As night follows day and Frank follows Dodd, inter-agency turf battles are the inevitable by-product of any legislation that breaks or makes new ground…and lets face it, nothing in recent memory has created more ill-defined regulatory territory than the Dodd-Frank Act’s broad-brush, leave-details-to-the-regulators, rewrite of finance-related rules.
One group still clamoring for regulators to get on with carving up a bit of regulatory turf thrown into limbo by Dodd-Frank are the regional transmission organizations (“RTOs”) and Independent System Operators (“ISOs”) that (i) serve up the nation’s electric power and (ii) manage the markets, products and transactions (“Transactions”) that grease that power’s flow in a market-based economy.
In “Power Struggle? The CFTC/FERC Jurisdictional Split under Dodd-Frank,” K&L Gates examines a CFTC/FERC impasse as to the regulation of Transactions and leaves the reader wondering whether this regulatory gridlock might be less about substantive issues than one agency’s instinctive urge to hold regulatory ground; regardless of whether it might more appropriately belong to someone else.
So why blame Dodd-Frank? The Act saddles RTOs/ITOs with duplicative regulatory oversight not so much because it is obtuse as to the special quasi-non-profit, quasi-governmental nature of RTOs/ITOs and the Transactions they manage (it is not) as because it seems to have overestimated the ability of the CFTC and FERC to fill in necessary regulatory detail on an expeditious and commercially practicable basis.
Dodd-Frank charges the CFTC and SEC with the role of ensuring that over-the-counter derivatives don’t accelerate us into another financial crisis. The CFTC gets responsibility for commodity-based derivatives and the SEC for their security-based brethren. As part of the division of the derivatives pie, regulatory jurisdiction over the Transactions, historically regulated by FERC, has been handed in part to the CFTC.
Dodd-Frank, however, provided the CFTC with some parameters as to how/when it should wield its new regulatory authority. Dodd-Frank’s Section 722(f) provides that the CFTC shall exempt agreements, contracts, or transactions entered into pursuant to a tariff or rate schedule approved or permitted to take effect by FERC if the CFTC “determines that the exemption would be consistent with the public interest.” This public interest determination is the regulatory trump card that lies at the heart of the turf battle. Should the CFTC play it such that it effectively hands much of its newly acquired regulatory authority back to FERC, a continuation of the status quo, or should the CFTC keep its options open and examine Transactions on a case-by-case basis? To help the agencies arrive at an answer, Dodd-Frank also mandated that the CFTC and FERC agree a Memorandum of Understanding (MOU) that would “ensure effective and efficient regulation in the public interest” and the avoidance of conflicts, over-lapping jurisdiction or duplicative regulation. This agreement to agree was to have been completed by January 2011.
In a straightforward “if it ain’t broke, don’t fix it” argument, RTOs/ISOs have urged throughout the rulemaking process that a hands-on, case-by-case approach by the CFTC would be a mistake, especially as to existing Transactions which they point out are already “subject to a long-standing, comprehensive regulatory framework…established by FERC and … the PUCT.” Energy markets need to flow as fluidly as the energy they trade and a CFTC failure to one way or another grandfather highly regulated, market-proven products would essentially amount to them “re-applying for their own jobs.”
In July, in what was seen as something of a grand finale in the OTC derivatives regulatory process, the CFTC and SEC finally issued product definitions. Maddeningly for RTOs/ISOs, the Transactions were not specifically included or excluded in the CFTC’s definition of “swap.” What the rulemaking offered up in place of a blanket exclusion from the swap definition (and CFTC regulatory authority) was the opportunity to petition the CFTC for an exemption from Section 4(c)(6) of the Commodity Exchange Act. The right to a lengthy, fact-specific inquiry into the possible exemption of complicated energy products being more or less exactly what the RTOs/ISOs have been trying to avoid.
To make things even more confusing, the same CFTC that is 16 months late on its MOU and which passed on the opportunity to resolve matters in its product definition rulemakings, has also from time-to-time given RTOs/ISOs reason to hope. In early 2012, CFTC Commissioner Scott O’Malia went on record to state that “to have two regulators would be a nightmare” and that “he was “confident that the jurisdictional lines will result in non-interference with FERC tariffs by the CFTC.” Likewise CFTC Chairman Gary Gensler has indicated that staff recommendations to exempt certain transactions in organized wholesale electricity markets have recently been “submitted to the CFTC’s internal network.”
We suspect that if RTOs/ISOs could just add a few words at the end of those internal recommendations, they might well be these:
“Just let go.”