United States: Court Finds CFTC RTO/ISO Exemptive Order Bars CEA § 22 Private Right Of Action, But More To Come From The CFTC

Last Updated: February 20 2015
Article by Gregory K. Lawrence, Christopher J. Polito and Lamiya Rahman

Most Read Contributor in United States, December 2018

Can private litigants bring claims under the Commodity Exchange Act alleging manipulation in ERCOT's energy markets?  On February 3, the U.S. District Court for the Southern District of Texas answered "no," granting defendants' motion to dismiss in Aspire Commodities v. GDF Suez Energy North America.

In Aspire v. GDF Suez, plaintiffs accused GDF Suez of violating the CEA's anti-manipulation provisions, and six other electricity generators of aiding and abetting GDF Suez.1  Specifically, plaintiffs alleged that GDF Suez intentionally withheld electricity generation during times of tight supply to drive up Real-Time prices in the ERCOT market.  While not challenging the ERCOT LMP prices themselves as being "unlawful, wrong or too high," plaintiffs claimed that, by manipulating the ERCOT LMP, GDF Suez consequently created "artificial and unpredictable" prices in derivatives markets, such as ICE.2

According to plaintiffs, GDF Suez "is willing to forego the profit it can make selling energy in the ERCOT market" at above cost because it makes more "by trading with inside, superior knowledge on commodities markets like ICE."3  Plaintiffs brought suit under CEA Section 22–which provides a private right of action to persons harmed by a CEA violation–on the grounds that GDF Suez's conduct within ERCOT caused them to suffer losses in the futures and virtual trading markets.4  In addition to damages, plaintiffs sought a declaratory judgment and a permanent injunction prohibiting GDF Suez from withholding generation.  

GDF Suez argued that its conduct is permitted under Texas law.  The Public Utility Commission of Texas prohibits generators with market power from withholding energy; but under the "small fish" rule, generators, like GDF Suez, that control less than five percent of installed generation capacity in ERCOT are deemed not to have market power.5  Moreover, in March 2013, GDF Suez entered into a Voluntary Mitigation Plan with the PUCT that provides it with an absolute defense against market power abuse claims under Texas law and PUCT regulations.6  Prior to this suit, plaintiffs unsuccessfully petitioned the PUCT to remove the small fish rule.7

In granting GDF Suez's motion to dismiss, the Court held that plaintiffs' claim was barred by the CFTC's RTO/ISO Exemptive Order,8 which exempts specified transactions in certain RTOs/ISOs from most CEA and CFTC requirements, assuming the RTOs/ISOs meet certain requirements.  The Exemptive Order applies to GDF Suez's electricity transactions in ERCOT's Real-Time market, and exempts them from all provisions of the CEA except for:

the Commission's general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9 and 13 and any implementing regulations promulgated under these sections including, but not limited to, Commission regulations 23.410(a) and (b), 32.4, and part 180.9

Because CEA Section 22–the private right of action section–was not among the sections preserved by the Exemptive Order (i.e., was not included in the "anti-fraud and anti-manipulation" provisions excepted from the Exemptive Order), the Court held that plaintiffs could not rely on the CEA's private right of action to challenge conduct that occurred entirely within ERCOT (because this right was included in the broad CEA provision exclusions), even if GDF had intended to influence the ICE market. 

Although Aspire v. GDF Suez directly addresses private claims under the CEA, the question lingers as to whether the CFTC can or will bring manipulation actions in the exempt RTOs/ISOs, like ERCOT.  In its Exemptive Order, the CFTC did not express an opinion as to whether it has jurisdiction over the ERCOT market with regard to the anti-fraud and anti-manipulation powers that it retained.10  However, reports that the CFTC has launched a manipulation probe into GDF Suez's ERCOT conduct seem to suggest that the CFTC's mind may already be set to proceed.

Footnotes

1 Plaintiffs alleged that GDF Suez violated the CEA's prohibitions on manipulation.

CEA section 6(c)(1) provides: "It shall be unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Commission shall promulgate...."  7 U.S.C. § 9(1).

CEA section 6(c)(3) provides: "In addition to the prohibition in paragraph (1), it shall be unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity."  7 U.S.C. § 9(3).

2 Aspire Commodities L.P.'s and Raiden Commodities, L.P.'s First Amended Complaint for Damages and Injunctive and Declaratory Relief, No. 4:14-cv-0111, n. 18 & ¶ 54 (July 14, 2014).

3 Id. ¶ 49.

4 CEA section 22(a)(1) provides: "Any person (other than a registered entity or registered futures association) who violates this chapter or who willfully aids, abets, counsels, induces, or procures the commission of a violation of this chapter shall be liable for actual damages resulting from one or more of the transactions referred to in subparagraphs (A) through (D) of this paragraph and caused by such violation to any other person... who purchased or sold a contract referred to in subparagraph (B) hereof or swap if the violation constitutes—the use or employment of, or an attempt to use or employ, in connection with a swap, or a contract of sale of a commodity, in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative device or contrivance in contravention of such rules and regulations as the Commission shall promulgate...; or a manipulation of the price of any such contract or swap or the price of the commodity underlying such contract or swap."  7 U.S.C. § 25(a)(1).

5 See PUCT Substantive Rule No. 25.504(c).

6 See Memorandum and Order Granting Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint, No. 4:14-cv-0111 at 4 (Feb. 3, 2015).

7 Id. at 4.

8 The Exemptive Order only covers the following RTOs/ISOs:  CAISO, ERCOT, ISO-NE, MISO, NY-ISO, and PJM.  It applies to contracts, agreements, and transactions for the purchase or sale of "Covered Transactions" entered into by appropriate persons pursuant to FERC or PUCT-approved tariffs or protocols.  "Covered Transactions" are limited to Financial Transmission Rights, Energy Transactions, Forward Capacity Transactions, and Reserve or Regulation Transactions.  Furthermore, "appropriate person" means: any entity listed in Sections 4(c)(3)(A)–(J) of the CEA; ECPs as defined in Section 1a(18) of the CEA and CFTC Rule 1.3(m); and any person in the business of generating, transmitting, or distributing electric energy or providing electric energy service necessary to support the reliability or operation of the transmission grid.  See Final Order in Response to a Petition from Certain Independent System Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas from Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in the Act, 78 Fed. Reg. 19880 (Apr. 2, 2013).

9 Id. at 19912.

10 Id. 19881 n. 15.

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