CADWALADER 	 Cadwalader, Wickersham & Taft LLP 

700 Sixth Street, N.W., Washington, DC 20001 

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New York London Charlotte Washington 

Houston Beijing Hong Kong Brussels 

February 24, 2016 

Via Electronic Submission 

Christopher Kirkpatrick 


Secretary ofthe Commission 


U.S. Commodity Futures Trading Commission 


Three Lafayette Centre 


1155 21st Street, N. W. 


Washington, DC 20581 


Re: 	 Notice ofProposed Order and Request for Comment on an AppIication 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) ofthe Act 

Dear Secretary Kirkpatrick: 

We are submitting this written statement to the Energy and Environmental Markets 


Advisory Committee ("EEMAC") ofthe Commodity Futures Trading Commission ("CFTC" or 


"Commission") on behalf ofthe independent system operators ("ISOs") and regional 


transmission organization ("RTOs") that submitted comments in response to the Commission's 


proposed order to grant a public interest exemption for certain transactions in the wholesale 


electricity markets operated by the Southwest Power Pool ("SPP"), SPP members, and SPP from 


all but the anti-manipulation and anti-fraud provisions ofthe Commodity Exchange Act 


("CEA"). 1 


I. 	 Introduction 

We represented PJM Interconnection, L.L.C. ("PJM") and the Electric Reliability 


Council ofTexas ("ERCOT") in applying for and receiving a public interest exemption under 


Section 4(c) ofthe CEA. In the application, which was submitted on February 7, 2012, and 


updated on June 11, 2012, PJM, ERCOT, and four other ISOs and RTOs, including the 


California Independent System Operator ("CAISO"), ISO New England Inc., the Midwest 


Independent System Transmission System Operator, Inc. and the New York Independent System 


Operator, Inc., requested a public interest exemption for specified transactions in the ISO-RTO 


markets, the ISOs and RTOs, and any person or class of persons offering, entering into, 


rendering advice, or rendering other services with respect to such transactions from all but the 


Notice of Proposed Order and Request for Comment on an Application for an Exemptive Order From 

Southwest Power Pool, Inc. From Certain Provisions ofthe Commodity Exchange Act Pursuant to the Authority 

Provided in Section 4(c)(6) ofthe Act, 80 Fed. Reg. 29490 (May 19, 2015) ("Proposed SPP Order"). 
CADWALADER 

Christopher Kirkpatrick, Secretary 

February 24, 2016 

Page 2 

anti-manipulation and anti-fraud provisions ofthe CEA. On April 2, 2013, the Commission 


issued a final order granting the requested exemption (the "ISO-RTO Final Order").2 


Separately, we submitted comments on behalf of PJM, ERCOT, and CAI SO in response 

to the Proposed SPP Order. In addition, we filed an amicus curiae brief on behalf of P JM, 

ERCOT, and CAISO in Aspire Commodities LP and Raiden Commodities LP v. GDF Suez 

Energy North America Inc. et al., a case in which Aspire Commodities L.P. and Raiden 

Commodities, L.P. filed a private claim against GDF-Suez Energy, North America, Inc. and six 

of its affiliates under CEA section 22 for allegedly manipulating electricity prices in the ERCOT 

market. 

This statement addresses the following three points: 

• 	 The benefits ofsection 4( c) public interest exemptions for the ISOs and RTOs, the 

CFTC, and the public; 

• 	 The history ofthe Commission's section 4(c) exemptions; and 

• 	 The adverse consequences of allowing private rights of action for transactions solely 

in ISO and RTO markets. 

II. 	 The Benefits of Section 4(c) Public Interest Exemptions for the ISOs and RTOs, 


the CFTC and the Public 


Questions about the regulatory certainty under the CEA of ISO and RTO transactions 

have been before the Commission for many years. In 1998, P JM submitted the first ofseveral 

requests for no-action relief from the Commission to confirm that it would not regulate various 

P JM transactions as futures contracts. In 20 I 0, twelve years after P JM submitted its first noaction request, and as part ofthe Dodd-Frank Wall Street Reform and Consumer Protection Act 

("Dodd-Frank Act"), Congress sought to avoid jurisdictional disputes between the CFTC, the 

Federal Energy Regulatory Commission ("FERC"), and the Public Utility Commission ofTexas 

("PUCT") over the regulation of ISO and RTO transactions by adding a specific provision to 

section 4(c) directing the Commission to grant exemptions for transactions made pursuant to a 

FERC-approved tariff or a protocol permitted to take effect by the PUCT if, as the CFTC found 

in the ISO-RTO Final Order, such an exemption is in the public interest.3 

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 ofTexas From Certain Provisions ofthe Commodity 

Exchange Act Pursuant to the Authority Provided in the Act, 78 Fed. Reg. 19880 (Apr. 2, 2013). 

7 U.S.C. § 6(c)(6). 
CADWALADER 

Christopher Kirkpatrick, Secretary 

February 24, 2016 

Page 3 

A public interest exemption provides the ISOs and RTOs and their members with legal 

certainty about how they, and their transactions in the organized wholesale electricity markets, 

will be regulated. Because FERC and the PUCT comprehensively regulate the organized 

wholesale electricity markets, an exemption protects ISOs and RTOs against duplicative and 

conflicting regulations. An exemption also provides ISOs and RTOs and their members with 

legal certainty about the enforceability oftheir transactions. Legal certainty about the regulation 

and enforceability of ISO and RTO transactions is critical to efficient federal and state 

regulation, and the "responsible economic or financial innovation and fair competition" that 

public interest exemptions are designed to promote.4 

At the same time, an exemption benefits the CFTC by avoiding counterproductive 

disputes between sister regulators about which agency has regulatory jurisdiction - an outcome 

that Congress expressly sought to achieve when it called for the CFTC and the FERC to exercise 

their respective authorities in a manner that would "ensure effective and efficient regulation in 

the public interest."5 Granting an exemption also conserves the CFTC's limited resources by 

enabling it to defer to the comprehensive regulation ofISOs and RTOs by the FERC and the 

PUCT. Finally, and as discussed in greater detail below, an exemption preserves the CFTC's 

ability, in a deliberate and controlled manner, to take enforcement action against wrongdoers 

who manipulate ISO and RTO markets. Importantly, one ofthe remedies that the CFTC can 

seek in an enforcement action is restitution to customers of damages caused by the defendant's 

illegal conduct.6 

Finally, an exemption benefits the public by ensuring that the complex wholesale 

electricity markets operated by the ISOs and RTOs are regulated by expert agencies, the FERC 

and the PUCT, in a manner that produces just and reasonable rates. 

III. The History of the Commission's Section 4(c) Exemptions 

Section 4( c) was added to the CEA in 1992. As far as we have been able to determine, 

over the past 24 years the Commission has expressly preserved a private right of action in broad 

public interest exemptions only two times. Those two exemptions were superseded within eight 

days by Congress with statutory exemptions that did not permit private rights of action in 

4 7 U.S.C. § 6(c)(l). 

Section 720(a)(l)(A) ofthe Dodd-Frank Act; 15 U.S.C. § 8308(a)(l) (Directing the CFTC and FERC to 

"negotiate a memorandum of understanding to establish procedure: (A) for applying their respective authorities in a 

manner so as to ensure effective and efficient regulation in the public interest; (B) resolving conflicts concerning 

overlapping jurisdiction between the 2 agencies; and ( C) avoiding, to the extent possible, conflicting or duplicative 

regulation."). 

6 7 u.s.c. § 9. 
CADWALADER 

Christopher Kirkpatrick, Secretary 

February 24, 2016 

Page4 

connection with exempt transactions.7 Similarly, in issuing an exemptive order for the effective 

date of certain provisions of the CEA that were amended by the Dodd-Frank Act, the 

Commission expressly stated that: "[t]o the extent that the Final Order provides [4(c)] exemptive 

relief [from certain provisions ofthe CEA], such exemptive relief would, in effect, preclude a 

person from succeeding in a private right ofaction under CEA section 22(a) for violation of such 

provisions."8 In the same regard, the ISO-RTO Final Order also does not preserve CEA section 

22 as continuing to apply to ISO and RTO transactions. Thus, the Commission's statement in 

the preamble to the Proposed SPP Order that it would be "highly unusual" for the Commission to 

preserve its own manipulation and fraud enforcement authority while excluding a private right of 

action for the same violations is inconsistent with its regular and long-standing practice in 

granting public interest exemptions. 

IV. 	 The Adverse Consequences of Allowing Private Rights of Action Based Solely 


Upon ISO and RTO Transactions 


Preserving private rights of action in public interest exemptions for ISO and RTO 

transactions will have many adverse consequences. Section 4( c) enables the Commission to 

exempt transactions from CEA regulation without determining whether those transactions are 

swaps or futures contracts.9 In the case of ISO and RTO transactions, this mechanism is 

precisely how a public interest exemption avoids jurisdictional disputes between sister 

regulators. 

Allowing private actions will undermine the legal certainty provided by the exemptions 

and potentially could divest FERC and the PUCT ofjurisdiction over certain ISO and RTO 

transactions. The following scenario, which focuses exclusively on a hypothetical manipulation 

of ISO-RTO transactions, not on a cross-market manipulation scheme that involves transactions 

regulated by the CFTC, demonstrates how allowing private claims related to ISO and RTO 

transactions would lead to significant regulatory uncertainty. Assume that: 

On December 13, 2000, the Commission issued two rules that preserved Section 22 in connection with Section 

4(c) exemption orders. See A New Regulato1y Framework/or Clearing Organizations, 65 Fed. Reg. 78020 (Dec. 

13, 2000) (Section 39.5 Enforceability); see also Exemption o/Transactions on a Derivatives Transaction Facility, 

65 Fed. Reg. 77962, 77986 (Dec. 13, 2000) (Section 37.8 Enforceability). Eight days later, in the Commodity 

Futures Modernization Act, Congress amended the CEA to grant statutory exemptive relief for certain types of 

transactions and did not preserve private rights ofaction. See former CEA Sections 2(d), (g) and (h). As a result, 

the CFTC was forced to withdraw its regulations. See A New Regulatory Framework/or Multilateral Transaction 

Execution Facilities, Intermediaries and Clearing Organizations; Rules Relating to Intermediaries ofCommodity 

Interest Transactions; A New Regulatory Framework/or Clearing Organizations; Exemption for Bilateral 

Transactions, 65 Fed. Reg. 82278 (Dec. 28, 2000). 

See Effective Date for Swap Regulation, 76 Fed. Reg. 42508, 42517 (Jul. 19, 2011 ). 

Indeed, in applying for the 4(c) exemption, the ISOs and RTOs expressly stated that they did not presume that 

transactions in the ISO and RTO markets are subject to the regulatory oversight ofthe CFTC. And in its ISO-RTO 

Final Order, the Commission took no position on this issue. 

9 
CADWALADER 

Christopher Kirkpatrick, Secretary 

February 24, 2016 

Page 5 

• 	 Party A sues Party B for manipulating the price of a financial transmission right or 

congestion revenue right (collectively for this hypothetical, "FTR") transaction in an 

ISO or RTO; 

• 	 To prevail on a private claim under CEA section 22, Party A first must prove that an 

FTR is a swap or futures contract; 

• 	 The district court and, ultimately, a court of appeals rules that an FTR is a swap, and 

consequently that the ISO or RTO, which acts as a central counterparty, is a 

designated contract market or swap execution facility; 

• 	 FERC then brings an enforcement action against Party B for manipulating the price of 

the same FTR transactions that are the subject ofthe private claim; 

• 	 Party B asserts that the CFTC's exclusive jurisdiction over swap transactions 

precludes FERC's claim and, on direct appeal to the same court of appeals that ruled 

in the civil suit, the court agrees, being bound by its precedent in the civil suit; 

• 	 Repeat this scenario in multiple jurisdictions across the United States; 

• 	 Because the CFTC's jurisdiction over swaps is "exclusive," if a number of federal 

circuits hold that FTRs or other ISO and RTO transactions are swaps or futures 

contracts, no other federal or state agency could regulate ISOs and RTOs or their 

transactions. 

It would not serve the public interest if allowing private rights of action based upon RTO 

and ISO transactions had the effect of precluding the FERC and the PUCT from regulating ISOs 

and RTOs or their transactions. By directing the CFTC to grant public interest exemptions for 

RTO and ISO transactions, Congress surely did not intend that the CFTC should either create or 

fill such a regulatory void. It is more sensible for the Commission to devote its limited resources 

to the primary markets, persons and transactions that it is charged to regulate rather than to divert 

resources to complex organized wholesale electricity markets that it does not have the expertise 

or experience to regulate. 

Importantly, a CFTC enforcement action does not raise the same jurisdictional problems 

as a private claim because the CFTC's anti-manipulation authority is not limited to swaps and 

futures contracts. 10 The CFTC can prosecute manipulation ofthe price of a commodity in 

interstate commerce regardless ofthe legal characterization ofthe transactions involved. 

Consequently, the CFTC can prosecute manipulation ofthe price of an FTR without proving that 

10 	 The definition of swap includes options. 7 U.S.C. la(47)(A)(i). 
CA	DW A L A D E R 

Christopher Kirkpatrick, Secretary 


February 24, 201 6 


Page 6 


an FTR is a swap or a futures contract and, therefore, without di vesting the FERC and the PUCT 

of jurisdiction over ISO and RTO transactions. 

There are several other adverse consequences to all owing private claims under the CEA 

for ISO and RTO transactions. As the ISO-RTO Commenters explained in the comments on the 

Proposed SPP Order, private claims will enable plaintiffs to collaterally attack rules approved by 

FERC or permitted to take effect by the PUCT by claiming that the ISO and RTO transactions 

made in compliance with those rules are unlawful. In addition, pri vate claims will enable pri vate 

parties to challenge "fil ed rates," something that the courts historically have le ft onl y to the 

FERC and the PUCT. Finally. private claims will interfere with the ability of the CFTC and the 

FERC to determine via their memorandum of understanding how to exercise their respective 

jurisdiction over ISO and RTO transactions and market participants. 

V. Conclusion 

For the foregoing reasons, the Commission should not preserve private rights of action in 

the ISO and RTO exemption orders. Instead, the Commission should continue to cooperate with 

the FERC and PUCT, and to rely on its existing enforcement authority, if and when necessary, to 

police manipulation and fraud in the ISO and RTO markets. 

Resp;/,y bm~ .' 

Pa'UJ /t::l1,/,~1 J. lnfun\I~. ··· ~ 1 

cc: 	 Ajay B. Sutaria, Secretary 


Energy & Environmental Markets Advisory Comm ittee 


U.S. Commodity Futures Trading Commission