Utility groups urge derivatives-reform caution

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Nov. 24 -- Three trade associations representing natural gas and electric utilities urged leaders of two US Senate committees considering over-the-counter derivatives reform to not unwittingly cut utilities off from critical financial markets.

American Gas Association Pres. David N. Parker, Edison Electric Institute Pres. Thomas R. Kuhn, and Electric Power Supply Association Pres. John E. Shelk said in a Nov. 23 letter to leaders of the Senate Agriculture and Banking committees that utilities use OTC derivatives to hedge against price volatility.

Seventy of the associations’ member companies also signed the letter to Christopher J. Dodd (D-Conn.), who chairs the Banking Committee, and Richard C. Shelby (R-Ala.), its ranking minority member; and Blanche L. Lincoln (D-Ark.), who chairs the Agriculture Committee, and Saxby Chambliss (R-Ga.), its ranking minority member.

The trade associations said their members do not contribute to overall systemic risk and should not be considered swap dealers or major system participants, which some members of Congress believe need to be more closely regulated. Independent oil and gas producers have made a similar argument to federal lawmakers considering commodities reforms.

AGA, EEI, and EPSA member companies rely on OTC derivatives to hedge prices and keep retail prices affordable, the association executives said in their letter. “When discussing any increased regulation of exchange and OTC derivatives markets, it is important to note that these transactions are not the source of systemic risk in the broader economy,” they said. “In fact, the entire commodity market is less than 1% of the global OTC derivative market, and the energy commodity portion is yet a fraction of that 1%.”

The associations support the clearing of standardized derivatives between large financial dealers, where appropriate, through regulated central counterparties. But they oppose mandates which would require all or most OTC transactions be centrally cleared or executed on exchanges.

The associations also said they support increased authority of the Commodity Futures Trading Commission to prevent market manipulation. But they said this could be accomplished more effectively and at a lower cost through mechanisms such as a central data repository than through mandatory clearing.

Contact Nick Snow at nicks@pennwell.com.

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