CFTC Exempts Certain Wholesale Power Market Transactions from CFTC Regulation, Private Rights of Action

On October 17, 2016, the U.S. Commodity Futures Trading Commission (the “CFTC”) clarified that certain transactions in Regional Transmission Organization (“RTO”) and Independent System Operator (“ISO”) markets are exempted from the Commodity Exchange Act (the “CEA”) provisions governing private rights of action, marking a reversal of the CFTC’s proposal in May 2016 which sought to subject the transactions to private rights of action.

In addition, the CFTC granted Southwest Power Pool, Inc.’s (“SPP”) request to exempt certain transactions in its markets from most CEA provisions and CFTC regulations, excluding those relating to the CFTC’s anti-fraud and anti-manipulation authority.

In March 2013, the CFTC exempted several specified transactions in markets administered by certain, petitioning RTOs/ISOs – not including SPP – from most CEA provisions and CFTC regulations (the “RTO/ISO Exemption Order”). These transactions included financial transmission rights, certain transactions in the day-ahead and real-time markets, forward capacity transactions, and operating reserve transactions.

However, the CFTC did not exempt the transactions from its anti-fraud and anti-manipulation authority. In October 2013, SPP filed an application with the CFTC requesting similar exemptions to those granted in the RTO/ISO Exemption Order. In response, the CFTC, in May 2015, requested comments on a proposed order that would grant SPP exemptive relief similar to the relief granted in the RTO/ISO Exemption Order.

In May 2016, the CFTC proposed an amendment to the RTO/ISO Exemption Order (see May 16, 2016 edition of the WER). Specifically, the CFTC proposed to clarify that the exemptions contained in the RTO/ISO Exemption Order would not include the private right of action under CEA section 22. Under the CFTC’s proposal, private actors would be permitted to file suits to enforce the anti-fraud and anti-manipulation rules contained in the CEA and the CFTC’s regulations.

In response, several commenters argued against the CFTC’s proposal, stating that such private rights of action: (1) are unnecessary because RTO/ISO markets are already subject to extensive oversight from FERC, the Public Utility Commission of Texas (“PUCT”), and independent market monitors; (2) would add regulatory uncertainty, disrupt the regulatory framework and oversight in the RTO/ISO markets, and undermine the efficiency of those markets; (3) would be contrary to congressional intent because the Federal Power Act (“FPA”) does not grant rights of private action for market manipulation; and (4) would increase costs on electric utilities that would be passed through to consumers.

In the October 17, 2016 order, the CFTC amended the RTO/ISO Exemption Order to clarify that the specified transactions are exempt from the CEA section 22 private right of action. In doing so, the CFTC reasoned that the RTO/ISO markets are already pervasively regulated and overseen by FERC, PUCT, and the independent market monitors.

The CFTC also concluded that Congress did not intend for there to be a private right of action for these markets because the FPA does not grant rights of private action. Finally, the CFTC found that private actions could interfere with FERC and PUCT oversight of the RTO/ISO markets.

In addition to amending the RTO/ISO Exemption Order, the CFTC granted SPP’s request to exempt specified transactions in its market from certain CEA provisions and CFTC regulations, including those regarding the private right of action. According to the CFTC, private actors can still participate in the enforcement process in these markets by filing a complaint with the CFTC requesting that the CFTC investigate conduct for fraud or manipulation, or by utilizing the CFTC’s whistleblower provisions.

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