The Commodity Futures Trading Commission has issued a notice of proposed amendment to a 2013 order (the RTO-ISO Order) exempting certain electric energy transactions from various provisions of the Commodity Exchange Act (CEA) and CFTC regulations.
The proposed amendment, if adopted, would permit private plaintiffs to sue Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) − entities regulated by the Federal Energy Regulatory Commission (FERC) − for alleged violations of rules mandated by the Dodd-Frank Act.
The RTO-ISO Order exempted the purchase or sale of specific electric energy transactions from all CEA provisions except for the anti-fraud, anti-manipulation and other scienter-based provisions. Specifically, the electric energy transactions exempted included financial transmission rights, energy transactions, forward capacity transactions, and reserve or regulation transactions, as defined in the RTO-ISO Order (collectively, Covered Transactions). To qualify, Covered Transactions had to be offered or sold pursuant to a tariff, rate schedule, or protocol approved by either FERC or the Public Utility Commission of Texas (PUCT). Notably, the RTO-ISO Order’s enumerated list of provisions excepted from the blanket exemption did not include Section 22 of the CEA, which provides a private right of action for CEA violations concerning Covered Transactions.
The proposed amendment, issued May 10, would also reverse the 2015 Texas federal court ruling in Aspire v. GDF Suez that dismissed a private lawsuit alleging that market participants intentionally withheld generation during peak periods to profit off of positions in the futures market. The US District Court for the Southern District of Texas reasoned that since the enumerated exceptions to the RTO-ISO Order’s exemption did not include Section 22, a private right of action under the CEA was unavailable to plaintiffs seeking to bring a claim regarding Covered Transactions. The US Court of Appeals for the Fifth Circuit affirmed the dismissal on appeal. In effect, the Aspire ruling meant that FERC and the CFTC − rather than private parties − were responsible for enforcing allegations of manipulation in these energy markets.
The proposed amendment would amend the RTO-ISO Order to clarify that the exemption was not intended to apply to actions pursuant to Section 22 of the CEA. Thus, private plaintiffs would be able to bring a cause of action for alleged violations of the anti-fraud and anti-manipulation provisions and other scienter-based prohibitions. This sea change could shift the regulatory landscape of the RTO and ISO markets and result in a flood of litigation against electricity companies and other participants in these markets.
Supported by Chairman Timothy Massad and Commissioner Sharon Bowen, the proposed amendment states that “private claims serve the public interest by empowering injured parties to seek compensation for damages where the Commission lacks the resources to do so on their behalf.” In a separate statement, Chairman Massad said that “private rights of action have been instrumental in helping to protect market participants and deter bad actors.”
In dissenting from the proposed amendment, Commissioner Christopher Giancarlo argued that market participants have been operating in reliance on the RTO-ISO Order, which he countered unambiguously exempted Covered Transactions from Section 22 of the CEA. Additionally, Commissioner Giancarlo stressed that the “extensive regulation and monitoring of RTOs and ISOs significantly obviates the policing role of private suits in these markets.”
Comments on the proposed amendment may be submitted to the CFTC through June 15, 2016.