Comment Text:
Please incorporate the attached testimony before the CPUC herein.
I question the lawfulness and adequacy of this CPUC’s and FERC's authority in this field; which is currently held by the Commodities Futures Trading Commission (“CFTC”). It is my testimony that the broad purposes and intent of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) are served by applying the new regulatory paradigm to hedging transactions of the investor owned utilities (“IOUs”).
Prior to the enactment of Dodd-Frank, energy commodity derivatives were broadly exempt from regulation by the Commission under the Commodity Exchange Act (“CEA”). For IOUs, the regulatory paradigm for hedging programs prior to Dodd-Frank consisted of the review and oversight of such programs by our state and federal prudential regulators, the CPUC and the FERC. There are many indications that the use of swaps to hedge or mitigate commercial risks by IOUs was related to the types of systemic risk that caused the financial crisis.
It is my testimony that a "bottomless pit" of unsecured debt opened up worldwide when the Congress allowed unregulated banks to be created in 2000 in the Enron loophole. The "Enron loophole" exempted most over-the-counter energy trades and trading on electronic energy commodity markets from government regulation. The "loophole" is so-called as it was drafted by Enron Corporation lobbyists working with U.S. Senator Phil Gramm (R-TX) to create a deregulated market for their experimental "Enron On-line" initiative. The "loophole" was enacted in sections § 2(h)(3) and (g) of the Commodity Exchange Act, 7 U.S.C. as a result of the Commodity Futures Modernization Act of 2000, signed by U.S. president Bill Clinton on December 21, 2000. It allowed for the creation, for U.S. exchanges, of a new kind of derivative security, the single-stock future, which had been prohibited since 1982 under the Shad-Johnson Accord, a jurisdictional pact between John S. R. Shad, then chairman of the U.S. Securities and Exchange Commission, and Phil Johnson, then chairman of the Commodity Futures Trading Commission. On June 22, 2008, then U.S. Senator Barack Obama proposed the repeal of the "Enron loophole" as a means to curb speculation on skyrocketing oil prices. In the first half of 2008 the notional amounts outstanding of over-the-counter (OTC) derivatives continued to expand. Notional amounts of all types of OTC contracts stood at $683.7 trillion at the end of June 2008.
As indicated in both of the NOPR referenced above, the 111th United States Congress enacted Dodd-Frank explicitly to: (i) reduce systemic risk, (ii) increase transparency, and (iii) promote market integrity. It is my testimony as described below, that the broad purposes of Congress in enacting Dodd-Frank, would be served by requiring IOUs and other utilities to comply with the new regulatory paradigm enacted as part of Dodd-Frank in addition to the current state and federal regulation and supervision by the CPUC and the FERC. Indeed, there are public interest considerations supporting the CFTC’s exercise of its broad powers in favor of IOU customers and customers of similarly situated regulated public utilities.
Where swap transactions are required or approved (or both) by our prudential regulators, IOU should be subject to CFTC’s oversight and should have to rely on the definitions of “swap,” “swap dealer,” and “major swap participant.” Furthermore, IOUs shouldn’t be permitted to be exempt from any reporting requirements under Dodd-Frank by submitting copies of the reports that were prepared and submitted to the CPUC and the FERC.
