```

[Federal Register Volume 78, Number 63 (Tuesday, April 2, 2013)]
[Notices]
[Pages 19670-19689]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07633]

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COMMODITY FUTURES TRADING COMMISSION

RIN 3038-AE01

Order Exempting, Pursuant to Authority of the Commodity Exchange 
Act, Certain Transactions Between Entities Described in the Federal 
Power Act, and Other Electric Cooperatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is exempting certain transactions between entities 
described in section 201(f) of the Federal Power Act (``FPA''), and/or 
other electric utility cooperatives, from the provisions of the 
Commodity Exchange Act (``CEA'' or ``Act'') and the Commission's 
regulations, subject to certain anti-fraud, anti-manipulation, and 
record inspection conditions. Authority for this exemption is found in 
section 4(c) of the CEA.

DATES: Effective date: April 2, 2013.

FOR FURTHER INFORMATION CONTACT: David Van Wagner, Chief Counsel, (202) 
418-5481, dvanwagner@cftc.gov, or Graham McCall, Attorney-Advisor, 
(202) 418-6150, gmccall@cftc.gov, Division of Market Oversight; or 
David Aron, Counsel, (202) 418-6621, daron@cftc.gov, Office of General 
Counsel; Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Petition for Relief
    B. Summary of Proposed Order
II. Comments Received and Commission Response
    A. Clarification With Respect to the Definition of ``Exempt 
Entity''

[[Page 19671]]

    B. Clarification With Respect to the Definition of ``Exempt Non-
Financial Energy Transaction''
    C. Clarification With Respect to the Commission's Right To 
Revisit the Terms of the Relief
    D. Request That Relief Not Be Conditioned Upon a Reservation of 
Jurisdiction Under the Commission's Authority Over Options 
Transactions
    E. Other Clarification and Comments
    1. Clarification With Respect to the Ability of Exempt Entities 
To Use Exempt Non-Financial Energy Transactions To Manage Price 
Risks
    2. Request That Relief Be Retroactive To the Date of Enactment 
of the Dodd-Frank Act
    3. Request That Relief Be Categorical
III. CEA Section 4(c) Determinations
    A. Applicability of CEA Section 4(a)
    B. Public Interest and the Purposes of the CEA
    C. Appropriate Persons
    D. Ability To Discharge Regulatory or Self-Regulatory Duties
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Consideration of Costs and Benefits
    1. The Statutory Mandate To Consider the Costs and Benefits of 
the Commission's Action: Section 15(a) of the CEA
    2. Costs
    3. Benefits
    4. Consideration of Alternatives
    5. Consideration of CEA Section 15(a) Factors
V. Final Order

I. Background

A. Petition for Relief

    On June 8, 2012, the Commission received a petition (``Petition'') 
from a group of trade associations and other organizations representing 
the interests of government and/or cooperatively-owned electric 
utilities \1\ requesting relief from the requirements of the CEA \2\ 
and Commission's regulations issued thereunder,\3\ pursuant to its 
exemptive authority under CEA section 4(c),\4\ for certain ``Electric 
Operations-Related Transactions'' entered into between certain ``NFP 
Electric Entities.''
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    \1\ The Petition was submitted by the National Rural Electric 
Cooperative Association, the American Public Power Association, the 
Large Public Power Council, the Transmission Access Policy Study 
Group and the Bonneville Power Administration (collectively, 
``Petitioners''), and is available on the Commission's Web site at 
http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nrecaetalltr060812.pdf.
    \2\ 7 U.S.C. 1 et seq.
    \3\ The Commission's regulations are set forth in title 17 of 
the Code of Federal Regulations (``CFR'').
    \4\ 7 U.S.C. 6(c).
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    Section 4(c) of the CEA provides the Commission with broad 
authority to exempt certain transactions and market participants from 
the requirements of the Act in order to ``provid[e] certainty and 
stability to existing and emerging markets so that financial innovation 
and market development can proceed in an effective and competitive 
manner.'' \5\ Importantly, the legislative history notes that the 
Commission need not determine whether the product for which an 
exemption is sought is within the Commission's jurisdiction prior to 
issuing 4(c) relief.\6\ The Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') \7\ added section 4(c)(6) to the 
CEA, which builds upon the Commission's existing 4(c) exemptive 
authority by providing that the Commission ``shall, in accordance with 
sections 4(c)(1) and 4(c)(2), exempt from the requirements of th[e] Act 
an agreement, contract, or transaction that is entered into * * * 
between entities described in section 201(f) of the Federal Power Act 
(16 U.S.C. 824(f)),'' but only ``[i]f the Commission determines that 
the exemption would be consistent with the public interest and the 
purposes of th[e] Act.'' \8\
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    \5\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213 
(``4(c) Conf. Report'').
    \6\ The 4(c) Conference Report provides in relevant part that
    [t]he Conferees do not intend that the exercise of exemptive 
authority by the Commission would require any determination 
beforehand that the agreement, instrument, or transaction for which 
an exemption is sought is subject to the [CEA]. Rather, this 
provision provides flexibility for the Commission to provide legal 
certainty to novel instruments where the determination as to 
jurisdiction is not straightforward. Rather than making a finding as 
to whether a product is or is not a futures contract, the Commission 
in appropriate cases may proceed directly to issuing an exemption.
    Id. at 3214-15.
    \7\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.
    \8\ 7 U.S.C. 6(c)(6)(C) (as added by section 722(f) of the Dodd-
Frank Act).
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    Petitioners represented that section 201(f) of the Federal Power 
Act (``FPA''), administered by the Federal Energy Regulatory Commission 
(``FERC''), provides broad-based relief from most provisions of Part II 
of the FPA \9\ for certain government and cooperatively-owned electric 
utility companies.\10\ According to Petitioners, Congress recognized 
that the same rampant abuses which existed with investor-owned public 
utilities and that the Public Utility Act of 1935 and Rural 
Electrification Act of 1936 (``REA'') were enacted to combat simply did 
not exist with government and consumer-owned electric utilities.\11\ 
Rather, Petitioners maintain that Congress understood these utilities 
to exist as self-regulating, not-for-profit entities with a shared 
public service mission of providing reliable, low-cost electric energy 
service through the management and operational oversight of elected or 
appointed government officials or

[[Page 19672]]

cooperative member/consumers, and thus excluded them from the same 
degree of federal oversight as investor-owned public utilities by 
promulgating FPA section 201(f).\12\
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    \9\ Per the Petition, Part II of the FPA governs the 
transmission of electric energy in interstate commerce, the sale at 
wholesale of electric energy in interstate commerce, and the 
facilities used for such transmission or sale. See Petition at 15 
(citing FPA section 201(b)); Petition Exhibit 1, at 1 (providing the 
full text of 16 U.S.C. 824 et seq.). Petitioners represented that 
section 201(f) does not, however, provide an exemption from FPA 
parts I or III. Part I of the FPA deals with the establishment and 
functioning of FERC and the regulation of hydroelectric resources. 
See Petition at 15 n.31 (citing 16 U.S.C. 792 et seq.). Part III of 
the FPA deals with recordkeeping and reporting requirements and 
FERC's procedural rules concerning complaints, investigations, and 
hearings. See id. (citing 16 U.S.C. 825 et seq.). Additionally, 
section 201(f) does not provide an exemption from FERC's refund 
authority, 16 U.S.C. 824e, reliability standards, 16 U.S.C. 
824o(b)(1), or jurisdiction over transmission facilities and 
services, 16 U.S.C. 824(i)-(j). See Petition at 16-17.
    \10\ FPA section 201(f) provides in relevant part that
    [n]o provision in [Part II of the FPA] shall apply to, or be 
deemed to include, the United States, a State or any political 
subdivision of a State, an electric cooperative that receives 
financing under the Rural Electrification Act of 1936 (7 U.S.C. 901 
et seq.) or that sells less than 4,000,000 megawatt hours of 
electricity per year, or any agency, authority, or instrumentality 
of any one or more of the foregoing, or any corporation which is 
wholly owned, directly or indirectly, by any one or more of the 
foregoing, or any officer, agent, or employee of any of the 
foregoing acting as such in the course of his official duty, unless 
such provision makes specific reference thereto.
    Petition at 16 (quoting 16 U.S.C. 824(f)).
    \11\ See Petition at 17-18. Petitioners explained that the FPA 
was enacted originally ``to remedy rampant abuses in the investor-
owned electric utility industry.'' See Salt River Project Agric. 
Improvement and Power District v. Fed. Power Comm'n, 391 F. 2d 470, 
475 (D.C. Cir. 1968). Petitioners maintained that of all the major 
abuses considered by Congress as the impetus for enacting the FPA, 
``virtually none could be associated with the [electric] cooperative 
structure where ownership and control is vested in the consumer-
owners.'' Id. at 475. Per the Petition, while FPA section 201(f), as 
originally enacted, exempted only government entities, the Federal 
Power Commission (``FPC''), FERC's predecessor at the time, 
determined that Congress had intended also to exempt electric 
cooperatives financed under the REA from the FPC's jurisdiction over 
``public utilities.'' See Dairyland Power Coop. et al. v. Fed. Power 
Comm'n, 37 F.P.C. 12, 27 (1967). Finally, Petitioners explained that 
Congress codified the FPC's interpretation as part of the Energy 
Policy Act of 2005 (``EPAct 2005''), as articulated in Dairyland and 
affirmed in Salt River, 391 F.2d 470, and further expanded the scope 
of FPA section 201(f) by also exempting electric cooperatives that 
sell less than 4,000,000 megawatt hours of electricity per month, 
regardless of financing under the REA. See Public Law 109-58, 1291, 
119 Stat. 594, 985 (2005). Counsel for Petitioners represented that 
while Congress did not exempt electric cooperatives that sell in 
excess of 4,000,000 megawatt hours of electricity per month due to 
EPAct 2005 attempting to focus on issues with large electricity 
providers that had caused the 2003 blackouts in the northeast United 
States, FERC nonetheless often has allowed non-FPA 201(f) 
cooperatives additional regulatory flexibility, subject to ``self-
regulation'' by the cooperatives' member/owner boards.
    \12\ See Petition at 17-18, 22 (FPA section 201(f) entities are 
``effectively self-regulating'' (quoting Salt River, 371 F.2d at 
473)).
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    While CEA section 4(c)(6) prompted the Petitioners to request 
relief for FPA section 201(f) entities, Petitioners also sought to 
include in their definition of NFP Electric Entities, in accordance 
with CEA sections 4(c)(1) and 4(c)(2), any Federally-recognized Indian 
tribe and the very small number of electric cooperatives that are not 
described by FPA section 201(f). Petitioners argued that FERC has 
precedent for treating Federally-recognized Indian tribes as FPA 201(f) 
government entities.\13\ Additionally, Petitioners argued that 
regardless of whether an electric cooperative is recognized under FPA 
section 201(f) by virtue of receiving funding from the Rural Utilities 
Service (``RUS'') \14\ or selling less than 4 million megawatt hours of 
electricity per year, all cooperatively-owned electric utilities share 
certain distinguishing features--a common not-for-profit public service 
mission and self-regulating governance model--that form the underlying 
rationale for the FPA section 201(f) exemption.\15\
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    \13\ See id. at 20 (citing City of Paris, KY vs. Fed. Power 
Comm'n, 399 F.2d 983 (D.C. Cir. 1968); Sovereign Power Inc., 84 FERC 
] 61,014 (1998); Confederated Tribes of the Warm Springs Reservation 
of Or., a Federally Recognized Indian Tribe, and Warm Springs Power 
Enterprises, a Chartered Enter. of the Confederated Tribes of the 
Warm Springs Reservation of Or., 93 FERC ] 61,182 at 61,599 (2000) 
(concluding that ``the Tribes are an instrumentality of the `United 
States, a State or any political subdivision of a state''' and that 
Warm Springs Power Enterprises, a Chartered Enterprise of the 
Tribes, was entitled to Tribes' Section 201(f) exemption)).
    \14\ Per the Petition, the REA established the RUS as the 
federal agency to administer financing to rural utilities. See 7 
U.S.C. 901 et seq.
    \15\ Per the Petition, to be treated as a ``cooperative'' under 
Federal tax law, regardless of FPA section 201(f) status, an 
electric cooperative must operate on a cooperative basis. See 26 
U.S.C. 501(c)(12), 1381(a)(2)(C). Petitioners explained that the 
United States Tax Court, in the seminal case of Puget Sound Plywood, 
Inc. v. Comm'r of Internal Revenue, held that operating on a 
cooperative basis means operating according to the cooperative 
principles of (i) democratic member control, (ii) operation at cost, 
and (iii) subordination of capital. See 44 T.C. 305 (1965); see also 
Internal Revenue Manual Sec.  4.76.20.4 (2006). Additionally, for 
any electric cooperative to be exempt from Federal income taxation 
pursuant to IRC 501(c)(12), it must collect annually ``85 percent or 
more of [its] income * * * from members for the sole purpose of 
meeting losses and expenses.'' 26 U.S.C. 501(c)(12)(A). Accordingly, 
Petitioners argued that an electric cooperative, regardless of FPA 
section 201(f) status, lacks incentive or motivation to manipulate 
prices, disrupt market integrity, engage in fraudulent or abusive 
sales practices, or misuse customer assets because it: (i) Is a 
consumer cooperative; (ii) is controlled by its members; (iii) must 
operate at cost and ``not operate either for profit or below cost;'' 
(iv) may not benefit its individual members financially; and (v) if 
exempt from Federal income taxation, must collect at least 85 
percent of its income from members.
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    Petitioners limited the relief requested to certain Electric 
Operations-Related Transactions that meet defined criteria. The 
Petition described seven specific categories of transactions that 
traditionally occur between NFP Electric Entities and provided examples 
of each: Electric energy delivered, generation capacity, transmission 
services, fuel delivered, cross-commodity transactions, other goods and 
services, and environmental rights, allowances or attributes.\16\ Under 
the Petitioners' proposed definition, Electric Operations-Related 
Transactions would not reference any ``commodity'' in the financial 
asset class or ``Other Commodity'' asset class that is based upon or 
derived from a metal, agricultural product or fuel of any grade not 
used for electric energy generation.\17\ In general, Petitioners 
represented that all transactions described by the seven categories fit 
within their proposed definition of Electric Operations-Related 
Transactions and were ``intrinsically related'' to the needs of NFP 
Electric Entities ``to hedge or mitigate commercial risks'' which arise 
from the entities' public service obligations.\18\ Notably, however, 
Petitioners requested categorical relief for ``any other electric 
operations-related agreement, contract or transaction to which the NFP 
Electric Entity is a party,'' even if such transaction was not 
described by one of the Petition's categories, but could be developed 
as a new category in the future.\19\
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    \16\ See generally Petition at 6-12, and Exhibit 2.
    \17\ See id. at 13.
    \18\ See id. at 12.
    \19\ See id. at 5, 13.
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B. Summary of Proposed Order

    The Commission published for comment in the Federal Register a 
``Proposal To Exempt Certain Transactions Involving Not-for-Profit 
Electric Utilities; Request for Comment'' (``Proposed Order'').\20\ The 
Proposed Order identified (i) the entities eligible to rely on the 
exemption for purposes of entering into an exempt transaction (``Exempt 
Entities''); \21\ (ii) the agreement, contract, or transaction for 
which the exemption could be relied upon (``Exempt Non-Financial Energy 
Transactions''); \22\ and (iii) the provisions of the CEA and 
Commission regulations that would continue to apply to Exempt Entities 
entering into Exempt Non-Financial Energy Transactions with one 
another.\23\
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    \20\ 77 FR 50998 (August 23, 2012).
    \21\ Exempt Entities are defined in Section IV.A of the Proposed 
Order. See id. at 51012.
    \22\ Exempt Non-Financial Energy Transactions are defined in 
Section IV.B of the Proposed Order. See id. at 51012-13.
    \23\ The conditions the Commission proposed to impose on the 
Proposed Order are described in Section IV.C thereof. See id. at 
51013.
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    The Commission proposed a definition of Exempt Entities intended to 
capture the same scope of entities for which relief was requested by 
Petitioners. Generally, these entities included (i) electric facilities 
owned by government entities described in FPA section 201(f), (ii) 
electric facilities owned by Federally-recognized Indian tribes, (iii) 
any cooperatively-owned electric utility treated as a cooperative under 
Federal tax laws, and (iv) any other not-for-profit entity wholly-owned 
by one or more of the foregoing.\24\ The Proposed Order provided the 
caveat that no Exempt Entity could qualify as a ``financial entity'' as 
such term is defined in CEA section 2(h)(7)(C).\25\
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    \24\ See id. at 51012.
    \25\ See id.
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    The Commission's proposed definition of Exempt Non-Financial Energy 
Transaction was narrower in scope than the transaction definition 
proposed by Petitioners. Namely, the Commission declined to propose 
categorical relief for any transaction not described by one of the 
seven categories included in the Petition because the broader 
transaction definition is too vague for the Commission to conduct a 
considered and robust public interest and CEA purposes analysis under 
CEA section 4(c).\26\ Additionally, due to overlap between certain 
transaction categories for which both Petitioners requested relief and 
the Commission's joint final rule and interpretation with the 
Securities Exchange Commission (``SEC'') determined not to be 
swaps,\27\ the Commission believed it was unnecessary to provide 
additional relief pursuant to CEA section 4(c) for those

[[Page 19673]]

overlapping transaction categories.\28\ Otherwise, the Commission 
proposed a definition for Exempt Non-Financial Energy Transactions that 
was intended to capture a similar scope of transactions as described in 
the Petition, limited in the Proposed Order to Electric Energy 
Delivered, Generation Capacity, Transmission Services, Fuel Delivered, 
Cross-Commodity Pricing, and Other Goods and Services.\29\
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    \26\ Id. at 51006, n.63. The Commission also declined to propose 
Petitioners' secondary requests for i) an additional exempted 
transaction category for ``trade options'' and/or ii) delegated 
authority to Commission staff to review and approve new categories 
of exempted transactions, for the reasons set forth in the Petition. 
See id. Also, because the Commission has promulgated a trade option 
exemption in Commission regulation 32.3, there was no need to 
promulgate a separate trade option exemption for Petitioners, who, 
like all other persons whose transactions satisfy the terms of the 
trade option exemption, can rely thereon.
    \27\ 77 FR 48208 (August 13, 2012) (``Products Release'').
    \28\ See Proposed Order at 51008-09. Specifically, the 
Commission noted that certain ``Fuel Delivered'' transactions, as 
described in Exhibit B of the Petition, would be covered by the 
forward exclusion from the swap definition. Id. at 51008 (citing 
Products Release, 77 FR 48236). Additionally, the Commission noted 
that agreements, contracts, and transaction involving the category 
of Environmental Rights, Allowances or Attributes, as specifically 
described by the Petition, would be covered by the forward exclusion 
from the swap definition. Id. (citing Products Release, 77 FR 48233-
34).
    \29\ See id. at 51012-13. Generally, the description of each 
category mirrored the descriptions provided in the Petition.
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    Pursuant to CEA section 4(c)(1), the Commission also proposed 
conditioning its relief. First, the Commission proposed to reserve its 
general anti-fraud, anti-manipulation, and enforcement authority.\30\ 
Second, the Commission proposed to reserve its general authority to 
inspect books and records of Exempt Non-Financial Energy Transactions 
already kept in the normal course of business.\31\ The overarching goal 
of these proposed conditions would be to allow the Commission to gain 
greater visibility with respect to Exempt Non-Financial Energy 
Transactions to ensure Exempt Entities' compliance with the terms of 
the order, provide a means to ensure that the relief provided in the 
order remains appropriate and in the public interest given the 
potential that Exempt Non-Financial Energy Transactions may continue to 
evolve and their usage otherwise change, and to maintain the ability to 
initiate enforcement proceedings against Exempt Entities' found to be 
engaged in manipulative, fraudulent, or otherwise abusive trading 
schemes when executing Exempt Non-Financial Energy Transactions with 
other Exempt Entities.\32\
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    \30\ Id. at 51013 (reserving authority including, but not 
limited to, CEA sections 2(a)(1)(B), 4b, 4c(b), 4o, 6(c), 6(d), 
6(e), 6c, 6d, 8, 9, and 13, and Commission rules 32.4 and Part 180).
    \31\ Id.
    \32\ Id. at 51009.
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    Given the scope of the relief contemplated by the Proposed Order as 
just described, the Commission was able to make the public interest 
determinations required under CEA sections 4(c)(1) and 4(c)(2). In the 
Proposed Order, the Commission determined that (i) Exempt Non-Financial 
Energy Transactions were innovative products necessary to meet the 
unique production, distribution, and usage needs of Exempt Entities 
that were constantly changing due to factors beyond their control; \33\ 
(ii) CEA section 4(a) should not apply to Exempt Non-Financial Energy 
Transactions, which were bespoke in nature and conducted in a closed 
loop between Exempt Entities, therefore making them unsuitable for 
exchange trading and less likely to affect price discovery in 
Commission-regulated markets; \34\ (iii) relief for Exempt Non-
Financial Energy Transactions between Exempt Entities was not 
inconsistent with the public interest because the transactions were 
used to ``manage'' commercial risks arising from electric operations 
and facilities, and therefore were not speculative in nature; \35\ (iv) 
Exempt Entities were self-regulating, not-for-profit public utilities 
with no outside investors or shareholders to profit from transactions, 
and as such, were less vulnerable to fraudulent or manipulative trading 
activity in accordance with the purposes of the CEA; \36\ (v) Exempt 
Entities were ``appropriate persons'' for purposes of 4(c) relief 
either by virtue of having been identified explicitly by Congress in 
CEA section 4(c)(6)(C) as being eligible for a 4(c) exemption, by being 
a government-sponsored entity, and/or otherwise being appropriate due 
to sufficient financial soundness and operational capabilities; \37\ 
and (vi) because of the foregoing, nothing would prevent the Commission 
or any contract market from discharging its respective regulatory or 
self-regulatory duties under the CEA.\38\
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    \33\ See id.
    \34\ See id. at 51010.
    \35\ See id.
    \36\ See id. at 51011.
    \37\ See id. at 51011-12.
    \38\ See id. at 51012.
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    In addition to requesting comment on the scope of the relief and 
the Commission's 4(c) determinations, the Commission posed specific 
questions \39\ related to different aspects of the Proposed Order and 
provided a 30-day comment period to respond.
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    \39\ See id. at 51013-14.
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II. Comments Received and Commission Response

    In response to the Proposed Order's Request for Comments, the 
Commission received two responses, both of which were generally 
supportive. The Electric Power Supply Association and the Edison 
Electric Institute, writing together (``Joint Associations''), voiced 
general support for the Proposed Order and the Commission's 
determinations that the exemption would be in the public interest, and 
did not request any clarification or propose any changes.\40\ The 
Petitioners also submitted a comment letter which, while approving 
overall of the Proposed Order and the Commission's ``appropriate[ ] 
implement[ation] [of] Congressional intent,'' requested that any final 
relief be clarified ``in certain minor respects to align more closely 
with the Congressional intent,'' and that responded directly to the 
Commission's specific questions.\41\
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    \40\ Letter from the Electric Power Supply Association and the 
Edison Electric Institute, at 1-2 (September 24, 2012) (``Joint 
Associations' Letter'') (``The Joint Associations support the 
Commission's Proposed 201(f) Exemption and agree that the Proposed 
201(f) Exemption is in the public interest.'').
    \41\ Letter from the National Rural Electric Cooperative 
Association, the American Public Power Association, the Large Public 
Power Council, the Transmission Access Policy Study Group and the 
Bonneville Power Administration, at 1-2 (September 24, 2012) 
(``Petitioners' Letter''). As discussed below, the Petitioners did 
not respond directly to the Commission's ``Request for Public 
Comment on Costs and Benefits'' of the Proposed Order.
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    Upon careful consideration of the comments received, the Commission 
has determined to finalize the Proposed Order, with certain revisions 
to the ``Final Order,''\42\ the majority of which are in response to 
comments discussed below and subject to the following interpretive 
guidance used to clarify the Commission's intent. Unless noted below, 
the Commission is finalizing the Proposed Order without change because 
it continues to believe that the scope of the Proposed Order is 
consistent with the public interest and purposes of the Act.\43\
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    \42\ See infra Section V.
    \43\ See Proposed Order at 51006-09.
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A. Clarification With Respect to the Definition of ``Exempt Entity''

    Generally, Petitioners agreed with the scope of entities included 
in the definition of Exempt Entity. In response to a question posed by 
the Commission,\44\ Petitioners commented that the scope of the Exempt 
Entities definition should not be limited further to include only those 
electric cooperatives with tax-exempt status under Federal tax law 
because ``[t]here is no operational or governance difference between 
electric cooperatives

[[Page 19674]]

that are tax exempt under IRC Section 501(c)(12) and those that are 
taxable under IRC Section 1381(a)(2)(C).'' \45\ Similarly, in response 
to a different question,\46\ Petitioners reiterated their support for 
including Federally-recognized Indian tribes within the scope of the 
relief for the same reasons that they provided in the Petition.\47\
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    \44\ Specifically, the Commission asked whether it should 
``limit the scope of Exempt Entities to only those electric 
utilities described by FPA section 201(f),'' and even if not, 
``should the Commission still limit the scope of electric 
cooperatives included as Exempt Entities to only those cooperatives 
with tax exempt status[?]'' Proposed Order at 51013.
    \45\ Petitioners' Letter at 9.
    \46\ Specifically, the Commission sought comment ``on every 
aspect of the Proposed Order as it relates to Indian tribes.'' 
Proposed Order at 51013.
    \47\ Petitioners' Letter at 10-11.
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    The Proposed Order defined Exempt Entities to include not only 
those entities described in FPA section 201(f),\48\ but federally-
recognized Indian tribes and non-FPA section 201(f) electric 
cooperatives. The Commission accepted Petitioners' representations that 
FERC has traditionally treated federally-recognized Indian tribes as 
FPA section 201(f) entities due to the similarities they share with 
government entities.\49\ The Commission also accepted Petitioners' 
representations that non-FPA section 201(f) electric cooperatives, so 
long as they are treated as cooperatives under Federal tax law but 
regardless of whether they have tax-exempt status, are owned and 
operated in the same not-for-profit, self-regulated manner as FPA 
section 201(f) cooperatives, and their source of financing or amount of 
monthly electricity sold does not affect their sharing with FPA section 
201(f) electric cooperatives the same underlying public service mission 
of providing affordable, reliable electric energy service to 
customers.\50\ Having received no comments challenging the Commission's 
determination based upon these representations, the Commission 
continues to believe that the scope of Exempt Entities included in the 
Proposed Order is consistent with the public interest and purposes of 
the Act, and thus is adopting the same general scope of Exempt Entities 
in the Final Order.\51\
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    \48\ See Proposed Order at 51006-07.
    \49\ See id. at 51007.
    \50\ See id.
    \51\ With regard to the Commission asking whether an Exempt 
Entity should be required to notify the Commission of any change in 
status under FPA section 201(f), Proposed Order at 51013, the 
Commission notes that the question was only relevant to electric 
cooperatives that fall in-and-out of FPA section 201(f) status based 
upon the amount of electricity they sell or from whom they receive 
financing. The Petitioners stated that such a change in status 
``would have no effect on outstanding Exempt Non-Financial Energy 
Transactions entered into with Exempt Entities prior to the change 
in status.'' Petitioners' Letter at 9. Having further considered the 
issue, the Commission confirms its belief that, for the reasons 
stated in the adopting release to the Proposed Order, an electric 
cooperative's FPA 201(f) status should not be determinative of its 
inclusion in the relief provided herein as long as it continues to 
meet the criteria for cooperatives as noted herein. Furthermore, the 
Commission does not believe that being notified of an electric 
cooperative's change in FPA 201(f) status would further any 
regulatory purposes under the Act, and therefore is not imposing any 
new reporting condition. The Commission is cognizant that any 
incentive provided by the Final Order for electric cooperatives to 
sell additional electricity and still be covered by the relief could 
be negated by the consequence of becoming fully regulated by FERC. 
The Commission stresses, however, that to the extent an electric 
cooperative no longer meets the criteria for cooperatives provided 
in the definition of an Exempt Entity, such electric cooperative may 
no longer rely on the relief provided in the Final Order.
---------------------------------------------------------------------------

    Petitioners suggested a number of minor revisions to the language 
used in defining Exempt Entities in the Proposed Order in order ``to 
clearly encompass the appropriate categories of electric entities 
discussed in the Petition and elsewhere in the Proposal.'' \52\ For 
example, Petitioners suggested clarifying that Exempt Entities can own 
either a facility ``or utility'' that is subject to exemption under FPA 
section 201(f), and that such a facility or utility should be ``wholly-
owned'' instead of partially-owned by entities that qualify under FPA 
section 201(f).\53\ The Commission agrees that the proposed revisions 
would help align the Final Order with the Commission's intent as 
expressed in the adopting release of the Proposed Order, and has 
modified the definition of ``Exempt Entity'' accordingly.\54\
---------------------------------------------------------------------------

    \52\ Id. at 3.
    \53\ Id.
    \54\ The Commission understands that a ``facility'' refers to an 
asset used in relation to the generation, transmission and/or 
delivery of electricity, whereas a ``utility'' refers to the entity 
that owns and/or operates the facility. Additionally, to qualify 
under FPA section 201(f) and, by extension, CEA section 4(c)(6)(C), 
an electric facility or utility cannot be partially-owned by an 
entity not described by FPA section 201(f). Furthermore, the 
Commission has clarified in the Final Order that, consistent with 
FPA section 201(f), an aggregated entity such as a Joint Power 
Administration can own facilities or utilities covered by the 
relief, subject to the caveat that the aggregated entity must 
consist solely of entities otherwise described as Exempt Entities. 
While not explicitly requested, the Commission has deleted the 
requirement that Federally-recognized Indian tribes must be 
``otherwise subject to regulation as a `public utility' under the 
FPA'' to account for the possibility that Indian tribes recognized 
by the U.S. government may someday be recognized explicitly under 
FPA section 201(f), at which point it could be confusing as to 
whether they are covered by the Final Order due to status with FERC 
as a public utility.
---------------------------------------------------------------------------

    Petitioners also requested that the Commission remove the reference 
to ``lowest cost possible'' from clause (iii) in the Proposed Order's 
definition of electric ``cooperatives'' that qualify as Exempt Entities 
in order ``to recognize that electric cooperatives have operational 
objectives in addition to low cost, e.g., electric service reliability 
and environmental stewardship.'' \55\ The Petitioners represented that 
these are additional public service objectives that all Exempt Entities 
share as part of their collective public service mission, in addition 
to providing affordable electric energy service.\56\ Additionally, 
Petitioners originally maintained that providing electric energy 
service at the lowest cost possible may be an operational goal of a 
cooperative, and that Federal tax law requires cooperatives to operate 
``at cost,'' as opposed to the lowest cost possible.\57\ The Commission 
agrees that this is a worthwhile clarification and, accordingly, has 
revised the language in clause (iii) of the Proposed Order describing 
electric cooperatives included in the definition of Exempt Entity to 
make clear that such cooperatives must provide electric energy service 
to their member/owner customers ``at cost,'' which the Commission 
intends to reflect the lowest cost possible in light of certain 
reliability and environmental standards and objectives, among others.
---------------------------------------------------------------------------

    \55\ Petitioners' Letter at 4.
    \56\ See id.
    \57\ See Petition at 26 (defining ``at cost'' as ``return[ing] 
excess operating revenues to [the cooperative's] member-patrons,'' 
which means the cooperative ``must not operate either for profit or 
below cost'' (citing Puget Sound Plywood v. Comm'r, 44 T.C. 305, 
307-308 (1965)).
---------------------------------------------------------------------------

    Lastly, Petitioners requested that the Commission delete the 
qualifier, ``not-for-profit,'' from clause (iv) of the Exempt Entity 
definition describing entities that are wholly-owned by one or multiple 
other Exempt Entities.\58\ The Petitioners noted that ``[e]ach of these 
subsidiary or aggregated entities are FPA 201(f) entities because they 
are wholly-owned by other FPA 201(f) entities, without regard to tax 
status,'' and therefore ``their activities do not benefit entities 
outside the `closed loop' of entities'' described in CEA section 
4(c)(6)(C).\59\ The Commission agrees that Petitioners' interpretation 
is consistent with FPA section 201(f) and CEA section 4(c)(6)(C). FPA 
section 201(f) provides that ``any corporation which is wholly owned, 
directly or indirectly, by any one or more of the foregoing [entities 
described in FPA section 201(f)]'' is exempted under the statute as 
well.\60\ Under the Proposed Order, relief is provided for transactions 
entered into solely between Exempt Entities, meaning that all exempted 
transactions, whether they generate profit or not, are

[[Page 19675]]

for the benefit of facilitating the closed loop's public service 
mission. Because it has determined the qualifier to not be necessary, 
the Commission has struck the reference to ``not-for-profit'' status in 
clause iv) of the Exempt Entity definition.
---------------------------------------------------------------------------

    \58\ Petitioner's Letter at 4.
    \59\ Id. (noting, as an example, that some Exempt Entities may 
have subsidiaries that provide their consumer-members with propane, 
on top of the subsidiary's primary electric service obligations).
    \60\ See FPA section 201(f), supra note 10.
---------------------------------------------------------------------------

B. Clarification With Respect to the Definition of ``Exempt Non-
Financial Energy Transaction''

    Similar to their suggested revisions to the definition of Exempt 
Entity, Petitioners suggested a number of minor revisions to the 
definition of Exempt Non-Financial Energy Transaction in order to align 
the Final Order more closely with Congressional intent. First, 
Petitioners requested that the Commission substitute the words ``public 
service obligations'' for ``contractual obligations'' in Section IV.B 
of the proposed definition to account for the fact that ``Exempt 
Entities' obligations to electric customers arise in some cases under 
Federal or state law, or under local municipal ordinances or city 
charters, under Tribal laws or, for electric cooperatives, under 
organizational charters or by-laws, rather than under individual 
customer contracts.'' \61\ Next, for the same reasons applicable to the 
requested revision of the definition of Exempt Entity, Petitioners 
requested that the Commission delete the phrase, ``at the lowest cost 
possible,'' when referring to the purpose of engaging in Exempt Non-
Financial Energy Transactions.\62\ Finally, Petitioners requested that 
the Commission delete the word ``only'' from the sentence immediately 
preceding enumerated transaction categories in Section IV.B of the 
proposed definition because it is industry practice to include these 
transactions as part of larger commercial agreements or arrangements 
that also encompass components not covered by the relief.\63\ 
Petitioners requested that the Commission not impose upon Exempt 
Entities the new burden of having to compartmentalize their commercial 
relationships in such a way as to limit certain arrangements to only 
those six exempted transaction categories.\64\
---------------------------------------------------------------------------

    \61\ Petitioners' Letter at 4.
    \62\ Id. at 5.
    \63\ Id. at 7 (citing fuel delivery contracts and environmental 
commodity and other nonfinancial commodity transactions as examples 
of larger agreements, and noting that some such agreements may 
include governance or employee sharing provisions that have nothing 
to do with operational goods and services).
    \64\ Id.
---------------------------------------------------------------------------

    The Commission agrees with these suggestions and has revised the 
definition of Exempt Non-Financial Energy Transaction accordingly. The 
Commission notes, however, that by allowing Exempt Non-Financial Energy 
Transactions to be included as part of larger commercial agreements, it 
is not providing relief to any other type of transaction or component 
of the agreement that is not explicitly defined in the Final Order. 
That is, the inclusion of an Exempt Non-Financial Energy Transaction 
within a broader commercial agreement does not thereby provide relief 
to every transaction included within the entire agreement.
    Petitioners also requested certain other clarifications with 
respect to the definition of Exempt Non-Financial Energy Transaction. 
First, the Commission is confirming that any ``agricultural product or 
diesel fuel or [other] grade of crude oil that is used as fuel for 
electric generation may be the underlying commodity upon which an 
`Exempt Non-Financial Energy Transaction' is based.'' \65\ Next, the 
Commission is clarifying that there is no requirement that Exempt Non-
Financial Energy Transactions ``involve only fixed amounts of goods or 
services, or fixed time frames or only fixed measures.'' \66\ Rather, 
the Commission confirms that the price, duration, quantity and any 
other aspect of these transactions may be variable, adjusted or 
adjustable during the term of an agreement, contract or transaction, as 
is customary for Exempt Non-Financial Energy Transactions.\67\ The 
definition in the Final Order has been revised to reflect these two 
points.
---------------------------------------------------------------------------

    \65\ See Petitioners' Letter at 6-7.
    \66\ See id. at 7.
    \67\ The Commission notes that the definition of Exempt Non-
Financial Energy Transaction is being revised in the Final Order to 
allow for price-hedging transactions, and that contrary to what was 
stated in the Proposed Order, some agreements may be variable price 
instead of fixed price. See infra Section II.E.1 and note 114 and 
accompanying text.
---------------------------------------------------------------------------

    Next, the Petitioners' requested certain changes to the proposed 
definition of Exempt Non-Financial Energy Transactions regarding what 
ultimate purpose the transactions must serve. First, Petitioners 
requested that the Commission substitute the words ``related to'' for 
``to facilitate'' in Section IV.B of the proposed definition because in 
some cases, such as with an agreement to share a generation asset in 
order to more cost-effectively comply with environmental standards, the 
transaction may ``limit rather than facilitate electric generation, 
transmission or distribution operations.'' \68\ Second, Petitioners 
requested that the Commission not include the proposed requirement that 
Exempt Non-Financial Energy Transactions must be ``intended for making 
or taking physical delivery of the commodity upon which the agreement, 
contract or transaction is based.'' \69\ Petitioners reiterated their 
original request that in issuing any 4(c) relief, the Commission not 
determine the regulatory status of any transaction or whether any 
transaction involves a ``commodity,'' including a ``nonfinancial 
commodity,'' as those terms are defined in the CEA.\70\ Specifically, 
Petitioners provided examples of certain transactions that fall within 
the defined ``Other Goods and Services'' transaction category in the 
Proposed Order, but that ``do not always involve an identifiable, 
tangible commodity intended for `delivery,' '' or where it would be 
objectively impractical for counterparties, who under an agreement 
jointly own and operate transmission facilities, to objectively monitor 
``intent'' because there is not a ``single, comprehensive operating 
agreement that embodies the relationship.'' \71\
---------------------------------------------------------------------------

    \68\ Id. at 5.
    \69\ Id.
    \70\ See id.
    \71\ See id.
---------------------------------------------------------------------------

    The Commission has determined to revise the purpose language to 
address Petitioners' concerns with the ``intent to physically deliver'' 
requirement. The amended definition no longer directly modifies an 
Exempt Entity's public service obligation as ``facilitating'' 
generation, transmission and/or delivery of electric energy service, 
and no longer includes the ``intent to physically deliver'' language. 
Rather, the amended definition provides that an Exempt Non-Financial 
Energy Transaction ``would not have been entered into, but for an 
Exempt Entities' need to manage supply and/or price risks arising from 
its existing or anticipated public service obligations to physically 
generate, transmit, and/or deliver electric energy service to 
customers.'' \72\
---------------------------------------------------------------------------

    \72\ See supra Section IV.B.
---------------------------------------------------------------------------

    The effect of the Commission's revisions to the definition should 
make it clear that Exempt Non-Financial Energy Transactions do not 
necessarily result in an immediate net increase in generation, 
transmission, and/or delivery of electric energy for each Exempt Entity 
involved. The Commission interprets the Final Order definition, as 
amended, in the larger context of an Exempt Entity's public service 
obligations, which can include certain reliability, conservation, and 
environmental considerations related to their operations and 
facilities. Thus,

[[Page 19676]]

under the examples posed in Petitioners' Letter, the need to enter into 
a demand-side management agreement or generation facility-sharing 
arrangement would still arise from the Exempt Entity's public service 
obligations, even if one Exempt Entity is required under the terms of 
the agreement to scale back its generation output to comply with 
demand-side management programming criteria, or the agreement itself 
does not directly result in physical generation, transmission, or 
delivery of electric energy service, but instead enables the 
fulfillment of physical obligations going forward.
    These revisions are based on the Commission's recognition that not 
all Exempt Non-Financial Energy Transactions necessarily result in 
making or taking physical delivery of the ``commodity'' upon which the 
transaction is based, although many will.\73\ As described in the Final 
Order, all categories of Exempt Non-Financial Energy Transactions 
represent agreements entered into by Exempt Entities in order to manage 
price \74\ and/or supply risk resulting from the public service role 
they play in physical electricity markets. The Commission stresses that 
the revised definition still does not allow for Exempt Non-Financial 
Energy Transactions to be purely financial arrangements lacking any 
essential relationship to a physical generation, transmission, and/or 
delivery obligation of electric energy service to customers.\75\ The 
proposed 4(c) public interest determination was premised on Exempt Non-
Financial Energy Transactions not being speculative transactions.\76\ 
Without requiring more than the ``closed loop'' limitation as advocated 
for by Petitioners, the Commission believes that the Exempt Non-
Financial Energy Transaction definition could be interpreted to cover 
purely financial transactions capable of being used for speculative 
purposes, which would not be in the public interest for the Commission 
to exempt.\77\ Thus, the Commission has revised the Final Order 
definition to include the ``but for'' language.
---------------------------------------------------------------------------

    \73\ With respect to Petitioners' comment that they specifically 
requested the Commission to not make any determination as to whether 
any Exempt Non-Financial Energy Transaction involves a 
``commodity,'' the Commission notes that Petitioners originally 
proposed that ``Electric Operations-Related Transactions'' be 
defined as ``involving a `commodity' (as such term is defined in the 
CEA) * * * .'' See Petition at 4.
    \74\ See supra Section II.E.1 (discussing the Commission's 
determination to clarify that an Exempt Non-Financial Energy 
Transaction can be used to manage the price risk of a commodity 
underlying the transaction).
    \75\ To emphasize the requirement that Exempt Non-Financial 
Energy Transactions be tied to obligations in physical electricity 
markets, the Commission has qualified the language in the Final 
Order definition to state that Exempt Entities' ``public service 
obligations'' are ``to physically generate, transmit, and/or deliver 
electric energy service to customers.'' See supra Section IV.B 
(emphasis added).
    \76\ See Proposed Order at 51010. The Commission explained that 
the scope of the proposed definition required that the transaction 
would ``contemplate `delivery' of the underlying good or service,'' 
but that settlement of the transaction could occur in some 
circumstances through a financial book-out transaction so long as 
the transaction was not intended for speculative purposes. Id. at 
51008, n.83 and accompanying text. Without the physical delivery 
requirement, the Commission notes that price management transactions 
under the Final Order can be financially settled, so long as the 
underlying physical commodity is being procured through a 
corresponding physical delivery agreement.
    \77\ In response to the Commission asking whether the Proposed 
Order's definitions would foreclose the possibility of exempt 
speculative trading, the Petitioners responded that ``Exempt 
Entities do not execute Exempt Non-Financial Energy Transactions for 
speculative purposes, but only to hedge or mitigate commercial risks 
arising from electric operations.'' Petitioners' Letter at 10. While 
the Commission appreciates that Petitioners represent their intent 
never will be to use the transactions to speculate, the Commission 
also believes it is in the public interest to foreclose the 
possibility of such exempt speculative trading activity through 
additional limiting language in the definition of Exempt Non-
Financial Energy Transactions.
---------------------------------------------------------------------------

    Lastly, while not requested by commenters, the Commission has 
further revised the Exempt Non-Financial Energy Transaction definition. 
The descriptions of ``Fuel Delivered'' and ``Cross-Commodity Pricing'' 
transactions have been modified by replacing the operative verb 
``include'' with ``consist of.'' While the category description is not 
necessarily closed, the Commission notes that the change is intended to 
reflect that there are certain characteristics that must be present for 
these types of transactions. The ``consist of'' language is consistent 
with the other four Exempt Non-Financial Energy Transaction category 
descriptions. Additionally, the Commission has added the qualification 
that Exempt Non-Financial Energy Transactions are not entered into on 
or subject to the rules of a registered entity, submitted for clearing 
to a derivatives clearing organization (``DCO''), and/or reported to a 
swap data repository (``SDR''). This modification is based on 
Petitioners' representation that Exempt Non-Financial Energy 
Transactions are not standardized instruments suitable for exchange 
trading, clearing, or reporting.\78\ If persons otherwise able to claim 
the relief in the Final Order choose to (i) enter into an agreement, 
contract or transaction on or subject to the rules of a registered 
entity, (ii) submit an agreement, contract or transaction for clearing 
to a DCO or (iii) report an agreement, contract or transaction to an 
SDR, such an agreement, contract or transaction will be not be an 
Exempt Non-Financial Energy Transaction and will be outside the scope 
of the Final Order. In such circumstances, such persons, agreements, 
contracts or transactions will be subject to the applicable regulatory 
regime.
---------------------------------------------------------------------------

    \78\ See, e.g., Petition at 6-7 (noting that ``Electric Energy 
Delivered'' contracts are not fungible and cannot be described in 
electronically reportable formats); Petition at 31 (explaining that 
``it is highly unlikely that any [ ] standardized derivatives 
trading contracts would contain the same customized economic terms 
of any particular [Exempt Non-Financial Energy Transactions]''). The 
Commission notes that Petitioners' original proposed transaction 
definition stated that the exempted transactions ``shall not include 
agreements, contracts or transactions executed, traded, or cleared 
on a registered entity * * * .'' See Petition at 5.
---------------------------------------------------------------------------

C. Clarification With Respect to the Commission's Right To Revisit the 
Terms of the Relief

    Regarding the condition that the Commission reserves the right to 
revisit any of the terms and conditions of the exemptive relief,\79\ 
the Petitioners requested that the Commission clarify that any such 
reconsideration would be subject to notice and comment under the 
Administrative Procedure Act (``APA'').\80\ The Commission clarifies 
that exemptive orders issued pursuant to section 4(c) of the CEA are 
subject to ``notice and opportunity for hearing.'' \81\
---------------------------------------------------------------------------

    \79\ Proposed Order at 51013.
    \80\ Id. at 7-8 (citing the APA, 5 U.S.C. 500 et seq.)
    \81\ CEA section 4(c)(1); 7 U.S.C. 6(c)(1) (providing that the 
Commission may exempt certain transactions ``after notice and 
opportunity for hearing'').
---------------------------------------------------------------------------

D. Request That Relief Not Be Conditioned Upon a Reservation of 
Jurisdiction Under the Commission's Authority Over Options Transactions

    Petitioners requested that the Commission remove references in the 
Proposed Order to CEA section 4c(b) and Commission regulation 32.4 as 
non-exclusive provisions being reserved for purposes of conditioning 
the relief on the Commission's general anti-fraud, anti-manipulation, 
and enforcement authority.\82\ Petitioners noted that the two 
``provisions are not part of the general anti-fraud, anti-market 
manipulation and enforcement authority, but instead articulate the 
Commission's jurisdiction over option transactions.'' \83\ 
Specifically, Petitioners expressed concern that the references were an 
attempt by the Commission ``to

[[Page 19677]]

reserve the right to decide later that it has jurisdiction over [a 
``Generation Capacity'' transaction between ``Exempt Entities''] as an 
option.'' \84\
---------------------------------------------------------------------------

    \82\ Petitioners' Letter at 8.
    \83\ Id.
    \84\ See id.
---------------------------------------------------------------------------

    The Commission has declined to remove the reference to CEA section 
4c(b) and Commission regulation 32.4 from the Conditions of the Final 
Order. As is standard practice with past exemptive orders issued 
pursuant to CEA section 4(c), the Commission reserves its general anti-
fraud and anti-manipulation authority, as well as the ability to 
revisit the terms and conditions of the relief at any time and 
determine that certain transactions are jurisdictional in order to 
execute the Commission's duties and advance the public interests and 
purposes of the CEA. The Commission also believes it prudent to reserve 
certain scienter-based prohibitions in the Act and Commission 
regulations (without finding it necessary in this particular context to 
preserve other enforcement authority), and has modified the language in 
the Final Order to make the scope of this reservation clear. While 
Petitioners are correct that the provisions in question do not 
articulate the Commission's general anti-fraud, anti-manipulation and 
enforcement authority directly, the provisions exemplify a possible 
statutory basis for bringing an enforcement action, were a need to 
arise 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.
    The Commission also has determined to add new CEA sections 
4s(h)(1)(A) and 4s(h)(4)(A) \85\ and Commission regulations 32.410(a) 
and (b) \86\ to the non-exclusive list of provisions that could provide 
a possible statutory basis for an enforcement action, as it has done in 
a similar proposed exemption for certain regional transmission 
organizations (``RTO'') and independent system operators (``ISO'').\87\ 
The inclusion of CEA sections 4c(b), 4s(h)(1)(A) and 4s(h)(4)(A), and 
Commission regulation 32.4, as examples of reserved authority in no way 
indicates the Commission's belief that a certain Exempt Non-Financial 
Energy Transaction is or could be a commodity option or other type of 
swap; to the contrary, consistent with the Commission's interpretation 
of the authority contained in section 4(c), the Commission has taken no 
position in issuing the Final Order as to the product category or 
jurisdictional or non-jurisdictional nature of any of the exempted 
transactions.
---------------------------------------------------------------------------

    \85\ 7 U.S.C. 6s(h)(1)(A), 6s(h)(4)(A) (as added by the Dodd-
Frank Act section 731). CEA section 4s(h)(1)(A) requires a swap 
dealer (``SD'') or major swap participant (``MSP'') to comply with 
all Commission rules and regulations related to fraud, manipulation, 
and other abusive practices involving swaps, while CEA section 
4s(h)(4)(A) makes it unlawful for any SD or MSP acting as an advisor 
to employ any deceptive device or scheme to defraud a Special 
Entity.
    \86\ These regulations prohibit an SD or MSP from perpetrating 
fraud, manipulation, or other abusive trading practices on ``Special 
Entities,'' as such term is defined in Commission regulation 
23.401(c), and provide an affirmative defense against charges of 
perpetrating such abusive schemes. See 77 FR 9822-23 (Feb. 17, 
2012).
    \87\ See 77 FR 52138, 52166 (August 28, 2012) (``Proposed RTO/
ISO Order''). The Proposed RTO/ISO Order exempted certain electric 
energy transactions that occur pursuant to a RTO/ISO tariff approved 
by the Federal Energy Regulatory Commission, subject to the 
Commission's general anti-fraud, anti-manipulation, and enforcement 
authority. Similar to the FPA section 201(f) Petitioners, the RTO/
ISO petitioners requested relief pursuant to the Commission's new 
authority in CEA section 4(c)(6).
---------------------------------------------------------------------------

    Finally, the Commission 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.'' \88\
---------------------------------------------------------------------------

    \88\ See 7 U.S.C. 6(d).
---------------------------------------------------------------------------

E. Other Clarification and Comments

    The Commission is providing further clarification with respect to 
the appropriate uses of Exempt Non-Financial Energy Transactions and 
responding to other comments made by the Petitioners.
1. Clarification With Respect to the Ability of Exempt Entities To Use 
Exempt Non-Financial Energy Transactions To Manage Price Risks
    The Commission requested comment on whether Exempt Non-Financial 
Energy Transactions, as defined in the Proposed Order, could be used to 
hedge price risk in an underlying commodity, and if so, whether the 
Commission explicitly should exclude such price-hedging 
transactions.\89\ Petitioners responded that they use Exempt Non-
Financial Energy Transactions to `` `hedg[e] or mitigat[e] commercial 
risks' arising from electric operations,'' and that commercial risks 
include ``both price and availability risks of the nonfinancial 
commodities required as fuel for generation or the goods or services 
that the entity sells or anticipates selling.'' \90\ If the Commission 
explicitly were to exclude price hedging transactions from the scope of 
relief, Petitioners argued they would be required to rely on the more 
limited end-user exception to clearing for such transactions,\91\ which 
Congress could not have intended because it added additional relief 
specifically for FPA section 201(f) entities in section 4(c)(6) of the 
CEA.\92\
---------------------------------------------------------------------------

    \89\ Proposed Order at 51014. In making its public interest 
determination in the Proposed Order, the Commission represented that 
it understood Exempt Entities to use Exempt Non-Financial Energy 
Transactions mainly to manage supply risk, and not price risk, of an 
underlying commodity. See id. at 51010. Therefore, the Commission 
declined to adopt Petitioners' proposed definition incorporating the 
phrase, `` `to hedge or mitigate commercial risks' (as such phrase 
is used in CEA Section 2(h)(7)(A)(ii),'' because the Commission 
generally did not interpret this phrase to refer to the full scope 
of transactions described in the Petition and incorporated into the 
Proposed Order through enumerated categories of Exempt Non-Financial 
Energy Transactions. Id. at 51007-08, n.81.
    \90\ See Petitioners' Letter at 12.
    \91\ CEA section 2(h)(7)(A), 7 U.S.C. 2(h)(7)(A) (providing 
relief from the clearing and trade execution mandate for swap 
transactions entered into where at least one counterparty is not a 
financial entity and uses the swap to hedge or mitigate commercial 
risk). As Petitioners note, while the end-user exception would 
provide some relief for Exempt Non-Financial Energy Transactions, 
the transactions ``nonetheless [would be] subject to other 
regulatory requirements.'' Petitioners' Letter at 12.
    \92\ See id. Petitioners argue that by providing both the 
``general end-user exception'' and the ``specific 4(c)(6) public 
interest waiver,'' ``Congress clearly intended that that the 
Commission waive its jurisdiction over [transactions entered into 
between FPA section 201(f) entities], not merely that such entities 
would have the end-user exception.'' Id.
---------------------------------------------------------------------------

    The Commission is persuaded that Congress intended for the 
Commission to consider providing relief for transactions managing price 
risk entered into between FPA section 201(f) entities that goes beyond 
the relief available through the end-user exception for price hedging 
transactions, if in the public interest. Therefore, the Commission has 
made explicit in the Final Order definition that the scope of relief 
covers transactions entered into not only to manage supply risk arising 
from an Exempt Entity's public service obligation to physically 
generate, transmit, and/or deliver electric energy service, but also 
any price risk associated with an underlying commodity used to 
facilitate the public service obligation. The Commission believes that 
the overall effect of the revisions to the definition of Exempt Non-
Financial Energy Transaction

[[Page 19678]]

previously discussed \93\ also helps to clarify that the Final Order 
clearly covers price-risk management transactions directly related to 
an Exempt Entity's public service obligation. The Commission notes, 
however, that because these transactions cannot be used for speculative 
purposes,\94\ any Exempt Non-Financial Energy Transaction used to 
manage the price risk of an underlying commodity must always be 
associated with an obligation to make or take physical delivery of that 
underlying commodity.\95\
---------------------------------------------------------------------------

    \93\ See supra Section II.B.
    \94\ As previously noted, the Commission's public interest 
determination was premised on an Exempt Entity's inability to use 
Exempt Non-Financial Energy Transactions as purely financial 
transactions for speculative purposes only. See supra Section II.B.
    \95\ The Commission also confirms its determination, as 
expressed in the Proposed Order, that Exempt Non-Financial Energy 
Transactions entered into solely between Exempt Entities do not 
materially impair price discovery in Commission-regulated markets. 
See supra Section III.C. In response to the Commission asking 
whether there could be any circumstances where it should revisit 
this determination and require reporting of swap transactions to a 
swap data repository for price transparency purposes, Petitioners 
responded by reiterating their argument that because Exempt Non-
Financial Energy Transactions are bespoke and occur within a 
``closed loop'' of Exempt Entities, they do not affect price 
discovery in Commission-regulated markets. Petitioners' Letter at 9-
10. Petitioners also argued that were FERC to require regulatory 
reporting of electric energy transactions entered into by FPA 
section 201(f) entities, the nature of the reporting and regulatory 
purposes behind requiring such reporting would be very different 
from those behind price transparency reporting of swaps as required 
by the CEA and Commission regulations. See id. At this time, the 
Commission agrees that any incremental regulatory benefit that might 
be gained from requiring regulatory reporting of Exempt Non-
Financial Energy Transactions entered into between Exempt Entities 
is not necessary for purposes of making the required public interest 
determinations in issuing the Final Order, regardless of whether 
FERC requires reporting for FPA 201(f) entities in the future.
---------------------------------------------------------------------------

2. Request That Relief Be Retroactive to the Date of Enactment of the 
Dodd-Frank Act
    The Commission sought comment on whether it should grant 
Petitioners' original request for the effective date of any 4(c) relief 
issued to be retroactive to the date of enactment of the Dodd-Frank 
Act.\96\ Petitioners reiterated their rationale from the Petition that 
certain transactions covered by the proposed definition of Exempt Non-
Financial Energy Transactions ``might otherwise require analysis as to 
whether they are `historical swaps,' and might otherwise require 
reporting by one or the other of the Exempt Entities, both of which are 
non-SDs/MSPs under the Dodd-Frank Act.'' \97\ In order to prevent 
Exempt Entities from passing along the costs of such historical swap 
analysis and reporting to electric energy consumers, the Commission has 
provided that the relief in the Final Order applies retroactively to 
the date of enactment of the Dodd-Frank Act.\98\ The Commission is 
persuaded that the representations made by Petitioners with respect to 
the public service obligations of government and cooperatively-owned 
not-for-profit electric utility companies and the transactions entered 
into to satisfy such obligations apply equally to the period between 
the enactment of the Dodd-Frank Act and the issuance of the Final Order 
contained herein, and thus the same public interest determinations 
support retroactive 4(c) relief.
---------------------------------------------------------------------------

    \96\ Proposed Order at 51013.
    \97\ Petitioners' Letter at 11.
    \98\ CEA section 4(c)(1) provides that the Commission may exempt 
any agreement, contract, or transaction ``either retroactively or 
prospectively, or both * * *.'' 7 U.S.C. 6(c)(1).
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3. Request That Relief Be Categorical
    In response to the Commission's specific request for comments on 
the topic,\99\ Petitioners reiterated their support for the Commission 
issuing categorical relief that would apply to all Electric Operation-
Related Transactions, regardless of whether a transaction was described 
by one of the six defined categories.\100\ Petitioners interpreted the 
``public interest waiver'' codified in CEA section 4(c)(6) as a mandate 
to the Commission to exempt all transactions that occur between the 
``closed loop'' of FPA section 201(f) entities, and that ``[n]othing in 
the statute require[d] the Commission to analyze or categorize [such] 
transactions * * * .'' \101\ The Commission rejects this interpretation 
of Congressional intent.
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    \99\ Proposed Order at 51013.
    \100\ Id. at 11-12.
    \101\ Id. Petitioners specifically noted their disagreement with 
the Commission's interpretation of CEA section 4(c)(6) ``as 
requiring an analysis of, or a limitation on, the transactions or 
class of transactions to be exempted * * *.'' Id. at 2, n.5.
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    As acknowledged by Petitioners elsewhere in their comment letter, 
Congress intended for all transactions occurring within the closed-loop 
of FPA section 201(f) entities to be ``eligible for'' an 
exemption,\102\ rather than automatically exempt without further 
Commission consideration or action. First, the plain language of CEA 
section 4(c)(6) added by the Dodd-Frank Act is unambiguous: Categorical 
relief is not mandatory and any relief provided requires an analysis 
of, and possible limitation to, the transactions being exempted. The 
provision begins with an explicit ``if'' clause pre-conditioning any 
relief upon the Commission ``determin[ing] that the exemption would be 
consistent with the public interest and purposes of [the] Act.'' \103\ 
If this determination can be made, the provision then instructs the 
Commission to issue relief ``in accordance with'' CEA sections 4(c)(1) 
and 4(c)(2), implying that additional analysis and limitations may be 
necessary and/or appropriate in the judgment of the Commission.\104\ 
Second, the Commission notes that the Dodd-Frank Act also amended CEA 
section 2(a)(1)(A) to codify the Commission's exclusive jurisdiction 
with respect to swap transactions.\105\ Had Congress intended for any 
transaction entered into between FPA section 201(f) entities to be 
exempt from this exclusive jurisdiction, it could have explicitly 
carved out these entities and any transactions occurring between them 
as categorically exempt.\106\ Instead, the Commission believes that 
Congress explicitly recognized transactions between entities described 
in FPA section 201(f) as eligible for a mandatory exemption, subject to 
those pre-conditions which the Commission deems appropriate.
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    \102\ See id. at 5.
    \103\ CEA section 4(c)(6), 7 U.S.C. 6(c)(6).
    \104\ Id.
    \105\ See 7 U.S.C. 2(a)(1)(A), as amended by the Dodd-Frank Act 
section 722(a). The provision already codified the Commission's 
exclusive jurisdiction with respect to commodity futures and options 
transactions.
    \106\ The Commission notes that such a carve-out would not be 
without precedent. See, e.g., CEA section 2(c)(1), 7 U.S.C. 2(c)(1) 
(providing that, subject to certain exceptions, the CEA does not 
govern or apply to an agreement, contract, or transaction in foreign 
currency, government securities, security warrants, security rights, 
resales of installment loan contracts, repurchase transaction in an 
excluded commodity, or mortgages or mortgage purchase commitments); 
CEA section 2(a)(1)(C)(i), 7 U.S.C. 2(a)(1)(C)(i) (providing that 
the CEA shall not apply to, and the Commission shall not have 
jurisdiction with respect to, designating a contract market for any 
transaction in which a party to such transaction acquires a put, 
call, or other option on one or more securities).
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    Accordingly, as stated in the Proposed Order, the Commission does 
not believe it can determine conclusively that it would be in the 
public interest to exempt any transaction entered into between Exempt 
Entities. Even if a transaction were to meet the requirements of the 
Exempt Non-Financial Energy Transactions definition, but not be 
described by one of the six enumerated transaction categories, the 
Commission would lack the necessary information about the specific 
nature of the transaction in order to make the requisite public 
interest determination.

[[Page 19679]]

III. CEA Section 4(c) Determinations

    The Commission is issuing the Final Order pursuant its authority in 
CEA sections 4(c)(1) and 4(c)(6).\107\ As required under both sections, 
the Commission must make certain determinations prior to issuing 
exemptive relief.\108\ Generally, the Commission confirms the 
determinations it made in the Proposed Order because it believes that 
such determinations continue to support adopting the Final Order.\109\ 
Where substantive changes have been made to the scope of the Final 
Order, the Commission is addressing such changes with additional 
discussion. In some instances, the Commission is expanding upon its 
proposed determinations to further support adoption of final exemptive 
relief for Exempt Non-Financial Energy Transactions entered into 
between Exempt Entities.
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    \107\ To the extent that the Final Order applies to entities not 
explicitly described in FPA section 201(f), the Commission is using 
its general exemptive authority found in CEA section 4(c)(1).
    \108\ These determinations include that (i) CEA section 4(a)--
the exchange trading requirement--should not apply; (ii) the 
exemption is consistent with the public interest and purposes of the 
CEA; (iii) the exemption is available only for ``appropriate 
persons,'' as such term is defined in CEA section 4(c)(3); and (iv) 
the exemption will not have a materially adverse effect on the 
ability of the Commission or any contract market to discharge its 
regulatory or self-regulatory duties under the CEA. See 7 U.S.C. 
6(c)(2).
    \109\ See generally Proposed Order at 51009-12 (proposing the 
Commission's CEA section 4(c) determinations).
---------------------------------------------------------------------------

A. Applicability of CEA Section 4(a)

    Due to the bespoke nature of Exempt Non-Financial Energy 
Transactions, the Commission does not believe that the exchange-trading 
requirement of CEA section 4(a) should apply. Generally, the exchange-
trading requirement is meant to facilitate the price discovery and 
price transparency processes. Because (i) exchange-traded contracts are 
less effective at adequately performing as risk management substitutes 
for Exempt Non-Financial Energy Transactions; and (ii) Exempt Non-
Financial Energy Transactions are executed within a closed-loop of 
Exempt Entities, and thus are not market facing, Exempt Non-Financial 
Energy Transactions do not materially impair price discovery in 
Commission-regulated markets and can continue to be executed 
bilaterally. For that reason, the Commission is limiting the Final 
Order to Exempt Non-Financial Energy Transactions entered into between 
Exempt Entities.

B. Public Interest and Purposes of the CEA

    The Commission continues to believe that the scope of the Final 
Order is consistent with the public interest supported by the CEA.\110\ 
As previously noted, Exempt Non-Financial Energy Transactions are 
bespoke and not suitable for trading as standardized products on a 
board of trade. Furthermore, the Final Order applies only to Exempt 
Non-Financial Energy Transactions entered into between Exempt Entities, 
which are transacting within a closed loop, and therefore do not 
materially impair price discovery in Commission-regulated markets.\111\ 
Therefore, exempting these types of transactions from the Commission's 
jurisdiction will not materially impair price discovery of electricity-
related commodities in Commission-regulated markets.\112\
---------------------------------------------------------------------------

    \110\ These public interests include ``providing a means for 
managing and assuming price risks, discovering prices, or 
disseminating pricing information through trading in liquid, fair 
and financially secure trading facilities.'' CEA section 3(a), 7 
U.S.C. 5(a).
    \111\ Given that Petitioners represented that exchange-traded 
instruments are, by their nature, primarily standardized, and 
therefore in many or most cases may be less effective for purposes 
of hedging the risks that Exempt Non-Financial Energy Transactions 
are specifically tailored to offset (e.g., due to the contract sizes 
not matching the risk being hedged, inconvenient delivery points, 
and/or unavailability of a contract overlying the specific 
commodity, the risk of which a market participant seeks to hedge), 
the Commission likewise presently considers any price link between 
Exempt Non-Financial Energy Transactions and transactions executed 
on exchange-traded derivative markets too attenuated to materially 
impair price discovery of exchange-traded derivatives.
    \112\ The Joint Associations agreed with this determination in 
the Proposed Order. See Joint Associations' Letter at 3.
---------------------------------------------------------------------------

    As discussed previously in response to Petitioners' comments, the 
Commission has clarified in the Final Order that Exempt Non-Financial 
Energy Transactions can be used to hedge prices of underlying 
commodities, so long as the transaction meets the other definitional 
criteria and falls into one of the delineated transaction 
categories.\113\ The Commission believes that exempting price hedging 
transactions is still in the public interest because of Exempt 
Entities' unique public service mission and not-for-profit operational 
structure. Like all public utilities, Exempt Entities have a need to 
manage the risk associated with fluctuations in both the supply and 
price of a commodity underlying a transaction.\114\ While managing 
supply risk goes to the reliability aspect of Exempt Entities' public 
service mission, hedging price risk goes to providing electric energy 
service that is low-cost as well. Therefore, it is in the public 
interest to allow Exempt Entities to continue engaging in price hedging 
transactions with one another, such that they can continue to provide 
both reliable and affordable electric energy service to customers.\115\
---------------------------------------------------------------------------

    \113\ See supra Section II.E.1.
    \114\ In the Proposed Order, the Commission noted that Exempt 
Non-Financial Energy Transactions generally are variable-priced 
transactions, as opposed to fixed-price, and therefore are entered 
into for the purposes of hedging supply risk resulting from 
unpredictable fluctuations in demand for electric energy. See 
Proposed Order at 51010. The Commission understands this to still be 
true, but also understands that in limited circumstances, fixed-
price arrangements exist such that Exempt Entities can hedge price 
risk.
    \115\ The Final Order, however, still does not exempt 
transactions that are speculative. Unlike price and supply risk 
management, speculative swap activity is not necessary to allow 
Exempt Entities to carry out their public service mission.
---------------------------------------------------------------------------

    The Commission also believes that the Final Order is consistent 
with the purposes of the CEA.\116\ As recognized by Congress in passing 
FPA section 201(f),\117\ the not-for-profit structure and governance 
model--elected or appointed government officials or citizens, or 
cooperative members or consumers--of all Exempt Entities reduce the 
incentives and other conditions that traditionally lead to fraudulent 
or manipulative trading activity, and thus should mitigate the need for 
prescriptive federal oversight.\118\ As previously noted, the 
Commission has clarified in the Final Order that some Exempt Entities 
may have a corporate for-profit form, but must nonetheless be wholly 
owned by other not-for-profit Exempt Entities. The Commission takes 
notice of the petitioner's representation that a for-profit subsidiary 
of an Exempt Entity, when engaged in Exempt Non-Financial Energy 
Transactions with other Exempt Entities, is less likely to engage in 
abusive trading practices than other entities, particularly in light of 
the non-profit, public service nature of the parent Exempt Entity (or 
Exempt Entities).\119\
---------------------------------------------------------------------------

    \116\ In order to foster the public interests, it is the purpose 
of the CEA ``to deter and prevent price manipulation or any other 
disruptions to market integrity; to ensure the financial integrity 
of all transactions subject to [the CEA] and the avoidance of 
systemic risk; to protect all market participants from fraudulent or 
other abusive sale practices and misuses of customer assets; and to 
promote responsible innovation and fair competition among boards of 
trade, other markets and market participants.'' CEA section 3(b), 7 
U.S.C. 5(b).
    \117\ See supra note 11 and accompanying text.
    \118\ The Joint Associations agreed with this determination in 
the Proposed Order. See Joint Associations' Letter at 2.
    \119\ The Commission notes that the Final Order retains the 
Commission's general anti-fraud and anti-manipulation authority, and 
certain scienter-based prohibitions, in addition to all public 
utilities, regardless of FPA section 201(f) status, being subject to 
FERC's market manipulation authority. See FPA section 222v, 16 
U.S.C. 824v.

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[[Page 19680]]

C. Appropriate Persons

    The Commission believes that Exempt Entities, as defined in the 
Final Order, are all ``appropriate persons'' for purposes of satisfying 
the CEA section 4(c)(2) requirement.\120\ As a starting point, the 
Commission believes that there is a presumption that entities 
explicitly described in FPA section 201(f) are appropriate persons 
because of Congress' mandate to the Commission to exempt, in accordance 
with CEA sections 4(c)(1) and 4(c)(2) (which precludes the Commission 
from granting a CEA section 4(c) exemption to persons other than 
appropriate persons), transactions entered into between such entities 
if it is in the public interest and consistent with the purposes of the 
Act.\121\ That is, the Commission infers that Congress would not have 
added CEA section 4(c)(6)(C), which explicitly identifies FPA section 
201(f) entities as eligible for an exemption, unless it had presumed 
such entities were appropriate beneficiaries of an exemption for 
purposes of the CEA section 4(c)(2) requirement, and subjected CEA 
section 4(c)(6) to CEA section 4(c)(2) simply so that the Commission 
would verify that presumption. For the reasons discussed throughout 
this release, the Commission believes that FPA section 201(f) entities 
are appropriate persons.\122\
---------------------------------------------------------------------------

    \120\ CEA section 4(c)(2)(B)(i) requires that the Commission 
exercise its 4(c) exemptive authority with respect to transactions 
entered into solely between ``appropriate persons.'' See 7 U.S.C. 
6(c)(2)(B)(i). CEA section 4(c)(3) provides various criteria an 
entity can meet for purposes of qualifying as an appropriate person. 
7 U.S.C. 6(c)(3). The Joint Associations supported the Commission's 
proposed determination and underlying rationale that all Exempt 
Entities were appropriate persons. See Joint Associations' Letter at 
2.
    \121\ CEA section 4(c)(6)(C), 7 U.S.C. 6(c)(6)(C). Under CEA 
section 4(c)(3)(K), the Commission can determine other persons not 
explicitly enumerated in section 4(c)(3) ``to be appropriate in 
light of their financial or other qualifications, or the 
applicability of appropriate regulatory protections.'' 7 U.S.C. 
6(c)(3)(K). The Commission believes that Congress' explicit 
recognition of FPA section 201(f) entities as being eligible for 
exemptive relief under CEA section 4(c)(6) constitutes an ``other 
qualification'' in support of such entities being appropriate 
persons, regardless of whether they otherwise would qualify under 
one of the enumerated appropriate person categories in CEA sections 
4(c)(3)(A)-(J).
    \122\ The Commission notes that many FPA section 201(f) entities 
would qualify as appropriate persons under other CEA section 4(c)(3) 
criteria. See, e.g., CEA section 4(c)(3)(F) (providing that a 
business entity with a net worth exceeding $1,000,000 or total 
assets exceeding $5,000,000 is an appropriate person); CEA section 
4(c)(3)(H) (providing that a government entity or political 
subdivision thereof, or any instrumentality, agency, or department 
of a government entity or political subdivision thereof, is an 
appropriate person).
---------------------------------------------------------------------------

    The Commission believes that Exempt Entities not explicitly 
described in FPA section 201(f) are also appropriate persons.\123\ 
First, the Commission interprets Federally-recognized Indian tribes as 
appropriate persons under CEA section 4(c)(3)(H) because they are 
analogous to governmental entities.
---------------------------------------------------------------------------

    \123\ The Commission notes that such entities are being exempted 
pursuant to the Commission's general exemptive authority in CEA 
section 4(c)(1).
---------------------------------------------------------------------------

    Next, some non-FPA section 201(f) electric cooperatives may qualify 
as appropriate persons under the CEA section 4(c)(3)(F) criteria by 
having a net worth exceeding $1,000,000 or total assets exceeding 
$5,000,000. For any non-FPA section 201(f) cooperative that does not 
otherwise qualify as an appropriate person under the specific 
provisions of section 4(c)(3), the Commission believes that such 
entities are at least as financially sophisticated and operationally 
capable as FPA section 201(f) cooperatives. Such cooperatives would not 
qualify as FPA section 201(f) entities because they sell in excess of 
4,000,000 megawatt hours of electricity per month, and/or receive 
financing from lenders other than the RUS. In either case, such 
cooperatives likely would have greater assets due to the increased 
sales, which could qualify them for better financing terms than those 
offered by the RUS. Additionally, the Commission notes that such 
cooperatives are not exempt from FERC's jurisdiction, and thus subject 
to more regulatory oversight than FPA section 201(f) electric 
cooperatives. The Commission interprets such FERC oversight of non-FPA 
section 201(f) electric cooperatives as the type of ``appropriate 
regulatory protections'' within the meaning of CEA section 4(c)(3)(K) 
that Congress had in mind when promulgating new exemptive authority for 
FPA 201(f) entities in CEA section 4(c)(6)(C).\124\ Therefore, under 
the Commission's discretionary authority in CEA section 4(c)(3)(K) to 
determine non-enumerated entities as appropriate persons based upon 
financial or other qualifications, or the applicability of other 
appropriate regulatory protections, the Commission believes that such 
non-FPA section 201(f) cooperatives are appropriate persons.\125\
---------------------------------------------------------------------------

    \124\ Compared to 201(f) cooperatives, non-201(f) electric 
cooperatives are still treated as ``public utilities'' for purposes 
of Part II of the FPA, and thus must receive FERC authorization 
under FPA section 203 to sell, merge or consolidate their electric 
facilities, or to purchase, acquire, or take any security of any 
other public utility. See Petition at 16 (citing 18 CFR Parts 2 and 
33, Transactions Subject to FPA Section 203). Additionally, such 
cooperatives must seek approval under FPA sections 205 and 206 when 
altering rates and charges to be collected in transmitting or 
selling electric energy service in interstate commerce. See id. 
(citing Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities, Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 78 
FERC ] 61,315 at 62,270 (2005)).
    \125\ To the extent that an electric cooperative would not 
otherwise qualify as an appropriate person, regardless of whether it 
qualifies as an FPA section 201(f) entity, the Commission notes that 
its determination that such cooperatives are appropriate persons 
applies only in the context of the Final Order, and should not be 
interpreted to mean that all electric cooperatives are appropriate 
for purposes of any existing or future exemptions issued by the 
Commission pursuant to CEA section 4(c).
---------------------------------------------------------------------------

D. Ability to Discharge Regulatory or Self-Regulatory Duties

    As stated previously, Exempt Non-Financial Energy Transactions are 
bespoke and executed within the closed-loop of Exempt Entities, meaning 
they do not materially affect trading or pricing of transactions 
involving the same underlying commodity in Commission-regulated 
markets. Additionally, the Commission has retained its anti-fraud and 
anti-manipulation authority, as well as certain scienter-based 
prohibitions. Accordingly, the Commission does not believe that the 
exemptive relief provided in the Final Order will have a materially 
adverse effect on the ability of the Commission or any contract market 
to discharge their regulatory or self-regulatory duties under the CEA. 
As noted above, the Commission is limiting the Final Order to Exempt 
Non-Financial Energy Transactions entered into other than on or subject 
to the rules of a registered entity, submitted for clearing to a DCO, 
and/or reported to a SDR.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that Federal 
agencies consider whether proposed rules will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\126\ The 
relief provided in the Final Order may be available to some small 
entities, because they may fall within standards established by the 
Small Business Administration (``SBA'') defining entities with electric 
energy output of less than 4,000,000 megawatt hours per year as a 
``small entity.'' \127\
---------------------------------------------------------------------------

    \126\ 5 U.S.C. 601 et seq.
    \127\ U.S. Small Business Administration, Table of Small 
Business Size Standards Matched to North American Industry 
Classification System Codes, footnote 1 (effective March 26, 2012), 
available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.

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[[Page 19681]]

    In response to the Proposed Order, the Commission received several 
comments from the Petitioners relevant to the RFA. The Petitioners 
requested that the Commission conduct future analyses of the impact on 
small entities the Petitioners represent if the Commission ever were to 
revisit the terms and conditions of the relief, and that the Commission 
provide relief retroactively to the enactment of the Dodd-Frank Act in 
the Final Order. In response to the request that the Commission conduct 
a future Small Business Regulatory Enforcement Fairness Act 
(``SBREFA'') analysis,\128\ the Commission notes that it does not 
conduct RFA analyses based upon requests; rather, all Commission 
rulemaking are subject to the legal requirements of the RFA, which 
provides that a RFA analysis shall not apply if the head of the agency 
certifies that the rule will not, if promulgated, have a significant 
economic impact on a substantial number of small entities.\129\ In 
response to the request that the Commission conduct a full RFA analysis 
if it were to decide not to grant the relief provided herein 
retroactively to the enactment of the Dodd-Frank Act,\130\ the 
Commission has addressed this comment by providing retroactive relief 
in the Final Order.\131\ To the extent that these comments are 
preemptive in nature or have been addressed in the Final Order, the 
Commission is of the view that the Final Order would not have a 
significant economic impact on a substantial number of small entities, 
including any Exempt Entities that may qualify as a small entity.
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    \128\ Petitioners' Letter at 8. The SBREFA amended the RFA.
    \129\ See 5 U.S.C. 605.
    \130\ Petitioners' Letter at 11.
    \131\ See supra Section II.E.2.
---------------------------------------------------------------------------

    With regards to the Petitioners' general conclusion that the 
organizations that they represent fall within the definition of ``small 
entity,'' \132\ the Commission notes that it has considered carefully 
the potential effect of this Final Order on small entities and has 
determined that it will not have a significant economic impact on any 
Exempt Entity, including any entities that may be small. Rather, the 
Final Order relieves the economic impact that the Exempt Entities, 
including any small entities that may opt to take advantage of the 
Final Order, by exempting certain of their transactions from the 
application of substantive regulatory compliance requirements of the 
CEA and Commission regulations thereunder. Significantly, the Final 
Order prevents new requirements for swaps, such as clearing, trade 
execution and regulatory reporting, from affecting transactions that 
Exempt Entities traditionally have engaged in to serve their unique 
public service mission of providing reliable, affordable electric 
energy service to customers. Absent such relief and to the extent 
Exempt Non-Financial Energy Transactions would qualify as swaps, small 
entities covered by the Final Order could be subject to compliance with 
all aspects of the CEA and its implementing regulations. Accordingly, 
the Chairman, on behalf of the Commission, hereby certifies pursuant to 
5 U.S.C. 605(b) that the Final Order will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \132\ Petitioners highlighted that the majority of the entities 
their respective organizations represent fall within the definition 
of ``small entity'' under the SBREFA, which incorporates by 
reference the SBA definition. Petitioners' Letter at 2.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    Under the Paperwork Reduction Act (``PRA''), an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number from the Office of Management and Budget (``OMB''). The 
Commission determined that the Proposed Order did not contain any new 
information collection requirements, and did not receive any comments 
regarding this determination. As the Commission has left the conditions 
that were contained in the Proposed Order unchanged, the Final Order 
therefore also does not contain any new information collection 
requirements that would require approval of OMB under the PRA.\133\ 
While the Commission reserves its authority to inspect books and 
records kept in the normal course of business that relate to Exempt 
Non-Financial Energy Transactions between Exempt Entities pursuant to 
the Commission's regulatory inspection authorities, the Commission is 
not imposing a recordkeeping burden with respect to the books and 
records of Exempt Non-Financial Energy Transactions that already are 
kept in the normal course of business. Moreover, any inspection of 
books and records typically only will occur in the event that 
circumstances warrant the need to gain greater visibility with respect 
to Exempt Non-Financial Energy Transactions as they relate to Exempt 
Entities' overall market positions and to ensure compliance with the 
terms of this Final Order. Accordingly, each inquiry would be specific 
to the facts triggering the inquiry, and thus will not involve 
``answers to identical questions posed to * * * ten or more persons,'' 
as the term ``collection of information'' is defined in the PRA in 
pertinent part.\134\
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    \133\ 44 U.S.C. 3501 et seq.
    \134\ 44 U.S.C. 3502(3)(a)(1). See also 44 U.S.C. 
3518(c)(1)(B)(i) and (ii) (excluding collections of information 
related to administrative investigations against specific 
individuals or entities, and any subsequent civil actions).
---------------------------------------------------------------------------

C. Consideration of Costs and Benefits

    Prior to the passage of the Dodd-Frank Act, swap market activity 
was largely unregulated. In the wake of the financial crisis of 2008, 
Congress adopted the Dodd-Frank Act, in part, to address conditions 
with respect to swap market activities. Among other things, the Dodd-
Frank Act amends the CEA to expand its scope beyond regulation of 
``contract[s] of sale of a commodity for future delivery'' \135\ 
(commonly referred to as futures) and options,\136\ by establishing a 
comprehensive regulatory framework for swaps as well.\137\ In amending 
the CEA, however, the Dodd-Frank Act preserved the Commission's 
authority under CEA section 4(c)(1) to exempt any transaction or class 
of transactions, including swaps, from select provisions of the 
CEA.\138\ It also added new subparagraph 4(c)(6)(C) to the CEA 
specifically directing the Commission, in accordance with 4(c)(1) and 
4(c)(2), to exempt agreements, contracts, or transactions entered into 
between FPA 201(f) entities if doing so ``is consistent with the public 
interest

[[Page 19682]]

and the purposes of'' the CEA.\139\ The Commission, through this Final 
Order, is exercising its exemptive authority under CEA section 4(c)(1) 
and 4(c)(6) with respect to ``Exempt Non-Financial Energy 
Transactions'' \140\ entered into solely between ``Exempt Entities,'' 
\141\ subject to certain conditions.\142\ These conditions are, among 
others, that the relief provided in the Final Order is subject to (i) 
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 Commission rules 32.4, 23.410(a) and (b), and Part 180; 
and, ii) the Commission's reserved authority to inspect the books and 
records related to Exempt Non-Financial Energy Transactions kept by 
Exempt Entities in the normal course of business pursuant to the 
Commission's regulatory inspection authorities.

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

    \135\ CEA section 4(a). See also CEA sections 1a(19) (``the term 
`future delivery' does not include any sale of a cash commodity for 
deferred shipment or delivery''); 1a(47)(B)(ii) (excluding from the 
swap definition ``any sale of a nonfinancial commodity * * * for 
deferred shipment or delivery, so long as the transaction is 
intended to be physically settled'').
    \136\ CEA section 1a(36).
    \137\ Public Law 111-203, 124 Stat. 1376 (2010). More 
specifically, Title VII of the Dodd-Frank Act amended the CEA to 
establish a comprehensive new regulatory framework for swaps, a term 
defined by the statute. See Section 4(c)(1) of the CEA. The 
legislative framework seeks to reduce risk, increase transparency, 
and promote market integrity within the financial system by, among 
other things: (1) Providing for the registration and comprehensive 
regulation of swap dealers (``SDs'') and major swap participants 
(``MSPs''); (2) imposing clearing and trade execution requirements 
on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to 
the Commission's oversight. Futures, options, and swaps are referred 
to collectively herein as ``derivatives.''
    \138\ Section 4(c)(1) of the CEA.
    \139\ CEA sections 4(c)(2) and 4(c)(3) further articulate the 
conditions precedent to granting an exemption under CEA section 
4(c)(1), including that the exempted agreements, contracts, or 
transactions be entered into between ``appropriate persons,'' as 
that term is defined in CEA section 4(c)(3).
    \140\ Section V.B., infra. ``Exempt Non-Financial Energy 
Transactions'' consist of ``any agreement, contract, or transaction 
based upon a `commodity,' as such term is defined and interpreted by 
the CEA and regulations thereunder, that would not have been entered 
into, but for an Exempt Entity's need to manage supply and/or price 
risks arising from its existing or anticipated public service 
obligations to physically generate, transmit, and/or deliver 
electric energy service to customers. The term `Exempt Non-Financial 
Energy Transaction' excludes agreements, contracts, and transactions 
based upon, derived from, or referencing any interest rate, credit, 
equity or currency asset class, or any grade of a metal, or any 
agricultural product, or any grade of crude oil or gasoline that is 
not used as fuel for electric energy generation. The term `Exempt 
Non-Financial Energy Transaction' also excludes agreements, 
contracts, or transactions entered into on or subject to the rules 
of a registered entity, submitted for clearing to a derivatives 
clearing organization, and/or reported to a swap data repository. 
Exempt Non-Financial Energy Transactions are limited to the 
following categories, which may exist as stand-alone agreements or 
as components of larger agreements that combine the following 
categories of transactions: [electric energy delivered, generation 
capacity, transmission services, fuel delivered, cross-commodity 
pricing, and other goods and services].''
    \141\ Section IV.A., infra. An Exempt Entity is: (i) Any 
electric facility or utility that is wholly owned by a government 
entity, as described in Federal Power Act (``FPA'') section 201(f), 
16 U.S.C. 824(f); (ii) any electric facility or utility that is 
wholly owned by an Indian tribe recognized by the U.S. government 
pursuant to section 104 of the Act of November 2, 1994, 25 U.S.C. 
479a-1; (iii) any electric facility or utility that is wholly owned 
by a cooperative, regardless of such cooperative's status pursuant 
to FPA section 201(f), so long as the cooperative is treated as such 
under Internal Revenue Code section 501(c)(12) or 1381(a)(2)(C), 26 
U.S.C. 501(c)(12), 1381(a)(2)(C), and exists for the primary purpose 
of providing electric energy service to its member/owner customers 
at cost; or (iv) any other entity that is wholly owned, directly or 
indirectly, by any one or more of the foregoing. A ``financial 
entity'' as defined in CEA section 2(h)(7)(C) is not an Exempt 
Entity.
    \142\ Section V.C., infra.
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1. 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 \143\ 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.
---------------------------------------------------------------------------

    \143\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission considers the costs and benefits of the Final Order 
to the public and market participants, including Exempt Entities, 
against the backdrop of the CEA regulatory regime for derivatives, as 
amended by the Dodd-Frank Act, and absent the relief provided by the 
Final Order.\144\ Under the post-Dodd-Frank Act regulatory regime, 
Exempt Entities that, as represented in the Petition, are 
``nonfinancial end-users of [Exempt Non-Financial Energy Transactions 
entered into] only to hedge or mitigate commercial risks,'' \145\ are 
subject to the Commission's general anti-fraud and anti-manipulation 
authority, as well as certain scienter-based prohibitions under the 
CEA.\146\ Absent the Final Order, to the extent that Exempt Non-
Financial Energy Transactions are futures transactions within the 
meaning of the CEA, they would be subject to the statute's exchange-
trading requirement and a comprehensive regulatory scheme.\147\ 
Similarly, absent the Final Order, to the extent that Exempt Non-
Financial Energy Transactions are swaps as defined in the CEA, the 
Exempt Entity counterparties to these transactions would be subject to 
requirements for swap data reporting \148\ and recordkeeping; \149\ in 
addition, unless both Exempt Entity counterparties to a swap 
transaction are eligible contract participants (``ECPs''),\150\ CEA 
section 2(e) would prohibit them from executing the swap other than on 
or subject to the rules of a registered DCM.\151\
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    \144\ As discussed earlier, to exempt transactions under CEA 
section 4(c), the Commission need not first determine--and is not 
determining--whether the transactions subject to the exemption fall 
within the CEA. However, to capture potential costs and benefits, 
this consideration assumes that the transactions may now or in the 
future be jurisdictional.
    \145\ Petition at 33.
    \146\ See, e.g., CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 
6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13, and Commission rules 32.4, 
23.410(a) and (b), and Part 180. CEA section 2(h)(7) (the ``end-user 
exception''), excepts a swap from the swap clearing requirement of 
CEA section 2(h)(1)(A) (it ``shall be unlawful for any person to 
engage in a swap unless that person submits such swap for clearing * 
* * if the swap is required to be cleared'') and the trade execution 
requirement of CEA section 2(h)(8) (transactions subject to the 
clearing requirement of CEA section 2(h)(1) must be executed on 
either a designated contract market (``DCM'') or a swap execution 
facility (``SEF'')). The end-user exception applies if one 
counterparty is ``not a financial entity; * * * is using swaps to 
hedge or mitigate commercial risk; and * * * notifies the 
Commission, in a manner set forth by the Commission, how it 
generally meets its financial obligations associated with entering 
into non-cleared swaps.''
    \147\ CEA section 4(a). The same is true for options on futures. 
See 17 CFR 33.3(a). The discussion of cost-benefit implications of 
this Final Order with respect to futures contracts applies equally 
to options on futures.
    \148\ The CEA as amended by the Dodd-Frank Act contemplates two 
types of reporting to SDR. First, is real-time reporting: For every 
swap executed, certain transaction information, including price and 
volume, is to be reported to an SDR'') ``as soon as technologically 
practicable.'' CEA section 2(a)(13)(A) & (C); see also Real-Time 
Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012) 
(adopting 17 CFR part 43 regulations to implement real-time 
reporting). For swaps executed off of a DCM or SEF and for which 
neither counterparty is an SD or MSP--as the Commission expects 
Exempt Non-Financial Energy Transactions engaged in between Exempt 
Entities would be--the real-time reporting obligation for the 
transaction falls to one of the counterparties, as agreed between 
themselves. 17 CFR 43.3(a)(3) Second, for each swap, additional 
information beyond that required in real-time reports must be 
reported to an SDR in a ``timely manner as may be prescribed by the 
Commission.'' CEA section 2(a)(13)(G); see also Swap Data 
Recordkeeping and Reporting Requirements 77 FR 2136 (Jan. 13, 2012) 
(adopting 17 CFR part 45); Swap Data Recordkeeping and Reporting 
Requirements: Pre-enactment and Transition Swaps 77 F.R. 35200 (June 
12, 2012) (adopting 17 CFR part 46).
    \149\ Swap Data Recordkeeping and Reporting Requirements, 77 FR 
2136 (Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data 
Recordkeeping and Reporting Requirements: Pre-enactment and 
Transition Swaps 77 F.R. 35200 (June 12, 2012) (adopting 17 CFR part 
46).
    \150\ See 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).
    \151\ 7 U.S.C. 2(e). Additionally, absent the Final Order, in 
the event that executing Exempt Non-financial Energy Transactions 
required an Exempt Entity to register as an SD or MSP, additional 
regulatory requirements would apply. See, e.g., Confirmation, 
Portfolio Reconciliation, Portfolio Compression, and Swap Trading 
Relationship Documentation Requirements for Swap Dealers and Major 
Swap Participants, 77 FR 55904 (Sept. 11, 2012); Swap Dealer and 
Major Swap Participant Recordkeeping, Reporting, and Duties Rules; 
Futures Commission Merchant and Introducing Broker Conflicts of 
Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, 
Major Swap Participants, and Futures Commission Merchants, 77 FR 
20128 (Apr. 3, 2012); Business Conduct Standards for Swap Dealers 
and Major Swap Participants With Counterparties, 77 FR 9734 (Feb. 
17, 2012).

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[[Page 19683]]

    The Commission remains cognizant of the regulatory landscape as it 
existed before the enactment of Dodd-Frank. As such, the Commission 
notes that any Exempt Non-Financial Energy Transactions engaged in 
between Exempt Entities that are swaps (excluding options) under the 
statutory definition and Commission rules were not regulated prior to 
Dodd-Frank. Thus, measured against a pre-Dodd-Frank Act reference 
point, Exempt Entities engaging in such swaps could experience costs 
attributable to the conditions placed upon the Final Order. For 
example, Exempt Entities were not subject to the Commission's routine 
regulatory inspection authorities with respect to records of Exempt 
Non-Financial Energy Transactions transacted bilaterally away from a 
trading facility prior to the enactment and effectiveness of the Dodd-
Frank Act. The same was not true to the extent Exempt Non-Financial 
Energy Transactions are futures contracts, as such contracts have 
always been regulated by the Commission and Dodd-Frank did not 
fundamentally alter the futures regulatory scheme.
    The Proposed Order expressly requested public comment on the 
Commission's cost-benefit considerations, including with respect to 
reasonable alternatives; the magnitude of specific costs and benefits 
(including data or other information to estimate a dollar valuation); 
and any impact on the public interest factors specified in CEA section 
15(a).\152\ Neither of the two comments received specifically addressed 
the Proposed Order's consideration of costs and benefits or otherwise 
provided data or other information to enable the Commission to better 
quantify the expected costs and benefits attributable to the Final 
Order. While, as a general matter, the Commission endeavors to quantify 
estimated costs and benefits where reasonably feasible, it considers 
the costs and benefits of this Final Order in qualitative terms only 
given that commenters did not provide data or information necessary for 
quantification.\153\
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    \152\ 77 FR 50988, 51019 (Aug. 23, 2012).
    \153\ In the Proposed Order, the Commission noted that it could 
not quantify the costs and benefits of the relief provided therein 
because it did not have such information available to it; 
accordingly, the Commission requested commenters provide specific 
figures for its consideration. See Proposed Order at 51019. Because 
the core requirements of the Dodd-Frank Act are currently being 
implemented, the Commission's ability to quantify the costs and 
benefits of the Final Order is unchanged from when it published the 
Proposed Order.
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    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 Exempt Entities, specifically. As discussed above, 
the Commission has refined the Final Order to clarify several issues 
identified in the Petitioners' comment letter.\154\ To the extent these 
refinements reflect a substantive choice among alternatives with 
potential cost-benefit significance, they are included in the 
discussion of alternatives, below. Finally, the Commission considers 
the Final Order's costs and benefits relative to the public interest 
factors enumerated in CEA section 15(a).
---------------------------------------------------------------------------

    \154\ More specifically, as discussed above in section II, these 
refinements include several modifications to clarify: The definition 
of ``Exempt Entity,'' the definition of ``Exempt Non-Financial 
Energy Transaction,'' the Commission's right to revisit the terms of 
relief, the ability to manage price risk, retroactivity, and the 
categorical nature of relief.
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2. Costs
To Exempt Entities
    The Final Order provides Exempt Entities with relief from 
regulatory requirements of the CEA for the narrow category of Exempt 
Non-Financial Energy Transactions engaged in between them. As with any 
exemption, this order is permissive, meaning that potentially eligible 
entities are not required to avail themselves of the relief it offers. 
Accordingly, the Commission presumes that an entity would rely on the 
Final Order only if the anticipated benefits warrant the costs. Here, 
the Final Order provides for the continued application of the 
Commission's general anti-fraud and anti-manipulation authority, and 
certain scienter-based prohibitions, under the CEA and its implementing 
regulations, and additionally reserves the Commission's inspection 
authority for books and records that the Exempt Entities currently 
prepare and retain.\155\ Accordingly, and to the extent Exempt Non-
Financial Energy Transactions are jurisdictional agreements, contracts 
or transactions, the incorporation of these conditions within the Final 
Order generates no incremental costs beyond those that currently exist 
under the CEA, a point that no commenter disputed.
---------------------------------------------------------------------------

    \155\ For example, Exempt Entities that receive financing from 
the RUS are required to keep records of all master agreements and 
term contracts for the procurement of goods and services. See 18 CFR 
125.3 (Schedule of records and periods of retention); RUS Bulletin 
180-2. Under the books and records inspection authority contained in 
the Proposed Order, the Commission could request any of these 
procurement agreements that document an Exempt Non-Financial Energy 
Transaction for the purchase or sale of ``electric energy 
delivered,'' as such term is defined in the Proposed Order.
---------------------------------------------------------------------------

To Market Participants and the Public
    The Commission has considered whether an exemption from the CEA for 
Exempt Non-Financial Energy Transactions engaged in between Exempt 
Entities will expose market participants and the public to the risks 
that the CEA guards against--a potential cost. For a variety of 
reasons, the Commission believes that it does not. These reasons--which 
were identified in the Proposed Order and not disputed by commenters--
include the following:
     Exempt Non-Financial Energy Transactions are ill-suited 
for exchange trading, as evidenced by their bespoke nature to manage 
Exempt Entities' operational risks, and thus do not serve a material 
price discovery function.\156\
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    \156\ In the Proposed Order, the Commission noted its belief 
that the commercial risks that Exempt Non-Financial Energy 
Transactions face generally are not related to fluctuations in the 
price of a commodity, but are rather related to ensuring Exempt 
Entities' ability to meet production, transmission, and/or 
distribution obligations. Proposed Order at 51010. As previously 
discussed, however, the Commission has determined in the Final Order 
that Exempt Non-Financial Energy Transactions can also be used to 
hedge price risk of an underlying commodity, but only if ``arising 
from its existing or anticipated public service obligations to 
physically generate, transmit, and/or deliver electric energy 
service to customers.'' See supra Section II.E.1; section B of the 
Final Order. The additional cost/benefit implications of this 
clarification are discussed in context of the Commission's 
Consideration of Alternatives, infra Section IV.C.4.
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     The incentive structure for Exempt Entities--as generally 
limited to not-for-profit governmental, tribal, and IRC section 
501(c)(12) or section 1381(a)(2)(c) electric cooperative entities 
\157\--is different than that of investor-owned entities and, according 
to Petitioners, mitigates incentives for fraud, manipulation, or other 
abusive practices against which Commission oversight and trading 
facility rules guard.\158\
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    \157\ As discussed in section II.A, above, to avoid confusion, 
the Commission has struck the explicit ``non-profit'' modifier from 
the fourth clause of the definition of Exempt Entity in the Final 
Order. As explained, FPA section 201(f) utilities may include for-
profit subsidiaries that are wholly-owned by other not-for profit 
FPA section 201(f) utilities. Subsequent short-hand references in 
this Consideration of Costs and Benefits to ``not-for-profit 
electric utility entities'' or ``not-for-profit Exempt Entities'' 
are intended to include all subsidiary entities captured by Final 
Order, including those for-profit subsidiaries.
    \158\ See Proposed Order, 77 FR 51011.
---------------------------------------------------------------------------

     Exempt Non-Financial Energy Transactions are executed 
bilaterally

[[Page 19684]]

within a closed-loop of non-financial, not-for-profit electric utility 
entities, are not market facing, and therefore have little, if any, 
ability to materially impact liquidity, fairness or financial security 
of derivative products trading on regulated exchanges.\159\
---------------------------------------------------------------------------

    \159\ See Proposed Order, 77 FR 51010.
---------------------------------------------------------------------------

    Besides carefully defining the boundaries for Exempt Non-Financial 
Energy Transactions between Exempt Entities, the Final Order 
incorporates conditions designed to protect the markets subject to the 
Commission's jurisdiction. Specifically, the Commission retains its 
general anti-fraud and anti-manipulation authority, and certain 
scienter-based prohibitions, contained in the CEA and its implementing 
regulations. Additionally, the Commission retains authority to inspect 
books and records kept in the normal course of business, pursuant to 
its regulatory inspection authorities, in the event that circumstances 
warrant greater visibility with respect to Exempt Non-Financial Energy 
Transactions as they relate to Exempt Entities' overall market 
positions and compliance with this Final Order. This retained authority 
to inspect books and records also provides a tool for the Commission to 
monitor any evolution and/or change in the usage of Exempt Non-
Financial Energy Transactions to ensure that they conform to the 
expectations described in this order and that the relief provided 
herein remains appropriate and in the public interest. Accordingly, for 
the narrow subset of electric industry transactions covered by this 
Final Order, the Commission believes that the risk potential, at most, 
is remote and the prescribed conditions appropriate to contain it. The 
Final Order, therefore, should not give rise to any costs attributable 
to increased risk.
    Next, the Commission considered the potential that price discovery 
in jurisdictional, non-exempt markets could be diminished because 
Exempt Entities, acting under the relief provide in this Final Order, 
eschewed such markets in favor of performing production and price risk 
management via Exempt Non-Financial Energy Transactions with one 
another. The Commission deems the risk of this occurring to be 
insignificant. While an underlying commodity may be similar or 
identical to that which underlies a standardized product available for 
trading in a non-exempt, jurisdictional market, the bespoke nature of 
Exempt Non-Financial Energy Transactions is such that it is unlikely 
that non-exempt market transactions would be an effective substitute 
for Exempt Entities going forward. As such, and in addition to the 
Commission's anticipation that the number of Exempt Entity transactions 
will be small relative to the total number of transactions in related 
non-exempt markets, any distortive impact on price discovery in 
Commission-regulated markets would be immaterial.
    Similarly, the Commission considered whether the Final Order would 
have any impact on the efficiency, competitiveness,\160\ and financial 
integrity of markets regulated under the CEA. Since Exempt Non-
Financial Energy Transactions are executed bilaterally between non-
financial entities primarily in order to satisfy existing or expected 
operations-related public service obligations, and since they are 
bespoke transactions, the Commission expects the exemptive relief 
provided herein to have little, if any, negative effect on market 
efficiency, competitiveness, or financial integrity of markets 
regulated by the CFTC.
---------------------------------------------------------------------------

    \160\ More specifically with respect to competition, absent the 
exemptive relief provided herein, it is unclear whether Exempt 
Entities otherwise would qualify as ECPs, and thus be able to 
continue transacting Exempt Non-Financial Energy Transactions 
bilaterally with one another at all. Because many of the 
transactions exempted under the Final Order relate to longstanding 
and exclusive agreements between Exempt Entities, the limited relief 
provided in the exemption is not likely, in and of itself, to cause 
Exempt Entities to change the nature or frequency of conducting 
Exempt Non-Financial Energy Transaction with one another; rather, 
they will continue to carry out their public service obligations 
under standard industry practices, as was intended by Congress in 
adding CEA section 4(c)(6)(c).
---------------------------------------------------------------------------

    The Commission does not view the various refinements that it 
incorporated in the Final Order in response to comments as altering the 
continuing logic or validity of these reasons; rather, as explained 
above,\161\ these refinements are mostly technical in nature and 
clarify the Commission's intended scope and operation of the relief as 
necessitated by certain practical issues highlighted by commenters. 
Substantive changes are addressed below in the ``Consideration of 
Alternatives.'' \162\
---------------------------------------------------------------------------

    \161\ See supra Section II.
    \162\ See supra Section IV.C.4.
---------------------------------------------------------------------------

3. Benefits
To Exempt Entities
    Relative to no exemption, the Final Order will benefit Exempt 
Entities by lessening the likelihood that compliance with the CEA and 
Commission regulations would diminish their ability and/or incentives 
to continue to engage in Exempt Non-Financial Energy Transactions that, 
as described in the Petition, the Proposed Order, and above, are an 
operational tool relied upon by Exempt Entities to effectively execute 
their public service mission. The exemption will benefit Exempt 
Entities by providing assurances that these Exempt Non-Financial Energy 
Transactions upon which they rely are not subject to the CEA and 
Commission regulations.\163\
---------------------------------------------------------------------------

    \163\ The refinements that the Commission has made in the Final 
Order to clarify its terms and application reinforce these benefits. 
As discussed below with respect to benefits to market participants 
and the public, Exempt Entities' members and other customers should 
be the indirect beneficiaries of these avoided costs. The Commission 
is aware, however, that the Final Order stops short of providing the 
categorical relief requested by Petitioners, and thus does not give 
Exempt Entities exact certitude that any electric energy 
transactions not specifically covered under the terms of this Order 
entered into between Exempt Entities will not be subject to the 
requirements of the CEA.
---------------------------------------------------------------------------

    To the extent Exempt Non-Financial Energy Transactions are swaps, 
as a threshold matter, absent Commission action, CEA section 2(e) would 
prohibit Exempt Entities from executing them away from a registered DCM 
unless both Exempt Entity counterparties qualify as ECPs. The relevant 
criteria for determining ECP status varies for Exempt Entities that are 
governmental entities (or political subdivisions of governmental 
entities) and those that are not. For the former, governmental Exempt 
Entities must meet certain line of business requirements,\164\ or ``own 
* * * and invest * * * on a discretionary basis $50,000,000 or more in 
investments.\165\ For the latter, non-governmental Exempt Entities 
either must have: (a) Assets exceeding $10,000,000; (b) a guarantee for 
obligations; or, (c) greater than $1,000,000 net worth and ``enter * * 
* into an agreement, contract, or transaction in connection with the 
conduct of the entity's business or to manage the risk associated with 
an asset or liability owned or incurred or reasonably likely to be 
owned or incurred by the entity in the conduct of the entity's 
business.'' \166\ While some of the larger Exempt Entities in 
particular may meet the definitional requirements to be ECPs, the 
Petition does not provide information evidencing that all Exempt 
Entities for all types of Exempt

[[Page 19685]]

Non-Financial Energy Transaction clearly would.\167\
---------------------------------------------------------------------------

    \164\ That is, have ``a demonstrable ability, directly or 
through separate contractual arrangements, to make or take delivery 
of the underlying commodity [or] incur * * * risks, in addition to 
price risk, related to the commodity.'' CEA section 1a(17)(A)(i) & 
(2) (as referenced in CEA section 1a(18)(A)(vii)(aa)). CEA section 
1a(18)(A)(vii) specifies alternative criteria to qualify for 
governmental-entity ECP status that do not appear relevant given 
that Exempt Entities are not SDs, MSPs, or financial entities.
    \165\ CEA section 1a(18)(A)(vii)(bb).
    \166\ CEA section 1a(18)(A)(v).
    \167\ Furthermore, a comment letter submitted by two of the 
Petitioners in connection with the Commission rulemaking on the 
Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant,'' and ``Eligible Contract Participant,'' states that 
some not-for-profit consumer-owned electric utilities ``may not meet 
the financial tests listed in the definition of ECP due to the 
relatively small size of their physical assets.'' Letter from NRECA, 
APPA and LPPC dated February 22, 2011, RIN 3235-AK65, at 12.
---------------------------------------------------------------------------

    If Exempt Entities are not ECPs, and given that Petitioners have 
represented that Exempt Non-Financial Energy Transactions are bespoke 
and therefore unsuitable for exchange trading, absent Commission 
action, non-ECP Exempt Entities would be unable to engage bilaterally 
in any Exempt Non-Financial Energy Transactions that are swaps. 
Relative to a circumstance that would preclude non-ECP Exempt Entities 
from continuing to engage in Exempt Non-Financial Energy Transactions 
that are swaps, the Final Order allows for the continued use of 
transactions that are closely related to Exempt Entities' public 
service mission to provide affordable, reliable electricity--a benefit. 
The Final Order also saves Exempt Entities the time and expense 
necessary to determine if they are ECPs. While under the Final Order, 
ECP status becomes largely irrelevant, without it, Exempt Entities may 
have to concern themselves with ECP status determinations as a 
threshold for engaging in certain transactions.
    Even assuming, arguendo, that all Exempt Entities are ECPs, absent 
this Final Order, Exempt Non-Financial Energy Transactions engaged in 
by Exempt Entities in the normal course of carrying out their public 
service obligations would count towards the de minimis swap dealing 
threshold, and thus impact whether an Exempt Entity would need to 
register with the Commission as an SD or MSP.\168\ The Final Order 
eliminates this possibility and any attendant compliance costs it might 
entail.\169\
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    \168\ 77 FR 30596, 30744-45 (May 23, 2012).
    \169\ Further, to the extent the potential for triggering a 
registration requirement might otherwise deter Exempt Entities from 
engaging in Exempt Non-Financial Energy Transactions with one 
another, the Final Order benefits Exempt Entities by maintaining the 
current number of available counterparties for such transactions and 
exempting Exempt Entities from otherwise applicable reporting and 
recordkeeping requirements applicable to non-SDs/MSPs.
---------------------------------------------------------------------------

    Lastly, to the extent that Exempt Non-Financial Energy Transactions 
are swaps, the Final Order also avoids potential costs that Exempt 
Entities might incur to comply with swap data reporting and 
recordkeeping requirements as articulated in Commission 
regulations.\170\
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    \170\ See Real-Time Public Reporting of Swap Transaction Data, 
77 FR 1182, 1232-40 (Jan. 9, 2012) (adopting 17 CFR part 43 
regulations to implement real-time reporting). Swap Data 
Recordkeeping and Reporting Requirements 77 FR 2136, 2176-93 (Jan. 
13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping and 
Reporting Requirements: Pre-enactment and Transition Swaps 77 FR 
35200, 35217-25 (June 12, 2012) (adopting 17 CFR part 46).
    Swap Data Recordkeeping and Reporting Requirements 77 FR 2136 
(Jan. 13, 2012) (adopting 17 CFR part 45); Swap Data Recordkeeping 
and Reporting Requirements: Pre-enactment and Transition Swaps 77 FR 
35200 (June 12, 2012) (adopting 17 CFR part 46); see also supra 
Section II.E.3 (clarifying that exemptive relief is granted 
retroactively to the date of Dodd-Frank Act enactment to avoid costs 
associated with the reporting requirements for historical swaps).
---------------------------------------------------------------------------

    Even for Exempt Non-Financial Energy Transactions that are not 
swaps, if Exempt Entities perceived some potential that they could be 
swaps (now or as they evolve in the future), Exempt Entities would 
likely need to expend resources to monitor contemplated transactions 
and make status determinations as to them. Moreover, the bespoke nature 
of these transactions could complicate the ability to generalize 
conclusions across transactions, potentially resulting in a need for 
more frequent, individualized assessments that could multiply 
determination costs. While the Commission lacks a basis to meaningfully 
project any such benefit in dollar terms, qualitatively it expects that 
the benefit would include the avoided costs of training staff to 
differentiate between swap and non-swap transactions and, in some cases 
at least, to obtain an expert legal opinion to support a determination. 
Additionally, uncertainty about whether a certain transaction would or 
would not be deemed a swap could prompt an Exempt Entity to forego a 
beneficial transaction or to substitute a transaction that served the 
operational needs less effectively. The Commission considers avoiding a 
result that would diminish the use of operationally-efficient Exempt 
Non-Financial Energy Transactions to be an important benefit.
To Market Participants and the Public
    For reasons similar to those discussed in the Commission's analysis 
of the Proposed Order under CEA sections 4(c)(1) and 4(c)(6), the 
Commission asserts that this Final Order will benefit the public, 
generally.\171\
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    \171\ In that the impacted transactions are undertaken 
exclusively in a closed-loop environment from which financial 
participants are absent, the Commission does not foresee that 
derivative market participants beyond Exempt Entities will realize 
either a cost (as earlier discussed) or benefit impact.
---------------------------------------------------------------------------

    First, in that the Exempt Entities share the same public-service 
mission of providing affordable, reliable electricity to their 
customers, those aspects of the Final Order that benefit Exempt 
Entities directly should benefit their customers indirectly as well. 
For example, the Final Order would enable non-ECP Exempt Entities to 
engage in Exempt Non-Financial Energy Transactions, to the extent they 
are swaps, that would be barred to them under CEA section 2(e), or 
facilitate the likelihood that they would continue to engage in Exempt 
Non-Financial Energy Transactions that they might choose to forego for 
regulatory uncertainty or cost reasons absent the exemption. In these 
circumstances, Exempt Entity customers likely would be the ultimate 
beneficiaries (via supply reliability and affordability) of the 
operational risk-management and efficiencies that Exempt Non-Financial 
Energy Transactions afford. Similarly, to the extent that the Final 
Order enables Exempt Entities to avoid compliance and/or monitoring 
costs they would otherwise incur, the non-profit structure, conformance 
with requisite Internal Revenue Code guidelines, and public service 
mission that Exempt Entities share means that the cost savings should 
be passed through to members and other customers in the form of lower 
electricity prices.
    Second, the public also benefits by the promotion of economic and 
financial innovation that this Final Order facilitates.\172\ The unique 
environment in which these electric utilities must operate to reliably 
serve their customer load in the face of constantly fluctuating 
demand--compounded by the fact that many of these Exempt Entities do 
not enjoy the same economies of scale as investor-owned utilities--
places a premium on innovative solutions to operational issues. Exempt 
Non-Financial Energy Transactions represent one such innovation. The 
Commission intends for the Final Order, as contemplated by 
Congress,\173\ to provide Exempt Entities with regulatory certainty 
important to their ability to continue to develop and deploy innovative 
solutions through bespoke, closed-loop agreements, contracts, and 
transactions.
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    \172\ See Proposed Order, 77 FR 51009-10.
    \173\ See House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 
3179, 3213 (``4(c) Conf. Report'').
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    Accordingly, the Final Order provides an overall benefit to the 
public.
4. Consideration of Alternatives
    The chief alternatives to this Final Order are for the Commission 
to (i)

[[Page 19686]]

decline to exercise its exemptive authority; (ii) adopt the Proposed 
Order without certain substantive changes made to the Final Order; or 
(iii) exercise its exemptive authority more broadly and without 
conditions as requested in the Petition or reiterated in the 
Petitioners' comment letter.
    With respect to the first alternative--decline to exempt--the costs 
and benefit consideration is the mirror-image of that discussed above. 
A decision not to provide an exemption in this circumstance would 
preserve the current post-Dodd-Frank regulatory environment.
    Relative to the second alternative--adopting the exemption as 
proposed--the Commission has made two substantive changes to the 
definition of Exempt Non-Financial Energy Transaction based upon 
Petitioners' comments. These are: i) Striking the requirement that 
Exempt Non-Financial Energy Transactions be ``intended for making or 
taking physical delivery of the commodity upon which the agreement, 
contract, or transaction is based'' (the ``physical delivery 
requirement''); and ii) consistent with the first change, explicitly 
clarifying that Exempt Non-Financial Energy Transactions can be used to 
``manage supply and/or price risk.'' As explained above, the Commission 
premised these changes on the Petitioners' representation that, absent 
such changes, certain benefits sought through the exemption would be 
lost, namely regulatory certainty of knowing that price management 
transactions falling within one of the six defined transaction 
categories would be afforded greater regulatory relief than otherwise 
would be provided through the end-user exception.\174\
---------------------------------------------------------------------------

    \174\ See Petitioners' Letter at 5-6, 12.
---------------------------------------------------------------------------

    Eliminating the physical delivery requirement and clarifying that 
Exempt Non-Financial Energy Transactions may be used to manage price 
risk (as well as supply risk) arguably blurs the definitional 
distinction that the Proposed Order otherwise would have expressly 
provided between Exempt Non-Financial Energy Transactions and 
jurisdictional futures contracts.
    However, even without the physical-delivery requirement and with 
the price-risk management clarification, the Commission does not expect 
the Final Order to undermine the exchange trading requirement for, or 
the Commission's oversight of, futures.\175\ Indeed, the Commission 
intends the protection of the public interest affected through 
Commission oversight of such activity to be fully preserved. As clearly 
stated throughout the Final Order, a foundational basis for granting 
this exemptive relief is the Commission's understanding, based on 
Petitioners' representations, that Exempt Non-Financial Energy 
Transaction are undertaken solely to manage supply and/or price risks 
arising from Exempt Entities' public service obligation to supply 
electric energy to customers and are bespoke to meet the needs of 
particular Exempt Entities, and thus not suited to DCM trading (or DCO 
clearing).\176\ The Commission expects this to continue to remain the 
case.\177\ Accordingly, the Commission views the revised terms of the 
Final Order as preserving similar protections as the Proposed Order, 
while affording enhanced direct benefits for Exempt Entities.
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    \175\ See CEA sections 2(h)(1) and 2(h)(8), 7 U.S.C. 2(h)(1), 
2(h)(8). The same is true for swap clearing and DCM or SEF trade 
execution mandates.
    \176\ For the same reasons as represented by Petitioners, a 
foundational basis for exempting Exempt Non-Financial Energy 
Transactions that may be swaps is that they are not suited to SEF 
trading.
    \177\ The Final Order's reservation of authority to revisit 
terms and conditions serves as adequate protection that, over time, 
transactions subject to the exemption retain their foundational 
characteristics, including that they be (i) undertaken solely to 
manage supply and/or price risks arising from Exempt Entities' 
public service obligation to supply electric energy to customers and 
(ii) bespoke and are not otherwise suitable for exchange trading as 
futures. In the hypothetical event that, over time, this proves 
untrue, the Commission anticipates it would use its reserved 
authority to revisit the terms and conditions of this Final Order's 
exemptive relief to realign it with the Commission's understanding 
and expectations in this regard.
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    The Commission also has revised the Final Order from what was 
proposed to accommodate Petitioners' request that final exemptive 
relief apply retroactively to the enactment of the Dodd-Frank Act. As a 
consequence, Exempt Entities will be saved any costs associated with 
determining whether certain Exempt Non-Financial Energy Transactions 
entered into prior to the effective date of the Final Order were 
historical swaps or not, and reporting those historical transactions to 
an SDR.\178\ Given the Commission's understanding of the nature and 
volume of Exempt Non-Financial Energy Transactions between Exempt 
Entities, it believes that any diminution in benefit attributable to 
historical swap reporting will be de minimis, if any.
---------------------------------------------------------------------------

    \178\ See supra Section II.E.3.
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    Relative to the third alternative of exercising its exemptive 
authority more broadly and in a manner that would provide categorical 
relief from all of the requirements of the CEA as requested by 
Petitioners in their original Petition, the Commission purposefully has 
defined the categories of exempt transactions more narrowly, and 
preserved certain aspects of CEA jurisdiction with respect to them. As 
reiterated in their comment letter,\179\ Petitioners sought categorical 
relief for all Electric Operation-Related Transactions, regardless of 
whether the transactions fell within a specifically-defined category. 
The more open-ended categorical relief sought by Petitioners 
theoretically would lessen the burden on Exempt Entities to determine 
whether a transaction engaged in between them is or is not exempted 
compared to the more refined and limited definition of Exempt Non-
Financial Energy Transactions that the Commission proposed. As stated 
previously in this release, however, while transactions may be relief-
eligible under 4(c)(6), the Commission must ``determine that the 
exemption would be consistent with the public interest and purposes of 
[the] Act.'' \180\ Commenters have not provided sufficient information 
for the Commission to make such a determination, or meaningfully 
quantify the costs and benefits that categorical relief, as 
distinguished from the relief provided in the Final Order, would confer 
on market participants and the public. Given the inability to foresee 
how these transactions may develop, the Commission considers it prudent 
and in the public interest to ring-fence the definition within stated 
parameters to restrict the potential for the transactions to evolve in 
a manner incompatible with the public interest and purposes of the CEA.
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    \179\ Petitioners' Letter at 11-12; see also Petition at 4-5.
    \180\ CEA section 4(c)(6), 7 U.S.C. 6(c)(6).
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    Finally, the exemption reserves the Commission's general anti-fraud 
and anti-manipulation authority, and certain scienter-based 
prohibitions, as well as the Commission's authority to review books and 
records already kept in the ordinary course of business in the event 
that circumstances warrant the need to gain greater visibility with 
respect to Exempt Non-Financial Energy Transactions as they relate to 
Exempt Entities' overall market positions, and to ensure compliance 
with the terms of this Final Order.\181\ Petitioners'

[[Page 19687]]

comment letter did not challenge the Proposed Order's imposition of 
these conditions on cost-benefit grounds, generally, though it did 
request that the Commission's reserved authority not explicitly include 
CEA section 4c(b) and regulation 32.4, as those provisions could be 
interpreted as a Commission determination that certain Exempt Non-
Financial Energy Transactions constituted commodity options.\182\ 
Reserving CEA section 4c(b) and regulation 32.4 should not be so 
interpreted. Furthermore, such reservations impose no additional costs 
on Exempt Entities, as currently they are subject to the Commission's 
authority under these provisions to the extent their transactions are 
options.
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    \181\ As explained in the Proposed Order, the Commission 
believes that this reservation of authority serves important 
beneficial ends to ensure the integrity of commodity and commodity 
derivatives markets within its jurisdiction. To the extent Exempt 
Entities incur some cost to remain compliant with the CEA's anti-
fraud and anti-manipulation regime, and the specified scienter-based 
prohibitions, the Commission considers such costs warranted by the 
importance of maintaining commodity market integrity. The Commission 
also believes that authority to inspect books and records kept in 
the ordinary course of business, pursuant to its regulatory 
inspection authority, as they relate to Exempt Non-Financial Energy 
Transactions is important to assure visibility into activity in such 
transactions on an as-needed basis. Further, as a general matter, 
the Commission expects to exert its regulatory inspection authority 
with respect to Exempt Non-Financial Energy Transactions 
infrequently; and, such authority would involve only records that 
Exempt Entities keep in the ordinary course of business, and only be 
exercised in the event that circumstances warrant the need to gain 
greater visibility with respect to Exempt Non-Financial Energy 
Transactions as they relate to Exempt Entities' overall market 
positions, and to ensure compliance with the terms of this Final 
Order. The Commission believes that any costs occasioned by this 
condition are de minimis.
    \182\ See supra Section II.D.
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5. 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 negatively affect the protection of market participants and 
the public. More specifically, Exempt Non-Financial Energy 
Transactions, as transacted bilaterally and in a closed loop between 
Exempt Entities in the highly specialized and unique electric-industry 
circumstances, do not appear to generate risks of the nature addressed 
by the CEA. The Commission has delineated the definitional boundaries 
for Exempt Entities and Exempt Non-Financial Energy 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. Moreover, the exemption incorporates conditions \183\ to 
counter residual risk that conceivably, though unexpectedly, might 
survive notwithstanding the Final Order's definitional crafting.
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    \183\ These conditions include the reservation of the 
Commission's anti-fraud and anti-manipulation authority, and certain 
scienter-based prohibitions, as well as its authority to inspect 
books and records already kept in the normal course of business. 
Further, the Commission reserves the right to revisit the terms and 
conditions of the Final Order's relief and alter or revoke them as 
appropriate. See Section V.C.
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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. This is because, to the extent any 
are jurisdictional, Exempt Non-Financial Energy Transactions entered 
into between Exempt Entities constitute only a narrow market segment 
limited to bespoke transactions, executed bilaterally between non-
financial entities primarily in order to satisfy existing or expected 
operations-related public service obligations. Moreover, the Commission 
anticipates the Final Order will help to maintain the competitive 
landscape and efficiency of the market segment for Exempt Non-Financial 
Energy Transactions entered into between Exempt Entities. As previously 
discussed, the Final Order maintains the number of counterparties that 
Exempt Entities will be able to face--namely, other Exempt Entities 
with which they already conduct Exempt Non-Financial Energy 
Transactions--by exempting Exempt Non-Financial Energy Transactions 
between Exempt Entities from CEA section 2(e), and eliminates the 
possibility that entering into Exempt Non-Financial Energy Transactions 
will subject Exempt Entities to the full array of compliance costs 
arising from the Commission's ongoing oversight regime.\184\ In 
addition, the Commission expects that the Final Order will contribute 
to operational efficiency in the market segment where Exempt Entities 
conduct Exempt Non-Financial Energy Transactions with one another by 
eliminating costs necessary to determine their regulatory status or the 
status of Exempt Non-Financial Energy Transactions.
---------------------------------------------------------------------------

    \184\ Exempt Entities may still incur minimal episodic 
compliance costs with respect to Exempt Non-Financial Energy 
Transactions if the Commission has a need to exercise its reserved 
authority.
---------------------------------------------------------------------------

    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 Exempt Entities 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, jurisdictional 
markets. The Commission recognizes that a desire to avoid regulation in 
theory could incentivize Exempt Entities to participate in Exempt Non-
Financial Energy Transactions to a greater extent than they otherwise 
might choose to do, vis-[agrave]-vis related non-exempt markets. This 
is unlikely, however, due to the requirement that Exempt Non-Financial 
Energy Transactions be entered into only to manage supply and/or price 
risk arising from their public service obligations to physically supply 
electric energy service to customers, and only with other Exempt 
Entities. The relatively small size of trading in this market segment 
also renders it unlikely that the Final Order will materially impair 
price discovery in jurisdictional markets even were the Final Order to 
incentivize Exempt Entities to execute some of their customer-serving 
transactions pursuant to the Final Order instead of on a registered 
entity. Thus, against the backdrop of Congress' mandate to consider 
exempting transactions between FPA 201(f) entities, the Commission 
believes that the Final Order would not materially distort price 
discovery in non-exempt, jurisdictional markets.
d. Sound Risk Management Practices
    The Final Order will promote the ability of Exempt Entities to 
manage the operational risks posed by unique electricity market 
characteristics, including the non-storable nature of electricity and 
demand that can and frequently does fluctuate dramatically within a 
short time-span. As discussed above, the Commission understands that 
Exempt Non-Financial Energy Transactions are an important tool 
facilitating the ability of Exempt Entities to efficiently manage 
operational risk in fulfillment of their public service mission to 
provide affordable, reliable electricity.
e. Other Public Interest Considerations
    In exercising its exemptive authority under CEA sections 4(c)(1) 
and 4(c)(6) in the Final Order, the Commission is acting to promote the 
broader public interest in facilitating the generation, transmission, 
and delivery of affordable, reliable electric energy service as 
Congress contemplated.

V. Final Order

    Based on the Petitioners' representations, and for the reasons set 
forth above, the Commission hereby

[[Page 19688]]

exempts, pursuant to Commodity Exchange Act (``CEA'') sections 4(c)(1) 
and 4(c)(6), from all requirements of the CEA and Commission 
regulations issued thereunder, except those specified below, all Exempt 
Non-Financial Energy Transactions (as defined below) entered into 
solely between Exempt Entities (as defined below), retroactive to the 
date of enactment of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, and subject to certain conditions (as detailed below):
    A. Exempt Entity means (i) any electric facility or utility that is 
wholly owned by a government entity, as described in Federal Power Act 
(``FPA'') section 201(f), 16 U.S.C. 824(f); (ii) any electric facility 
or utility that is wholly owned by an Indian tribe recognized by the 
U.S. government pursuant to section 104 of the Act of November 2, 1994, 
25 U.S.C. 479a-1; (iii) any electric facility or utility that is wholly 
owned by a cooperative, regardless of such cooperative's status 
pursuant to FPA section 201(f), so long as the cooperative is treated 
as such under Internal Revenue Code section 501(c)(12) or 
1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C), and exists for the 
primary purpose of providing electric energy service to its member/
owner customers at cost; or (iv) any other entity that is wholly owned, 
directly or indirectly, by any one or more of the foregoing. The term 
``Exempt Entity'' does not include any ``financial entity,'' as defined 
in CEA section 2(h)(7)(C).
    B. Exempt Non-Financial Energy Transaction means any agreement, 
contract, or transaction based upon a ``commodity,'' as such term is 
defined in CEA section 1a(9) and Commission regulation 1.3(e), that 
would not have been entered into, but for an Exempt Entity's need to 
manage supply and/or price risks arising from its existing or 
anticipated public service obligations to physically generate, 
transmit, and/or deliver electric energy service to customers. The term 
``Exempt Non-Financial Energy Transaction'' excludes agreements, 
contracts, and transactions based upon, derived from, or referencing 
any interest rate, credit, equity or currency asset class, or any grade 
of a metal, or any agricultural product, or any grade of crude oil or 
gasoline that is not used as fuel for electric energy generation. The 
term ``Exempt Non-Financial Energy Transaction'' also excludes 
agreements, contracts, or transactions entered into on or subject to 
the rules of a registered entity, submitted for clearing to a 
derivatives clearing organization, and/or reported to a swap data 
repository. Exempt Non-Financial Energy Transactions are limited to the 
following categories, which may exist as stand-alone agreements or as 
components of larger agreements that combine the following categories 
of transactions:
    1. Electric Energy Delivered transactions consist of arrangements 
in which a provider Exempt Entity agrees to deliver electric energy to 
a recipient Exempt Entity within a geographic service territory, load, 
or electric system over a period of time. Such transactions include 
``full requirements'' contracts, under which one Exempt Entity becomes 
obligated to provide, and the recipient Exempt Entity becomes obligated 
to take, all of the electric energy the recipient needs to provide 
reliable electric service to its fluctuating electric load over a 
specified delivery period at one or multiple delivery points or 
locations, net of any electric energy the recipient is able to produce 
through generation assets that it owns.
    2. Generation Capacity transactions consist of agreements in which 
a recipient Exempt Entity purchases from a provider Exempt Entity the 
right to call upon the provider Exempt Entity's electric energy 
generation assets to supply electric energy within a geographic area, 
regardless of whether such right is ever exercised for the purposes of 
the recipient Exempt Entity meeting its location-specific reliability 
obligations. Such transactions also may specify certain conditions that 
must exist prior to exercising the right to use an Exempt Entity's 
generation assets, or establish an agreement between Exempt Entities to 
share pooled electric generation assets in order to satisfy regionally-
imposed demand side management program requirements.
    3. Transmission Services transactions consist of arrangements in 
which a provider Exempt Entity owning transmission lines sells to a 
recipient Exempt Entity the right to deliver the recipient Exempt 
Entity's electric energy from one designated point on the transmission 
lines to another, at a price per wattage and over a period of time, in 
order for the recipient Exempt Entity to provide electric energy to its 
customers. Such transactions may include ancillary services related to 
transmission such as congestion management and system losses.
    4. Fuel Delivered transactions consist of arrangements used to buy, 
sell, transport, deliver, or store fuel used in the generation of 
electric energy by an Exempt Entity. Additionally, Fuel Delivered 
transactions may include an agreement to manage the operational basis 
or exchange (i.e., location or time of delivery) risk of an Exempt 
Entity that arises from its location-specific, seasonal or otherwise 
variable operational need for fuel to be delivered.
    5. Cross-Commodity Pricing transactions consist of arrangements 
such as heat rate transactions and tolling agreements in which the 
price of electric energy delivered is based upon the price of the fuel 
source used to generate the electric energy. Cross-Commodity 
transactions also include fuel delivered agreements in which the price 
paid for fuel used to generate electric energy is based upon the amount 
of electric energy produced.
    6. Other Goods and Services transactions consist of arrangements in 
which the Exempt Entities enter into an agreement to share the costs 
and economic benefits related to construction, operation, and 
maintenance of facilities for the purposes of generation, transmission, 
and delivery of electric energy to customers. In a full requirements 
contract between Exempt Entities that share ownership of generation 
assets, the provider Exempt Entity may determine how generation to meet 
the recipient Exempt Entity's full requirements will be allocated among 
the provider's independent generation assets, the jointly-owned 
generation assets, and the recipient's independent generation assets. 
Other Goods and Services transactions also may include agreements 
between Exempt Entities to operate each other's facilities, share 
equipment and employees, and interface on each other's behalf with 
third parties such as suppliers, regulators and reliability 
authorities, and customers, regardless of whether such agreements are 
triggered as contingencies in emergency situations only or are 
applicable during the normal course of operations of an Exempt Entity.
    C. Conditions. The relief provided herein is subject to 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. Additionally, the Commission reserves its 
authority to inspect books and records kept in the normal course of 
business that relate to Exempt Non-Financial Energy Transactions 
between Exempt Entities pursuant to the Commission's regulatory 
inspection authorities. The relief provided herein does not affect the 
jurisdiction of FERC or any other

[[Page 19689]]

government agency over the entities and transactions described herein. 
Furthermore, the Commission reserves the right to revisit any of the 
terms and conditions of the relief provided herein and alter or revoke 
such terms and conditions as necessary in order for the Commission to 
execute its duties and advance the public interests and purposes under 
the CEA, including a determination that certain entities and 
transactions described herein should be subject to the Commission's 
full jurisdiction.

    Issued in Washington, DC, on March 28, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.

Appendices to Order Exempting, Pursuant to Authority in Section 4(c) of 
the Commodity Exchange Act, Certain Transactions Between Entities 
Described in Section 201(f) of the Federal Power Act, and Other 
Electric Cooperatives--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 certain electricity and 
electricity-related energy transactions between rural electric 
cooperatives and/or federal, state, municipal, and tribal power 
authorities (as defined in section 201F of the Federal Power Act).
    Congress authorized that these transactions be exempt from 
certain provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, which is consistent with previous exemptions 
Congress has granted from the Federal Power Act. For decades, these 
entities have been generally recognized as performing a public 
service mission to provide their customers or cooperative members 
with reliable, affordable electric energy service. They have been 
largely exempt from regulation by the Federal Energy Regulatory 
Commission because of their government entity status or their not-
for-profit cooperative status.
    This final order responds to a petition filed by a group of 
these cooperatives and authorities and has benefitted from public 
input.
    The scope of the final order is carefully tailored to physically 
backed electricity and electricity-related energy transactions that 
are necessary for the generation, transmission and delivery of 
electric energy services to customers.

[FR Doc. 2013-07633 Filed 4-1-13; 8:45 am]
BILLING CODE 6351-01-P
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