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Sep 13, 2016

FERC Staff and PUCT Oppose CFTC Proposal to Permit Private Right of Action for RTO/ISO Transactions

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In June, the General Counsel of the Federal Energy Regulatory Commission (FERC) and the Public Utility Commission of Texas (PUCT) submitted comments to the Commodity Futures Trading Commission (CFTC) opposing the CFTC’s proposed amendment to an order it issued in 2013.1 The amendment clarified that the five FERC-jurisdictional regional transmission organizations (RTOs), the independent system operators (ISOs) and the PUCT-jurisdictional Electric Reliability Council of Texas (ERCOT) covered by the 2013 Order are not exempt from the private right of action provided in Section 22 of the Commodity Exchange Act (CEA) for violating the CEA’s anti-manipulation and anti-fraud provisions.2

In commenting on the Amendment Order, FERC urged the CFTC to “interpret the CEA as “not applying to any contract or instrument traded in [RTO and ISO] markets pursuant to a FERC tariff.”  Similarly, PUCT urged the CFTC to leave the 2013 Order “in its current form, thereby clarifying that [private claims for violations of the CEA] are precluded.”

Background

Under the CEA, as amended in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the CFTC has exclusive jurisdiction with respect to accounts, agreements and transactions involving swaps or contracts of sale of a commodity for future delivery traded, executed and cleared on CFTC-regulated exchanges and clearinghouses,3 including for natural gas and electricity, for purposes of enforcement of the CEA’s provisions against fraudulent behavior and manipulation of markets.

Dodd-Frank also sought to avoid jurisdictional disputes between the CFTC, FERC (which regulates wholesale sales of electricity in interstate commerce) and PUCT (which has jurisdiction over sales of electricity within ERCOT) by adding a specific provision to Section 4(c) of the CEA directing the CFTC to exempt from CFTC regulation those transactions made pursuant to a FERC-approved tariff or a PUCT protocol if the CFTC finds that such an exemption is in the public interest.

In the 2013 Order, the CFTC granted exemptions from the provisions of the CEA and CFTC regulations, with the exception of the CFTC’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions under specified sections of the CEA.  These exemptions involve the purchase or sale of “financial transmission rights,” “energy transactions,” “forward capacity transactions” and “reserve or regulation transactions”  offered or sold in markets administered by six RTOs and ISOs – Midwest Independent Transmission System Operator, Inc. (MISO), ISO New England, Inc. (ISO-NE), PJM Interconnection L.L.C. (PJM), the California Independent System Operator Corporation (CAISO), the New York Independent System Operator, Inc. (NYISO) and ERCOT pursuant to a tariff or protocol that has been approved or permitted to take effect by FERC or the PUCT.

In 2015, the CFTC issued a proposed order providing a similar exemption for transactions in the markets administered by the Southwest Power Pool (SPP), an RTO.4 However, the SPP Order proposed not to exempt SPP from the private right of action under Section 22 of the CEA for violations of the manipulation, fraud and scienter-based provisions.  In the SPP Order, the CFTC explained that by enacting Section 22 of the CEA, Congress had intended to permit private parties to bring suit for fraud, manipulation and other scienter-based violations of the CEA as a means to address violations of the CEA as an alternative or supplement to CFTC enforcement action.  The preamble to the SPP Order also suggested that the CFTC had intended the same result – permitting private lawsuits for violations of the CEA – in the 2013 Order.

CFTC Amendment Order

On May 16, the CFTC issued the Amendment Order, proposing to amend the 2013 Order to clarify that it does not exempt RTOs and ISOs from the private right of action provided in Section 22 of the CEA for violations of the CEA’s anti-fraud, anti-market manipulation provisions. 

According to the CFTC, a February 2016 decision by the US Court of Appeals for the Fifth Circuit led to its proposed amendment of the 2013 Order. The decision affirmed an order of the US District Court for the Southern District of Texas dismissing a lawsuit by Aspire Commodities, L.P. and Raiden Commodities, L.P. (“Aspire”) against GDF Suez Energy North American, Inc. and its subsidiaries (“GDF Suez”) for violating anti-manipulation provisions of the CEA.5  Aspire alleged that GDF Suez had manipulated the locational marginal price on the ERCOT grid to profit on its trades, violating the anti-manipulation provisions of the CEA.   GDF Suez moved to dismiss the suit because of the 2013 Order which had exempted ERCOT from provisions of the CEA.  The district court had granted the motion to dismiss.

The Fifth Circuit affirmed the lower court’s decision, finding that while the 2013 Order clearly subjects ERCOT transactions to the anti-manipulation provision of the CEA, and that the CFTC expressly retained the authority to enforce this anti-manipulation section, those ERCOT transactions are exempted from a private right of action under the CEA.  Aspire had argued that under a proper interpretation of the 2013 Order, guided by the SPP Order, the private right of action under the CEA still applies to transactions in ERCOT.  The court rejected Aspire’s argument because, among other things, it found that the CFTC’s statements in the preamble of the SPP Order “directly contradict” the “plain language” of the 2013 Order.

In the Amendment Order, the CFTC states that although it did not intend to provide an exemption from the private right of action established in Section 22 of the CEA in the 2013 Order, the Fifth Circuit “held that this was the effect” of the 2013 Order.

The CFTC contends that the existence of a private right of action is not inconsistent with or detrimental to cooperation between the CFTC and FERC, will not cause regulatory uncertainty or duplicative or inconsistent regulation and will not affect the jurisdiction of FERC or any relevant state regulatory authority.  The CFTC argues that private claims under the CEA serve the public interest by empowering injured parties to seek compensation for damages where the CFTC lacks the resources to do so on their behalf and deters misconduct in maintaining the integrity of the markets subject to CFTC jurisdiction.

The CFTC observes that the Federal Power Act (FPA) expressly prohibits private rights of action for fraud and manipulation with respect to the purchase or sale of electric energy subject to FERC’s jurisdiction, while the private right of action under Section 22 of the CEA was an integral part of the CEA’s enforcement and remedial scheme.  The fact that Congress made different judgments with respect to private rights of action under the CEA and the FPA, the CFTC argues, does not amount to a conflict between the two statutes. 

FERC and PUCT Opposition to the Amendment Order

In its comments, FERC opposes the CFTC’s proposed introduction to FERC jurisdictional markets of a private right of action under the CEA because it would upset the Congressionally mandated balance between FERC and the CFTC, would be inconsistent with Congressional intent and would conflict with the design of the FPA.” 

In 2005, FERC argues, Congress amended the FPA to prohibit energy market manipulation, gave FERC authority to enforce the anti-market manipulation provision, including the authority to impose significant civil penalties, and explicitly prohibited private rights of action for violation of the energy market manipulation prohibitions.  According to FERC, this amendment of the FPA constituted a “statutory decision by Congress in favor of public enforcement by a specialized agency, rather than private enforcement through a generalist court.”  FERC argues that introducing a private right of action to markets regulated by FERC via the CEA appears to be inconsistent with Congressional intent and would conflict with the design of the FPA.

According to FERC, “[a]llowing private rights of action through the courts could frustrate the careful line Congress drew when establishing complaint proceedings under the FPA designed to balance the need for market certainty with the goal of consumer protection,” and “risks the potential of jurisdiction conflicts between the CFTC and FERC being disputed by private actors in court proceedings, than through the inter-agency cooperation that Congress intended.”

In its comments, PUCT maintains that allowing private parties to litigate causes of action under Section 22 of the CEA could have harmful effects on the oversight authority of PUCT. It could also adversely affect administration of the ERCOT markets by allowing private claims to collaterally attack the rules that constitute the structure of a market’s regulatory scheme, and allow a private litigant to sue ERCOT directly for activities undertaken in ERCOT.

PUCT also asserts that the scope of potential liability under Section 22 of the CEA is “incredibly broad” and could result in a potential private claim against ERCOT itself in a lawsuit brought under Section 22 of the CEA.

In addition, PUCT contends that Aspire v. GDF Suez “provides an example of the potential confusion and harm that private claims under Section 22 of the CEA could inflict on the ERCOT market.”   PUCT argues that the plaintiff in Aspire v. GDF Suez alleged that GDF Suez was able to submit offers for electricity in ERCOT with the intent to manipulate prices in the derivative commodity market because of PUCT’s “Small Fish Rule.” According to this rule, electricity generators controlling less than 5% of the total installed generating capacity in ERCOT do not have market power.  PUCT contends that if activities undertaken in compliance with the Small Fish Rule were subject to judicial scrutiny under a CEA private-party claim, then the federal proceeding could raise doubts about the prudence of relying on that rule.  According to PUCT, the effect would be to impair a market rule that is designed to benefit electricity consumers.

Additional Opposition to Amendment Order

The Electric Power Supply Association (EPSA), the trade association representing electricity generators and marketers, also submitted comments opposed to the Amendment Order.  EPSA argues that the CFTC’s proposal to clarify the 2013 Order would be harmful to the interests of electricity consumers affected by misconduct in RTO/ISO markets because a private lawsuit brought under Section 22 of the CEA cannot provide comprehensive relief that consumers may obtain through regulatory proceedings of the FERC or PUCT, such as resettling markets and refunds.  EPSA also argues that allowing private rights of action under Section 22 of the CEA would impose unnecessary and excessive costs on electricity consumers, because the costs of Section 22 lawsuits would be passed on to consumers in electric bills and would foster opportunistic, meritless lawsuits that would upset the important balance between the RTO/ISO responsibilities to send price signals and ensure reliability by intervening in the market.

In addition, the US members of the ISO/RTO Council (IRC) – CAISO, ERCOT, ISO-NE, MISO, NYISO, PJM and SPP – submitted comments asking that the CFTC not adopt its proposed amendment to the 2013 Order. 

The IRC states that the members of the IRC covered by the 2013 Order (i.e.,  MISO, PJM, ISO-NE, NYISO, CAISO and ERCOT) believe that neither they nor the transactions covered by the 2013 Order are subject to CFTC jurisdiction under the CEA, and that they requested the exemption provided in the 2013 Order in order to avoid litigating this and other related jurisdictional questions in court.

The IRC argues that permitting private lawsuits is likely to have a number of additional unintended consequences that do not serve the public interest, including creating uncertainty about the legal status of the regulatory regimes that oversee ISO-RTO markets, and enabling private parties to supplant the jurisdiction of FERC and PUCT to determine appropriate market outcomes by permitting collateral attacks on transactions under FERC- or PUCT-approved tariffs or protocols.

After considering the comments received in response to the Amendment Order and the SPP Order, the CFTC will issue final orders in those two proceedings.


1 Final Order in Response to a Petition from Certain Independent System Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in the Act, 78 Feg. Reg. 19880, April 2, 2013 (the “2013 Order”).
2 Notice of Proposed Amendment to and Request for Comments on the Final Order in Response to a Petition From Certain Independent System Operators and Regional Transmission Organizations To Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy regulatory Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in the Act, 81 Fed. Reg. 30245, May 16, 2016 (the “Amendment Order”).
3 7 U.S.C. 2(a)(l)(A).
4 Notice of Proposed Order and Request for Comment on an Application for an Exemption Order From Southwest Power Pool, Inc. From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of the Act, 80 Fed. Reg. 29490 (May 21, 2015) (the “SPP Order”).
5 Aspire Commodities, L.P., et al. v. GDF Suez Energy north America, Inc., et al., No. 15-20125 (Feb. 25, 2016) (“Aspire v. GDF Suez”).

Authors and Contributors

Donna J. Bobbish

Counsel

Project Development & Finance

+1 202 508 8089

+1 202 508 8089

Washington DC

Industries