by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The Commodity Futures and Trading Commission, the nation’s lead financial market watchdog, appears to have gotten the message from energy companies that sweeping new financial regulations that the agency is rolling out could drive up energy costs for consumers if not handled correctly.
Commission Chairman Timothy Massad on Tuesday addressed the regulations that his agency has been charged by Congress to craft in response to the 2008 Wall Street financial collapse.
“I … know the regulatory change is a challenge for you,” Massad said at the Natural Gas Roundtable energy industry forum in Washington. “And as someone who spent many years in the private sector as a lawyer advising businesses that are trying to plan investment and trying to plan strategies, I appreciate the value of predictability and certainty in regulation. And I’m committed to trying to provide that as much as possible.”
The primary concern for natural gas and utility industries is the commission’s new rules for policing the “swap” markets, which until the collapse on Wall Street had served energy companies and other commercial end users “very well,” he said. “But we saw in 2008 how certain parts of the swaps market generated excessive risks that were not well understood.”
Swaps are basically contracts between two or more groups that define an exchange of one item for something else. In the case of the energy industry, they are used to manage fuel purchases to hedge volatility as prices change and costs move up and down. A utility could purchase a swap contract for natural gas or electricity over a specified time that locks in a certain price. Mortgage default swaps are the financial instrument that led to the Wall Street collapse, as banks used the swaps to hedge against the risk of mortgage holders defaulting on their loans.
The Dodd-Frank financial reform legislation, intended to reform the financial industry, set into motion the regulations for the swap markets. The energy industry said the broad language in early versions of the rules would not have differentiated between the swap markets, pulling the energy markets in along with everything else.
The new regulations — meant to regulate how the banks use swap markets — could pose challenges for how energy companies use them too, potentially raising the cost of doing business and leading to higher energy costs for consumers, industry groups have argued.