NARUC resolution cites need to retain access to OTC markets

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Feb. 22 -- Financial reform legislation should ensure natural gas and electric power utilities have continued access to over-the-counter risk-management products to keep prices more predictable and less volatile, the National Association of Regulatory Utility Commission (NARUC) said during its 2010 winter meeting.

Proposed federal legislation would give the US Commodity Futures Trading Commission oversight of all OTC products, including mandatory centralized clearing and exchange trading for all OTC products, according to the resolution. This would increase hedging costs and, ultimately, consumer prices because margin requirements would be increased, it warned.

Any new legislation addressing OTC risk management products should exempt legitimate gas and electric hedging activity from mandatory clearing requirements, it recommended. The exemption should be narrowly tailored to prevent excessive speculation in gas and electricity markets, the resolution continued.

Independent oil and gas producers have also said that higher margin requirements required by regulated exchanges would severe restrict their ability to manage cash flow and obtain financing. The resolution which NARUC directors approved during the Feb. 14-17 meeting noted that a report by the Joint Association of End-Users found that such requirements would make less money available for utility infrastructure and for exploration and production.

“The laudable goals of reform that ensure market transparency and adequate regulatory oversight can be accomplished by means other than mandatory clearing of OTC risk management contracts and the anticipated extra expense,” it continued. Requiring gas and electric market participants using legitimate OTC hedges to report them to the CFTC would make markets sufficiently transparent without additional costs associated with mandatory clearing, for example, NARUC’s resolution said.

Contact Nick Snow at nicks@pennwell.com.

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