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CFTC Moves To Allow Private Lawsuits Concerning ERCOT, RTO Market Outcomes; CFTC's Sought Outcome Has Been Blasted As Allowing "Collateral Attack" on PUCT Authorized Market Rules
• Move Opens Door For Private Court Challenges To Underpinnings of PUCT's Energy-Only Market Structure

May 10, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

In yet another example of federal overreach, the U.S. Commodity Futures Trading Commission (CFTC) issued a proposed amendment to a final order the CFTC issued on March 28, 2013 that exempted certain specified transactions of six Regional Transmission Organizations and Independent System Operators (RTO-ISO Order), including ERCOT, from certain provisions of the Commodity Exchange Act (CEA) and CFTC regulations.

The RTO-ISO Order exempted contracts, agreements, and transactions for the purchase or sale of the limited electric energy-related products that are specifically described within the RTO-ISO Order from the provisions of the CEA and CFTC regulations, with the exception of the CFTC’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under specified provisions of the CEA and implementing regulations.

The proposed amendment to the RTO-ISO Order would explicitly state that the exemption also does not apply to actions pursuant to CEA section 22 with respect to those specified provisions. In doing so, the CFTC's proposed change would provide that the RTO exemption does not prohibit private rights of action for violations of the anti-fraud and anti-manipulation provisions that are explicitly reserved in the order.

Such private rights of action could be used to challenge long-standing market rules and designs of the Texas electric market, such as the small fish swim free rule that is integral to an energy-only market which is dependent on the presence of scarcity pricing when conditions warrant to drive investment. Notably, a suit filed by Aspire Commodities L.P. and Raiden Commodities L.P. in federal court -- after failing in a bid to change the small fish swim free rule at the Texas PUC -- was dismissed in part because private rights of action were not allowed under the CFTC's prior RTO exemption order (click here for details)

In a presentation earlier this year on the CFTC's proposal to allow private rights of action under the RTO order, Texas Public Utility Commissioner Kenneth Anderson had warned that, "private causes of action will allow collateral attacks on FERC and PUCT authorized valid market rules, undermining the efficient operation and regulation of electricity markets."

Anderson had noted that allowing private causes of action under Section 22 of the CEA as it relates to RTOs means that, "transactions that are lawful under FERC or PUCT approved ISO-RTO rules can be challenged under the CEA by third parties without the participation of the regulator in the proceedings."

"Federal courts will be interpreting PUCT and FERC regulations and RTO-ISO market rules, instead of the regulatory authority," Anderson had noted

"It is likely that inconsistent determinations by different federal courts will result," Anderson had noted

"This will weaken the market and regulatory structure and cause market uncertainty regarding what conduct is permitted under the rules," Anderson had noted

Such potential for regulation by the courts results rather than by the expert regulator, "provides an end-run around the absence of a private right of action in the FPA and PURA," Anderson had noted, meaning, "enforcement will be conducted by a court, instead of being resolved by the agency where the expertise resides."

CFTC Commissioner J. Christopher Giancarlo dissented from the CFTC's proposed order to allow private rights of action.

"Today’s 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

"By this action, the Commission contends that its silence with respect to section 22 of the CEA should be interpreted as evincing its intention all along to retain a private right of action for violations of the Reserved Provisions and that the proposed addition of section 22 to that list is nothing more than a technical clarification. With all due respect, the Commission’s position is disingenuous. It flies in the face of well-accepted legal precedent established by the U.S. Supreme Court, and was soundly rejected recently by the courts in the Aspire litigation," Giancarlo said

"[B]y taking this action the Commission is introducing a disturbing precedent regarding the legal certainty of its orders. In particular, the Commission’s proposal to change the scope of the RTO-ISO Order, based not on any change in facts or circumstances but on a legal fiction that it intended to reserve section 22 all along, calls into question the legal certainty of all other section 4(c) orders in which the Commission failed to discuss or reserve the applicability of section 22 for violations of the Act or regulations reserved for itself," Giancarlo said

Noting extensive oversight and regulation of RTO markets by FERC and the PUCT, Giancarlo said, "I believe that with the protection provided by such extensive regulatory oversight the Commission should not permit private litigation. Doing so would result in too many cooks in the proverbial oversight kitchen. It will lead to conflicting outcomes depriving market participants of the regulatory certainty and coherence Congress intended when it directed the CFTC and the FERC to apply 'their respective authorities in a manner so as to ensure effective and efficient regulation in the public interest,' to resolve conflicts concerning their overlapping jurisdiction and to avoid, 'to the extent possible, conflicting or duplicative regulation.' Moreover, exempting the transactions from section 22 would promote the congressionally-directed harmony between the CEA and the Federal Power Act ('FPA'), which expressly disclaims any private right of action for manipulative or deceptive trade practices."

"Aside from the injustice of changing the scope of the RTO-ISO Order three years after it was issued, subjecting the transactions covered by the Order to private suits under the CEA undermines carefully considered policy designed to promote affordable and reliable electricity for millions of American consumers. The defendants’ conduct in the Aspire litigation was explicitly permitted under Texas law and related PUCT regulations. Indeed, the plaintiffs in Aspire brought suit only after they tried and failed to convince the PUCT to change its rules permitting the conduct at issue," Giancarlo said

"In my view, the Aspire case is a telling example of the problems with subjecting RTO-ISO transactions to private section 22 litigation. Even if a firm is only involved in the generation or transmission of electric power (and not in the derivatives markets), it may nonetheless be subject to extensive litigation -- lasting years, exacting significant sums in defense costs, subjecting ratepayers to potential damages and distracting the firm from its core business -- all for merely complying with standards crafted and enforced by its primary regulator. Moreover, subjecting electricity providers to private litigation will deprive them of the certainty that the RTO-ISO Order was supposed to provide; if private section 22 claims are allowed, it will be impossible for market participants to be certain which FERC or state rules governing power markets can be adhered to without incurring liability. I fail to see how permitting these kinds of suits would 'promote responsible economic or financial innovation and fair competition' that the Commission’s exemptive authority is supposed to provide," Giancarlo said

"Indeed, permitting these suits is in tension with long-standing jurisprudence disallowing private litigants from collaterally attacking a rate, tariff, protocol and/or rule approved or permitted to take effect by the PUCT and/or the FERC. Courts have regularly relied on the so-called 'filed rate doctrine,' which deprives them of jurisdiction to hear otherwise valid private rights of action where such action seeks to undermine or attack 'any ‘filed rate’--that is, one approved by the governing regulatory agency--[because such a rate] is per se reasonable and unassailable in judicial proceedings brought by ratepayers,'" Giancarlo said

"In conclusion, adding section 22 to the list of Reserved Provisions is a serious misstep. At a time of stagnant wage growth, today’s proposal may needlessly subject millions of American ratepayers to higher utility bills as a result of the almost certain increase in litigation, court costs and settlement damages. Permitting private rights of action in the heavily regulated RTO-ISO markets is in great tension with the congressional command that the CFTC, the FERC and where applicable, state regulators, work to ensure effective, efficient regulation that provides the RTO-ISO market participants with legal certainty," Giancarlo said

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