Energy Dodged the Dodd Frank Bullet

Energy industry appears to have successfully dodged a big Dodd Frank bullet with the Commodity Futures Trading Commission (CFTC) decision July 10, 2012 by a 4-1 vote defining a “swap” for energy transaction purposes as largely exempting any regulatory driven environmental transactions.  The types of typical transactions exempted includes environmental commodities, power supply peaking supply contracts, tolling agreements and many natural gas supply contracts, as well as environmental transactions including carbon offsets, emissions allowances and renewable energy credits.  All remain exempt from CFTC rules.  A decision classifying these transactions as swaps would have subjected them to onerous new regulations under Dodd-Frank.

A combination of prayer, constant lobbying and unanimity of opposition across the energy industry over the last two years since Dodd Frank was approved by Congress and signed into law by President Obama seems to have worked.  But the rising chorus of worry about the cost and implications of defining swaps as a forward and thus subjecting them to the Dodd Frank rules was also holding up the rulemaking process itself because the CFTC has jurisdiction over swaps and options, but not forwards. So until it defined a swap the Dodd Frank rules remained stalled.

The decision by the CFTC keeps energy transactions with volumetric optionality outside the technical definition of a swap thus allowing the industry to continue to use contracts that changes the volume of natural gas, electricity or other energy commodities consumed during the course of the agreement.  That flexibility always made practical sense but this is Washington DC and practical is not always politically correct.

The American Petroleum Association, the American Gas Association, the Coalition for Emission Reduction Policy, the Environmental Markets Association, the American Wind Energy Association and other energy industry trade groups had been persistent and blunt in their views that the CFTC should not mess with the basic contract vehicles that help keep the energy market balanced.

The CFTC decision now starts the clock ticking on more than 20 Dodd-Frank rules pending for reporting, clearing, trading and record-keeping which can now be finalized as early as September. Those firms that are covered by the swap definition have sixty days to register and disclose their required data.  But the Energy industry was not the only interest looking for relief. The swap definition adopted by the CFTC also includes exemptions for life insurance, property and casualty insurance, interest-rate caps on consumer mortgages and home heating oil agreements and other retail transactions were also exempted.