The Commodity Futures Trading Commission (CFTC) has unanimously approved proposed guidance, issued jointly with the Securities and Exchange Commission (SEC), that certain electric power capacity contracts and natural gas peaking supply contracts should not be considered swaps under the Commodity Exchange Act.
The proposal was made because the regulators believe the contracts "are examples of customary commercial arrangements as described in the final rule defining the term 'swap,'" according to CFTC Chairman Timothy Massad.
"For example, these contracts are entered into to assure availability of a commodity, not to hedge against risks arising from a future change in price of that commodity or for speculative or investment purposes. They are typically entered into in response to regulatory requirements, the need to maintain reliable energy supplies, and practical considerations of storage or transport. All of these factors are consistent with what has been set forth in previous commission guidance," Massad said.
The natural gas contracts described by commenters were "peaking supply contracts" that are entered into by electric utilities, with or without minimum gas delivery requirements, CFTC said.
"The CFTC understands a peaking supply contract in this context to be a contract that enables an electric utility to purchase natural gas from another natural gas provider on those days when its local natural gas distribution companies curtail its natural gas transportation service," the CFTC said.
The electric power contracts described are used in situations where regulatory requirements from state public utility commissions obligate load-serving entities and load-serving electric utilities to purchase capacity from suppliers to secure grid management and on-demand deliverability of power to consumers.
"...As they have been described by commenters, the natural gas and electric power contracts...are all entered into by commercial market participants, who contemplate physical settlement of the transactions, in response to regulatory requirements, the need to maintain reliable supplies, and practical considerations of storage or transport. In each case, the particular commodities covered by the contract are needed by at least one of the parties for the normal operation of its business, and the specific identity of the counterparty is an important consideration because of, for example, concerns about reliability or the practicability of supply."
In accordance with section 712(d)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the proposed guidance was issued jointly with the SEC Monday, after consultation with the board of governors of the Federal Reserve System.
"We are issuing this guidance after considering the useful input we have received from market participants expressing concern about this issue," Massad said. "I support this proposal as it will properly clarify the treatment of contracts used by many businesses with respect to the supply and delivery of electric power and natural gas.”
The CFTC will accept comment on the proposed guidance for 30 days after it is published in the Federal Register.