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Legal Battleground

2010 Law & Lawyers Report

Fortnightly Magazine - November 2010

regulated—and because the exemptions cover only non-standard, customized OTC swaps, which, again, haven’t yet been defined. Standard swaps that energy companies trade on a regular basis will be cleared through exchanges.

Until CFTC finalizes the Dodd-Frank regulations, companies will find themselves in the awkward position of having to guess what kinds of trading activities will be regulated. “The good news is that most of the regulations won’t be effective until next summer,” Moore says. “The bad news is that we don’t know what exactly will be effective next summer, so planning for it will be difficult.”

In October CFTC issued an interim rule requiring all swaps—including those entered before Dodd-Frank’s enactment that hadn’t expired by July 15, 2010—to be reported to the commission or a swap data repository (see “Interim Rule for Reporting Pre-Enactment Swap Transactions,” Federal Register 2010-25325, Vol. 75, No. 198, Oct. 14, 2010) . This interim rule will help companies to implement records-retention and reporting regimes, but at this writing it remains unclear exactly what kinds of transactions will fall under the Dodd-Frank “swap” umbrella.

The definition might go so far as to include things like financial transmission rights (FTR) in RTO markets, and potentially even renewable energy certificates and SO2 and NOX emissions allowances—all of which are derivative instruments now regulated by FERC and its authorized market operators. Dodd-Frank directs FERC and CFTC to negotiate a memorandum of understanding on how to divide oversight authority, but the MOU hasn’t materialized yet—and FERC has been conspicuously absent in the CFTC rulemaking process.

“There’s a danger of all those things being captured as swaps,” Moore says. “They’re financially settled, and they don’t directly involve physical delivery. We won’t know for sure until CFTC issues the reporting requirements and proposes rules to flesh out the definitions. As long as you’re doing something that could be called a swap, you need to retain records and be prepared to report them.”

Unto the Breach

Environmental regulations, green energy incentives, and financial reform aren’t the only regulatory battlegrounds being contested today. The industry faces changes and conflicts on multiple fronts, from federal rules for pricing demand response resources (see “ Bench Report - #2 Negawatts = Megawatts? ”) to revenue decoupling in the states (see “ Baked-In or Decoupled ”).

Some of the shifts happening today can be traced to the Democratic takeover of the White House and Congress in the 2008 elections. However, overhanging regulatory uncertainties are attributable to a long-term shortage of policy direction. Federal and state regulators are struggling to draw the boundaries precisely because Congress has been unable to articulate a clear energy strategy.

The most obvious example is the failure of GHG legislation, but other examples include policies affecting nuclear energy, transmission construction, and smart grid development. Although many legislative efforts have advanced one policy priority or another, most of these provisions have been incremental and ambiguous.

In the absence of strategic direction, the regulatory framework is becoming increasingly uncertain and complicated. While the industry’s legal advocates are working diligently to bring greater clarity and certainty, the problem