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Dodd-Frank and Electric Utilities

Understanding the new mosaic of commodities trading regulations.

Fortnightly Magazine - December 2013
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The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act) 1 amended the Commodity Exchange Act (CEA) 2 and greatly expanded the jurisdiction of the Commodity Futures Trading Commission (CFTC or the commission) over financial instruments used in energy transactions. At the time of its enactment, there was great uncertainty about how Dodd-Frank and the related CFTC-implementing regulations would affect retail electric utilities and local natural gas distribution companies. Even after several years of CFTC clarification, the CEA’s applicability to specific retail utility transactions requires constant vigilance by utilities. 

Retail utilities and large end-users who purchase energy often enter into associated financial transactions that shift the price risk of the energy from the utility purchaser to a third party. Implementation of Dodd-Frank potentially exposed retail utilities and other energy purchasers to the same regulatory burden as large financial institutions 3 when such entities enter into financial and physical commodity transactions. 4

Over the past few years, the CFTC has issued a whole mosaic of interrelated implementing rules. 5 As part of this mosaic, the CFTC has issued several rules and interpretive guidance notifications that clarify the extent to which it will regulate the activities of electric and natural gas utilities (and other end-users). In large part, retail utilities can rely on these labyrinthian exemptions and no-action determinations to avoid the full regulatory burdens of Dodd-Frank. However, the CFTC’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions under CEA continue to apply. 6 Moreover, the CEA-exemptions that apply to retail utilities generally require case-by-case scrutiny, because they are determined by the facts and circumstances of each transaction. 

Unintended Targets

Before the individual tiles in the Dodd-Frank mosaic can be fully interpreted as applicable to utilities, the overarching intent of the Act must be understood. Electric and natural gas utilities provide utility services to retail customers in accordance with the rates and conditions approved by state regulatory commissions. While utilities purchase natural gas and electricity for physical delivery, they also use financial tools to hedge risks associated with providing retail service. 7 In other words, most utilities are end-users, and they use financial instruments to mitigate the price volatility of the commodities needed to provide service to customers and mitigate the effect of potential commodity price fluctuations on customers. 8 The financial instruments include exchange traded futures contracts and energy derivatives. 9

Prior to Dodd-Frank, financial instruments associated with a physical energy transaction and used by a regulated purchaser to hedge its price risk were largely unregulated by the CFTC. Moreover, except for the CEA’s anti-manipulation provisions, the CFTC expressly exempted contracts for the purchase and sale of crude oil, condensates, natural gas, and natural gas liquids. 10 Specifically, certain oil, natural gas, and electricity related transactions were primarily subject to oversight by the Federal Energy Regulatory Commission

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