EVO & TO 

Where are we now?

CFTC Energy and Environmental Markets Advisory Committee Meeting

July 29, 2015

Paul Hughes, Manager, Risk Control, Southern Company Services 

Arushi Sharma Frank, Director of Regulatory Affairs and Counsel, Electric Power Supply Association 
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Since we last spoke about EVO & TO...

• Proposed TO rule welcomed

– Continuing to track and are very supportive of the proposed TO relief.

– Hope for some additional rule revisions and clarifications in preamble guidance.

– Disappointed with no mention of Position Limits exclusion for TO. Comment docket 

shows energy stakeholder support (especially from end-users) for clarity on PL 

Exclusion to be included in the final TO rule. 

• Southern is in the process of re-evaluating its previous agreements based on the 

revised EVO language.

• General “sigh of relief” across the industry for EVO clarity, but...

• Spent a lot of time discussing preamble language and concurrences...

– Treatment of Capacity Contracts

– Contracts that allow for zero or nominal delivery

• Will discuss today how the TO docket can be a forum for clear direction on EVO 

vs. TO analysis.
Bridging the Gap

Between Forwards and Swaps

(Intended to be 

physically settled) (Financially settled)

Forward Contracts Swaps

Forward Contracts with 

“embedded optionality”

(intended to be physically

settled)

Stand-alone Commodity 

Trade Options

(intended to be physically

settled)

Commodity Options

(financially settled)

The term “swap” means any agreement, contract, or transaction 

that is a put, call, cap, floor, collar, or similar option of any kind that 

is for the purchase or sale, or based on the value, of 1 or more 

interest or other rates, currencies, commodities, securities, 

instruments of indebtedness, indices, quantitative measures, or 

other financial or economic interests or property of any kind. 

- CEA 1a(47)(A)(i)

The term “swap” does not include any sale of a nonfinancial 

commodity or security for deferred shipment or delivery, so 

long as the transaction is intended to be physically settled. 

- CEA 1a(47)(B)(ii)

Facts and Circumstances Bridge

A B
Multi-factor 

Dispatch Model Customer Base

Generation Fleet, including PPAs Example

• Regional Physical Markets

• Real-time nature of business requires ability to 

take zero, but does not change the settlement 

intent (no storage / real-time business)

• Capacity contracts

• Accounting Rules provide exception for 

capacity type transactions

• Facts & Circumstances support physical 

settlement

• Regional Physical Markets

• Real-time nature of business requires ability to 

take zero, but does not change the settlement 

intent 

• Storage is not always available

• Facts & Circumstances support physical 

settlement

Power Gas
Issues That Need...

• Swap Definition / CEA Exclusion Interpretation

– How do “facts & circumstances” apply to:

(i) Contracts with the intent to physically settle that allow zero or nominal delivery 

(including, but not limited to “peaking” or “swing” contracts).

- Affirmation of Treatment of Capacity Contracts

Separately...

• Exclusion of Trade Options from Position Limits
“Facts and Circumstances” - Physical Gas Contracting 

A. A natural gas utility enters into a Master Physical Gas/Base Supply Agreement with a natural 

gas producer in 1998. 

Characteristics of the 1998 Physical Gas Master Agreement (“Base Contract”): 

(i) No obligation on either party to do anything, e.g. enter into any specific deal for physical gas 

(ii) Dictates on a going-forward basis the business relationship if the parties choose to enter into a 

physical delivery agreement 

(iii) Contemplates only physical delivery based on to-be-determined pricing, quantity and service 

terms 

(iv) Any financial options tied to physical delivery must be reflected in amendment to physical 

master/base or separately reflected in financial documentation, e.g. ISDA 

B. The natural gas utility and gas producer choose to undertake three different deals pursuant to 

the same underlying Physical Gas Master Agreement. executed on separate transaction confirms:

B1 - Interruptible Delivery (fully interruptible by buyer or seller) 

B2 - Firm Variable (baseload/minimum take + swing as percentage thereof)

B3 - Firm (no baseload/minimum take + peaking or swing of up to fixed qty.) 

Given what we know about the agreement, how would these contracts be classified? 
Industry Report: Classification Approaches Differ 

• Clarity achieved on “Firm Variable” and “Interruptible”

• Treatment of “Firm” by market participants is inconsistent

– Views may not be shared between physical counterparties as to contract 

characterization... “agree to disagree”

– Smaller suppliers (independent producers, marketers, storage providers) are 

not responding to solicitations or Requests for Proposals for peaking/firm 

end-user to end-user deals
Proposed Solutions 

TO Proposal is an Important Starting Point

 Could get small EUs back in the game if Form TO no longer required 

 Careful review of comments on the TO “tracking” issue 

 Some comments discuss the quantification challenges for valuation of TOs for 

reporting and/or tracking

TO Final Rule is an Opportunity for Further Clarity 

 Final rule should clarify and affirm that physical contracts which allow for zero 

or nominal delivery may satisfy the CFTC’s interpretations and guidance on 

forward contracts, in light of a Facts and Circumstance Analysis demonstrating 

that such contracts exclusively intend physical settlement 

This is consistent with the Seven-Part Test, which itself contemplates that actual 

delivery may or may not occur 

 Clarify capacity contracts status 

 Clarify that TOs are excluded from future Position Limits rule 
In closing, a bit of perspective...

Federal Power Act – 80 years (1935)

Natural Gas Act – 77 years (1938)

Dodd-Frank Act – 5 years (2010)
Arushi Sharma Frank

Director of Regulatory Affairs, and Counsel 

Electric Power Supply Association

1401 New York Ave., NW

Suite 1230

Washington, DC 20005

(202) 628-8200 | asharmafrank@epsa.org

Paul Hughes, CPA

Manager, Risk Control

Southern Company Services

600 18th Street North

GS-8164

Birmingham, AL 35203

(205) 257-3035 | phughes@southernco.com