ASC 815-10-15-40 through 15-51 describe the types of contracts that may qualify for the normal purchases and normal scope exception, as summarized in Figure 3-6.
Figure 3-6
Types of contracts that may be designated normal purchases or normal sales
Type of contract |
Key considerations |
Freestanding option contracts
|
- Not eligible, except for the limited exception for power contracts as defined in ASC 815-10-15-45
|
Forward contracts (non-option-based)
|
- Applies to forward contracts with no volumetric optionality
- Must be probable at inception and throughout the contractual period that physical delivery will occur
- Contracts subject to unplanned netting (i.e., book-out) are not eligible for this exception. See specific exception for power purchase or sale agreements subject to book-out below.
|
Forward contracts with optionality features
|
- Generally, contracts with volumetric optionality are not eligible for the normal purchases and normal sales scope exception
- Limited exception for power contracts as defined in ASC 815-10-15-45
- Contracts with other types of optionality (e.g., market price) may be eligible for the exception if the criteria in ASC 815-10-15-42 through 15-43 are met
|
Power purchase or sale agreements
|
- A power purchase or sale agreement (forward, option, or a combination) is eligible for the scope exception if the contract meets the definition of a capacity contract
- Specific to power contracts—other commodities are not eligible for this exception
- Buyer and seller should meet certain requirements
- The power contract exception may be applied even if the contract is subject to book-out, if all other requirements are met
|
The considerations for applying the normal purchases and normal sales scope exception to each of these types of contracts are discussed in the following sections.
Freestanding option contracts9
ASC 815-10-15-40
Option contracts that would require delivery of the related asset at an established price under the contract only if exercised are not eligible to qualify for the normal purchases and normal sales scope exception, except as indicated in paragraphs 815-10-15-45 through 15-51.
A contract with volumetric optionality is not eligible for the normal purchases and normal sales scope exception because it cannot be determined if it is “probable at inception and throughout the term of the individual contract that the contract will result in physical delivery.” Option contracts only contingently provide for such physical delivery (i.e., delivery is made only when the price of the item is above the strike price and the holder exercises the option).
In evaluating option contracts, the key factor that should be considered is whether the optionality impacts the quantity to be delivered under the contract. A volumetric option is not eligible for the normal purchases and normal sales scope exception, except in the case of certain qualifying power contracts. Contracts that contain optionality related only to price or other non-volumetric features would be eligible for the normal purchases and normal sales scope exception if the other required criteria are met.
Forward contracts (Non-option based)
ASC 815-10-15-41 states that the normal purchases and normal sales scope exception can be applied to forward contracts, which would include contracts for natural gas, coal, oil, and other commodities (hereinafter referred to as the commodity forward exception). One of the underlying principles of the commodity forward exception is that it applies to contracts for physical delivery. However, some commodity contracts may include implicit or explicit net settlement provisions (
UP 3.2.3.1) or have a market mechanism that permits net settlement (
UP 3.2.3.2). Because a contract with one of those features may not require physical delivery, it must be probable at inception and throughout the term of the contract that physical delivery of the commodity will occur in order for this type of contract to qualify.
Excerpt from ASC 815-10-15-41
Forward contracts are eligible to qualify for the normal purchases and normal sales scope exception. However, forward contracts that contain net settlement provisions as described in either paragraphs 815-10-15-100 through 15-109 or 815-10-15-110 through 15-118 are not eligible for the normal purchases and normal sales scope exception unless it is probable at inception and throughout the term of the individual contract that the contract will not settle net and will result in physical delivery.
As noted, contracts with net settlement provisions will not quality for the normal purchases and normal sales scope exception unless it is probable that physical delivery will occur throughout the entire term of the contract. Net settlement of a particular contract would preclude application of the normal purchases and normal sales scope exception to that contract in the future and would call into question whether similar contracts qualify. See
UP 3.3.1.3 Subsequent impact of net settlement (Tainting).
Question 3-23Can a power contract subject to book-out qualify for the normal purchases and normal sales scope exception in
ASC 815-10-15-26(b)?
PwC response
Generally, no. Due to the structure of the power markets, there is an institutional convention that allows certain power contracts to be “booked out.” A book-out is an unplanned netting of a purchase and sale agreement by the contracting counterparties. Book-outs are an accepted practice in the industry and arise as multiple transactions routinely occur at the same point of delivery as utilities and power companies balance their loads. Counterparties will offset their schedules (i.e., book out) when they have a buy and a sell of the same quantities at the same point. Booking out results in no physical delivery under the contract and avoids transmission losses and administrative fees.
A book-out is a form of net settlement and the ability to book out precludes qualification for this exception, even if the reporting entity does not intend to and does not have a practice of booking out. As a result, most power contracts do not qualify for this exception. However,
ASC 815 provides an exception for certain power contracts. See
UP 3.3.1.5 Certain power contracts for further information on this exception.
Forward contracts that contain optionality10 Consistent with the guidance for freestanding options discussed in
UP 3.3.1.5,
ASC 815 precludes application of the normal purchases and normal sales scope exception to any forward contract that contains volumetric optionality (except certain power contracts).
Excerpt from ASC 815-10-15-42
Except for power purchase or sales agreements addressed in paragraphs 815-10-15-45 through 15-51, if an option component permits modification of the quantity of the assets to be delivered, the contract is not eligible for the normal purchases and normal sales scope exception, unless the option component permits the holder only to purchase or sell additional quantities at the market price at the date of delivery.
Therefore, a contract cannot qualify for the normal purchases and normal sales scope exception if its terms include volumetric optionality, unless the volumetric option is priced based on the market price at the time of delivery. Furthermore,
ASC 815-10-55-26 specifically prohibits a reporting entity from bifurcating the forward component and the option component in a combined contract and then electing the normal purchases and normal sales scope exception for the forward component. However, a reporting entity may be able to avoid some of the accounting implications of this guidance as follows:
Separate forward and option contractsAs discussed in
ASC 815-10-55-27, instead of executing a single supply contract, a reporting entity could enter into two separate contracts: a forward contract for a specified quantity and an option contract for additional quantities whose purchase is conditional on the exercise of the option. The separate forward contract may then be eligible for the normal purchases and normal sales scope exception, provided all the criteria are met.
- Requirements contracts
A requirements contract specifies that the supplier will provide amounts equal to the purchaser’s needs, with prohibition against resale. In some cases, the contract requires a certain level of minimum purchases (resulting in a derivative for the specified minimum amount). Any remaining fluctuation in quantity would not be included in the notional amount. In a requirements contract, the portion of the contract that is accounted for as a derivative would be eligible for designation under the normal purchases and normal sales scope exception, provided all the criteria are met. See UP 3.2.1.1 for further information on requirements contracts.
- Power contracts
Power contracts may be eligible for the normal purchases and normal sales scope exception in accordance with ASC 815-10-15-45 through 15-51. See UP 3.3.1.5 Certain power contracts for further information.
Furthermore, once a volumetric option feature expires or has been exercised, it would no longer affect the evaluation.
Excerpt from ASC 815-10-15-43
If the optionality feature in the forward contract can modify the quantity of the asset to be delivered under the contract and that option feature has expired or has been completely exercised (even if delivery has not yet occurred), there is no longer any uncertainty as to the quantity to be delivered under the forward contract. Accordingly, following such expiration or exercise, the forward contract would be eligible for designation as a normal purchase or normal sale, provided that the other applicable conditions in this Subsection are met.
Therefore, if a contract includes a volumetric option, the reporting entity may reassess whether the contract qualifies for the normal purchases and normal sales scope exception upon exercise or expiration of the option. Once the option has expired, the contract no longer has any volumetric optionality and the reporting entity can determine whether the contract will result in physical delivery. See
UP 3.3.1.4 Timing of election for the accounting when a contract is designated as normal subsequent to its inception.
Question 3-24
Can a contract that requires the sale of a fixed volume of natural gas with an embedded option for additional volumes at a price based on an index plus a fixed-price adjuster qualify for the normal purchases and normal sales scope exception?
PwC response
It depends. A contract that includes both a forward component and an option component can only qualify for the normal purchases and normal sales scope exception if the optional volumes are purchased or sold at market prices at the time of the delivery. Price adjustments to market should be carefully considered prior to concluding that the contract can qualify for the normal purchases and normal sales scope exception. For example, if the market price is adjusted to compensate for a customary fee or administrative costs that are typically incurred, then the contract may still be eligible for designation under the normal purchases and normal sales scope exception. However, if the differential is intended to reflect basis differences due to the delivery location (e.g., the contract is priced on NYMEX Henry Hub but the delivery location is SoCal Border, a market hub for natural gas located in California), then the price differential may not be reflective of market at all delivery dates. In such cases, the contract would not qualify for this exception.
Application examples — normal purchases and normal sales scope exception: Contracts with volumetric optionality
EXAMPLE 3-18
Application of the normal purchases and normal sales scope exception — contract with volumetric optionality
Assume the same facts as in Example 3-1: Ivy Power Producers agrees to purchase natural gas from Guava Gas Company for delivery to the Maple Generating Station. The contract has a maximum daily quantity (10,000 MMBtus per day). IPP is required to take or pay for at least 75% of the maximum daily quantity specified in the contract (i.e., 7,500 MMBtus per day) and may take additional amounts up to the maximum specified.
Does the contract qualify for the normal purchases and normal sales scope exception?
Analysis
As discussed in Example 3-1, this arrangement represents a forward contract for 7,500 MMBtus per day combined with an option contract for up to an additional 2,500 MMBtus per day. As a result of the volumetric optionality, the contract does not qualify for the normal purchases and normal sales scope exception in this fact pattern.
However, the contract may potentially qualify for accounting as a normal purchase in the following circumstances:
- The option component permits the holder only to purchase or sell additional quantities at the market price at the date of delivery (see ASC 815-10-15-42).
- The option feature is expired or has been completely exercised (even if delivery has not yet occurred) (see ASC 815-10-15-43).
- The contract is determined to be a requirements contract (because the volumetric optionality would not be included in the notional amount of the contract). See UP 3.2.1.1 for further information. See Example 3-19.
In such cases, the contract could qualify for the normal purchases and normal sales scope exception if all other requirements are met.
EXAMPLE 3-19
Application of the normal purchases and normal sales scope exception — requirements contract with volumetric optionality
Assume the same facts as in Example 3-18, except that the contract specifies that the Guava Gas Company is to supply all of Ivy Power Producers’ natural gas needs for the Maple Generating Station. In addition, IPP is required to take at least 7,500 MMBtus/day and may take additional amounts up to its maximum needs (total needs are expected to be around 10,000 MMBtus/day). The agreement explicitly states that all purchases under the contract must be used for generation at the Maple power plant and that resale is prohibited. This is the same fact pattern described in Example 3-2.
Does the contract qualify for the normal purchases and normal sales scope exception?
Analysis
As discussed in Example 3-2, this contract is a requirements contract with a notional amount of 7,500 MMBtus/day. The additional quantity above the required amount is not included in the notional because this is a requirements contract. Because the notional relates only to the forward component, the contract could qualify for the normal purchases and normal sales scope exception if all other requirements are met.
EXAMPLE 3-20
Application of the normal purchases and normal sales scope exception — natural gas contract
Ivy Power Producers (IPP) enters into a forward contract with Guava Gas Company to purchase 10,000 MMBtus of natural gas per day for 3 years for use in the Maple Generating Station. In addition, the contract states that at the end of each year, the parties will cash settle for any difference between the contracted amount of natural gas and the amount of natural gas that was delivered. If the total natural gas delivered is greater than the contractual amount, IPP will pay the then-current market rate for the excess natural gas. However, if the natural gas delivered is less than the contractual amount, IPP will receive the difference between the then-current market rate and the fixed price.
Does the contract qualify for the normal purchases and normal sales scope exception?
Analysis
Although the contract has certain provisions that may result in financial settlement, the contract is eligible for the normal purchases and normal sales scope exception if IPP can assert that all contractual volumes will result in physical delivery. The contract is still eligible for the exception because the additional volumes are purchased at the then-current market price. If, however, at the end of any particular year, the contract is net settled because IPP did not take physical delivery of the full contractual amount of natural gas, then the contract will need to be recorded at fair value. The net settlement would also call into question the designation of other similar contracts.
Certain power contracts11 Due to unique characteristics in the electric power industry, particularly the fact that power cannot be readily stored in significant quantities,
ASC 815 provides a specific normal purchases and normal sales scope exception for certain qualifying power contracts (herein referred to as the power contract exception). Guidance on application of the power contract exception is provided in
ASC 815-10-15-45 through 15-51 as well as
ASC 815-10-55-31.
This scope exception solely applies to power purchase and sales agreements and cannot be analogized to other commodities such as natural gas, crude oil, or fuel oil. This exception allows for power contracts that meet the specified criteria to qualify for application of the normal purchases and normal sales scope exception, even if the contract contains volumetric optionality or is subject to book-out (see Question 3-23). Contracts that are subject to book-out, whether through local operating protocols or as a result of the requirements of an independent system operator or regional transmission organization, should be evaluated under the power contract exception.
In determining whether a contract qualifies for this exception, there are certain criteria that should be met by all parties to the contract. There are also additional criteria applicable to contracts with volumetric optionality. Note that forward contracts that are not subject to unplanned netting also may be evaluated under
ASC 815-10-15-41 (forward contracts exception) and are not required to meet the additional requirements of the power contracts exception.
Criteria for all qualifying contracts
Overall guidance on application of the power contracts exception is provided in
ASC 815-10-15-45.
Excerpt from ASC 815-10-15-45
Notwithstanding the criteria in paragraphs 815-10-15-41 through 15-44, a power purchase or sales agreement (whether a forward contract, option contract, or a combination of both) that is a capacity contract for the purchase or sale of electricity also qualifies for the normal purchases and normal sales scope exception if all of the following applicable criteria are met.
Definition from ASC 815-10-20
Capacity Contract: An agreement by an owner of capacity to sell the right to that capacity to another party so that it can satisfy its obligations. For example, in the electric industry, capacity (sometimes referred to as installed capacity) is the capability to deliver electric power to the electric transmission system of an operating control area.
While the standard specifies that the contract must be a capacity contract, we believe that the application of the power contracts exception is applicable for capacity contracts that include the physical delivery of power in the arrangement. To qualify for this exception, power contracts should be assessed to determine if the criteria set forth in
ASC 815-10-15-45 are met. Figure 3-7 highlights the criteria applicable to each party to the contract.
Figure 3-7
Power contracts exception criteria
Criteria |
Applicable to buyer |
Applicable to seller |
The terms of the contract require physical delivery of electricity. That is, the contract does not permit net settlement, as described in ASC 815-10-15-100 through 15-109. ( ASC 815-10-15-45(a)(1)) |
Yes |
Yes |
The electricity that would be deliverable under the contract involves quantities that are expected to be used or sold by the reporting entity in the normal course of business. ( ASC 815-10-15-45(b) and 15-45(c)(1)) |
Yes |
Yes |
The buyer of the electricity under the power purchase or sales agreement is an entity that meets both of the following criteria: (i) The entity is engaged in selling electricity to retail or wholesale customers; (ii) The entity is statutorily or otherwise contractually obligated to maintain sufficient capacity to meet electricity needs of its customer base. ( ASC 815-10-15-45(c)(2)) |
Yes |
Not applicable |
The contracts are entered into to meet the buyer’s obligation to maintain a sufficient capacity, including a reasonable reserve margin established by or based on a regulatory commission, local standards, regional reliability councils, or regional transmission organizations. ( ASC 815-10-15-45(c)(3)) |
Yes |
Not applicable |
ASC 815-10-15-45 also includes criteria that are only applicable to contracts with volumetric optionality (see
UP 3.3.1.5 Certain power contracts).
To qualify for the power contracts scope exception, a reporting entity should assess not only its own compliance with the requirements but also whether the contract counterparty meets the requirements. For example, the seller under the contract should consider whether the purchaser is buying to meet its obligation. To meet the requirement, it is not sufficient to only consider that the seller has capacity to support the contract. Therefore, to assist reporting entities in applying the guidance, PwC has developed interpretive guidance and specific criteria to consider in assessing whether the counterparty meets the relevant criteria. Key factors to consider are summarized in Figure 3-8.
Figure 3-8
Assessment of a counterparty in power purchase or sale agreements
Counterparty |
Considerations |
Buyer’s assessment of seller |
- Seller’s source of power does not necessarily have to be specified
- Buyer should have evidence (beyond the regulatory requirements to qualify as a “firm power forward”) that seller has access to capacity at or near the delivery point (e.g., known generating capacity at or near the delivery point)
|
Seller’s assessment of buyer |
- Seller has knowledge (including publicly available information) about buyer’s existing load commitments at or near the delivery point
- Buyer’s load commitments can include retail, wholesale, and certain contractual commitments
- Seller does not have to verify that the quantity being purchased, when added to existing generation capacity and other purchases, would exceed buyer’s projected power needs
- There is a presumption (which can be overcome with appropriate evidence) that a sale to a non-load serving entity (e.g., power brokers and load serving entities with no load in the applicable area) would not qualify under this criterion.
|
The considerations in Figure 3-8 are further discussed below.
Buyer’s evaluation
For the buyer to meet its requirement to evaluate the seller, it would not be necessary for the contract to specify the source of the energy. However, the buyer should have evidence (beyond the regulatory requirements to qualify as a “firm power forward”) that the seller has access to capacity at or near the delivery point at the time the contract is designated as qualifying under the normal purchases and normal sales scope exception. In addition to the broad regulatory requirement, the buyer would have to consider evidence of the seller’s existing capacity. This requirement could be met if any of the following conditions are present:
- The seller is known to have generating capacity at or near the delivery point
- The seller is selling to the buyer at a location where the seller has access to a power pool (e.g., PJM Interconnection, L.L.C., California Independent System Operator) that makes generating capacity available to all participants, in which case the buyer can assume such capacity because the power pool would, if necessary, provide it to the seller
- Other evidence is obtained that demonstrates that the seller has the available capacity through direct ownership of a generating plant or by contract
For example, if the seller is a power broker that does not have access to a pool, the buyer would have to obtain evidence supporting a conclusion that the seller has access to capacity at or near the delivery point (e.g., a long-term power purchase contract or tolling agreement) to back the contract. Similarly, such evidence would have to be obtained if the seller (or a sister company) is a known owner of generation but the delivery point in the contract is a location that cannot be served from its owned capacity.
Seller’s evaluation
In assessing whether it has sufficient capacity to meet its commitment, the seller should consider its own existing generating assets plus firm capacity purchase contracts, and deduct existing native load requirements and any other existing power sales contracts. In other words, the seller cannot double count the same capacity (i.e., it cannot count existing capacity as both meeting its native load capacity requirements and at the same time backing a sales contract it wishes to designate as a normal sales contract).
In making this assessment, the seller may also consider power resources that it has available because it has access to a power pool that makes generating capacity available to all participants. Furthermore, the seller should meet this requirement on the date the contract is designated (i.e., a sales contract would not qualify if the seller intends to obtain the quantity through a future purchase, unless the future purchase will be from a power pool that makes generating capacity available to all participants, or if access to the power pool provides a back-up source to fulfill the delivery obligation).
In assessing whether the buyer needs the energy for use or sale, the seller could assess the buyer’s ability based on knowledge (including publicly available information) of the buyer’s existing load commitments (i.e., the seller could presume the buyer is purchasing under the contract to meet its load requirements if the buyer is known to have such a requirement at or near the delivery point under the contract). Load requirements would include retail and wholesale requirements and certain contractual requirements. In assessing whether this criterion is met, the seller would not have to verify whether the specific quantity being purchased, when added to the buyer’s existing generating capacity and other purchases by the buyer, would exceed the buyer’s projected needs.
There is a presumption that a sale to a non-load serving entity (including a power broker or a load serving utility with no load at or near the delivery point) would not qualify under this criterion. However, that presumption could be overcome if evidence is obtained that demonstrates that the ultimate use of the power will be to fulfill a load serving requirement (e.g., of a customer of the non-load serving purchaser). Such evidence can be assumed to exist if the purchaser is a sister company of a load serving entity that has a load requirement at or near the delivery point (see further discussion below).
Consolidated groups
Reporting entities that are members of a consolidated group should apply the criteria above based on facts existing at the consolidated level. For example, if a power broker subsidiary buys power to sell to a load serving sister company, the broker subsidiary’s purchase transaction would (1) meet the purchaser criterion that the purchaser has an obligation to maintain sufficient capacity and (2) qualify as a capacity contract (assuming the other criteria are met) at both the subsidiary and consolidated levels.
Similarly, in applying the criteria, reporting entities may assume certain facts about intercompany relationships with respect to a counterparty’s consolidated group, if the circumstances support such an assumption. For example, a sale to the power broker subsidiary of a consolidated group that includes a load serving entity would meet the seller criterion if the purchase is at a location where the load serving sister company is known to have a load requirement. On the other hand, absent further evidence of the intended use of the power, that seller criterion would not be met in a sale to a power broker subsidiary of a consolidated group that includes a load serving entity if the delivery point is not at or near the load requirement of the sister company.
Option contracts
In general, contracts with volumetric optionality cannot qualify for the normal purchases and normal sales scope exception. However,
ASC 815 contains a special exemption for certain qualifying power contracts with volumetric optionality because of the unique considerations related to power as described above. In accordance with
ASC 815-10-15-45, in addition to the criteria applicable to all contracts discussed in
UP 3.3.1.5 Certain power contracts, for option contracts, physical delivery is required if the option is exercised. Furthermore, option contracts should be assessed using the additional criteria provided by
ASC 815-10-55-31. This guidance differentiates between qualifying option contracts (i.e., capacity contracts) and financial options on electricity. Factors to consider in assessing whether a contract is a capacity contract as outlined in
ASC 815-10-55-31 are summarized in Figure 3-9.
Figure 3-9
Distinguishing between capacity contracts and financial option contracts
Characteristic |
Capacity contract |
Financial option contract |
Source of power |
Usually specifies the plant or group of plants |
No reference is made to the source of power |
Price |
Includes pricing terms to compensate plant operator for variable operations and maintenance costs during production period |
Structured based on the forward price of power |
Quantity |
Based on individual needs of parties to the agreement |
Standard market amounts |
Delivery |
Usually one or a group of physical delivery locations; seller or buyer specific location |
Major market hub (liquid hub) |
Operations |
Certain operational criteria are usually specified (e.g., heat rate of facility) |
No criteria specified |
Transmission |
May include interconnection or physical transmission requirements |
No requirements specified |
Outages |
May specify jointly agreed-to plant outages and may include penalties for unexpected outages |
Not plant specific; no penalties pertaining to a specific plant |
Default |
Usually based on a refund of the capacity payment; default provision usually tied to the expected facility |
Damages based on market liquidating damages |
Duration |
Term is usually long (one year or more) |
Term reflects liquid market period (18 to 24 months in the guidance) |
In determining whether a contract with volumetric optionality qualifies for the power contract exception, a reporting entity should consider all relevant contract characteristics. Not all of the characteristics in
ASC 815-10-55-31 need to be met to conclude that the contract qualifies as a capacity contract; however, the conclusion should be based on the predominant characteristics of the contract. Consideration of the purpose for executing the agreement may also be helpful in performing this assessment.
Application examples — normal purchases and normal sales scope exception: option contracts
The following simplified examples are provided to illustrate the application of the power contracts exception to option contracts, specifically considering the evaluation under
ASC 815-10-55-31. For purposes of these examples, assume all of the other relevant criteria for application of the normal purchases and normal sales scope exception are met.
EXAMPLE 3-21
Application of the normal purchases and normal sales scope exception — option contract
Ivy Power Producers (IPP) enters into an agreement to sell electric energy to Rosemary Electric & Gas Company (REG). The contract states that REG has an option to take an hourly quantity of 100 MWs during on-peak hours for the month of August 2015. Energy will be delivered from the Maple Generating Station for an initial option premium plus start-up fees, variable operating and maintenance fees, and a natural gas charge based on a heat rate of 7.0. The delivery location is at the power plant. REG has retail customer load commitments near the Maple Generating Station.
Is the contract eligible for the power contract exception?
Analysis
This contract exhibits a significant number of the characteristics of a capacity contract including specified plant location and delivery point, as well as pricing based on plant operations. Although the contract is short-term (one month), it would be eligible for the power contract exception because the predominant characteristics of the contract meet the capacity contract criteria.
If, however, no plant is specified, the pricing is based on the forward price curve for power, and delivery is to a liquid trading point, the contract would predominantly have characteristics of an option contract and it would not be eligible for the normal purchases and normal sales scope exception.
EXAMPLE 3-22
Application of the normal purchases and normal sales scope exception — option contract
Ivy Power Producers (IPP) enters into a contract with Rosemary Electric & Gas Company (REG) to sell electric energy from the Maple Generating Station. The contract term is five years. REG has an option to take up to an hourly amount of 100 MWs during on-peak hours. The contract price includes a start-up fee, variable operating and maintenance fee, and a natural gas charge based on a 7.0 heat rate. The delivery location is a liquid trading location for power. The contract specifies the timing of plant outages. REG has retail load commitments located near the Maple power plant.
Does the contract qualify for the normal purchases and normal sales scope exception?
Analysis
Although this contract includes some characteristics of a financial option (e.g., delivery at a liquid trading point), the predominant characteristics are that of a capacity contract. Therefore, the contract is eligible for the normal purchases and normal sales scope exception. This would likely still be the case even if the pricing was market-based. However, assessing whether a contract is a capacity contract requires judgment and all relevant criteria should be considered in the assessment.
9Guidance originally issued as DIG Issue C10,
Scope Exceptions: Can Option Contracts and Forward Contracts with Optionality Features Qualify for the Normal Purchases and Normal Sales Exception? 10Guidance originally issued as DIG Issue C16,
Scope Exceptions: Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchased Option Contract.
11Guidance originally issued as DIG Issue C15,
Scope Exceptions: Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity (DIG Issue C15) and in FAS 133, paragraph 58(b).