The Commodity Futures and Trading Commission, the nation’s lead financial market watchdog, appears to have gotten the message from energy companies that sweeping new financial regulations that the agency is rolling out could drive up energy costs for consumers if not handled correctly.
Commission Chairman Timothy Massad on Tuesday addressed the regulations that his agency has been charged by Congress to craft in response to the 2008 Wall Street financial collapse.
“I … know the regulatory change is a challenge for you,” Massad said at the Natural Gas Roundtable energy industry forum in Washington. “And as someone who spent many years in the private sector as a lawyer advising businesses that are trying to plan investment and trying to plan strategies, I appreciate the value of predictability and certainty in regulation. And I’m committed to trying to provide that as much as possible.”
The primary concern for natural gas and utility industries is the commission’s new rules for policing the “swap” markets, which until the collapse on Wall Street had served energy companies and other commercial end users “very well,” he said. “But we saw in 2008 how certain parts of the swaps market generated excessive risks that were not well understood.”
Swaps are basically contracts between two or more groups that define an exchange of one item for something else. In the case of the energy industry, they are used to manage fuel purchases to hedge volatility as prices change and costs move up and down. A utility could purchase a swap contract for natural gas or electricity over a specified time that locks in a certain price. Mortgage default swaps are the financial instrument that led to the Wall Street collapse, as banks used the swaps to hedge against the risk of mortgage holders defaulting on their loans.
The Dodd-Frank financial reform legislation, intended to reform the financial industry, set into motion the regulations for the swap markets. The energy industry said the broad language in early versions of the rules would not have differentiated between the swap markets, pulling the energy markets in along with everything else.
The new regulations — meant to regulate how the banks use swap markets — could pose challenges for how energy companies use them too, potentially raising the cost of doing business and leading to higher energy costs for consumers, industry groups have argued.
Massad’s comments, however, suggest he is taking the industry’s concerns seriously.
“Commercial end users were not responsible for [the financial] crisis. And our challenge today is to implement this new regulatory framework in a way that achieves the important goals of bringing some transparency, sensible oversight, and prevention of excessive risk, while making sure that these markets still function effectively and efficiently for the many commercial firms that depend on them,” he said.
“After all, that should be the ultimate purpose of the derivatives markets — to help commercial companies manage their risks,” he said.
The commission has taken several steps to demonstrate its commitment to preserving the swap markets for energy companies, he said. In the fall, for example, the CFTC acted to make “it easier for local utility companies to access energy swaps.”
“These companies, which keep the lights on in many homes across the country, must access these markets efficiently in order to provide reliable, cost-effective service to their customers,” he said.
The commission also granted relief for special liquid swaps, specifically waiving “real-time reporting requirements” used in swaps involving jet fuel, he said. CFTC staff “did so because it recognized that in a very illiquid market, immediate reporting can undermine a company’s ability to hedge.” Reporting requirements do not always allow for trades to be executed quickly. Massad said the commission made the move in response to a request from an industry stakeholder.
Massad also said the commission worked with the Federal Energy Regulatory Commission to exempt the large regional transmission operators that FERC oversees from certain swap regulations.
Massad listed a number of similar changes to the nuts and bolts of rules to make it easier on the energy industry. That comes after years of pressure by the energy industry to seek exemptions from the regulations.
Nevertheless, he said the commission’s work will continue to define the framework of swap regulations in the coming months, including a number of rules that the energy industry is tracking closely.
In recent years, a major alliance between the oil and gas industry and electric utilities was created to advocate for changes to the regulations, pressing the commission to live up to Congress’ intent not to include the end-use markets in the commission’s rules.
