The energy industry was able to heave a collective sigh of relief based on the treatment of energy transactions under the so-called Swap Product Rule1 jointly adopted on August 13, 2012, by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) and, in particular, the forward contract exclusion2 contained in the rule. However, subsequent actions by the CFTC suggest that not all energy transactions are being treated appropriately in the views of some energy market participants—who note the potential for CFTC intrusion into areas traditionally reserved to the jurisdiction of the Federal Energy Regulatory Commission (FERC) and other regulators.
For example, in early October, the CFTC has issued at least five interpretation and no-action letters dealing with a variety of issues for certain energy transactions, including:
- No-action relief preserving the regulatory status quo for regional transmission organizations, independent system operators and their participants, pending CFTC action on proposed exemptions for specified transactions in electricity markets regulated by FERC or the Public Utility Commission of Texas (which has jurisdiction over transmission within ERCOT) from certain provisions of the Commodity Exchange Act;3
- No-action relief preserving the regulatory status quo for certain government and cooperatively owned public utilities;4 and
- No-action relief for any non-financial entity that regularly transacts in the physical energy markets but does not apply to be registered as a swap dealer, if the entity limits its swaps connected with its dealing activities with publicly owned, government-owned and federal agency utilities to no more than $800 million per year and other requirements set out in the letter are met.5
Not all energy industry concerns have been addressed by the CFTC. In particular, the CFTC has not yet acted on the request by several industry trade groups for clarification and no-action relief for natural gas and other physical commodity transportation and storage arrangements.
This request was made by letter dated October 11, 2012,6 signed by the American Gas Association (AGA), American Petroleum Institute (API), the Independent Petroleum Association of America (IPAA) and the Natural Gas Supply Association (NGSA and, together with the AGA, API and IPAA collectively, the Associations), requesting that the CFTC clarify and grant no-action relief with respect to the application of the Forward Contract Exclusion to transportation and storage agreements for natural gas and other physical commodities.
Specifically, the Associations requested immediate no-action relief stating that the CFTC “will not regulate agreements for transportation service on natural gas pipelines or the use of natural gas storage facilities (along with all other agreements for the use of specific facilities for transportation or storage of any physical commodities) as swaps until it issues a final clarification, interpretation, rule revision, or response to the comments of AGA, API, IPAA and NGSA and others regarding this aspect of the [Swap Product Rule].” The Associations also claimed that, because market participants had no notice that the Swap Product Rule would contain certain specified guidance,7 good cause exists for expedited clarification and no-action relief.
In support of the request, the Associations note that natural gas transportation and storage agreements do not resemble, and have never been considered to be, options, and they further note (with seeming approval) the CFTC’s description of an option:
[A]n option is a limited risk instrument. That is, the option purchaser is not liable for payment resulting from any adverse price movement of the commodity underlying the option. Rather, the option purchaser will benefit from a favorable price move and will not be liable for any other losses beyond the premium or other payment that the purchaser pays for the option.
The Associations note that fees for natural gas transportation and storage are not designed to shift economic risk, but, rather, to serve the function of providing economic means to pay for facilities that permit physical commodities to be moved and stored for commercial purposes according to demand. Further, the Associations note that:
[T]he reservation fees under such natural gas transportation and storage contracts compensate the pipeline or storage owner for its investment and costs in making the facility available, in exchange for granting a shipper the right to use the facility for transportation or storage up to the volume specified. Generally speaking, under a FERC-approved tariff, a reservation fee is designed to recover the owner’s fixed costs with respect to a facility and is paid monthly over the term of a contract. The usage fees under transportation and storage contracts pay for the actual use of the facilities and are generally designed to cover the variable costs of the transportation or storage service. This two-part fee is a reasonable economic means to pay for the different components of the service, availability and use, provided under both transportation and storage contracts, and such fee structure should not be the basis
for characterization of such contracts as options.
Layering CFTC regulation on top of FERC’s regulations governing the use of transportation or storage capacity and release to third parties of such capacity could subject shippers to double, and potentially conflicting, regulation. It could also result in CFTC-imposed financial and other regulatory requirements on parties that contract for the firm transportation or storage of natural gas.8
We anticipate that many industry participants anxiously await the requested CFTC action and expect that there will be other similar requests to clarify the Swap Product Rule as the energy industry continues to assess its full consequences.
1 Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208 et. seq., available at:
2 See 77 FR 48277 et seq.
3 See CFTC Letter No. 12-11 available at:
4 See CFTC Letter No. 12-12, available at:
5 See CFTC Letter No. 12-18, available at:
6 Available at: http://comments.cftc.gov/Handlers/PdfHandler.ashx?id=24774.
7 The specific guidance that the Associations refer to is contained on 77 FR 48282, and provides: “However, in the alternative, if the right to use the specified facility is only obtained via the payment of a demand charge or reservation fee, and the exercise of the right (or use of the specified facility or part thereof) entails the further payment of actual storage fees, usage fees, rents, or other analogous service charges not included in the demand charge or reservation fee, such agreement, contract or transaction is a commodity option subject to the swap definition.”
8 Characteristics Distinguishing Cash and Forward Contracts and “Trade” Options, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) P 22,718 (Sept. 30, 1985) (emphasis added) (“1985 Interpretative Statement”).