FERC & CFTC Duel Over Energy Derivatives Contracts

Congress is currently considering legislation that would establish jurisdiction over energy derivatives contracts. Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC) and Jon Wellinghoff, chairman of the Federal Energy Regulatory Commission (FERC)are dueling over jurisdiction over energy derivatives contracts in this pending Congressional legislation. The arcane turf war is very important to the regulatory framework and agency oversight for America's energy future. The CFTC believes 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.

CFTC wants the financial restructuring bill to 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. CFTC believes that 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. CFTC wants Congress to avoid any bright-line exemption that runs the risk of creating the next regulatory loophole.

The U.S. House version of the regulatory reform 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.

FERC is urging lawmakers to more clearly define jurisdictional boundaries. FERC believes 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.

Power companies have integrated financial trading into their strategies to manage the physical flows of supply and demand, and balance their ledgers. 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. (WSJ, 3/9/10)