Justification for rapidly changing regulation? With Axpo Head of Regulatory Affairs

July 25, 2016

 

 

We need to remind no one of just how high-profile a matter regulation is in today’s landscape. With traders and operations people frequently areas where regulation can do more for the markets they regulate, we thought we’d get an alternate view from someone whose job it is actually manage regulatory affairs.

 

With that we took some time to speak to Michele Governatori, Head of Public and Regulatory Affairs at Axpo, to ask him some questions ahead of his speakership at ETOT in October.

 

The energy trading sector has been undergoing deep changes in the past few years, with the rise of renewable energy offers, and the heavy regulatory requirements. In your opinion, what has been the main impact of these changes on the markets?

 

I expect strong changes in volatility and liquidity of the electricity markets, because of support systems to renewables. Renewables being subsidised might reduce in the upcoming years the importance of short-term markets as we know them now. The long-term contracts and/or subsidies mean that the link power producers will be less and less able to rely on scarcity signals from short-term markets to make their earnings.

 

“The long-term contracts and/or subsidies [for renewables] mean that the link power producers will be less and less able to rely on scarcity signals from short-term markets to make their earnings.”

We were speaking to the head of back office for Endesa and he told us the regulators need to do more to minimise the margin for error in being compliant -- Would you agree with this?

 

That’s always an issue in our industry of course. Because the rules always change -- they need to change because they do need to adapt to millions of scenarios -- So of course, for us would be nicer to know in advance what we can expected in terms of market design and other rules. But in the real world it’s quite understandable that regulators have to continuously adapt to market changes. So it’s a sort of a role play. Markets change, and they change must faster than usually people can forecast and they also change more abruptly than companies might expect. My job is to try to see what the trends are and adapt to them. So yes, of course company would like to have a steady flow of rules but also rule makers need to continuously introduce new tools.

 

Would you say that it’s also related to the fact that rules, if supposedly left stagnant, “will” be open to abuse?

 

It might also be this case, of course I guess any business is trying to adapt to the environment, and make the most profit from it and the environment is also composed by rules in regulated industries like commodity trading. So it’s quite normal that once a rule is well-known, operators try to adapt them and make the most profit from it they can, of course being compliant with the rule.

 

Sometimes the rule maker sees that the attitude of operators is not exactly what they expected so there’s an outcome, which is, from their point of view, different from what it would be on a comprehensive and social point of view. So they decide to change the rule again. So yes it’s partly like that. You can’t see what the outcome of the rules is before given the operator the chance to adapt to them. So, again, it’s a continuous adapting process.

 

“Sometimes the rule maker sees that the attitude of operators is not exactly what they expected so there’s an outcome, which is, from their point of view, different from what it would be on a comprehensive and social point of view.”

How would you describe your communication process with the business units and the IT teams? Do you communicate often; do you work closely with them?

 

“With the business team it is continuous communication channel - they often call me and try to understand what’s changing and how -- they maybe have heard a rumor about a rule changing and want to anticipate what could be the consequence to their job. So that, with the business unit with the traders there is a continuous communication channel. With the IT department, it is not as continuous as that, because it depends on whether there is a process of adapting the IT system. In this case, in the design process, we have to participate in order to taking into account what to expect from the regulator’s side.”

 

What do you think?

 

Would you agree that it’s important that regulation adapts and changes in order to remain robust? Or are the frequent changes simply not manageable in an environment of tighter resources?

 

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