Berlin, 9 November 2010

Big European utilities can relax as impending regulation will be shaped so that their own hedging will not be treated the same as speculative trading by financial companies, a senior European Commission official told Reuters on Monday.

Next month's European Commission regulations for traders of energy derivatives will exclude energy companies from regulated clearing as long as they were only hedging their own activities, Philip Lowe, the European Commission's director-general for energy, said in an interview.

"Because so much of energy derivatives trading is hedging of their own production and sales, I personally don't see many utilities qualifying (for mandatory clearing)," he said.

Another regulation being prepared by Energy Comissioner Guenther Oettinger would distinguish energy from other sectors covered by a market abuse directive applying to banks while ensuring it was monitored closely enough, Lowe said.

"I don't think it is a politically very controversial thing," he said.

Big European utilities such as RWE and E.ON have been warning against an overregulation of their trading activities in the wake of the finance crisis that they said could raise costs and cut investment.

Forcing energy firms to treat their derivatives positions as if they were speculative trades would force them to set aside lots of cash for margin calls, E.ON said.

Utilities often buy and sell OTC products such as swaps to hedge their exposure to fluctuating raw material prices such as oil or coal, outside regulated exchanges. There are big links between such trading and use of generation capacity.

Lowe said the industry should make sure it was not forced into clearing when it did not need to be, and to establish clear thresholds for mandatory clearing mechanisms to be triggered.

"I think it is all looking palatable but it is something that energy companies should watch closely over the next few months to make sure that the details don't create too much difficulty for markets' functioning," he said.

As for Oettinger's initiative, it would need to strike a balance between ensuring competitiveness and intervening selectively where there were problems, enlisting financial and energy regulators to work together, Lowe said. "We do need to control market abuse," he said.

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