APPA: CFTC Rule Approved Today Will Help Public Power Utilities Hedge Fuel and Electric Power Price Risks
September 17, 2014
Washington, D.C., September 17, 2014 – A final rule approved by the Commodity Futures Trading Commission (CFTC) will help ensure that public power utilities have access to the counterparties needed to hedge fuel and electric power price risks, the American Public Power Association said Wednesday.
“The CFTC is to be commended: the rule approved today will help our members continue to serve their customers with affordable – and predictable – rates,” APPA President and CEO Sue Kelly said. “Public power utilities, like any other end user, use swaps to hedge commercial operations risks. The rule gives public power utilities access to the broad array of counterparties necessary to protect their customers from rate increases and fluctuations.”
The rule makes permanent the relief provided for utility operations-related swaps by “utility special entities” in a March 21, 2014, CFTC no action letter. It does not include a notification requirement included in a draft version of the rule. APPA and other stakeholders opposed the notification requirement, arguing that it would impose an unnecessary hurdle to counterparties wanting to enter swaps with public power utilities.
By way of background, generally, under CFTC regulations any entity engaging in more than $8 billion in swap dealing activity must register as a swap dealer. However, there is a $25 million “sub threshold” for swap dealing activity with “special entities,” including state or local governmental entities, charitable organizations, and pension funds. Prior to the March 21 no action letter, entities not expecting to exceed the $8 billion threshold had simply stopped entering swap transactions with public power utilities (to avoid being forced to register as a swap dealer because they had triggered the $25 million special entity sub threshold).
While public power utilities can, and do, enter swap transactions with swap dealers, or enter swaps through exchanges, they also rely on natural gas distributors, investor-owned utilities, and independent electric power generators as swap counterparties. These non-swap dealers can provide customized swaps necessary to meet diverse needs driven by wide regional variations in customer base, weather, climate, energy availability, fuel sources and reliance on renewable – and highly variable – energy.
A survey of APPA members relying on swaps to hedge risks showed that, on average, the number of available counterparties to swaps had been cut in half after the $25 million sub threshold took effect. This hugely diminished pool of counterparties meant either negotiating swaps under less favorable terms or – when counterparties for certain customized swap transactions could not be found – being unable to adequately, or appropriately hedge certain operations risks. This also put public power utilities at a disadvantage to other market participants, including investor-owned electric utilities and rural electric cooperatives, swaps with which were subject to the $8 billion, not $25 million swap dealing threshold.
The rule approved today instead would exempt operations-related swaps with utility special entities from the $25 million sub threshold. The rule narrowly defines which entities and swaps qualify for the relief. Conversely, non-operations-related swaps with utility special entities and swaps with any other type of special entity would still be subject to the $25 million sub threshold.
Finally, as welcome as the CFTC’s actions are today, work on this issue is not complete.
First, APPA hopes Congress will continue to pursue enactment of the Public Power Risk Management Act (H.R. 1038 and S. 1802). Doing so would eliminate any ambiguities as to Congress’ intent and ensure that this regulatory relief is not revisited at a later date.
Second, the CFTC has indicated that it may seek to amend swap reporting requirements to ensure that it can adequately monitor the swap transactions covered by today’s rule. APPA has long championed the Dodd-Frank Act and the market clarity it provides and will work with CFTC to ensure that it has the information – and resources – it needs to do the job.