Commodities News and Trends

Welcome to the inaugural issue of Commodities Trading News and Trends, the first in a series aiming to help commodity market participants identify and adapt to the market news and legal developments that impact their commodity trading. Each issue will feature summaries and insights into current topics, ranging from developments in renewable energy to recently enacted federal and state laws and regulations. Our goal is to help you successfully navigate the shifting currents while remaining competitive. Please enjoy this issue.

Renewables

• The US offshore wind industry continues to expand as three states agree to collaborate on a large-scale project off the Atlantic coast. Maryland, Virginia, and North Carolina have agreed to collaborate on offshore wind projects, offering an alternative model for states to pursue their climate related goals. This collaboration has two related aims: to advance regional offshore wind projects and to promote the Southeast and Mid-Atlantic United States as a hub for offshore wind energy and industry. These are not the only Atlantic states acting to develop an offshore wind industry. For example, in June 2020, New Jersey announced its plan to begin constructing in 2021 the country’s first port dedicated to building wind turbine; in the summer, New York’s Governor Andrew Cuomo announced the largest combined clean energy solicitations issued to date in the US. But these are individual, state-level efforts. The Maryland-Virginia-North Carolina collaboration presents a regional, rather than state-level, model; other states may be attracted to this approach because of the economies of scale it offers. As a memorandum of understanding between the participants describes, the states’ wind project pipeline could support up to 86,000 jobs, bring $57 billion in investments, and provide up to $25 billion in economic output by 2030.
• Foreign governments impact US LNG exporters. Negotiations on a multibillion-dollar liquified natural gas import contract between a US- based LNG development company and ENGIE, a French energy and services group, reportedly ended after the French government expressed concerns over the contract’s environmental impact. The French company’s decision arrives despite the US company’s anticipated ability to reduce its carbon dioxide equivalent emissions at its proposed LNG facility by approximately 90 percent. European Union countries intend to accomplish the EU’s goal of carbon neutrality by 2050. Recently, the head of the international relations and enlargement unit at the European Commission’s energy directorate commented that the “LNG trade and gas will remain the main topic of our cooperation with the US in the years to come,” which suggests to us that the failed negotiations may be just the first sign of a growing reluctance to engage with US LNG exporters. Now, not only may fossil fuel companies see less enthusiasm from institutional investors – some of whom are increasingly divesting away from such companies – but international commitments may also affect contractual relationships between LNG exporters and their customers. One solution available to US LNG exporters, as recently seen, is for them to develop a relationship with their EU customers similar to that between a French oil and gas company and a foreign oil and gas company in which the parties will explore opportunities to partner in joint research, development, and deployment endeavors to address CO2 emission reductions and carbon capture, utilization and storage.

Carbon

• As private businesses address climate change, NGOs and carbon registries exercise diminishing influence over carbon offset markets. The days of NGOs and carbon registries regulating the carbon offset market may be coming to an end. As key actors call on governments to step in and regulate the carbon offset markets, the impact of NGOs and carbon registries is weakening. With the climate crisis accelerating, many private businesses are taking steps to address climate change by mitigating their GHG emissions and investing in clean energy alternatives. A key component of this private-sector push is the sustainable-finance movement, which is now a core business for the largest banks and fund managers. But the proliferation of private standards and the lack of consistent and binding guidelines and regulations have left the playing field uneven, and investors are calling for the clarity of government intervention.
• Columbia Law School launches carbon database. Columbia Law School’s Sabin Center for Climate Change Law, long a leader in the law of climate change, recently debuted its state-of-the-art carbon database to aggregate legal materials related to carbon dioxide removal and carbon sequestration and use. The CDR Law database aggregates over 1,000 annotated legal resources related to carbon dioxide removal and to carbon capture, utilization, and storage. The resources span sectors and industries, and the database lists them according to the technical pathways to which they are relevant. A work in progress, the database will continue to be updated as more laws are passed or brought to the Sabin Center’s attention.

Commodity Futures Trading Commission

• CFTC updates guidance on compliance programs and enforcement. In its most recent push to ensure the transparency of its processes for registrants and the public, the CFTC has announced how a registrant’s compliance program will affect penalty assessments in enforcement actions. The CFTC has long looked to issuers’ compliance programs as a consideration in assessing penalties in enforcement actions. Its recent guidance spells out how the existence and effectiveness of a company’s preexisting compliance program and its post-violation conduct will be considered as mitigating factors when setting penalties. The guidance is intended to bring transparency to the process so members of the regulated community can tailor their programs to maximize compliance with the CFTC’s expectations. To learn more about this guidance, please see our alert, available here. For further guidance on ESG considerations, please see DLA Piper’s handbook, Assessing ESG factors in the energy sector.  
• CFTC issues guidance to staff on how to recommend public recognition of respondents. In late October, the CFTC issued guidance to its Division of Enforcement staff on how the Commission’s enforcement orders should publicly recognize the level of a respondent’s self-reporting, cooperation, and remediation. This guidance may ultimately impact the credibility of a company’s statements about the strength of its internal controls as well as its claims for having a culture that promotes regulatory compliance. The guidance notes that staff may make this recommendation using one of four standards, ranging from no recognition to a level that results in a substantially reduced penalty. In turn, companies may find it beneficial to use the Commission’s characterization of its self-reporting, cooperation, and remediation in its promotional materials. Accordingly, the CFTC’s guidance provides another potential benchmark that companies may use to communicate how oriented its policies and procedures are to investors’ ESG expectations, which frequently include an analysis of a company’s internal controls and culture for compliance. To learn more on this guidance, please see our alert, available here. For further guidance on ESG considerations, please see DLA Piper’s handbook, Assessing ESG factors in the energy sector.
• CFTC approves final rules on speculative position limits for derivatives. In mid-October, by a 3-2 vote, the CFTC has approved a final rule that rounds out its major rulemaking related to the relevant Dodd-Frank Act amendments to the Commodity Exchange Act. As Chairman Heath P. Tarbert remarked, “We are removing a cloud [with this final rule] that has hung over both the CFTC and the derivatives markets for a decade. Market participants, particularly Americans who need markets to hedge the risks inherent in their businesses, will finally have regulatory certainty.” The rule aims to promote such regulatory certainty by, among other things, designating new and amended federal spot month position limits for derivative contracts associated with 25 physical commodities; it also redefines “bona fide hedging transaction or position” to include an expanded list of enumerated bona fide hedges. This rule will come into effect 60 days after publication in the Federal Register, however compliance dates are tiered with certain provisions beginning on January 1, 2022 or January 1, 2023. To learn more about the CFTC and position limits, please see our see our analysis of position limits, available here.
• CFTC reports a record-setting year for its enforcement division. In the waning days of 2020, the CFTC issued its annual report on the activities of its Division of Enforcement. The Division of Enforcement filed 113 enforcement actions, surpassing the prior annual record of 102 actions, obtaining total relief of over $1.3B, the fourth highest sum in its history. CFTC also filed its largest-ever spoofing and manipulation case, ordering monetary relief in the amount of $920M. Other records from 2020 include 56 fraud actions, 16 actions brought in parallel with federal criminal authorities, a single enforcement action filed jointly with 30 state regulations, and over 140 court cases. Beyond enforcement actions, the Commission also issued multiple guidance documents for the regulated community. Looking ahead, the Commission expects to focus its efforts on “(1) preserving market integrity; (2) protecting customers; (3) promoting individual accountability; and (4) coordinating with other regulators and criminal authorities on parallel matters.”

Federal Energy Regulatory Commission

• FERC confirms its jurisdiction over carbon pricing in wholesale markets. In mid-October 2020, FERC proposed a policy statement that presented the basis for the Commission’s jurisdiction over organized wholesale electric market rules when those rules incorporate state-determined carbon prices. The proposal reinforces FERC’s jurisdiction over state-determined carbon prices incorporated in wholesale electric markets and encourages the use of these market rules. Eleven states have adopted some form of carbon-pricing regime, and other states are considering adopting one. As FERC Commissioner Neil Chatterjee stated, “Carbon pricing has emerged as an important, market-based tool that has wide support across sectors.” The proposed policy statement both looks ahead to, and encourages, regional transmission operators (RTOs) and independent system operators (ISOs) to include such market rules in the wholesale electric market. Still, FERC’s ability to exercise jurisdiction over these market rule changes does not guarantee the changes will be approved. Rather, market rule changes that incorporate state-determined carbon pricing are subject to the Commission’s analysis of whether the market rules are “just, reasonable and not unduly discriminatory or preferential.” The Commission asked for comments on how to evaluate market rule changes against this standard. We will monitor this matter as it continues to develop.
• Complaint’s outcome may expand available market for third-party aggregators. A recent complaint filed against the Midcontinent Independent System Operator, Inc. (MISO) asks the FERC to reverse Order 719. This reversal would allow RTO/ISOs to more effectively realize the capacities of demand response technology, which until now, the complaint argues, remain largely untapped. The complaint takes issue with the inability of third-party aggregators of demand response to freely participate in MISO’s wholesale markets. The complaint was filed on behalf of a third-party aggregator, who, the complaint claimed, was excluded from the wholesale markets of many MISO states because of Order 719’s opt-out provision. Order 719, the complaint states, has allowed 12 of the 15 states in MISO to opt out of allowing “aggregators of retail customers” to compete against utility demand response programs. The complaint goes on to charge that there are three problematic effects of excluding these aggregators:
  
  (1) FERC’s responsibilities under the Federal Power Act are undermined
  (2) unjust and unreasonable rates are more prevalent and
  (3) demand response resources generally and demand response aggregators specifically are discriminated against.
  
  The complaint justifies its request on several grounds, one of which is that the Commission’s conclusion that its exclusive jurisdiction over wholesale market rates precludes states from barring participation of storage or distributed energy resources should apply with equal force to demand response under the reasoning of Order 841. Moreover, the complaint explains that reversing Order 719 would also allow the Commission to more effectively realize the benefits of its recently enacted Order 2222, which, as FERC states in its press release for Order 2222, “empowers new technologies to come online and participate on a level playing field, further enhancing competition, encouraging innovation and driving down costs for customers.”

Environmental Protection Agency

• Climate change lawsuit reaches US Supreme Court. In October, the US Supreme Court granted certiorari in an important climate change lawsuit in which it will rule on a jurisdictional matter. Although the Court will not reach the merits of the case, its decision may have major implications for litigation strategies in current and future climate focused disputes. The underlying lawsuit includes claims that the defendants violated state law because they knew of a direct link between fossil fuel use and global warming but engaged in a coordinated campaign to conceal that knowledge. However, the question before the Supreme Court actually deals with the defendants’ ability to remove the case to federal court. This outcome matters because companies facing climate-focused lawsuits often prefer federal courts, considering them to be less hostile toward industry defendants. Therefore, even though the Supreme Court will not address the merits of the City of Baltimore’s claims, if the Supreme Court sides with the defendants, federal courts may see more climate-focused lawsuits even where plaintiffs only allege violations of state common law.

Enforcement and litigation

Enforcement

• CFTC begins AML enforcement. Since August 2020, the CFTC has brought a series of high-profile actions, including several in coordination with the SEC and FINRA. The three separate enforcement actions allege violations of Regulation 42.2, which requires futures commission merchants and introducing brokers to adopt anti-money-laundering and know-your-customer programs in compliance with the Bank Secrecy Act. Observers are calling this trend a wake-up call for regulated futures registrants.
• Oil and gas company’s request for gas transportation contract to be rejected highlights tension between bankruptcy court and FERC. An oil and gas company has petitioned its bankruptcy court to reject gas transportation contracts as part of its Chapter 11 petition. This request highlights a growing conflict over the boundary between the jurisdiction of bankruptcy courts and that of FERC.

Litigation

• Small refinery wins again in its battle for a renewable-fuel hardship exemption. For the second time, a federal appeals court has vacated the US Environmental Protection Agency’s denial of a refiner’s request for an exemption from the Renewable Fuel Standard program. The refiner had requested to be exempt from the RFS through a hardship waiver available for small refineries. The court expressed concern that new evidence suggested the agency granted an exemption to another similar company while denying the small refiner’s request.
• Petitioners argue against extraterritorial application of the ATS to domestic corporations. Petitioners in a high-profile human-rights case appeared before the Supreme Court to argue against extraterritorial ATS liability for domestic corporations. The plaintiffs claimed they were enslaved, as children, on African plantations, and they have sued two global food companies under the Alien Tort Statute (ATS). These companies, which have extensive programs to prevent child slavery and other labor abuses, argue that the perpetrators should be brought to justice but that the ATS is not intended to apply extraterritorially against domestic corporations.

In the news

• Policy issues to watch under a Biden Administration. President-elect Joe Biden’s anticipated energy policies may result in certain oil and gas companies gaining market share while expanding competition in other markets. Many executives of oil and natural gas companies are stating that the Biden Administration’s anticipated energy policies will affect oil and natural gas operations in the following ways:
  
  (1) For upstream oil and natural gas companies, it will become more difficult to drill on federal land - including, for example, areas in New Mexico, the Gulf of Mexico, and Alaska.
  (2) For midstream oil and natural gas companies, increased regulatory scrutiny may add additional barriers to new projects, and the Dakota Access Pipeline might be shut down.
  (3) For downstream oil and natural gas refiners, the goal of carbon neutrality may prompt refiners to produce more environmentally friendly products, such as biodiesel.
  
  However, the scale of the impact that these possible policies may have on the oil and natural gas industry is uncertain. The Biden Administration may pursue the above policies through executive agencies, but whether it is able to accomplish broader climate goals, such as the $2 trillion plan to overhaul energy and transportation infrastructure, is less certain because this requires Congressional support.
  
• States and cities adopt clean energy initiatives in recent elections. Voters in a number of US jurisdictions have approved clean energy-related ballot measures that may affect governmental structures and abilities, while directly impacting electric utilities. In New Mexico, voters approved a constitutional amendment that will change the structure of the New Mexico Public Regulation Commission. Instead of continuing to feature five elected members, beginning in January 2023, the commission will have three commissioners appointed by the governor. Voters in Columbus, Ohio, approved a green-energy electricity aggregation plan that affects the city’s ability to contract with electricity service providers; the plan allows the city to obtain all of the power for retail electric loads from renewable resources by 2023. Also, voters in Nevada passed Question 6, which requires electric utilities to acquire 50 percent of their electricity from renewable resources by 2030. Support for clean energy commitments may not be surprising. Over 160 cities, more than ten counties, and eight states across the US have goals to power their communities with 100 percent clean, renewable energy, which translates into 100 million people living in communities with official 100 percent renewable electricity targets. But support for clean energy is not guaranteed. For example, New Hampshire voters reelected Republican Governor Chris Sununu over a Democratic challenger with a more proactive climate mitigation plan, and in Texas, all three members of the Texas Railroad Commission remain Republican. In sum, although certain communities support a quicker transition towards clean energy technologies, this transition may continue to face challenges in the court of public opinion, ultimately slowing the ability for governments to put in place legal measures aimed at furthering clean-energy ambitions.