Power industry preps to take on CFTC proposal on private actions

By Edward Klump | 05/12/2016 07:35 AM EDT

The Commodity Futures Trading Commission is trying to open the door for individuals and companies trading energy in wholesale power markets to sue electric grid operators under a federal anti-manipulation law.

The Commodity Futures Trading Commission is trying to open the door for individuals and companies trading energy in wholesale power markets to sue electric grid operators under a federal anti-manipulation law.

CFTC has announced a proposed amendment to legal exemptions granted in 2013 to six regional transmission organizations (RTOs) and independent system operators (ISOs). But the original order didn’t exempt ISOs and RTOs from general provisions of the Commodity Exchange Act (CEA) that "prohibit fraud and manipulation," Chairman Timothy Massad said in a statement supporting the new proposal Tuesday.

"If adopted, the proposed amendment would 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," Massad said.


It was a significant move for CFTC after the issue surfaced in a matter involving the Southwest Power Pool (SPP), which operates the grid in much of the Great Plains. SPP, according to its general counsel, filed a "me, too" request for the operator to be included under the original ISO/RTO exemptions.

In a Federal Register entry last year on a proposed order, CFTC discussed a possible SPP exemption but raised the possibility of allowing private rights of action. Then came a proposal this week to amend the 2013 decision.

Not everyone at CFTC agreed with it, including Commissioner J. Christopher Giancarlo.

Giancarlo said in a statement 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."

Giancarlo said proponents could argue that private claims serve a public interest by helping injured parties seek compensation, where the commission lacks the resources to adjudicate the cases.

"Yet, the extensive regulation and monitoring of RTOs and ISOs significantly obviates the policing role of private suits in these markets," he said, noting that CFTC could seek restitution on their behalf, while private complaints can be filed with the Federal Energy Regulatory Commission over violations of the Federal Power Act.

Aspire case

Exemptions were sought in light of the Dodd-Frank Wall Street Reform and Consumer Protection Act, with hopes of avoiding an overlap of regulation from CFTC and FERC. But the wrinkle on allowing private rights of action drew opposition. SPP CEO Nick Brown told an industry conference in Houston last month it would be "insane" to open wholesale market operations to potential lawsuits in a host of federal district courts.

A challenge brought by Aspire Commodities LP contending that an energy market participant withheld supply to influence prices in Texas triggered some of the recent action. An appeals court this year affirmed a district court’s dismissal of a case brought by Aspire against GDF Suez Energy North America over possible violations of federal anti-manipulation regulations. GDF had sought dismissal because of a CFTC exemption related to the Texas power market.

Adam Sinn, president of Aspire, told CFTC that private actions could be good for the public and regulators who care about the integrity of rules under the Commodity Exchange Act. Increased manipulation — or even the perception of it — can cause greater risk, which could filter through to contracts and prices, he said.

"In short, the cost of increased market manipulation — the inevitable consequence of eliminating the private right of action permitted by the CEA — will be borne by consumers, contrary to the public interest," Sinn said.

Yesterday, Barry Hammond, general counsel for Aspire, said CFTC’s intent was clear regarding private rights of action.

"They think it’s an important part of the regulatory framework, and we’re encouraged to see them take this step," Hammond said.

It will be helpful to have a comment period, even if CFTC’s proposal wasn’t what the energy industry at large was hoping for, said Arushi Sharma Frank, director of regulatory affairs and counsel at the Electric Power Supply Association. She said there will be a robust record to show private actions aren’t beneficial to the public interest.

Lopa Parikh, a senior director of federal regulatory affairs at the Edison Electric Institute, said her group prefers for the exemption to remain unchanged. But, she said, if the commission wants to change the order, that should happen only after a chance for comment.

Industry investments

Parikh said EEI members had more than $100 billion in estimated 2015 capital spending on generation, distribution and transmission, with two-thirds of members in RTO or ISO markets.

"In order to continue to make these types of long-term investments, there needs to be some type of regulatory certainty and the ability for their regulatory agencies to communicate and work with each other in a manner that reduces duplicative regulation and that is not unnecessarily burdensome," Parikh said.

The matter received attention during a February advisory committee hearing. The U.S. Senate also has gotten involved, with a committee backing draft legislation with amended language to head off the possibility of certain private actions. That amendment had support from Sen. John Boozman (R-Ark.).

"This amendment would ensure the current regulatory framework remains in place and prevent inconsistent regulations between FERC and the CFTC," said Sara Lasure, a spokeswoman for Boozman.

The ISO/RTO Council detailed concerns earlier this year about possible private actions. For SPP, the issue has involved the issue of certainty, according to Paul Suskie, SPP’s executive vice president of regulatory policy and general counsel.

"If you open RTO markets up to lawsuits in federal court, there’s almost no limit to the various places you could be fighting," he said. A private lawsuit could start in district court, compared with an appeal to circuit court after a FERC proceeding.

Kenneth Anderson, a member of the Public Utility Commission of Texas (PUC), worried in filed comments last year about a private litigant possibly suing a grid organization such as the Electric Reliability Council of Texas (ERCOT). The PUC is the main electricity regulator in Texas, and its decisions also can be appealed in court.

"ERCOT funds devoted to defending private lawsuits brought under the CEA would be imposed on load serving entities that, in turn, would be passed to their customers, ultimately raising the cost of electric services," Anderson said.

In its own filed comments last year, FERC urged CFTC to clarify that its actions on SPP’s application, including statements related to private claims for fraud or manipulation under the CEA, "do not limit or otherwise affect FERC’s authority."