Share

 

Reading the Regulatory Tea Leaves under the new Trump Administration

Though the confirmation process has taken longer than in previous administrations, most of President Trump’s new cabinet is now in place; and in particular, with the confirmation of Rick Perry to head up the Department of Energy, the key roles that will impact the future of energy regulation changes have been solidified. These new cabinet members, including Ryan Zinke, heading the Interior Department, and Scott Pruitt, now Administrator of the EPA, will be tasked with implementing President Trump’s promised repeal of many of the regulations and rules that were put in place under the Obama administration.

As we noted in a previous blog post, President Trump’s campaign platform focused heavily on several key areas of concern for energy producers and traders, including reducing the burden of compliance with financial and environmental regulations and improving economic growth. We also noted that in the second week of his presidency, President Trump issued a directive aimed at rolling back or revising portions of the Dodd-Frank regulations covering bank fiduciary rules and empowered the Treasury secretary to restructure other (and as of now, undetermined) provisions of the Dodd-Frank regulations to ensure they are in line with the administration’s goals to improve competitiveness of U.S. businesses in the global markets. What remains unclear and yet unexamined in any detail are the Dodd-Frank requirements that had most impacted energy traders, including clearing requirements, trade reporting, margining and the virtual prohibition on proprietary energy trading by banks.

Actions So Far

To date, President Trump and his new team have taken a number of steps to stall or eliminate various regulations that they believe disadvantage U.S. energy companies or hinder economic development. These changes include:

  • Repeal of the Cardin-Lugar Anti-Corruption Provision of the Dodd-Frank Act, which forced American oil, gas and mining companies to disclose financial transactions with foreign governments.
  • Undoing of administrative blockades that had prevented the final federal approval and construction of the Dakota Access and Keystone pipelines.
  • Repeal of the methane emissions rule that had required oil and gas to maintain records and report methane emissions from individual producing, processing and transportation assets.
  • Directing the EPA to begin steps to rescind the Clean Water Rule enacted under the Obama administration. This rule had greatly expanded the EPA’s reach to include almost all U.S. waterways, including streams and wetlands, and impacted the development of various energy and other industrial and infrastructure projects.
  • A recently signed executive order that effectively ends the Obama-era “Climate Action Plan”. Actions included in the order: directing the EPA to rewrite rules that limited carbon dioxide emissions from power generators, a rule primarily targeted at coal-fired facilities; instructed the Department of the Interior to end a moratorium on new coal leases on federal lands; repealed several Obama-era environmental directives aimed at reducing the federal government’s carbon footprint; and ordered federal agencies to review all policies that “result in impediments” to U.S. energy production. The order also ends the requirement that federal agencies and officials must consider the impact of climate change when making future policy decisions.

More broadly, the Trump administration announced a moratorium on any new federal regulations pending review of each proposed rule by the new secretaries of the affected agencies. The administration further announced that any future regulations would require two existing regulations to be stricken prior to any new rule being enacted.

Undoing Regulations Doesn’t Necessarily Mean Undoing the Changes Brought by Those Regulations

Right now, regulatory uncertainties are plentiful. Despite President Trump’s recent executive orders around reducing regulation of carbon emissions, the ultimate impact of the orders is still unclear. Most the environmental regulatory infrastructure built-up over the last decade has been directed at reducing carbon emissions and encouraging use of alternative energy resources. Under that regime of rules and subsidies, the renewables industries flourished with the support of taxpayer subsidies, while conventional sources of energy, particularly those related to the coal industry, were being punished.

Whether these regulations were responsible for the growing numbers of coal-fired facilities being shut down (or announced to be shut down in the near future) is debatable. While certainly some of the current and near-future closures were, and are, in direct response to pending regulations (as court challenges have delayed their implementation), some of these plants were simply too expensive to compete against cheap natural gas.

Despite the lack of firm numbers on either side, there unquestionably has been some regulatory impact – and any undoing of the carbon dioxide emissions rules will also certainly have an impact – but the magnitude is unclear. Can, and will, any recently mothballed facilities be brought back online, and even if they could be, can they be competitive against cheap gas and renewables? Will any previously announced retirement dates be rescinded and facilities kept open? Will the net effect be increased demand for coal, and will that result in the reopening of recently closed U.S. mines? All of these questions feed into the investment decision-making process: Where are the opportunities to invest capital (which markets/facilities), and what’s the potential return on that investment? Unfortunately, these billion dollar-sized decisions need regulatory clarity. Though early actions and current political rhetoric point toward continuing deregulation, the impact of these current and future changes are difficult to quantify, and many will certainly face court challenges.

Additionally, even if President Trump had, on his first day in office, acted on all his campaign promises, including killing Dodd-Frank in its entirety, exiting the Paris Agreement and eliminating all carbon dioxide regulation, these actions could conceivably have a life of no more than four years - right up to the next presidential election. After that, given the current political environment, it’s uncertain what might come next. Investments in new capital facilities (such as power plants, transmission lines, pipelines, refineries, processing plants, etc.) are decisions that can leave a mark on a company for 30 or more years, and simply reversing a decade of intensive regulations won’t result in a reversal of the investments and strategy decisions that were made during that time.

While the mass of regulations put in place under the Obama administration have undoubtedly increased costs and created some level of inefficiency in the energy markets, simply undoing those regulations won’t allow companies to recover those costs, or allow the broader energy trading industry to immediately return to the “good old days.” Banks, for example, if given relief from all Dodd Frank regulations, may still be reluctant to re-enter the market given that the next administration could simply implement a replacement for Dodd-Frank.

Furthermore, some banks may simply feel that the investment isn’t worth the increased market risks that seem to have gripped the industry over the last several years (think oil price collapse, cheap natural gas, etc.).

Looking at the issue in terms of ETRM or CTRM technologies, even if energy trading companies were freed from Dodd-Frank reporting requirements and “swap dealers” freed from strict oversight, the investments that have been made to comply with these rules are sunk. These companies, once released from Dodd-Frank rules, won’t simply throw-out the software systems and tools that enabled them to meet the requirements, particularly as much of the compliance capabilities has been “baked-in” to the existing systems. They will, however, certainly adjust processes and, as a result, some functionality or capability of their ETRM/CTRM may go unused. Still, that doesn’t imply that these investments will have been wasted; much of the capabilities that were required for improved timeliness and accuracy of trade reporting have undoubtedly resulted in improved information flow and position management capabilities in most trading shops.

Waiting for Clarity Doesn’t Mean Standing Still

Obviously, changes are happening quickly. New executive orders are being issued in rapid succession, and new policy pronouncements are being made almost daily. Nonetheless, business can’t stand still and wait for the other shoe to drop. Despite the promise of sweeping regulatory relief, until the new “rules of the road” are clearly established, have cleared court challenges and are in effect, the market pretty much has to continue as it has. Critical infrastructure development must continue and existing facilities maintained, just as critical trading systems must be maintained and updated as technology advances and new commercial opportunities arise. Taking advantage of new technologies, such as cloud computing, big data solutions and advanced analytics can help companies find and properly value commercial opportunities today and better position themselves to address accelerating market changes as the regulatory breaks are increasingly released.

Unfortunately, regulatory uncertainty can be the most difficult of unknowns to deal with. It seems that more often than not these decisions are being made to advance changing political agendas, and much less often to improve market efficiencies or limit abuses. All we can do as an industry is continue to operate within whatever rules exist at this time, and keep a wary eye and open ear in order to anticipate future changes. Being nimble in all things – including strategy, decision-making and technology – will be a key attribute possessed by the most successful companies during this period.