05 July 2016

Energy Enforcement Update

This week’s enforcement update covers the City Power district court proceeding, letters from Congress on the CFTC’s proposed amendment to the RTO/ISO exemption order, a CFTC request for comment on swap clearing requirement submissions and a Senator’s letter to FERC on Aliso Canyon.

City Power responds to FERC’s supplemental brief.  On June 30, City Power filed its response to FERC’s supplemental brief on issues addressed at the June 1 hearing on City Power’s motion to dismiss.  City Power argues that FERC’s new brief does nothing to advance its old arguments or to rebut the key defense arguments.  According to City Power, there was no fraud.  City Power posits that under FERC’s allegations, there was no improper omission or any deceptive conduct because, for example, PJM saw all aspects of the UTC trades placed on PJM platforms and there is no specific allegation of how PJM was deceived.  City Power also rebuts FERC’s “implied misrepresentation” theory – under which FERC alleges that City Power did not disclose the “purpose” of its trades when placed.  City Power argues that FERC’s theory erroneously assumes a duty to disclose the trading strategy, as FERC expressly created no such duty in adopting the anti-manipulation rule.

Attorneys for Michael Coscia file Sentencing Memorandum.  On June 29, attorneys for Michael Coscia filed a sentencing memorandum asking that a sentence of probation be imposed in lieu of prison time.  As you may recall, in November 2015, a jury convicted Coscia on six counts of commodities fraud and six counts of spoofing.  Coscia faces a maximum sentence of 25 years in prison and a $250,000 fine for each count of commodities fraud, and a maximum sentence of 10 years in prison and a $1 million fine for each count of spoofing.  The memorandum argues that together with a sentence of probation, the punishment already imposed on Mr. Coscia is sufficient ($4.5 million in fines and disgorgement, and one-year suspension from trading).

Senator Cantwell sends letter to FERC on Aliso Canyon.  On June 21, U.S. Senator Maria Cantwell (D-Wash.), Ranking Member of the U.S. Senate Committee on Energy and Natural Resources, sent a letter to FERC Chairman Norman Bay, urging FERC to prevent energy marketers and electric generators from taking advantage of consumers due to a natural gas shortage in Southern California associated with the Aliso Canyon storage facility outage.  In the letter and related press release, Senator Cantwell wrote, “I am concerned that natural gas shortages and supply disruptions in Southern California will increase electricity and natural gas prices throughout the region and enable generators and marketers to engage in Enron-like tactics to pad their profit statements at the expense of consumers.”  She also urged FERC to use its authority under the Energy Policy Act of 2005 to enhance transparency and prevent entities from engaging in manipulative practices that harm consumers: “FERC should utilize this and other authority … to ensure that energy marketers and electric generators do not exploit natural gas shortages in Southern California to raise electricity and natural gas prices throughout the region.”

Representatives from House Energy and Commerce Committee request briefing from CFTC on proposed RTO/ISO order amendment.  On June 24, House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Ranking Member Frank Pallone, Jr. (D-NJ) sent a letter to the CFTC requesting a briefing on the CFTC’s proposed amendment to the 2013 RTO/ISO Final Order that would allow private parties to bring claims under the Commodity Exchange Act (CEA) for fraud and manipulation involving financial energy products traded in the organized wholesale power markets.  The Members expressed concerned that the CFTC’s proposal could have a negative impact on wholesale electricity markets.  Noting that FERC is the primary federal regulator of electricity transactions and RTO/ISO markets, the Members stated, “We are concerned that the CFTC’s proposal could adversely affect FERC’s fundamental statutory missions of ensuring just and reasonable rates in wholesale electric markets and ensuring the reliability of the electric grid.”

House Agriculture Committee also sends letter to CFTC on proposed amendment to RTO/ISO exemption.  On June 23, House Agriculture Committee Chairman K. Michael Conaway (R-TX), along with Ranking Member Peterson (D-MN), Rep. Austin Scott (R-GA) and Rep. David Scott (D-GA) sent a similar letter to CFTC Chairman Tim Massad.  The letter expresses concern that private rights of action would undermine the congressionally-mandated agreement between the CFTC and FERC on the regulatory framework for electricity markets.  The Members write, “Given the already heavily regulated nature of electricity markets, and the shared regulatory expertise of these two agencies, Congress required FERC and the CFTC to enter into a Memorandum of Understanding (MOU) to provide a consistent, efficient, and effective framework for energy producers and market participants.”  According to the letter, “We recognize the harm to consumers of fraud and market manipulation in electricity markets, and value the CFTC’s vigorous work to police these shared markets.  However, to uphold the Congressional intent expressed in Section 720(a) of the Dodd-Frank Act, and to ensure that FERC and the CFTC are able to continue their effective and cooperative monitoring of the energy markets, we urge you to consider the possibility that the proposals will result in widespread, inconsistent judicial interpretations of the Commodity Exchange Act.”

The CFTC requests public comment on swap clearing requirement submissions.  On June 23, the CFTC issued a release requesting public comment on swap clearing requirement submissions.  Derivatives clearing organizations (DCOs) are required under the Commodity Exchange Act to file certain information with the CFTC when they list new categories of swaps for clearing.  That information is intended to provide a basis on which the CFTC may determine whether to propose to mandate clearing for those swaps.  Over the past few years, a number of these swaps submissions have been made by the DCOs.  The DCOs have made 34 submissions so far, which include certain interest rate swaps, credit default swaps, FX NDFs, energy swaps, agricultural swaps and inflation swaps.  To date, the CFTC has simply been sitting on those submissions.  However, on June 23 the CFTC issued a blanket request for public comment on all of these DCO swaps submissions.  The CFTC is not currently proposing to mandate clearing for any of the swaps that are the subject of the DCO submissions, however, the CFTC will take public comments into consideration in determining whether to propose one or more clearing mandates in the future.  Comments must be submitted by July 25, 2016.

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