As House lawmakers consider legislation to reform U.S. derivatives markets, Edison Electric Institute President Tom Kuhn said today it is crucial that Congress preserve the ability of electric utilities to use over-the-counter (OTC) derivatives markets for transactions because that will benefit electricity consumers.
“These financial instruments help reduce costs for electric companies, including costs for fuels and wholesale electricity trades,” said Kuhn. “These savings are passed on to our customers in their monthly bills.”
OTC derivatives are financial products that electric utilities and a variety of other U.S. businesses use to manage financial risks in various markets, including commodity fuel and wholesale electricity markets. Kuhn noted that trading derivatives “over-the-counter”—directly between two parties instead of through centralized clearinghouses or exchanges—enables utilities to manage risk and minimize price volatility in a cost-effective manner.
Kuhn’s comments came as the House Financial Services Committee reviews legislative efforts to reform financial derivatives markets, including draft legislation unveiled by the panel’s chairman, Massachusetts Democrat Barney Frank.
Declaring that Frank’s draft is a “step in the right direction,” Kuhn said it would provide needed transparency while also enabling electric utilities to continue using risk management tools, including the use of OTC derivatives transactions, to save money for their customers.
However, Kuhn said, “other related proposals now pending in Congress, while well-intentioned, would greatly diminish this vital option for electric utilities and other end-users of OTC derivatives. Under such proposals, derivatives would have to be centrally cleared or executed on exchanges.”
Such proposals, Kuhn said, “would place a significant financial burden on utilities and other industries that use derivatives. For utilities and their customers, the increased costs of making such trades on exchanges would be astronomical—in the neighborhood of hundreds of millions of dollars annually for an average-size utility.”
EEI today joined with nearly 20 other trade associations, including the American Gas Association, the American Public Gas Association, the American Public Power Association, the Electric Power Supply Association and the National Rural Electric Cooperative Association, in releasing a joint statement outlining the groups’ views on the need for continued use of the OTC derivatives market.