APPA, LPPC urge Senate panel to provide relief from CFTC rule on special entities
APPA and the Large Public Power Council have urgently requested the leaders of the Senate Agriculture Committee to provide legislative relief from regulations setting a $25 million threshold for an entity’s annual swap-dealing activity with "special entities," which include public power, public gas and federal utilities. In a May 1 letter to Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., and ranking member Thad Cochran, R-Miss., APPA and LPPC said the protections the Commodity Futures Trading Commission is trying to afford through the $25 million special entity sub-threshold "are not needed for utility operations-related swaps entered into by government-owned utilities."
Under the CFTC’s swap dealer rule, an entity that engages in a de minimis level of swap dealing would not be considered a swap dealer and thus would not have to meet capital, margin, and reporting and recordkeeping requirements, as well as to comply with rigorous business conduct and documentation standards. The CFTC set the de minimis threshold at $3 billion annually ($8 billion during a phase-in period)—with a separate sub-threshold of $25 million annually for swap dealing with special entities.
A failure to enact "the narrow relief provided under the Public Power Risk Management Act or similar legislation will limit our members’ ability to hedge against risks and lead to increased risk and costs to the ratepayers they serve," APPA and LPPC said. Introduced by Rep. Doug LaMalfa, R-Calif., the Public Power Risk Management Act (H.R. 1038) "would provide that the CFTC, in making a determination to exempt a swap dealer under the de minimis exception, shall treat a utility operations-related swap with a utility special entity the same as a utility operations-related swaps with any entity that is not a special entity," they said.
The legislation "should provide the certainty to nonfinancial entities that they can enter into swap transactions with government-owned utilities without fear of being deemed a swap dealer," APPA and LPPC said. "It truly levels the playing field. And, it does nothing to otherwise alter the CFTC’s implementation of the Dodd-Frank Act."
There are a limited number of counterparties for any particular operations-related swap sought by a utility, APPA and LPPC said. "Each regional geographic market has a somewhat different set of demands driven by climate, weather, population, and industrial activity, among other factors. Each regional geographic market also has a somewhat different group of financial entity counterparties and nonfinancial entity counterparties available to meet these demands and thus able to enter into utility operations-related swaps needed for hedging price and supply risks." The assumption that financial firms "will be able to replace all the swaps offered currently by our nonfinancial swap partners reflects a dangerous misunderstanding of how electricity is delivered and an indifference to the price Wall Street will impose in the absence of adequate competition," they said
The CFTC issued a no-action letter relating to the $25 million special entity sub-threshold, but it "has failed to provide nonfinancial counterparties with the assurances they need to enter into swap transactions with our members," they said.
A legislative fix, either as a standalone bill or as part of a CFTC reauthorization bill, is urgently needed, "given the realities we face and the ongoing damage being done under the current rules," APPA and LPPC said.
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