Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad notified Congress that the CFTC expects to exempt Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) from private rights of action. In his September 13, 2016, letter to Senator John Boozman (R-AR), chairman of the Senate Appropriation Committee’s Subcommittee of Financial Services and General Government, Chairman Massad wrote that he will “recommend to the CFTC that the final order exempt RTOs and ISOs from all private rights of action under Section 22 of the Commodity Exchange Act (CEA)”. This letter reiterates the same point he made in a letter to Senators Lisa Murkowski (R-AK), Pat Roberts (R-KS), Maria Cantwell (D-WA) and Debbie Stabenow (D-MI) dated September 12.
… several state consumer advocate offices charged with protecting consumers submitted comments noting that private rights of action could inadvertently introduce regulatory uncertainty and increased costs for consumers. – CFTC Chairman Massad
Chairman Massad’s recommendation that RTOs and ISOs be exempt from private rights of action for market manipulation represents a significant change from the CFTC’s prior position on the issue. Most importantly, the CFTC’s exemption from private litigation for market manipulation claims is consistent with Federal Energy Regulatory Commission (FERC) final rules and should free utilities and other regulated market participants from costly and unnecessary litigation.
Section 22(a)(1) of the CEA provides a private right of action by third parties against persons that violate the CEA’s anti-manipulation and anti-fraud provisions in connection with swaps or contracts for sale of commodities. Sections 722 of Dodd-Frank amended the CEA to, among other things, provide the CFTC with jurisdiction over swaps or contracts for sale of electricity. Section 722 of Dodd-Frank also granted the CFTC specific powers to exempt from regulations under these statutory provisions any agreement, contract or transaction entered into pursuant to the tariff or rate schedule of an RTO or ISO and subject to FERC regulatory authority.
Exercising its authority under Section 722 of Dodd-Frank, on April 2, 2013, the CFTC issued a final order (Final Order) to Midwest Independent Transmission System Operator, Inc., ISO New England, Inc., PJM Interconnection, L.L.C., California Independent System Operator Corporation, New York Independent System Operator, Inc. and the Electric Reliability Council of Texas, that excluded (1) financial transmission rights, (2) energy transactions, (3) forward capacity transactions and (4) reserve or regulation transactions from most CFTC regulation provided that the transactions are entered into with appropriate persons and the transactions are entered into pursuant to the tariff or rate schedule of an RTO or ISO and subject to FERC regulatory authority. The CFTC’s Final Order specifically retained the CFTC’s anti-fraud and anti-manipulation authority over swaps or contracts for sale of electricity. The CFTC’s Final Order made no mention of Section 22 of the CEA’s private right of action.
On May 18, 2015, the CFTC issued a proposed order (Proposed Order) to Southwest Power Pool, Inc. that would exempt from CFTC regulation substantially similar transactions as specified in the Final Order. The Proposed Order would also retain the CFTC’s anti-fraud and anti-manipulation authority. However, in the Proposed Order, the CFTC took the position that:
“By enacting CEA Section 22, Congress provided private rights of action as a means for addressing violations of the CEA alternative to CFTC enforcement action. It would be highly unusual for the CFTC to reserve to itself the power to pursue claims for fraud and manipulation — a power that includes the option of seeking restitution for persons who have sustained losses from such violations or a disgorgement of gains received in connection with such violations — while at the same time denying private rights of action and damages remedies for the same violations. Moreover, if the CFTC intended to take such a differentiated approach (i.e., to limit the rights of private persons to bring such claims while reserving to itself the right to bring the same claims), the Final Order would have included a discussion or analysis of the reasons therefore. Thus, the CFTC did not intend to create such a limitation, and believes that the Final Order does not prevent private claims for fraud or manipulation under the CEA. For the avoidance of doubt, the CFTC notes that this view equally applies to the Proposed Order. Therefore, the Proposed Order also would not preclude such private claims.”
The CFTC’s initial determination in the Proposed Order to not preclude private rights of action under Section 22 of the CEA was unfortunate. The CFTC’s position in the Final Order created market uncertainty because private rights of action do not exist under Section 222 of the Federal Power Act (FERC’s anti-manipulation regulatory authority). Prior to Dodd-Frank’s expansion of the CFTC’s authority to regulate swaps and contracts for sale of electricity, it was settled that such private rights of action in connection with electric energy transactions do not exist. In addition to creating market uncertainty, the CFTC’s position in the Proposed Order was inconsistent with the Memorandum of Understanding on Overlapping Jurisdiction entered into with FERC in January 2, 2014.
In commenting on the Proposed Order, energy market participants and regulatory agencies advanced a number of strong arguments supporting exemption from private rights of action under Section 22 of the CEA for electricity transactions subject to FERC regulatory authority. Chairman Massad noted the following in his letter to Senator Boozman:
“Private rights of action do have an important place in our regulatory structure. As one commentator noted, they have ‘played an instrumental role in helping to protect market participants and deter bad actors.’ That being said, several state consumer advocate offices charged with protecting consumers submitted comments noting that private rights of action could inadvertently introduce regulatory uncertainty and increased costs for consumers.”
Chairman Massad’s letter indicating the CFTC’s change of heart is good news for energy market participants. The CFTC and FERC will have more consistent regulation and provide certainty to the energy market. Utilities and other FERC regulated entities will have less reason to fear costly and duplicative or otherwise unnecessary litigation. Moreover, the approach will allow for a more uniform approach to the application of the relatively new market manipulation rules of each agency to these markets. The CFTC is expected to make its final determination exempting RTOs and ISOs from private rights of action before the end of October.