March 20, 2013 / 5:16 PM / in 5 years

U.S. bill would ease muni utilities' ability to hedge risk

March 20 (Reuters) - The U.S. House Agriculture Committee on Wednesday approved a bill that would make it easier for municipal and other government-owned utilities to hedge against power and fuel price risks with all market participants.

The legislation seeks to end the unintended consequences of the swap dealer rules adopted by the Commodity Futures Trading Commission to implement the Dodd-Frank act.

Under current CFTC regulations, non-financial entities like investor-owned utilities, independent power producers and natural gas providers that enter into as little as $25 million in swap transactions with special entities like government-owned utilities over any 12-month period risk being drawn into the highly regulated swap dealer regime.

A company 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. Most of the companies registered as swap dealers are banks or units of banks, some with trillions of dollars of derivatives contracts.

To avoid being considered swap dealers, non-financial entities have stopped entering into such transactions with government-owned utilities, the American Public Power Association (APPA), an industry trade group representing community- and state-owned not-for-profit utilities, said in a release.

The move has boosted the cost of doing business for government-owned utilities because there are often only a limited number of counterparties available for any particular swap sought, APPA said.

The bill passed by the committee would treat a utility operations-related swap with a government-owned utility no differently than a similar swap with any other entity, so these transactions would not count toward the $25 million threshold.

“This much-needed legislation will allow government-owned utilities to hedge against power and fuel price risks with all market participants and not just the biggest banks and swap dealers,” APPA’s president and chief executive, Mark Crisson, said. “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.”

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