On May 10, 2016, the U.S. Commodity Futures Trading Commission (“CFTC”) issued a notice of proposed amendment to its 2013 order exempting specified electric energy transactions in certain Regional Transmission Organizations (“RTOs”), Independent System Operators (“ISOs”) and the Electric Reliability Council of Texas (“ERCOT”) from regulation under certain provisions of the Commodity Exchange Act (“CEA”) and the CFTC’s regulations thereunder (the “RTO-ISO Order”).
- Scope of the RTO-ISO Order The RTO-ISO Order exempts from the CEA and CFTC regulations (i) Financial Transmission Rights, (ii) Energy Transactions, (iii) Forward Capacity Transactions, and (iv) Reserve or Regulated Transactions offered or sold in a market administered by one of the covered RTOs, ISOs or ERCOT. In order for a transaction to qualify for exemption, all parties to the transaction must be “appropriate persons” or “eligible contract participants” – as those terms are defined in the CEA – or otherwise engaged in the business of generating, distributing or transmitting electric energy or providing services necessary to support the reliable operation of the electric transmission system. The CFTC did not provide an exemption from its general anti-fraud and anti-manipulation authority and scienter-based prohibitions.
- Fallout from Aspire The proposed amendment is a direct response to the recent decision in Aspire v. GDF Suez. In that case, the U.S. Court of Appeals for the Fifth Circuit upheld a district court’s dismissal of a claim alleging manipulation by certain ERCOT generators of contract prices in the derivatives markets. The district court found, and the Fifth Circuit affirmed, that plaintiffs were barred from bringing such a private right of action because the RTO-ISO Order exempts the transactions from the CEA and CFTC regulations, and does not include a “carve-out” for private rights of action.
- Proposed Modification In response to the Aspire litigation, the CFTC contended that it “did not intend to provide an exemption from the private right of action in CEA section 22.” The CFTC therefore proposed to amend the RTO-ISO Order to clarify that there is no exemption from private rights of action for claims related to fraud, manipulation or scienter-based prohibitions. The proposal would not permit private rights of action for violations of other provisions of the CEA, since RTOs, ISOs and ERCOT are exempted from compliance with such provisions under the RTO-ISO Order.
- Commissioner Giancarlo Dissents Condemning the CFTC’s position as “disingenuous,” Commissioner Giancarlo cautioned that the proposed amendment would deprive the marketplace of much needed regulatory certainty by changing the scope of the RTO-ISO Order “based not on any change in facts or circumstances but on a legal fiction that it intended to reserve section 22 all along.” According to Commissioner Giancarlo, this calls into question the legal certainty of other CFTC orders that do not explicitly discuss or reserve the applicability of private rights of action. Additionally, Commissioner Giancarlo argued that private rights of action are problematic because market participants may be subject to such actions for complying with standards set and enforced by their primary regulator. Commissioner Giancarlo further warned that private rights of action as allowed under the proposed amendment are in tension with the long-standing jurisprudence concerning the application of the filed-rate doctrine.
- Comment Period Comments on the proposed amendment must be submitted within 30 days after the notice is published in the Federal Register.