On May 10, 2016, the Commodity Futures Trading Commission (CFTC) issued a press release announcing proposed amendments (the Proposed Amendments) to an order issued in 2013 (the RTO-ISO Order) relating to certain electric energy-related products. If adopted, the amendments would allow private litigants to sue certain Regional Transmission Organizations (RTOs), Independent System Operators (ISOs) and market participants for certain violations of the Commodity Exchange Act (CEA) and CFTC regulations (the CFTC Rules) relating to such products,1 including for alleged fraud or market manipulation. The Proposed Amendments would effectively reverse the holding in a recent Fifth Circuit case, Aspire Commodities v. GDF Suez Energy North America,2 in which the court held that private rights of action for violation of the CEA and CFTC Rules were foreclosed pursuant to the RTO-ISO Order. The Proposed Amendments were approved by the Commissioners by a two over one vote with a dissent from Commissioner J. Christopher Giancarlo.
The RTO-ISO Order
On March 28, 2013, the CFTC issued the RTO-ISO Order,3 which exempted certain financial contracts, agreements and transactions for the purchase or sale of electric energy-related products (Exempted Contracts) from all provisions of the CEA and CFTC Rules, other than certain specified excluded provisions (discussed below). The exemption provided by the RTO-ISO Order extended to any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to the Exempted Contracts, including the RTO and ISO parties that requested the RTO-ISO Order (Exempted Persons).4 Exempted Contracts were defined narrowly in the RTO-ISO Order to include certain Financial Transmission Rights, Energy Transactions, Forward Capacity Transactions and Reserve or Regulation Transactions, in each case as defined in the RTO-ISO Order. The availability of the exemption was subject to certain enumerated conditions, including that the parties
1 Available here. 2 Aspire Commodities, L.P. v. GDF Suez Energy N. Am., Inc., No. H-14-1111, 2015 WL 500482 (S.D. Tex. Feb. 3, 2015), aff'd, No. 15-20125, 2016 WL 758689 (5th Cir. Feb. 25, 2016). 3 78 Fed. Reg. 19880 (Apr. 2, 2013); available here. 4 The "Requesting Parties" were California Independent Service Operator Corporation, Electricity Reliability Council of Texas, ISO New England Inc., Midwest Independent Transmission System Operator, Inc., New York Independent System Operator, Inc. and PJM Interconnection, L.L.C. Subsequent to the CFTC's issuance of the RTO-ISO Order, Southwest Power Pool, Inc. (SPP) requested an exemptive order similar to the RTO-ISO Order for the benefit of Exempted Contracts and Exempted Persons utilizing SPP. In May 2015, the CFTC issued a draft of its proposed Order for SPP. In that proposed Order the CFTC deviated from the RTO-ISO Order by expanding the Excluded Provisions to include Section 22 of the CEA. The CFTC's inclusion of Section 22 in the Excluded Provisions of the proposed SPP Order has been the subject of significant negative comments from the industry and also was the topic of a panel at the CFTC's February 25, 2016 Energy and Environmental Markets Advisory Committee meeting.
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to the Exempted Contract satisfy certain sophistication requirements, and that the Exempted Contract be offered and sold pursuant to a rate tariff approved by the Federal Energy Regulatory Commission (FERC) or, in the case of the Electric Reliability Council of Texas, the Public Utility Commission of Texas.
The RTO-ISO Order provided that the broad exemption for Exempted Contracts in the RTO-ISO Order would not extend to the general anti-fraud and anti-manipulation authority or to scienter-based prohibitions under the CEA and CFTC Rules (the Excluded Provisions), which would continue to apply to Exempted Contracts.
Importantly, the RTO-ISO Order did not list Section 22 of the CEA5 as an Excluded Provision, and therefore Section 22 did not apply to Exempted Contracts. Section 22 provides a private right of action for damages against persons who violate the CEA or persons who willfully aid, abet, counsel, induce or procure the commission of a violation of the CEA. The Proposed Amendments would add Section 22 to the Excluded Provisions of the RTO-ISO Order.
Aspire Commodities v. GDF Suez
In the Aspire case, a three-judge panel of the Fifth Circuit affirmed a decision from the Southern District of Texas ruling that the CFTC, in issuing the RTO-ISO Order, had exempted market participants, including RTOs and ISOs, from private lawsuits under Section 22 of the CEA for violation of the anti-manipulation provisions of the CEA, because as stated above, Section 22 was not among the Excluded Provisions enumerated in the RTO-ISO Order. The result of the Aspire decision, at least in the Fifth Circuit, was that there was no private right of action for manipulation with respect to the Exempted Contracts. Private litigants also do not have a right under the Federal Power Act to bring claims alleging manipulation with respect to the Exempted Contracts, so the Aspire decision would effectively leave only CFTC or FERC administrative remedies available with respect to such manipulation.
The Proposed Amendments and Request for Comments
The Proposed Amendments would reverse the Aspire decision by clarifying that the CFTC did not intend to exempt the Exempted Contracts from Section 22 of the CEA when it issued the RTO-ISO Order. The Proposed Amendments would allow private litigants, including those in the Fifth Circuit, to bring claims for damages for alleged market manipulation or fraud with respect to the Exempted Contracts. In defending the Proposed Amendments, Chairman Timothy Massad argued that "[p]rivate rights of action have been instrumental in helping to protect market participants and bad actors."6 He went on to argue that the ability of private litigants to bring lawsuits under Section 22 "augment the limited enforcement resources of the CFTC and serve the public interest by allowing harmed parties to seek damages in instances where the Commission lacks the resources to do so on their behalf."7
In his dissent from the Proposed Amendments, Commissioner Giancarlo argued that the plain language of the RTO-ISO Order exempted the Exempted Contracts from Section 22 of the CEA and pointed out that "U.S. power market participants have been operating in reliance on the RTO-ISO Order" for over three years, and that
5 7 U.S.C. 25. 6 Statement of Chairman Timothy Massad in Support of the Proposed Amendment to the RTO-ISO Order (May 10, 2016); available here. 7 Id.
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"Commission orders should not be amended, expanded or withdrawn absent a change in facts or circumstances or the law."8 Commissioner Giancarlo also stated that the extensive regulation and monitoring of RTOs and ISOs "obviates the policing role of private suits in these markets" and that conflicting judicial decisions will create legal uncertainty.
The CFTC's proposal to amend the RTO-ISO order was published in the Federal Register as of May 16, 2016. The Proposed Amendments will be open for public comment until June 15, 2016.
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8 Statement of Dissent by CFTC Commissioner J. Christopher Giancarlo on the Proposed Amendment to the RTO-ISO Order (May 10, 2016); available here.