On Friday, August 17, 2012, the U.S. Commodity Futures Trading Commission (CFTC) approved a proposed order that would exempt certain transactions by electric cooperatives, among other “Exempt Entities,” from many of the requirements of the Commodity Exchange Act.
According to the Notice of Proposed Order and Request for Comment:
The Commodity Futures Trading Commission . . . is proposing to exempt certain transactions between entities described in section 201(f) of the Federal Power Act (“FPA”), and other electric utility cooperatives, from the provisions of the Commodity Exchange Act (“CEA” or “Act”) and the regulations thereunder, subject to certain antifraud, anti-manipulation, and recordkeeping conditions. Authority for this exemption is found in section 4(c) of the CEA. The Commission is requesting comment on every aspect of this Notice of Proposed Order (“Notice”).
The proposed exemption under the Act is based, in part, on electric cooperatives’ limited exemption under Section 201(f) of the Federal Power Act. Section 201(f) provides:
[n]o provision in this subchapter [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.
In addition to the Section 201(f) exemption, the CFTC apparently recognized the electric cooperatives’ unique characteristic of being owned and governed by their customers. It also relied on the non-profit nature of electric cooperatives.
Accordingly, in addition to organizations identified in FPA Section 201(f), the proposed exemption would apply to other “cooperatively-owned electric utilities,” so long as they are considered “cooperative organizations” under the Internal Revenue Code. Such organizations include “a non-profit or not-for-profit entity that is organized and continues to operate primarily to provide its members with electric energy services at the lowest cost possible and is taxed as an electric cooperative pursuant to IRC section 501(c)(12) or 1381(a)(2)(C).”
The exemption would apply to transactions that are to be physically settled and entered into for the primary purpose of meeting current or anticipated contractual obligations to facilitate generation, transaction, or delivery of electricity.
The proposed order would apply to:
agreements, contracts, or transactions entered into between Exempt Entities primarily in order “to satisfy existing or anticipated contractual obligations to facilitate the generation, transmission, and/or delivery of electric energy service to customers at the lowest cost possible, and the agreement, contract, or transaction is intended for making or taking physical delivery of the commodity upon which the agreement, contract, or transaction is based.”
Of course, several other provisions of the Act continue to apply despite the exemption. These include provisions relating to anti-fraud, anti-manipulation, enforcement, and inspection authorities of the commission.