Incidents of alleged fraud and market manipulation in the energy markets increasingly have received the attention of federal agency enforcement efforts, including the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC). Our recent post highlights FERC’s growing efforts to combat market manipulation. And on November 21, 2016, the CFTC released its 2016 annual enforcement results, noting that one of its high impact cases involved attempted manipulation of natural gas monthly index settlement prices by a firm and individual trader and resulted in a $3.6 million penalty and 2-year trading limitation. Until recently, Regional Transmission Operators (RTOs) and Independent Service Operators (ISOs) may have had to answer for market manipulation not just to the government agencies that have regulatory jurisdiction over them, but also to individuals via private lawsuits. RTOs and ISOs can breathe a little easier though, now that the CFTC has changed its position and explicitly prohibited private rights of action against them for fraud and market manipulation under the Commodity Exchange Act (CEA).
The 2013 RTO/ISO Order
In 2013, the CFTC issued an Order exempting certain RTO and ISO contracts and transactions from most of the provisions of the CEA. The 2013 RTO-ISO Order explicitly maintained that RTOs and ISOs were subject to the CEA’s anti-fraud and anti-market manipulation provisions and could be subject to claims brought by the CFTC for violations. A separate section of the CEA, Section 22, allows private individuals to bring actions against those who violate the statute. And the 2013 RTO-ISO Order did not address Section 22 private rights of action at all, leaving open the question of whether RTOs and ISOs could be subjected to private lawsuits for fraud and market manipulation under the CEA. On October 18, 2016, the CFTC decided to amend the 2013 RTO-ISO Order to explicitly prevent individuals from bringing private lawsuits against RTOs and ISOs, including for fraud and market manipulation under the CEA. The decision to prohibit private actions was welcomed by the industry, but was contrary to the CFTC’s original position and proposal on the issue.
CFTC’s Original Proposal to Preserve Private Actions
In 2013, the Southwest Power Pool requested to be exempted from certain provisions of the CEA similar to the RTOs/ISOs subject to the 2013 RTO-ISO Order. The CFTC issued a proposed order in response to SPP’s request (in 2015), taking the position that the 2013 RTO-ISO Order did not preclude private claims for fraud or market manipulation. At the time, the CFTC’s view was that if it meant to limit the right of private individuals to sue for CEA violations while reserving that right for itself, which would be unusual, there would have been analysis and justification to do so in its Order.
A federal court case then forced the CFTC to address squarely whether private rights of action for fraud and market manipulation under the CEA may be brought against RTOs and ISOs. In 2015, the Southern District of Texas dismissed a private suit alleging electricity market manipulation, finding that the private right of action was unavailable under the 2013 RTO-ISO Order. In early 2016, the Fifth Circuit Court of Appeals upheld the dismissal. Accordingly, the CFTC issued a notice of proposed order shortly thereafter which proposed to amend the 2013 RTO-ISO order to state explicitly that RTOs and ISOs were not exempt from private rights of action for fraud and market manipulation. The CFTC justified maintaining the private right of action, in part, because it “is instrumental in protecting the American public, deterring bad actors, and maintaining the credibility of the markets subject to the Commission’s jurisdiction,” and “was established by Congress as an integral part of the CEA’s enforcement and remedial scheme.”
Why the CFTC Change in Position?
In its final order, which became effective upon publication in the Federal Register on October 24, 2016, the CFTC decided to issue a complete exemption from the private right of action in CEA section 22, including fraud and market manipulation claims. Why the about-face? The CFTC was convinced by the comments it received, concluding that a variety of factors supported the prohibition on private actions, including that (1) the RTO-ISO markets are heavily regulated (by FERC, the Public Utility Commission of Texas (PUCT), and the CFTC), (2) Congress considered and explicitly declined to grant a private right of action for electricity market manipulation when it amended the Federal Power Act in 2005, and (3) private actions could interfere with FERC and PUCT oversight of RTO-ISO markets. Although private individuals do not have the authority to sue directly, RTOs and ISOs may still find themselves the subject of enforcement proceedings prompted by individuals, as the CFTC did stress that the whistleblower provisions are intact and individuals can bring questionable behavior to the agency’s attention.