November 19, 2009
Glenn English, CEO of the National Rural Electric Cooperative Association (NRECA) testified before the Senate Agriculture Committee on financial reform proposals that include new regulation of over-the-counter derivatives.
English called for reforms that would increase transparency and prevent manipulation, but he cautioned the Committee against regulation that could increase costs for co-ops:
NRECA’s electric cooperative members, primarily generation and transmission members need predictability n the purchase price for their inputs if they are to provide stable, affordable prices to their consumers. Rural electric cooperatives use derivatives to keep costs down by reducing the risks associated with both volatile energy prices and financial transaction costs. It is important to understand that electric co-ops are engaged in activities that are pure hedging, or risk management. Our consumers expect us, on their behalf, to protect them against volatility in the energy markets that can jeopardize small businesses and adversely impact the family budget.
In particular, English expressed concern that any provision requiring all derivatives contracts to clear would not be affordable for cooperatives, explaining, “[t]he margin we would have to provide would make hedging untenable for many of our members – we would have to come up with hundreds of millions of dollars in cash that we just do not have on hand.”
NRECA has proposed amending the Treasury proposal to require the Commodity Futures Trading Commission and C and Securities Exchange Commission to jointly update the definition for bona fide hedging transaction s to reflect the current use of derivatives to manage business risk. The new definition should exclude bona fide hedgers form the definitions of a “swap dealer” and a “major swap participant” who are subject to additional margin and capital requirements.
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