On May 10, 2016, the Commodity Futures Trading Commission ("CFTC") proposed to expressly preserve the right of private litigants to sue utilities, power producers, marketers and other market participants for fraud and manipulation resulting from certain transactions occurring in the electricity markets administered by RTOs and ISOs. If adopted, the CFTC's proposal will escalate litigation risk, increase compliance costs, and create regulatory uncertainty in the energy industry. A copy of the CFTC's proposal is available here. The proposal will be available for comment for 30 days after its publication in the Federal Register.
In 2013, the CFTC issued an exemption from certain provisions of the Commodity Exchange Act to six organized energy markets1 pursuant to authority granted by the Dodd-Frank Act. The exemption order (“RTO-ISO Order”) applied to certain defined financial transmission rights, energy, forward capacity, and reserve or regulation transactions “offered or sold” in the RTOs’ and ISOs’ markets pursuant to tariffs, rates, or protocols approved by either the Federal Energy Regulatory Commission (“FERC”) or, for certain transactions in ERCOT, the Public Utility Commission of Texas (“PUCT”). The RTO-ISO Order did not expressly address the private right of action provided pursuant to section 22 of the Commodity Exchange Act to sue for violations of the anti-fraud, anti-manipulation, and scienter-based prohibitions provisions of the Act.
On February 3, 2015, the U.S. District Court for the Southern District of Texas dismissed a private market-manipulation lawsuit, in Aspire Commodities, L.P. v. GDF Suez Energy North America, Inc., on the basis that the RTO-ISO Order rendered the private right of action unavailable to the plaintiffs. The U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal in February of this year.
Before the Fifth Circuit issued its ruling, the CFTC had released a proposed order in response to the Southwest Power Pool’s (“SPP”) request for an exemption substantially identical to the one provided in the RTO-ISO Order. The CFTC’s proposed SPP Order, unlike the RTO-ISO Order, expressly stated that the order’s exemptions did not apply to the section 22 private right of action. In addition, the CFTC used the proposed SPP Order to explain its view that the RTO-ISO Order also did not exempt market participants in other organized markets from the section 22 private right of action.
In response to the Aspire ruling, the CFTC has proposed an amendment to the RTO-ISO Order to expressly exclude the section 22 private right of action from the exemptions granted in that order. As a consequence, private litigants would be able to sue for fraud or manipulation arising from certain transactions occurring in the markets administered by ISOs and RTOs. The CFTC asserts that the amendment will ensure clarity while preserving the “instrumental” role that a private right of action plays in “protecting the American public, deterring bad actors, and maintaining the credibility of the markets subject to [CFTC’s] jurisdiction.”
The CFTC’s proposal to expressly preserve a private right of action to sue for fraud or manipulation will have two primary consequences for entities that participate in ISO and RTO markets. First, the private right of action will significantly increase the litigation risk for entities that engage in transactions of electric energy-related products in the markets regulated by FERC and PUCT. While the CFTC proposal downplays the litigation risk as “marginally increased,” it acknowledges that the private right of action will increase legal and compliance costs, particularly to the extent litigation is pursued based on private, rather than public interest, concerns.
Second, a private right of action to pursue claims of manipulation and fraud will inject significant uncertainty into markets that are comprehensively regulated by FERC, the PUCT, RTOs and ISOs, and their market monitors. PJM, ERCOT, and CAISO previously expressed concern that judicial determinations made in response to private litigation under the Commodity Exchange Act could potentially divest FERC and the PUCT of jurisdiction over certain transactions within RTO or ISO markets. Further uncertainty may result as private litigants challenge actions taken pursuant to a rate, tariff, or rule approved by FERC or the PUCT. Historically, under the “filed rate doctrine,” the rates approved by FERC or the PUCT are deemed reasonable and generally immune from collateral attack by private litigants in judicial proceedings.