On May 10, 2016, the Commodity Futures Trading Commission (“CFTC”) proposed an amendment (“Proposed Amendment”) to an order it issued on March 28, 2013 (“RTO-ISO Order”), exempting certain electric energy transactions from a number of provisions of the Commodity Exchange Act (“CEA”) and CFTC regulations other than the general anti-fraud and anti-manipulation provisions, and other scienter-based prohibitions. If adopted, the Proposed Amendment would clarify that private rights of action under Section 22 of the CEA are not exempt under the RTO-ISO Order. Accordingly, plaintiffs would be permitted to pursue CEA-based allegations of fraud and market manipulation in connection with wholesale electricity market transactions that are primarily regulated by the Federal Energy Regulatory Commission (“FERC”) and the Electric Reliability Council of Texas (“ERCOT”) even though the Federal Power Act bars private actions.

The CFTC’s statement in the preamble to the proposed Southwest Power Pool exemption order that it did not intend to preclude private actions based upon alleged fraud or manipulation in the RTO-ISO markets introduced uncertainty about the scope of the exemption orders. The Proposed Amendment only adds to this uncertainty.

In a thoughtful and well-supported dissent, Commissioner Giancarlo noted that the Proposed Amendment is “based . . . on a legal fiction that it intended to reserve Section 22 all along, calls into question the legal certainty of all other section 4(c) orders in which the Commission failed to discuss or reserve the applicability of Section 22 for violations of the Act or regulations reserved for itself.” Even if the CFTC adopts the Proposed Amendment, this uncertainty may linger because the Proposed Amendment does not state that it would be effective retroactively.

The proposal includes a 30-day public comment period that will begin the day the proposal is published in the Federal Register, which we expect to occur sometime next week. As part of the comment period, the CFTC asked for comments on several specific questions, including whether the filed-rate doctrine will bar follow-on litigation under Section 22 of the CEA. Participants in RTO-ISO markets should consider commenting on the Proposed Amendment.

I. Exemptive Relief for ISO-RTO Markets

The CFTC has “exclusive jurisdiction” over futures, options, and swaps on “commodities”; however, CEA section 2(a)(1)(I) preserves the statutory authority of the FERC and state and local authorities over specified agreements, contracts, and transactions entered into pursuant to a FERC- or state-approved tariff or rate schedule. On March 28, 2013, the CFTC issued an order exempting specified transactions of six RTOs and ISOs from the CFTC’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, pursuant to section 4(c)(6) of the CEA. The order did not mention or expressly preserve private rights of action under CEA Section 22.

Southwest Power Pool (“SPP”), a FERC-regulated RTO that was not included in the RTO-ISO Order, filed an application for exemption requesting substantially similar relief granted to other RTOs and ISOs under the RTO-ISO Order. On May 18, 2015, the CFTC issued a proposed order that would exempt SPP from the CFTC general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, but not from the private right of action under Section 22 of the CEA (“SPP Proposed Order”). The CFTC noted that it did not intend to exempt private rights of action in the RTO-ISO Order and does not propose to do so for SPP.

Subsequently, in Aspire Commodities v. GDF Suez Energy North America, the U.S. District Court for the Southern District of Texas held that plaintiffs may not bring private lawsuits under Section 22 of the CEA pursuant to the RTO-ISO Order.1 Aspire filed a private right of action under Section 22 of the CEA, maintaining that GDF manipulated the Intercontinental Exchange (“ICE”) and ERCOT markets. GDF moved to dismiss Aspire’s claim on the ground that the RTO-ISO Order precluded Aspire’s claim because it exempts ERCOT transactions from all but certain express provisions of the CEA. Aspire opposed this motion and argued, among other things, that the RTO-ISO Order did not exempt RTOs and ISOs from the anti-fraud and anti-manipulation provisions of the CEA. In support of this argument, Aspire referenced the SPP Proposed Order. The SPP Proposed Order stated that the CFTC intended to preserve private causes of action for fraud and manipulation under Section 22 of the CEA when it issued the RTO-ISO Order despite the fact that this provision was not included in the enumerated list of exceptions. Ultimately, the District Court found Aspire’s arguments unpersuasive and granted GDF’s Motion to Dismiss. On February 26, 2016, the U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision on appeal.

II. The Proposed Amendment

Responding to the Fifth Circuit’s decision in Aspire, the CFTC proposed an amendment to the RTO-ISO Order to clarify that the exemption does not apply to private lawsuits under Section 22 of the CEA. In the Proposed Amendment, the CFTC observes that it is unclear whether it even has the authority to exempt private rights of action pursuant to section 4(c)(6) of the CEA, under which the RTO-ISO Order was issued. Section 4(c)(6) permits the CFTC to exempt agreements, contracts, and transactions from “requirements” of the CEA. However, private rights of action are not necessarily “requirements.”

CFTC Commissioner Giancarlo “emphatically dissent[ed]” from the proposed amendment, voicing concerns that he previously raised with the SPP Proposed Order at the Energy and Environmental Markets Advisory Committee meeting earlier this year.2 He stated that the Proposed Amendment “manages to simultaneously toss legal certainty to the wind and threaten the household budgets of low and middle-income ratepayers by permitting private lawsuits in heavily regulated markets that are at the heart of the U.S. economy.”

Chairman Massad touted the merits of private rights of action and noted the limited resources of the CFTC as a driver for the Proposed Amendment. He dismissed Commissioner Giancarlo’s concerns about legal uncertainty as unfounded.

In the interim while the CFTC considers the Proposed Amendment, market participants and potential plaintiffs will need to consider which interpretation of the current RTO-ISO Order is more compelling: the CFTC’s, which asserts that private rights of action are implicitly permitted even though they are not mentioned in the text of the order itself; or the Fifth Circuit’s, which holds that plain language of the RTO-ISO Order prevails and private actions are barred unless and until the order is formally amended. In either case, all participants in RTO-ISO markets should consider the new possibility of private litigation and how such uncertainty may impact their businesses.

The full text of the Proposed Amendment is available here.