Over-the-counter (OTC) derivatives are financial products that electric utilities and a variety of other U.S. businesses use to manage financial risks associated with energy production and fuel costs. Utilities engage in OTC transactions with other utilities and in transactions within the financial markets in order to lock in a guaranteed price for commodities such as electricity, natural gas, and coal for future delivery.
Trading derivatives “over-the-counter”—directly between two parties instead of through centralized clearinghouses or exchanges—enables utilities to manage risk and minimize price volatility in a cost-effective manner.
After Congress passed the Dodd-Frank financial reform law in July 2010, the Commodity Futures Trading Commission (CFTC) proposed to address the oversight and transparency of OTC energy markets and to prevent excessive speculation. Some proposals would have eliminated the ability of electric companies to use OTC derivatives. This would increase the cost of hedging and reduce the capital available for capital investments and job creation by electric companies.
In 2012, the CFTC issued two final rules that preserve the ability of companies to access critical OTC energy derivatives products and OTC energy commodities markets. Access to these markets is key to protecting energy customers from wholesale commodity price volatility. And it provides the stability and certainty electric companies need to make critical capital investments that contribute to economic growth and job creation.