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Regulatory Climate

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Keep your eyes open in 2018, a year in which some regulatory impacts

will be reduced even while new ones will take effect.

By Michael Prokop and Paul Campbell

The energy regulatory climate was in for a great deal of change in 2017 under the new administration, and those changes will continue taking effect throughout 2018. Regulatory reform and deregulation will continue to be the focus at the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC), even though those commissions are struggling to come back to full leadership strength.

The CFTC made a bold step in 2017 by creating the newly appointed position of “chief regulatory reform officer.” This position will be charged in 2018 with studying the efficacy of existing regulations, analyzing the value of pending regulations and assessing the need for regulations that have been declawed through the issuance of no-action letters. The CFTC will also be finalizing its stance on commodity position limits, hedge exemption rules and cross-border regulations.

The FERC also went through a period of rebuilding of leadership in 2017 and the new guard will take charge during 2018. FERC will remain committed in 2018 to the operation of orderly markets, the reliable process of price index creation and the surveillance of these markets to weed out wrong doers. FERC will also be very focused on the building of new interstate pipelines that will be in need of oversight and sensible tariff structures.

Digital Transformation

Expect to see the regulators begin to go through a great deal of digital transformation in 2018. This movement started in 2017 when the CFTC formed “LabCFTC,” which allows companies to come into established physical spaces where they may build and test new innovative solutions with actual offline CFTC data and systems. FERC’s FinTech innovations will be coming from the top in 2018 as the Department of Energy has already begun to test blockchain solutions. These technologies will enable a great deal of standardization and automation of regulatory reporting for both the regulators and those they regulate.

Although the regulators are seeing the benefits of digital innovation already, they will also see its challenges in 2018. Consider Bitcoin, for example. The Bitcoin market has proven to be very volatile and there are no signs this will ease in 2018. New cryptocurrencies or transfers of virtual value will become regulated this coming year as these vehicles either become futures or the target of financial regulators such as the SEC.

We expect to see the continuation of the convergence of traditional risk and compliance programs in the energy markets in 2018. This year will be an important one in this arena because people need to decide how they are going to comply with myriad regulations coming out of multiple jurisdictions and geographic regions. Firms that are faced with monitoring offshore affiliates will opt to incorporate the most stringent regulatory models across their entire compliance program so that they may reduce the risk of falling short on their compliance responsibilities.

For example, there are deadlines approaching for the European market players to be compliant with a number of stringent regulations around trade surveillance. Rather than have a U.S. rule-based program and an EU rule-based program, multinational firms are opting to adopt the broader EU compliance model to their entire global portfolio. That reduces the risk of non-compliance and helps to ensure that an entity will not lose its ability to trade in certain markets.

Infrastructure and Cybersecurity

We will continue to see regulators step in to address the aging infrastructure here in the United States. Operational risk and integrity will be a significant topic to be addressed through regulation in 2018. A number of catastrophic events over time have led up to this regulatory need and the states where these events have happened are leading the way.

California’s SB 1371 program requires targeted pipeline and infrastructure replacement programs for improving public safety and methane emissions. The California Public Utility Commission has also prescribed the use of empirical data to prioritize asset replacement, a major step forward in modernizing the approach around asset risk management.

Regulators will also have their eyes on cybersecurity threats against energy companies and markets in 2018. We expect to see the cyber policies for many companies evolve this year, and in years to come, as regulations from the NERC, CFTC, SEC and others come into play. Regulation AT, which is an initiative founded at the CFTC to protect the integrity of the traded commodity markets, will need to be complied with in 2018. This will require that those that operate trading platforms, and entities that trade on those platforms, have regular cyber reviews and secure archives of their system schemas.

While 2018 will be a year that will see a reduction of regulation in certain areas, it is also sure to be a year when new regulations will take effect. Either way, careful regulatory attention will need to be paid by energy and mining companies to help ensure the safety and integrity of the markets and the general public.

Michael Prokop is managing director and Paul Campbell is principal of Deloitte & Touche LLP’s energy regulatory and risk practice.

 

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