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"The U.S. power industry gave a cautiousthumbs up to new rules defining what constitutes a &amp;quot;swap&amp;quot;, adesignation that some feared could raise costs or impose newlimits on a large swathe of the nation's electricity markets.    Power traders, utilities and other big players worried theCommodity Futures Trading Commission (CFTC) might counttransactions intended for physical delivery -- such as commodity&amp;quot;forward&amp;quot; contracts typically held until delivery -- as swapsthat must be reported and may require margin or clearing costs.    But the CFTC on Tuesday appears to have excluded physicallydeliverable forward contracts from the swaps definition andincluded a seven-part test for determining the distinctionbetween a physical &amp;quot;forward&amp;quot; and a purely financial &amp;quot;swap&amp;quot;.    &amp;quot;We think that the CFTC did a good job of coming up withrules that seem to be well balanced and in line with thedirection of congress,&amp;quot; Richard McMahon, VP of finance at EdisonElectric Institute (EEI), the trade group representing U.S.investor owned power companies.    Contracts involving environmental commodities such asemissions allowance offsets and renewable energy credits mayalso qualify for the forward exclusion, the CFTC said.    The CFTC approved of the swaps definition on Tuesday butfull details of the rule may not be published for several days.    The commission also approved regulations governing end-userexemptions to the clearing of swaps.     &amp;quot;The power industry is satisfied with how the rule came out.It will not draw in a lot of transactions that the industry didnot consider swaps,&amp;quot; William Hederman, director at Deloitte &amp;Touche's Enterprise Risk Services practice told Reuters.    &amp;quot;There are some remaining uncertainties but most firms canwork with the swap rules and move forward,&amp;quot; Hederman said.    Power companies enter into long- and short-term physicaltransactions to buy and sell electricity, natural gas and otherfuels to serve customer needs, and sometimes use financialhedges to manage volatile prices.        DODD-FRANK REFORMS    The CFTC drafted the swaps rules pursuant to the Dodd-Frankfinancial reform act of 2010 to lower risk and promotetransparency in commodities and other markets, seeking morestandardized derivatives that could be traded on open platformsand guaranteed through clearinghouses.    But the power industry uses several derivative contractsthat can't be standardized or easily traded on an exchangebecause they need to be flexible in the timing and volume thatcan vary with changes in weather related demand.    Some of these transactions include customized deals inremote hubs that are only traded by a couple of local entitieswith too little volume for an exchange to be possible.    Power companies are also concerned about so-called bookoutswhere parties commit to a physical delivery but end up closingthe contract in a financial or paper transaction.    CFTC Chairman Gary Gensler however said the commission wasstill seeking additional comments on forwards with embeddedvolumetric options.    &amp;quot;Transactions with embedded optionality may satisfy thistest and therefore qualify for the forward exclusion if thepredominate feature of the transaction is actual delivery,&amp;quot; CFTCCommissioner Scott O'Malia said in a statement Tuesday.    Not everyone however was happy about the power exclusions.    &amp;quot;This rule falls short with energy markets,&amp;quot; Tyson Slocum,director of the Energy Program at Public Citizen, a consumerrights advocacy group, said in a release.     &amp;quot;With progressive Commissioner Bart Chilton dissenting, theCFTC opened a big loophole to certain types of energy forwardcontracts, exempting them from reporting requirements entirely.The CFTC should deploy its full authority to police this crucialmarket,&amp;quot; Slocum said.        COMPLIANCE COSTS    Now that the CFTC has defined what a swap is, the so-calledswap dealers, mostly banks with more than $8 billion in swaptrades annually, will have 60 days to register after the finalrule is published.    The CFTC has estimated about 125 companies will have toregister as swap dealers or major swap participants, includingabout 25 to 50 energy companies, Deloitte's Hederman said.    The issuance of the swap definition will likely result in aperiod of significantly reduced activity in energy commoditymarkets as companies determine whether they need to restructuretheir businesses, processes and compliance procedures, DianeMoody, Director of Statistical Analysis at American Public PowerAssociation (APPA) said.    APPA is a trade group representing more than 2,000community-owned electric companies.    Even if a power company is not a &amp;quot;swap dealer&amp;quot; under theCFTC definition, they still need to report and monitortransactions and may need to post margin or clear their swaps,Evan Koster, a partner at the Hogan Lovells US LLP law firm inNew York, told Reuters.    &amp;quot;If the transaction is a swap, it will be subject to somerequirements. The extent depends on who the entities are. Thekey for the companies is to make sure they meet theirobligations under the new rules,&amp;quot; Koster said.    One thing power companies sought and received to reducetheir exposure to the swaps rules was the end-user exception.    Under the end-user exception, swaps do not have to gothrough a clearinghouse if at least one party in the trade is a&amp;quot;non-financial&amp;quot; entity and is using the swap to hedge against&amp;quot;commercial risk.&amp;quot;        DECISIONS STILL TO COME    Even though the clock is ticking to comply with the swaprules, the CFTC still has some important decisions to make.    Power grid operators, like PJM, were still waiting for theCFTC to decide whether grid traded products like financialtransmission rights (FTRs) and ancillary services that arealready regulated by the U.S. Federal Energy RegulatoryCommission (FERC) were swaps.    PJM, the biggest power grid in the nation serving more than60 million people in all or parts of 13 Mid-Atlantic and Midweststates, said they expect to hear from the CFTC on theirexemption request for FTRs later in July.    In addition, a couple CFTC commissioners said municipalutilities needed some relief from the commission's earlier swapdealer rule that classified the munis as &amp;quot;special entities.&amp;quot;    Under that rule, which was designed to protect themunicipalities, any party doing more than $25 million of swapswith a &amp;quot;special entity&amp;quot; would be deemed a &amp;quot;swap dealer&amp;quot; andsubject to strict regulation.    &amp;quot;Given the size of their operations, the $25 million deminimis threshold is an unworkable level that will drive manynonbank firms away from dealing with municipal utilities toavoid the swap dealer designation,&amp;quot; Commissioner O'Malia said.    &amp;quot;Commercial end-users in general and municipal utilities inparticular, did not cause or advance the financial crisis of2008 ... it is difficult to justify imposing increasedoperational costs on them without adding any significantprotection to the broader financial markets,&amp;quot; O'Malia said. (Additional reporting by Edward McAllister;editing by SofinaMirza-Reid)"^^<http://www.w3.org/2001/XMLSchema#string>
<http://in.reuters.com/article/utilities-cftc-swap-idINL2E8IA70G20120711>