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New Rules on Swaps Create Burdens for Energy Cos., Attorney Says


-- Wide Net of Dodd-Frank Captures Day-to-Day Energy Transactions, Notes Veteran LeClairRyan Securities Attorney William Despo.

WASHINGTON, Feb. 24, 2012 /PRNewswire/ -- When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the goal was to re-regulate the financial system. But the act's broadly written rules on swaps inadvertently captured a gamut of day-to-day transactions carried out by the U.S. energy industry. In addition to creating heavy burdens, the new regulations have sparked a host of unanswered questions for power generators, resale merchants, traders and other energy-industry participants, said a veteran LeClairRyan securities attorney.

"If you read them literally, the swaps provisions in Dodd-Frank capture most, if not all, of the commercial transactions that go on in the energy industry today," said William Despo, a Newark, N.J.-based shareholder in LeClairRyan and a member of the firm's Energy Industry Team. "As part of routine grid-management, for example, so-called independent systems operators (ISOs) and regional transmission organizations (RTOs) frequently engage in transactions that, under Dodd-Frank, meet or could meet the criteria of a swap. This means an agency best known as a financial-system regulator -- the U.S. Commodity Futures Trading Commission (CFTC) -- now casts its watchful eye over much of the U.S. energy industry."

The compliance challenges created by this new regulatory framework were among the topics explored in "New Frontiers in Energy: CFTC and ISO/RTO Issues," a seminar conducted by LeClairRyan on Feb. 13 at Washington's Mayflower Hotel. During the event, Despo summarized the historical background of the current regulations and described the types of energy transactions that now meet or potentially meet Dodd-Frank's broad criteria on swaps. The attorney explored the sweeping implications of this for the industry itself and discussed many of the unanswered questions that remain.

One of the biggest of those questions, for example, is whether the buying and selling of so-called Financial Transmission Rights -- essentially, auctions that help market participants hedge their price risk when delivering energy on the grid -- will be regulated and defined as swaps. "If so, this means market participants will suddenly have to 'clear' these transactions through the complex regulatory processes created by the act," Despo said. "That constitutes both a big change and an expensive burden -- the costs of which will have to be passed on to consumers. The purpose of Dodd-Frank was to bring transparency and accountability to the financial system while reducing risk to the overall economy. Somehow the energy industry became regulatory targets as well."

Meanwhile, just about any company that buys energy in the normal course of business could be affected by the Dodd-Frank swap provisions. That is because routine energy transactions, in which the price of electricity or gas might be either fixed or tied to a fluctuating index, could meet the literal definition of a swap and thereby trigger the act's complex requirements, Despo noted. As a result, energy market participants and other companies should work with their legal counsel to take a close look at their obligations and potential obligations under Dodd-Frank. These include swaps-related record-keeping and reporting, interactions with so-called "swap dealers" and "major swap participants" and more. In addition, those entities that are required to register as Derivative Clearing Organizations should take care to understand and comply with the associated financial obligations and clearing functions, Despo noted.

During the presentation, Terry Boston, president and CEO of PJM Interconnection, the Norristown, Penn.-based RTO, updated the audience on a host of ISO/RTO matters and discussed topics such as the impact of natural gas in the fuel mix among generators in PJM's system, and the importance of grid reliability. Michael Ruggio, a shareholder in LeClairRyan's Washington, D.C., office, moderated the two-hour program for energy industry executives, which was sponsored by the firm's Energy Industry team. LeClairRyan's Energy Industry team provides comprehensive regulatory, litigation, transactional, corporate, and policy advocacy legal services to energy-related businesses of all types and sizes -- from emerging energy technology start-ups to SEC-registered energy companies.

About LeClairRyan
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