract or transaction is to 

be offered or sold, shall include any 

requirement that the RTO or ISO notify 

its members prior to providing 

information to the Commission in 

response to a subpoena or other request 

for information or documentation.448

There are also two conditions to the 

effectiveness of the exemption set forth 

in the Final Order. For a Requesting 

Party subject to the jurisdiction of FERC, 

the exemption set forth in the Final 

Order is effective upon satisfaction of all 

of the following: (1) Submission and 

acceptance of a legal opinion or 

memorandum of outside counsel that is 

satisfactory to the Commission, in the 

Commission’s sole discretion, and that 

provides the Commission with 

assurance that the netting arrangements 

contained in the approach selected by 

that Requesting Party to satisfy the 

obligations contained in FERC 

regulation 35.47(d) will, in fact, provide 

the Requesting Party with enforceable 

rights of set off against any of its market 

participants under title 11 of the United 

States Code in the event of the 

bankruptcy of the market participant; 

and (2) demonstration that the 

Requesting Party has fully complied 

with FERC regulation 35.47, as 

measured by FERC’s acceptance and 

approval of all of the Requesting Party’s 

submissions that are necessary to 

implement the requirements of FERC 

regulation 35.47.449 For ERCOT, which 

is subject to the jurisdiction of PUCT, 

the exemption set forth in the Final 

Order is effective upon satisfaction of all 

of the following: (1) submission and 

acceptance of a legal opinion or 

memorandum of outside counsel that is 

satisfactory to the Commission, in the 

Commission’s sole discretion, and that 

provides the Commission with 

assurance that the netting arrangements 

contained in the approach selected by 

ERCOT to satisfy standards that are the 

same as those contained in FERC 

regulation 35.47(d) will, in fact, provide 

the ERCOT with enforceable rights of set 

off against any of its market participants 

under title 11 of the United States Code 

in the event of the bankruptcy of the 

market participant; and (2) 

demonstration that ERCOT has fully 

complied with standards that are the 

same as those set forth in FERC 

regulation 35.47, as measured by PUCT 

permitting all of the necessary ERCOT 

protocol revisions to take effect; 

provided that the Commission will 

accept a demonstration that ERCOT has 

protocols in effect that substantially 

meet the settlement and billing period 

standards set forth in FERC regulation 

35.47(b).450

In the discussion that follows, the 

Commission considers the costs and 

benefits of the Final Order to the public 

and market participants generally, and 

to the Requesting Parties specifically. It 

also considers the costs and benefits of 

the exemption described in the Final 

Order, in light of the public interest 

factors enumerated in CEA section 

15(a). 

6. Costs of the Final Order 

The Final Order is exemptive and 

provides ‘‘appropriate persons’’ 

engaging in Covered Transactions relief 

from certain of the requirements of the 

CEA and attendant Commission 

regulations. As with any exemptive rule 

or order, the exemption in the Final 

Order is permissive, meaning that the 

Requesting Parties were not required to 

request it and are not required to rely on 

it. Accordingly, the Commission 

assumes that the Requesting Parties 

would rely on the exemption only if the 

anticipated benefits warrant the costs of 

the exemption. 

In response to the comments of 

NYISO and others, the Commission is of 

the view that the Requesting Parties will 

experience minimal, if any, ongoing 

costs as a result of the determinations 

and conditions set forth in the Final 

Order because, as the Requesting Parties 

certify pursuant to Commission 

regulation 140.99(c)(3)(ii), the attendant 

conditions are substantially similar to 

requirements that the Requesting Parties 

and their market participants already 

incur in complying with FERC or PUCT 

regulations. 

The requirement that all parties to the 

agreements, contracts, or transactions 

that are covered by the exemption in the 

Final Order must be (1) an ‘‘appropriate 

person,’’ as defined sections 4(c)(3)(A) 

through (J) of the CEA; (2) an ‘‘eligible 

contract participant,’’ as defined in 

section 1a(18)(A) of the CEA and in 

Commission regulation 1.3(m); or (3) a 

‘‘person who actively participates in the 

generation, transmission, or distribution 

of electric energy,’’ as defined in 

paragraph 5(g) of the Order—is not 

likely to impose any significant, 

incremental costs on the Requesting 

Parties because their existing legal and 

regulatory obligations under the FPA 

and FERC or PUCT regulations mandate 

that only eligible market participants 

may engage in the Covered 

Transactions, as explained above.451 To 

the comments of NYISO and others, the 

Commission recognizes that this 

requirement will mean that certain 

entities that currently operate in RTOs 

and ISOs but that do not satisfy the 

minimum financial criteria described 

above will not be able to avail 

themselves of the exemption. Such a 

result could cause those market 

participants wishing to avail themselves 

of the exemption to incur costs to satisfy 

the Final Order’s minimum criteria or 

exit the market. The Commission 

considered these costs but has 

determined that these market 

participants must be excluded because 

they lack the minimum financial 

wherewithal the Commission believes is 

necessary to make the requisite finding 

under CEA section 4(c)(3)(K) that they 

meet the statutory requirements of CEA 

section 4(c)(3)(K). In response to the 

comments of the Financial Marketers 

Coalition, the Commission has clarified 

that if an entity meets the minimum 

criteria set forth in the Final Order, they 

may continue to operate in these 

markets even if they do not own or 

operate physical assets. 

The requirement that the Covered 

Transactions must be offered or sold 

pursuant to a Requesting Party’s Tariff— 

which has been approved or permitted 

to take effect by: (1) In the case of 

ERCOT, the PUCT or; (2) in the case of 

all other Requesting Parties, FERC—is a 

statutory requirement for the exemption 

set forth in CEA section 4(c)(6) and 

therefore is not a cost attributable to an 

act of discretion by the Commission.452

Moreover, requiring that the Requesting 

Parties not operate outside their 

approved Tariffs derives from existing 


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453See section IV.A.3.b.ii. supra. 

454See section IV.A.3.a.ii. supra. 

455The Court in Laffey v. Northwest Airlines, Inc., 

572 F.Supp. 354, 371 (D.D.C. 1983) ruled that 

hourly rates for attorneys practicing civil law in the 

Washington, DC metropolitan area could be 

categorized by years in practice and adjusted yearly 

for inflation. For 2012 Laffey Matrix rates, see 

http://www.justice.gov/usao/dc/divisions/ 

civil_Laffey_Matrix_2003-2012.pdf. 

456There are possibilities of economies of scale if 

multiple Requesting Parties share the same counsel 

in preparing these memoranda or opinions. 

legal requirements and is not a cost 

attributable to this Final Order. 

As described above, FERC and PUCT 

impose on the Requesting Parties, and 

their MMUs, various information 

management requirements. These 

existing requirements are not materially 

different from the condition that none of 

a Requesting Party’s Tariffs or other 

governing documents may include any 

requirement that the Requesting Party 

notify a member prior to providing 

information to the Commission in 

response to a subpoena, special call, or 

other request for information or 

documentation. While the Commission 

is mindful that the process of changing 

Tariffs will cause the Requesting Parties 

to incur costs, those costs are necessary 

for the Commission to find that the 

exemption is in the public interest and 

consistent with the purposes of the 

CEA. 

Requiring that an information sharing 

arrangement between the Commission 

and FERC be in full force and effect is 

not a cost to the Requesting Parties or 

to other members of the public because 

it has been an inter-agency norm since 

2005. The requirement that the 

Requesting Parties comply with the 

Commission’s requests on an as-needed 

basis for related transactional and 

positional market data will impose only 

minimal costs on the Requesting Parties 

to respond because the Commission 

contemplates that any information 

requested will already be in the 

possession of the Requesting Parties.453

The legal opinion or memorandum of 

counsel requirement 454 will require the 

Requesting Parties to incur costs to 

acquire. Based on the Laffey Matrix for 

2012, assuming the opinion or 

memorandum is prepared by an 

experienced attorney (with 20 plus 

years of legal practice), his/her hourly 

rate ($734 per hour) multiplied by the 

amount of hours taken to prepare the 

opinion, will be the basic cost of such 

an opinion.455 The Commission 

estimates that the cost of such 

memoranda will range between $15,000 

and $30,000, part of which depends on 

the complexity of the analysis necessary 

to support the conclusion that the 

Requesting Party’s set off rights are 

enforceable, and assuming that the 

opinion will take 20–40 hours to 

prepare.456 While important, these costs 

are mitigated by the Commission 

determination, in response to 

comments, not to require that the 

opinions or memoranda be signed on 

behalf of the law firm that is issuing the 

opinion. 

7. Benefits 

The Commission’s comprehensive 

action in this Final Order benefits the 

public and market participants in 

several substantial if unquantifiable 

ways, as discussed below. First, by 

considering a single application from all 

Requesting Parties at the same time, and 

deciding to allow all provisions of the 

exemption set forth in the Final Order 

to apply to all Requesting Parties and 

their respective market participants, the 

Final Order provides a cost-mitigating, 

procedural efficiency. 

By cabining the Covered Transactions 

to the definitions provided in this Final 

Order, the Commission limits the 

potential that purely financial risk can 

accumulate outside the comprehensive 

regime for swaps regulation established 

by Congress in the Dodd-Frank Act and 

implemented by the Commission. The 

mitigation of such risk inures to the 

benefit of the Requesting Parties, market 

participants, and the public, especially 

electric energy ratepayers. 

The condition that only appropriate 

persons may enter the Covered 

Transactions benefits the public, and 

the excluded market participants 

themselves, by ensuring that only 

persons with resources sufficient to 

understand and manage the risks of the 

transactions are permitted to engage in 

the same. Further, the condition 

requiring that the Covered Transactions 

only be offered or sold pursuant to a 

FERC- or PUCT-approved Tariff benefits 

the public by, for example, ensuring that 

the Covered Transactions are subject to 

a regulatory regime that is focused on 

the physical provision of reliable 

electric energy, and also has credit 

requirements that are designed to 

achieve risk management goals 

congruent with the regulatory objectives 

of the Commission’s DCO and SEF Core 

Principles. Absent these and other 

similar limitations on participant- and 

financial-eligibility, the integrity of the 

markets at issue could be compromised, 

and members and ratepayers left 

unprotected from potentially significant 

losses resulting from purely financial, 

speculative activity. Moreover, the 

Commission’s requirement that the 

Requesting Parties file an opinion of 

counsel regarding the right of set off in 

bankruptcy provides a benefit in that 

the analytical process necessary to 

formulate such an opinion would 

highlight risks faced by the Requesting 

Parties, and permit them to adapt their 

structure and procedures in a manner 

best calculated to mitigate such risks, 

and thus helps ensure the orderly 

handling of financial affairs in the event 

a participant defaults as a result of the 

Covered Transactions. Further, ensuring 

that the Requesting Parties have 

enforceable rights of set off against any 

of its market participants in the event of 

a bankruptcy of a market participant 

also provides a benefit in reducing costs 

to the Requesting Party that arise from 

a bankruptcy proceeding. 

The Commission’s retention of its 

authority to redress any fraud or 

manipulation in connection with the 

Covered Transactions protects market 

participants and the public generally, as 

well as the financial markets for electric 

energy products. For example, the Final 

Order is conditioned upon the 

Commission’s ability to obtain certain 

positional and transactional data within 

the Requesting Parties’ possession from 

the Requesting Parties. Through this 

condition, the Commission expects that 

it will be able to continue discharging 

its regulatory duties under the CEA. 

Further, the condition that the 

Requesting Parties remove any Tariff 

provisions that would require a 

Requesting Party to notify members 

prior to providing the Commission with 

information will help maximize the 

effectiveness of the Commission’s 

enforcement program. 

8. Consideration of Alternatives 

The chief alternatives to this Final 

Order relate to the scope of RTO and 

ISO market participants that are eligible 

for the exemption set forth therein, and 

the scope of Covered Transactions. 

As discussed above in section 

IV.B.2.d.i., the Commission received 

several requests to include various 

subsets of market participants in the 

definition of ‘‘appropriate person’’ 

pursuant to 4(c)(3)(K) of the CEA for 

purposes of the exemption described in 

the Proposed Order, including requests 

to extend the exemption to (1) any 

persons who qualify under market 

participant standards set forth in FERCor PUCT-approved Tariffs, (2) persons 

who actively participate in the 

generation, transmission, or distribution 

of electric energy, and (3) more specific 

requests to include particular market 

participants, such as CSPs, LSEs, and 


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457See section IV.B.2.d.i. supra. 

458See paragraph 2(b) of the Order. 

459See section IV.B.2.d.i. supra. 

460See section IV.A.1.d. supra. 

461See id. 462See related discussion in section I. supra. 

REPs.457 The exemption set forth in the 

Final Order includes those entities 

described in (2) and (3), but does not 

include other entities who are not 

‘‘appropriate persons’’ as defined in 

sections 4(c)(3)(A) through (J) of the Act, 

are not ECPs, and are not in the business 

of (i) generating, transmitting, or 

distributing electric energy or (ii) 

providing electric energy services that 

are necessary to support the reliable 

operation of the transmission system.458

For those excluded entities, the 

exemption in the Final Order would 

impose costs relative to a definition that 

would allow all current market 

participants to avail themselves of the 

exemption. These affected market 

participants are excluded because, in 

the Commission’s opinion, they lack the 

minimum financial wherewithal and 

therefore pose a risk to themselves and 

the physical electric energy market.459

Regarding the scope of Covered 

Transactions, the Commission 

considered the costs and benefits of 

various alternatives posed by 

commenters, including whether to 

expand the definition of Covered 

Transactions to include future products 

that are the ‘‘logical outgrowth’’ of 

existing products.460 The Commission 

declined this approach, in part, because 

of the concern that such an open-ended 

definition could present risks beyond 

those contemplated. At the same time, 

the Commission made clear that any 

new transactions that fall within the 

Covered Transactions, which are 

explicitly defined in the Final Order, 

and any modifications to existing 

transactions that do not alter the 

Covered Transactions’ characteristics in 

a way that would cause them to fall 

outside those definitions, that are 

offered by a Requesting Party pursuant 

to a FERC- or PUCT-approved Tariff, are 

intended to be included within the 

exemption in the Final Order.461 This 

provides a benefit in that no 

supplemental relief for such products 

would be required, which is a costmitigating efficiency gain for the 

Requesting Parties. 

9. Consideration of CEA Section 15(a) 

Factors 

a. Protection of Market Participants and 

the Public 

As explained above, the Commission 

does not foresee that the Final Order 

will have any negative effect on the 

protection of market participants and 

the public. More specifically, the 

Covered Transactions, in light of the 

representations of the Petitioners and in 

the context of their regulation by FERC 

and PUCT, do not appear to generate 

significant risks of the nature of those 

addressed by the CEA. The Commission 

has attempted to delineate the 

definitional boundaries for the Covered 

Transactions in a manner that 

appropriately ring-fences against the 

possibility that they could generate such 

risks, either now or as they may evolve 

in the future. In addition, the 

Commission has limited the exemption 

set forth in the Final Order to persons 

with resources sufficient to understand 

and manage the risks of the Covered 

Transactions. This requirement serves to 

protect excluded market participants 

and it minimizes the risk of potential 

misuse of the exempt transactions. 

b. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The Commission foresees little, if any, 

negative impact from the Final Order on 

the efficiency, competitiveness, and 

financial integrity of markets regulated 

under the CEA. Further, as an exercise 

of the Commission’s CEA section 4(c) 

authority to provide legal certainty for 

novel instruments as Congress intended, 

the Final Order affords entities who 

partake of the exemption delineated 

therein transactional flexibility that the 

Commission understands to be valuable 

to their ability to efficiently deploy their 

limited resources. 

c. Price Discovery 

The Commission does not believe that 

the Final Order will materially impair 

price discovery in non-exempt markets 

subject to the Commission’s 

jurisdiction. As discussed above, the 

Covered Transactions are used to 

manage unique electric industry 

operational risks, which appears to 

make them ill-suited for exchange 

trading and/or to serve a useful price 

discovery function. 

d. Sound Risk Management Practices 

The Commission believes that the 

Final Order will promote the ability of 

RTOs, ISOs, and their market 

participants to manage the operational 

risks posed by unique electric energy 

market characteristics, including the 

non-storable nature of electric energy 

and demand that can and frequently 

does fluctuate dramatically within a 

short time-span. As discussed above, the 

Commission understands that the 

Covered Transactions are an important 

tool facilitating the ability of the 

Requesting Parties to efficiently manage 

operational risk in fulfillment of their 

public service mission to provide 

affordable, reliable electric energy. 

e. Other Public Interest Considerations 

In exercising its sections 4(c)(1) and 

4(c)(6)(C) exemptive authority in the 

Final Order, the Commission is acting to 

promote the broader public interest by 

facilitating the supply of affordable, 

reliable electric energy, as contemplated 

by Congress.462

VI. Order 

Upon due consideration and 

consistent with the determinations set 

forth above, the Commission hereby 

issues the following Order: 

Pursuant to its authority under 

section 4(c)(6) of the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’) and in 

accordance with sections 4(c)(1) and (2) 

of the Act, the Commodity Futures 

Trading Commission (‘‘Commission’’) 

1. Exempts, subject to the conditions 

and limitations specified herein, the 

execution of the electric energy-related 

agreements, contracts, and transactions 

that are specified in paragraph 2 of this 

Order and any person or class of 

persons offering, entering into, 

rendering advice, or rendering other 

services with respect thereto, from all 

provisions of the CEA, except, in each 

case, the Commission’s general antifraud and anti-manipulation authority, 

and scienter-based prohibitions, under 

CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 

4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 

6(e), 6c, 6d, 8, 9, and 13 and any 

implementing regulations promulgated 

under these sections including, but not 

limited to, Commission regulations 

23.410(a) and (b), 32.4, and part 180. 

2. Scope. This exemption applies only 

to agreements, contracts, and 

transactions that satisfy each of the 

following requirements: 

a. The agreement, contract, or 

transaction is for the purchase and sale 

of one of the following electric energyrelated products: 

(1) ‘‘Financial Transmission Rights’’ 

defined in paragraph 5(a) of this Order, 

except that the exemption shall only 

apply to such Financial Transmission 

Rights where: 

(a) Each Financial Transmission Right 

is linked to, and the aggregate volume 

of Financial Transmission Rights for any 

period of time is limited by, the 

physical capability (after accounting for 

counterflow) of the electric energy 

transmission system operated by a 

Requesting Party, as defined in 

paragraph 5(h) of this Order, offering the 

contract, for such period; 


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(b) The Requesting Party serves as the 

market administrator for the market on 

which the Financial Transmission 

Rights are transacted; 

(c) Each party to the transaction is a 

member of the Requesting Party (or is 

the Requesting Party itself) and the 

transaction is executed on a market 

administered by that Requesting Party; 

and 

(d) The transaction does not require 

any party to make or take physical 

delivery of electric energy. 

(2) ‘‘Energy Transactions’’ as defined 

in paragraph 5(b) of this Order. 

(3) ‘‘Forward Capacity Transactions,’’ 

as defined in paragraph 5(c) of this 

Order. 

(4) ‘‘Reserve or Regulation 

Transactions’’ as defined in paragraph 

5(d) of this Order. 

b. Each party to the agreement, 

contract or transaction is: 

(1) an ‘‘appropriate person,’’ as 

defined sections 4(c)(3)(A) through (J) of 

the CEA; 

(2) an ‘‘eligible contract participant,’’ 

as defined in section 1a(18)(A) of the 

CEA and in Commission regulation 

1.3(m); or 

(3) a ‘‘person who actively 

participates in the generation, 

transmission, or distribution of electric 

energy,’’ as defined in paragraph 5(g) of 

this Order. 

c. The agreement, contract, or 

transaction is offered or sold pursuant to 

a Requesting Party’s Tariff and that 

Tariff has been approved or permitted to 

take effect by: 

(1) In the case of the Electricity 

Reliability Council of Texas (‘‘ERCOT’’), 

the Public Utility Commission of Texas 

(‘‘PUCT’’), or 

(2) In the case of all other Requesting 

Parties, the Federal Energy Regulatory 

Commission (‘‘FERC’’). 

3. Applicability to particular regional 

transmission organizations (‘‘RTOs’’) 

and independent system operators 

(‘‘ISOs). Subject to the conditions 

contained in the Order, the Order 

applies to all Requesting Parties with 

respect to the transactions described in 

paragraph 2 of this Order. 

4. Conditions. The exemption 

provided by this Order is expressly 

conditioned upon the following: 

a. Information sharing: 

(1) With respect to all Requesting 

Parties subject to the jurisdiction of 

FERC, information sharing arrangements 

between the Commission and FERC that 

are acceptable to the Commission 

continue to be in effect, and those 

Requesting Parties’ compliance with the 

Commission’s requests through FERC to 

share, on an as-needed basis and in 

connection with an inquiry consistent 

with the CEA and Commission 

regulations, positional and transactional 

data within the Requesting Parties’ 

possession for products in the 

Requesting Parties’ markets that are 

related to markets that are subject to the 

Commission’s jurisdiction, including 

any pertinent information concerning 

such data. 

(2) With respect to ERCOT, the 

Commission’s ability to request, and 

obtain, on an as-needed basis from 

ERCOT, concurrently with the provision 

of written notice to PUCT and in 

connection with an inquiry consistent 

with the CEA and Commission 

regulations, positional and transactional 

data within ERCOT’s possession for 

products in ERCOT’s markets that are 

related to markets that are subject to the 

Commission’s jurisdiction, including 

any pertinent information concerning 

such data, and ERCOT’s compliance 

with such requests by sharing the 

requested information. 

b. Notification of requests for 

information: With respect to each 

Requesting Party, neither the Tariffs nor 

any other governing documents of the 

particular RTO or ISO pursuant to 

whose Tariff the agreement, contract or 

transaction is to be offered or sold, shall 

include any requirement that the RTO 

or ISO notify its members prior to 

providing information to the 

Commission in response to a subpoena 

or other request for information or 

documentation. 

5. Definitions. The following 

definitions shall apply for purposes of 

this Order: 

a. A ‘‘Financial Transmission Right’’ 

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 electric energy, 

established on an electric energy market 

administered by a Requesting Party, at 

a specified source (i.e., where electric 

energy is deemed injected into the grid 

of a Requesting Party) and a specified 

sink (i.e., where electric energy is 

deemed withdrawn from the grid of a 

Requesting Party). The term ‘‘Financial 

Transmission Rights’’ 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). 

b. ‘‘Energy Transactions’’ are 

transactions in a ‘‘Day-Ahead Market’’ 

or ‘‘Real-Time Market,’’ as those terms 

are defined in paragraphs 5(e) and 5(f) 

of this Order, for the purchase or sale of 

a specified quantity of electric energy at 

a specified location (including virtual 

and convergence bids and offers), 

where: 

(1) The price of the electric energy is 

established at the time the transaction is 

executed; 

(2) Performance occurs in the RealTime Market by either 

(a) Delivery or receipt of the specified 

electric energy, or 

(b) A cash payment or receipt at the 

price established in the Day-Ahead 

Market or Real-Time Market (as 

permitted by each Requesting Party in 

its Tariff); and 

(3) The aggregate cleared volume of 

both physical and cash-settled energy 

transactions for any period of time is 

limited by the physical capability of the 

electric energy transmission system 

operated by a Requesting Party for that 

period of time. 

c. ‘‘Forward Capacity Transactions’’ 

are transactions in which a Requesting 

Party, for the benefit of load-serving 

entities, purchases any of the rights 

described in subparagraphs (1), (2), and 

(3) below. In each case, to be eligible for 

the exemption, the aggregate cleared 

volume of all such transactions for any 

period of time shall be limited to the 

physical capability of the electric energy 

transmission system operated by a 

Requesting Party for that period of time. 

(1) ‘‘Generation Capacity,’’ meaning 

the right of a Requesting Party to: 

(a) Require certain sellers to maintain 

the interconnection of electric 

generation facilities to specific physical 

locations in the electric-energy 

transmission system during a future 

period of time as specified in the 

Requesting Party’s Tariff; 

(b) Require such sellers to offer 

specified amounts of electric energy into 

the Day-Ahead or Real-Time Markets for 

electric energy transactions; and 

(c) Require, subject to the terms and 

conditions of a Requesting Party’s Tariff, 

such sellers to inject electric energy into 

the electric energy transmission system 

operated by the Requesting Party; 

(2) ‘‘Demand Response,’’ meaning the 

right of a Requesting Party to require 

that certain sellers of such rights curtail 

consumption of electric energy from the 

electric energy transmission system 

operated by a Requesting Party during a 

future period of time as specified in the 

Requesting Party’s Tariff; or 

(3) ‘‘Energy Efficiency,’’ meaning the 

right of a Requesting Party to require 

specific performance of an action or 

actions that will reduce the need for 

Generation Capacity or Demand 

Response Capacity over the duration of 

a future period of time as specified in 

the Requesting Party’s Tariff. 

d. ‘‘Reserve or Regulation 

Transactions’’ are transactions: 


tkelley on DSK3SPTVN1PROD with NOTICES2
19914 Federal Register / Vol. 78, No. 63 / Tuesday, April 2, 2013 / Notices 

463 In the Matter of the Petition for an Exemptive 

Order Under Section 4(c) of the Commodity 

Exchange Act by California Independent Service 

Operator Corporation; In the Matter of the Petition 

for an Exemptive Order Under Section 4(c) of the 

Commodity Exchange Act by the Electric Reliability 

Council of Texas, Inc.; In the Matter of the Petition 

for an Exemptive Order Under Section 4(c) of the 

Commodity Exchange Act by ISO New England 

Inc.; In the Matter of the Petition for an Exemptive 

Order Under Section 4(c) of the Commodity 

Exchange Act by Midwest Independent 

Transmission System Operator, Inc.; In the Matter 

of the Petition for an Exemptive Order Under 

Section 4(c) of the Commodity Exchange Act by 

New York Independent System Operator, Inc.; and 

In the Matter of the Petition for an Exemptive Order 

(1) In which a Requesting Party, for 

the benefit of load-serving entities and 

resources, purchases, through auction, 

the right, during a period of time as 

specified in the Requesting Party’s 

Tariff, to require the seller of such right 

to operate electric facilities in a physical 

state such that the facilities can increase 

or decrease the rate of injection or 

withdrawal of a specified quantity of 

electric energy into or from the electric 

energy transmission system operated by 

the Requesting Party with: 

(a) physical performance by the 

seller’s facilities within a response time 

interval specified in a Requesting 

Party’s Tariff (Reserve Transaction); or 

(b) prompt physical performance by 

the seller’s facilities (Area Control Error 

Regulation Transaction); 

(2) For which the seller receives, in 

consideration, one or more of the 

following: 

(a) Payment at the price established in 

the Requesting Party’s Day-Ahead or 

Real-Time Market, as those terms are 

defined in paragraphs 5(e) and 5(f) of 

this Order, price for electric energy 

applicable whenever the Requesting 

Party exercises its right that electric 

energy be delivered (including Demand 

Response,’’ as defined in paragraph 

5(c)(2) of this Order); 

(b) Compensation for the opportunity 

cost of not supplying or consuming 

electric energy or other services during 

any period during which the Requesting 

Party requires that the seller not supply 

energy or other services; 

(c) An upfront payment determined 

through the auction administered by the 

Requesting Party for this service; 

(d) An additional amount indexed to 

the frequency, duration, or other 

attributes of physical performance as 

specified in the Requesting Party’s 

Tariff; and 

(3) In which the value, quantity, and 

specifications of such transactions for a 

Requesting Party for any period of time 

shall be limited to the physical 

capability of the electric energy 

transmission system operated by the 

Requesting Party for that period of time. 

e. ‘‘Day-Ahead Market’’ means an 

electric energy market administered by 

a Requesting Party on which the price 

of electric energy at a specified location 

is determined, in accordance with the 

Requesting Party’s Tariff, for specified 

time periods, none of which is later than 

the second operating day following the 

day on which the Day-Ahead Market 

clears. 

f. ‘‘Real-Time Market’’ means an 

electric energy market administered by 

a Requesting Party on which the price 

of electric energy at a specified location 

is determined, in accordance with the 

Requesting Party’s Tariff, for specified 

time periods within the same 24-hour 

period. 

g. ‘‘Person who actively participates 

in the generation, transmission, or 

distribution of electric energy’’ means a 

person that is in the business of: (1) 

Generating, transmitting, or distributing 

electric energy or (2) providing electric 

energy services that are necessary to 

support the reliable operation of the 

transmission system. 

h. ‘‘Requesting Party’’ means 

California Independent Service Operator 

Corporation (‘‘CAISO’’); ERCOT; ISO 

New England Inc. (‘‘ISO NE’’); Midwest 

Independent Transmission System 

Operator, Inc. (‘‘MISO’’); New York 

Independent System Operator, Inc. 

(‘‘NYISO’’) or PJM Interconnection, 

L.L.C. (‘‘PJM’’), or any successor in 

interest to any of the foregoing. 

i. ‘‘Tariff.’’ Reference to a Requesting 

Party’s ‘‘Tariff’’ includes a tariff, rate 

schedule or protocol. 

j. ‘‘Petition’’ means the consolidated 

petition for an exemptive order under 

4(c)(6) of the CEA filed by CAISO, 

ERCOT, ISO NE, MISO, NYISO, and 

PJM on February 7, 2012, as amended 

June 11, 2012. 

6. Effectiveness of the Exemption. 

a. For a Requesting Party subject to 

the jurisdiction of FERC, the exemption 

set forth in this Order is effective upon 

satisfaction of all of the following: 

(1) Submission and acceptance of a 

legal opinion or memorandum of 

outside counsel that is satisfactory to 

the Commission, in the Commission’s 

sole discretion, and that provides the 

Commission with assurance that the 

netting arrangements contained in the 

approach selected by that Requesting 

Party to satisfy the obligations contained 

in FERC regulation 35.47(d) will, in fact, 

provide the Requesting Party with 

enforceable rights of set off against any 

of its market participants under title 11 

of the United States Code in the event 

of the bankruptcy of the market 

participant; and 

(2) Demonstration that the Requesting 

Party has fully complied with FERC 

regulation 35.47, as measured by FERC’s 

acceptance and approval of all of the 

Requesting Party’s submissions that are 

necessary to implement the 

requirements of FERC regulation 35.47. 

b. For ERCOT, which is subject to the 

jurisdiction of PUCT, the exemption set 

forth in this Order is effective upon 

satisfaction of all of the following: 

(1) Submission and acceptance of a 

legal opinion or memorandum of 

outside counsel that is satisfactory to 

the Commission, in the Commission’s 

sole discretion, and that provides the 

Commission with assurance that the 

netting arrangements contained in the 

approach selected by ERCOT to satisfy 

standards that are the same as those 

contained in FERC regulation 35.47(d) 

will, in fact, provide the ERCOT with 

enforceable rights of set off against any 

of its market participants under title 11 

of the United States Code in the event 

of the bankruptcy of the market 

participant; and 

(2) Demonstration that ERCOT has 

fully complied with standards that are 

the same as those set forth in FERC 

regulation 35.47, as measured by PUCT 

permitting all of the necessary ERCOT 

protocol revisions to take effect; 

provided that the Commission will 

accept a demonstration that ERCOT has 

protocols in effect that substantially 

meet the settlement and billing period 

standards set forth in FERC regulation 

35.47(b). 

7. Delegation of Authority. The 

Commission hereby delegates, until 

such time as the Commission orders 

otherwise, to the Director of the 

Division of Clearing and Risk and to 

such members of the Division’s staff 

acting under his or her direction as he 

or she may designate, in consultation 

with the General Counsel or such 

members of the General Counsel’s staff 

acting under his or her direction as he 

or she may designate, the authority to 

accept or reject any legal memorandum 

or opinion that is required by sections 

6(a)(1) and 6(b)(1) of this Order. Further, 

The Commission hereby delegates to the 

Director of the Division of Market 

Oversight and to such members of the 

Division’s staff acting under his or her 

direction as he or she may designate, in 

consultation with the General Counsel 

or such members of the General 

Counsel’s staff acting under his or her 

direction as he or she may designate, the 

authority to request information from 

Requesting Parties pursuant to sections 

4(a)(1) and 4(a)(2) of this Order. 

This Order is based upon the 

representations made in the 

consolidated petition for an exemptive 

order under 4(c) of the CEA filed by the 

Requesting Parties 463 and supporting 


tkelley on DSK3SPTVN1PROD with NOTICES2
Federal Register / Vol. 78, No. 63 / Tuesday, April 2, 2013 / Notices 19915 

Under Section 4(c) of the Commodity Exchange Act 

by PJM Interconnection, L.L.C. (Feb. 7, 2012, as 

amended June 11, 2012). 

materials provided to the Commission 

by the Requesting Parties and their 

counsel. Any material change or 

omission in the facts and circumstances 

pursuant to which this Order is granted 

might require the Commission to 

reconsider its finding that the 

exemption contained therein is 

appropriate and/or consistent with the 

public interest and purposes of the CEA. 

Further, the Commission reserves the 

right, in its discretion, to revisit any of 

the terms and conditions of the relief 

provided herein, including but not 

limited to, making a determination that 

certain entities and transactions 

described herein should be subject to 

the Commission’s full jurisdiction, and 

to condition, suspend, terminate or 

otherwise modify or restrict the 

exemption granted in this Order, as 

appropriate, upon its own motion. 

Issued in Washington, DC, on March 28, 

2013, by the Commission. 

Christopher J. Kirkpatrick, 

Deputy Secretary of the Commission. 

Appendices to Final Order in Response 

to a Petition From Certain Independent 

System Operators and Regional 

Transmission Organizations To Exempt 

Specified Transactions Authorized by a 

Tariff or Protocol Approved by the 

Federal Energy Regulatory Commission 

or the Public Utility Commission of 

Texas From Certain Provisions of the 

Commodity Exchange Act Pursuant to 

the Authority Provided in Section 

4(c)(6) of the Act—Commission Voting 

Summary and Statement of the 

Chairman 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final order regarding 

specified electric energy-related transactions 

entered into on markets administered by 

regional transmission organizations (RTOs) 

or independent system operators (ISOs). 

Congress authorized that these transactions 

be exempt from certain provisions of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act as they are subject 

to extensive regulatory oversight by the 

Federal Energy Regulatory Commission 

(FERC) or, in one instance, the Public Utility 

Commission of Texas (PUCT). 

This final order responds to a petition filed 

by a group of RTOs and ISOs and has 

benefitted from public input. 

These entities were established for the 

purpose of providing affordable, reliable 

electric energy to consumers within their 

geographic region. In addition, these markets 

administered by RTOs and ISOs are central 

to FERC and PUCT’s regulatory missions to 

oversee wholesale sales and transmission of 

electric energy. 

The scope of the final order is carefully 

tailored to four categories of transactions— 

financial transmission rights; energy 

transactions; forward capacity transactions; 

and reserve or regulation transactions, which 

are offered or entered into a market 

administered by one of the requesting RTOs 

or ISOs. This exemption is conditioned on, 

among other things, each of these 

transactions being inextricably linked to the 

physical delivery of electric energy. 

[FR Doc. 2013–07634 Filed 4–1–13; 8:45 am] 

BILLING CODE 6351–01–P 


tkelley on DSK3SPTVN1PROD with NOTICES2