Background
Title VII of the Dodd-Frank Act amended the CEA to expand the CFTC’s exclusive jurisdiction beyond futures contracts to include swaps. The Dodd-Frank Act included a savings clause that, among other things, preserves the jurisdiction of FERC over contracts and transactions entered into under a FERC-approved (or state regulatory authority-approved) tariff or rate schedule that are executed, traded or cleared on an ISO or RTO trading facility. The CEA also preserved the CFTC’s jurisdiction over such transactions, but allowed the CFTC to exempt such transactions from the requirements of the CEA if the exemption is in the public interest and certain conditions are met.
On March 28, 2013, the CFTC issued the RTO-ISO Order exempting specific transactions of particular ISOs and RTOs1 from certain provisions of the CEA and the CFTC’s regulations. The scope of the RTO-ISO Order included transactions that fall within the definitions of “Financial Transmission Rights,” “Energy Transactions,” “Forward Capacity Transactions,” or “Reserve or Regulation Transactions”—transactions that could potentially be considered swaps—and that are offered or sold in an ISO or RTO pursuant to a tariff approved by FERC or the PUCT.2 To be eligible for the exemption in the RTO-ISO Order, the transactions must comply with certain additional terms and conditions. The RTO-ISO Order exempted these transactions from regulation under the CEA, other than the antifraud, antimanipulation and scienter-based prohibitions. The RTO-ISO Order did not discuss the application of Section 22 of the CEA—which provides for a private right of action for CEA violations—with respect to the substantive prohibitions excepted from the exemption.
In February 2015, a federal district court in Texas dismissed a private lawsuit on the ground that the private right of action provided under Section 22 of the CEA was not available for claims involving transactions subject to the RTO-ISO Order. In Aspire Commodities, L.P. v. GDF Suez Energy North America, Inc.,3 the court held that the RTO-ISO Order foreclosed private claims for market manipulation in connection with the wholesale market operated by ERCOT—one of the ISOs subject to the RTO-ISO Order—on the basis that the RTO-ISO Order did not specifically except the Section 22 private right of action from the scope of the exemption. In February 2016, a federal appeals court affirmed the district court’s ruling.4
In May 2015, the CFTC issued a proposed order with respect to an exemption requested by the Southwest Power Pool (SPP), a FERC-regulated ISO that was not subject to the March 2013 RTO-ISO Order. That proposed order, which has not yet been finalized, would not exempt SPP transactions from the private right of action under Section 22 of the CEA for violations of the antifraud, antimanipulation and scienter-based prohibitions. The CFTC explained in the SPP proposed order that it had not intended in the RTO-ISO Order to limit private actions for fraud and market manipulation.
Proposed Amendment
In light of the Aspire court ruling, the CFTC is proposing to amend the text of the RTO-ISO Order to clarify that entities covered by the exemption are not exempt from the private right of action in Section 22 of the CEA with respect to the antifraud, antimanipulation and scienter-based prohibitions excepted from the exemption. In justifying the proposal, the CFTC explained that the proposal would not cause regulatory uncertainty or inconsistent or duplicative regulation, since RTO and ISO transactions have already been subject to the same substantive CEA provisions in connection with the CFTC’s own enforcement authority. The CFTC also explained that the private right of action in the CEA is instrumental in protecting the American public, deterring bad actors and maintaining the credibility of the markets subject to the CFTC’s jurisdiction. The CFTC further noted that the private right of action is an integral part of the CEA’s enforcement and remedial scheme and that preservation of Section 22 liability with respect to the antifraud, antimanipulation and scienter-based prohibitions is consistent with the CFTC’s prior use of its exemption authority under the Dodd-Frank Act.
Profound Implications for RTO and ISO Market Participants
If adopted, the proposed amendment to the RTO-ISO Order would have profound implications for RTO and ISO markets and market participants. The proposal would effectively open up these predominantly FERC-regulated markets to private actions in federal district courts for fraud or market manipulation so long as the claim implicated a transaction meeting the CFTC’s broad definition of “swap.” While FERC has aggressively enforced its own antifraud rule in connection with RTO and ISO transactions, the FERC-administered FPA does not provide for a private right of action, and the focus of FERC’s enforcement actions is generally punitive rather than compensatory (i.e., assessing penalties against alleged wrongdoers rather than awarding damages to other market participants). The private right of action under the CEA, therefore, could be attractive to potential plaintiffs rather than (or in addition to) requesting a FERC investigation or filing a regulatory complaint at FERC. The proposed amendment would introduce material litigation risk for all RTO and ISO market participants.
In addition, the proposed amendment to the RTO-ISO Order would potentially allow private parties to bring claims based on conduct in FERC-regulated markets that is not prohibited by FERC’s own antifraud regulations, and that may be authorized by FERC-approved tariffs and market rules. Notably, while FERC and the CFTC’s antifraud rules contain similar prohibitions, the CFTC separately prohibits “price manipulation,” which, unlike the antifraud rules, does not require a showing of fraud.5 While the CFTC has not had much success litigating “price manipulation” claims, such cases have often involved alleged abuses of market power. In the ISO and RTO context, however, market power is extensively regulated through FERC-mandated offer price caps, offer mitigation rules and related measures. The proposed amendment to the RTO-ISO Order could potentially allow private plaintiffs to bring market power-related manipulation claims in federal court when the conduct at issue was subject to—and complied with—extensive market power regulation by FERC. Another significant difference in substantive prohibitions between the CFTC and FERC is that the private right of action under Section 22 of the CEA expressly provides for liability for those who aid and abet violations of the CEA, whereas FERC’s antimanipulation authority does not expressly provide for aiding and abetting liability. The CFTC proposal would potentially allow private plaintiffs to use the Section 22 private right of action to reach aiding and abetting conduct in ISO and RTO markets that is outside the reach of FERC’s enforcement jurisdiction.
While the CFTC notes that ISO and RTO market participants have already been subject to these CEA prohibitions due to the CFTC’s ability to bring its own enforcement actions, the CFTC has been judicious in using its enforcement authority in connection with FERC-regulated electricity markets. To date, the CFTC has not brought an enforcement action involving conduct in FERC-regulated ISOs and RTOs. Therefore, while there has always been the potential for inconsistent and conflicting regulation and enforcement of ISO and RTO conduct under the FPA and the CEA, the CFTC’s proposal to allow private claims would make it more likely that such inconsistencies and conflicts will materialize.
Finally, another potential implication of the CFTC proposal is that ISO and RTO market participants could be subject to discovery even when not directly implicated in the private litigation. It is likely that, in most private actions involving ISO and RTO markets, the plaintiff(s) and defendant(s) will seek discovery of third-party market participants in order to obtain information to bolster their claims, defenses and damages calculations. Responding to third-party document and deposition subpoenas is costly and burdensome. In addition, in the context of competitive power markets, such discovery could implicate significant concerns regarding confidentiality of commercially sensitive information, requiring additional time and expense to address such matters. This is less of a concern in FERC and CFTC investigations, where information obtained in investigations is generally treated nonpublicly as a matter of course.
Comments Requested
The CFTC requested comments on all aspects of its proposed amendment to the RTO-ISO Order. It specifically requested comments on certain topics, including the potential for frivolous litigation as a result of the proposed amendment, implications of the filed rate doctrine on private actions under Section 22, and the potential for regulatory uncertainty and/or inconsistent rulings that could result from private actions.
Comments on the proposed amendment must be submitted on or before June 15, 2016.
1 The ISOs and RTOs subject to the 2013 RTO-ISO Order included Midcontinent Independent System Operator, Inc. (MISO); ISO New England, Inc. (ISO-NE); PJM Interconnection, L.L.C. (PJM); California Independent System Operator Corp. (CAISO); New York Independent System Operator, Inc. (NYISO); and the Electric Reliability Council of Texas, Inc. (ERCOT).
2 The electric grid operated by ERCOT is subject to regulation by the PUCT rather than FERC.
3 No. H-14-1111, 2015 WL 500482 (S.D. Tex. Feb. 3, 2015).
4 Aspire Commodities, L.P. v. GDF Suez Energy N. Am., Inc., No. 15-20125, 2016 WL 758689 (5th Cir. Feb. 25, 2016).
5 CFTC Rule 180.2, 17 C.F.R. § 180.2.
