|July 28, 2010|
The Dodd-Frank Act Will Affect Energy Companies
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Title VII of the Dodd-Frank Act adopts sweeping changes to how the markets for over-the-counter ("OTC") derivatives, and the participants in those markets, will be regulated. In the Schiff Hardin Securities and Futures Regulation Group's Client Alert, summarizing certain sections of the Dodd-Frank Act, Section I deals with the OTC derivatives provisions Title VII of the Dodd-Frank Act.
ISN'T THE DODD-FRANK ACT ABOUT "WALL STREET REFORM"? WHY SHOULD ENERGY COMPANIES CARE?All energy companies involved in the United States natural gas and power markets will be affected by the Dodd-Frank Act. This includes regional transmission organizations, merchant power generators, public utilities, retail energy marketers, financial entities trading energy products, brokers of energy products, small municipal utilities and rural electric cooperatives. Energy companies need to understand the newly-christened energy market regulator known as the Commodity Futures Trading Commission (the CFTC). The Dodd-Frank Act puts the CFTC firmly in charge of constructing new and different regulated markets for the purchase and sale of energy derivatives. The energy markets you participate in today will change dramatically — and the CFTC is now writing the new rules.
The Dodd-Frank Act amends the Commodity Exchange Act (the CEA) by deleting the exemptions and exclusions upon which today's energy markets are structured. The Commodity Futures Modernization Act of 2000 exempted many OTC energy derivatives and swaps from the CEA and the jurisdiction of the CFTC. Since 2000, the natural gas and power markets have developed without CFTC oversight under the jurisdiction of FERC. The Dodd-Frank Act simply repeals all these exemptions.
The Dodd-Frank Act defines a new energy market structure and identifies the market entities that will comprise the structure. These market entities are exchanges or "designated contract markets," clearing entities or "designated clearing organizations," "swap execution facilities" and "swap data repositories," and the Dodd-Frank Act gives the CFTC authority to write new rules for each such entity. Each regional transmission organization, each electronic energy transaction platform, each data collection enterprise, each clearing entity, will have to choose one (or more) of these new CFTC-designated roles, even if the market entity only participates in the over-the-counter energy markets. The Dodd-Frank Act also imposes new regulations on brokers, dealers, "market-makers," investment advisors, and other intermediaries who operate in the OTC natural gas and power markets — intermediaries who previously were unregulated. In the Dodd-Frank Act, there isn't a category called "Other — FERC/state energy-regulated" that allows a market entity to opt out of playing a CFTC-designated role.
The Dodd-Frank Act also amends the CEA to define a new universe of OTC energy market participants. These market participants include "swap dealers," "major swap participants," "introducing brokers" and "advisors," "end users," "special entities" and "eligible contract participants." The Dodd-Frank Act gives the CFTC authority to define and refine these new roles, with different registration and regulatory filings, reporting and recordkeeping responsibilities and transaction restrictions for each. Energy companies must choose their new CFTC role. Again, there is no choice to continue to be regulated only by FERC and/or the states for each role.
The Dodd-Frank Act makes it unlawful to do business as one of these entities, or to transact in energy "swaps," without complying with the Commodity Exchange Act and the new CFTC rules, or seeking appropriate exemptions or exclusions. Even though energy companies have operated for years (or decades) under the FERC and state energy regulatory structures, these structures and your energy regulatory status are irrelevant in the new Dodd-Frank Act world. The CFTC will decide. How will your entity fit within these definitions and comply with the new CFTC rules? In addition to the market structure rulemakings, the Dodd-Frank Act also grants the CFTC new authority to set position limits, authority to regulate "large traders," broad new enforcement authority, whistle-blower protection and reward authority, and new enforcement remedies. These, too, will require rulemakings.
WHY DO ENERGY COMPANIES NEED TO BECOME INVOLVED NOW?The Dodd-Frank Act sets very aggressive deadlines for the CFTC rulemaking — in most cases the Act contemplates a 90- to 360-day timeframe — starting now. In some of the rulemakings, the CFTC will be working alone. In others, the Dodd-Frank Act requires the CFTC to work jointly with the Securities and Exchange Commission and/or the bank regulators. During an overlapping 180-day time frame, the CFTC is required to negotiate a memorandum with the Federal Energy Regulatory Commission "to establish procedures for...applying their respective authorities in a manner so as to ensure effective and efficient regulation in the public interest;... resolving conflicts concerning overlapping jurisdiction; and... avoiding, to the extent possible, conflicting or duplicative regulation."
Each energy company must decide where within its organization CFTC compliance will fall. The CFTC has begun its rulemakings — and announced 30 topic areas for attention — none of which focuses on natural gas, power or energy regulation. Energy companies need to impress upon policymakers that the markets for natural gas and power in the United States are different. Natural gas and power are essential services, as well as commodities. In these markets, reliability and affordability of the delivered product are important public service objectives. The energy industry has an even greater need for regulatory certainty than other industrial, commercial or financial industries — long-term financing and planning for critical infrastructure investment and energy independence demand it.
If you have questions about what your energy company needs to know about the Dodd-Frank Act, or how your company can become involved in the CFTC rule-making process, please call Patty Dondanville at 312-258-5709, contact Patty at firstname.lastname@example.org or call one of your other Schiff Hardin Energy and Public Utilities Group contacts.
ABOUT SCHIFF HARDIN LLPSchiff Hardin is proud to have nationally recognized expertise in the energy industry and its markets, the regulation of commodity markets and the participants in those markets, and antitrust laws and policy. This unusual combination of expertise enables us to add immediate value for our energy industry clients.
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