Congress took away financial tools that energy producers and consumers use to circumvent energy price volatility when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, and it needs to make changes and clarifications to the law to avoid hurting energy markets, according to a report by the Abraham Group.
In a 13-page report, CEO Spencer Abraham and Mark Mills, CEO of the Digital Power Group, assert that the "use of swaps and futures hedging by energy businesses had nothing to do with triggering the Great Recession...Dodd-Frank disrupts and puts at risk long-standing and effective use of hedging and swaps to protect both businesses and consumers from energy volatility.
"Disrupting effective price risk management in America's energy markets could not come at a worse time. The United States is undergoing a renaissance in the production of oil and natural gas, and collaterally seeing hundreds of billions in investments in new energy-producing and energy-intensive manufacturing enterprises, with the potential creation of millions of jobs."
Mills and Abraham, a former U.S. senator and Energy Secretary, urged Congress to exempt physical commodities businesses from being regulated as financial businesses. They also want lawmakers to rein in the Commodity Futures Trading Commission (CFTC), and its plans to drop in 2018 the threshold for a firm to register under Dodd-Frank from $8 billion in annual energy trades to $3 billion.
"Regardless of the merits of arguments to modify or restrict the role of financial institutions in physical or energy commodity markets, it does not collaterally make sense that the commercial energy businesses that provide and use physical commodities should be regulated like financial institutions," the authors said. On the threshold issue, they said Congress "should at least ensure that the relevant threshold for regulation does not automatically drop below current levels with no regard for future prices or market conditions.
"Any change in the registration trigger should require a formal rulemaking process and Congressional input."
Abraham and Mills also want Congress to give the CFTC guidelines and standards to follow, and to hold the agency accountable for resolving and clarifying jurisdictional conflicts, especially with the Federal Energy Regulatory Commission (FERC). Dodd-Frank, they said, gives the CFTC about 400 new rules to use at its discretion.
"Imprecise language in Dodd-Frank has led the CFTC to promulgate inappropriate or ill-advised rules that fail to recognize damage to, and have eliminated long-standing effective energy market practices," the authors said, adding that conflicts between the CFTC and FERC hurts energy markets.
"Congress recognized the over-lapping jurisdiction and potential for confusion, and in Dodd-Frank directed FERC and the CFTC to develop a memorandum of understanding [MOU] within 180 days of the Act's passage," the authors said. "[But] it has been three years and no MOU has surfaced.
“None of this is good. None of it makes any sense. None of it was necessary to avoid a future systemic failure and repeat of 2008. None of it is relevant to the 99.7% of the financial activity in the markets that was the ostensible target of Congress in passing Dodd-Frank.”
Earlier this month, the CFTC voted to propose new rules in place of the discarded position limits rule (see Daily GPI, Nov. 5). Specifically, the agency has proposed implementing Section 737 of Dodd-Frank, which would clamp down on speculation in 28 physical commodity futures and swaps, including New York Mercantile Exchange (Nymex) Henry Hub natural gas, light sweet crude oil, New York Harbor gasoline blendstock, as well as New York Harbor heating oil.