Resolution on Financial Reform Legislation Affecting Over-the-Counter Risk Management 

Products and Its Impacts on Consumers 

WHEREAS, There is a diverse group of end-users, consisting of electric and natural gas 

utilities, suppliers, customers, and other commercial entities who rely on over-the-counter 

("OTC") derivative products and markets to manage electricity and natural gas price risks for 

legitimate business purposes, thereby helping to keep rates stable and affordable for retail 

consumers; and 

WHEREAS, The United States Congress is considering financial reform legislation with the 

goal of ensuring that gaps in regulation, oversight of markets and systemic risk do not lead to 

economic instability; and 

WHEREAS, Previous NARUC resolutions support federal legislative and regulatory actions 

that fully accommodate legitimate hedging activities by electric and natural gas utilities; and 

WHEREAS, The proposed legislation would, among other things, provide the Commodity 

Futures Trading Commission (CFTC) with oversight of OTC risk management products, 

including mandatory centralized clearing and exchange trading of all OTC products; and 

WHEREAS, Mandatory centralized clearing of all OTC contracts will increase expenses 

associated with hedging activity, and ultimately end-user prices, due to increased margin 

requirements; and 

WHEREAS, A report by the Joint Association of Energy End-Users stated that the effect of 

margin requirements resulting from mandatory clearing for electric utilities would have the 

unintended effect of reducing or eliminating legitimate hedging practices and could jeopardize or 

reduce investments in Smart Grid technology; and for natural gas utilities and production 

companies could reduce capital devoted to infrastructure and natural gas exploration; and 

WHEREAS, The laudable goals of reform that ensure market transparency and adequate 

regulatory oversight can be accomplished by means other than mandatory clearing of OTC risk 

management contracts and the anticipated extra expense. For example, a requirement that natural 

gas and electric market participants engaging in legitimate hedging repmi all OTC derivative 

transactions to a centralized data repository, like the CFTC, provides sufficient market 

transparency without the costs associated with mandatory clearing; and 

WHEREAS, Proposed reforms would cause regulatory uncertainty with regard to the oversight 

of Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), 

where such uncertainty and/or overlapping jurisdiction can lead to negative impacts on liquidity, 

market confidence and reliability; and 

WHEREAS, The Federal Energy Regulatory Commission (FERC), and the Public Utility 

Commission of Texas (PUCT) for Texas/ERCOT, as the regulators with the necessary expertise 

and statutory mandates to oversee electricity and natural gas markets to protect the public interest 

and consumers, should not be preempted by the financial reform legislation from being able to 
continue exercising their authority to ensure reliable, just and reasonable service and protect 

consumers; and 

WHEREAS, Energy markets currently regulated by FERC or the PUCT (for Texas/ERCOT) 

under accepted tariffs or rate schedules should continue to be subject to FERC's and the PUCT's 

(for Texas/ERCOT) exclusive Federal jurisdiction, including jurisdiction over physical and 

financial transmission rights, and market oversight; and should themselves not be subject to 

CFTC jurisdiction as a clearinghouse due to the financial and other settlement services they 

provide those transacting in regional electricity markets; now, therefore be it 

RESOLVED, That the Board of Directors of the National Association of Regulatory Utility 

Commissioners, convened at its 2010 Winter Committee Meetings in Washington, D.C., 

suppmis passage of financial reform legislation ensuring that electric and natural gas market 

participants continue to have access to OTC risk management products as tools in their 

legitimate hedging practices to provide more predictable and less volatile energy costs to 

consumers; and be it further 

RESOLVED, That new financial legislation being considered by Congress should weigh the 

costs of potential end-user utility rate increases versus the benefits of new standards for the 

clearing of OTC risk management contracts used by natural gas and electric utilities for 

legitimate hedging purposes; and be it further 

RESOLVED, That any federal legislation addressing OTC risk management products should 

provide for an exemption from mandatory clearing requirements for legitimate hedging activity 

in natural gas and electricity markets; and be it further 

RESOLVED, That any exemption to the mandatory clearing requirement for OTC derivatives 

be narrowly tailored as to not allow excessive speculation in natural gas and electricity markets; 

and be it fitrther 

RESOLVED, That the FERC, and the PUCT for Texas/ERCOT, charged with the statutory 

obligation to protect the public interest and consumers, should continue to be the exclusive 

Federal regulators with authority to oversee any agreement, contract, transaction, product, 

market mechanism or service offered or provided pursuant to a tariff or rate schedule filed and 

accepted by the FERC, or the PUCT for Texas/ERCOT; and be it further 

RESOLVED, That NARUC authorizes and directs the staff and General Counsel to promote 

with the Congress, the Commodity Futures Trading Commission and other policymakers at the 

federal level, policies consistent with this statement. 

Sponsored by the Committee on Gas, Consumer Affairs, and Electricity 

Adopted by the NARUC Board of Directors February 17, 2010