May 17, 2016
On Tuesday, May 10, 2016, the Commodity Futures Trading Commission (“CFTC”) proposed an amendment (the “Proposal”)[1] to its 2013 RTO/ISO Exemption Order[2] that would allow private parties to bring lawsuits alleging violations of the anti-fraud and anti-manipulation rules for swaps and derivatives traded in the FERC-regulated markets of Regional Transmission Operators (“RTO”) and Independent System Operators (“ISO”), and in Texas. The Proposal was approved on party lines–Chairman Massad offered a statement in strong support of the Proposal, while Commissioner Giancarlo issued a fiery dissent. The Proposal, if adopted, is intended to deter bad actors and serve as another layer of protection for market participants. However, it may also increase the potential for frivolous litigation against rule-abiding market participants, create regulatory uncertainty, and create an avenue for litigation that has never before existed, as the Federal Power Act does not provide a private right of action. Concerned market participants must move quickly to file any objections to the Proposal within the short 30-day comment period. Comments are due on June 15, 2016.
In order to fully understand this Proposal, it is helpful to understand its background. In the original 2013 RTO/ISO Exemption Order, the CFTC exempted from certain provisions of the Commodity Exchange Act (“CEA”) and its rules and regulations the purchase or sale of specifically defined “Covered Transactions” that are offered or sold in a market administered by one of the FERC-regulated RTOs, ISOs, or ERCOT (which is subject to the jurisdiction of the Public Utility Commission of Texas).
The Covered Transactions include the following:
In its 2013 RTO/ISO Exemption Order, the CFTC excluded these Covered Transactions “from all provisions of the CEA” except for those enumerated in the order, which included the CFTC’s general anti-fraud and anti-manipulation authority and scienter-based (centered on intent) provisions. Noticeably absent from this enumerated list was Section 22 of the CEA, which provides a private right of action for violations of the CEA with respect to the Covered Transactions.[3]
In February 2015, a Texas federal court dismissed a private lawsuit¾Aspire Commodities v. GDF Suez Energy[4]¾alleging that certain electricity generators had manipulated the ERCOT markets by intentionally withholding generation during peak periods in order to benefit from their positions in the secondary futures markets. The district court reasoned that the CFTC had exempted the transactions at issue from the CEA in its 2013 RTO/ISO Exemption Order, and thus the investor plaintiffs had no private right of action.
The Proposal, if adopted, will amend the exemption to state: “This exemption also does not apply to actions pursuant to CEA section 22 with respect to the foregoing enumerated provisions.”[5] As Chairman Massad explained, the CFTC’s Proposal is meant to “make clear that this exemption does not prohibit private rights of action for violations of the very same anti-fraud and anti-manipulation provisions that are explicitly reserved in the order.”[6]
In its Proposal, the CFTC states that the private right of action is “instrumental in protecting the American public, deterring bad actors, and maintaining the credibility of the markets subject to the Commission’s jurisdiction,”[7] and further maintains that “[p]rivate claims serve the public interest by empowering injured parties to seek compensation for damages where the Commission lacks the resources to do so on their behalf. Moreover, the prospect of private rights of action serves the public interest by deterring misconduct in and maintaining the integrity of the markets subject to the Commission’s jurisdiction.”[8]
But the three CFTC Commissioners are not in agreement as to the prudence of the Proposal. Indeed, Commissioner Giancarlo noted in his dissent that the “proposal manages to simultaneously toss legal certainty to the wind and threaten the household budgets of low and middle-income ratepayers by permitting private lawsuits in heavily regulated markets that are at the heart of the U.S. economy.”[9]
This Proposal, if adopted, could have negative ramifications for markets and regulatory certainty. Private litigants would have a means of suing RTOs/ISOs/ERCOT (and their market participants) in Federal District Court for damages associated with alleged market manipulation. The resulting impact may be an increase in frivolous litigation filed against FERC-jurisdictional market participants, which could ultimately result in utility companies having no choice but to pass along the excessive legal fees to retail customers.
Such a private right of action does not exist under the Federal Power Act, and in the Energy Policy Act of 2005, Congress decided not to create such a right. While the CFTC’s Proposal recognizes that these markets are heavily regulated with oversight from the FERC, from RTOs, ISOs, and ERCOT, and from their independent market monitors, it nonetheless believes that allowing for private rights of action will serve the public interest. This may not sit well with the FERC.
While some of the “frivolous” lawsuits that are expected to occur may be thrown out because they fall under the filed rate doctrine (i.e., the doctrine under which courts refuse to hear cases against practices that are permitted under a FERC-approved tariff or rate and have not caused market distortion or dysfunction), some of them (including the Aspire claim) may now survive at the motion to dismiss stage. If a party is able to make a viable argument to avoid the filed rate doctrine defense, then market participants could be subject to multi-year litigation, even if it is eventually dismissed at the summary judgment stage.
As Commissioner Giancarlo noted, “permitting these suits is in tension with long-standing jurisprudence disallowing private litigants from collaterally attacking a rate, tariff, protocol and/or rule approved or permitted to take effect by the PUCT and/or the FERC. Courts have regularly relied on the so-called ‘filed rate doctrine,’ which deprives them of jurisdiction to hear otherwise valid private rights of action where such action seeks to undermine or attack ‘any “filed rate”–that is, one approved by the governing regulatory agency–[because such a rate] is per se reasonable and unassailable in judicial proceedings brought by ratepayers.'”[10]
In part because Commissioner Giancarlo is clearly in disagreement with Chairman Massad and Commissioner Bowen on the substance of the Proposal, we expect that comments filed with the CFTC will play an integral role in determining whether and how the Proposal progresses to a final rule.
[1] Notice of Proposed Amendment to and Request for Comment on the 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, 81 Fed. Reg. 30,245 (May 16, 2016) [hereinafter “Proposal”].
[2] 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. 19,880 (Apr. 2, 2013).
[3] Id. at 19,912.
[4] Aspire Commodities, LP v. GDF Suez Energy N. Am., Inc., No. CIV. A. H-14-1111, 2015 WL 500482 (S.D. Tex. Feb. 3, 2015), aff’d, No. 15-20125, 2016 WL 758689 (5th Cir. Feb. 25, 2016).
[5] Proposal, supra note 1, at 30,248.
[6] Id. at 30,253.
[7] Id. at 30,248.
[8] Id.
[9] Id. at 30,254.
[10] Id. at 30,255 (alteration in original).
Gibson, Dunn & Crutcher’s Energy Regulation and Litigation and its Commodities and Derivatives Enforcement lawyers are available to assist in addressing any questions you may have regarding the developments discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:
William S. Scherman – Washington, D.C. (+1 202-887-3510, [email protected])
Eugene Scalia – Washington, D.C. (+1202-955-8206, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Jennifer C. Mansh – Washington, D.C. (+1 202-955-8590, [email protected])
Kristine Beaudoin – New York (+1 212-351-5379, [email protected])
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