Bloomberg News

EU Rules May Force Utilities to Raise Capital, Shearman Says

October 21, 2011

(Updates with industry associations in seventh paragraph.)

Oct. 21 (Bloomberg) -- The European Union’s plan for regulating energy and commodity markets may require power utilities and commodity traders to raise fresh capital, said a lawyer from Shearman & Sterling LLP.

The EU’s plan to expand its Markets in Financial Instruments Directive, or Mifid, rules will seek to regulate companies not subject to financial regulation such as energy utilities and commodity businesses, said Thomas Donegan, a senior associate in London at Shearman & Sterling, which advises financial institutions and utilities on regulation. Those companies may currently have regulatory exemptions, he said.

“There’s going to be a broader range of firms subject to financial regulation,” which will mean they may need to set aside capital when they take positions in energy and commodity markets, he said. “If you’ve got a big trading book, you’ll have a larger capital requirement,” Donegan said.

The EU yesterday proposed new regulations to reduce market volatility, increase regulatory oversight and promote competition. Specific measures include requiring trading venues to either cap the number of commodity derivative contracts that traders can enter into, or make “alternative arrangements” with the same effect.

After losing exemptions, some companies may need to set aside capital that would otherwise be spent on projects or raise cash by issuing shares or subordinated debt, Donegan said.

‘Vague Test’

Companies may still win exemption if they show the trading is “ancillary” to their core business, Donegan said. That may be difficult to show. “It’s a rather vague test at this stage,” he said. “Most of the exemptions for energy companies and commodities traders are being tightened up.”

EU energy associations urged the bloc’s executive and national governments to exempt the industry from financial rules proposed yesterday, saying they’ll lead to over-regulation that may curb investment.

The proposals, which center around mandatory clearing for standardized over-the-counter contracts, could drive away market participants, the European Federation of Energy Traders, the electricity industry group Eurelectric and the gas sector association Eurogas said.

EON Energy Trading SE, a unit of Germany’s biggest utility, said questions remain over the definition of some key terms in the proposed directive.

“There are some questions that remain to be clarified regarding the definitions of financial instruments and ancillary services,” the Dusseldorf-based company said today by e-mail.

--With assistance from Lars Paulsson in London and Ewa Krukowska in Brussels. Editors: Alessandro Vitelli, Rob Verdonck.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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