On February 22, 2011, Michael Bardee, General Counsel for FERC, submitted comments in response to the Commodity Futures Trading Commission’s (“CFTC”) Notice of Proposed Rulemaking (“NOPR”) on the elective exception to mandatory clearing for swaps under the Commodity Exchange Act (“CEA”). Bardee stated that CFTC should interpret and apply the CEA, as amended by the Dodd-Frank Act, to ensure there is no overlap with FERC jurisdiction. Bardee stated that “duplicative and conflicting” regulatory requirements could slow investment needed for national energy infrastructure or impose unnecessary costs on consumers.
Bardee emphasized that coordination between CFTC and FERC should be similar to that seen between CFTC and the SEC in financial markets. In addition, Bardee made three specific recommendations:
- FERC should retain comprehensive jurisdiction over RTOs and ISOs;
- CFTC regulation over RTO/ISO swaps is unnecessary and potentially harmful, and because FERC currently has comprehensive regulation over those transactions, Dodd-Frank terms should not apply to RTO/ISO instruments trading under a FERC approved schedule or tariff; and
- The end-user rules should not impose unreasonable costs on energy providers and their customers.
Bardee noted that the Federal Power Act requires just and reasonable rates for wholesale power and transmission, and that many view electricity as a “public good,” rather than a commodity. He also explained that RTOs/ISOs are already subject to extensive FERC regulation. Bardee also cited to FERC’s market oversight and enforcement efforts in the recent years, and the enhanced civil penalty authority under the Energy Policy Act of 2005 as reasons why FERC should retain jurisdiction.
Bardee addressed concerns that contracts that are normally subject to FERC-approved tariffs might be construed as “swaps” and whether RTOs/ISOs should be considered “swap dealers.” Bardee argued that RTO/ISO markets like Firm Transmission Rights (“FTRs”) do not “pose systemic risk to the economy.” He went on to argue that an “expansive” interpretation of terms like swap, swap dealer, major swap participant, swap execution facility, or derivatives clearing organization, would result in overlapping regulation of FTRs. Thus, a conflict in authority would detract from the CFTC’s job of reforming products and trading environments which were previously unsupervised. Bardee argued that it makes “little sense” to subject organized electricity markets and transactions to multiple regulatory regimes, particularly in light of FERC’s current authority.
Finally, Bardee argued that hedging transactions in FERC-regulated markets are “risk management tools” which reduce costs and contribute to just and reasonable rates. Thus, mandatory clearing of transactions in energy markets would raise costs and reduce capital, and Bardee warned that an “overly narrow” end-user exception could limit legitimate hedging activity in energy markets and increase energy costs for consumers.
A copy of the General Counsel’s comments is available here.