CFTC warns against exempting energy contracts from its jurisdiction


By Sarah N. Lynch and Ian Talley
The Wall Street Journal
Tuesday, March 9, 2010

WASHINGTON -- The head of the U.S. futures watchdog agency warned lawmakers Tuesday against excluding some energy contracts from pending legislation, fueling an ongoing turf war between federal regulators.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said that exempting financial contracts overseen by the Federal Energy Regulatory Authority from pending over-the-counter derivatives legislation could create a "significant and problem-filled loophole" in the future.

Mr. Gensler made his remarks in testimony prepared for delivery before a Senate energy committee studying how evolving contracts in the energy markets should be overseen.

FERC and CFTC officials have been battling over jurisdiction of energy contracts that increasingly blur the line between the traditional mandates of the agencies. Power companies have integrated financial trading into their strategies to manage the physical flows of supply and demand, and balance their ledgers.

FERC Chairman Jon Wellinghoff, also scheduled to testify before the committee, is expected to urge lawmakers to more clearly define jurisdictional boundaries.

CFTC's Mr. Gensler said Tuesday that the financial restructuring bill should ideally encompass a wide range of over-the-counter products, and if jurisdictional issues arise between regulators, they can simply deal with it through cooperative agreements. Wholesale exemptions preventing CFTC regulation -- including futures and swaps contracts, clearing, or exchange trading -- for anything regulated by the FERC "undermine the effectiveness of comprehensive reform," he said.

"Congress should avoid any bright-line exemption that runs the risk of creating the next regulatory loophole," he said.

The U.S. House version of the bill, which passed in December, would give the CFTC and the U.S. Securities and Exchange Commission authority to police the swaps market. But FERC and some lawmakers believe the definition of a swap is much too broad and might apply to certain financial products and entities regulated by FERC, thereby hindering its ability to police wholesale energy markets. Now as the Senate prepares to tackle the financial overhaul, FERC is seeking to convince lawmakers to make changes before a final bill is approved.

Meanwhile, a senior FERC official said last month that if the agency's role was reduced by legislation, it could adversely affect customers. Uncertainty could chill investments in energy infrastructure by raising the cost of capital and jurisdictional shift could limit their ability to pursue market manipulation cases, he said.

FERC got some backing from state regulators and industry officials. Joseph Kelliher, former FERC chairman and now representing the Edison Electric Institute, said Congress needed to protect FERC's authority and clarify jurisdictional boundaries. Gary Brown, chairman of the New York Public Services Commission and representing the National Association of Regulatory Utility Commissioners, also said the legislation could harm customers. Giving CFTC oversight of all over-the-counter products would raise costs, particularly of hedging, which would ultimately be passed through to rate-payers.

At issue in particular are contracts called "financial transmission rights," which are used by firms to manage congestion and hedge against the costs of moving power onto high-voltage lines. Also in question is whether the managers of the contracts, which are currently regulated by FERC, should fall under CFTC regulation.

Responding to FERC concerns, House lawmakers tried to reach a compromise by inserting language into the bill that would allow the CFTC to grant regulatory exemptions to products that may fall within FERC's purview. It also called for the CFTC and FERC to strike an agreement to resolve jurisdictional conflicts and avoid dual regulation.

Those changes have not appeased FERC. But Mr. Gensler on Tuesday seemed to support some of the same solutions to the turf issue that were written into the final House bill.

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