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Rep. LaMalfa offers bill to provide relief from CFTC rule discouraging swaps with public power utilities

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With bipartisan support, Rep. Doug LaMalfa, R-Calif., yesterday introduced a bill, H.R. 1038, to provide relief from Commodity Futures Trading Commission (CFTC) rules that have discouraged counterparties from engaging in swaps with "special entities," including public power utilities. APPA applauded the introduction of the bill, the Public Power Risk Management Act of 2013.

The legislation is needed in light of CFTC regulations that 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, APPA said. 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 association said.

The problem presented by the regulation will only increase over time, APPA said. "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, a non-financial entity entering into as little as $25 million in swap transactions with government-owned utilities risks being defined as a swap dealer and drawn into the swap dealer regulatory 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, non-financial entities have simply stopped entering into such transactions with government-owned utilities, APPA said.

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 bill) 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.

H.R. 1038 is co-sponsored by House Agriculture Committee members Jim Costa, D-Calif., Jeff Denham, R-Calif., John Garamendi, D-Calif., and Financial Services Committee member Blaine Luetkemeyer, R-Mo. LaMalfa also is a member of the Agriculture Committee, which oversees the CFTC.

The legislation drew praise from a wide range of public power officials. "This legislation simply allows public power utilities to appropriately hedge their commercial operations risks," said Turlock Irrigation District (California) General Manager Casey Hashimoto. "It will level the regulatory playing field," confirmed WPPI Energy Senior Vice President Dan Ebert. "It preserves our ability to hedge against spikes in energy prices," said Massachusetts Municipal Wholesale Electric Company CEO Ron DeCurzio.

 "The CFTC regulations have seriously hampered our efforts to secure low-cost power for our members," said New York Municipal Power Agency General Manager Tony Modafferi. "Perhaps the burden on public power in New York state was not clearly understood when these regulations were enacted, but now that the negative effects are plain, we need Congress to act."

"The CFTC asserts their rules protect local governments from financial risks," said Northern California Power Agency General Manager James J. Pope. "Unfortunately, the application of these rules to municipal utilities has significantly increased our exposure to commercial risk by severely restricting the number and types of counterparties we can do business with."

"The loss of bilateral hedging counterparties associated with CFTC rules has had a material impact on the costs we incur and the level of reserves we must now maintain," said Terrance Naulty, general manager of Owensboro Municipal Utilities in Kentucky. "These incremental costs must be passed through in rates and provide no net benefit to our customer/owners."

"Fuel and energy hedging used to serve customers is being regulated by the new CFTC rules to a different set of market rules and requirements than neighboring privately owned utilities, which will unfairly add costs to our customers who pay our rates," said Los Angeles Department of Water and Power General Manager Ronald Nichols. "This legislation provides the necessary balance to ensure that the ratepayers continue to receive a stable and cost-effective fuel and energy supply."

"We are encouraged that Congress is willing to take action to ensure that government-owned utilities will not be at a disadvantage in the future," said Seattle City Light Superintendent Jorge Carrasco, speaking also on behalf of the Snohomish County, Wash., Public Utility District. "This legislation provides a much-needed and appropriate fix that will allow publicly owned utilities to better protect our customers from higher costs," said Tacoma Public Utilities Director and CEO Bill Gaines.

"The Dodd-Frank Act clearly intended to hold end-users harmless from excessive regulation: this bill makes good on that promise," said Grand River Dam Authority General Manager and CEO Daniel Sullivan. —ROBERT VARELA


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