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July 13, 2012
Discount Power Elected to NEM Executive Committee

NEM is pleased to announce that Discount Power, Inc. (“DPI”) has been elected to the Executive Committee. David Gable, President; David Feldman, VP of Operations; and Gino Tarantino, Chief Financial Officer, will represent Discount Power, Inc. (“DPI”).

Discount Power, Inc (“DPI”), located in Shelton, Connecticut, is a licensed retail electric supply company in Connecticut and New York formed to take advantage of the deregulated electrical energy markets in the United States. The company, incorporated in May of 2008, launched operations in Connecticut in December 2009. The company currently offers a full suite of products to residential and small commercial customers throughout the State of Connecticut.

NEM Summer Policy Conference

NEM's Summer Policy Conference will take place on August 21-23, 2012, in Chicago, Illinois. The Illinois Commerce Commission has confirmed that the entire Commission and its staff will participate and other top State Officials and Stakeholders will be invited. We are also pleased to inform you that the University Club has granted NEM permission to offer rooms at this exclusive Club on a first-come, first-served basis to our members subject to its code of conduct for guests at the Club. All reservations for members who wish to stay in the Club should be arranged with Catalina Aguilar at NEM headquarters. Please also note that we are arranging to have an NEM Member Baseball Game Night, the evening of August 22, 2012, at 7PM, White Sox v. New York Yankees. Please use this hotlink to register.

CFTC Rules on Definition of "Swap" and End-User Exception to Clearing Requirement Under Dodd Frank

This week, CFTC issued a final rule and interpretations of the term “swap” under Dodd-Frank. CFTC believes the term as used in Dodd Frank is detailed and comprehensive but has issued the rule to clarify that certain insurance products, consumer and commercial agreements, and loan participations are not swaps or security-based swaps.

Of particular note, CFTC issued an interpretation clarifying the scope of the forward contract exclusion for nonfinancial commodities that is included in the statutory swap definition.

• “The interpretation provides that the forward exclusion in nonfinancial commodities should be interpreted in a manner consistent with the CFTC’s historical interpretation of the existing forward exclusion with respect to futures contracts.
• The principles underlying the CFTC’s “Brent Interpretation” regarding “book-outs” transactions that apply to the forward exclusion from the definition of “future delivery” also would apply to the forward exclusion from the swap definition for nonfinancial commodities. Commercial market participants that regularly make or take delivery of the referenced commodity in the ordinary course of their business, where the book-out transaction is effectuated through a subsequent, separately negotiated agreement, should qualify for the forward exclusion from the swap definition.
• The CFTC’s 1993 Energy Exemption is withdrawn as proposed because it is no longer necessary in light of the extension of the Brent Interpretation to all nonfinancial commodities; however, the CFTC is clarifying that the alternative delivery procedures (netting, etc.) mentioned in the Energy Exemption continue to apply.
• Providing guidance regarding nonfinancial commodities as commodities that may be physically delivered and are exempt or agricultural commodities, and regarding environmental commodities (e.g. offsets, allowances, and RECs) that they are nonfinancial commodities.
• Clarifying in response to commenters that oral book-outs are permissible if they are followed by a written or electronic confirmation.
• Providing guidance regarding forward with embedded volumetric optionality: Commenters in the energy industry asserted that many of their transactions contain volumetric optionality and should be considered forwards, while prior CFTC guidance restated in the proposal covered price optionality only. If among other things the volumetric optionality is due to physical factors or regulatory requirements beyond the control of the parties, the interpretation provides that the agreement, contract or transaction may qualify for the forward exclusions from the swap and future delivery definitions. The CFTC is requesting comment on its forwards with volumetric optionality interpretation.
• Providing guidance that certain contract provisions do not disqualify transactions for the forward exclusion (liquidated damages, renewal/evergreen provisions).
• Providing guidance regarding certain types of arrangements as described in the release, fuel delivery agreements and physical exchange transactions, are not swaps.
• Providing guidance regarding certain physical commercial arrangements that are similar to leases that they are not options and may qualify for the forward exclusions under the facts and circumstances.
• Providing guidance regarding energy management agreements that such agreements do not alter the nature of the transactions conducted under them.”

CFTC notes that its interpretation regarding forwards with volumetric options is an interpretation of the CFTC and may be relied upon by market participants. However, it has requested comments on a series of questions related to that interpretation.
"1. Are the elements set forth in the interpretation to distinguish forwards with embedded volumetric optionality from commodity options appropriate? Why or why not?
2. Are there additional elements that would be appropriate? Please describe and provide support for why such elements would serve to distinguish forwards with embedded volumetric optionality from commodity options.
3. Is the seventh element that, to ensure that an agreement, contract, or transaction with embedded volumetric optionality is a forward and not an option, the volumetric optionality is based primarily on physical factors, or regulatory requirements, that are outside the control of the parties and are influencing demand for, or supply of, the nonfinancial commodity, necessary and appropriate? Why or why not? Is the statement of this element sufficiently clear and unambiguous? If not, what adjustments would be appropriate?
4. Are there circumstances where volumetric optionality is based on other factors? Please describe. Would such factors, if made a part of the interpretation, serve to distinguish forwards with embedded volumetric optionality from commodity options? If so, how?
5. Does the interpretation provide sufficient guidance as to whether agreements, contracts, or transactions with embedded volumetric optionality permitting a nominal amount, or no amount, of a nonfinancial commodity to be delivered are forwards or options, viewing the agreements, contracts, or transactions as a whole, if they satisfy the seven elements of the interpretation? Why or why not? Does this interpretation encourage evasion, or do the seven
elements sufficiently distinguish forwards from agreements, contracts, and transactions that may evade commodity options regulation?
6. Is the interpretation sufficiently clear with respect to capacity contracts, transmission (or transportation) services agreements, peaking supply contracts, or tolling agreements? Why or why not? Do capacity contracts, transmission (or transportation) services agreements, peaking supply contracts, or tolling agreements generally have features that satisfy the forwards with volumetric options interpretation included in this release? If so, which ones? If not, why not? Could these types of agreements, contracts, and transactions qualify for the forward exclusions under other parts of the interpretation set forth above? Are there material
differences in the structure, operation, or economic effect of these types of agreements, contracts, and transactions as compared to full requirements contracts that are relevant to whether such agreements, contracts, and transactions are options under the CEA? Please explain. If so, what are the material differences?
7. Do the agreements, contracts, and transactions listed in question no. 6 above have embedded optionality in the first instance? Based on descriptions by commenters, it appears that they may have a binding obligation for delivery, but have no set amount specified for delivery. Instead, delivery (including the possibility of nominal or zero delivery) is determined by the terms and conditions contained within the agreement, contract, or transaction (including, for example, the satisfaction of a condition precedent to delivery, such as a commodity price or temperature reaching a level specified in the agreement, contract, or transaction). That is, the variation in delivery is not driven by the exercise of embedded optionality by the parties. Do the agreements, contracts, and transactions listed in question no. 6 exhibit these kinds of characteristics? If so, should the CFTC consider them in some manner other than its forward
interpretation? Why or why not?"

The full text of the Final Rule and Interpretations on the Definition of "Swap" is available on the NEM Website.

CFTC also adopted a final rule on the end-user exception to the Dodd Frank clearing requirement. To be eligible for the exception, one of the counterparties to the swap must be a non-financial entity using the swap to hedge or mitigate commercial risk and notifies CFTC “how it generally meets its financial obligations associated with entering into non-cleared swaps.” The final rule establishes criteria for determining whether a swap is “hedging or mitigating commercial risk” under the end user exception. The criteria adopted are virtually the same as the criteria used in the definition of “major swap participant” recently adopted by CFTC. The full text of the Final Rule is available on the NEM Website.

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ORMD Annual Report on Retail Electric Competition

The Office of Retail Market Development (ORMD) filed its 2012 Annual Report with the Commission, legislature and Governor on the status of retail electric competition. ORMD reports that there are 70 Commission-certified ARES. More than 60% of total electric usage of ComEd and Ameren customers is being provided by retail electric suppliers. Nearly half a million residential customers have switched. There are 211 licensed Agents, Brokers and Consultants. ORMD analyzed market concentration for the various customer segments. It concluded that,"there appears to be effective competition among the active retail electric suppliers in almost all non-residential segments at this time." From June 20111 to May 2012, "the ComEd residential market is substantially and consistently less concentrated than Ameren Illinois; market," however, "with few exceptions, the three Ameren Illinois Rate Zones exhibited lower concentration from one month to the next." ORMD also performed a residential savings estimate for customers that switched from ComEd. ORMD estimates these customers saved $24 million from June 2011 to May 2012. ORMD's recommendation going forward is for a Commission rulemaking to address policy and legal issues associated with municipal aggregation. The full text of the ORMD Report is available on the NEM Website.

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Workshop to Review Electric and Natural Gas Competition Rules

The Commission is statutorily required to engage in a review process of its regulations every five years. The Commission has ordered a workshop be convened for the purpose of reviewing provisions of its electric and natural gas competition rules. The workshop will take place on August 6, 2012, at 10AM at the Commission's offices. At the workshop, Staff will be seeking feedback on proposed rule revisions it has as well as proposals from stakeholders. Afterwards, Staff will prepare proposed rule amendments for comment. The full text of the Workshop Notice is available on the NEM Website.

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