```

[Federal Register Volume 78, Number 63 (Tuesday, April 2, 2013)]
[Notices]
[Pages 19879-19915]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07634]

[[Page 19879]]

Vol. 78

Tuesday,

No. 63

April 2, 2013

Part III

Commodity Futures Trading Commission

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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

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

[[Page 19880]]

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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.

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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\
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    \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).
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    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/iso-rto4cappattach.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/iso-rto4cappfercchart.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

[[Page 19881]]

    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 CFTC-regulated 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:
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    \6\ See 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.
    \8\ Section 722(e) of the Dodd-Frank Act.
    \9\ See 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).

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

    The Dodd-Frank Act also added a savings clause that addresses the 
roles of the Commission, FERC, and state agencies as they relate to 
certain agreements, contracts, or transactions traded pursuant to the 
tariff 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 FERC- or 
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\
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    \11\ See 7 U.S.C. 2(a)(1)(I).
    \12\ See 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.
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    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\
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    \14\ The 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)).
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    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\

[[Page 19882]]

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\
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    \15\ Section 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 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).
    \18\ Section 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).
    \20\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).
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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, non-discriminatory 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\
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    \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.
    \22\ Requesting 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).
    \24\ See 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.
    \27\ See 77 FR 52139. See also Petition at 2-3, 6.
    \28\ See 77 FR 52139. See also Petition at 2-4; 16 Tex. Admin. 
Code (``TAC'') 25.1 (1998).
    \29\ See 77 FR 52139. See also Petition at 2 n.2.
    \30\ See 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.
    \31\ See 77 FR 52139. See also Petition at 3.
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    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 long-standing, 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\
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    \32\ See 77 FR 52139. See also Petition at 2-3.
    \33\ See 77 FR 52139. See also Petition at 11.
    \34\ See 77 FR 52139. See also Petition at 3.
    \35\ See discussion in section IV.D. infra.
    \36\ See 77 FR 52139. See also Petition at 6.
    \37\ See id.
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B. The Proposal

    On August 28, 2012, the Commission issued the Proposed Order.\38\
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    \38\ 77 FR 52138.
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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

[[Page 19883]]

or Regulation Transactions, pursuant to section 4(c)(6) of the CEA.\40\
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    \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.
    \40\ Id. at 52141, 52166-67.
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    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\
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    \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.
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    ``Energy Transactions'' were proposed to be defined as transactions 
in a ``Day-Ahead 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\
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    \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).
    \46\ See 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.
    \47\ See 77 FR 52167. See also id. at 52142; Petition at 7.
---------------------------------------------------------------------------

    ``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\
---------------------------------------------------------------------------

    \48\ See 77 FR at 52167.
    \49\ See id.
---------------------------------------------------------------------------

    ``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\
---------------------------------------------------------------------------

    \50\ See id. See also id. at 52145.

    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\
---------------------------------------------------------------------------

    \51\ See id. at 52143.
---------------------------------------------------------------------------

    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

[[Page 19884]]

case of all other Requesting Parties, FERC.'' \53\
---------------------------------------------------------------------------

    \52\ For 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.
    \53\ See id.
---------------------------------------------------------------------------

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 well-reasoned 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\
---------------------------------------------------------------------------

    \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.
    \55\ See 77 FR 52164.
    \56\ See 11 U.S.C. 553.
    \57\ See 77 FR 52165.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \58\ See id. at 52142.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \59\ See 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.
---------------------------------------------------------------------------

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, anti-manipulation, 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\
---------------------------------------------------------------------------

    \60\ See id. at 52167. See also id. at 52142, 52165.
    \61\ See id. at 52142. See also Petition at 20.
    \62\ See 77 FR 52142.
    \63\ See 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.
    \64\ See 77 FR 52142. See also Petition at 15-18.
    \65\ See 77 FR 52142.
    \66\ See id. at 52167. See also id. at 52142.
    \67\ See id. at 52167-68. See also id. at 52142; Petition at 15-
18.
    \68\ See 77 FR at 52166. See also id. at 52163.
---------------------------------------------------------------------------

II. Summary of the Comments

    The public comment period on the Proposed Order ended on September 
27, 2012. The Commission received twenty-three (23) comment letters on 
the Proposed Order,\69\ the majority of which provided general support 
for the proposed exemption.\70\ The comment

[[Page 19885]]

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 
anti-fraud, 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.
---------------------------------------------------------------------------

    \69\ All 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'').
    \70\ See, e.g., APPA at 1; Commercial Working Group at 1; DC 
Energy at 1; FIEG at 1; Financial 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.
    \71\ See section IV.E. infra.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \72\ See NYTOs at 5; Requesting Parties at 9-10.
    \73\ See Joint Trade Associations at 3 n.3.
---------------------------------------------------------------------------

    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

[[Page 19886]]

commenter specifically asked whether `logical outgrowth' ``transactions 
[should] be viewed as Commission-regulated until a future exemption is 
issued * * *'' \78\
---------------------------------------------------------------------------

    \74\ See, e.g., FERC Staff at 5; FIEG at 2; Joint Trade 
Associations at 9; NEPOOL at 5.
    \75\ See, e.g., PUCT at 7-8.
    \76\ See, e.g., Requesting Parties at 10-11; NYTOs at 5.
    \77\ See, 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 Final Order ``could have a chilling effect on innovation and 
overall market efficiency.'').
    \78\ COPE at 5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \79\ PUCT at 7.
    \80\ Requesting Parties at 11.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \81\ 77 FR 52144. See also Petition at 11.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \82\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \83\ See 77 FR 52163.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \84\ 77 FR 52142 (citing Petition at 6).
    \85\ See, e.g., DC Energy at 2; PUCT at 5-6; Requesting Parties 
at 12.
    \86\ Specifically, 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).
    \87\ Commercial Working Group at 2; DC Energy at 2; FIEG at 2; 
NEPOOL at 10; Requesting Parties at 12; PUCT at 5.
    \88\ Requesting Parties at 13.
---------------------------------------------------------------------------

    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

[[Page 19887]]

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\
---------------------------------------------------------------------------

    \89\ See 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'').
    \90\ Requesting Parties at 13 (citing 77 FR 52138).
    \91\ 77 FR 52143.
    \92\ See Financial Marketers Coalition at 7-8; FIEG at 2; NEPOOL 
at 3.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \93\ See, 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.
    \94\ Requesting 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 Day-Ahead 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.'').
---------------------------------------------------------------------------

    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 day-ahead 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\ Day-Ahead 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\
---------------------------------------------------------------------------

    \95\ PUCT 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 
day-ahead prices converge with real-time prices.'').
    \96\ PUCT 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).
    \97\ Requesting 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.
    \98\ Requesting Parties at 14.
    \99\ See id.
---------------------------------------------------------------------------

    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

[[Page 19888]]

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.
---------------------------------------------------------------------------

    \100\ See 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.
    \101\ Consistent 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 Day-Ahead Market is entered into. See 
paragraph 5(e) of the Order.
    \102\ Requesting Parties at 14. See also PUCT at 6.
    \103\ Requesting Parties at 14.
    \104\ See, e.g., NYISO at 3-4.
---------------------------------------------------------------------------

    Finally, CAISO and ISO NE requested that the proposed definition of 
``Energy Transactions'' be amended to allow for cash settlement based 
upon the Day-Ahead 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.
---------------------------------------------------------------------------

    \105\ See CAISO/ISO NE March at 2-3.
    \106\ Id. at 3.
    \107\ See paragraph 5(b) of the Order (emphasis added).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \108\ See generally Joint Trade Associations at 10; NEPOOL at 4; 
PUCT at 8; Requesting Parties at 10-11.
    \109\ See generally Joint Trade Associations at 10.
    \110\ See generally NEPOOL at 4.
---------------------------------------------------------------------------

    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 FERC-regulated 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\
---------------------------------------------------------------------------

    \111\ PUCT at 8.
    \112\ Requesting Parties at 10-11.
    \113\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \114\ The 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.
    \117\ See id. at 52142, 521664; Petition at 2-3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \118\ 77 FR 52167.
    \119\ Id.
    \120\ See id. at 52164.
---------------------------------------------------------------------------

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

[[Page 19889]]

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\
---------------------------------------------------------------------------

    \121\ The Proposed Order referred to FERC Order 741 to 
collectively describe 75 FR 65942 (``FERC Original Order 741'') and 
76 FR 10492 (``FERC 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.
    \123\ See 77 FR at 52147-48.
    \124\ See id.
    \125\ See id. at 52147-48, 52150-53.
    \126\ See id. at 52147.
    \127\ See id. at 52147-48; 52150-53.
    \128\ See 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.
    \129\ See id. at 52172.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \130\ See, e.g., Joint Trade Associations at 15; COPE at 7.
    \131\ See generally Commercial Working Group at 4.
    \132\ See, e.g., Joint Trade Associations at 14-15; Commercial 
Working Group at 4.
    \133\ See, e.g., Joint Trade Associations at 15.
    \134\ See, e.g., id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \135\ See, e.g., COPE at 7-8; Joint Trade Associations at 14; 
PUCT at 3, 11; Requesting Parties at 19.
    \136\ See, e.g., COPE at 7-8; Joint Trade Associations at 14.
    \137\ See COPE at 8.
    \138\ See PUCT at 11; Requesting Parties at 19.
    \139\ See PUCT at 11-12; Requesting Parties at 19-22.
---------------------------------------------------------------------------

    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 
fourteen-day time frame established by FERC regulation 35.47(b)) for 
92% of operating days and within the fourteen-day 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

[[Page 19890]]

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 FERC-required seven day 
statement issuance period.\147\
---------------------------------------------------------------------------

    \140\ See 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.'').
    \141\ See 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).
    \143\ See Requesting Parties at 20.
    \144\ See id.
    \145\ Id.
    \146\ See 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.
    \147\ See id. at 21.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
    \149\ See FERC Order No. 741 Implementation Chart; Revised FERC 
Order No. 741 Implementation Chart.
    \150\ See Revised FERC Order No. 741 Implementation Chart.
---------------------------------------------------------------------------

    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 
well-reasoned 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 set-off rights.\152\ The Commission requested 
comment on this proposal.\153\
---------------------------------------------------------------------------

    \151\ FERC 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.
    \153\ See id. at 52172.
---------------------------------------------------------------------------

    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 
FERC-approved 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\
---------------------------------------------------------------------------

    \154\ COPE at 8.
    \155\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \156\ See generally APPA at 4; Joint Trade Associations at 15.
    \157\ Requesting Parties at 16-17.
---------------------------------------------------------------------------

    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

[[Page 19891]]

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.
---------------------------------------------------------------------------

    \158\ See 77 FR 52165.
    \159\ See paragraph 7 of the Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \160\ Id. at 52166.
    \161\ Id.
    \162\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \163\ COPE at 4 (internal footnote omitted).
    \164\ Commercial Working Group at 3 n.4.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \165\ See 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.
    \167\ See, 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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \168\ See 77 FR 52166.
    \169\ See id. at 52172.
---------------------------------------------------------------------------

    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

[[Page 19892]]

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\
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    \170\ Requesting Parties at 15; PUCT at 13.
    \171\ Commercial Working Group at 4.
    \172\ COPE at 8.
    \173\ PUCT at 13.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \174\ COPE at 8.
---------------------------------------------------------------------------

    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.
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    \175\ See 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).
---------------------------------------------------------------------------

    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\
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    \176\ As 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.
    \177\ See paragraph 4(a)(1) of the Order.
    \178\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \179\ See 7 U.S.C. 6(c)(2)(B)(ii).
    \180\ 7 U.S.C. 5.
---------------------------------------------------------------------------

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

[[Page 19893]]

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\
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    \181\ The 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)).
    \182\ Id. (emphasis added).
    \183\ CEA 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)].''
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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\
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    \184\ Section 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.
---------------------------------------------------------------------------

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\
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    \185\ See 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.
    \186\ CEA 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).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \187\ See discussion regarding CEA section 4(c)(6) in sections 
I. supra and IV.B.1.a. infra.
---------------------------------------------------------------------------

    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 FERC-accepted 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \190\ COPE 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).
---------------------------------------------------------------------------

    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

[[Page 19894]]

give rise to unnecessary jurisdictional disputes.'' \192\
---------------------------------------------------------------------------

    \192\ PUCT at 4.
---------------------------------------------------------------------------

    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 Dodd-Frank 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:
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

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

    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\
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    \195\ See 77 FR 52144-45.
    \196\ See id.
    \197\ See 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.
    \198\ TEX. UTIL. CODE ANN. 11.001 et seq. (Vernon 1998 & Supp. 
2005).
    \199\ See 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.
    \200\ See 77 FR 52144 (quoting Petition at 14). See also 18 CFR 
35.34(k)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \201\ See 77 FR 52144. See also generally Petition at 20.
    \202\ See 77 FR 52144. See also Petition at 3-4.
    \203\ See 77 FR 52144. See also Petition at 15-18.
---------------------------------------------------------------------------

    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

[[Page 19895]]

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.
---------------------------------------------------------------------------

    \204\ See id. See also Petition at 6-9 (describing the 
transactions for which an exemption was requested 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'').
    \205\ See 77 FR 52145-47.
---------------------------------------------------------------------------

    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\
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    \206\ See 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.
    \207\ See sections IV.A.3.a.i. infra and IV B.2.e.ii. infra; 77 
FR at 52147-48.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \208\ See, e.g., COPE at 6; Commercial Working Group at 4.
    \209\ Commercial Working Group at 4.
    \210\ COPE at 6.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \212\ See sections IV.B.2.e.i.-ii. infra; 77 FR at 52149-62.
    \213\ See appropriate persons analysis, section IV.B.2.d. infra; 
77 FR at 52147-48.
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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

[[Page 19896]]

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\
---------------------------------------------------------------------------

    \214\ 7 U.S.C. 6(c)(2)(B)(i).
    \215\ 7 U.S.C. 6(c)(3).
    \216\ Id.
    \217\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \218\ 77 FR 52166. See also id. at 52145-46, 52163-64.
    \219\ See 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.
    \221\ See id. at 52146, 52166, 52172.
    \222\ See id. at 52172.
    \223\ See id. at 52164, 52172.
    \224\ See id.
    \225\ See id. at 52172.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \226\ See generally Industrial Coalitions at 4-5.
    \227\ See, 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.
    \228\ See, e.g., TEAM/ARM at 2-3; PUCT at 10.
    \229\ See, e.g., Industrial Coalitions at 4; NYISO Supplement to 
Requesting Parties' Comment, Attachment B at 6-7.
    \230\ See, e.g., Industrial Coalitions at 4.
    \231\ See, e.g., Financial Marketers Coalition at 2-13; NYISO at 
2-10.
---------------------------------------------------------------------------

    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

[[Page 19897]]

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\
---------------------------------------------------------------------------

    \232\ See, e.g., APPA at 3, FERC Staff at 6; Joint Trade 
Associations at 11-13; PUCT at 11.
    \233\ See generally Joint Trade Associations at 11-12.
    \234\ See generally APPA at 3; Joint Trade Association at 12.
    \235\ See generally Joint Trade Associations at 12.
    \236\ See, e.g., TEAM/ARM at 2-3; PUCT at 10.
    \237\ See, e.g., TEAM/ARM at 2-3.
    \238\ Id.
    \239\ PUCT at 10.
    \240\ See, e.g., Industrial Coalitions at 4; NYISO Supplement to 
Requesting Parties' Comment, Attachment B at 6-7.
    \241\ See generally NYISO Supplement to Requesting Parties' 
Comment, Attachment B at 6-7.
    \242\ See generally Industrial Coalitions at 4-5.
    \243\ See, e.g., Financial Marketers Coalition at 2-13; NYISO at 
2-10.
    \244\ See generally Financial Marketers Coalition at 2-10.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \245\ Accordingly, 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \246\ See 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.
---------------------------------------------------------------------------

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

[[Page 19898]]

economy from a default in an RTO or ISO market.\250\
---------------------------------------------------------------------------

    \247\ See, 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.
    \248\ See, 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.
    \249\ See, 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.
    \250\ See, 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.
---------------------------------------------------------------------------

    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 RTO- and 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\
---------------------------------------------------------------------------

    \251\ See, 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.
    \252\ See, e.g., AB Energy at 2; CAISO/ISO NE January at 6-7; 
Financial Markets Coalition at 13-15; PUCT at 10.
    \253\ See generally CAISO/ISO NE January at 7.
    \254\ See, 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.
    \255\ See, 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.
    \257\ See, e.g., CAISO/ISO NE January at 7; Requesting Parties 
at 4.
    \258\ See, e.g., Commercial Working Group at 4; ERCOT October at 
5-6; NYPSC at 2; Requesting Parties at 4.
    \259\ See generally Requesting Parties at 4.
    \260\ See generally id.
    \261\ See, 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.
    \262\ See, 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.
    \263\ NYISO Supplement to Requesting Parties' Comment, 
Attachment B at 4-5; Requesting Parties at 5.
    \264\ See, e.g., NEPOOL at 2-3; PJM at 4; PUCT at 9; Requesting 
Parties at 2-5.
    \265\ See generally COPE at 5.
    \266\ See generally AB Energy at 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \267\ See, 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.
    \268\ See, e.g., Commercial Working Group at 4; NYPSC at 2.
    \269\ See, 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.'').
    \270\ See, e.g., PUCT at 9; TEAM/ARM at 2-3.
    \271\ See, e.g., PJM at 2.
    \272\ 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.
    \273\ See, e.g., Requesting Parties at 6; Tarachand at 2.
    \274\ See, e.g., PJM at 2; Requesting Parties at 6; Tarachand at 
2.
    \275\ See, 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.
    \277\ See, 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.
    \278\ See, e.g., NYPSC at 3.
    \279\ See, e.g., CAISO/ISO NE January at 3; Financial Marketers 
Coalition at 3, 11, 16-18.
---------------------------------------------------------------------------

    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 cross-purposes 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

[[Page 19899]]

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\
---------------------------------------------------------------------------

    \280\ See, e.g., CAISO/ISO NE January at 3; Commercial Working 
Group at 3-4; FERC Staff at 6; Tarachand at 2.
    \281\ See generally Commercial Working Group at 3.
    \282\ See, 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.'').
    \283\ See generally Tarachand at 2.
    \284\ See, 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.
    \285\ Tarachand at 2.
    \286\ Industrial Coalitions at 4-5.
    \287\ See generally Financial Marketers Coalition at 12.
    \288\ See generally Commercial Working Group at 3-4.
    \289\ Tarachand at 2.
    \290\ See, e.g., AB Energy at 2; Tarachand at 2.
    \291\ See, e.g., FERC Staff at 6; PUCT at 9; Requesting Parties 
at 3, 8.
    \292\ See, e.g., CAISO/ISO NE January at 7-8; Requesting Parties 
at 3.
    \293\ See generally ERCOT December at 8-9.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \294\ See generally Tarachand at 2.
    \295\ See, e.g., AB Energy at 2; Commercial Working Group at 3; 
Tarachand at 2.
    \296\ See, e.g., AB Energy at 2; Tarachand at 2; PUCT at 11.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \297\ For 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \298\ Paragraph 5(g) of the Order.
---------------------------------------------------------------------------

    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

[[Page 19900]]

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.
---------------------------------------------------------------------------

    \299\ 7 U.S.C. 6(c)(A)-(J).
    \300\ 7 U.S.C. 6(c)(F).
    \301\ CAISO/ISO NE January at 7.
    \302\ See, e.g., Petition at 27-28.
    \303\ 77 FR 52146.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \304\ APPA 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \307\ E.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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \309\ 7 U.S.C. 6(c)(3)(F) (emphasis added).
    \310\ As 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.
    \312\ As 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \314\ Financial Marketers Coalition at 15-16.
    \315\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \316\ As 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.
---------------------------------------------------------------------------

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

[[Page 19901]]

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.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \318\ See 77 FR 52148-57.
    \319\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \320\ See, 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.
    \323\ COPE at 6, 9.
    \324\ Commercial Working Group at 4.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \325\ See 77 FR 524149-57.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \326\ See 77 FR 52157-62.
    \327\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \328\ Commercial Working Group at 4.
    \329\ COPE 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \330\ Joint Trade Associations at 6.
    \331\ Id. at 7.
---------------------------------------------------------------------------

    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

[[Page 19902]]

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.
---------------------------------------------------------------------------

    \332\ 77 FR 52157-62.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \333\ 77 FR 52159.
    \334\ 77 FR 52173.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \335\ Requesting Parties at 17; Joint Trade Associations at 8; 
FIEG at 3.
    \336\ Joint Trade Associations at 8.
    \337\ FIEG at 3.
    \338\ COPE at 10.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \339\ Requesting 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).
    \340\ Requesting Parties at 17-18.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \341\ The 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \342\ 77 FR 52173.
---------------------------------------------------------------------------

    Some commenters contested the underlying utility of being able to 
re-create 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 re-create the Day-Ahead Market and Real-Time 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\
---------------------------------------------------------------------------

    \343\ Requesting Parties at 18 (citing several FERC decisions 
and related RTO and ISO filings that ``unequivocally reject the 
market re-run concept'').
    \344\ PUCT at 13.
    \345\ DC Energy at 3.
    \346\ See 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.
    \347\ COPE at 8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \348\ Requesting 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 physical maintenance of the hardware and software 
involved with all trading and clearing over time).

---------------------------------------------------------------------------

[[Page 19903]]

    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.
---------------------------------------------------------------------------

    \349\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \350\ See 77 FR 52158-59.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \351\ 7 U.S.C. 6(c)(2)(B).
    \352\ See H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 79 
(1992).
---------------------------------------------------------------------------

    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 inter-agency 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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

    \354\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \355\ See id. at 52143.
    \356\ Nor 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.
---------------------------------------------------------------------------

    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 self-regulatory 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\
---------------------------------------------------------------------------

    \357\ See 77 FR at 52147.
    \358\ See id. at 52146.
    \359\ See id. at 52148, 52151, 52157-58.
    \360\ See id. at 52146-47.
---------------------------------------------------------------------------

    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

[[Page 19904]]

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\
---------------------------------------------------------------------------

    \361\ See note 359 and accompanying text supra.
    \362\ See section IV.A.3.b.ii. supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \363\ 77 FR 52164 (alterations in original).
    \364\ Id. C.f. section IV.B.2.a. supra.
    \365\ 77 FR 52164.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \366\ See, e.g., Requesting Parties at 14-15; Joint Trade 
Associations at 14-15.
    \367\ See, e.g., PUCT at 4.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \368\ See, e.g., Requesting Parties at 15.
    \369\ Id. at 15-16.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \370\ See 77 FR 52164.
    \371\ See discussion regarding effectiveness of the exemption, 
section IV.E. infra.
---------------------------------------------------------------------------

    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

[[Page 19905]]

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.
---------------------------------------------------------------------------

    \372\ See section II.B.3. supra.
    \373\ See 77 FR at 52142, 52165.
    \374\ See id. at 52142. See also Petition at 20.
    \375\ See 77 FR 52142.
    \376\ See 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.
    \377\ See 77 FR 52142. See also Petition at 15-18.
    \378\ See 77 FR 52142.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \379\ See id. at 52163, 52166.
    \380\ See, e.g., Industrial Coalitions at 3; Joint Trade 
Associations at 10-11; FERC Staff at 5.
---------------------------------------------------------------------------

    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 anti-
manipulation 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\
---------------------------------------------------------------------------

    \381\ See, e.g., Industrial Coalitions at 3.
    \382\ See, e.g., Joint Trade Associations at 10-11.
    \383\ See, e.g., FERC Staff at 5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

    \385\ See 77 FR at 52167.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \386\ Commercial Working Group at 2; DC Energy at 2.
    \387\ DC Energy at 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \388\ Requesting Parties at 15.
    \389\ Id.
    \390\ Id.
    \391\ Id.
---------------------------------------------------------------------------

    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 no-action 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

[[Page 19906]]

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\
---------------------------------------------------------------------------

    \392\ CFTC Staff Letter 12-11.
    \393\ See Revised FERC Order No. 741 Implementation Chart.
    \394\ See 11 U.S.C. 553.
    \395\ See section IV.A.3.a.ii. supra.
    \396\ See section IV.A.3.a.i. supra.
    \397\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \398\ See sections IV.A.3.a.i. and IV.B.2.e.i. supra.
    \399\ See id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \400\ 5 U.S.C. 601 et seq.
    \401\ See 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-market-surveillance-and-analysis-through-ongoing-electronic-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/CompanyInformation_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.
    \402\ See 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).
    \403\ See 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.
    \404\ See Opting Out of Segregation, 66 FR 20740 at 20743, April 
25, 2001.
    \405\ See 77 FR at 52168.
---------------------------------------------------------------------------

    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

[[Page 19907]]

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\
---------------------------------------------------------------------------

    \406\ See discussion in section IV.b.2.d. supra.
    \407\ See 77 FR at 52164, 52172.
    \408\ See, e.g., Industrial Coalitions at 4-5. See section 
IV.B.2.d.ii. supra.
    \409\ Accordingly, 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.
    \410\ See section IV.B.2.d.ii. supra (citing 77 FR at 52146).
    \411\ See note 401 supra (citing 13 CFR 121.201).
    \412\ PJM 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.
    \413\ The 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \414\ 77 FR at 52166.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \415\ Paragraph 4(a) of the Order.

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

[[Page 19908]]

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\
---------------------------------------------------------------------------

    \416\ See more detailed discussion in section I. supra.
---------------------------------------------------------------------------

    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 long-standing, 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\
---------------------------------------------------------------------------

    \417\ As 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.
    \418\ See 77 FR 52139. See also Petition at 2-3, 6.
    \419\ See 77 FR 52139. See also Petition at 3.
    \420\ See paragraph 1 of the Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \423\ 77 FR 52166-67. See also section II.B.1. supra.
    \424\ For 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \426\ See id. at 52143.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \427\ See 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \428\ COPE at 2, 5.
    \429\ Id. at 11.
    \430\ Joint Trade Associations at 5.
---------------------------------------------------------------------------

    Another commenter, NYSIO, asserted that the benefit of Commission

[[Page 19909]]

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\
---------------------------------------------------------------------------

    \431\ NYISO Supplement to Requesting Parties' Comment, 
Attachment B at 7.
    \432\ NYISO at 9.
    \433\ Id.
    \434\ Id. (citing 16 U.S.C. 824d).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \435\ Financial Marketers Coalition at 11-12.
    \436\ Id.
    \437\ PUCT at 9.
    \438\ Tarachand at 2.
    \439\ Requesting Parties at 8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \440\ Industrial Coalitions at 3.
    \441\ Commercial Working Group at 2.
    \442\ Requesting Parties at 3.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \443\ NEPOOL at 4.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \444\ Requesting Parties at 16.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \445\ Id. at 18.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \446\ See sections II.A.1.a.-c. supra.
    \447\ See section II.A.1.d. supra.
---------------------------------------------------------------------------

    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

[[Page 19910]]

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\
---------------------------------------------------------------------------

    \448\ Paragraph 4(b) of the Order.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \451\ See 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.
---------------------------------------------------------------------------

    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

[[Page 19911]]

legal requirements and is not a cost attributable to this Final Order.
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \454\ See section IV.A.3.a.ii. supra.
    \455\ The 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.
    \456\ There are possibilities of economies of scale if multiple 
Requesting Parties share the same counsel in preparing these 
memoranda or opinions.
---------------------------------------------------------------------------

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 FERC- or 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

[[Page 19912]]

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\
---------------------------------------------------------------------------

    \457\ See section IV.B.2.d.i. supra.
    \458\ See paragraph 2(b) of the Order.
    \459\ See section IV.B.2.d.i. supra.
---------------------------------------------------------------------------

    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 cost-mitigating efficiency gain 
for the Requesting Parties.
---------------------------------------------------------------------------

    \460\ See section IV.A.1.d. supra.
    \461\ See id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \462\ See related discussion in section I. supra.
---------------------------------------------------------------------------

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 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 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 energy-related 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;

[[Page 19913]]

    (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 Real-Time 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:

[[Page 19914]]

    (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

[[Page 19915]]

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.
---------------------------------------------------------------------------

    \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 Under Section 4(c) of the Commodity Exchange Act by 
PJM Interconnection, L.L.C. (Feb. 7, 2012, as amended June 11, 
2012).

    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
```