CFTC/Dodd-Frank Working Group Background and Overview September 16, 2011

1. CFTC/Dodd-Frank Working GroupBackground and OverviewSeptember 16, 2011

2. Outline Energy World Prior to Dodd-Frank Forward Contract Exclusion Public Interest Exemption Consequences of Being a Swap Proposed NEPOOL Recommendations Next Steps for Working Group Meeting Schedule

3. Energy World Prior to Dodd-Frank Energy companies regularly buy and sell natural gas, electric power or capacity, fuel for generation, etc. Such physical commodity transactions hedge against their commercial risks, e.g., pricing and availability Commonly referred to as “OTC” bilateral contract markets Typically uses Master Agreement (EEI/ISDA), and parties can negotiate various forms of credit support/credit risk arrangements (or transact without such arrangements) Since 2000 (Commodity Futures Modernization Act), OTC derivatives used in the energy industry have, for the most part, been explicitly exempt from the CEA (Commodity Exchange Act) Dodd-Frank eliminates the current exclusions and exemptions from the CEA and brings all “swaps” under the jurisdiction of the CFTC

4. Dodd-Frank Act is Enacted (July 2010) Broad definition of swaps raises concerns Act defines “swap” as “any agreement, contract, or transaction (i) that is a put, call, cap, floor, collar, or similar option of any kind that is for the purchase or sale, or based on the value of, … [an underlying asset]; (ii) that provides for any purchase, sale, payment, or delivery… that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence; (iii) that provides on an executory basis for the exchange… of one or more payments based on the value of…[any underlying assets] and that transfers, as between the parties to the transaction,…the financial risk associated with a future change in any such value… without also conveying a[n]…ownership interest… or (iv) that is…, or in the future becomes, commonly known to the trade as a swap….”

5. §721(a)(21) Forward Contract Exclusion Act excludes from the definition of swap “any sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the transaction is intended to be physically settled.” Also referred to by the CFTC as “commercial merchandising transactions” CFTC refers to this as the “forward contract exclusion” and states that such exclusion should be read “consistent with the CFTC’s historical interpretation of the forward contract exclusion”

6. §721(a)(21) Forward Contract Exclusion Intent to deliver is an essential element of forward contract exclusion (that has not changed as a result of Dodd-Frank) Can be demonstrated by a binding delivery point in the contract CFTC will also look to the fact that the parties do actually regularly make or take deliveries of the commodity as part of their business Even if parties later “book-out” the transaction, i.e., settle it financially, it can still qualify for the exclusion if there was an intent to deliver. This applies to all energy commodities.

7. §721(a)(21) Forward Contract Exclusion Embedded options in Forward Contracts under Dodd-Frank are to be interpreted by the CFTC similar to regulations pre-Dodd Frank Forward contracts with embedded options would still be excluded if the options: may be used to adjust the forward contract price, but do not overall undermine the overall nature of the contract as a forward contract do not target the delivery term, so that the predominant feature is still actual delivery cannot be severed and marketed separately from the contract.

8. FERC and Electric Trade Associations FERC has advocated for transactions that are executed or traded on RTOs/ISOs to be excluded from the definition of swap These transactions should be excluded from the definition of swap whether because they are commercial merchandising transactions, i.e., within the forward contract exclusion, or such definition is inconsistent with the text, goals, and purpose of Dodd-Frank Industry trade groups have supported this position, seeking to exclude RTO/ISO transactions and services from the definition of swap (and noting concerns with having to go through the exemption process)

9. §722 Public Interest Exemption “Tariff Transaction” exemption would give CFTC jurisdiction, if found in the public interest, to exempt from the requirements of the Act, agreements, contracts or transactions that are entered into pursuant to a tariff or rate schedule approved by the FERC or a state regulatory authority. ISOs/RTOs to file for an exemption under this section for their products 30-Day Public Comment period expected

10. Consequences of Being a Swap Mandatory Clearing and Exchange Trading The CFTC will have authority to determine which swaps are required to be cleared on a derivatives clearing organization (“DCO”). Moreover, swaps that are required to be cleared must also be executed or traded on an exchange (referred to in the Act as a designated contract market or “DCM”) or swap execution facility (“SEF”), unless no exchange or SEF will make the swap available for trading. DCOs, DCMs and SEFs all will be regulated by the CFTC DCOs are member-funded organizations that act as an intermediary in clearing and settling trades and netting offsetting transactions. They will be required to establish margin requirements for cleared swaps and their use is intended to reduce “systemic risk.” Counterparties to swaps subject to these mandatory clearing and trading requirements will be required to adhere to the rules of the DCOs and exchanges, including the posting of margins, sometimes daily or intra-daily.

11. Consequences of Being a Swap End User Exemption to Mandatory Clearing and Exchange Trading If certain conditions are met, a swap will be exempt from the clearing and exchange trading requirements if one of the counterparties to the swap is an end user that is hedging its own commercial risk and such person elects exemption. “End Users” cannot be “financial entities” – which are defined as including “Swap Dealers” and “Major Swap Participants.” A qualifying end user must be using the swap to hedge or mitigate risk and must notify the CFTC how it generally meets its financial obligations associated with entering into a non-cleared swap--which, under the CFTC’s proposed regulation, may be by providing credit support, pledged or segregated assets or guarantees or through available financial resources or by other means. Additional information will also be required from end users that are SEC reporting companies.

12. Consequences of Being a Swap End User Exemption (con’t) As written, margin requirements appear to apply even if an end user is a counterparty to the swap. Dodd-Frank states that the CFTC “shall adopt rules for swap dealers and major swap participants . . . imposing . . . both initial and variation margin requirements on all swaps that are not cleared by a registered derivatives clearing organization.” If margin requirements are imposed on end users, much of the benefit of the end-user exemption from the clearing requirements may be negated. End users could still be impacted if an end user’s counterparty is required to maintain a certain amount of capital against an end user’s transactions (those costs will be passed on to the end user) Also, even if an entity utilizes the end user exemption from clearing and exchange-trading, end users who engage in swaps will still have to comply with CFTC registration, recordkeeping, and reporting regulations

13. Consequences of Being a Swap Recordkeeping and Reporting Title VII places several recordkeeping and reporting requirements on Swap Dealers and Major Swap Participants, in general requiring such entities to maintain daily records and to open such records up to inspection and examination by the CFTC. These requirements include maintaining recorded communications, such as e-mails, instant messages and recorded telephone conversations. The Act also requires the establishment of swap data repositories (“SDRs”) to collect and maintain data relating to uncleared swap transactions and directs the CFTC to prescribe standards for swap data recordkeeping and reporting (not just applicable to Swap Dealers and Major Swap Participants) End users will also be required to maintain records with respect to uncleared swaps and to report them in cases where the counterparty is neither a swap dealer nor a major swap participant.

14. Potential NEPOOL Process Overall NEPOOL Process Support the exclusion of all FERC-jurisdictional bilaterals from the definition of a swap (with further analysis by this Working Group as to such scope of exclusion) Consistent with FERC’s direction CFTC decision expected this fall NEPOOL is past the filing deadlines in that specific proceeding, although may be able to express that support as part of its pleading in response to the ISO exemption request Failing that exclusion, draft and file a public interest exemption before the CFTC for all FERC-jurisdictional bilaterals (or a narrower scope of bilaterals, as determined by NEPOOL)

15. Next Steps for Working Group Need to discuss scope of any potential NEPOOL public interest exemption filing Is starting with all FERC-jurisdictional bilaterals appropriate? Do Participants wish to narrow (or expand) that scope further? What bilaterals should or should not be covered?

16. Next Steps for Working Group Further work to define the criteria against which any NEPOOL exemption request will be weighed Target is November PC for NEPOOL to have a more substantial position and/or direction (whether as further direction, outline of a pleading and/or pleading itself)

17. Meeting Schedule September 16, 2011 at 10 a.m. September 27, 2011 at 1 p.m. October 11, 2011 at 10 a.m. October 28, 2011 at 10 a.m. (NOTE: Moved from October 26 listed on the prior notice to Participants) Targeting NPC Vote on November 18, 2011