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By Paul Pantano, Sohair Aguirre and Lamiya Rahman
On May 19, 2015, the Commodity Futures Trading Commission (“CFTC” or “Commission”) issued an order in response to an application from Southwest Power Pool, Inc. (“SPP”) proposing to exempt three categories of SPP transactions (“Covered Transactions”) from all but the anti-fraud and anti-manipulation provisions of the Commodity Exchange Act (“CEA”) and CFTC Regulations, subject to certain conditions (“Proposed Exemption”). The Proposed Exemption was published in the Federal Register today and comments are due by June 22, 2015.1
SPP’s Proposed Exemption would apply to any person entering into the Covered Transactions or rendering services with respect to the Covered Transactions, including rendering advice with respect to the Covered Transactions. The Proposed Exemption is substantially similar to the final exemption order that the CFTC approved in April 2013 for transactions in several other independent system operators and regional transmission organization (“ISO-RTO”) markets.2 The Commission is requesting comments on several aspects of the Proposed Exemption. Below, we provide: (1) an analysis of key issues in the Proposed Exemption that are ripe for comment; and (2) a summary of the scope of, and the conditions applicable to, the Proposed Exemption.
The Proposed Exemption largely mimics the Final ISO-RTO Order, which already has been in effect for two years. However, the Proposed Exemption raises several additional issues discussed further below.
CEA § 22 Private Right of Action
The CFTC weighs in on a recently-litigated issue in today’s release: namely, are private rights of action under CEA Section 22 barred by the Final ISO-RTO Order?
In the Final ISO-RTO Order, because the CFTC specifically carved out the anti-fraud and anti-manipulation provisions of the CEA and CFTC regulations, these provisions still apply notwithstanding the exemptive relief.3 However, because Section 22 of the CEA was not specifically preserved, the District Court for the Southern District of Texas held last February that the Final ISO-RTO Order precludes private rights of action under the CEA with respect to the transactions that fall within the scope of the Final ISO-RTO Order.4
The CFTC disagreed with this reasoning in the Proposed Exemption, opining:
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…Thus, the Commission did not intend to create such a limitation, and believes the [Final ISO-RTO Order and the Proposed Exemption do not] prevent private claims for fraud or manipulation under the Act.
It is noteworthy that, despite having recognized the ambiguity surrounding Section 22, the CFTC neither expressly preserved the private right of action this time around in the text of the Proposed Exemption, nor requested public comment on its interpretation of the provision’s applicability.
Demand Response’s Uncertain Fate
Like the Final ISO-RTO Order, the Proposed Exemption includes demand response transactions as a Covered Transaction. But the consensus on the jurisdiction of the Federal Energy Regulatory Commission (“FERC”) over retail demand response has been on shaky ground of late. The Supreme Court recently granted cert to determine once and for all the validity of FERC Order No. 745 (requiring ISO/RTOs to compensate demand response providers at full locational marginal price), which was vacated by the D.C. Circuit a year ago.5
The CFTC’s public policy rationale for exempting the Covered Transactions and the transactions covered under the Final ISO-RTO Order hinges in part on FERC’s regulation of these products. Thus, if the Supreme Court finds FERC does not have jurisdiction over retail demand response, it may weaken the CFTC public policy rationale for exempting these transactions.6
Forward Capacity Transactions
Despite significant similarities, one notable difference between the Proposed Exemption and Final ISO-RTO Order is that SPP did not request an exemption for Forward Capacity Transactions, which currently are not offered in SPP’s markets.
Yet, if SPP were to offer Forward Capacity Transactions in the future, it would not be able to rely on the same type of exemptive relief that other ISO/RTOs currently enjoy for such transactions under the Final ISO-RTO Order. This is because the CFTC declined to grant SPP’s broad request for relief for products that currently are not defined in the Proposed Exemption, but that are ”directly related to, and a logical outgrowth of, any of the SPP’s core functions as an RTO.”7 Accordingly, as new products arise in its markets, SPP will need to apply for supplemental relief from the CFTC’s rules; even if these products fall within the definitions of the transactions covered in the Final ISO-RTO Order.
To this end, the CFTC requests comment on whether the proposed scope of the exemption is sufficient to allow for innovation and, if not, how the scope could be expanded, without exempting products that may be substantially different from those the CFTC has reviewed. One approach would be to provide relief to SPP for transactions that fall within either the definitions of the Covered Transactions under the Proposed Exemption or the definitions of the transactions covered in the Final ISO-RTO Order.
Scope of the Proposed Exemption
The CFTC is proposing exemptive relief from most CEA provisions and CFTC Regulations for three specifically-defined categories of transactions in SPP’s markets:
The Covered Transactions defined in the Proposed Exemption are substantially similar to those exempted in the Final ISO-RTO Order (with the exception of Forward Capacity Transactions, for which SPP did not request an exemption). As with the Final ISO-RTO Order, so long as any products SPP develops in the future fall under these three categories, SPP would be able to rely on the Proposed Exemption and would not need to request further supplemental relief. In contrast, the CFTC denied SPP’s broader request to exempt future products that do not fall into these three categories but are a logical outgrowth of SPP’s core functions.
It is also worth noting that, although SPP’s application specifically included “convergence or virtual bids and offers” in its definition of Energy Transactions, the Proposed Exemption leaves out the term “convergence” and simply retains “virtual bids and offers” in its definition of Energy Transactions. It is likely that this change was merely an oversight by the CFTC because in the preamble to the Proposed Exemption, the CFTC clarifies that convergence bidding would be subject to the Proposed Exemption if it otherwise fits within the definitions of the Covered Transactions. Market participants should consider commenting on this aspect of the Proposed Exemption.
Conditions on Exemptive Relief
The Proposed Exemption imposes the following additional conditions that are largely identical to the conditions imposed in the Final ISO-RTO Order. Specifically,
No Position Limits for Covered Transactions
As with the Final ISO-RTO Order, the CFTC proposes not to impose position limits on SPP’s markets, noting that it has made a preliminary determination that such limits are not necessary. In the Final ISO-RTO Order, the CFTC accepted the requesting parties’ representations that the physical capability of their transmission grids limits the size of positions that any single market participant can take at a given time. The CFTC similarly accepted SPP’s representations to the same effect, subject to public comment.
1 See 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 Fed. Reg. 29490 (May 21, 2015), available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2015-12346a.pdf.
2 See 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 (“Final ISO-RTO Order”), 78 Fed. Reg. 19880 (Apr. 2, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-07634a.pdf; see also our previous Client and Friends Memo summarizing the Final ISO-RTO Order.
3 Specifically, the CFTC retained with respect to Covered Transactions: “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.” 78 Fed. Reg. 19912.
4 For more information on the District Court for the Southern District of Texas’ decision, please see our previous Client and Friends Memo.
5 For more information on the D.C. Circuit decision, please see our previous Client and Friends Memo.
6 Note, however, that demand response transactions may qualify for an exclusion from most CEA provisions and CFTC Regulations under the forward contract exclusion. In a final interpretation published earlier this week, the CFTC clarified that demand response agreements may constitute “regulatory requirements” under the seventh prong of the CFTC’s seven-part interpretation for forward contracts with embedded volumetric optionality. See Forward Contracts with Embedded Volumetric Optionality, Final Interpretation, 80 Fed. Reg. 28239 (May 18, 2015), available at http://www.gpo.gov/fdsys/pkg/FR-2015-05-18/pdf/2015-11946.pdf.
7 The CFTC took the same approach in the Final ISO-RTO Order.
This memorandum has been prepared by Cadwalader, Wickersham & Taft LLP for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Cadwalader, Wickersham & Taft LLP without first communicating directly with a member of the Firm about establishing an attorney-client relationship.
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