FERC Staff And PUCT Oppose CFTC Proposal To Permit Private Right Of Action For RTO/ISO Transactions
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.”
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.