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Major New Legislative Proposal Would Expand FERC Jurisdiction to Trading in Carbon Markets

Energy & Environmental Law Update

October 20, 2008

The Federal Energy Regulatory Commission (FERC) will have a prominent role in environmental matters if the "discussion draft" cap-and-trade bill recently released by Congressmen John Dingell (D-MI) and Rick Boucher (D-VA) becomes law. FERC would have a new role of consulting with the Administrator of the Environmental Protection Agency (EPA) on the regulations to be promulgated for auctions of strategic reserve allowances. However, the major change involving FERC that is proposed in the discussion draft would be its new jurisdiction over brokers, dealers and certain others involved in carbon trading that will be exerted by a new Office of Carbon Market Oversight that would be established at FERC. The draft bill would amend the Federal Power Act to add provisions regarding the regulation of carbon markets.

Proposed Jurisdiction over Carbon Markets

FERC would have substantial jurisdiction over both domestic and foreign transactions involving regulated instruments, defined as emission allowances, offset credits, and instruments whose values are tied to the prices of such allowances or credits, when such instruments are not otherwise regulated by the Securities and Exchange Commission.  Brokers and dealers, as well as entities seeking to serve as Carbon Clearing Organizations (CCOs) in order to settle trading transactions on an exchange-type, centralized basis as opposed to bilaterally, would need to register with FERC.

FERC would monitor price and market manipulation of regulated instruments.  It would be charged with promulgating regulations to prevent excessive speculation in regulated instrument trading and would receive information and reports from large traders.  Registered brokers and dealers would be subject to record retention obligations to be prescribed by FERC, including a requirement to make records available the morning after a trade occurs.  FERC would be the ultimate arbiter of decisions to suspend or expel certain participants in carbon trading activity.  FERC would be authorized to assess civil penalties of $1 million per violation of the cap-and-trade law or up to three times the monetary gain obtained as a result of the violation.  FERC would collect information and issue market reports to Congress quarterly on the status of trading in the regulated instrument markets, price issues, the relationship between the regulated instrument market and the spot and futures markets for energy commodities such as electricity, among other things.

Why the Change?

The enhanced jurisdiction of FERC in the Dingell-Boucher discussion draft is related to several developments.  Previously, market oversight in the case of clean-air trading programs has notably vested in the Clean Air Markets Division of the EPA.  While EPA's regulatory efforts in the previous Acid Rain program were successful, the current draft may reflect the fact that control of global greenhouse emissions has a broader economic impact and necessitates the specific expertise in energy economics available at FERC.  Another possibility is that the choice of using FERC oversight was made to advance tactical considerations within Congress due to Committee jurisdiction over FERC and the Federal Power Act.  In either event, historically, the House Energy and Commerce Committee has not lightly advanced policy proposals - so the FERC approach is an intriguing development.

Future of the Draft

Congressmen Dingell and Boucher have stressed that their "discussion draft" is aptly named; it is a draft only, and it is meant to stimulate discussion.  Indeed, the bill contains blanks on some fundamental elements.  For example, it proposes—and asks for comment—on four different mechanisms for allocating emissions allowances, running the gamut from free allocations to auctions.  While much work is left to be done, the Dingell-Boucher draft is the serious work product of dozens of hearings and lengthy white papers, stretching over two years.  When the next Administration comes to office, it will work with Congress on climate change legislation.  The Dingell-Boucher draft, although purposefully incomplete, is likely to be highly influential on the process that produces a final bill over the next several years.