On August 21, 2012, the Commodity Futures Trading Commission (“CFTC”) and Securities Exchange Commission (“SEC”) published a proposal [PDF] to exempt certain independent system operator (“ISO”) and regional transmission operator (“RTO”) related transactions from the Commodity Exchange Act’s (“CEA”) obligations.  The California ISO, ERCOT, ISO New England, Midwest ISO, NYISO, and PJM had filed petitions seeking exemptions for transactions entered into pursuant to their organized markets regulated by FERC or the Public Utilities Commission of Texas.

Specifically, the CFTC defines and then proposes to exempt the following transactions from coverage under the CEA if those transactions are entered into pursuant to an ISO or RTO’s tariff:

  1. Financial Transmission Rights,
  2. Energy Transactions in the day ahead or real time markets,
  3. Forward Capacity Transactions, and
  4. Reserve or Regulation Transactions.

The ISO or RTO tariffs must not require notification to a member prior to providing information to the CFTC, and ERCOT must enter into an agreement providing for information sharing with the CFTC.  The CFTC also proposes that the provisions of FERC’s Credit Reform Policy (Order No. 741) [PDF] be applicable prior to granting the proposed exemptions.  As ERCOT is not subject to Order No. 741, it would have to adopt those credit provisions in order for participants in its markets to be exempt from the CEA under the August 21 proposed order.

The CFTC notes that the exemption is appropriate because ISOs and RTOs were formed to provide the physical delivery of reliable electric service in particular regions and their markets provide the means for such delivery.  In addition, the transactions are entered into pursuant to tariffs approved by FERC or the PUCT and the relevant markets are subject to monitoring.

The proposed order makes clear that the exemption applies only to the four defined types of transactions.  The CFTC rejected the proposals by the ISOs and RTOs to include related transactions, “products and services directly related to . . . the core functions [of] an ISO/RTO.”

Comments must be filed no later than 30 days after the proposed order is published in the Federal Register.  Check our blog for further updates and analysis as this proceeding continues.