ENERGY MARKET PARTICIPANTS today are facing sweeping changes in the regulatory environment. To understand all the complexities of the Dodd-Frank Wall Street Reform and Consumer Protection Act and comply with its provisions, an effective compliance program is necessary.
It is worth noting that the Federal Energy Regulatory Commission (FERC) has been especially aggressive in policing energy markets. In addition, the Federal Trade Commission (FTC) and the Commodity Futures Trading Commission (CFTC) have asserted jurisdiction over certain energy products. As the regulatory landscape continues to evolve, some of these agencies have overlapping boundaries, which is often confusing for market participants who don't know which agency is responsible for regulating a particular facet of their business.
In this special report on Energy Trading and Risk Management, we are offering three separate articles from industry experts who provide their expertise on subjects of interest to a large number of our readers. We hope the insight they provide into best practices and standards will provide practical steps to identifying and managing risk in our ever-changing regulatory environment.
David Leevan, Director of Analytic & Optimization Solutions for OpenLink Americas, has written a piece on optimization in energy in which he discusses the need for better physical asset management, particularly during times of high price volatility and increased regulatory and political change. He says what is needed is a physical portfolio optimizer (PPO) to supplement the work of what the ETRM is doing.
"When an ETRM is integrated with a PPO," says Leevan, "all the assets in an energy company's portfolio will be optimized by considering the performance of each unit as well as looking at trading conditions."
Herschel Hamner and Robert Stephens of law firm Sidley Austin LLP have penned an article about hedging strategies for energy companies. They see a need to link hedging program requirements to certain market conditions. Under such an arrangement, lenders would be able to ensure that a material price improvement would be captured by the borrower, and not lost to overly optimistic views of continued price increases. Such adjusted hedging programs may provide more utility to lenders and borrowers than the traditional minimum hedging requirements that made sense at higher price levels.
Finally, Gajan Sritharan of Navigant in London assesses the impact of new energy market regulations in Europe, particularly the Markets in Financial Instruments Directive I, also known as MiFID I, which is on the eve of implementation. The tranche of new regulations is intended to increase investor protection, align regulations across the European Union, increase competition across the financial markets, and introduce reinforced supervisory powers.
Sritharan notes that dealing with the changes in Europe is likely to require more than simple operational tweaks and will affect a company's strategy and structure in the long term.
We hope you find the insight and analysis in these articles of value.