Can private litigants bring claims under the Commodity Exchange Act alleging manipulation in ERCOT’s energy markets? On February 3, the U.S. District Court for the Southern District of Texas answered “no,” granting defendants’ motion to dismiss inAspire Commodities v. GDF Suez Energy North America.
In Aspire v. GDF Suez, plaintiffs accused GDF Suez of violating the CEA’s anti-manipulation provisions, and six other electricity generators of aiding and abetting GDF Suez.1 Specifically, plaintiffs alleged that GDF Suez intentionally withheld electricity generation during times of tight supply to drive up Real-Time prices in the ERCOT market. While not challenging the ERCOT LMP prices themselves as being “unlawful, wrong or too high,” plaintiffs claimed that, by manipulating the ERCOT LMP, GDF Suez consequently created “artificial and unpredictable” prices in derivatives markets, such as ICE.2
According to plaintiffs, GDF Suez “is willing to forego the profit it can make selling energy in the ERCOT market” at above cost because it makes more “by trading with inside, superior knowledge on commodities markets like ICE.”3 Plaintiffs brought suit under CEA Section 22–which provides a private right of action to persons harmed by a CEA violation–on the grounds that GDF Suez’s conduct within ERCOT caused them to suffer losses in the futures and virtual trading markets.4 In addition to damages, plaintiffs sought a declaratory judgment and a permanent injunction prohibiting GDF Suez from withholding generation.
GDF Suez argued that its conduct is permitted under Texas law. The Public Utility Commission of Texas prohibits generators with market power from withholding energy; but under the “small fish” rule, generators, like GDF Suez, that control less than five percent of installed generation capacity in ERCOT are deemed not to have market power.5 Moreover, in March 2013, GDF Suez entered into a Voluntary Mitigation Plan with the PUCT that provides it with an absolute defense against market power abuse claims under Texas law and PUCT regulations.6 Prior to this suit, plaintiffs unsuccessfully petitioned the PUCT to remove the small fish rule.7
In granting GDF Suez’s motion to dismiss, the Court held that plaintiffs’ claim was barred by the CFTC’s RTO/ISO Exemptive Order,8 which exempts specified transactions in certain RTOs/ISOs from most CEA and CFTC requirements, assuming the RTOs/ISOs meet certain requirements. The Exemptive Order applies to GDF Suez’s electricity transactions in ERCOT’s Real-Time market, and exempts them from all provisions of the CEA except for:
the Commission’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13 and any implementing regulations promulgated under these sections including, but not limited to, Commission regulations 23.410(a) and (b), 32.4, and part 180.9
Because CEA Section 22–the private right of action section–was not among the sections preserved by the Exemptive Order (i.e., was not included in the “anti-fraud and anti-manipulation” provisions excepted from the Exemptive Order), the Court held that plaintiffs could not rely on the CEA’s private right of action to challenge conduct that occurred entirely within ERCOT (because this right was included in the broad CEA provision exclusions), even if GDF had intended to influence the ICE market.
Although Aspire v. GDF Suez directly addresses private claims under the CEA, the question lingers as to whether the CFTC can or will bring manipulation actions in the exempt RTOs/ISOs, like ERCOT. In its Exemptive Order, the CFTC did not express an opinion as to whether it has jurisdiction over the ERCOT market with regard to the anti-fraud and anti-manipulation powers that it retained.10 However, reports that the CFTC has launched a manipulation probe into GDF Suez’s ERCOT conduct seem to suggest that the CFTC’s mind may already be set to proceed.