By Rich Heidorn Jr.

WASHINGTON — A parade of witnesses implored the U.S. Commodity Futures Trading Commission Thursday to reverse its position in a case that they say could undermine the broad exemptions the commission granted RTOs and ISOs in 2013.

At issue is the CFTC’s draft order on a request from SPP seeking the same exemptions from the Commodity Exchange Act (CEA) that the commission granted the six other RTOs and ISOs.

The CFTC’s 2013 order exempted electricity transactions subject to FERC-approved tariffs from most provisions of the CEA while retaining its general anti-fraud and anti-manipulation authority.

SPP was the only grid operator not party to the 2013 order because its day-ahead market was not fully implemented until March 2014. Unlike the 2013 order, however, the draft SPP order includes a preamble stating the CFTC’s intent to preserve “private rights of action” under Section 22 of the CEA.

Representatives of the ISO/RTO Council (IRC), the Public Utility Commission of Texas, the Edison Electric Institute and energy management firm ACES made their case against the preamble language in a hearing of the CFTC’s Energy and Environmental Markets Advisory Committee. No witnesses spoke in favor of the added language.

Undoing the Balance

The preamble could undo “the careful balance of public interests that Congress struck when it directed coordination between the CFTC and the FERC to avoid ‘duplicative regulation’” in the 2010 Dodd-Frank Act, the IRC said in a Feb. 23 letter to the commission.

PJM, ERCOT and CAISO separately raised objections last June. (See PJM: CFTC Order on SPP Undermines Exemption.)

Texas PUC Commissioner Kenneth W. Anderson Jr. told the committee that FERC and the PUCT are more “efficient” than private legal proceedings in resolving disputes. Allowing private actions, he said, would result in “collateral attacks on FERC- and PUCT-authorized valid market rules, undermining the efficient operation and regulation of electricity markets.”

“This provides an end-run around the absence of a private right of action” in the Federal Power Act and Texas Public Utility Regulatory Act, Anderson said.

Uncertainty

“Even if the commission decides to only apply this to the SPP RTO … that still creates a lot of uncertainty for EEI members, primarily because most EEI members operate in more than one RTO,” said Lopa Parikh, EEI’s senior director of federal regulatory affairs.

She noted that the commission did not address whether products such as financial transmission rights and virtual trades are subject to the CEA. “And so now to have the possibility of a number of district courts and lower-level courts opining on this decision further creates regulatory uncertainty,” Parikh said.

Administration of FTRs “would no longer be clearly linked to the underlying physical attributes of the grid, as it inevitably would be argued that FERC was divested of jurisdiction over these products due to the ‘exclusive jurisdiction’ provisions of the CEA,” the IRC said. “Such an outcome would create, for the first time, a ‘regulatory gap’ between the allocation and trading of the product itself and its use in addressing real-time congestion on the grid, a matter clearly within FERC’s jurisdiction.”

Jeff Walker, senior vice president and chief risk officer for ACES, said there was no evidence for a “public interest determination” to add the private rights language to the SPP order.

“Nothing indicates the RTO markets … are opaque pools of interconnected financial entity transactions or instruments,” said Walker, whose company has load-serving entities in five of the seven ISOs and RTOs.

Walker described a scenario involving a generation owner that purchases hedges before taking an outage to repair tube leaks in its boiler.

“Coincidentally, local RTO prices spike,” causing losses for another market participant that held a short physical position and wasn’t expecting the spike. “What does it do? It files a Section 22 action against the generation owner for market manipulation in one of the 100 or so federal district courts.

“Section 22 does not require the plaintiff to prove that the generation owner was not acting in a prudent utility practice manner when scheduling the repair outage,” Walker said. “That is legal uncertainty.”

Separate Rulemaking?

Several witnesses said if the CFTC addresses the private rights issue, it should be done in a separate rulemaking.

“Having worked a lot on these issues in the years right after the passage of Dodd-Frank, there were times when the relations between the CFTC and the FERC were rocky. I think we’ve come into a period of relative calm more recently, which I think those in the industry have welcomed,” said Sue Kelly, president of the American Public Power Association.

“There’s no one from FERC here, so let me just say for them, this could really ruffle some feathers,” she continued. “So I think if you are going to tread into this area, you need to do so very carefully and respectfully of the two agencies’ jurisdiction and have a real full airing of this issue.”

Commissioners Appear Split

All three of the current CFTC commissioners began their terms in 2014, after the 2013 RTO exemption order.

The draft SPP order, published last May, said, “It would be highly unusual for the commission to reserve to itself the power to pursue claims for fraud and manipulation … while at the same time denying private rights of action and damages remedies for the same violations.

“Moreover, if the commission intended to take such a differentiated approach … the RTO–ISO order would have included a discussion or analysis of the reasons therefore,” it continued. “Thus, the commission did not intend to create such a limitation, and believes that the RTO–ISO order does not prevent private claims for fraud or manipulation under the act.”

Commissioner J. Christopher Giancarlo expressed concern over the private rights language in his opening statement. “Commenters have warned that permitting private suits will undermine regulatory certainty and could result in collateral attacks on the finely calibrated electricity market structure that state and federal regulators have enacted,” he said, citing a CEA Section 22 suit by Aspire Commodities and Raiden Commodities against GDF-Suez Energy North America for allegedly manipulating electricity prices in ERCOT. A district court judge dismissed the case in February 2015 based on CFTC’s exemption order, a decision upheld by the 5th Circuit of Appeals last week.

But Chairman Timothy Massad indicated less sympathy for the witnesses’ concerns over litigation to which regulators are not a party and the risk of conflicting district court rulings. “We face that every day … so I don’t think that issue is really unique here,” he said.

“We certainly want to balance the value of regulatory certainty with the need to make sure there is adequate recourse for private actors. The CEA does provide for private rights of action,” he added.

He also indicated no interest in starting a separate rulemaking on the issue, saying, “I think we have taken a lot of public comments on this in the context of the SPP order.”

Commissioner Sharon Y. Bowen was noncommittal, saying only that she wanted to hear market participants’ concerns.