On April 4, 2016, the U.S. Commodity Futures Trading Commission (CFTC) announced that it had unanimously approved proposed guidance regarding the appropriate treatment of certain electric power and natural gas contracts under the definition of the term “swap.”   

The Proposed Guidance

The guidance proposes that certain capacity and peaking supply contracts should not be considered “swaps” under the Commodity Exchange Act (CEA). This proposed guidance, issued jointly with the U.S. Securities and Exchange Commission (SEC) in accordance with the 2010 Dodd-Frank Act, provides some much-needed clarity for utilities and other power producers.  

Capacity and peaking supply contracts are commonly used by public utilities and other power producers. Capacity contracts allow load-serving entities and electric utilities to purchase capacity from suppliers to secure grid management and on-demand deliverability of power to consumers, in compliance with federal and state regulatory requirements. Peaking supply contracts allow an electric utility to purchase natural gas from another provider when its local natural gas supplier curtails service, ensuring sufficient natural gas supply during interruptions.

The CFTC preliminarily concludes that these contracts are examples of customary commercial arrangements as described in the Commission’s 2012 final rule further defining the term “swap” and should not be considered swaps. The CFTC notes that the contracts are entered into by commercial market participants to serve independent commercial and business purposes, such as meeting regulatory requirements and maintaining reliable energy supplies. Unlike the purpose of swaps, the purpose of these contracts is “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,” CFTC Chairman Timothy Massad said in a statement regarding the guidance. The CFTC also considered the fact that the contracts are not traded on an organized market or over-the-counter and do not have payment obligations that are severable from the contract.      

Comment Period

The CFTC will be accepting comments on the proposed guidance provided on or before May 9, 2016.

Krista Hess is co-author of this article.