House Agriculture Committee Reps. Issue Statement on Swaps with Public Utilities (with Lofchie Comment)

House Agriculture Committee Chairman Frank Lucas (R-OK) and Rep. Doug LaMalfa (R-CA) issued statements in response to the recent CFTC No-Action Letter (14-34) which exempts producers, utility companies and other non-financial entities from being required to register as swap dealers when they enter into energy contracts with government-owned utilities.

Chairman Lucas stated that he is pleased the CFTC has reconsidered its regulatory treatment of public utilities under Dodd-Frank, but also objected to the use of no-action letters as a replacement for law, noting that "this approach means [the] CFTC reserves the right to change its mind and regulate these entities as swap dealers in the future." Chairman Lucas called for a legislative response, stating that Majority Leader Reid should pass the House bill or its Senate companion so that "millions of Americans have certainty that the Dodd-Frank Act will not increase their electric bills."

Under the CFTC's swap dealer registration requirement, nonfinancial entities can engage in up to $3 billion in most swap activities, including with a private utility, before being regulated as swap dealers. However, if engaging with a public utility, nonfinancial entities can only engage in $25 million in swap activities. The Agriculture Committee press release purports to affirm that these regulations have served as a deterrent for many from doing business with public utilities. In response, Rep. LaMalfa introduced H.R. 1038, the Public Power Risk Management Act, which the House Agriculture Committee advanced and the U.S. House passed unanimously.

The U.S. Senate has yet to consider H.R. 1038 or its Senate companion legislation, S. 1802. In his statement, Rep. LaMalfa stated that the Senate must act fast to ensure that the 47 million Americans who rely upon public power will not face rate increases as a result of Dodd-Frank.

Lofchie Comment: Conceptually, Chairman Lucas and Rep. LaMalfa's statement is concerned that regulation can injure those whom it is intended to protect. In the case of many financial regulations, it is not always clear that "protected" persons (both legal entities and individuals) benefit from the intended protections. In the instant matter, public utilities were effectively "protected" by being prevented (as a practical matter) from entering into a swap with any entity that was not itself a CFTC-registered swap dealer. The effect of this protection was to materially limit the counterparties who could provide swaps to public utilities and, thus, to have the effect of raising the costs to public utilities. The question, then, is whether this protection of public utilities is worth the cost. To Lucas and LaMalfa, the protection is not worth the cost in this instance. That said, the real concerns with Dodd-Frank are the myriad instances in which the regulation provides "protections" that impose material costs on protected parties, but provide questionable benefits.

See: House Agriculture Committee Statements and Press Release.See also: H.R. 1038; S. 1802; CFTC Letter 14-34. Related news: CFTC No-Action Letter (14-34) Raises De Minimis Threshold for Swaps with Utility Special Entities (with Lofchie Comment) (March 21, 2014); CFTC Staff Ratifies Cross-Margining of Customer Swaps Collateral (with Lofchie Comment) (October 19, 2012).