By Lene Powell, J.D.
The leaders of the House Agriculture Committee wrote to CFTC Chairman Timothy Massad to express concern about a proposed CFTC order that would recognize a private right of action for market manipulation involving certain transactions in the electricity markets. The transactions were largely but not completely exempted from the Commodity Exchange Act (CEA) by a previous CFTC order, creating uncertainty whether private actions involving the excluded transactions were permitted. According to the legislators, allowing private lawsuits in this area would upset the existing division of authority between CFTC and the Federal Energy Regulatory Commission (FERC) and lead to legal inconsistency.
“We recognize the harm to consumers of fraud and market manipulation in electricity markets, and value the CFTC’s rigorous work to police these shared markets,” wrote the lawmakers. “However, to uphold the Congressional intent expressed in Section 720(a) of the Dodd-Frank Act, and to ensure that FERC and the CFTC are able to continue their effective and cooperative monitoring of the energy markets, we urge you to consider the possibility that the proposals will result in widespread, inconsistent judicial interpretations of the CEA.”
The letter was signed by Chairman Michael Conaway (R-Texas) and Ranking Member Collin Peterson (D-Minn), as well as Austin Scott (R-Ga) and David Scott (D-Ga), chairman and ranking member of the Subcommittee on Commodity Exchanges, Energy, and Credit.
Transactions excluded. In 2012, a group of Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) petitioned the CFTC to exempt specified electricity transactions from the CEA and CFTC regulations. The following year, the CFTC issued a final order that exempted the purchase or sale of defined “financial transmission rights,” “energy transactions,” “forward capacity transactions,” and “reserve or regulation transactions” offered or sold in a market administered by one of the petitioning RTOs or ISOs under a tariff or protocol approved or permitted to take effect by FERC or the Public Utility Commission of Texas (PUCT). The exemption was subject to conditions, and the transactions remained subject to the CFTC anti-fraud and anti-manipulation authority and scienter-based prohibitions.
In a subsequent private action that alleged market manipulation in the Texas electricity markets, a federal district court in Texas interpreted the 2013 order as prohibiting private actions involving the excluded transactions. The Fifth Circuit affirmed the decision of the district court (Aspire Commodities v. GDF Suez Energy North America).
Private right of action. In May 2016, the CFTC proposed to revise the 2013 order to explicitly provide that the order does not exempt covered entities from the private right of action in CEA Section 22 with respect to the excluded transactions. Chairman Timothy Massad explained that although regulatory certainty is important, private actions play an important role in protecting market participants and the public interest. Commissioner J. Christopher Giancarlo dissented from the proposal, noting that the covered entities are extensively regulated and monitored by the Federal Energy Regulatory Commission, lessening the policing role of private suits involving these markets. The comment period for the proposal closed June 15, 2016.
Aspire Commodities, the trading firm that brought the market manipulation action, supported the proposal. According to Aspire, private actions are needed to prevent market manipulation because the RTOs and ISOs do not adequately police the markets and the CFTC does not have the resources or knowledge to do so either. But FERC and PUCT joined energy trade associations in opposing the proposal, saying it could upset the Congressionally-mandated balance of overlapping jurisdiction between the CFTC and FERC.
House Agriculture opposition. Led by Chairman Conaway, the leadership of the House Agriculture Committee pointed out that Congress specifically intended to avoid uncertainty in the electricity markets by requiring the CFTC and FERC to enter into a Memorandum of Understanding (MOU) delineating oversight between the two agencies. A private right of action would open market rules to judicial interpretation, likely resulting in inconsistent determinations across the country. This would undermine the ability of the carefully negotiated MOU to provide a consistent, efficient, and effective framework for energy producers and market participants, the lawmakers warned.