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CFTC seeks to allow private parties to sue RTOs/ISOs

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Essential Energy Insights - September 17, 2020

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CFTC seeks to allow private parties to sue RTOs/ISOs

In areversal of course that some claim could have dramatic implications for RTOsand ISOs, the U.S. Commodity Futures Trading Commission has to amend an earlier order toallow private citizens to sue parties that transact in RTO and ISO markets forallegedly violating the Commodities and Exchange Act by engaging in fraud ormarket manipulation.

CFTCChairman Timothy Massad in a statement asserted that such private rights ofaction "have been instrumental in helping to protect market participantsand deter bad actors." He said they also help ensure that harmed partiescan seek damages where the CFTC lacks the resources to do so on their behalf.

Whilerecognizing the need for regulatory certainty, Massad said the necessity ofproviding adequate recourse for market participants outweighs that need here.Moreover, he said Congress called for private rights of action in the CEA toensure wronged parties were given an appropriate remedy.

"Congressdetermined that the benefits to the public good outweigh any potential coststhat may be incurred. Our job is to ensure that determination is properlyimplemented and enforced," Massad said.

CommissionerJ. Christopher Giancarlo disagreed. "Today's proposal manages tosimultaneously toss legal certainty to the wind and threaten the householdbudgets of low and middle-income ratepayers by permitting private lawsuits inheavily regulated markets that are at the heart of the U.S. economy," thecommissioner wrote in a dissent.

InMarch 2013, the CFTC exempted specified transactions (including FTRs, energy,capacity, and reserve/regulation transactions) in particular RTOs and ISOs fromcertain provisions of the CEA and CFTC regulations. However, that exemption didnot extend to the CFTC's general anti-fraud and anti-manipulation authority andscienter-based (centered on intent) prohibitions.

Afederal district court in February 2015 dismissed a private lawsuit — Aspire Commodities v. GDF Suez Energy —alleging that certain electricity generators manipulated the market by intentionally withholding electricity generation during times oftight supply, among other things. The CFTC's March 2013 order does not allowsuch private rights of action, the district court ruled in a decision that waslater upheld by a federal appeals court.

However,in response to a request by the Southwest Power Pool Inc., which was not one of the gridoperators listed in the March 2013 order, the CFTC in May 2015 issued aproposed order refusing to exempt the RTO (and its market participants) fromprivate rights of action for market manipulation and fraud. The commissionreasoned that reserving to itself the power to pursue claims for fraud andmanipulation "would be highly unusual," while at the same time,without explanation, denying private rights of action and damages remedies forthe same violations.The CFTC further explained that it never intended to create such a limitation,and that the March 2013 order does not prevent private claims for fraud ormanipulation under Section 22 of the CEA.

CFTC's proposal

Therefore,and in light of the Aspire courtruling, the CFTC on May 9 proposed to amend the text of the March 2013 order topreserve the private rights of action with respect to fraud and manipulation inall RTOs and ISOs, not just SPP.

"Thecovered entities will be subject to the same substantive CEA provisions,including judicial interpretations of those provisions, regardless of whetherthe plaintiff who brings an action alleging a violation of one of thoseprovisions is the commission or a private party. When such interpretations arenecessary in a civil action, the identity of the plaintiff is of littlesignificance," the proposal stated.

Accordingto the agency, the proposal will not harm the cooperative arrangement the CFTChas with FERC nor lead to duplicative or inconsistent regulation. It noted thatthe Federal Power Act does not allow a private party to sue an entity formanipulating power markets. However, FERC has ruled that a person or entity mayinitiate an administrative proceeding alleging market manipulation.

"Thedifference between the two statutes in this respect is by Congress'sdesign," the CFTC maintained.

TheCFTC also asserted that the private rights of action in the CEA are"instrumental in protecting the American public, deterring bad actors, andmaintaining the credibility of the markets subject to the commission's jurisdiction."

"Privateclaims serve the public interest by empowering injured parties to seekcompensation for damages where the commission lacks the resources to do so ontheir behalf. Moreover, the prospect of private rights of action serves thepublic interest by deterring misconduct in and maintaining the integrity of themarkets subject to the commission's jurisdiction," the agency said.

ToGiancarlo, however, the majority's insistence that the proposal is nothing morethan a technical clarification is disingenuous. He also warned that the agencyis establishing a disturbing new precedent by proposing to change the scope ofthe March 2013 order "based not on any change in facts or circumstancesbut on a legal fiction." As such, the commissioner said the CFTC iscreating regulatory uncertainty.

"Commissionorders should not be amended, expanded or withdrawn absent a change in facts orcircumstances or the law," Giancarlo said.

Giancarloalso took aim at the majority's claim that private claims may serve the publicinterest by empowering injured parties to seek compensation for damages wherethe commission lacks the resources to do so on their behalf.

Henoted that RTOs and ISOs are subject to extensive regulation and monitoring byFERC, the Public Utility Commission of Texas, and independent market monitors,and therefore insisted that allowing private litigation "would result intoo many cooks in the proverbial oversight kitchen." The commissioner furthernoted that the CFTC may seek restitution on behalf of persons alleging harmfrom fraudulent or manipulative practices.

Subjectingelectricity providers to private litigation also means that "it will beimpossible for market participants to be certain which FERC or state rulesgoverning power markets can be adhered to without incurring liability,"Giancarlo said. In particular, he said permitting such suits could lead toprivate litigants attacking a rate, tariff or rule that was already approved bythe PUCT and/or FERC in violation of the so-called "filed rate doctrine."

Finally,Giancarlo warned that while the CFTC would work closely with FERC or the PUCTand consider a wide range of factors before formally pursuing an alleged marketmanipulator on its own, "private parties — who may be interested primarilyin winning a cash award and/or securing attorneys' fees — will not consider thematter so broadly."

"Permittingprivate rights of action in the heavily regulated RTO-ISO markets is in greattension with the congressional command that the CFTC, the FERC and whereapplicable, state regulators, work to ensure effective, efficient regulationthat provides the RTO-ISO market participants with legal certainty,"Giancarlo said.

Commentson the proposal are due 30 days after its publication in the Federal Register. Oneof the items that the CFTC has requested comments on is "[t]o the extentthere is a concern about an increase in litigation regarding filed rates, howwould such litigation survive a motion to dismiss based on the filed ratedoctrine?"

Potential ramifications

WilliamScherman, partner at the law firm Gibson Dunn who has defended parties accusedof manipulating power markets, also warned of the ramifications the CFTC'sproposal could have on markets and regulatory certainly. He noted in anemail that the Federal Power Act does not allow private litigants to sueRTO/ISO/ERCOT market participants in federal court for damages associated withalleged market manipulation, and claimed that Congress in passing the EnergyPolicy Act "made a very specific decision to not create such a right"when it bolstered the FPA's market manipulation prohibitions significantly.

The reason why, according to Scherman, is that providingsuch a right would lead to an increase in frivolous litigation. While some ofthose suits may be thrown out because they go against the filed rate doctrine,he predicted that many of them, including the Aspire claim, may survive at themotion to dismiss stage if the proposal is adopted.

The lawyer also noted that the CFTC even acknowledged thatRTO and ISO markets already get plenty of oversight by FERC and market monitors."But, with this proposal, the CFTC is effectively saying that thesemarkets could use some more regulation and protection, and therefore privateparties should be permitted to bring such claims," Scherman said. Hetherefore wondered how FERC will respond to the proposal. He also suggestedthat "a legislative fix may be the best way to stop this plaintiff lawyerearly Xmas present from moving forward."