Stepped-up regulation at the Commodity Futures Trading Commission (CFTC) is a good thing and Sempra Energy doesn’t see its joint venture energy trading business being adversely affected by whatever emerges from the current regulatory debate, Sempra CEO Don Felsinger and CFO Mark Snell said during an earnings conference call Friday. “It’s probably going to be fine for us,” Snell said.

Although results were down, quarter-over-quarter overall and in the trading space, the executives were still bullish about full-year prospects. A $64 million one-time write-off for part of its Liberty Gas Storage project in Louisiana was the main reason cited for the overall earnings decline ($198 million, or 80 cents/share, for the second quarter vs. $244 million, or 98 cents/share, for the same period in 2008).

“Regarding the CFTC, I think the objective of Congress is to try to regulate and put a stop to a lot of speculative trading going on,” Felsinger said. “We do a lot of physical delivery of commodities, plus trading activity for customers that need to hedge their supplies or purchases. I sense something is going to happen, but the impact on our business is not going to be as impacted as it could be on people who are just out there simply doing screen trading.”

Snell acknowledged that he has been closely following the debate about the future regulatory approach of the CFTC for which a second day of hearings was held Wednesday and another hearing will be held next Wednesday (see Daily GPI, July 30). He is convinced at this point that there is little agreement on what to do and how future regulation should be shaped.

He thinks two things are going to happen as a result of the current activity: there will be increased capital requirements for counterparties, and a push to put as much of the derivatives activity — commodities as well as other financial derivatives — as possible on exchanges, creating margin requirements.

“The push from the commodity traders, such as us [RBS Sempra Commodities joint venture], is that there is a recognition that these markets were effectively established for end-users — producers, power plants and those kinds of companies who use these markets to hedge their outputs or their raw materials. From that perspective, I think those businesses will get some kind of exemption from the margining requirements so they can continue to do that. And that is really what is core to our business.”

The regulatory ideas being tossed around really are to the benefit of a joint venture such as Sempra’s with the Royal Bank of Scotland (RBS), Snell said. The level of capital that a global commercial bank has is an advantage, he said. This is the type of thing that other players will have to have, according to Sempra’s executives.

“For dealing with customers, our ability to extend credit to those types of end-users will be critical to keeping the market functioning,” Snell said. “All in all, we pretty much support the activity around more transparency and the elimination of systemic risk. We’re just trying to protect our customers in the legislative battle that is going on.”

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