Regulation
Managing fuel costs could get riskier under new EU rules for energy trading according to James Brown
P
lenty of ink has been shed on the subject of regulation for the rail industry. But there is one emerging compliance area not likely to be high on the current boardroom agenda.
As you read this the EU is implementing legislation to improve accountability in wholesale energy trading markets. For UK and European rail operators hedging their fuel costs by purchasing energy commodities in volume, these rules add a new layer of regulatory risk.
There are two new rulebooks to follow: EMIR1
commodity transactions and REMIT2 , which governs energy ,
which covers physical fuel trades. Both arose from the fallout of the global financial crisis and moves by the G20 to improve transparency in over-the-counter derivative markets, mainly through the reporting of activities to trade repositories.
But even as the implementation mandates for EMIR and REMIT unfold, little clarity has been established. Deadlines have shifted, definitions have changed and the rail firms affected have been left wondering what to do next. Most have hesitated to act for fear of
investing in solutions that turn out to be expensive dead-ends. The alternative of abandoning fuel-cost hedging strategies altogether and capitulating to higher prices has seemed almost the lesser of two evils – remarkable given the impact of fuel costs on the bottom line. The British rail industry used 681 million litres of diesel in 2009/10, with freight using 199 million litres and passenger using 482 million.
Despite the uncertainty, some things
are clear. The new rules will affect any rail company dealing in:
• energy-related options, futures and swaps on interest rates, securities, credit and indices
• energy commodity derivatives and derivatives on underlyings; including rates, freight rates, emission allowances and climatic variables
• contracts for gas and electricity, as well as pure transportation derivatives
Participants in the energy market, rail businesses which use these hedging
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