With its proposed order issued earlier this week, the Commodity Futures Trading Commission (CFTC) may be making an already complicated landscape governing energy market manipulation even more so. The proposed order (CFTC Notice of Proposed Order) would open courthouse doors to private litigants arguing that participants in Regional Transmission Organization (RTO) markets (including ERCOT) have violated the Commodity Exchange Act (CEA) prohibition against manipulative or fraudulent practices heretofore policed exclusively by the CFTC and the Federal Energy Regulatory Commission (FERC). For future purposes, the proposal would effectively reverse the February 25, 2016 decision by the U.S. Court of Appeals for the Fifth Circuit that such suits were foreclosed by the CFTC’s earlier decision to refrain from oversight of RTO markets, with the exception of CFTC-initiated actions to address fraud and market manipulation. See Aspire Commodities, L.P. and Raiden Commodities L.P. v. GDF Suez Energy North America, et al., (Fifth Cir., No. 15-20125).
The enforcement regime governing energy market manipulation is already complex, with the line between FERC's and the CFTC's authority uncertain and FERC under fire for failing to define prohibited conduct clearly. While the D.C. Circuit in Hunter v. FERC, 711 F.3d 155 (D.C. Cir. 2013) handed the CFTC a clear victory in its claim that it has exclusive authority to police manipulation of future markets, the Eastern District of California came to a contrary conclusion in FERC v. Barclays Bank, 105 F. Supp. 3d 1121 (E.D. Cal. 2015) with respect to the use of physical trading to benefit swap positions. The Barclays case further highlights the contention of certain market participants that it is unfair to hold them culpable for conduct that is not clearly proscribed by tariffs or associated rules. That contention has been very publically underscored by the controversy surrounding FERC's decision in the Houlien Chen, Powhatan Energy Fund, et al., 151 FERC ¶ 61,179 (2015).
In this unsettled environment, the CFTC's current proposal to invite private litigants to press their own theories of market manipulation in court proceedings in which regulatory agencies have no special status holds the promise of more uncertainty. While the Chairman of the CFTC says in a separate statement that the decision is animated by an interest in augmenting limited prosecutorial resources and providing market participants additional recourse, a strong dissent argues that the proposed order is a blow against regulatory certainty and coherent policy.
Comments on the proposed order are due 30 days from pending publication of the proposal in the Federal Register. Stay tuned!
