Energy companies eye exemption in financial derivatives overhaul

The Edison Electric Institute (EEI), Electric Power Supply Association and American Gas Association, among other interests, are hoping to persuade lawmakers that their role in the market does not represent the same type of risks to the economy as Wall Street’s derivatives trades.

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“It is important to note that these transactions are not the source of systemic risk in the broader economy,” the associations and 70 of their member companies wrote to senators debating derivatives legislation. The associations represent companies in the electric power, generator and local energy utility industries.

Fourteen industry lobbying associations set up the “Energy End-Users Coalition” to work on derivatives legislation, said Richard McMahon, executive director of finance at EEI.

Congressional lawmakers are debating broad new curbs on the market for financial derivatives, which are tools a range of companies use to hedge against risk.

Critics blame derivatives, particularly one form known as credit default swaps, for exacerbating the financial crisis and bringing American International Group (AIG) to its knees. The government committed more than $180 billion to AIG.

House and Senate lawmakers are working on legislation that aims to increase transparency in the market by shifting derivatives transactions onto third-party clearinghouses.

Lawmakers also want to shift many of the trades onto public exchanges. The derivatives market is currently a largely dark market where trades occur simply between two parties, or “over-the-counter” (OTC).

At the end of 2008, the OTC derivatives market had a gross market value of $34 trillion, according to the Bank for International Settlements.

Commodity-based derivatives represent ed $955 billion of that $34 trillion gross OTC market, or a little less than 3 percent. Energy companies are active in that part of the market, which includes derivatives related to oil, natural gas, electricity, and other commodities.

“These are very volatile  commodities,” McMahon said. “Our customers want to see stable rates.”

The associations argue their relatively small part of the market makes them different from some of the other financial and manufacturing interests that constitute a much greater share. The derivatives business has been a major boon for Wall Street, with record revenue of $9.8 billion in cash and other derivatives trades in the first quarter of 2009, according to the Office of the Comptroller of the Currency.

Energy interests are lobbying lawmakers to preserve the OTC market and “provide a clear exemption” for the final derivatives users, such as electric and gas utilities.

“Our members are opposed to mandates that would require all or most OTC derivatives transactions to be centrally cleared or executed on exchanges,” the associations wrote.

McMahon said energy companies already use public exchanges for a share of their derivatives transactions, but that the margin requirements under new legislation related to clearinghouses could cut deeply into the firms’ budgets. The 76 holding companies that are members of EEI would likely each need to post an average of between $250 million and $400 million a year in margin requirements.

The House Energy and Commerce Committee is holding a hearing after Thanksgiving on derivatives legislation and its potential impact on the natural-gas and electricity markets.

Committee Chairman Henry Waxman (D-Calif.) said he called the hearing because of the “unintended impact” legislation could have on energy markets.

Waxman worries the bill was “not developed with adequate regard to how the nation’s energy markets actually function.” Rep. Edward Markey (D-Mass.), the chairman of the subcommittee that will hold the hearing, said the bill must be changed.

“The derivatives legislation that has been under consideration in the House needs to be fixed in order to prevent it from interfering with our nation’s electricity and natural-gas markets,” Markey said in a statement.


Ben Geman contributed to this article.

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