CFTC Proposes to Permit Private Rights of Action Against RTOs and ISOs and Persons Transacting Thereon
By Lawrence Patent
The Commodity Futures Trading Commission (CFTC) has proposed to amend its previous Order exempting specified electric energy transactions from certain provisions of the Commodity Exchange Act (CEA) and CFTC regulations and to permit a private right of action against regional transmission organizations (RTOs) and independent system operators (ISOs) and persons transacting thereon for alleged fraud and manipulation. 81 Fed. Reg. 30245 (May 16, 2016). The CFTC stated that it did not intend in the original RTO/ISO Order, issued in 2013 (78 Fed. Reg. 19880 (April 2, 2013)), to grant exemption from the private right of action provided in CEA Section 22, but the Fifth Circuit held that this was the effect of the RTO/ISO Order in Aspire Commodities, L.P. v. GDF Suez Energy N.Am., Inc., No. 15-20125, 2016 WL 758689 (5th Cir. Feb. 25, 2016). Therefore, were the CFTC to adopt the amendment to the RTO/ISO Order, it would in effect be overruling Aspire. The types of transactions covered by the RTO/ISO Order include financial transmission rights, energy transactions, forward capacity transactions, and reserve or regulation transactions, and the RTO/ISO Order applies to any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to these transactions.
The CFTC has in the interim issued a proposed exemptive Order to Southwest Power Pool, Inc. (SPP) that would explicitly provide for a private right of action and the CFTC states that adopting the proposed amendment to the RTO/ISO Order and finalizing the SPP Order would bring consistent treatment to these entities.
Aspire alleged that GDF Suez manipulated the Locational Marginal Price in the Texas electricity market to profit on its futures trades on the Intercontinental Exchange (ICE), even as Aspire presumably lost money on its transactions in the Texas electricity market. Aspire claimed that prices for electricity in Texas influenced the prices of ICE electricity futures and that it lost money in the derivatives markets because of GDF Suez’s alleged price manipulation.
The Federal Power Act expressly prohibits private rights of action for fraud and manipulation with respect to the purchase or sale of electric energy subject to the Federal Energy Regulatory Commission’s (FERC) jurisdiction. However, the CEA expressly provides a private right of action for persons who purchase futures contracts or swaps against a person who violates the anti-manipulation provisions of the CEA, which may include manipulation of the cash market as well as the futures or swaps markets.
The proposed amendment to the RTO/ISO Order was issued on a 2-1 vote, over the dissent of CFTC Commissioner Giancarlo. During the comment period on the amendment, which closed on June 15, 2016, FERC and some state regulatory bodies expressed opposition to the CFTC proposal. In addition, on June 23, 2016, the Chairman and Ranking Member of the House Committee on Agriculture, as well as the Chairman and Ranking Member of the subcommittee that has jurisdiction over the CFTC, sent a letter to CFTC Chairman Massad expressing concern with the proposed exemptive Order for SPP and the proposed amendment to the RTO/ISO Order. It therefore remains to be seen if and when the CFTC will adopt the proposed amendment.
The CFTC proposal is another illustration that regulation of energy industry transactions under Dodd-Frank is a developing area and that the jurisdictional boundaries between the CFTC and FERC are not settled, a topic discussed in a previous Alert.