The proposal could create uncertainty for market participants and raise jurisdictional questions about which regulator should police power markets.

On May 10, the US Commodity Futures Trading Commission (CFTC) proposed an amendment to a prior order that exempted certain transactions that occur in the markets of Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) from select provisions of the Commodity Exchange Act (CEA) and the CFTC’s regulations (the Proposed Amendment). With the issuance of the Proposed Amendment, the CFTC aims to ensure that Section 22 of the CEA—which enables private rights of action for entities or persons harmed by a CEA violation—will be an available remedy for ISO and RTO market participants that allege fraud and manipulation under the CEA.

Background

As part of a number of reforms targeted at regulated financial markets, the Dodd Frank Act added Section 4(c)(6) to the CEA, vesting the CFTC with the authority to exempt certain financial transactions from CEA requirements.[1] The exemption authority applies specifically to transactions entered into pursuant to a tariff or rate schedule regulated by FERC or a state regulatory authority. On March 28, 2013, the CFTC exercised that authority and issued an order exempting certain transactions offered or sold in RTO- and ISO-administered markets from select provisions of the CEA and the CFTC’s regulations (RTO-ISO Order).[2] The CFTC did explain, however, that there were exceptions to those exemptions. Specifically, transactions that occur in the RTO and ISO markets would continue to be subject to the CFTC’s general antifraud and antimanipulation authority and scienter-based prohibitions.

At the same time, the CFTC was silent on whether market participants could bring private rights of action under CEA Section 22 for alleged fraud or manipulative activity related to RTO- and ISO-market transactions. The apparent ambiguity resulted in a federal district court in Texas dismissing a private lawsuit in Aspire Commodities, L.P. v. GDF Suez Energy North America, Inc., in which the plaintiff alleged price manipulation in ERCOT’s markets.[3] Because the RTO-ISO Order did not explicitly permit private rights of action under CEA Section 22, the district court found that the plaintiff’s claims were precluded by the RTO-ISO Order. In 2016, the district court’s ruling was upheld by the US Court of Appeals for the Fifth Circuit.[4]

Proposal

The prohibition of a private right of action under CEA Section 22 for RTO- and ISO-market transactions was an unintended consequence of the RTO-ISO Order. The CFTC’s Proposed Amendment would modify the RTO-ISO Order to clarify that entities covered under it are not exempt from private rights of action with respect to the CFTC’s general antifraud and antimanipulation authority and scienter-based prohibitions.

The CFTC posits that the Proposed Amendment is necessary to restore a congressionally approved remedy for injured parties. In the Proposed Amendment, the CFTC stated that the right to initiate a private action under CEA Section 22 was established by Congress as an “integral part of the CEA’s enforcement and remedial scheme,” in contrast to the Federal Power Act (FPA), which expressly prohibits private rights of action for fraudulent or manipulative actions related to FERC-jurisdictional energy transactions. [5] The Proposed Amendment does not, however, note that the FPA permits complaints at FERC in which a complainant can seek refunds and statutory interest or that FERC typically requires the payment of refunds and interest in manipulation and fraud cases.

Implications

If approved, the Proposed Amendment may create further questions about the jurisdiction of organized power markets and trigger myriad lawsuits in federal court. Currently, organized power markets are already heavily regulated by FERC—or the PUCT in the case of ERCOT—and are subject to the oversight of independent market monitors. The CFTC argues that its proposal will not cause regulatory uncertainty or duplicative regulation because the entities covered by the RTO-ISO Order are subject to the same substantive CEA provisions, regardless of whether the plaintiff bringing an action that alleges a violation of those provisions is a private party or the CFTC itself. However, as noted by CFTC Commissioner J. Christopher Giancarlo in his dissenting opinion, in initiating any enforcement action related to activity in ISO or RTO markets, the CFTC would follow the procedures stipulated in a 2014 Memorandum of Understanding with FERC under which staff of the CFTC and FERC have agreed to consult each other on matters of mutual interest and overlapping jurisdiction.[6] In other words, private claims that allege a CEA violation would not be vetted with the same degree of scrutiny or consideration for any regulatory implications as would an enforcement action initiated by the CFTC itself.

Moreover, it is unclear at this time what types of transactions could be implicated under the CFTC’s Proposed Amendment. For example, under the CEA, the CFTC has exclusive jurisdiction over “swaps,” which are broadly defined. If certain transactions that occur within RTO and ISO markets are later determined to be swaps by a federal court in a private lawsuit, it is unclear how FERC and the CFTC would manage such a jurisdictional overlap, or whether FERC or the PUCT could possibly be divested of jurisdiction over those transactions. In that regard, the effect of opening the door to private litigation may, as characterized in Commissioner Giancarlo’s dissent, “depriv[e] market participants of the regulatory certainty and coherence Congress intended.”

In addition, a private action commenced under Section 22 that yields a damages payment could effectively duplicate the private remedy that is afforded by the FPA’s refunds-and-interest formulation, leading to situations in which an enforcement target is exposed to extraordinarily outsized remedial and punitive payments. Some targets might be unwilling to pursue the settlement of FERC RTO/ISO manipulation cases if the presumptive result of settling a FERC case is duplicative exposure to similar remedial payments under Section 22.

The CFTC has requested comments on the Proposed Amendment by June 15, 2016.