CONFIDENTIAL

September __, 2001

CONFIDENTIAL TREATMENT REQUESTED

Mr. John C. Lawton
Acting Director
Division of Trading and Markets
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581.

Re:  Request for No-Action Letter Concerning 
        Certain Financially-Settled Transactions_
Dear Mr. Lawton:
On behalf of Enron Energy Services, Inc.< (>3, and any of its affiliates engaged in substantially the same business as EES or providing services substantially similar to those provided by EES, all as described more fully below (EES and such affiliates being referred to collectively herein as 4“EES”), we respectfully request the written confirmation of the Division of Trading and Markets (the “Division”) with respect to the types of transactions described below.  In particular, we respectfully request your written concurrence5 that the Division will not recommend that the Commodity Futures Trading Commission (the “Commission”) initiate enforcement action under the Commodity Exchange Act (the “Act”) or the Commission’s rules if EES offers and enters into financially-settled transactions in energy commodities with commercial entities that are not “eligible contract participants” (“ECPs”), as defined in Section 1a(12) of the Act, subject to the conditions set forth below.  We believe that the relief requested herein will provide small businesses with an important means of protecting their businesses against the potentially adverse effects of price volatility and uncertainty, without compromising the customer protection goals of the Act, and that this relief is fully consistent with the purpose and intent of the Commodity Futures Modernization Act of 2000 (the “CFMA”).  Pursuant to 17 C.F.R. § 145.9, and by separate letter, EES respectfully requests confidential treatment of this letter under the Freedom of Information Act, 5 U.S.C. § 522 (1994) (“FOIA”).  
I. 	Factual Background
	a.	EES and its Affiliates
		EES, a wholly owned subsidiary of Enron Corp. (“Enron”), provides integrated energy and facility management outsourcing solutions to businesses and end-users.  As Enron’s energy services and retail marketing arm, EES offers a variety of energy delivery and management services focused on, among other things, assisting businesses in <maximizing>6obtaining7 energy savings and <reducing>8managing9 the risk of energy prices and operations for businesses.  The risk management services offered by EES to its clients include energy efficiency projects, tariff and information management, financial services and price risk management.  EES currently has over 20,000 customer facilities under contract across the U.S and serves customers in 46 U.S. states and six countries (U.S., Canada, U.K., Spain, Italy and Portugal).  
		Enron provides natural gas and electricity as well as retail energy and bandwidth products to wholesale and retail customers worldwide.  Enron’s business structure is divided into three main branches: wholesale services, energy services and transportation services.  Enron is involved, through its subsidiaries, in the generation, transmission, storage and distribution of natural gas and power throughout the country.  Enron is also engaged, on a regular basis and throughout North America, in the delivery of power directly to a variety of commercial entities.  On a global level, Enron provides commodity trading services, financial and Internet services, as well as commodity risk management, retail energy and facility management services.  Enron, a leader in the energy market, has over 20,000 employees in over 40 countries and was the largest marketer of natural gas and electricity in North America in 2000.  Enron had revenues of $101 billion in 2000, and total assets of $63 billion for the quarter ending June 30, 2001.
		Enron and its subsidiaries, including EES, currently enter into a variety of swaps, options and other derivative products on natural gas, electricity, crude oil and other energy-related and non-energy commodities, with a wide range of commercial and institutional counterparties.  In addition, Enron owns and operates “EnronOnline”, the largest web-based e-commerce site in the world.  EnronOnline offers electronic pricing and execution of transactions in physical commodities as well as derivatives on energy-related commodities, bandwidth and other commodities.  In the second quarter of 2001 alone, over 325,000 transactions were executed through EnronOnline.  To date, Enron has entered into cash-settled swaps and other derivatives only with ECPs (or, prior to the adoption of the CFMA, eligible swap participants).  Enron, and EES in particular, believe, however, that the benefits of these risk management products should be available to certain types of non-ECPs as well.  		
b.	Developments in the Energy Markets
		As a result of recent developments in the energy markets, and the resulting increase in price volatility, non-ECPs have found themselves exposed to severe price risks in connection with their energy needs and have therefore sought to protect themselves against these risks.  The need for alternative risk management mechanisms is particularly acute for small businesses, which are more vulnerable to this type of market uncertainty.
	One of the principal causes of instability in the energy markets is the ongoing process of deregulation and restructuring.  Over the past ten years, the energy markets have been in transition from highly regulated local monopolies to open competitive markets.  The natural gas market, today a competitive market, began restructuring in 1985 with Federal Energy Regulatory Commission Order 436, which established open access for transportation services to gas pipelines.  The restructuring of the electric power markets is currently taking place on a state-to-state level throughout the country.  As of March, 2001, 24 states and the District of Columbia had enacted legislation or issued orders regarding the restructuring of their electric power markets and another 18 states are currently investigating restructuring strategies.  In approximately half the states, therefore, dramatic changes have been implemented, and such changes have either been made or are under consideration in 42 states.  
This has in turn resulted in significant fragmentation of the U.S. electricity market.  Some local electricity markets are open to private companies, some of which may be national or regional suppliers, while others remain either entirely or partially supplied by local utilities.  Differing types of local regulation or deregulation have caused further fragmentation.  The effect of these factors on small businesses has been to increase uncertainty and volatility in the cost of energy needs<, because supplies may be coming from different sources and a variety of types of suppliers at any given time>10.  In addition, inelasticity of demand and weather-sensitivity of energy commodities further exacerbate the unpredictability of prices.  Price volatility in the natural gas industry has also recently been linked to diminished volumes in storage, constraints in the pipeline delivery systems and operational difficulties.  However, while deregulation has increased price volatility, it has not yet resulted in greater competition.  To the contrary, EES and other market participants remain precluded from providing physical power in many regions and users in these regions are therefore able to acquire power from only <a limited number of>11designated12 suppliers.
	Over the past year, issues of energy price stability and service stability have been of particular concern to users nationwide.  Many commentators and consumer groups fear that, as a result of the restructuring process, small businesses and homeowners will experience higher prices and unstable energy services in the natural gas, fuel and electricity markets.  In the gas industry, prices increased significantly in 2000 and have remained high throughout the first half of 2001.  Future retail price levels remain uncertain and will depend on capacity, weather, fuel prices, use, generation, transmission and distribution costs.  Fears of higher prices have been fueled by unprecedented price spikes and outages (e.g., in the Midwest during the summer of 1998, in New England in the winter of 2000 and in the ongoing situation in California).
These factors can have particularly devastating consequences for small businesses, such as local grocery stores, dry cleaners and retailers, which are often significant energy users but operate on extremely narrow profit margins.  A sudden or sustained increase in energy costs could mean the difference between an annual profit or loss for such businesses, and might also determine whether many businesses are able to survive at all.  The need for energy risk management products to assist small businesses in navigating through these risks, is therefore acute.
II.	Transactions for which Relief is Requested
	EES proposes to offer financially-settled swaps and options, as well as other financially-settled agreements, contracts or transactions (collectively “financially-settled transactions”) on energy commodities to qualifying non-ECPs in order to permit them to manage the risks to which they are exposed as a result of their energy needs.  For example, a non-ECP, such as a local grocery store, might enter into a requirements contract, pursuant to which it agrees to purchase electricity from a third party supplier (which may be affiliated or unaffiliated with Enron, but will in either case be an entity separate from EES) over a one-year period at a floating market price.  This allows the grocery store to ensure a steady supply of power but leaves it fully exposed to market price risks.  EES will enter into a financially-settled transaction with the grocery store, covering no more than the quantity of power to be provided under the requirements contract, and <will>13may additionally14 agree to pay the store’s electricity bills, on a monthly basis, in return for the store’s payment to EES of a fixed amount per kilowatt hour each month.  If the electricity cost in a given month is below that amount, EES will retain the difference.  However, if the electricity cost is above this fixed amount, the store will have locked in the fixed amount and will be protected against any increase in price above this level.  
	EES will enter into these types of financially-settled transactions only with commercial entities that have executed contracts for the supply of energy commodities with one or more suppliers or that otherwise expect to purchase a given quantity of energy commodities over a specified term.  For this purpose, the term “commercial entity” will be defined to mean an entity (and not an individual) engaged in a business that utilizes natural gas, electricity, oil or other energy commodities on a regular basis, and that is exposed to the risk of changes in the price of such commodity in connection with its business activities.  EES will require that the counterparty make appropriate representations concerning the amount of the energy commodity it has contracted to purchase or its estimated needs, as the case may be, as well as representations that the transaction is not for speculative purposes.  Where <a>15appropriate, EES may obtain contracts, invoices or other documents reflecting the16 counterparty< enters into a financially-settled transaction in connection with a>17’s energy18 requirements <contract, EES will also require that the counterparty provide actual copies of the relevant supply contracts>19or usage20.  Accordingly, Enron will obtain appropriate representations that the financially-settled transactions will be solely for risk management purposes in connection with the operation of commercial enterprises and will not be used for speculation.  In addition, EES will enter into these financially-settled transactions only with commercial non-ECPs and will not enter into such transactions with individuals.  
Section 2(h) of the Act, as recently amended by the CFMA, excludes any “contract, agreement or transaction in exempt commodities” from the off-exchange trading prohibition and other provisions of the Act.  To be excluded from the scope of the Act, a transaction must be entered into between eligible contract participants and must not be executed or traded on a trading facility (other than an electronic trading facility).  The financially-settled transactions to be entered into by EES will be “contracts, agreements or transactions” and will be based on “exempt commodities” (as defined under the CEA).  
EES and other Enron entities are ECPs, as well as “eligible commercial entities”, as defined in Section 1a(11) of the Act, with respect to natural gas, power and other energy commodities. The counterparties to the proposed financially-settled transactions, as noted, will not be ECPs and this criterion under the CFMA obviously will not be satisfied.  We note, however, that Section 105(c) of the CFMA requires the Commission, along with other relevant agencies, to study the status of swaps with non-ECPs and to make recommendations for permitting such transactions to be entered into.  In view of the congressional mandate to study the offer and sale of swaps to non-ECPs, the limitations to be imposed on the transactions proposed by EES, as set forth above, and the pressing need for this type of product on the part of a variety of small businesses, we believe that EES should be permitted to enter such transactions subject to the conditions described herein.  
III.	Necessity for and Appropriateness of Certain 
	Financially- Settled Transactions with Non-ECPs
	The financially-settled transactions with non-ECPs proposed by EES offer an important risk management mechanism for small businesses, which will enable such businesses to protect themselves from price volatility in the energy market.  By fixing floating prices at specified levels, small businesses will be able to stabilize significant business costs, while still ensuring that all of their energy needs are met through long term supply contracts with third party sources or under such sources’ tariffs21.  This form of risk management, as noted, may be crucial to the survival of many small businesses, which characteristically operate on thin profit margins, and whose greatest expenses are often energy costs.  
	The ability to offer financially-settled transactions to small businesses will also increase competition in the commercial energy markets.  EES, for example, currently offers swaps as integrated elements of “bundled” physical power supply contracts to both ECP and non-ECP customers.  Under such transactions, EES enters into supply contracts with commercial customers but allows such customers, under the terms of the relevant contracts, to elect to “fix” the cost of the power to be acquired.  Because this is done in the context of physical supply contracts (which constitute forward contracts, as that term is understood under the Act), EES is able to enter into the transactions with non-ECPs.  However, EES is currently unable to supply, or prohibited from supplying, physical power to customers in certain regulated and deregulated markets.  Moreover, in certain markets, it may be more efficient for commercial entities to purchase power from local utilities or other third parties, rather than EES.  Consequently, the opportunity to offer financially-settled transactions as a separate service will allow EES to compete in markets in which it cannot or does not otherwise supply power, which will increase competition and provide commercial entities with greater flexibility in satisfying their risk management needs.  
The fact that financially-settled transactions are currently being offered by EES and others to ECPs< and non-ECPs,>22 and are being used by ECPs (as well as non-ECP commercial entities, through “bundled” contracts) underscores the fact that the transactions proposed by EES with respect to non-ECPs represent an important risk management tool and will not pose any additional risks to the entities entering into the transactions or raise any customer protection issues.  Moreover, the transactions proposed by EES could, like transactions entered into between ECPs pursuant to Section 2(h) of the Act, remain subject to the antifraud and antimanipulation provisions of the Act.  This will provide an additional measure of protection to non-ECPs entering into such transactions and will also allow the Commission to pursue fraud violations in enforcement proceedings.
	Based on the foregoing, EES respectfully requests written confirmation that the Division will not recommend to the Commission that enforcement action be initiated against EES <or>23(including those of24 its affiliates that are within the definition of EES above) 25if EES <enters>26or such affiliates enter27 into financially-settled transactions on energy commodities with non-ECPs, provided that, with respect to each such transaction:
(1)	the non-ECP counterparty is a commercial entity engaged in a business that exposes it to risks arising from the need to acquire and use energy, and is not an individual, investment fund or other similar type of person or entity;
(2)	EES <or any affiliate of EES that enters into the transaction >28is an eligible commercial entity, as defined in Section 1a(11) of the Act;
(3)	the amount of the relevant energy commodity underlying the transaction is equal to or less than the total of (a) amounts that the counterparty has <contracted>29agreed30 to purchase< during the term of the transaction>31, and (b) any other amounts that the counterparty reasonably anticipates it will require during the term of the transaction in connection with the operation of the business; and
(4)	EES obtains representations from the counterparty regarding the risk management purposes of the transaction, the fact that the underlying quantity does not exceed the amounts described above and that the counterparty is not entering into the transaction for speculative purposes.
	If at any time prior to the issuance of the relief sought herein, any material representation made in this request ceases to be true and complete, EES will inform the Commission’s staff promptly in writing of all materially changed facts and circumstances.  If a material change in facts or circumstances occurs subsequent to the issuance of such relief, we will promptly inform the Commission’s staff.  In our view, the relief requested herein is fully consistent with the purposes of the Act and the CFMA and will advance important public policy objectives of the Act without jeopardizing customer protections. 
Attached hereto as Appendix A is a list of specific sections of the Act and Commission Rules for which no-action relief is sought in this request.  
Pursuant to 17 C.F.R. § 145.9, we request here, and by separate letter ( a copy of which is enclosed), confidential treatment of this letter under FOIA.  Accordingly, we request that this letter be maintained in a non-public file and that access to it by third parties be denied, except as specifically permitted by law. 
Thank you for your consideration of this matter.  If you have any questions, please do not hesitate to call the undersigned at (    )___ - _____.
									
					Sincerely,

Attachment

cc:	Edward M. Colbert, Esq.
	Office of the Secretariat
	Commodity Futures Trading Commission

Appendix A

Summary of Requested No-Action Relief for Retail Swaps

I.	Commodity Futures Modernization Act of 2000

	Section 105(c) – Study Regarding Retail Swaps

II.	Commodity Exchange Act

	Section 1a(11) – Definition of Eligible Commercial Entity	
	
	Section 1a(12) – Definition of Eligible Contract Participant

	Section 2(g) – Excluded Swap Transactions

	

Document comparison done by DeltaView on Friday, September 28, 2001 13:04:29
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Document 1	pcdocs://NY12532/302545/6 	
Document 2	pcdocs://NY12532/302545/8 	
Rendering set	S&C Default	

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No.	Change	Text	
1-2	Change 	"September 7, 2001" changed to "September 28, 2001"	
3-4	Change 	"(“EES”)," changed to ", and any of its...herein as “EES”),"	
5	Change 	"“Division”) that the" changed to "“Division”) with respect...concurrence that the"	
6-7	Change 	"businesses in maximizing energy" changed to "businesses in obtaining energy"	
8-9	Change 	"savings and reducing the risk" changed to "savings and managing the risk"	
10	Change 	"needs, because supplies...at any given time." changed to "needs."	
11-12	Change 	"from only a limited number of suppliers." changed to "from only designated suppliers."	
13-14	Change 	"contract, and will agree" changed to "contract, and may additionally agree"	
15-16	Change 	"Where a counterparty" changed to "Where appropriate, EES...the counterparty"	
17-18	Change 	"counterparty enters into...with a requirements" changed to "counterparty’s energy requirements"	
19-20	Change 	"requirements contract,...supply contracts." changed to "requirements or usage."	
21	Change 	"sources." changed to "sources or under such sources’ tariffs."	
22	Change 	"to ECPs and non-ECPs, and are" changed to "to ECPs and are"	
23-24	Change 	"against EES or its affiliates" changed to "against EES (including those of its affiliates"	
25	Change 	"affiliates if EES" changed to "affiliates that are...of EES above) if EES"	
26-27	Change 	"if EES enters into financially-settled" changed to "if EES or such affiliates...into financially-settled"	
28	Change 	"EES or any affiliate of...the transaction is an" changed to "EES is an"	
29-30	Change 	"counterparty has contracted to purchase" changed to "counterparty has agreed to purchase"	
31	Change 	"purchase during the term of the transaction, and" changed to "purchase, and"	

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