Jurisdictional conflict between the Federal Energy Regulatory Commission (FERC) and the Commodities Futures Trading Commission (CFTC) is nothing new.  FERC currently has jurisdiction over physical movements and rate settings requirements for electric transmission and natural gas pipelines.  FERC mainly regulates physical products on spot markets rather than futures contracts, while the CFTC oversees the futures markets.  FERC is subject to oversight of both the House and Senate Energy Committees, while the CFTC falls under the oversight of the House and Senate Agriculture Committees.  The FERC and CFTC have a long history fighting turf wars - most recently in the courts - regarding FERC’s jurisdiction over financial institutions whose allegedly illegal actions impact prices in the physical market.

Against that back-drop, the new Waxman-Markey energy and climate bill, the leading cap-and-trade bill in Congress, throws fuel on the fire.  The revised draft, released late last week, would give FERC control over the burgeoning carbon allowances and offset market (the “cash market”), which many speculate will reach $1 trillion in trades annually by 2020.  The regulatory fate of the carbon derivatives market, however, is left to the discretion of the President.  The bill directs the President, with advice from an interagency working group (including FERC and CFTC), to determine primary jurisdiction over carbon credit derivatives.  The Environmental Protection Agency (EPA) likely will have the leading role in preserving the underlying environmental integrity of the carbon assets though monitoring, reporting, verification, registration and enforcement, regardless of who oversees market activity.

The agency ultimately given jurisdiction to ensure compliance in the markets will have broad influence across sectors from electricity generators, energy intensive industry, and transportation, to financial institutions - both large and small, public and private.  The power sector is more accustomed to dealing with FERC because of its oversight in the energy and electricity markets.  Financial institutions, who will trade a variety of financial products and design endlessly creative carbon-based investment strategies, generally have more experience with the CFTC.  The CFTC is already regulating some forms of carbon trading, including the activity of the Chicago Climate Exchange, a voluntary carbon offset market.  Not surprisingly, there is no shortage of advocates before Congress on both sides of the FERC/CFTC jurisdictional debate. 

Members of Congress are divided along the same fault lines, with the added feature that some believe the proposed regulations are not sufficiently protective.  The CFTC appears poised to showcase its capabilities at the first meeting of its expanded energy and environment markets advisory committee.  This committee includes 11 new members, several of whom have vocally endorsed CFTC as the logical choice.  Some Members suggest a partnership between the two agencies, pairing FERC’s significant experience in regulation of power plants with the CFTC’s experience in regulating commodities.  Finally, other Members have voiced skepticism of any carbon trading regime, viewing carbon credits as the next great opportunity for “market failure,” particularly with respect to carbon derivatives, pressing the claim that proposed regulatory regime is not protective enough.  Just today, Bart Stupak (D-MI), introduced legislation (HR 2448) to, among other things, tighten regulation of the carbon market, indicating that he would not vote for the bill without a strong regulatory framework in place to deal with carbon derivatives. 

The White House has not yet expressed a clear position on its choice for regulator.  Carol Browner, Obama’s chief of environmental and energy policy has questioned whether carbon is a security or a commodity.  Classifying the legal nature of emissions allowances is yet another complexity that must be resolved in this debate.  See http://climateintel.com/2009/01/23/property-rights-conveyed-by-emission-allowances-an-analysis/.  The more important questions for consideration are not who is the regulator, but rather what the regulations do and how the regulator assures compliance. 

To view Part II in the two-part series, please click here.

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