CFTC Energy And Environmental Markets Advisory Committee Addresses Electrification And The Future Of Financial Transmission Rights Oversight

On February 28, 2023, the CFTC Energy and Environmental Markets Advisory Committee (EEMAC) held a public meeting featuring two panels convened to address electrification and the impact of low carbon market growth on the power and metals markets. The first panel discussed Financial Transmission Rights (FTRs) and how electrification and increased reliance on renewable and intermittent energy sources could affect the electric grid and the need for better oversight of the FTR markets. The second panel explored how increases in electric vehicle production could grow, and potentially stress, CFTC-regulated metals markets. CFTC Commissioners Summer K. Mersinger, Christy Goldsmith Romero, and Caroline D. Phamalso opened the public meeting with short remarks.This advisory committee agenda and the related discussion concerning FTR market activity suggest the current CFTC leadership may be beginning to reconsider the CFTC's oversight role with respect to FTRs.

This EEMAC meeting reflects the CFTC's growing attention to oversight in the electricity and environmental markets and is consistent with prior remarks from CFTC Chairman Benham during the June 2022 Voluntary Carbon Markets Convening, indicating: "The CFTC is uniquely poised as the regulator at the forefront of climate-related risk management.My intention is to focus on ensuring that America's farmers, ranchers, manufacturers, commercial end-users, and investors are equipped to manage their risks from increasingly severe and frequent weather events as well as the transition to a net-zero, low-carbon economy."

In addition, that the EEMAC dedicated a full panel to FTR markets is itself noteworthy. Following the passage of the Dodd-Frank Act, the CFTC and the Federal Energy Regulatory Commission (FERC) navigated tensions regarding FTR market oversight authority, with the CFTC issuing an exemptive order in which it provided FERC-regulated Regional Transmission Organizations and Independent System Operators with an exemption from most CEA-based requirements (and thus CFTC oversight) for FTRs and similar swaps defined in the Final Order.¹Accordingly, apart from antifraud authority, the CFTC currently does not actively oversee FTR markets. Nevertheless, the CFTC asserts that it has never fully relinquished its claim to FTR market oversight jurisdiction. During the Advisory Committee meeting, one panelist (Jaqueline Roberts) closed her presentation with the following question, which was addressed during the meeting: "Given the importance of FTRs in the emerging low carbon markets, who should oversee FTR hedging: the CFTC or FERC?" As indicated above, this advisory committee discussion and the Commissioners' opening statements indicate the current CFTC leadership may be reconsidering the CFTC's oversight role with respect to FTRs.

CFTC Commissioner Opening Remarks

In their opening remarks, Commissioners Mersinger, Romero, and Pham all highlighted how electricity markets and metals derivatives markets are changing in complexity, size, and scale, and expressed interest in panel discussion about the CFTC's potential role in these new industry dynamics. For example, Commissioner Mersinger asserted that, despite the exemptions issued by the CFTC, FTR markets were "an important topic for EEMAC to discuss and better understand" because of the "interest in FTR markets by . EEMAC members, the implications of increased risk regarding FTRs for power derivatives markets, and [the CFTC's] general surveillance of derivatives markets." Commissioner Romero stated that she was "particularly interested to hear how FTR markets have evolved, or need to evolve, with the growth of renewable energy. "And Commissioner Pham emphasized that it is "important for the CFTC to be hearing first-hand from market participants about the critical issues surrounding the physical energy markets."

Panel 1: Financial Transmission Rights

The first panel featured Jaqueline Roberts (West Virginia Public Service Commission), Joe Bowring (PJM Independent Market Monitor, Monitoring Analytics), and Demetri Karousos (Nodal Exchange, LLC), discussed Financial Transmission Rights (FTRs) and addressed how electrification and increased reliance on renewable and intermittent energy sources could affect the electric grid and the FTR market. Ms. Roberts noted that FTRs are expected to be integral in the transition to low carbon generation. She also expressed concern about the danger of inadequate oversight of collateral requirements in the FTR markets and the resulting financial risk to retail electric customers. Roberts finished her presentation by asking attendees to consider: "Given the importance of FTRs in the emerging low carbon markets, who should oversee FTR hedging: the CFTC or FERC?"

Joe Bowring, the IMM for PJM, clarified that he does monitor the FTR market and stated that he has developed rules to try to prevent market manipulation in the PJM FTR market. The third panelist, Demetri Karousos of Nodal Exchange, LLC, likewise challenged some of Roberts' concerns, asserting that exempting FTR markets and their market participants from certain provisions of the Commodity Exchange Act and CFTC regulations was the "appropriate regulator solution for FTRs given the unique nature of the FTR market," but that this scheme "should not preclude [the markets] from exploring suitable risk management solutions . including solutions involving CFTC-jurisdictional entities."

Panel 2: Electric Vehicles & CFTC-Regulated Metals Markets

The second panel, which featured Dan Bowerson (Alliance for Automotive Innovation) and George Pullen (CFTC Division of Market Oversight), explored how increases in electric vehicle production could grow, and potentially stress, CFTC-regulated metals markets. The second panel addressed how the increase in demand for electric vehicles has, and will, impact CFTC-regulated metals markets.Panelist Dan Bowerson of the Alliance for Automotive Innovation presented data on current trends in the electric vehicle (EV) market and described the various agencies and regulations that cover EVs. Bowerson also emphasized the global nature of the "competition to electrify everything," and stressed the importance of a reliable battery supply chain as the entire industry shifts towards electrification. Panelist George Pullen, who is a staffer in the Division of Market Oversight at the CFTC, focused on electrified vehicle market derivatives, specifically the types of financial risk that EV manufacturers face and how derivatives markets are vital to hedge those risks. Pullen presented on the commodity derivatives markets currently available to EV manufacturers, which allow them to hedge the financial risks associated with sourcing battery materials, and also highlighted which materials do not yet have markets.

Key Takeaway

CFTC attention to climate resilience, the growth of low carbon markets, and its impact on CFTC regulated derivatives markets is increasing. Commission advisory committee topics often serve as a harbinger of subjects to be addressed in future CFTC rulemakings and enforcement investigations. Accordingly, this EEMAC meeting and its attention to the FTR and metals markets should serve as a reminder to market participants to closely follow forthcoming CFTC activities in these areas and reconfirm policies and procedures targeted to ensure compliance with related CFTC regulatory obligations.

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