On February 25, 2016, the United States Court of Appeals for the Fifth Circuit affirmed the decision of the United States District Court for the Southern District of Texas dismissing a complaint by Aspire Commodities, L.P. and Raiden Commodities, L.P. (collectively “Aspire”) against GDF Suez Energy North America, Inc. and several of its affiliates (collectively “GDF”).  The court held that a public interest exemption order issued by the Commodity Futures Trading Commission (“CFTC”) precludes private claims under the Commodity Exchange Act (“CEA”) for claims arising out of transactions in the markets operated by the Electric Reliability Council of Texas (“ERCOT”).

Background on CFTC Exemption Order

On April 2, 2013, the CFTC issued a final order exempting certain independent system operators (“ISOs”) and regional transmission organizations (“RTOs”), their members, and specified transactions in their markets, from all but the CFTC’s anti-manipulation and anti-fraud provisions of the CEA and CFTC regulations thereunder (“Final ISO-RTO Order”).¹  The Final ISO-RTO Order was issued in response to an exemption request filed pursuant to Section 4(c) of the CEA by several ISOs and RTOs, including ERCOT.²  These ISOs and RTOs sought an exemption for specified transactions authorized under tariffs or protocols approved by the Federal Energy Regulatory Commission (“FERC”) or the Public Utility Commission of Texas (“PUCT”), in the case of ERCOT, and any persons, including the ISOs and RTOs and their members or other market participants offering, entering into, rendering advice, or rendering other services with respect to the specified transactions. 

The Parties

GDF generates electricity in the Texas electricity market.  As a producer of electricity, GDF Suez participates in all of the ERCOT markets.  Aspire participates only in ERCOT’s virtual market.  In addition, Aspire and GDF trade on the Intercontinental Exchange (“ICE”) where the prices of certain ERCOT-related electricity futures contracts are based upon the Locational Marginal Price (“LMP”) in ERCOT’s markets.³

Aspire alleged that GDF manipulated the ERCOT Real-Time Market in order to benefit its positions on ICE.  Specifically, Aspire claimed that GDF created artificial scarcity by increasing the price of its offer curves, which essentially made its electricity unavailable for purchase.  According to Aspire, GDF’s prices not only were significantly above the LMP but also exceeded the prices GDF had offered in the Day-Ahead Market.  According to the complaint, GDF further contributed to market scarcity by reporting that its plants were offline.  While not challenging the ERCOT LMP prices themselves as being “unlawful, wrong, or too high,” Aspire claimed that, by manipulating the ERCOT LMP, GDF Suez created “artificial and unpredictable” prices in derivatives markets, such as ICE.

The District Court’s Ruling

Aspire filed its claim under Section 22 of the CEA, which authorizes private rights of action for violations of the CFTC’s anti-manipulation rules.  GDF moved to dismiss Aspire’s claim arguing that the Final ISO-RTO Order precluded Aspire’s claim because under the Final ISO-RTO Order, ERCOT transaction were exempt from all but certain express provisions of the CEA.  GDF argued that Section 22 (providing for private claims under the CEA) was not one of the express provisions that the CFTC carved out from its broad exemption in the Final ISO-RTO Order.  Aspire opposed this motion and argued that the Final ISO-RTO Order did not apply because GDF manipulated prices on the ICE markets.  Finding this argument unpersuasive, the District Court granted GDF’s motion to dismiss.⁴

The Fifth Circuit’s Ruling

Aspire appealed to the Fifth Circuit.  Three ISOs and RTOs, including ERCOT, and the Public Utility Commission of Texas filed amicus briefs arguing that the court should affirm the district court’s dismissal. 

On appeal, Aspire raised three arguments.  First, Aspire renewed its argument that the Final ISO-RTO Order did not apply because GDF’s conducted resulted in the manipulation of the ICE markets.  The Fifth Circuit agreed with the District Court and found that all of GDF’s allegedly improper activity occurred in the ERCOT market.   

Second, Aspire argued that the Final ISO-RTO Order did not exempt ERCOT transactions from private rights of action.  In support, Aspire referenced a Southwest Power Pool (“SPP”) proposed order that explicitly discussed the Final ISO-RTO Order.⁵  In the preamble to the SPP Proposed Order, the CFTC stated that it intended to preserve private causes of action for fraud and manipulation under Section 22 of the CEA when it issued the Final ISO-RTO Order despite the fact that this provision was not included in the enumerated list of exceptions.⁶  Aspire argued that the CFTC’s interpretation of the Final ISO-RTO Order should be controlling.  The Fifth Circuit rejected this argument for two reasons:  (1) the Fifth Circuit could not properly consider this argument because Aspire did not raise it in the District Court; and (2) even if the Court considered the argument, it would reject it because the Final ISO-RTO Order was not ambiguous and the SPP Proposed Order was merely persuasive and not binding.

Finally, Aspire argued that the Final RTO-ISO Order does not exempt GDF’s alleged activity on the ERCOT market because GDF’s activity—withholding its electricity—was not an energy-related “agreement, contract, [or] transaction,” and thus outside the scope of the Final ISO-RTO Order.  Again, the court dismissed this argument because Aspire failed to argue it before the District Court. 

The SPP Final Exemption Order

The CFTC has yet to finalize the exemption order for SPP.  It will be interesting to see whether in issuing the final order for SPP, the CFTC will expressly carve out Section 22 of the CEA from the exemption.  If so, the CFTC likely will seek to revise the Final ISO-RTO Order as well.

_{¹ 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 Fed. Reg. 19880 (Apr. 2, 2013).} 

_{²See 7 U.S.C. § 6(c)(6) (providing that the if the Commission determines that an exemption would be consistent with the public interest, the Commission shall exempt an agreement, contract, or transaction that is entered into:  (1) pursuant to a tariff or rate schedule approved or permitted to take effect by the Federal Energy Regulatory Commission; or (2) 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).} 

_{³ LMP is a market price that ERCOT constantly adjusts to balance supply and demand at various nodes on the grid.}

_{⁴ For more information on the District Court’s decision, see Court Finds CFTC RTO/ISO Exemptive Order Bars CEA § 22 Private Right of Action, but More to Come from the CFTC.}

_{⁵ 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 19, 2015) (“SPP Proposed Order”).}

_{⁶ For more information on the SPP Proposed Order, see CFTC Issues Proposed Order to Exempt Certain SPP Transactions from Regulation Under Most Provisions of the CEA and CFTC Rules.}