On March 15, the D.C. Circuit Court of Appeals dealt the Federal Energy Regulatory Commission (“FERC”) a major setback in its enforcement efforts by ruling that FERC had encroached on the exclusive jurisdiction of the Commodity Futures Trading Commission (“CFTC”) in a market manipulation case, Hunter v. FERC.
Hunter involved a former trader for now-defunct Amaranth Advisors who was accused of dumping a significant number of natural gas futures contracts during the “settlement period” for natural gas futures, allegedly for the purpose of driving down the price of natural gas. Hunter benefitted from the drop in price because he had taken an opposing position in swap derivatives. On July 25, 2007, the CFTC filed a civil enforcement action against Hunter. FERC filed its own enforcement action the following day. Following the administrative process, FERC ruled against Hunter and imposed a $30 million fine for alleged manipulation of the natural gas futures market.
Hunter petitioned for review, arguing that FERC lacked jurisdiction to pursue the enforcement action. The CFTC intervened in support of Hunter. FERC contended that it had jurisdiction over the matter because the Energy Policy Act of 2005 expanded FERC’s authority to regulate manipulation in energy markets, and because Hunter’s manipulation of the settlement price had affected the price of natural gas in FERC-regulated markets.
In an opinion authored by Judge David Tatel, the D.C. Circuit rejected FERC’s jurisdiction argument, holding that nothing in the Energy Policy Act “clearly and manifestly” repealed the CFTC’s exclusive jurisdiction under the Commodities Exchange Act (“CEA”) to regulate transactions involving commodity futures contracts. The court broadly held that if a scheme “involves buying or selling commodity futures contracts, [the CEA] vests the CFTC with jurisdiction to the exclusion of other agencies.”
It remains to be seen how FERC will respond to the decision, which significantly curtails FERC’s enforcement jurisdiction. Natural gas futures and natural gas prices are often intertwined, and the agencies generally argue that manipulation of the former will effect the latter. In light of Hunter, it will fall to the CFTC alone to combat manipulation in the natural gas “futures” markets. Although FERC seeks to ensure that energy is supplied to customers within FERC’s jurisdiction at reasonable rates, its ability to protect customers by preventing manipulation that could lead to higher rates may now depend, in part, on the CFTC’s enforcement of its anti-manipulation regulations.
The degree to which the Hunter decision will curb FERC’s aggressive enforcement approach of the last decade is an open question. Following Enron’s manipulation of electricity markets and the passage of the Energy Policy Act, FERC had aggressively expanded its Office of Enforcement, by, for instance, expanding its staff and more than doubling its budget. FERC had used this authority to obtain several large settlements from companies including Constellation Energy Commodities Group, Inc. and an energy-trading unit of Deutsche Bank AG. FERC is currently pursuing $470 million in penalties and disgorgement from Barclays PLC, based on an alleged scheme to trade day-ahead fixed-price electricity to improve Barclay’s Intercontinental Exchange fixed-for-floating financial swap positions. FERC will have to re-evaluate its current investigations involving allegations of manipulative trading, to determine whether they concern commodity futures markets and thus fall within the CFTC’s exclusive jurisdiction. In instances involving manipulation of commodity futures and physical natural markets, FERC may have to focus its enforcement solely on the manipulation directly related to physical markets.
Under the Dodd-Frank Act, FERC and the CFTC are obligated to submit a memorandum of understanding (“MOU”) outlining how the two agencies can exercise their authority without encroaching upon one another, while sharing information and cooperating in investigations. The Dodd-Frank Act called for the agencies to complete the MOU by January 2011, but they have not done so to date. The Hunter decision may prompt the agencies to finally complete it.
Timothy J. Sullivan
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