Gardett: Stuck in the Past – Dodd-Frank and the Energy Sector
Is it possible to know too much and too little at the same time?
The proliferating rulemaking processes that have only begun to spin out of the immense and far-reaching Dodd-Frank financial legislation seem to prove that it is, at least insofar as those rules impact the energy sector.
Thought Dodd-Frank was just about controlling Wall Street’s biggest banks? Thought it was about ensuring that the 2008 financial crisis could “never happen again”? No such luck – the dauntingly complex and lengthy legislation was merely the starting point for agencies now embarked on a rulemaking and rule-refining spree seemingly destined to guarantee full employment for lawyers and agency staff for decades to come.
Much was made at the time of Dodd-Frank’s passage of its difference from that other iconic double-barreled piece of since-dismantled financial regulation, the Glass-Steagall Act. Glass-Steagall was concise and had a single purpose of immense consequence to a sector it recognized as one of unusual significance; the banks it divided up were where the money was. Not knowing the way the banking sector would develop, legislators made a moral choice to design a banking sector they could fundamentally understand, then stood back to let the banks get on with their business.
In many ways the complexity that gave birth to Dodd-Frank reflected the complexity that preceded it. Energy companies learned about that complexity firsthand when Enron collapsed at the start of the decade, contributing to the confusion that led to damaging blackouts and a halt to efforts to fundamentally reform the energy supply and delivery business. In the years since, they’ve ceded complexity to the banks, which in turn broke the financial markets they are intended to serve and ended two decades of deregulation as gospel. Despite some sharp repercussions, the lessons haven’t been learned by legislators, who have now embraced the same kind of micro-managing complexity in the form of the Dodd-Frank rules. I hate to think that the next thing to break is the U.S. economy, but the trend isn’t our friend here.
The rules now emerging from Dodd-Frank have all kinds of numbers in them, and exemptions so complex even the companies intended to benefit from them have sought clarification. Lawyers representing everything from small-scale public utilities to major multinational oil firms are combing the rules as written and issuing complaints about the specificity of hedging exemptions, the percentages of this or that activity they are allowed to do and the volumes of this or that they are allowed to trade.
At the heart of every number, every position limit and every exemption lies the fallacy that regulators can predict future behavior based on existing data, while the existence of each limit and exemption reveals the hand of a micro-industry dedicated to keeping Washington politicians and regulators on the side of the status quo.
Rather than asking themselves how the best banking or energy sector possible would be structured, the authors and implementers of Dodd-Frank have chosen to tinker with a sector besieged by fundamental changes.
As one of the primary users of the banking and hedging tools that Dodd-Frank seeks to control, the energy business is now abuzz with how those controls will affect a sector that has fought disruption and transformation with greater vehemence each passing year. In an industry accustomed to tinkering around the edges with technology while leaving fundamental business and regulatory models untouched, Dodd-Frank is at least familiar territory.
The value of energy hedging is in the billions of dollars annually, but the very fact that an exact number is so hard to ascertain is part of the problem. Academic arguments have largely focused on whether it raises or lowers the value of firms, political arguments have focused on whether consumers are being gouged, and meanwhile banks, corporations and trading houses continue to place unaccounted for bets on the U.S. energy sector every day.
In a business as vibrant, essential, changeable and prone to sudden shifts as the intersection of the financial and energy sectors, knowing what you don’t know is probably a good start.
Dodd-Frank needs to be seen for the false start that it was, and the simplest possible new legislation designed to maximize both flexibility and transparency in energy finance needs to be passed.
Admitting you don’t know something is hard for everyone, and probably especially hard for Members of the House and Senate. But until legislation is crafted to allow for change in the energy sector, we are living according to rules crafted for a world that no longer exists.
Peter Gardett currently serves as the managing editor of AOL Energy and previously served as a senior correspondent and later a bureau chief for Argus Media.