Last week the Commodity Futures Trading Commission (CFTC) issued a notice of proposed order and request for comment proposing to allow a private right of action to enforce violations of the anti-manipulation, anti-fraud or scienter based provisions (Anti-fraud provisions) of the Commodity Exchange Act (CEA) in organized electricity markets. The proposal is a controversial reversal of policy that critics say could open electricity market participants to increased costs and liability. (more…)
The Commodity Futures Trading Commission (CFTC) last week released a final rule excluding certain electricity and natural gas swaps with governmental agencies and municipalities from the lower de minimis threshold for swaps with special entities. The rule makes permanent currently existing no-action relief previously issued by CFTC Staff. The final rule is the result of a petition filed by advocates for public energy companies claiming that subjecting swap transactions with governmental entities to a lower de minimis threshold would reduce the number of available counterparties, raise market liquidity concerns and make it more difficult for public energy companies to mitigate risk. To address these concerns the CFTC will allow certain swaps with special entities to be counted as regular swaps for purposes of swap dealer registration.
Under the Commodity Exchange Act and the CFTC’s regulations, an entity is exempt from registration as a swap dealer if the aggregate notional value of the swaps it entered into during the preceding 12 month period does not exceed the de minimis threshold of $3 billion (subject to a phase-in level of $8 billion). However, for swaps with special entities—federal or state agencies, municipalities, employee benefits plans, governmental plans and endowments—the de minimis threshold is only $25 million. As a result, companies entering into swaps with special entities have to be aware of their counterparty’s special entity status and take care not to exceed the substantially lower de minimis threshold.
The CFTC’s new rule creates an exception to the $25 million special entity threshold, so that “utility operations-related swaps” entered into with “utility special entities” are subject to the general $3 billion de minimis threshold. To qualify for the exception the swap must be with a special entity that owns or operates electric or natural gas facilities; associated with the generation, production, purchase or sale of electricity or natural gas; and for the purpose of hedging or mitigating commercial risk. In explaining why the exception is necessary, the CFTC recognized that utility special entities have unique responsibilities to provide electricity or natural gas services that must be continuous and are important to public safety. The CFTC also acknowledged that utility special entities often conduct swaps in localized and specialized markets, and the lower de minimis threshold could limit the number of willing counterparties to these important risk mitigation transactions. The new rule treats utility special entities similarly to non-governmental entities and will reduce regulatory barriers to transacting with special entities. The rule will become effective October 27, 2014.
White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York. White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553. The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts. Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.
This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May. The London offices of Platts were also searched. After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme. In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.
The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon. Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.
The Federal Energy Regulatory Commission (FERC) General Counsel recently argued to the Commodity Futures Trading Commission (CFTC) that “[a]pplying Dodd-Frank swap regulations to [regional transmission organization] RTO and [independent system operator] ISO products and services is not only unnecessary but also potentially harmful.” Transactions entered under RTO and ISO tariffs, according to the FERC General Counsel, should be exempt from the definition of “swap.”
The FERC General Counsel made these arguments in August 21 comments, partially supporting the petition of the nation’s six RTO/ISOs asking the CFTC to exempt them from swaps regulation under the Commodity Exchange Act in connection with four types of electricity purchases and sales they offer pursuant to FERC- or Public Utility Commission of Texas-approved tariffs. The FERC General Counsel had to resort to comment in order to make the Commission’s views known because the FERC and CFTC have yet to enter into a memorandum of understanding for “resolv[ing] conflicts concerning overlapping jurisdiction between the [two] agencies,” as required by § 720 of Dodd-Frank Wall Street Reform and Consumer Protection Act.
All RTO/ISO activities, from planning and operating transmission grids to dispatching generation resources to complying with reliability standards are governed by explicit tariffs that FERC must approve before they take effect. FERC staff also monitors RTO/ISO market operations, and ensures that they comply with FERC reporting requirements and credit practices. Consequently, according to the FERC General Counsel “[i]t makes little sense to subject organized electricity markets and transactions that are conducted pursuant to FERC-approved tariffs, subject to extensive reporting, as well as to FERC’s enforcement authority, to an entirely different regulatory model” under Dodd-Frank.
The FERC General Counsel also took issue with the scope of the exemptions that the RTO/ISOs sought, which would exempt only four categories of RTO/ISO transactions: (1) financial transmission rights, (2) energy transactions, (3) forward capacity transactions and (4) reserve or regulation transactions. The FERC General Counsel argued that all purchases and sales of products that are a logical outgrowth of the ISO or RTO’s core functions should be exempt in order to allow the ISOs/RTOs flexibility to adapt their products over time.
The CFTC is expected to make a ruling on the RTO/ISO petition and the FERC General Counsel’s comments by the end of the year.
The Commodity Futures Trading Commission (CFTC) has met resistance in its attempt to implement parts of the Dodd-Frank financial reform less than two weeks before they were scheduled to go into effect. On September 28, U.S. District Judge Robert L. Wilkins issued an opinion vacating the CFTC’s position limits rule and remanding it to the Commission. Judge Wilkins’ problem with the rule was not its substance but rather that the CFTC did not make necessary factual findings mandated by the Dodd-Frank Act.
The position limits rule was finalized in November and set spot-month position limits for both physical delivery and cash-settled contracts tied to 28 physical commodities, including natural gas and crude oil. The U.S. District Court for the District of Columbia vacated and remanded the rule because the CFTC made no findings about whether position limits were “necessary and appropriate” to “diminish, eliminate, or prevent excessive speculation” before imposing them, as the Dodd-Frank Act required. The CFTC contended that the Dodd-Frank Act mandated that the agency set position limits and went so far as argue that the CFTC had no discretion not to impose the limits.
The court disagreed with the CFTC’s interpretation and instead determined that Congress “clearly and unambiguously” required the Commission to make a finding of necessity prior to imposing position limits. The court found that the Commission has a longstanding requirement to make a finding of necessity under the Commodity Exchange Act (CEA). The CEA contains substantially similar language to Dodd-Frank, and the CFTC has made necessity findings before promulgating regulations for 45 years under the CEA. Given this history and the similarity in Congress’s mandate between the two statutes, the court was not convinced there was any reason the Commission should deviate from its previous practices. The court concluded that Dodd-Frank unambiguously requires that the Commission find that position limits are necessary prior to their imposition.
The court’s opinion leaves open the possibility of issuing a new rule about position limits after the CFTC makes a finding of necessity. Gary Gensler, Chairman of the CFTC, says the agency is “considering ways to proceed.” Gary Chilton, a Commission member, has called for a new proposal on position limits that satisfies the court’s objections. In a statement, Mr. Chilton vowed to continue the push for a position limits rule. Michael V. Dunn, the commissioner who provided the third vote in favor of the rule, has since left the CFTC.
The court did not rule on whether the agency must conduct a full cost-benefit analysis, leaving the question open to a future challenge should the Commission pass a new rule on position limits.
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