The board of directors of the National Association of Regulatory Utility Commissioners (NARUC) voted out resolutions last Wednesday supporting financial reform legislation that carves out an exemption from mandatory clearing requirements for legitimate hedging activities in natural gas and electricity markets, and clearly spells out the exclusive jurisdiction of FERC in regional electricity markets.

One of the resolutions, co-sponsored by the NARUC committees on Gas, Consumer Affairs and Energy Resources and the Environment at the association’s Winter Meeting in Washington, DC, last week resolved that any federal legislation to regulate the over-the-counter (OTC) derivatives markets “should provide for an exemption from mandatory clearing requirements for legitimate hedging activity in natural gas and electricity markets.” With the board’s approval, the resolution is considered NARUC policy.

Absent an exemption, “mandatory centralized clearing of all OTC contracts may increase expenses associated with hedging activity, and ultimately end-user prices, due to increased margin requirements,” the resolution read. The effect of the proposed margin requirements resulting from mandatory clearing “could have the unintended effect of reducing or eliminating hedging practices and could jeopardize or reduce investments in Smart Grid technology; and natural gas utilities and production companies could reduce capital devoted to infrastructure and natural gas exploration,” the resolution continued, citing a report by the Joint Association of Energy End-Users.

It called for the exemption from mandatory clearing to be “narrowly tailored as to not allow excessive speculation in natural gas and electricity markets.”

A second resolution on financial regulatory reform, co-sponsored by the NARUC Committees on Electricity, Gas and Consumers Affair, made clear that the Federal Energy Regulatory Commission (FERC) and the Public Utility Commission of Texas (PUCT), which oversees the Electric Reliability Council of Texas (ERCOT), rather than the Commodity Futures Trading Commission (CFTC), “should continue to be the exclusive…regulators” of services or products offered or provided under regional transmission organization (RTO) or independent system operator (ISO) tariffs accepted by FERC or PUCT fin regional markets.

In short, NARUC said RTOs and ISOs should not be subject to CFTC jurisdiction as a clearinghouse due to the financial and other settlement services that they provide those transacting in regional electricity markets. Rather it said RTOs and ISOs should continue to be under FERC jurisdiction.

In RTOs and ISOs, FERC regulates transmission in interstate commerce and related financial transmission rights, real-time and day-ahead energy markets, capacity markets and ancillary services, all of which are conducted using electronic trading facilities in accordance with detailed market rules contained in tariffs and contracts on file at the FERC, the Commission said.

CFTC Chairman Gary Gensler believes that his agency should have control of regional electricity markets under the derivatives reform bill. Turning the organized electricity markets over to the CFTC to regulate would “create market uncertainty” and increase the “potential for market disruption,” FERC Chairman Jon Wellinghoff told Congress in late 2009.

In mid-December the House passed by a vote of 223 to 202 a sweeping financial regulatory reform bill that would regulate OTC derivatives for the first time (see NGI, Dec. 14, 2009). The legislation preserved an exemption for bona fide hedgers of commercial risk, but it did not address the FERC vs. CFTC dispute over jurisdiction in regional electricity markets.

Leaders of the Senate Banking Committee are trying to craft financial regulatory reform legislation, but are running into roadblocks along the way. President Obama made financial regulatory reform a priority in his State of the Union address (see NGI, Feb. 1). However, the fate of the Senate bill — not to mention whether it will address the jurisdictional dispute in regional power markets — remains uncertain (see Daily GPI, Jan. 25; Jan. 11).

Both NARUC resolutions on financial regulatory reform call on NARUC staff and its general counsel to urge Congress, the CFTC and other federal policymakers to promote “policies with this statement.”

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.