2016-11385
Federal Register, Volume 81 Issue 94 (Monday, May 16, 2016)
[Federal Register Volume 81, Number 94 (Monday, May 16, 2016)]
[Notices]
[Pages 30245-30255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11385]
[[Page 30245]]
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COMMODITY FUTURES TRADING COMMISSION
Notice of Proposed Amendment to and Request for Comment on the
Final Order in Response to a Petition From Certain Independent System
Operators and Regional Transmission Organizations To Exempt Specified
Transactions Authorized by a Tariff or Protocol Approved by the Federal
Energy Regulatory Commission or the Public Utility Commission of Texas
From Certain Provisions of the Commodity Exchange Act Pursuant to the
Authority Provided in the Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed order and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing an amendment to an order issued on March
28, 2013 exempting specified transactions from certain provisions of
the Commodity Exchange Act (``CEA'' or ``Act'') and Commission
regulations.
DATES: Comments for the Notice of Proposed Order must be received on or
before June 15, 2016.
ADDRESSES: You may submit comments by any of the following methods:
CFTC Web site: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one of these methods.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the established
procedures in Sec. 145.9 of the Commission's regulations, 17 CFR
145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of this action will be retained in the public comment file
and will be considered as required under the Administrative Procedure
Act and other applicable laws, and may be accessible under the Freedom
of Information Act.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel,
202-418-5092, [email protected], Alicia L. Lewis, Special Counsel,
202-418-5862, [email protected], or Andr[eacute]e Goldsmith, Special
Counsel, 202-418-6624, [email protected], Division of Clearing and
Risk; David P. Van Wagner, Chief Counsel, 202-418-5481,
[email protected], or Riva Spear Adriance, Senior Special Counsel,
202-418-5494, [email protected], Division of Market Oversight, in each
case at the Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Overview
The Commission is proposing to amend an order issued on March 28,
2013 pursuant to the authority in section 4(c)(6) of the Act \1\
exempting specified electric energy transactions from certain
provisions of the CEA and Commission regulations (``RTO-ISO
Order'').\2\ The RTO-ISO Order was issued in response to a consolidated
petition from certain regional transmission organizations (``RTOs'')
and independent system operators (``ISOs''). 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
Commission regulations, with the exception of the Commission's general
anti-fraud and anti-manipulation authority, and scienter-based
prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o,
4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13 of the
Act, and any implementing regulations promulgated under these sections
including, but not limited to, Commission regulations 23.410(a) and
(b), 32.4, and part 180.\3\ The RTO-ISO Order did not specifically note
that the exemption contained therein does not apply to actions pursuant
to CEA section 22 with respect to those substantive provisions that are
excepted from the exemption (i.e. the Excepted Provisions). Although
the Commission did not intend to provide an exemption from the private
right of action in CEA section 22, the Fifth Circuit held that this was
the effect of the RTO-ISO Order. The Commission is thus proposing to
amend the text of the RTO-ISO Order to explicitly provide that the RTO-
ISO Order does not exempt the entities covered under the RTO-ISO Order
from the private right of action found in section 22 of the CEA \4\
with respect to the Excepted Provisions (``Proposed Amendment''). A
copy of the RTO-ISO Order is available at 78 FR 19880, and on the
Commission's Web site at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2013-07634a.pdf.
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\1\ 7 U.S.C. 1 et seq.
\2\ Final Order in Response to a Petition From Certain
Independent System Operators and Regional Transmission Organizations
to Exempt Specified Transactions Authorized by a Tariff or Protocol
Approved by the Federal Energy Regulatory Commission or the Public
Utility Commission of Texas From Certain Provisions of the Commodity
Exchange Act Pursuant to the Authority Provided in the Act, 78 FR
19880, Apr. 2, 2013. The RTO-ISO Order was published in the Federal
Register on April 2, 2013.
\3\ The foregoing provisions are referred to as the ``Excepted
Provisions.''
\4\ 7 U.S.C. 25.
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Table of Contents
I. Relevant Dodd-Frank Provisions
II. Background
A. RTO-ISO Order
B. Aspire v. GDF Suez
C. Southwest Power Pool Proposed Order
III. Proposed Amendment
A. Private Right of Action Under CEA Section 22
B. Section 4(c) Analysis
1. Overview of CEA Section 4(c)
2. Section 4(c) Determinations
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Consideration of Costs and Benefits
2. Consideration of CEA Section 15(a) Factors
V. Request for Comment on the Proposed Amendment to the RTO-ISO
Order
I. Relevant Dodd-Frank Provisions \5\
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\5\ For a fuller discussion, see RTO-ISO Order at 19881-82.
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On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\6\ Title VII
of the Dodd-Frank Act amended the CEA and
[[Page 30246]]
altered the scope of the Commission's exclusive jurisdiction.\7\ In
particular, it expanded the Commission's exclusive jurisdiction, which
had included futures traded, executed, and cleared on CFTC-regulated
exchanges and clearinghouses, to also cover swaps traded, executed, or
cleared on CFTC-regulated exchanges or clearinghouses.\8\ As a result,
the Commission's exclusive jurisdiction now includes swaps as well as
futures.
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\6\ See Dodd-Frank Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
\7\ Section 722(e) of the Dodd-Frank Act.
\8\ See 7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added
section 2(h)(1)(A), which requires swaps to be cleared if required
to be cleared and not subject to a clearing exception or exemption.
See 7 U.S.C. 2(h)(1)(A).
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The Dodd-Frank Act also added a savings clause that addresses the
roles of the Commission, the Federal Energy Regulatory Commission
(``FERC''), and state regulatory authorities as they relate to certain
agreements, contracts, or transactions traded pursuant to the tariff or
rate schedule of an RTO or ISO that has been approved by FERC or the
state regulatory authority.\9\ That savings clause, paragraph (I)(i) of
CEA section 2(a)(1), preserves the statutory authority of FERC and
state regulatory authorities over agreements, contracts, or
transactions entered into pursuant to a tariff or rate schedule
approved by FERC or a State regulatory authority, that are (1) not
executed, traded, or cleared on an entity or trading facility subject
to registration, or (2) executed, traded, or cleared on a registered
entity or trading facility owned or operated by an RTO or ISO.\10\
However, paragraph (I)(ii) of CEA section 2(a)(1) also preserves the
Commission's statutory authority over such agreements, contracts, or
transactions.\11\
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\9\ See 7 U.S.C. 2(a)(1)(I).
\10\ 7 U.S.C. 2(a)(1)(I)(i).
\11\ See 7 U.S.C. 2(a)(1)(I)(ii).
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The Dodd-Frank Act granted the Commission specific powers to exempt
certain contracts, agreements, or transactions from duties otherwise
required by statute or Commission regulation by adding, as relevant
here, new section 4(c)(6) to the CEA. Section 4(c)(6) provides that the
Commission shall, if certain conditions are met, issue exemptions from
the ``requirements'' of the CEA for certain transactions entered into
pursuant to a tariff or rate schedule approved or permitted to take
effect by FERC or a state regulatory authority.\12\
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\12\ See 7 U.S.C. 6(c)(6). CEA section 4(c)(6) provides that the
Commission shall issue an exemption only if the Commission
determines that the exemption would be consistent with the public
interest and the purposes of the Act. Moreover, the Commission must
act in accordance with 4(c)(1) and 4(c)(2) when issuing an exemption
under section 4(c)(6).
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The Commission must act ``in accordance with'' sections 4(c)(1) and
(2) of the CEA when issuing an exemption under section 4(c)(6).\13\
Section 4(c)(1) grants the Commission the authority to exempt any
agreement, contract, or transaction or class of transactions, including
swaps, from certain provisions of the CEA, in order to promote
responsible economic or financial innovation and fair competition.\14\
Section 4(c)(2) \15\ of the Act further provides that the Commission
may not grant exemptive relief unless it determines that: (1) The
exemption would be consistent with the public interest and the purposes
of the CEA; (2) the transaction will be entered into solely between
``appropriate persons'' as that term is defined in section 4(c); \16\
and (3) the exemption will not have a material adverse effect on the
ability of the Commission or any contract market to discharge its
regulatory or self-regulatory responsibilities under the CEA.\17\ In
enacting section 4(c), Congress noted that the purpose of the provision
is to give the Commission a means of providing certainty and stability
to existing and emerging markets so that financial innovation and
market development can proceed in an effective and competitive
manner.\18\
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\13\ 7 U.S.C. 6(c)(6).
\14\ 7 U.S.C. 6(c)(1).
\15\ 7 U.S.C. 6(c)(2).
\16\ Section 4(c)(3) of the CEA further outlines who may
constitute an appropriate person for the purpose of a particular
4(c) exemption and includes, as relevant to the RTO-ISO Order: (a)
Any person that qualifies for one of ten defined categories of
appropriate persons; or (b) such other persons that the Commission
determines to be appropriate in light of their financial or other
qualifications, or the applicability of appropriate regulatory
protections.
\17\ 7 U.S.C. 6(c)(2).
\18\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess., 1992
U.S.C.C.A.N. 3179, 3213 (1992).
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II. Background
A. RTO-ISO Order
On March 28, 2013, the Commission issued the RTO-ISO Order, which
exempts specified transactions of particular RTOs and ISOs \19\ from
certain provisions of the CEA and Commission regulations. The scope of
the RTO-ISO Order includes transactions that fall within the
definitions of ``Financial Transmission Rights,'' ``Energy
Transactions,'' ``Forward Capacity Transactions,'' or ``Reserve or
Regulation Transactions'' \20\ (collectively, the ``Covered
Transactions'') and that are offered or sold in a market administered
by one of the petitioning RTOs or ISOs pursuant to a tariff, rate
schedule, or protocol that has been approved or permitted to take
effect by FERC or PUCT.\21\ In addition, to be eligible for the
exemption in the RTO-ISO Order, all parties to the agreements,
contracts, or transactions that are covered by the RTO-ISO Order must
be: (1) ``Appropriate persons,'' as defined in section 4(c)(3)(A)
through (J) of the CEA; (2) ``eligible contract participants,'' as
defined in section 1a(18)(A) of the CEA and in Commission regulation
1.3(m); or (3) in the business of (i) generating, transmitting, or
distributing electric energy, or (ii) providing electric energy
services that are necessary to support the reliable operation of the
transmission system.\22\ To be eligible for the exemption in the RTO-
ISO Order, the transactions must comply with all other enumerated terms
and conditions in the RTO-ISO Order.\23\
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\19\ Six entities (the ``Requesting Parties'') jointly filed a
petition requesting the exemption provided in the RTO-ISO Order:
Midwest Independent Transmission System Operator, Inc. (``MISO''),
ISO New England, Inc. (``ISO NE''), and PJM Interconnection, L.L.C.
(``PJM'') are RTOs subject to regulation by FERC; California
Independent System Operator Corporation (``CAISO'') and New York
Independent System Operator, Inc. (``NYISO'') are ISOs subject to
regulation by FERC; and the Electric Reliability Council of Texas,
Inc. (``ERCOT'') performs the role of an ISO and is subject to
regulation by the Public Utility Commission of Texas (``PUCT''). See
RTO-ISO Order at 19882.
\20\ See id. at 19912-13.
\21\ See id. at 19913. The exemption in the RTO-ISO Order also
applies to ``any person or class of persons offering, entering into,
rendering advice, or rendering other services with respect'' to any
of the Covered Transactions. See id. at 19912. These entities,
including the six Requesting Parties (see supra note 19) are
hereinafter referred to collectively as the ``Covered Entities.''
\22\ See id. at 19913-14.
\23\ See id. at 19912-15.
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In the RTO-ISO Order, the Commission excepted from the exemption
the Commission's general anti-fraud and anti-manipulation authority,
and scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d),
4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8,
9, and 13 of the Act, and any implementing regulations promulgated
under these sections including, but not limited to, Commission
regulations 23.410(a) and (b), 32.4, and part 180.\24\ The RTO-ISO
Order did not discuss the application of CEA section 22 with respect to
those substantive provisions that are excepted from the exemption (i.e.
the Excepted Provisions).\25\
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\24\ See id. at 19912.
\25\ See id.
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B. Aspire v. GDF Suez
In February 2015, the United States District Court for the Southern
District of Texas dismissed a private lawsuit on the ground that the
CEA section 22 private right of action was not available to the
plaintiffs under the RTO-ISO
[[Page 30247]]
Order.\26\ The lawsuit alleged that certain electricity generators in
ERCOT's market manipulated the market price of electricity by, among
other things, intentionally withholding electricity generation during
times of tight supply.\27\ The suit further alleged that this conduct
created artificial and unpredictable prices in the secondary futures
markets.\28\ The claim thus alleged that defendants were manipulating
contract prices in the derivatives commodities market in violation of
the Act.\29\ The District Court dismissed the claim, finding that under
the RTO-ISO Order, the private right of action in CEA section 22 was
``unavailable to [p]laintiffs.'' \30\ In February 2016, the United
States Court of Appeals for the Fifth Circuit affirmed the District
Court's ruling.\31\
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\26\ Aspire Commodities, L.P. v. GDF Suez Energy N. Am., Inc.,
No. H-14-1111, 2015 WL 500482 (S.D. Tex. Feb. 3, 2015).
\27\ Id. at *1-*2.
\28\ Id. at *2.
\29\ See id.
\30\ Id. at *5.
\31\ See Aspire Commodities, L.P. v. GDF Suez Energy N. Am.,
Inc., No. 15-20125, 2016 WL 758689 (5th Cir. Feb. 25, 2016).
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C. Southwest Power Pool Proposed Order
Southwest Power Pool (``SPP'') is an RTO subject to regulation by
FERC. On October 17, 2013, SPP filed an Exemption Application \32\ with
the Commission requesting that the Commission exercise its authority
under section 4(c)(6) of the CEA \33\ and section 712(f) of the Dodd-
Frank Act \34\ to exempt certain contracts, agreements, and
transactions for the purchase or sale of specified electric energy
products, that are offered pursuant to a FERC-approved tariff, from
most provisions of the Act.\35\ The relief that SPP requested was
substantially similar to the relief the Commission granted in the RTO-
ISO Order.\36\
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\32\ SPP filed an amended Exemption Application on August 1,
2014. Citations herein to ``Exemption Application'' are to the
amended Exemption Application.
\33\ 7 U.S.C. 6(c)(6).
\34\ See section 712(f) of the Dodd-Frank Act.
\35\ See Exemption Application at 1. SPP was not one of the
entities that petitioned for the RTO-ISO Order because SPP did not
at that time offer the types of transactions covered by that order.
See id. at 7.
\36\ See id. at 2.
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On May 18, 2015, the Commission issued a proposed order with
respect to SPP's Exemption Application (``SPP Proposed Order'').\37\
The exemptive relief proposed in the SPP Proposed Order was
substantially similar to the exemptive relief granted by the Commission
in the RTO-ISO Order. Like the RTO-ISO Order, the SPP Proposed Order
excepted from the exemption the Commission's general anti-fraud and
anti-manipulation authority, and scienter-based prohibitions, under CEA
sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A),
6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13, and any implementing
regulations promulgated thereunder including, but not limited to,
Commission regulations 23.410(a) and (b), 32.4, and part 180.\38\
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\37\ Notice of Proposed Order and Request for Comment on an
Application for an Exemptive Order From Southwest Power Pool, Inc.
From Certain Provisions of the Commodity Exchange Act Pursuant to
the Authority Provided in Section 4(c)(6) of the Act, 80 FR 29490,
May 21, 2015. The SPP Proposed Order was published in the Federal
Register on May 21, 2015.
\38\ SPP Proposed Order at 29516.
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As proposed, the SPP Proposed Order would not exempt SPP from the
private right of action under CEA section 22 for violations of the
manipulation, fraud, and scienter-based provisions from which SPP will
not be exempted. The Commission explained in the SPP Proposed Order
that neither the proposed nor the final RTO-ISO Order discussed,
referred to, or mentioned CEA section 22, which provides for private
rights of action for damages against persons who violate the CEA, or
persons who willfully aid, abet, counsel, induce, or procure the
commission of a violation of the Act.\39\ The Commission explained that
by enacting CEA section 22, Congress provided private rights of action
as a means for addressing violations of the Act as an alternative or
supplement to Commission enforcement action.\40\ The Commission
observed that it would be highly unusual for the Commission to reserve
to itself the power to pursue claims for fraud and manipulation--a
power that includes the option of seeking restitution for persons who
have sustained losses from such violations or a disgorgement of gains
received in connection with such violations--while at the same time,
without explanation, denying private rights of action and damages
remedies for the same violations.\41\ The Commission stated that if it
intended to take such a differentiated approach (i.e., to limit the
rights of private persons to bring such claims while reserving to
itself the right to bring the same claims), the RTO-ISO Order would
have included a discussion or analysis of the reasons therefore.\42\
The Commission therefore stated that it did not intend to create such a
limitation, and that, in the Commission's view, the RTO-ISO Order does
not prevent private claims for fraud or manipulation under the CEA.\43\
The Commission further stated that this view would apply equally to the
SPP Proposed Order.\44\
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\39\ Id. at 29493.
\40\ Id.
\41\ Id.
\42\ Id.
\43\ Id.
\44\ Id.
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The public comment period on the SPP Proposed Order ended on June
22, 2015. The Commission received thirteen (13) comment letters on the
SPP Proposed Order,\45\ the majority of which argued that the
exemptions contained in the RTO-ISO Order extended to include private
claims for fraud and manipulation under section 22 of the CEA, and that
the exemption in the final SPP exemptive order should also include
those private claims.
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\45\ All comment letters received in response to the SPP
Proposed Order are available through the Commission's Web site at:
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1586.
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III. Proposed Amendment
A. Private Right of Action Under CEA Section 22
Currently, Paragraph 1 of the RTO-ISO Order states that the
Commission:
Exempts, subject to the conditions and limitations specified
herein, the execution of the electric energy-related agreements,
contracts, and transactions that are specified in paragraph 2 of
this Order and any person or class of persons offering, entering
into, rendering advice, or rendering other services with respect
thereto, from all provisions of the CEA, except, in each case, the
Commission's general anti-fraud and anti-manipulation authority, and
scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d),
4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d,
8, 9, and 13, and any implementing regulations promulgated under
these sections including, but not limited to, Commission regulations
23.410(a) and (b), 32.4, and part 180.\46\
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\46\ See RTO-ISO Order at 19912.
Under the RTO-ISO Order, for those CEA requirements from which the RTOs
and ISOs are exempt, it follows that there can be no claim under CEA
section 22 with respect to those requirements. The RTO-ISO Order did
not specifically note that the exemption contained therein does not
apply to actions pursuant to CEA section 22 with respect to the
Excepted Provisions.
In light of the Aspire court ruling discussed above,\47\ the
Commission is proposing to amend the text of the RTO-ISO Order to
clarify that the Covered Entities are not exempt from the private right
of action in CEA section 22 with respect to the Excepted Provisions.
Specifically, the Commission proposes to amend
[[Page 30248]]
Paragraph 1 of the RTO-ISO Order to read as follows (the additional
language is italicized):
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\47\ See supra section II.B.
Exempts, subject to the conditions and limitations specified
herein, the execution of the electric energy-related agreements,
contracts, and transactions that are specified in paragraph 2 of
this Order and any person or class of persons offering, entering
into, rendering advice, or rendering other services with respect
thereto, from all provisions of the CEA, except, in each case, the
Commission's general anti-fraud and anti-manipulation authority, and
scienter-based prohibitions, under CEA sections 2(a)(1)(B), 4(d),
4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d,
8, 9, and 13, and any implementing regulations promulgated under
these sections including, but not limited to, Commission regulations
23.410(a) and (b), 32.4, and part 180. This exemption also does not
apply to actions pursuant to CEA section 22 with respect to the
foregoing enumerated provisions.\48\
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\48\ The Commission's Proposed Amendment to the RTO-ISO Order
does not alter any of the other terms or conditions of the RTO-ISO
Order.
The Commission believes that the treatment of the section 22 private
right of action should be consistent across all RTOs and ISOs.\49\ The
Commission therefore proposes the foregoing amendment to the RTO-ISO
Order in order to ensure clarity, and for the additional reasons stated
below.
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\49\ One commenter on the SPP Proposed Order expressed the
concern that if the final SPP exemptive order contained preamble
language to the effect that SPP would not be exempt from the CEA
section 22 private right of action, it would be inconsistent with
the RTO-ISO Order. In amending the RTO-ISO Order and finalizing the
SPP exemptive order, the Commission will ensure that the language of
both orders and both preambles is consistent.
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It has been suggested that preserving the private right of action
in CEA section 22 would cause regulatory uncertainty or inconsistent or
duplicative regulation. However, the Covered Entities will be subject
to the same substantive CEA provisions, including judicial
interpretations of those provisions, regardless of whether the
plaintiff who brings an action alleging a violation of one of those
provisions is the Commission or a private party acting under CEA
section 22.\50\ When such interpretations are necessary in a civil
action, the identity of the plaintiff is of little significance. Thus,
any potential for conflict among regulators and others or for
conflicting judicial interpretations does not depend on whether the
plaintiff is a private litigant or the Commission. The Commission also
notes that the CFTC frequently participates as amicus curiae in cases
where significant interpretive issues arise under the CEA. The
existence of a private right of action also is not inconsistent with or
detrimental to cooperation between the CFTC and FERC. Therefore,
amending the RTO-ISO Order to explicitly preserve the private right of
action with respect to fraud and manipulation will not cause regulatory
uncertainty or duplicative or inconsistent regulation. Moreover,
conflicting judicial interpretations regarding the nature of the
Covered Transactions would not affect the jurisdiction of FERC or any
relevant state regulatory authority.\51\
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\50\ For this reason, the Commission does not believe that the
Proposed Amendment to the RTO-ISO Order undermines any reasonable
reliance interests on the part of the Covered Entities. The affected
parties should have been aware of, and complying with, the CEA
provisions on fraud and manipulation whether or not a private
plaintiff could sue for violating them, because they knew or should
have known that the Commission could bring an action to redress
violations of those provisions.
\51\ To the extent that a court, during a civil proceeding
alleging fraud or manipulation under CEA section 22, deems one of
the Covered Transactions to be a swap, such a finding would not
affect FERC's or PUCT's authority over the Covered Transactions.
Section 2(a)(1)(I)(i) of the CEA provides that nothing in the Act
shall limit or affect any statutory authority of FERC or a State
regulatory authority with respect to an agreement, contract, or
transaction that is entered into pursuant to a tariff or rate
schedule approved by FERC or a State regulatory authority and is--
(1) not executed, traded, or cleared on a registered entity or
trading facility; or (2) executed, traded, or cleared on a
registered entity or trading facility owned or operated by an RTO]
or ISO.
By the terms of the RTO-ISO Order, all of the Covered
Transactions must be offered or sold pursuant to a Requesting
Party's tariff that has been approved or permitted to take effect by
FERC or PUCT (which is a state regulatory authority). See RTO-ISO
Order at 19913. In addition, the RTO-ISO Order exempts the Covered
Entities from registration requirements under the CEA, and the
Proposed Amendment does not change that. As a result, none of the
Covered Entities is a ``registered entity'' as defined in CEA
section 1a(40). Thus, the Covered Transactions, to the extent they
are cleared, would fall within CEA section 2(a)(1)(I)(i)(I).
Moreover, to the extent the Covered Transactions are executed or
traded on a ``trading facility,'' any such trading facility would be
owned or operated by an RTO or ISO, since the Covered Transactions
are offered or sold in a market administered (i.e., owned or
operated by) one of the Requesting Parties. As such, the Covered
Transactions would fall within CEA section 2(a)(1)(I)(i)(II).
Therefore, given the savings clause in CEA section 2(a)(1)(I)(i),
nothing in the CEA could limit or otherwise affect FERC's or PUCT's
authority over the Covered Transactions, regardless of any judicial
finding regarding the nature of the Covered Transactions.
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Second, the private right of action in the CEA is instrumental in
protecting the American public, deterring bad actors, and maintaining
the credibility of the markets subject to the Commission's
jurisdiction. Private claims serve the public interest by empowering
injured parties to seek compensation for damages where the Commission
lacks the resources to do so on their behalf. Moreover, the prospect of
private rights of action serves the public interest by deterring
misconduct in and maintaining the integrity of the markets subject to
the Commission's jurisdiction.
Third, the private right of action under CEA section 22 was
established by Congress as an integral part of the CEA's enforcement
and remedial scheme. The Act grants the Commission various
administrative tools to enforce the statute,\52\ and it also authorizes
the Commission to seek redress in court in the form of injunctions,
penalties, and restitution for injured parties.\53\ But Congress deemed
those tools insufficient, and, in the Futures Trading Act of 1982,
codified an express private right of action because it found that
private damages actions are ``critical to protecting the public and
fundamental to maintaining the creditability of the futures market.''
\54\ The Federal Power Act (``FPA''), on the other hand, expressly
prohibits private rights of action for fraud and manipulation with
respect to the purchase or sale of electric energy subject to FERC's
jurisdiction.\55\ The fact that Congress made different judgments with
respect to a private right of action in the CEA and the FPA does not
persuade the Commission to strip injured parties of their remedy under
the CEA, nor does it amount to a conflict between the two statutes. The
difference between the two statutes in this respect is by Congress's
design, subject to the proviso that the Commission is to issue
exemptions where it determines exemptions would be in the public
interest.\56\
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\52\ E.g., 7 U.S.C. 9(4).
\53\ See 7 U.S.C. 13a-1.
\54\ H.R. Rep. No. 97-565, at 57 (1982).
\55\ See FPA section 222(a), 16 U.S.C. 824v(a) (prohibiting the
use of any manipulative or deceptive device or contrivance in
connection with the purchase or sale of electric energy or
transmission services subject to the jurisdiction of FERC) and FPA
section 222(b), 16 U.S.C. 824v(b) (stating that nothing in that
section shall be construed to create a private right of action.).
Under section 306 of the FPA, however, a person or entity may
initiate an administrative proceeding with FERC for a violation of
the FPA, see 16 U.S.C. 825e, and FERC has ruled that a person or
entity may initiate an administrative proceeding alleging market
manipulation in violation of 16 U.S.C. 824v. See Blumenthal v. ISO
New England Inc., 128 FERC ] 61,182, at para. 56 (Aug. 24, 2009).
\56\ See 7 U.S.C. 6(c)(6).
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Finally, the Commission's preservation of section 22 liability with
respect to the Excepted Provisions is consistent with the Commission's
actions in prior 4(c) orders. Section 22 establishes liability for any
person ``who violates'' the Act or ``who willfully aids, abets,
counsels, induces, or procures the commission of a violation'' of the
Act.\57\
[[Page 30249]]
The beneficiary of an order under section 4(c) does not violate the Act
by noncompliance with CEA requirements from which it is exempt. For
instance, in a 4(c) order issued in 2011, the Commission granted
temporary exemptive relief from certain provisions of the CEA added or
amended by Title VII of the Dodd-Frank Act that referenced certain
terms that the Commission had not yet defined.\58\ That order expressly
stated that exemption from section 22 liability was ``not necessary''
because, ``[t]o the extent that the Final Order provides exemptive
relief under CEA section 4(c) [from certain provisions of the CEA],
such exemptive relief would, in effect, preclude a person from
succeeding in a private right of action under CEA section 22(a) for a
violation of such provisions.'' \59\ In other words, no private right
of action exists for noncompliance with exempted CEA provisions, as
such conduct would not ``violate[ ]'' the Act within the meaning of
section 22. On the other hand, exempting the Covered Entities from
private liability for violations of CEA requirements with which they
must comply--the prohibitions on fraud and manipulation--would not be
consistent with the Commission's actions in prior 4(c) exemptive
orders.
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\57\ 7 U.S.C. 25(a)(1).
\58\ Effective Date for Swap Regulation, 76 FR 42508, Jul. 19,
2011.
\59\ Id. at 42517.
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Moreover, in prior 4(c) exemptive orders issued by the Commission
that reserved anti-fraud and anti-manipulation provisions, the
Commission has never reserved its own ability to sue for such behavior
while at the same time denying private rights of action for the same
conduct.\60\ In certain instances, the Commission specifically reserved
certain substantive CEA provisions prohibiting fraud and manipulation,
but did not include section 22 in that list.\61\ In such cases,
however, the orders did not explicitly preserve any means of enforcing
those prohibitions, including Commission enforcement actions or private
lawsuits. The Commission does not believe that these exemptions were
intended to preserve the prohibitions on fraud and manipulation but to
eliminate any means of enforcing them. Therefore, the Proposed
Amendment, which explicitly clarifies that section 22 is reserved with
respect to claims for fraud and manipulation, is consistent with the
Commission's treatment of such claims in prior 4(c) exemptive
orders.\62\
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\60\ See, e.g., Exemptive Order for SPDR Gold Futures Contracts,
73 FR 31979, 31979-80, June 5, 2008 (exempting transactions in SPDR
gold futures contracts ``from those provisions of the Act and the
Commission's regulations thereunder that, if the underlying were
considered to be a commodity that is not a security, would be
inconsistent with the trading and clearing of SPDR gold futures
contracts as security futures''); Order: (1) Pursuant to Section
4(c) of the Commodity Exchange Act (a) Permitting Eligible Swap
Participants To Submit for Clearing and ICE Clear U.S., Inc. and
Futures Commission Merchants To Clear Certain Over-The-Counter
Agricultural Swaps and (b) Determining Certain Floor Brokers and
Traders To Be Eligible Swap Participants; and (2) Pursuant to
Section 4d of the Commodity Exchange Act, Permitting Certain
Customer Positions in the Foregoing Swaps and Associated Property To
Be Commingled With Other Property Held in Segregated Accounts, 73 FR
77015, 77016 n.4, Dec. 18, 2008 (noting that jurisdiction over the
subject transactions was retained for the ``provisions of the CEA
proscribing fraud and manipulation''); Order Exempting the Trading
and Clearing of Certain Products Related to the CBOE Gold ETF
Volatility Index and Similar Products, 75 FR 81977, 81979, Dec. 29,
2010 (exempting the trading and clearing of certain products ``from
the provisions of the CEA and the regulations thereunder, to the
extent necessary to permit such products to be so traded and
cleared'' on SEC-regulated entities).
With respect to the last 4(c) order listed above, the Commission
exempted the trading and clearing of the subject transactions from
the CEA only ``to the extent necessary'' to permit them to be traded
and cleared on SEC-regulated entities. The Commission notes that
this exemption does not extend to the fraud and manipulation
provisions of the CEA because it is not ``necessary'' to act
fraudulently or manipulatively in order to trade and clear such
contracts on SEC-regulated entities, nor is exemption from the
private right of action for acting fraudulently or manipulatively
``necessary'' to permit the trading and clearing of such contracts
on SEC-regulated entities. Moreover, in all of the orders listed
above, specific mention of CEA section 22 was not needed because, to
the extent the orders did not provide an exemption from the anti-
fraud and anti-manipulation provisions of the CEA, any violation of
such provisions would be subject to a private right of action.
\61\ See, e.g., Exemption for Certain Swap Agreements, 58 FR
5587, 5594, Jan. 22, 1993; Exemption for Certain Contracts Involving
Energy Products, 58 FR 21286, 21294, Apr. 20, 1993.
\62\ The Commission notes that it has, in two prior 4(c) orders,
specifically enumerated section 22 as one of the reserved
provisions. See A New Regulatory Framework for Clearing
Organizations, 65 FR 78020, 78027, Dec. 13, 2000; A New Regulatory
Framework for Multilateral Transaction Execution Facilities,
Intermediaries and Clearing Organizations, 65 FR 77962, 77986, Dec.
13, 2000. However, the fact that section 22 was explicitly preserved
in two orders but not in others does not provide a counterexample
for the proposition that the Commission has never reserved its own
ability to sue for fraud and manipulation while at the same time
denying private rights of action for the same conduct.
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B. Section 4(c) Analysis
1. Overview of CEA Section 4(c)
a. Sections 4(c)(6)(A) and (B)
As discussed above in section I., the Dodd-Frank Act amended CEA
section 4(c) to add sections 4(c)(6)(A) and (B), which provide
authority to exempt certain transactions ``from the requirements'' of
the CEA entered into: (a) Pursuant to a tariff or rate schedule
approved or permitted to take effect by FERC, or (b) pursuant to a
tariff or rate schedule establishing rates or charges for, or protocols
governing, the sale of electric energy approved or permitted to take
effect by the regulatory authority of the State or municipality having
jurisdiction to regulate rates and charges for the sale of electric
energy within the State or municipality.\63\ Indeed, section 4(c)(6)
provides that if the Commission determines that the exemption would be
consistent with the public interest and the purposes of the Act, the
Commission shall issue such an exemption.\64\ However, any exemption
considered under section 4(c)(6)(A) and/or (B) must be done ``in
accordance with [CEA section 4(c)(1) and (2)].'' \65\
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\63\ The exemption language in section 4(c)(6) states that if
the Commission determines that the exemption would be consistent
with the public interest and the purposes of the Act, the Commission
shall, in accordance with paragraphs (1) and (2), exempt from the
requirements of this Act an agreement, contract, or transaction that
is entered into (A) pursuant to a tariff or rate schedule approved
or permitted to take effect by the Federal Energy Regulatory
Commission; (B) pursuant to a tariff or rate schedule establishing
rates or charges for, or protocols governing, the sale of electric
energy approved or permitted to take effect by the regulatory
authority of the State or municipality having jurisdiction to
regulate rates and charges for the sale of electric energy within
the State or municipality; or (C) between entities described in
section 201(f) of the Federal Power Act (16 U.S.C. 824(f)).
\64\ 7 U.S.C. 6(c)(6).
\65\ 7 U.S.C. 6(c)(6).
---------------------------------------------------------------------------
Based on the difference in language between section 4(c)(6), under
which the RTO-ISO Order was issued, and section 4(c)(1), the Commission
notes that it is not clear that section 4(c)(6) provides the Commission
with the authority to exempt the Covered Entities from the private
right of action found in section 22. Section 4(c)(1) authorizes the
Commission to grant exemptions from the Act's ``requirements'' or
``from any other provision of this Act,'' with certain exceptions.\66\
Section 4(c)(6), by contrast, empowers the Commission to exempt
agreements, contracts, or transactions from ``requirements'' of the Act
only. It is not clear that the section 22 private right of action
itself is a ``requirement'' and, therefore, it is not clear that the
power to provide an exemption from section 22 is within the scope of
the power granted to the Commission by section 4(c)(6).
---------------------------------------------------------------------------
\66\ 7 U.S.C. 6(c)(1).
---------------------------------------------------------------------------
b. Section 4(c)(1)
As described above,\67\ CEA section 4(c)(1) requires that the
Commission act by rule, regulation, or order, after notice and
opportunity for hearing. It also provides that the Commission may act
either unconditionally or on stated terms or conditions or for stated
periods
[[Page 30250]]
and either retroactively or prospectively, or both and that the
Commission may provide an exemption from any provisions of the CEA
except subparagraphs (C)(ii) and (D) of section 2(a)(1).
---------------------------------------------------------------------------
\67\ See supra section I.
---------------------------------------------------------------------------
c. Section 4(c)(2)
As set forth above in section I., CEA section 4(c)(2) requires the
Commission to determine that: To the extent an exemption provides
relief from any of the requirements of CEA section 4(a), the
requirement should not be applied to the agreement, contract or
transaction; the exempted agreement, contract, or transaction will be
entered into solely between appropriate persons; \68\ and the exemption
will not have a material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory duties under the CEA.\69\
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\68\ See 7 U.S.C. 6(c)(2)(B)(i). See also the discussion of CEA
section 4(c)(3) below.
\69\ See 7 U.S.C. 6(c)(2)(B)(ii). CEA section 4(c)(2)(A) also
requires that the exemption would be consistent with the public
interest and the purposes of the CEA, but that requirement
duplicates the requirement of section 4(c)(6).
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d. Section 4(c)(3)
As explained in section I. above, CEA section 4(c)(3) outlines who
may constitute an appropriate person for the purpose of a 4(c)
exemption, including as relevant to the RTO-ISO Order: (a) Any person
that fits in one of ten defined categories of appropriate persons; or
(b) such other persons that the Commission determines to be appropriate
in light of their financial or other qualifications, or the
applicability of appropriate regulatory protections.\70\
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\70\ See 7 U.S.C. 6(c)(3). CEA section 4(c)(3) provides that the
term ``appropriate person'' shall be limited to the following
persons or classes thereof: (A) A bank or trust company (acting in
an individual or fiduciary capacity); (B) A savings association; (C)
An insurance company; (D) An investment company subject to
regulation under the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.); (E) A commodity pool formed or operated by a person
subject to regulation under this Act; (F) A corporation,
partnership, proprietorship, organization, trust, or other business
entity with a net worth exceeding $1,000,000 or total assets
exceeding $5,000,000, or the obligations of which under the
agreement, contract or transaction are guaranteed or otherwise
supported by a letter of credit or keepwell, support, or other
agreement by any such entity or by an entity referred to in
subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph; (G)
An employee benefit plan with assets exceeding $1,000,000, or whose
investment decisions are made by a bank, trust company, insurance
company, investment adviser registered under the Investment Advisers
Act of 1940 (15 U.S.C. 80a-1 et seq.), or a commodity trading
advisor subject to regulation under this Act; (H) Any governmental
entity (including the United States, any state, or any foreign
government) or political subdivision thereof, or any multinational
or supranational entity or any instrumentality, agency, or
department of any of the foregoing; (I) A broker-dealer subject to
regulation under the Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) acting on its own behalf or on behalf of another
appropriate person; (J) A futures commission merchant, floor broker,
or floor trader subject to regulation under this Act acting on its
own behalf or on behalf of another appropriate person; (K) Such
other persons that the Commission determines to be appropriate in
light of their financial or other qualifications, or the
applicability of appropriate regulatory protections.
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2. Section 4(c) Determinations
a. Consistent With the Public Interest and the Purposes of the CEA
As required by CEA section 4(c)(2)(A), as well as section 4(c)(6),
the Commission previously determined that the exemption set forth in
the RTO-ISO Order is consistent with the public interest and the
purposes of the CEA.\71\ The Proposed Amendment does not alter the
Commission's prior determinations with respect to the public interest
and purposes of the CEA, and the Commission proposes to incorporate
such prior determinations herein.\72\
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\71\ See RTO-ISO Order at 19894-95, 19900-02. The Commission's
prior determination was based on a number of findings, including
that (a) the Covered Transactions have been, and are, subject to a
long-standing, regulatory framework for the offer and sale of the
Transactions established by FERC or PUCT; (b) the Covered
Transactions administered by the RTOs, ISOs, or ERCOT are part of,
and inextricably linked to, the organized wholesale electric energy
markets that are subject to FERC and PUCT regulation and oversight;
(c) the Covered Transactions are entered into primarily by
commercial participants that are in the business of generating,
transmitting, and distributing electric energy; (d) the Requesting
Parties were established for the purpose of providing affordable,
reliable electric energy to consumers within their geographic
region; (e) the Covered Transactions that take place on the
Requesting Parties' markets are overseen by Market Monitoring Units,
required by FERC and PUCT to identify manipulation of electric
energy on the Covered Entities' markets; (f) the Covered
Transactions are inextricably tied to the Requesting Parties'
physical delivery of electric energy; (g) the RTO-ISO Order is
explicitly limited to Covered Transactions taking place on markets
that are monitored by either an independent Market Monitoring Unit,
a market administrator (the RTO, ISO, or ERCOT), or both, and a
government regulator (FERC or PUCT); (h) the standards set forth in
FERC regulation 35.47 appear to achieve goals similar to the
regulatory objectives of the Commission's DCO Core Principles, and
substantial compliance with such requirements was key to the
Commission's determination that the tariffs and activities of the
Requesting Parties and supervision by FERC or PUCT are congruent
with, and--in the context of the Covered Transactions--sufficiently
accomplish, the regulatory objectives of each DCO Core Principle;
(i) the Requesting Parties' policies and procedures appear to be
consistent with, and to accomplish sufficiently for purposes of the
RTO-ISO Order, the regulatory objectives of the DCO Core Principles
in the context of the Covered Transactions; and (j) the Requesting
Parties' policies and procedures appear to be consistent with, and
to accomplish sufficiently for purposes of the RTO-ISO Order, the
regulatory objectives of the SEF Core Principles in the context of
the Covered Transactions. Id.
\72\ The Commission notes that, since the Commission did not
intend to provide an exemption from the private right of action in
CEA section 22 in the RTO-ISO Order, the RTO-ISO Order did not
consider or make any determination that it would be in the public
interest to do so.
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In addition, the Commission proposes to determine that the Proposed
Amendment to the RTO-ISO Order, which would explicitly preserve the
section 22 private right of action with respect to the Excepted
Provisions, serves the public interest by helping to deter fraudulent
conduct and maintain the credibility of the markets under the
Commission's jurisdiction. In the same vein, private civil actions for
fraud and manipulation serve the public interest by supplementing the
Commission's ability to address the same conduct. Further, the
Commission proposes to determine that the Proposed Amendment is
consistent with the purposes of the CEA because it will deter and
prevent price manipulation or any other disruptions to market
integrity.\73\
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\73\ See 7 U.S.C. 5(b) (listing the purposes of the CEA).
---------------------------------------------------------------------------
b. Other 4(c) Determinations
In the RTO-ISO Order, the Commission made a number of other
determinations under CEA section 4(c), including:
The Dodd-Frank Act applies to contracts and instruments
traded in RTO or ISO markets pursuant to a FERC- or state-approved
tariff or rate schedule, subject to the Commission's authority under
CEA section 4(c)(6) to exempt contracts, agreements, or transactions
traded pursuant to such a tariff or rate schedule upon determining that
the exemption would be in the public interest and consistent with the
purposes of the CEA; that the exemption would be applied only to
agreements, contracts, or transactions that are entered into solely
between appropriate persons; and that the exemption will not have a
material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory duties
under the CEA.\74\
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\74\ See RTO-ISO Order at 19893-94; see also CEA section
4(c)(6).
---------------------------------------------------------------------------
Due to the FERC or PUCT regulatory scheme and the RTO or
ISO market structure already applicable to the Covered Transactions,
the linkage between the Covered Transactions and those regulatory
schemes, and the unique nature of the market participants that are
eligible to rely on the exemption in the RTO-ISO Order, CEA section
4(a) should not apply to the Covered
[[Page 30251]]
Transactions under the RTO-ISO Order.\75\
---------------------------------------------------------------------------
\75\ See RTO-ISO Order at 19895; see also CEA section
4(c)(2)(A).
---------------------------------------------------------------------------
Eligible contract participants, as defined in section
1a(18)(A) of the CEA and in Commission regulation 1.3(m), are
appropriate persons for purposes of the RTO-ISO Order in light of their
financial or other qualifications, or the applicability of regulatory
protections.\76\ In addition, a ``person who actively participates in
the generation, transmission, or distribution of electric energy,'' as
defined within the RTO-ISO Order, is an appropriate person for purposes
of the exemption provided therein.\77\
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\76\ See RTO-ISO Order at 19896; see also CEA section
4(c)(2)(B)(i).
\77\ See RTO-ISO Order at 19897; see also CEA section
4(c)(2)(B)(i).
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The exemption in the RTO-ISO Order for the Covered
Transactions would not have a material adverse effect on the
Commission's or any contract market's ability to discharge its
regulatory function.\78\
---------------------------------------------------------------------------
\78\ See RTO-ISO Order at 19903-04; see also CEA section
4(c)(2)(B)(ii).
---------------------------------------------------------------------------
The Proposed Amendment does not alter the Commission's
determination with respect to any of the above 4(c) determinations.
Therefore, the Commission proposes to incorporate such prior 4(c)
determinations, and the findings on which such determinations are
based, herein. All transactions that were permitted pursuant to the
exemption set forth in the RTO-ISO Order would still be permitted under
the RTO-ISO Order with the Proposed Amendment. The only change to the
RTO-ISO Order made by the Proposed Amendment is that the Proposed
Amendment would provide explicitly an additional means of deterring
fraudulent or manipulative conduct--conduct that was already prohibited
under the RTO-ISO Order--consistent with the public interest and the
purposes of the Act.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that the
Commission consider whether the Proposed Amendment to the RTO-ISO Order
will have a significant economic impact on a substantial number of
small entities and, if so, provide a regulatory flexibility analysis
respecting the impact.\79\ In the RTO-ISO Order, the Commission
determined that the RTO-ISO Order would not have a significant economic
impact on a substantial number of small entities,\80\ and the RFA
analysis in the RTO-ISO Order is still valid. Specifically, the RTOs
and ISOs covered by the RTO-ISO Order should not be considered small
entities based on the central role they play in the operation of the
electronic transmission grid and the creation of organized wholesale
electric markets that are subject to FERC and PUCT regulatory
oversight,\81\ analogous to functions performed by DCMs and DCOs, which
the Commission has previously determined not to be ``small entities.''
\82\ In addition, the RTO-ISO Order, with the amendment proposed
herein, includes entities that qualify as (1) ``appropriate persons''
pursuant to CEA sections 4(c)(3)(A) through (J), (2) ECPs, as defined
in CEA section 1a(18)(A) and Commission regulation 1.3(m), or (3)
persons who are in the business of: (i) Generating, transmitting, or
distributing electric energy, or (ii) providing electric energy
services that are necessary to support the reliable operation of the
transmission system. The Commission has previously determined that ECPs
are not ``small entities'' for purposes of the RFA.\83\ The Commission
is of the view that, based on the Commission's existing information
about the RTOs' and ISOs' markets, their market participants consist
mostly of entities exceeding the thresholds defining ``small
entities.'' \84\
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\79\ 5 U.S.C. 601 et seq.
\80\ See RTO-ISO Order at 19906-07. The RFA analysis in the RTO-
ISO Order determined that the Requesting Parties (CAISO, NYISO, PJM,
MISO, ISO NE., and ERCOT) are not small entities. See id.
\81\ The regulations of the Small Business Administration
(``SBA'') define the threshold for a small Electric Bulk Power
Transmission and Control entity to be 500 employees. See 13 CFR
121.201 (Sector 22, Subsector 221; NAICS code 221121). FERC has
previously determined under this standard that five of the
Requesting Parties (CAISO, NYISO, PJM, MISO, and ISO NE) are not
small entities. See Settlement Intervals and Shortage Pricing in
Markets Operated by Regional Transmission Organizations and
Independent System Operators, 80 FR 58393, 58403, Sept. 29, 2015.
Additionally, the Commission understands that ERCOT is not a small
entity, as defined by SBA's regulations.
\82\ See RTO-ISO Order at 19906; see also A New Regulatory
Framework for Clearing Organizations, 66 FR 45604, 45609, Aug. 29,
2001 (DCOs); Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18618-19, Apr. 30, 1982 (DCMs).
\83\ See RTO-ISO Order at 19906; see also Opting Out of
Segregation, 66 FR 20740, 20743, Apr. 25, 2001.
\84\ See RTO-ISO Order at 19907; see also supra note 81.
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Also, the RTO-ISO Order, with the amendment proposed herein, would
continue to alleviate the economic impact that the exempt entities,
including any small entities that may opt to take advantage of the
exemption set forth in the RTO-ISO Order, otherwise would be subjected
to by continuing to exempt certain of their transactions from the
application of substantive regulatory compliance requirements of the
CEA and Commission regulations thereunder. In addition, there is no
evidence of any substantial litigation with respect to fraud and
manipulation under CEA section 22 in the RTO or ISO markets,
particularly against any small entities that opt to take advantage of
the exemption set forth in the RTO-ISO Order. Accordingly, the
Commission does not expect the RTO-ISO Order, with the Proposed
Amendment, to have a significant economic impact on a substantial
number of small entities. Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
exemption set forth in the RTO-ISO Order, with the amendment proposed
herein, would not have a significant economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995 (``PRA'') \85\
are, among other things, to minimize the paperwork burden to the
private sector, ensure that any collection of information by a
government agency is put to the greatest possible uses, and minimize
duplicative information collections across the government. The PRA
applies to all information, ``regardless of form or format,'' whenever
the government is ``obtaining, causing to be obtained [or] soliciting''
information, and includes and requires ``disclosure to third parties or
the public, of facts or opinions,'' when the information collection
calls for ``answers to identical questions posed to, or identical
reporting or recordkeeping requirements imposed on, ten or more
persons.'' \86\
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\85\ 44 U.S.C. 3501 et seq.
\86\ 44 U.S.C. 3502(3).
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The Commission previously determined that the RTO-ISO Order did not
impose any new recordkeeping or information collection requirements, or
other collections of information on ten or more persons that require
OMB approval.\87\ The Commission's Proposed Amendment to the RTO-ISO
Order does not impose any recordkeeping or information collection
requirements, or other collections of information on ten or more
persons that require OMB approval.
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\87\ See RTO-ISO Order at 19907-08.
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[[Page 30252]]
C. Cost-Benefit Considerations
1. Consideration of Costs and Benefits
a. Introduction
Section 15(a) of the CEA \88\ requires the Commission to ``consider
the costs and benefits'' of its actions before promulgating a
regulation under the CEA or issuing certain orders. In proposing this
amendment to the RTO-ISO Order, the Commission is required by CEA
section 4(c)(6) to ensure the same is consistent with the public
interest. In much the same way, section 15(a) further specifies that
the costs and benefits shall be evaluated in light of five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the section 15(a) factors.
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\88\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
As discussed above, the RTO-ISO Order currently exempts 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 certain provisions of the CEA and Commission
regulations, with the exception of the Commission's general anti-fraud
and anti-manipulation authority, and scienter-based prohibitions, under
CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A),
6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13, and any implementing
regulations promulgated under these sections including, but not limited
to, Commission regulations 23.410(a) and (b), 32.4, and part 180.\89\
The RTO-ISO Order does not specifically note that the exemption
contained therein does not apply to actions pursuant to CEA section 22
with respect to the Excepted Provisions. The Commission is proposing to
amend the RTO-ISO Order to clarify that the RTO-ISO Order does not
exempt the Covered Entities from the private right of action found in
section 22 of the CEA with respect to the Excepted Provisions.\90\ The
Commission's Proposed Amendment to the RTO-ISO Order does not alter any
of the other terms or conditions of the RTO-ISO Order.
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\89\ See RTO-ISO Order at 19912.
\90\ See supra section III.A.
---------------------------------------------------------------------------
In the discussion that follows, the Commission considers the costs
and benefits of the Proposed Amendment to the RTO-ISO Order to the
public and market participants generally, and to the Covered Entities
specifically. It also considers the costs and benefits of the Proposed
Amendment in light of the public interest factors enumerated in CEA
section 15(a).
b. Proposed Baseline
The Commission's proposed baseline for consideration of the costs
and benefits of the Proposed Amendment to the RTO-ISO Order is the
costs and benefits that the public and market participants would
experience if the existing RTO-ISO Order is interpreted to exempt
market participants from liability under the CEA section 22 private
right of action.
In the discussion that follows, where reasonably feasible, the
Commission endeavors to estimate quantifiable dollar costs of the
Proposed Amendment to the RTO-ISO Order. The costs and benefits of the
Proposed Amendment, however, are not presently susceptible to
meaningful quantification. Where it is unable to quantify, the
Commission discusses proposed costs and benefits in qualitative terms.
c. Benefits
Using the hypothetical baseline described above,\91\ the Commission
notes that preserving the CEA section 22 private right of action with
respect to fraud and manipulation will benefit the market because
private claims for fraud and manipulation protect market participants
and the public generally, as well as the financial markets for electric
energy products. Moreover, making the preservation of the CEA section
22 private right of action with respect to fraud and manipulation
explicit will benefit the market because it will clarify the scope of
the RTO-ISO Order and prevent future uncertainty regarding the
availability of the private right of action under CEA section 22 with
respect to fraud and manipulation.
---------------------------------------------------------------------------
\91\ See supra section IV.C.1.b.
---------------------------------------------------------------------------
d. Costs
Using the hypothetical baseline described above,\92\ the Commission
recognizes that subjecting market participants to the CEA section 22
private right of action with respect to fraud and manipulation may
increase legal and compliance costs due to a marginally increased
chance of litigation, particularly to the extent that private counsel
may pursue litigation based upon private, rather than public, concerns.
However, this is a common criticism of private rights of action
generally, and the Commission does not believe that such a possibility
is a sufficient reason to exempt the Covered Transactions and Covered
Entities from the private right of action that Congress explicitly
provided for by statute. Thus, the Commission elects to propose to
amend the RTO-ISO Order to expressly retain the CEA section 22 private
right of action with respect to Excepted Provisions.
---------------------------------------------------------------------------
\92\ See supra section IV.C.1.b.
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e. Consideration of Alternatives
The Commission considered not issuing the Proposed Amendment to the
RTO-ISO Order. The Commission considered the uncertainty that has
arisen with respect to the scope of the RTO-ISO Order and the
availability of a private right of action under the RTO-ISO Order,
particularly following the court rulings in the Aspire v. GDF Suez
action,\93\ and proposes to determine that a no-amendment alternative
would prolong such uncertainty and thus be contrary to the public
interest.
---------------------------------------------------------------------------
\93\ See supra section II.B.
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The Commission also considered the costs and benefits of amending
the RTO-ISO Order to explicitly exempt the CEA section 22 private right
of action with respect to fraud and manipulation. In the absence of the
availability of a private right of action to address fraudulent and
manipulative conduct, the potential for market disruption would
increase since market participants would not be able to address such
conduct through private claims. On the other hand, the costs of private
litigation would be avoided under this alternative. The Commission has
considered these costs and benefits and has declined to elect the
alternative of explicitly exempting the Covered Entities from the CEA
section 22 private right of action.
The Commission has considered the costs and benefits of retaining
the CEA section 22 private right of action with respect to fraud and
manipulation that the Commission determined to except from the RTO-ISO
Order, and has elected to propose to amend the RTO-ISO Order to
expressly retain the CEA section 22 private right of action with
respect to the Excepted Provisions.
2. Consideration of CEA Section 15(a) Factors
a. Protection of Market Participants and the Public
The Commission believes that the Proposed Amendment, by clarifying
the existence of a private right of action with respect to fraud and
manipulation, will serve to protect market participants
[[Page 30253]]
and the public because private actions for fraud and manipulation will
help to deter misconduct in and maintain credibility of the markets
subject to Commission jurisdiction.
b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The Commission does not believe that the Proposed Amendment will
have an effect on the efficiency, competitiveness, and financial
integrity of the futures markets.
c. Price Discovery
The Commission does not believe that the Proposed Amendment will
have an effect on price discovery.
d. Sound Risk Management Practices
The Commission does not believe that the Proposed Amendment will
have a material effect on sound risk management practices.
e. Other Public Interest Considerations
The Commission does not believe that there are any additional
public interest considerations with respect to the Proposed Amendment.
3. Request for Public Comment on Costs and Benefits
The Commission invites public comment on its cost-benefit
considerations of the Proposed Amendment to the RTO-ISO Order,
including the consideration of reasonable alternatives. Commenters are
invited to submit any data or other information that they may have
quantifying or qualifying the costs and benefits of the proposal with
their comment letters.
V. Request for Comment on the Proposed Amendment to the RTO-ISO Order
The Commission requests comment on all aspects of its Proposed
Amendment to the RTO-ISO Order. In addition, the Commission
specifically requests comment on the specific provisions and issues
highlighted in the discussion above and on the issues presented in this
section. For each comment submitted, please provide a detailed
rationale supporting the response.
1. To the extent there are concerns that explicitly amending the
RTO-ISO Order to preserve private claims for fraud and manipulation
under CEA section 22 would result in frivolous litigation, the
Commission requests comment on the following issues regarding such
litigation.
a. Please provide details as to the specifics of such litigation,
including:
i. What type of entity might sue what other type of entity?
ii. What are the theories under which such litigation might be
brought?
iii. How might the causes of action in such litigation derive from
the enumerated fraud and manipulation provisions of the CEA that are
excepted from the RTO-ISO Order?
b. To the extent there is a concern about an increase in litigation
regarding filed rates, how would such litigation survive a motion to
dismiss based on the filed rate doctrine? \94\
---------------------------------------------------------------------------
\94\ See Nantahala Power & Light Co. v. Thornburg, 106 S. Ct.
2349, 2354-57 (1986); Texas Commercial Energy v. TXU Energy, Inc.,
413 F.3d 503, 508-10 (5th Cir. 2005).
---------------------------------------------------------------------------
2. In a letter submitted to the Commission's Energy and
Environmental Markets Advisory Committee, PJM, ERCOT, and CAISO argued
that ``[a]llowing private actions will undermine the legal certainty
provided by the exemptions and potentially could divest FERC and the
PUCT of jurisdiction over certain ISO and RTO transactions.'' \95\ The
letter then set forth a hypothetical scenario involving alleged market
manipulation in the RTO-ISO markets, and noted that, ``[b]ecause the
CFTC's jurisdiction over swaps is `exclusive,' if a number of federal
circuits hold that [financial transmission rights] or other ISO and RTO
transactions are swaps or futures contracts, no other federal or state
agency could regulate ISOs and RTOs or their transactions.'' \96\ The
Commission requests comment on how, given the effect of the savings
clause in CEA section 2(a)(1)(I)(i), discussed supra in note 51, FERC
or PUCT would be divested of jurisdiction in the event of a judicial
finding that one or more of the Covered Transactions is a swap. More
broadly, the Commission requests comment on how, given that savings
clause, preservation of the private right of action would result in
regulatory uncertainty and/or inconsistent rulings.
---------------------------------------------------------------------------
\95\ Letter from Paul J. Pantano, Jr. to Christopher
Kirkpatrick, Secretary of the Commission, Feb. 24, 2016, at 4,
available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/eemac022516_pantano.pdf.
\96\ Id. at 5.
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3. To the extent any commenters believe that preserving the private
right of action in the RTO-ISO Order will have any other detrimental
effect(s) on the RTO-ISO markets or market participants, the Commission
requests that such commenters provide a specific and detailed basis for
such a conclusion.
Issued in Washington, DC, on May 9, 2016, by the Commission.
Robert N. Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Notice of Proposed Amendment To and Request for Comment
on the Final Order in Response to a Petition From Certain Independent
System Operators and Regional Transmission Organizations To Exempt
Specified Transactions Authorized by a Tariff or Protocol Approved by
the Federal Energy Regulatory Commission or the Public Utility
Commission of Texas From Certain Provisions of the Commodity Exchange
Act Pursuant to the Authority Provided in the Act--Commission Voting
Summary, Chairman's Statement, and Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioner Bowen voted in
the affirmative. Commissioner Giancarlo voted in the negative.
Appendix 2--Statement of Chairman Timothy Massad in Support of the
Proposed Amendment to the RTO-ISO Order
The proposal we have approved today would amend a 2013 CFTC
order that exempted specified transactions of six independent system
operators (``ISOs'') and regional transmission organizations
(``RTOs'') from certain provisions of the Commodity Exchange Act
(CEA). That order explicitly did not exempt ISOs and RTOs from the
general CEA provisions that prohibit fraud and manipulation. 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.
Private rights of action have been instrumental in helping to
protect market participants and deter bad actors. These actions can
also augment the limited enforcement resources of the CFTC, and
serve the public interest by allowing harmed parties to seek damages
in instances where the Commission lacks the resources to do so on
their behalf.
I appreciate the desire of businesses to have as little
regulatory uncertainty as possible. Indeed, providing certainty for
market participants is something upon which we're always striving to
improve. But we also must make sure there is adequate recourse for
those participants.
Moreover, private rights of action were called for by Congress
under the CEA, to ensure wronged parties were provided with an
appropriate remedy. Congress determined that the benefits to the
public good outweigh
[[Page 30254]]
any potential costs that may be incurred. Our job is to ensure that
determination is properly implemented and enforced.
While some believe the Commission must have intended to exempt
ISOs from private rights of action in the original order because it
did not specifically preserve them, the proposal points out that it
would be unusual for the Commission to have such an intention and
say nothing about it, given that it expressly excluded general anti-
fraud and anti-manipulation authority from the exemption.
Regardless, we should decide the issue now on the merits. The
proposal invites comment from all market participants and members of
the public.
Finally, let me say that we are giving this proposal careful
thought and consideration. We want to balance the value of
regulatory certainty with the need to make sure that there is
adequate recourse for market participants. We have heard from market
participants in a number of venues, including a February meeting of
the Energy and Environmental Markets Advisory Committee, and in
other requests for comment. And we have tried to incorporate those
concerns into the discussion of this proposal. This Notice of
Proposed Amendment poses a number of specific questions that seek
further detail with respect to the concerns we have heard from
market participants. I encourage all interested parties to carefully
consider these questions, and provide the Commission with your
feedback.
I thank all those who have already provided us with the benefit
of their perspective, as well as the CFTC staff and my fellow
Commissioners for their work on this proposal. I look forward to
hearing more as the comment period transpires.
Appendix 3--Statement of Dissent by Commissioner J. Christopher
Giancarlo
I dissent from the proposed amendment to the final RTO-ISO Order
issued by the Commission in 2013.
For over three years, U.S. power market participants have been
operating in reliance on the RTO-ISO Order. They have trusted in the
reasonable, unambiguous understanding that transactions covered by
the Order are exempt from all provisions of the Commodity Exchange
Act (``CEA or Act'') except for those specifically enumerated as
reserved (the ``Reserved Provisions''). They have relied on the
plain language of the RTO-ISO Order that ``[e]xempts . . . the
execution of [specified] electric energy-related agreements,
contracts and transactions . . . and any person or class of persons
offering, entering into, rendering advice or rendering other
services with respect thereto, from all provisions of the CEA
except, in each case, the Commission's general anti-fraud and anti-
manipulation authority, and scienter-based prohibitions . . . '' \1\
Too bad for them.
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\1\ RTO-ISO Order, 78 FR 19880, 19912 (Apr. 2, 2013) (emphasis
added) (referring to CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o,
4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13).
---------------------------------------------------------------------------
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.
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,\2\ and was soundly rejected recently by the
courts in the Aspire litigation.\3\
---------------------------------------------------------------------------
\2\ Under well-accepted canons of construction, when a general
rule is stated, ``[but] there are enumerated exceptions[,]
`additional exceptions are not to be implied . . . .' '' In re
Condor Ins. Ltd., 601 F3d 319, 324 (5th Cir. 2010) (quoting Andrus
v. Glover Constr. Co., 446 U.S. 608, 616-17 (1980)). This is a well-
settled application of the canon expressio unius est exclusio
alterius, which provides that when some provisions are listed, but
other related provisions are omitted, courts infer ``that items not
mentioned were excluded by deliberate choice, not inadvertence.''
Barnhart v. Peabody Coal Co., 537 U.S. 149, 168 (2003). Moreover,
the Supreme Court has explained that ordinarily, silence does not
convey any meaning, much less the potential for sweeping liability.
See Cmty. For Creative Non-Violence v. Reid, 490 U.S. 730, 749
(1989) (``Ordinarily, Congress' silence is just that--silence.'').
\3\ Aspire Commodities, L.P. v. GDF Suez Energy N. Am., Inc.,
No. H-14-1111, 2015 WL 500482 (S.D. Tex. Feb. 3, 2015), aff'd, No.
15-20125, 2016 WL 758689 (5th Cir. Feb. 25, 2016).
---------------------------------------------------------------------------
Of course, the Commission is free to change its mind and amend
final orders through the notice and comment process, as it proposes
to do now. Still, by taking this action the Commission is
introducing a disturbing precedent regarding the legal certainty of
its orders.\4\ 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.\5\ Commission orders should not
be amended, expanded or withdrawn absent a change in facts or
circumstances or the law.
---------------------------------------------------------------------------
\4\ The Supreme Court has cautioned that when an administrative
agency changes its mind, which the Commission has clearly done
here--its claim of clarification notwithstanding--it must be mindful
of reliance interests that regulated persons have formed in the
interim. FCC v. Fox Television Stations, Inc., 556 U.S. 502, 514-16
(2009) (citing Smiley v. Citibank (South Dakota), N.A., 517 U.S.
735, 742 (1996)).
\5\ It is not unusual for the Commission to reserve its anti-
fraud or anti-manipulation authority without also reserving section
22; the Commission has done so in the past. See, e.g., A New
Regulatory Framework for Clearing Organizations, 65 FR 78020, 78025,
78027 (Dec. 13, 2000) (specifically enumerating section 22 as
reserved for reserved provisions of the Act and regulations); A New
Regulatory Framework for Multilateral Transaction Execution
Facilities, Intermediaries and Clearing Organizations, 65 FR 77962,
77976, 77986 (Dec. 13, 2000) (specifically enumerating section 22 as
reserved for reserved violations of the Act and regulations in
connection with transactions executed of Derivatives Transaction
Execution Facilities and as not reserved for certain purposes);
Effective Date for Swap Regulation, 76 FR 42508, 42517 (Jul. 19,
2011) (discussing exemption from section 22); see also RTO-ISO
Comment Letter at 6-7, n.11 (Jun. 22, 2015). To remove all doubt,
treating the failure to reserve section 22 as intentional is
consistent with Commission practice. As the 4(c) orders cited above
demonstrate, when the Commission intends to reserve section 22, it
has had little trouble either specifically enumerating section 22 as
reserved, or including a discussion of its applicability or
inapplicability.
---------------------------------------------------------------------------
It can be argued that private claims may serve the public
interest by empowering injured parties to seek compensation for
damages where the Commission lacks the resources to do so on their
behalf. Yet, the extensive regulation and monitoring of RTOs and
ISOs significantly obviates the policing role of private suits in
these markets. The six entities covered by the RTO-ISO Order are
subject to extensive and effective regulation by the RTO-ISO's
primary regulator (the Federal Energy Regulatory Commission,
``FERC'' or the Public Utility Commission of Texas, ``PUCT''), and
overseen by an independent market monitor responsible to the RTO-
ISO's primary regulator. As the FERC has explained, RTOs and ISOs
operate not only transmission facilities, but also markets for
trading electric energy among utilities, and the ``RTO and ISO
markets and transmission services are tightly integrated and are
regulated to a greater extent than other commodity markets.'' \6\
The FERC has explained that these entities are ``critical components
in carrying out the FERC's statutory responsibilities,'' \7\ and the
FERC therefore regulates them ``more extensively than other public
utilities.'' \8\
---------------------------------------------------------------------------
\6\ FERC Comment Letter on Proposed Order and Request for
Comment on Petition of ISOs and RTOs for Exemption of Specified
Transactions from Certain Provisions of the CEA, at 2 (Sept. 27,
2012).
\7\ Id. at 1.
\8\ Id. at 2.
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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.'' \9\ 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.\10\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 8308(a)(1).
\10\ 16 U.S.C. 824v (2012).
---------------------------------------------------------------------------
Disallowing private suits under the CEA does not leave persons
alleging harm from fraudulent or manipulative practices without
recourse. The CFTC may seek restitution on
[[Page 30255]]
their behalf.\11\ In addition, section 306 of the FPA permits the
filing of private complaints with the FERC for any violation of the
FPA.\12\
---------------------------------------------------------------------------
\11\ 7 U.S.C. 13a-1(d)(3) (2012).
\12\ See Joint Trade Associations, Comment Letter on Proposed
Order and Request for Comment on an Application for an Exemptive
Order From Southwest Power Pool, Inc. From Certain Provisions of the
Commodity Exchange Act Pursuant to the Authority Provided in Section
4(c)(6) of the Act, at 7 n.17 (Jun. 22, 2015) (citations omitted);
see also PUCT Comment Letter at 6-7 (Jun. 22, 2015) (explaining that
market participants regulated by the Electric Reliability Council of
Texas (``ERCOT'') aggrieved by the activities of other market
participants may bring complaints for adjudication by ERCOT, whose
decisions are subject to review by PUCT and the Texas state courts).
---------------------------------------------------------------------------
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.\13\ 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.\14\
---------------------------------------------------------------------------
\13\ Aspire, 2015 WL 500482, at *1; see also 16 Tex. Admin. Code
25.504(c) (2006). I take no position on the specific PUCT Rule at
issue, other to note that it appears to be backed by a broad
consensus of Texas electricity stakeholders and vigorously defended
by the PUCT. See Aspire, 2016 WL 758689, Brief for PUCT as Amicus
Curiae, at 27-29.
\14\ Aspire, 2015 WL 500482, at *1.
---------------------------------------------------------------------------
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.\15\ 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.\16\
---------------------------------------------------------------------------
\15\ See PUCT Comment Letter on Proposed Order and Request for
Comment on an Application for an Exemptive Order From Southwest
Power Pool, Inc. From Certain Provisions of the Commodity Exchange
Act Pursuant to the Authority Provided in Section 4(c)(6) of the
Act, at 7-10 (Jun. 22, 2014) (describing the Aspire litigation and
its potential deleterious effects on the RTO-ISO markets).
\16\ 7 U.S.C. 6(c); see also Feb. 25, 2016 Energy and
Environmental Markets Advisory Committee Meeting, transcript at 21-
70 (discussing the consequences for consumers and rate payers that
would flow from permitting private rights of action against RTO-ISO
participants).
---------------------------------------------------------------------------
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.'' \17\
---------------------------------------------------------------------------
\17\ Tex. Commercial Energy v. TXU Energy, 413 F.3d 503, 508
(5th Cir. 2005 (quoting Wegoland, Ltd. v. NYNEX Corp., 27 F.3d 17,
18 (2d Cir. 1994) (barring otherwise valid antitrust law claim on
the basis of the filed-rate doctrine based on PUCT oversight over
the relevant electricity market).
---------------------------------------------------------------------------
Here, the Commission dismisses concerns that preserving the
section 22 private right of action may cause regulatory uncertainty
or inconsistent or duplicative regulation by arguing that the same
result could occur if the CFTC were to bring enforcement actions for
violations of the Reserved Provisions. This is a concern, to be
sure. But the CFTC may bring suit only after an affirmative vote of
a majority of Commissioners and in accordance with its Memorandum of
Understanding with the FERC under which staff of the CFTC and the
FERC have agreed to consult each other on matters of mutual interest
and overlapping jurisdiction.\18\ The CFTC would therefore be far
likelier than a private plaintiff to consider the impact an action
for violating the CEA could have on the regulatory policy of co-
equal regulators operating in their primary field. Furthermore,
unlike private plaintiffs, the CFTC would have a thorough
appreciation of a potential defendant's positions in derivatives
markets and access to a potential defendant's positions in the cash
markets, ensuring that only cases of true merit would be brought.
One would expect the CFTC to conduct an extensive investigation and
carefully consider any impact an action for CEA violations would
have on electricity regulation before bringing suit. I certainly
will. As commenters have pointed out, private parties--who may be
interested primarily in winning a cash award and/or securing
attorneys' fees--will not consider the matter so broadly.
---------------------------------------------------------------------------
\18\ Memorandum of Understanding between the FERC and the CFTC
(Jan. 2, 2014), http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcfercjmou2014.pdf.
---------------------------------------------------------------------------
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.
As such, I emphatically dissent from the proposal.
[FR Doc. 2016-11385 Filed 5-13-16; 8:45 am]
BILLING CODE 6351-01-P