CFTC Proposes Reversing Course, Granting Private Right of Action in Energy Market Manipulation
Last week the Commodity Futures Trading Commission (CFTC) issued a notice of proposed order and request for comment proposing to allow a private right of action to enforce violations of the anti-manipulation, anti-fraud or scienter based provisions (Anti-fraud provisions) of the Commodity Exchange Act (CEA) in organized electricity markets. The proposal is a controversial reversal of policy that critics say could open electricity market participants to increased costs and liability.
After the Dodd-Frank Act expanded the CFTC’s jurisdiction under the CEA to include regulation of swaps, six regional transmission organizations (RTO) and independent system operators (ISO) petitioned the CFTC seeking exemptions from various provisions of the CEA for certain energy products traded in the electricity markets that the RTOs/ISOs administer. These products include physical energy products traded with the ISOs/RTOs as well as financial transmission rights and other products that settle financially. Other than the Electricity Reliability Council of Texas (ERCOT), which is regulated by the Public Utility Council of Texas (PUCT), the Federal Energy Regulatory Commission (FERC) has historically regulated the RTOs/ISOs and the energy products at issue under the Federal Power Act. On March 28, 2013, the CFTC issued an order (RTO/ISO Order) exempting these types of transactions of the six RTOs/ISOs from all but certain enumerated provisions of the CEA. While the RTO/ISO Order did not exempt transactions in the RTO/ISO markets from the Anti-fraud provisions, the Order did not expressly discuss whether a private right of action under the CEA could apply to violations of the Anti-fraud provisions for trading in the RTO/ISO products. However, in a subsequent proposed exemption order, exempting a seventh RTO, Southwest Power Pool (SPP), from various CEA provisions, the CFTC declined to exempt SPP from private rights of action. Confusingly, the CFTC stated its view that the original RTO/ISO Order did not prevent private claims for fraud or manipulation under the CEA.
The CFTC’s proposed reversal of course stems from the Fifth Circuit’s recent Aspire decision. In that case, the Fifth Circuit affirmed the US District Court for the Southern District of Texas’s dismissal of a private lawsuit alleging an ERCOT market participant intentionally withheld generation during times of tight supply to benefit its positions in the secondary futures markets. The court dismissed the allegations of manipulation because it found that under the RTO/ISO Order, the transactions at issue were exempt from CFTC regulation under the CEA, which therefore included the Anti-fraud provisions of the CEA. A private right of action was therefore not available to the plaintiffs.
In response to the court’s decision, the CFTC’s proposal intends to amend the exemption in the RTO/ISO Order to preserve private causes of action for violations of the anti-fraud provisions. The CFTC takes the view that private lawsuits will benefit the public interest by checking manipulative activities that the CFTC may not have knowledge of or resources to address. Critics of the proposal, including CFTC Commissioner Giancarlo, are concerned that it will increase risk and ultimately costs for electricity market participants and consumers. In his written dissent, Commissioner Giancarlo noted that these markets are already subject to “extensive and effective” regulation of FERC or the PUCT and warned of “too many cooks in the proverbial oversight kitchen.” Due to the number of market participants affected by the CFTC’s proposal, this is certain to be a controversial proceeding. The CFTC is currently accepting comments through June 15, 2016.