CFTC’s Office of General Counsel Responds to Questions Regarding Certain Physical Commercial Agreements for the Supply and Consumption of Energy (with Lofchie Comment)

CFTC's Office of General Counsel ("OGC") supplied the attached FAQ in response to questions from market participants and other interested parties regarding the classification of certain physical commercial agreements for the supply and consumption of energy that contain both a variable cost and a fixed cost component. According to the CFTC, market participants were concerned that every agreement with a variable cost component would be regulated as a commodity option.

But not to worry:

In the view of the CFTC staff (which may not reflect the view of the CFTC), if

(1) a facility usage agreement, contract or transaction of a type discussed in the FAQ includes a two-part fee structure,

(2) the right to use the specified portion of the facility for the term of the agreement, contract or transaction is legally established upon entering into the agreement, contract or transaction,

(3) the party who has legally established the right to use the specified portion of the facility for the term of the agreement, contract or transaction pays the Demand Charge/Reservation Fee in a commercially reasonable timeframe,

(4) the use of the facility does not depend on the further exercise of an option, and

(5) the Usage Fee is in the nature of a reimbursement for the variable costs incurred by the operator of the facility in rendering the service,

then such a facility usage agreement, contract or transaction is not an option and is not intended to be regulated as such.

The staff goes on to say, however, that a facility usage agreement, contract or transaction with a two-part fee structure that fails to meet one or more of the conditions above may or may not be an option. Whether such an agreement, contract or transaction is an option depends on the specific facts and circumstances of the agreement, contract or transaction as a whole.

Lofchie Comment: Thank goodness there is a nice, easy, five-part test to deal with this issue, one that may be further supplemented by reference to a facts and circumstances test.

Click hereto view FAQ in full (links externally to CFTC website).See: CFTC Press Release; CFTC Proposed Rule "Clearing Exemption for Swaps between Certain Affiliated Entities" (77 FR 50425).See also: CFTC/SEC Joint Release on Swap Definitions (77 FR 48207) Comments for Proposed Rule 77 FR 48207.