Applying financial rules to energy companies will hurt consumers and reduce the industry’s competitiveness, argues Paul Dawson.
Paul Dawson is the chairman of the European Federation of Energy Traders (EFET).
When we think about energy or industrial companies, or even local municipalities, rarely do we associate them with banks or other financial institutions. However, this is exactly what the European Securities and Markets Authority (ESMA) and the European Commission are currently considering as they set out ways of implementing wide-ranging financial legislation.
This past September represents the seventh anniversary of Lehmann Brothers’ collapse. Today, ESMA and the Commission will be putting the finishing touches to the implementing measures under the revised Markets in Financial Instruments Directive (MiFID II); one of the key elements of the package designed to address the underlying causes of the financial collapse. It is therefore a good time to reflect on the reforms and whether they will indeed provide the ‘cure’ for the financial market, or rather achieve a pyrrhic victory at the cost of killing the real economy.
MIFID II includes exemptions for companies whose energy trading activity is “ancillary” to their main industrial and commercial business. The exemption currently proposed by ESMA, however, renders the scale of a company’s asset base and primary industrial and commercial business irrelevant. As a result the regulation’s original intent is severely undermined because energy and other real economy companies will be subject to the requirements that apply to investment banks.
The differences are clear, as are the consequences. Unlike banks and other financial institutions, energy companies take no deposits from private clients, are not suppliers of credit and are not excessively leveraged. They deal only with professional counterparties in the wholesale market and pose no risk to financial market stability. There is no question that greater oversight of financial markets is needed. It should be borne in mind, however, that energy markets are already subject to rigorous oversight at the EU level and the full range of financial market rules. As such, no ‘level playing field’ needs to be achieved.
Failing to consider the industrial and commercial business and corresponding asset base in designing secondary legislation under MiFID II will inadvertently damage the structure and liquidity of Europe’s energy markets. Many producers and suppliers of energy, including some medium-sized utilities, would either be treated as if they were banks, subject to higher trading costs and onerous capital requirements, or forced to reduce substantially their activity in the market.
It is clear that a reduction in market liquidity and a decrease of competition in Europe’s energy markets would ensue. That, in turn would increase the burden on the energy sector and corresponding costs and risks to business and residential energy consumers to the tune of tens of billions of Euros. Recent industry calculations concluded that these costs would amount to €6.8bn per year for every percentage increase in final prices of electricity and gas and €12bn for every additional hour that supply is expected not to meet demand, causing a blackout.
Adopting proposals that would inflict significant additional costs on the European economy and harm the EU’s competitiveness would be in stark contrast with some of the key policy objectives of the Commission. They would come in addition to another recent ESMA proposal – to remove the hedge exclusion under the EMIR regulation – that would cost European business some €200bn. Indeed, a similar order of magnitude to the EU’s flagship European Fund for Strategic Investments…
The EU’s Better Regulation Agenda should ensure that any new proposals “meet policy goals at minimum cost and deliver maximum benefits to citizens, businesses and workers while avoiding all unnecessary regulatory burdens […] allowing the EU to ensure its competitiveness in the global economy”. The Energy Union should drive down energy costs, complete the internal energy market and reduce greenhouse gas emissions. It is difficult to see how the current proposals would contribute to these important EU policy goals.
It is not surprising that questions about the current approach have been raised by the governments of Germany, France and the United Kingdom as well as by national energy regulators. All stress that a company’s physical or commercial activity should be taken into account – the so-called ‘capital employed test’ – when determining eligibility for an exemption of MIFID licensing. The consequences might otherwise be dire not only for the energy sector, but also for the real economy and Europe’s competitiveness.
We call on European regulators to adopt the capital employed test to avert any unintended consequences, while ensuring that energy markets remain efficient and open to competition for the benefit of European businesses and consumers.