CFTC Clarifies That Typical Retail Energy Contracts Are Not Subject To Regulation Under Dodd-Frank’s Retail Commodity Transaction Provisions

On Friday August 23, the Commodity Futures Trading Commission clarified that typical retail energy contracts with homeowners and commercial users will not be subject to the Dodd-Frank Act’s requirements applicable to “Retail Commodity Transactions.”

Congress, in the Dodd-Frank Act, defined a Retail Commodity Transaction as “any agreement, contract, or transaction in any commodity that is entered into with, or offered to, a non-eligible contract participant or non-eligible commercial entity on a leveraged, margined, or financed basis.”  See Section 742(a) of the Dodd-Frank Act, adding section 2(c)(2)(D) to the Commodity Exchange Act.  Such agreements, contracts and transactions must be conducted on a regulated exchange and are subject to the CFTC’s anti-fraud authority.  The Retail Commodity Transaction requirements do not apply, however, to a commodity transaction for which “actual delivery” is made within 28 days.

Trade associations representing retail energy suppliers argued that typical retail transactions — in which the sale and delivery of electricity or natural gas occurs on a recurring basics — meet the actual delivery standard and thus should not be considered Retail Commodity Transactions.  For example, the National Associations of Energy Marketers requested clarification “that the type of transactions which its retail energy marketer members typically enter into with residential and commercial customers, in which they contract with the customer to provide physical energy supply (electricity or natural gas) for terms that regularly in the course of business contemplate delivery of the physical energy commodity in excess of 28 days, were not intended and should not be interpreted to constitute ‘retail commodity transactions’ under the Act [the Dodd-Frank Act.]” 78 FR 62427.

The CFTC agreed, describing the transactions as follows:  “[E]nergy firms enter into fixed price contracts with customers to supply electricity or natural gas to the customer’s residence or business for a period of one or more years. The customer consumes the electricity or natural gas and subsequently pays for that usage, along with all applicable taxes, on a periodic basis.”  Id. at 52428.  The CFTC then said that the Dodd-Frank requirements would not apply to such transactions.  “The Commission [the CFTC] is not of the view that new CEA section 2(c)(2)(D) [the new Commodity Exchange Act section added by the Dodd-Frank Act] applies to this scenario, particularly in light of the fact that the customer regularly receives delivery of and consumes the physical energy commodity over the term of the contract and periodically pays for that usage.” Id.

Trade associations expressed pleasure with the CFTC’s clarification.  For example, Melissa Lauderdale, president of the Retail Energy Suppliers Association, said RESA was “pleased the CFTC agreed that our retail electricity and natural gas contracts do constitute actual delivery of a commodity. It is important for both the industry and consumers that retail suppliers be able to continue to provide products and services to residences and businesses without unnecessary regulation of these transactions that were clearly not the focus of the Dodd-Frank legislation.”  E-mail to Megawatt Daily from Melissa Lauderdale, Megawatt Daily, August 26, 2013, at p. 18.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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