The U.S. House of Representatives Agriculture Committee approved House Resolution 1038, the Public Power Risk Management Act of 2013.
The bipartisan bill was introduced by House Agriculture Committee member Doug LaMalfa (R-CA) and was co-sponsored by fellow House Agriculture Committee members Jim Costa (D-CA), Jeff Denham (R-CA), John Garamendi (D-CA), and Financial Services Committee member Blaine Luetkemeyer (R-MO) on March 11, 2013.
The bill was the subject of a House Agriculture Committee hearing on March 14 examining legislative improvements to the Commodities Exchange Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
In hearings in July of 2011 and again in June of 2012, Chairman Frank Lucas (R-OK) brought before the committee the issue of public power's ability to manage risk in the wake of the Dodd-Frank Act.
"We greatly appreciate the committee's action today," Mark Crisson, president and CEO of the American Public Power Association. "This much-needed legislation will allow government-owned utilities to appropriately hedge against power and fuel price risks with all market participants and not just the biggest banks and swap dealers. This will put our members on a level playing with other power utilities and will help ensure that they can adequately plan for the future and continue to provide reliable service and affordable rates to our customers."
The legislation is needed in light of the Dodd-Frank Act's implementation by the Commodity Futures Trading Commission (CFTC). These regulations effectively limit the willingness of non-financial entities (including investor-owned utilities, independent power producers, and natural gas providers) to enter into operations-related swaps with government-owned utilities.
"While the CFTC has not completed its implementation of the Dodd-Frank Act, these regulations are affecting APPA members now. Nonetheless, we understand Ranking Member Peterson's desire to withhold amending the Dodd-Frank Act until the CFTC has finalized all the regulations implementing it. As a result, we are doubly appreciative of his work to improve the legislation prior to its introduction," Crisson said.
Energy markets are incredibly diverse geographically and there are often a limited number of counterparties for any particular operations-related swap sought by a utility, so each potential financial or non-financial swap counterparty brings important market liquidity and diversity. The problem presented by the regulation will only increase over time.
For now coal prices remain steady, and natural gas prices remain low, but there is every expectation of increased price volatility for power and fuel as demand increases, surplus supply is consumed for other purposes, and providers rely increasingly on renewable (and therefore often variable) sources of power.
Under CFTC regulations, non-financial entities entering into as little as $25 million in swap transactions with government-owned utilities over any 12 month period risk being drawn into the swap dealer regime.
Otherwise, an entity may engage in up to $8 billion in swap dealing activity (phasing down to $3 billion over time) without being considered a swap dealer by the CFTC. As a result, these non-financial entities have simply stopped entering into such transactions with government-owned utilities.
The Public Power Risk Management Act says that a utility operations-related swap transaction with a government-owned utility (defined as a "utility special entity" under the act) would be treated no differently than a utility operations-related swap with any other entity. As a result, these transactions would not count toward the $25 million threshold, but would count toward the $8 billion threshold.