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Public Power Risk Management Act is introduced in the Senate


From the December 13, 2013 issue of Public Power Daily

Originally published December 13, 2013

By Jeannine Anderson
Editor

Sens. Joe Donnelly, D-Ind., and James Inhofe, R-Okla., on Dec. 11 introduced S. 1802, the Public Power Risk Management Act. Joining the two as original cosponsors of the bill were Sens. Sheldon Whitehouse, D-R.I., Patrick Leahy, D-Vt., Heidi Heitkamp, D-N.D., Dan Coats, R-Ind., Susan Collins, R-Maine, and Roy Blunt, R-Mo.

The bill is the Senate companion to H.R. 1038, which passed the House in June on a unanimous vote of 423-0.

The legislation addresses a problem created by new rules drawn up by the Commodity Futures Trading Commission under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The CFTC's new rules require entities to register as swap dealers if they engage in more than $25 million in swap dealing activity with a "special entity." The commission's definition of "special entity" includes government bodies, such as public power utilities. On the other hand, entities need not register and be regulated as swap dealers unless they have more than $3 billion in swap activities ($8 billion during a phase-in period) with investor-owned utilities or rural electric cooperatives.

Among those supporting the Public Power Risk Management Act are APPA, the Consumer Federation of America, the U.S. Chamber of Commerce, Public Citizen, the Edison Electric Institute and the Commodities Markets Oversight Coalition.

"This bill provides much-needed relief to public power utilities," said APPA President and CEO Mark Crisson. "It allows them to hedge commercial operations risks — not with just the biggest banks and swap dealers, but with regional utilities, natural gas distributors, and independent power generators who have served as swap counterparties in the past."

"Public power just wants to be treated like the rest of the electric utility industry," Crisson said. "This bill does that by leveling the playing field between public power utilities, investor-owned utilities, and rural electric cooperatives."

The legislation "addresses CFTC regulations intended to ‘protect’ public power utilities from abuses by large banks and swap dealers," APPA said in a Dec. 11 statement. "These regulations have instead left public power utilities limited to engaging with large banks and swap dealers as their only potential counterparties to swaps."

This increases the cost of swaps and makes it more difficult for public power utilities "to find the customized swaps necessary to meet diverse needs driven by wide regional variations in customer base, weather, climate, power availability, fuel sources and reliance on renewable – and highly variable – power," APPA said.

APPA officials said earlier this year that since the CFTC rule on special entities went into effect, nonfinancial counterparties have been refusing to enter into swaps with public power utilities because they do not want to exceed the $25 million special entity threshold.

"In trying to protect special entities from the perils of trading in the swaps market, we have forced them to trade with large Wall Street banks," CFTC Commissioner Scott O’Malia said in a May 14 speech. "Instead of providing them greater protection, we have limited the pool of counterparties with which special entities can trade, concentrating risk to fewer market participants."

"The Public Power Risk Management Act returns the Dodd-Frank Act to its original intent and will re-establish a level playing field for public power organizations," said Indiana Municipal Power Agency President and CEO Raj Rao. The bill "will continue to provide for market transparency, while allowing public power entities like the Indiana Municipal Power Agency to better manage their commercial risks, thus protecting Hoosier ratepayers," he said. "We thank Sen. Donnelly for taking an interest in this issue and being a champion for public power not only in Indiana, but throughout the country."

"Our ability to hedge against power and fuel price fluctuations will be critical to controlling future costs for our customers, which is something public power takes very seriously," said Dan Sullivan, CEO and director of investments for the Grand River Dam Authority in Oklahoma. "Unfortunately, CFTC rules implementing Dodd-Frank have left us and our public power counterparts at a competitive disadvantage. We are grateful that Congress is stepping in to rectify this situation."

The Public Power Risk Management Act provides that a utility operations-related swap transaction with a public power utility (defined as a "utility special entity" under the Dodd-Frank Act) cannot be treated differently than a utility operations-related swap with any other entity for purposes of determining whether a counterparty is a swap dealer.

If implemented as part of the CFTC’s current swap dealer rules, the legislation is intended to have the effect of exempting operations-related swap transactions with a public power utility from the $25 million special entity threshold. The legislation also would apply to operations-related swap transactions by public natural gas utilities.

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