CFTC Mostly Exempts ISO Markets from Dodd-Frank Regulation

On April 2, 2013, the Commodity Futures Trading Commission (CFTC) issued an exemption under the Commodity Exchange Act (CEA),1 for certain transactions in the CAISO, ERCOT, MISO, PJM, ISO-NE and NYISO markets. For a transaction to be exempt, it must be entered into pursuant to a tariff approved by the Federal Energy Regulatory Commission (FERC) or the Public Utility Commission of Texas, and it must fall within one of the following categories:

  • “Forward Capacity Transactions” for the benefit of load-serving entities, so long as the aggregate volume of all such cleared transactions does not exceed the physical capacity of the transmission grid
  • “Financial Transmission Rights” that obligate one party to pay, and another to receive, an amount based on transmission congestion costs
  • “Energy Transactions,” defined as transactions in the day-ahead and real-time markets for electric energy, including demand response and energy efficiency products. Also expressly included in the exemption are virtual and convergence bids and offers, despite their fundamentally financial, as opposed to physical, nature
  • “Reserve or Regulation Transactions,” defined, in part, by the requirement that the seller physically operate electric facilities to increase or decrease the rate of electric energy injected into, or withdrawn from, the transmission grid.

In order for a transaction to be exempt, it must be authorized pursuant to a tariff that meets FERC’s credit regulations for organized wholesale electric markets.2 In addition, each independent system operator/regional transmission organization (ISO/RTO) must submit a memorandum from outside counsel stating that its netting approach is sufficient to provide legally enforceable rights to “set off” credits due to, and debts owed by, market participants in case of bankruptcy. The ISO/RTOs have until September 30, 2013 to make any required changes to their tariffs, and until April 30, 2013 to submit the required legal memorandum.

The CFTC declined to grant all ISO/RTO market participants an exemption. Market participants who are involved in “generating, transmitting or delivering electric energy” or in “providing electric energy services that are necessary to support the reliable operation of the transmission system” are exempt.3 However, the exemption is not intended to apply to market participants who lack financial wherewithal or requisite business expertise.

The exemption requires that ISO/RTOs share information with CFTC on an as-needed basis and that ISOs not inform their members of such information requests. In addition, the exemption is conditioned on the continued existence of information-sharing agreements between CFTC and FERC that CFTC finds “acceptable.” CFTC did not define what is “acceptable.”

In a separate order issued the same day, CFTC also granted an exemption for non-financial swaps between and among government-owned and/or cooperatively owned electric utilities.4 The exemption applies to non-financial swaps for the purposes of hedging supply and price risk associated with electric energy, generation capacity, transmission services, fuel, cross-commodity pricing (including such transactions as tolling agreements) and “other goods and services.”

In both orders, CFTC expressly retained enforcement authority over the otherwise exempt transactions under CEA’s antifraud and antimanipulation provisions. The CFTC’s retention of enforcement authority, in combination with the D.C. Circuit’s recent decision in Hunter v. FERC (upholding CFTC’s exclusive jurisdiction over commodity futures markets even if trading in those markets impacts physical markets that are regulated by FERC), signals the continuing significance of CFTC’s enforcement role in the energy industry.

For a complete copy of CFTC’s orders on ISO/RTO exemptions, click here. For a complete copy of CFTC’s orders on exemption for non-financial swaps between and among government-owned and/or cooperatively owned electric utilities, click here.

Contact Information

If you have questions concerning this alert, please contact:

Julia E. Sullivan
Washington, D.C.
Suedeen G. Kelly
Washington, D.C.
George D. Cannon Jr.
Washington, D.C.
G. Philip Nowak
Washington, D.C.
Cynthia A. Marlette
Washington, D.C.
J. Porter Wiseman
Washington, D.C.

1 7. U.S.C. § 1 et seq., as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

2 see 18 C.F.R. § 35.47

3 ISO Order at 19,897.

4 Order Exempting, Pursuant to Authority of the Commodity Exchange Act, Certain Transactions Between Entities Described in the Federal Power Act, and Other Electric Cooperatives, 78 Fed. Reg. 19,670 (Apr. 2, 2013).