Yesterday, May 10, the CFTC issued proposed amendment to the 2013 RTO/ISO Final Order to exempt private rights of action. This marks a potentially major change for the financial energy products transacted under the RTO/ISOs tariff.

The CFTC’s proposed amendment to the 2013 RTO/ISO Final Order seeks to change that 2013 order, which exempted specified RTO/ISO transactions from certain provisions of the Commodity Exchange Act (CEA) and CFTC regulations. The proposed amendment to the RTO/ISO Final Order would explicitly state that the exemption does not apply to actions pursuant to CEA Section 22, which allows for a private right of action. If adopted, the amendment would permit private parties to bring claims under the CEA for fraud and manipulation involving financial energy products traded in the organized wholesale power markets, which is not permitted under the Federal Power Act. The comment period on the CFTC’s proposed amendment will be open for 30 days after publication in the Federal Register.

Chairman Timothy Massad issued a statement in support of the CFTC’s proposed amendment, which statement may hold open the possibility of not finalizing this proposal. According to Chairman Massad, private rights of action have been instrumental in helping to protect market participants and deter bad actors. Chairman Massad asserts that private actions can supplement the CFTC’s limited enforcement resources and serve the public interest by allowing harmed parties to seek damages in instances where the CFTC lacks the resources to do so.

Commissioner Christopher Giancarlo issued a strongly-worded dissent from the proposed amendment. According to Commissioner Giancarlo, if private claims are allowed under CEA Section 22, it will be impossible for market participants to be certain which FERC or state rules governing power markets can be adhered to without incurring liability. Commissioner Giancarlo stated: “Permitting private rights of action in the heavily regulated RTO-ISO markets is in great tension with the congressional command that the CFTC, the FERC and where applicable, state regulators, work to ensure effective, efficient regulation that provides the RTO-ISO market participants with legal certainty.”

The CFTC’s actions follows on-going debate about how to handle this issue in the Southwest Power Pool’s application for exemptive relief, which application is still pending. The CFTC’s proposed exemption order for Southwest Power Pool includes a statement in the preamble that appears to authorize private rights of action under Section 22 of the CEA.

And it follows the US Court of Appeals for the Fifth Circuit decision early this spring denying an appeal involving private parties’ claims in the Aspire Commodities case. The appellate court agreed with the district court that the RTO/ISO Final Order (applicable to ERCOT) cut off private parties’ right to sue over GDF Suez’s alleged energy market manipulation in Texas. In addition, the Southwest Power Pool’s request for exemption is still pending before the CFTC. For more information on the CFTC’s exemption orders and the Aspire Commodities case, please see our recent National Law Journal article.

We believe comments from groups will be critically important for the CFTC’s decision-making process. Concerns we see include,

  • Congress and the State of Texas created expert regulatory agencies to oversee the vital RTO-ISO markets. The CFTC’s proposal undermines legislative intent by giving judges who lack the regulators’ expertise the authority to issue conflicting decisions that will create regulatory uncertainty, which is not in the public interest.
  • As witnessed by Commissioner Giancarlo’s dissent and the comments of the RTO Council, the CFTC’s proposal will likely increase costs to consumers and decrease efficiency as RTO/ISO market participants have to spend resources on lawyers instead of on the creation of new jobs.
  • The CFTC’s proposal may result in court decisions that will upset a highly regulated market. Instead of the expert regulators making the rules of the road, numerous judges who lack the regulators’ expertise may be issuing conflicting decisions that will undermine regulatory certainty.