The era of polemics about electric competition is nearly over. It’s time to compare the relative performance of competition and traditional regulation as these two established models operate side-...
2010 Law & Lawyers Report
electricity. “The attraction of a feed-in tariff is that it doesn’t involve a direct tax or subsidy,” Tewksbury says. “Politically, it’s a lot easier.”
He adds, however, that this political dodge might not be strictly legal, from a Constitutional perspective (see “ Bench Report - #6 Feed-In Frenzy ”). FERC issued a declaratory order in July that a California FIT statute usurped federal authority to regulate wholesale energy transactions. The state PUC responded in August by modifying the terms of its FIT, requiring investor-owned utilities to solicit competitive bids to supply the FIT quotas.
To the degree states are determined to push green energy harder than federal lawmakers are prepared to do, they might try to restructure their FIT programs as California did to avoid federal conflicts. If that happens, it will spur renewable development—but it also will further complicate the interplay of economic and policy forces driving the competitiveness of various energy resources.
“You have people participating in the market who are getting payments and incentives outside the market, and that affects other competitors,” Tewksbury says. “In some cases, maybe that’s appropriate from a societal perspective. But I’d like to see some thought given to how these energy policies work in the market, so they don’t defeat the purpose of those markets.”
While initiatives focused on energy and environmental policies created a storm of uncertainty in 2010, perhaps the most sweeping legislative action during the year actually targets an entirely different business sector. Enacted in July, the Dodd-Frank Wall Street Reform and Consumer Protection Act was aimed at increasing accountability and transparency in the U.S. financial system. But for the energy industry, its primary effect is to impose a host of new regulations on a range of wholesale trading activities—including derivative “swap” contracts that companies routinely use to hedge their commodity price risks.
The law is expected to end over-the-counter (OTC) trading in standardized derivative contracts, forcing such transactions into regulated exchanges where they’ll be priced and cleared transparently.
“Everything about the landscape in hedging activities is going to change,” says Janice Moore, a partner with Pierce Atwood. “The energy derivatives space is going to be rather fully occupied by the CFTC [Commodities Futures Trading Commission]. That’s big news.”
The news doesn’t seem to have reached many companies in the industry, however, in part because the legislation included language that promised to exempt some market participants, including “end users” like utilities, gencos and fuel suppliers engaging in trades for the purpose of hedging commercial risk—as opposed to securities dealers trading for speculative purposes. But the Dodd-Frank language is ambiguous, leaving most details to be defined by the CFTC. The commission hasn’t yet clarified even the most basic provisions, including how it will define regulated dealers vs. exempt end users. Nor has it determined how counterparties will go about securing their exempt status—whether it will require a one-time process, a separate filing for each trade, or something in between.
And even if companies are exempt, they’re still affected by the regulations, because many of their trading partners will be