Confusion Continues Over Market Manipulation Jurisdiction
May 13, 2016
A recent Commodities Futures Trading Commission (“CFTC”) amendment suggests that wholesale electricity markets appear to continue to be caught in a jurisdictional struggle. The CFTC, the Federal Energy Regulatory Commission (“FERC”), and state utility commissions, such as the Public Utility Commission of Texas (“PUCT”), have all attempted to regulate energy markets and prevent market manipulation. Absent preemption legislation from Congress, it is likely that as long as this tug of war continues, there will be confusion and ambiguity over which agency has ultimate jurisdiction.
On May 10, 2016, the CFTC issued a proposed amendment to a final order the CFTC issued on March 28, 2013 that exempted certain specified transactions of six Regional Transmission Organizations and Independent System Operators (“RTO-ISO Order”) from certain provisions of the Commodity Exchange Act (“CEA”) and CFTC regulations. The RTO-ISO Order had exempted contracts, agreements, and transactions for the purchase or sale of the limited electric energy-related products that are specifically described within the RTO-ISO Order from the provisions of the CEA and CFTC regulations. The amendment makes clear that the RTO-ISO Order did not preempt the CFTC’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions. The comment period on the proposed CFTC amendment will be open for 30 days after publication in the Federal Register.
CFTC Commissioner J. Christopher Giancarlo wrote a scathing dissent regarding the proposed CFTC amendment. He argued, in part, that the proposed amendment “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.”
Private rights of action in federal courts could further muddy the jurisdictional waters over potential market manipulation issues. The CEA amendment could result in energy transactions that are lawful under the PUCT and FERC being challenged by parties in federal courts. PUCT Commissioner Kenneth Anderson has stated, in fact, that allowing private causes of action will allow collateral attacks on FERC and PUCT orders.
Partly as a consequence of the California energy market crisis between 2000 and 2001, Congress passed the Energy Policy Act of 2005. This federal legislation attempted to legislate the “rules of the road” that energy market participants must follow. A key element of the legislation was a provision that required the CFTC and FERC to meet and resolve jurisdictional issues through a memorandum of understanding. Although such a MOU was executed on October 12, 2005 allowing information exchange related to oversight or investigations, the issue of potentially overlapping jurisdiction over energy market manipulation remained. FERC implemented its authority in 18 C.F.R. §1.c which prohibited, for example, “the use of any device, scheme, or artifice to defraud . . . [or] to engage in act, practice, or course of business that operates or would operate as a fraud.”
On July 21, 2010, Congress again directed the CFTC and FERC to develop MOUs as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. On January 2, 2014, FERC and the CFTC finally executed a second MOU addressing data sharing, and a separate MOU to address “circumstances of overlapping jurisdiction.”
Significantly, state regulatory agencies, such as the PUCT, have not been participants in any of these MOUs, even though state regulatory agencies continue to have a role to play in preventing energy market manipulation. The PUCT, for example, maintains considerable jurisdiction over the ERCOT energy markets, which are intrastate markets beyond FERC’s jurisdiction.
The lack of clarity between the jurisdiction of the PUCT, CFTC and FERC will likely result in parties being subject to conflicting standards, and the potential for forum shopping. For example, the U.S. Court of Appeals for the D.C. Circuit held in 2012 that the CFTC, not FERC, has exclusive jurisdiction over manipulative conduct in natural gas futures markets, even if that conduct impacts FERC jurisdictional gas markets. See, https://www.cadc.uscourts.gov/internet/opinions.nsf/99CC9904B30AC2CB85257B2F004DEA04/$file/11-1477-1425550.pdf.
This jurisdictional conflict between the CFTC, FERC and state commissions is of more than academic interest. Each agency has different standards for evaluating whether a violation has occurred. Each agency also has different standards for retroactively seeking redress. Entities that participate in the energy market industry may wish to consider filing comments regarding the proposed CFTC amendment.
This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contactCharlie Zdebski at (202) 659-6605 – czdebski@eckertseamans.com.