[Federal Register: May 30, 2006 (Volume 71, Number 103)]
[Rules and Regulations]
[Page 30585-30589]
[DOCID:fr30my06-14]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 292

[Docket No. RM05-36-001; Order No. 671-A]

Revised Regulations Governing Small Power Production and
Cogeneration Facilities

Issued May 22, 2006.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final order; order on rehearing.

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SUMMARY: In this order on rehearing, the Federal Energy Regulatory
Commission

(Commission) reaffirms its determinations and grants clarification in
part of Order No. 671, which amended the Commission's regulations
governing small power production and cogeneration facilities.

DATES: Effective Date: The final rule and order on rehearing will
become effective June 29, 2006.

FOR FURTHER INFORMATION CONTACT:
Paul Singh (Technical Information), Office of Energy Markets and Rates,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426.<PHONE_NUMBER>.
Samuel Higginbottom (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426.<PHONE_NUMBER>.
Eric D. Winterbauer (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426.<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead Brownell,
and Suedeen G. Kelly.

    1. On February 2, 2006, the Federal Energy Regulatory Commission
(Commission) issued Order No. 671,\1\ in which the Commission revised
its regulations governing qualifying small power production and
cogeneration facilities. Specifically, the Commission, among other
things, eliminated certain exemptions from rate regulation that were
previously available to qualifying facilities (QFs). Several parties
have requested rehearing or clarification. For the reasons discussed
below, we deny the requests for rehearing and grant clarification in
part.
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    \1\ Revised Regulations Governing Small Power Production and
Cogeneration Facilities, Order No. 671, 71 FR 7852 (February 15,
2006), FERC Stats. & Regs. ] 31,203 (2006).
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Introduction

    2. Order No. 671 was issued in response to the Energy Policy Act of
2005 (EPAct 2005),\2\ which modified in relevant part section 210 of
the Public Utility Regulatory Policies Act of 1978 (PURPA).
Specifically, Order No. 671 sought to: (1) Ensure that new qualifying
cogeneration facilities are using their thermal output in a productive
and beneficial manner; that the electrical, thermal, chemical and
mechanical output of new qualifying cogeneration facilities is used
fundamentally for industrial, commercial, residential or institutional
purposes; and that there is continuing progress in the development of
efficient electric energy generating technology; (2) amend Form 556 \3\
to reflect the criteria for new qualifying cogeneration facilities; (3)
eliminate ownership limitations for qualifying cogeneration and small
power production facilities; and (4) amend the exemptions available to
QFs from the requirements of the Federal Power Act (FPA) \4\ and the
Public Utility Holding Company Act of 1935 (PUHCA 1935).\5\ ARIPPA,\6\
the National Rural Electric Cooperative Association (NRECA) and the
Non-Utility QF Group have requested rehearing.
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    \2\ Energy Policy Act of 2005, Public Law No. 109-58, 119 Stat.
594 (2005).
    \3\ 18 CFR 131.80.
    \4\ 16 U.S.C. 824 et seq.
    \5\ 15 U.S.C. 79; See Public Law No. 109-58, 1261-77, 119 Stat.
594, 972-78 (2005).
    \6\ ARIPPA, formerly known as the Anthracite Region Independent
Power Producers Association, states that it is a not-for-profit
association comprising fourteen independent power producers in
Pennsylvania that generate approximately 1,346 MW of electrical
power buring coal mining refuse.
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Exemption of QFs From FPA Section 205/206 Authority

Background

    3. In Order No. 671, the Commission stated that in light of
significant changes that have occurred in the industry since the first
QF facilities were introduced and in light of changing electric markets
and resulting market power issues that have arisen in recent years, it
was no longer necessary or appropriate to completely exempt QFs from
sections 205 and 206 of the FPA.\7\ However, the Commission clarified
that QFs would continue to have an exemption from sections 205 and 206
of the FPA when a sale is made pursuant to a state regulatory
authority's implementation of PURPA. In addition, to avoid creating the
hardship that removal of exemptions might cause for smaller QFs, the
Commission provided that facilities 20 MW or smaller would remain
exempt from sections 205 and 206 of the FPA.
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    \7\ 16 U.S.C. 824d, 824e.
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Requests for Rehearing

    4. ARIPPA argues against the imposition of rate regulation on QFs
that are not owned by electric utilities. It argues that the rule
change is a ``bait-and-switch,'' in that it would impose rate
regulation on QF owners who had been induced to invest in and develop
QFs by the exemption from the state and Federal rate regulation.
    5. ARIPPA points to the Commission's statement that ``a complete
exemption is not necessary to encourage the development'' of
cogeneration.\8\ It emphasizes the word ``development,'' noting that
this might be a reasonable basis for a rule that newly-built QFs would
not enjoy exemptions from rate regulation, but argues that the
statement does not address the issue of the Commission's treatment of
those who invested in such facilities in the past in reliance on the
exemption from rate regulation. It argues that the Commission's
statement that QF's had no reasonable expectation that the rules would
not be amended is wrong. It argues that that was the inducement for
developers to invest.
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    \8\ Id. at 6 (citing Order No. 671 at P 96).
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    6. ARIPPA argues that the Commission cites to no record for its
assertion that non-QF sales by QFs could potentially have a significant
market effect. It argues that the Commission did not cite to a single
indication that one or more non-utility QFs under common ownership and
control have achieved or could achieve market power. It argues that
Commission's assertion is mere speculation.
    7. ARIPPA argues that the exception for QFs selling pursuant to a
state avoided-cost regime is inconsistent with other parts of the
existing rule. It argues that it is vague and that the uncertainty it
will create will stymie future development, despite Congress'
continuing charge to the Commission to continue to encourage
development. It contends that it is unclear how much variance from a
state avoided-cost regime is tolerable and how much crosses the line
and would cause the QF to lose its exemption from Federal rate
regulation. It questions whether investors will be willing to initiate
development knowing that the process may be affected by such
uncertainties. It also questions whether it is in the public interest
for the Commission to set up what is sees as barriers and disincentives
to settlement of disputes arising during contract negotiations between
utilities and QFs.
    8. NRECA, on the other side, argues that all power sales by QFs
owned by Commission-regulated public utilities should be subject to
sections 205 and 206 even if the sales were made pursuant to a state's
implementation of PURPA.\9\ It states that Order No. 671 continues to
exempt from sections 205 and 206 any sales made pursuant to a state
PURPA implementation plan, even

if the QF is owned by a public utility.\10\ It argues that there is no
policy reason why such wholesale sales of power from QFs owned by
public utilities should be exempt from Commission review under sections
205 and 206, while all other wholesale sales by such public utilities
(i.e., from resources other than QFs) are subject to such review.
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    \9\ NRECA Request for Rehearing at 5.
    \10\ Id. (citing Order No. 671 at P 99).
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    9. NRECA argues that all sales by QFs owned by public utilities
should be subject to the Commission's rate authority, whether such
sales are pursuant to an avoided cost rate or not. NRECA also states
that the filing of avoided cost contracts with the Commission will
enhance oversight and transparency, while not requiring filing creates
a risk of market power abuse.
    10. NRECA further argues that all QFs that make non-PURPA sales
should be subject to sections 205 and 206, no matter how small. It
states that it is sensitive to the needs of smaller QFs, but that a QF
as small as 5 MW could have a substantial impact upon a small
distribution cooperative. NRECA states that small QFs that believe they
are too small to handle public utility regulation may continue to make
sales pursuant to a state PURPA implementation plan, and continue to be
exempt from section 205 and 206 (unless they are owned by a public
utility). NRECA adds that, on the other hand, if small QFs want the
flexibility available to utilities with market-based rates and feel
that they are large enough and sophisticated enough to sell at market-
based rates, they should be subject to sections 205 and 206, like any
other public utility that sells power at market-based rates.
    11. NRECA argues that, under Order No. 671, if a large public
utility owned a 20 MW QF, it could make power sales from that QF
without any Commission review. It further argues that, if the facility
were not a QF, the public utility would not be able to make such a sale
without the Commission's express approval. It argues that this
underscores the potential for market power abuse and affiliate
transaction abuse that could occur if Order No. 671 is not changed.
    12. The Non-Utility QF Group argues that the Commission should
increase the threshold for exemption from sections 205 and 206 of the
FPA from 20 MW to 30 MW. First, it argues that the change would
simplify Commission regulation by maintaining a consistent 30 MW
threshold for all FPA exemptions as they apply to qualifying small
power production facilities. Second, it argues that, in PURPA, Congress
determined that 30 MW was a critical threshold for small power
production facilities, and notes that Congress did not disturb that
threshold in EPAct 2005. Thus, it argues, the Commission already has a
ready statutory reference for a 30 MW threshold, while the 20 MW
threshold is more arbitrary. Third, it argues that the total installed
generation capacity for all qualifying cogeneration plants under 30 MW,
combined with the total installed generation capacity of all qualifying
small power production facilities under 30 MW, totals a mere 7,095.5
MW.\11\ It argues that this represents less than 0.7 percent of the
total installed generation capacity in the U.S. in 2004. It argues
that, accordingly, exemptions for QFs less than 30 MW would not detract
from the purposes of sections 205 and 206 of the FPA, and would serve
both administrative efficiency and Congressional mandates to avoid
utility-type regulation of entities having de minimis market presence.
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    \11\ Non-Utility QF Group Request for Rehearing at 4-5 (citing
U.S. Department of Energy Annual Electric Generator Report (2004)).
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Commission Determination

    13. We disagree that any original ``bargain'' has been reneged on,
or that the Commission has engaged in what ARIPPA refers to as a ``bait
and switch.'' The Commission granted very broad exemptions from the FPA
(and state laws) in order to remove the disincentive of utility-type
regulation from QFs. Exemptions from FPA sections 205 and 206 rate
regulation were necessary to encourage the development of QFs. However,
at that time the Commission had no way to predict how markets would
develop in the decades to follow. When the Commission first granted the
exemptions from sections 205 and 206 of the FPA in 1980, there was no
market for electric energy produced by non-traditional generators and
thus such generators were rare. However, prompted originally by PURPA,
markets for electric energy produced by non-traditional generators have
developed. Now that these markets are in existence and provide a forum
for sales of electric energy produced by non-traditional generators,
the same level of encouragement for QFs is no longer necessary; access
to these markets provides encouragement. Accordingly, it is no longer
necessary to completely exempt QFs from sections 205 and 206 of the FPA
in order to encourage development of QFs.
    14. Moreover, given these changes to energy markets, there will be
times when Commission oversight of QF sales is appropriate and
necessary under section 205 and 206 of the FPA. The passage and
implementation of EPAct 2005 has provided us an opportunity to now
provide for such oversight.
    15. We remain unpersuaded that eliminating exemptions will upset
the legitimate expectations of QF owners, lenders and investors. As we
stated in Order No. 671, the exemptions previously granted were always
subject to revision and QFs had no justifiable expectations that, no
matter the changes in circumstances, changes in the regulatory regime
would not occur. In addition, the Commission has already taken
significant steps to ease any adverse impact. Specifically, the
Commission recognized that expectations reflected in current contracts
should be protected, and did so by grandfathering the exemption from
sections 205 and 206 of the FPA for existing contracts.\12\ However, on
a prospective basis, the need for oversight of QF sales is a compelling
reason to subject new contracts to rate regulation under section 205
and 206 of the FPA.
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    \12\ Order No. 671 at P 97.
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    16. ARIPPA's argument that Order No. 671's changes to the
exemptions from sections 205 and 206 of the FPA will discourage future
development of non-traditional generation is misplaced. The large
number of non-QF independent generators that have developed in recent
years, addressed in the many orders granting them market-based rate
authority under section 205 of the FPA, indicate that the exemptions
from sections 205 and 206 are not necessary to promote non-traditional
generation.
    17. We find unpersuasive the arguments made by NRECA that even
sales made by utility-owned QFs that are subject to a state's PURPA
implementation plan should nevertheless be subject to section 205 and
206 regulation. Our goal in part was and is to close the gap that had
developed in the regulatory regime that allowed some QF sales to avoid
any rate regulation.\13\ We believe that having QF sales regulated at
the state level is sufficient, and will allow us to close the
regulatory gap while not dramatically or inappropriately increasing the
regulatory burden on QFs.
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    \13\ Id. at P 95-96.
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    18. Likewise, we find unpersuasive the arguments of the Non-Utility
QF Group and NRECA to change the threshold for section 205/206
exemptions. The Non-Utility QF Group argues that the threshold should
be increased to 30 MW; NRECA argues that all non-PURPA sales should be
regulated no matter how small the QF.

In Order No. 671, we attempted to strike a balance by ensuring that QF
sales are regulated by either the states or the Commission while at the
same time easing the burden on the smallest facilities.\14\ In the
NOPR, the Commission originally suggested that the exemptions should
remain in effect for QFs under 5 MW. Most commenters supported the
exemption for QFs under 5 MW, while some suggested a higher figure.\15\
In response to those comments, the Commission raised the threshold to
20 MW.\16\ The 20 MW threshold strikes a reasonable balance by
protecting the smallest facilities while ensuring that sales by larger
QFs are subject to Commission oversight.\17\ The arguments presented by
the Non-Utility QF Group are simply not compelling enough to persuade
us to raise the threshold further. In addition, we reject arguments by
NRECA to make all non-PURPA sales subject to rate regulation, no matter
how small the QF. We believe that an exemption from regulation is still
appropriate to ease the regulatory burden for the smallest QFs.
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    \14\ Id. at P 98.
    \15\ Id. at P 87.
    \16\ Id. at P 98.
    \17\ The 20 MW threshold adopted in Order No. 671 is also
consistent with the 20 MW size limit for small generating facilities
found in Order No. 2006. Standardization of Small Generator
Interconnection Agreements and Procedures, Order No. 2006, 70 FR
34100 (June 13, 2005), FERC Stats. & Regs. ] 31,180 at P 75 (2005),
order on reh'g, Order No. 2006-A, 70 FR 71760 (November 30, 2005),
FERC Stats. & Regs. ] 31,196 (2005).
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Self-Certification

Background

    19. In Opinion No. 671, the Commission retained the option to self-
certify for new cogeneration facilities. The Commission also stated
that self-certifications and self-recertifications of new cogeneration
facilities would now be noticed in the Federal Register, in order to
enhance the visibility of self-certifications for interested parties.
The Commission further stated that a facility should not be able to
claim QF status without having made any filing with the Commission.
Accordingly, the Commission amended its regulations to expressly
require that a facility claiming QF status must file either a notice of
self-certification or an application for Commission certification.\18\
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    \18\ Id. at P 78-83.
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Requests for Rehearing

    20. NRECA argues that the Commission should not permit new
cogeneration facilities to self-certify. It states that the
``fundamental use'' and ``presumptively useful'' standards are
subjective and that there are no guidelines established yet on how the
standard will be applied. It contends that, although the Commission has
stated that these factors will require a case-by-case review, self-
certification will be meaningless if the Commission accepts a new
cogeneration facility's unsupported representation in a self-
certification that it satisfies subjective standards. It argues that,
consequently, new cogeneration facilities should at the present time be
required to submit an application and obtain a Commission determination
as to its QF status.\19\
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    \19\ NRECA Request for Rehearing at 8.
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    21. NRECA further argues that the Commission's proposal in Order
No. 671 to notice self-certifications and self-recertifications in the
Federal Register is insufficient to ensure that new cogeneration
facilities satisfy the new standards for QF status, given the
inherently subjective and case-by-case nature of the application of
such new standards. It contends that, because QFs frequently file self-
certifications before they have approached an electric utility for
interconnection or power sales, electric utilities would be compelled
to monitor every self-certification filing in order to determine
whether the QF is planning to locate in the electric utility's service
territory. It further argues that, until the new standards are better
developed, it will be unclear on what basis an electric utility could
challenge a QF's qualifying status. It contends that only electric
utilities with significant litigation resources will be in position to
protect themselves from inappropriate self-certifications, and that
small cooperatives will be at a disadvantage.

Commission Determination

    22. We deny rehearing. We find the processes and safeguards
included in Order No. 671 to be sufficient. As we noted in Order No.
671, the Commission has the authority to review a self-
certification.\20\ With this authority, the Commission is able to
review the self-certifications of new cogeneration facilities to ensure
their compliance with the new standards. NRECA argues that, for the
first self-certifications, there will be no prior cases that provide
guidelines on how to satisfy the standards. We think EPAct 2005's
statutory language and the newly-adopted regulations provide a
sufficient starting point, and we also expect such case law to develop
quickly so that QFs and electric utilities will have further guidance
on what is necessary to meet the new standards.
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    \20\ Order No. 671 at P 78.
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    23. In addition, we disagree with NRECA's argument that publication
of notice in the Federal Register will not help to ensure that
prospective QFs comply with the new standards. Publication of such
notices will enhance the visibility of self-certifications and self-
recertifications for interested parties. We expect that such visibility
will allow attempted self-certifications and self-recertifications of
new cogeneration facilities that fail to meet the new standards set
forth in Order No. 671 to be spotted quickly, and so help to ensure
that such facilities satisfy the new standards in Order No. 671.

PUHCA Clarification

Background

    24. In Order No. 671, the Commission stated that it interprets
PURPA to permit it to exempt QFs from the Public Utility Holding
Company Act of 2005 (PUHCA 2005) \21\ in 18 CFR 292.602. The Commission
stated that, accordingly, revised 18 CFR 292.602 would now provide that
a QF shall not be considered an ``electric utility company'' as defined
by PUHCA 2005. We also stated in Order No. 671 that, consistent with
recent actions on FPA section 203,\22\ QFs would be considered
``electric utility companies'' for purposes of section 203(a)(2) of the
FPA.\23\
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    \21\ Public Law No. 109-58, 1261-77, 119 Stat. 594, 972-78
(2005).
    \22\ 16 U.S.C. 824b.
    \23\ Order No. 671 at P 102.
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Requests for Rehearing

    25. The Non-Utility QF Group argues that there is a tension between
Order No. 671 and Order No. 669 \24\ in how the two orders relate to
transactions involving entities that only own QFs and exempt wholesale
generators (EWGs) for purposes of section 203(a)(2) of the FPA. It
states that, in Order No. 669, the Commission explained that,
regardless of their status under PUHCA 2005, QFs (and EWGs) will be
regarded as ``electric utility companies'' for purposes of section
203(a)(2), which addresses the acquisition of securities by ``holding
companies'' as defined in PUHCA 2005.\25\ It notes that the Commission
also stated that, while most QFs themselves remain exempt from section
203, holding companies will

require Commission approval pursuant to section 203 in order to acquire
an interest in a QF or an EWG.\26\ Finally, it notes that the
Commission in Order No. 669 stated that this would hold true even if
the holding company were a holding company solely by reason of its
ownership interest in QFs, EWGs and foreign utility companies (FUCOs).
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    \24\ Transactions Subject to FPA Section 203, Order No. 669, 70
FR 58636 (October 7, 2005), FERC Stats. & Regs. ] 31,200 (2005),
order on reh'g, Order No. 669-A, 71 FR 28,422 (May 16, 2006), FERC
Stats. & Regs. ] 31,214 (2006).
    \25\ See Non-Utility QF Group Request for Rehearing at 5.
    \26\ Id. (citing Order No. 669 at P 59-60 and 70).
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    26. The Non-Utility QF Group states that, while it understands why
the Commission would want some review of acquisitions of large QFs by
holding companies having real generation or transmission market power,
it disagrees with the Commission's suggestion in Order No. 669 that
holding companies otherwise exempted by Congress from PUHCA 2005, i.e.,
owners only of QFs, EWGs and FUCOs, should be subject to section 203
requirements. It argues that this assertion represents a potential
dramatic increase in regulatory oversight over independent companies
that own precisely the types of smaller, non-traditional generating
plants that Congress has long sought to encourage. It argues that it is
``silly'' to require every 500 KW landfill gas or hydroelectric plant
to be subject to section 203 just because it is being acquired by the
owner of another small QF.
    27. The Non-Utility QF Group argues that a better balance is
provided by Order No. 671. It argues that, by exempting QFs from PUHCA
2005's definition of ``electric utility company,'' a QF would not be an
``electric utility company'' under PUHCA 2005, and therefore its
upstream 10 percent owners would not be ``holding companies'' under
PUHCA 2005--and therefore would not be ``holding companies'' for
purposes of section 203(a)(2) of the FPA.\27\
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    \27\ Id. at 6 (citing Order No. 671 at P 92-94).
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Commission Determination

    28. The Non-Utility QF Group is correct that there was an
inconsistency in the treatment of QFs with regards to their status
under PUHCA 2005. However, the Commission has corrected this
inconsistency in its order on rehearing of Order No. 667,\28\ the final
rule which amended the Commission's regulations to implement the repeal
of PUHCA 1935 and the enactment of PUHCA 2005. In that order on
rehearing, the Commission clarified that QFs will not be excluded from
the definition of ``electric utility company'' but added that the
Commission intends nevertheless to exempt QFs from PUHCA 2005 and most
FPA requirements pursuant to the Commission's PURPA authority to grant
such exemptions.\29\ Accordingly, we will on rehearing here revise 18
CFR 292.602 to remove the statement that a QF is not an ``electric
utility company'' within the meaning of PUHCA 2005, and to provide an
exemption from PUHCA 2005. As to FPA section 203, the definition of
``electric utility company'' in that context was addressed in Order No.
669-A.\30\
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    \28\ Repeal of the Public Utility Holding Company Act of 1935
and Enactment of the Public Utility Holding Company Act of 2005,
Order No. 667, 70 FR 75,592 (December 20, 2005), FERC Stats. & Regs.
] 31,197 (2005), order on reh'g, Order No. 667-A, 71 FR 28,446 (May
16, 2006), FERC Stats. & Regs. ] 31,213 (2006).
    \29\ See Order No. 667 at P 14 n. 31.
    \30\ Order No. 669-A at P 41-54.
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    The Commission orders:
    Rehearing is hereby denied and clarification is hereby granted in
part, as discussed in the body of this order.

List of Subjects in 18 CFR Part 292

    Electric Power Plants, Electric utilities, Natural gas, Reporting
and recordkeeping requirements.

    By the Commission.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, under the authority of EPAct 2005,
the Commission is amending part 292 in Chapter I of Title 18 of the
Code of Federal Regulations, as set forth below:

PART 292--[AMENDED]

0
1. The authority citation for part 292 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7101-7352.

0
2. In Sec.  292.602, paragraph (b) is revised to read as follows.

Sec.  292.602  Exemption of qualifying facilities from the Public
Utility Holding Company Act of 2005 and certain State law and
regulation.

* * * * *
    (b) Exemption from the Public Utility Holding Company Act of 2005.
A qualifying facility described in paragraph (a) of this section or a
utility geothermal small power production facility shall be exempt from
the Public Utility Holding Company Act of 2005, 42 U.S.C. 16,451-63.
* * * * *
 [FR Doc. E6-8204 Filed 5-26-06; 8:45 am]

BILLING CODE 6717-01-P


[Federal Register Volume 82, Number 156 (Tuesday, August 15, 2017)]
[Notices]
[Pages 38726-38730]
[FR Doc No: 2017-17167]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81359; File No. SR-MRX-2017-14]

Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Regarding Market
Maker Quotations

August 9, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 26, 2017, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II, below, which Items have
been prepared by the Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend Rule 804, entitled ``Market Maker
Quotations.''
    The text of the proposed rule change is available on the Exchange's
Web site at www.ise.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend MRX Rule 804, entitled ``Market
Maker Quotations'' to amend the current rule text at MRX Rule 804(g)(1)
and (2) to adopt a revised description of the manner in which MRX
removes Market Maker quotes when certain risk parameters have been
triggered. The Exchange believes that the proposed new rule text will
provide more detailed information to participants concerning the manner
in which these risk features will remove quotes from the Order Book.
    Today, MRX Rule 804(g)(1) provides that a Market Maker must provide
parameters by which the Exchange will automatically remove a Market
Maker's quotations in all series of an options class. If a Market Maker
does not provide parameters then the Exchange will apply default
parameters announced to members. The Exchange will automatically remove
a Market Maker's quotation when, during a time period established by
the Market Maker, the Market Maker exceeds: (i) The specified number of
total contracts in the class, (ii) the specified percentage of the
total size of the Market Maker's quotes in the class, (iii) the
specified absolute value of the net between contracts bought and
contracts sold in the class, or (iv) the specified absolute

value of the net between (a) calls purchased plus puts sold in the
class, and (b) calls sold plus puts purchased in the class.
    The Exchange proposes to adopt a new rule that continues to require
Market Makers to provide parameters by which the Exchange will
automatically remove a Market Maker's quotations in all series of an
options class. The Exchange proposes to amend this rule text to apply
to the automated quotation removal protections in the current rule.\3\
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    \3\ The Exchange notes that it separately filed a proposed rule
change to MRX Rule 804(g)(1) to provide that a Market Maker must
provide parameters by which the Exchange will automatically remove a
Market Maker's quotations in all series of an options class. If a
Market Maker does not provide parameters then the Exchange will
apply default parameters announced to members. See Securities
Exchange Act Release No. 81204 July 25, 2017) (SR-MRX-2017-02) (not
yet published) [sic] (Order Approving Proposed Rule Change to Amend
Various Rules in Connection with a System Migration to Nasdaq INET
Technology). The proposed rule text seeks to reword and relocate the
proposed amended language concerning the parameters to include that
language in the revised rule text.
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    The proposed rule text in 804(g)(1) makes clear that Market Makers
are required to utilize the Percentage, Volume, Delta and Vega
Thresholds, each a Threshold, described in subsections (A)-(D) in the
new rule text. These are the same risk parameters that are offered
today by MRX. The Exchange is seeking to identify each risk parameter
specifically and describe the function of each parameter in Rule
804(g)(1)(A)-(D). For each feature, the Exchange's system (``System'')
will continue to automatically remove quotes in all series in options
class when a certain threshold for any of the parameters has been
exceeded.
    The Exchange elaborates in the proposed rule that a Market Maker is
required to specify a period of time not to exceed 30 seconds
(``Specified Time Period'') during which the system will automatically
remove a Market Maker's quotes in all series of an options class. The
limitation of not to exceed 30 seconds is new for MRX Members. In order
to establish a reasonable limit to the allowable Specified Time Period,
an MRX Member will be limited to the setting their Specified Time
period to no more than 30 seconds for these Thresholds. A Specified
Time Period will commence for an options class every time an execution
occurs in any series in such options class and will continue until the
System removes quotes as described in proposed MRX Rule 804(g)(2) or
(3) or the Specified Time Period expires. This is the case today, and
is not changing. The Specified Time Periods will be the same value
described in subsections (A)-(D). Also, as is the case today, a
Specified Time Period operates on a rolling basis among all series in
an options class in that there may be Specified Time Periods occurring
simultaneously for each Threshold and such Specified Time Periods may
overlap. If a Market Maker does not provide parameters, the Exchange
will apply default parameters, which default settings will be announced
to Members via an Options Trader Alert.
    Proposed Rule 804(g)(1)(A) describes in greater detail the
operation of the Percentage Threshold. As is the case today, a Market
Maker must provide a specified percentage of quote size (``Percentage
Threshold''), of not less than 1%, by which the System will
automatically remove a Market Maker's quotes in all series of an
options class. The Exchange is adding more detail about the manner in
which the System will calculate percentages and amending the current
rule to change its operation.
    For each series in an options class, the System will determine (i)
during a Specified Time Period and for each side in a given series, a
percentage calculated by dividing the size of a Market Maker's quote
size executed in a particular series (the numerator) by the Market
Maker's quote size available at the time of execution plus the total
number of the Market Market's quote size previously executed during the
unexpired Specified Time Period (the denominator) (``Series
Percentage''); and (ii) the sum of the Series Percentages in the
options class (``Issue Percentage'') during a Specified Time Period.
The System will track and calculate the net impact of positions in the
same option issue; long call percentages are offset by short call
percentages, and long put percentages are offset by short put
percentages in the Issue Percentage. The Exchange also notes that in
calculating the Percentage the System will compare the number of
contracts executed in that series relative to the size of the quote at
the time of the execution plus the number of executed contracts that
have occurred in the current time period. The current system calculates
the Percentage risk parameter by comparing the number of contracts
executed in that series relative to the size of the original quote only
at the time of the execution. This difference is captured within the
proposed rule text.
    The Exchange notes that with the upcoming migration from MRX's
current system to the INET system the manner in which the System
offsets will change. The current MRX system does not offset, in that
long call percentages are not offset by short call percentages, and
long put percentages are not offset by short put percentages, [sic] The
proposed System however will track and calculate the net impact,\4\
[sic] The Exchange notes this difference in the calculation and seeks
to memorialize the change in the process upon the migration to INET.
The proposed rule will provide participants with greater clarity as to
the operation of the Percentage risk feature on INET. The proposed text
indicates that if the Issue Percentage exceeds the Percentage Threshold
the System will automatically remove a Market Maker's quotes in all
series of the options class.
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    \4\ The net impact of positions takes into account the offsets
noted herein.
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    Proposed Rule 804(g)(1)(B) describes in greater detail the
operation of the Volume Threshold. As is the case today on MRX's
current system, a Market Maker must provide a Volume Threshold by which
the System will automatically remove a Market Maker's quotes in all
series of an underlying security when the Market Maker executes a
number of contracts which exceeds the designated number of contracts in
all options series in an options class.
    Proposed Rule 804(g)(1)(C) describes in greater detail the
operation of the Delta Threshold. As is the case today on MRX's current
system, a Market Maker must provide a Delta Threshold by which the
System will automatically remove a Market Maker's quotes in all series
of an underlying security. For each class of options, the System will
maintain a Delta counter, which tracks the absolute value of the
difference between (i) purchased call contracts plus sold put contracts
and (ii) sold call contracts plus purchased put contracts. If the Delta
counter exceeds the Delta Threshold established by the Member, the
System will automatically remove a Market Maker's quotes in all series
of the options class.
    Proposed Rule 804(g)(1)(D) describes in greater detail the
operation of the Vega Threshold. As is the case today on MRX's system,
a Market Maker must provide a Vega Threshold by which the System will
automatically remove a Market Maker's quotes in all series of an
options class. For each class of options, the System will maintain a
Vega counter, which tracks the absolute value of purchased contracts
minus sold contracts. If the Vega counter exceeds the Vega Threshold
established by the Member, the System will automatically remove a
Market Maker's quotes in all series of the options class.

    Proposed Rule 804(g)(2) provides more detail about the System's
current operation with respect to quote removal. The System will
automatically remove quotes in all options in an underlying security
when the Percentage Threshold, Volume Threshold, Delta Threshold or
Vega Threshold has been exceeded. The System will send a Purge
Notification Message to the Market Maker for all affected series when
any of the above thresholds have been exceeded. The Percentage
Threshold, Volume Threshold, Delta Threshold and Vega Threshold are
considered independently of each other. Quotes will be automatically
executed up to the Market Maker's size regardless of whether the
execution of such quotes would cause the Market Maker to exceed the
Percentage Threshold, Volume Threshold, Delta Threshold or Vega
Threshold.
    Proposed Rule 804(g)(3) provides more detail about the manner in
which the System resets the counting of the various risk parameters.
Notwithstanding the automatic removal of quotes described in the rule,
if a Market Maker requests the System to remove quotes in all options
series in an options class, the System will automatically reset all
Thresholds.
    Proposed Rule 804(g)(4) provides more detail about the process to
re-initiate quoting. When the System removes quotes because the
Percentage Threshold, Volume Threshold, Delta Threshold or Vega
Threshold were exceeded, the Market Maker must send a re-entry
indicator to re-enter the System.
    Proposed Rule 804(g)(5) provides more detail about default
parameters as mentioned above. If a Market Maker does not provide a
parameter for each of the automated quotation removal Thresholds
described in Rule 804(g)(1)(A-D) above, the Exchange will apply default
parameters, which are announced to Members. This language exists today
in the current text and is being memorialized herein.
    Finally, proposed Rule 804(g)(6) describes the interaction between
the four Thresholds and the market wide parameter. In addition to the
Thresholds described in Rule 804(g)(1)(A)-(D) above, a Market Maker
must provide a market wide parameter by which the Exchange will
automatically remove a Market Maker's quotes in all classes when,
during a time period established by the Market Maker, the total number
of quote removal events specified in Rule 804(g)(1)(A)-(D) exceeds the
market wide parameter provided to the Exchange by the Market Maker.
    Below are some illustrative examples of the Percentage and Volume
risk parameters.
    Example #1: Describes the Percentage risk parameter. Presume the
following Order Book:

------------------------------------------------------------------------
        Series of underlying XYZ            Size on bid x offer for MM1
------------------------------------------------------------------------
100 Strike Call.........................  300 x 300
100 Strike Put..........................  50 x 50
110 Strike Call.........................  200 x 200
110 Strike Put..........................  150 x 150
------------------------------------------------------------------------

    In this example, assume the Specified Time Period designated by the
Market Maker #1 is 10 seconds and the Percentage Threshold is set to
100%. Assume at 12:00:00, Market Maker #1 executes 100 contracts of his
offer size, 200 contracts, in the 110 Strike Calls. This represents an
execution equaling 50% (100 contracts of the 200 contract quote size)
of the 100% Percentage Threshold. Assume at 12:00:01, Market Maker #1
executes 50 additional contracts in the same 110 Strike Calls. This
execution equates to an additional 25% ((50 contracts/(100 remaining
quote size +100 contracts already executed within the Specified Time
Period)) for a net 75% Series Percentage count toward the 100%
Percentage Threshold. If at 12:00:03, Market Maker #1 executes the full
size of his bid (50 contracts) in the 100 Strike Put, the System will
automatically remove all of Market Maker #1's quotes in Underlying XYZ
since the execution caused his 100% Percentage Threshold to be
exceeded; the execution in the 100 Strike Put added 100% Series
Percentage to his previously calculated Series Percentage of 75%
totaling 175% Issue Percentage. No further quotes for Market Maker #1
in Underlying XYZ will be available until re-entry. The Specified Time
Period will be reset for Market Maker #1 in options class XYZ and
Market Maker #1 will need to send a re-entry indicator in order to re-
enter quotes in options series for options class XYZ into the System.
    Example #2 is another example of the Percentage Threshold. Presume
the following Order Book:
    In this example, assume Market Maker #1 has Percentage Threshold
set at 100% with a Specified Time Period over 5 seconds. Assume at
12:00:00, Market Maker #1 is quoting the XYZ 20 strike calls at 1.00
(10)-1.20 (10). An incoming Order to buy 5 contracts for 1.20 trades
against Market Maker #1's quote. Based on this trade, the Series
Percentage Threshold calculation is 5/[(10)+(0)] = 5/10 = 50%. Since
this is the only execution during the Time Period, 50% also represents
the Issue Percentage, therefore Market Maker #1's quote is now 1.00
(10)-1.20 (5).
    Next, assume at 12:00:01 an Incoming Order to buy 2 contracts for
1.20 trades against Market Maker #1's quote. Based on this trade, the
Series Percentage Threshold calculation is 2/[(5)+(5)] = 2/10 = 20%.
The Issue Percentage calculation is the sum of Series Percentages
during the time period, or 50% +20% = 70%.
    Finally, presume Market Maker #1's quote is now 1.00 (10)-1.20 (3).
At 12:00:02, Market Maker #1 updates his quote in the XYZ 20 strike
calls to increase his offer size back to 10 contracts, 1.00 (10)-1.20
(10). An incoming Order to buy 6 contracts for 1.20 trades against
Market Maker #1's quote. Based on this trade, the Series Percentage
Threshold calculation: 6/[(10)+(7)] = 6/17 = 35.29%. The Issue
Percentage calculation is the sum of Series Percentages during the time
period, or 50% + 20% + 35.29% = 105.29%. In this scenario, Market Maker
#1's quotes are removed in all series of XYZ since his setting of 100%
over 5 seconds has been exceeded.
    Example #3 describes the Volume Threshold. Presume the following
Order Book:

------------------------------------------------------------------------
        Series of underlying XYZ            Size on bid x offer for MM1
------------------------------------------------------------------------
100 Strike Call.........................  300 x 300
100 Strike Put..........................  50 x 50
110 Strike Call.........................  200 x 200
110 Strike Put..........................  150 x 150
------------------------------------------------------------------------

    In this example, assume the Specified Time Period designated by the
Market Maker #1 is 10 seconds and the designated number of contracts
permitted for the Volume-Based Threshold is 250 contracts. Assume at
12:00:00, the Market Maker #1 executes all of his offer size, 200
contracts, in the 110 Strike Calls. The System will initiate the
Specified Time Period and for 10 seconds the System will count all
volume executed in series of options class XYZ. If at any point during
that 10 second period, the Market Maker #1 executes additional
contracts in any series of the options class XYZ, those contracts will
be added to the initial execution of 200 contracts. To illustrate,
assume at 12:00:05 the Market Maker #1 executes 60 contracts of his
offer in the 100 Strike Calls. The total volume executed is now 260
contracts. Since that volume exceeds the Market Maker #1's designated
number of contracts for the Volume Threshold (250 contracts), all of
his quotes in all series of the options class XYZ over the Specialized

Quote Feed \5\ will be removed from the System; no further quotes will
be executed until re-entry. The Volume Specified Time Period will be
reset for Market Maker #1 in options class XYZ and Market Maker #1 will
need to send a re-entry indicator in order to re-enter quotes in
options series for options class XYZ into the System.
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    \5\ The Specialized Quote Feed (``SQF'') interface allows Market
Makers to connect and send quotes, sweeps and auction responses into
MRX. SQF Data includes the following: (1) Options Auction
Notifications (e.g., opening imbalance, Flash, PIM, Solicitation and
Facilitation or other information); (2) Options Symbol Directory
Messages; (3) System Event Messages (e.g., start of messages, start
of system hours, start of quoting, start of opening); (4) Option
Trading Action Messages (e.g., halts, resumes); (5) Execution
Messages; and (6) Quote Messages (quote/sweep messages, risk
protection triggers or purge notifications).
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Implementation
    The Exchange will begin a system migration to Nasdaq INET in Q3 of
2017.\6\ The migration will be on a symbol by symbol basis as specified
by the Exchange in a notice to Members. The Exchange is proposing to
implement this rule change on the INET platform as the symbols migrate
to that platform.
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    \6\ See Securities Exchange Act Release No. 81204 July 25, 2017)
(SR-MRX-2017-02) (not yet published) [sic] (Order Approving Proposed
Rule Change to Amend Various Rules in Connection with a System
Migration to Nasdaq INET Technology).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\7\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general to protect investors and the public interest,
by memorializing, with greater detail, the risk protections available
to Market Makers. The described Thresholds serve to decrease risk and
increase stability. Additionally, because the Exchange offers these
risk tools to Market Makers, in order to encourage them to provide as
much liquidity as possible and encourage market making generally, the
proposal removes impediments to and perfects the mechanism of a free
and open market and a national market system and protects investors and
the public interest. The Exchange believes that amending Rule 804(g) to
add more clarifying text, which explains in greater detail the manner
in which the four Thresholds operate will bring more transparency to
the rule which serves to protect investors and the public interest,
because Market Makers will be more informed about the manner in which
the functionality operates.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    In addition, the Exchange's proposal to amend the current
Percentage Threshold to: (i) Calculate offsets; and (ii) calculate the
Percentage Threshold during a Specified Time Period and for each side
in a given series, a percentage, by dividing the size of a Market
Maker's quote size executed in a particular series (the numerator) by
the Market Maker's quote size available at the time of execution plus
the total number of the Market Market's quote size previously executed
during the unexpired Specified Time Period, will provide Market Makers
with greater precision in calculating quoting risks. The Exchange
believes that providing Market Makers with tools to calculate risk
serves to perfect the mechanism of a free and open market and a
national market system, and, in general to protect investors and the
public interest because Market Makers are better able to manage risks
with this risk tool.
    The Exchange further represents that its proposal will continue to
operate consistently with the firm quote obligations of a broker-dealer
pursuant to Rule 602 of Regulation NMS and that the functionality is
mandatory. Specifically, any interest that is executable against a
Market Maker's quotes that are received \9\ by the Exchange prior to
the time any of these functionalities are engaged will be automatically
executed at the price up to the Market Maker's size, regardless of
whether such execution results in executions in excess of the Market
Maker's pre-set parameters.
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    \9\ The time of receipt is the time such message is processed by
the Order Book.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Specifically, the proposal will
not impose a burden on intra-market or inter-market competition, rather
it provides Market Makers with the continued opportunity to avail
themselves of risk tools, [sic] The proposal does not impose a burden
on inter-market competition, because participants may choose to become
Market Makers on a number of other options exchanges, which may have
similar but not identical features.\10\ The proposed rule change is
meant to continue to protect Market Makers from inadvertent exposure to
excessive risk. Accordingly, the proposed rule change will have no
impact on competition.
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    \10\ See BATS Rule 21.16, BOX Rules 8100 and 8110, C2 Rule 8.12,
CBOE Rule 8.18, MIAX Rule 612, NYSE MKT Rule 928NY and NYSE Arca
Rule 6.40.
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    The Exchange's proposal to amend the current Percentage Based risk
feature to: (i) Calculate offsets; and (ii) calculate the Percentage
Threshold during a Specified Time Period and for each side in a given
series, a percentage, by dividing the size of a Market Maker's quote
size executed in a particular series (the numerator) by the Market
Maker's quote size available at the time of execution plus the total
number of the Market Market's quote size previously executed during the
unexpired Specified Time Period, does not impose an undue burden on
competition and is non-controversial because the Exchange offers a
Percentage Threshold today. The proposed changes to the Percentage risk
tool simply add more precision to the existing calculation to permit
Market Makers to better control their risk with respect to quoting.
    Further, the Exchange is memorializing more detail concerning the
function of the Thresholds with this rule proposal and making clear the
method in which the Percentage risk tool is calculated. The risk tools
will continue to reduce risk for Market Makers in the event of a
systems issue or due to the occurrence of unusual or unexpected market
activity.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \11\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.

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    In its filing, MRX requests that the Commission waive the 30-day
operative delay in order to enable the Exchange to coordinate the
implementation of the proposed rule changes with its planned migration
to the INET platform, which will commence in Q3 of 2017. Although the
Exchange proposes certain technical changes to how the risk parameters
will operate (e.g., limiting the Specified Time Period to 30 seconds),
the proposed changes are largely intended to provide more detail about
the operation of the existing risk parameters. Accordingly, the
Commission believes that granting a waiver of the operative delay is
consistent with the protection of investors and the public interest and
therefore designates the proposed rule change to be operative upon
filing.\13\
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    \13\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest; for the protection of investors; or
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-MRX-2017-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-MRX-2017-14. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-MRX-2017-14, and should be
submitted on or before September 5, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17167 Filed 8-14-17; 8:45 am]
 BILLING CODE 8011-01-P