United States: CFTC Proposes Amendment To 2013 Order Exempting Certain RTO/ISO Transactions From General CFTC Regulation

On May 10, 2016, the U.S. Commodity Futures Trading Commission ("CFTC") proposed to amend ("Proposed Amendment") its own 2013 order that generally exempted certain electricity transactions from the CFTC's regulation ("RTO/ISO Exemption Order"). Specifically, the Proposed Amendment would clarify that the exemptions contained in the RTO/ISO Exemption Order would not include the private right of action under Commodity Exchange Act ("CEA") section 22.

In March 2013, the CFTC issued its RTO/ISO Exemption Order in response to a consolidated petition from several regional transmission organizations ("RTOs") and independent system operators ("ISOs"). In doing so, the CFTC exempted specified transactions in these particular RTOs and ISOs from certain CEA provisions and CFTC regulations. Notably, while the exemptions apply to a wide variety of transactions that are offered or sold in a market administered by the petitioning RTOs or ISOs pursuant to a tariff, rate schedule, or protocol that has been approved or permitted to take effect by FERC or the Public Utility Commission of Texas ("PUCT"), the CFTC did not waive its general anti-fraud and anti-manipulation authority and scienter-based prohibitions as part of its RTO/ISO Exemption Order.

More recently, in February 2015, the United States District Court for the Southern District of Texas ("Southern District of Texas") dismissed a private lawsuit, which alleged that certain ERCOT generators manipulated the market price of electricity by intentionally withholding generation during times of tight supply, on the ground that the RTO/ISO Exemption Order exempted the transactions from the CEA section 22 private right of action. In February 2016, the United States Court of Appeals for the Fifth Circuit affirmed the Southern District of Texas's ruling.

In its Proposed Amendment, the CFTC maintained that it did not intend to provide an exemption to the section 22 private right of action in the RTO/ISO Exemption Order. In order to address the issue, the CFTC stated that the Proposed Amendment would make this clarification. As a result, the CFTC explained that the entities previously covered in the RTO/ISO Exemption Order would be subject to the same substantive anti-manipulation and anti-fraud rules, regardless of whether the plaintiff bringing an action alleging a violation of one of those provisions is the CFTC or a private party. Furthermore, the CFTC stated that the private right of action is instrumental in protecting the public, deterring bad actors, and maintaining the credibility of the commodities markets. Finally, the CFTC explained that the CEA section 22 private right of action was established by Congress as an integral part of the CEA's enforcement and remedial scheme, whereas Congress decided against providing a similar right in the Federal Power Act's anti-manipulation provisions.

CFTC Chairman Timothy Massad issued a statement supporting the Proposed Amendment, stating that "[p]rivate rights of action have been instrumental in helping to protect market participants and deter bad actors" and that private rights of action can "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." Conversely, CFTC Commissioner J. Christopher Giancarlo stated that the Proposed Amendment is unnecessary because the transacting entities covered by the RTO/ISO Exemption Order are subject to "extensive and effective" regulation by FERC or the PUCT and are already overseen by an independent market monitor. Commissioner Giancarlo also argued that adding a private right of action "could lead to conflicting outcomes depriving market participants of the regulatory certainty and coherence Congress intended" when it directed the CFTC and FERC to oversee their respective markets.

As part of the Proposed Amendment, the CFTC also sought comments regarding the proposal, including whether a private right of action would result in frivolous litigation, how FERC or the PUCT might be divested of jurisdiction over the types of transactions covered by the RTO/ISO Exemption Order, and how the private right of action could have an adverse effect on RTO/ISO markets or market participants.

Comments on the Proposed Amendment are due June 15, 2016. A copy of the Proposed Amendment is available here. A copy of Chairman Massad's statement is available here. A copy of Commissioner Giancarlo's statement is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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