Barriers to Cooperation between the CFTC and FERC Hinder Investigations into Energy Market Manipulation – A Legislative Fix May be on the Horizon

by Moore & Van Allen PLLC

The Federal Energy Regulatory Commission (“FERC”) has initiated investigations into energy market manipulation in the last two years that have resulted in nearly $1 billion in penalties and profit disgorgements from companies and traders.  See our previous posts here, here, and  here.  Despite the significant enforcement efforts undertaken thus far, FERC Chairman Wellinghoff recently identified additional communication and jurisdictional barriers between FERC and the Commodity Futures Trading Commission (“CFTC”) that are preventing FERC from more effectively fulfilling its charge to police the integrity of the energy markets.  FERC Chairman Wellinghoff explained in an August 2013 letter to Sen. Ron Wyden, chairman of the Committee on Energy and Natural Resources, Sen. Lisa Murkowski, ranking member of the Committee on Energy and Natural Resources, and Sen. Dianne Feinstein, chairman of the Appropriations Subcommittee on Energy and Water Development, the impact that disagreements between FERC and the CFTC and developing federal case law regarding FERC jurisdiction is having on the agency’s ability to exercise the authority that it believes it already has over the energy markets.  Chairman Wellinghoff’s letter was sent in response to the April 2013 letter from the Senators which urged the FERC and CFTC Chairmen to negotiate new Memorandums of Understanding (“MOUs”) that would integrate their market oversight efforts and increase communication and information sharing, as required by the Dodd-Frank Act.  Chairman Wellinghoff invited Congressional action to remove impediments to FERC exercising its authority, including the recent decision issued by the U.S. Court of Appeals for the District of Columbia in Hunter v. FERC, 711 F.3d 155 (D.C. Cir. 2013) which held that the CFTC has exclusive jurisdiction over futures.  On September 6, 2013, Senator Wyden and Senator Feinstein issued responding statements that forecast the possibility of legislative action to shore up FERC’s authority.

            In the April 2013 letter to Chairman Wellinghoff and CFTC Chairman Gensler, the Senators stressed their “strong concerns” that disputes between the agencies regarding the agencies’ jurisdiction “undermine the free flow of information and allow market manipulators to exploit gaps in regulatory oversight and ultimately drive up the price of energy for American consumers.”   Chairman Wellinghoff’s August 2013 letter responding to the Senators identified the following barriers that continue to prevent FERC and the CFTC from developing the new information sharing and jurisdictional MOUs required by Dodd-Frank:

  • FERC and the CFTC “disagree over whether the CFTC should provide FERC with certain data that we believe is critical to our surveillance program to detect and deter energy market manipulation,” including “the Large Trader Report, which would allow FERC staff to identify market participants with an incentive in the financial markets to manipulate the physical markets by trading at physical hubs and nodes.”  FERC believes that access to this report “would improve the efficiency and precision of FERC staffs surveillance screens.”
  • There is “disagreement over whether FERC has the authority to protect consumers from price impacts in the physical energy markets resulting from manipulation occurring in the financial markets,” although “FERC believes that in the Energy Policy Act of 2005, Congress authorized FERC to protect against manipulation that affects the wholesale natural gas and electric markets.”
  • The D.C. Circuit’s holding in Hunter that the CFTC has exclusive jurisdiction over futures, “depriv[es] FERC of authority to bring an action based on manipulation in the futures market even though the activity affected prices in the physical natural gas and electricity markets.”  Chairman Wellinghoff stated that he “support[s] a legislative fix to eliminate uncertainty on this matter and ensure that FERC has the full authority needed to police manipulation of wholesale physical natural gas and electric markets.”

            On September 6, 2013, Senators Wyden and Feinstein responded to Chairman Wellinghoff’s August 2013 letter with strongly worded statements, indicating that Congressional intervention can be expected to ensure that FERC and the CFTC meet their requirement to monitor trading in the natural gas and electricity markets and effectively protect consumers against market manipulation.  The Senators previously explained in the April 2013 letter that “[w]hile Federal statute divides the jurisdiction of FERC and CFTC between cash markets and futures markets, respectively, Federal law also recognizes that detecting many forms of manipulation in these integrated markets requires active oversight of both markets in an integrated fashion.”  Senator Wyden’s September 6th statement identifies the CFTC as the obstacle to such integrated market oversight and makes clear the Senator’s intent to address the issue at the Congressional level:

In the wake of the Enron scandal, Congress took steps in 2005 to strengthen the Federal Energy Regulatory Commission’s authority to police the energy markets. While FERC has already taken major enforcement actions against traders and companies that manipulated energy prices, it appears that their federal counterparts at the CFTC have been working to undermine FERC’s efforts. Chairman Wellinghoff has asked Congress to step in and I will be consulting with our colleagues on Capitol Hill about doing exactly that.

Senator Feinstein was equally as critical of the CFTC’s failure to cooperate in her September 6th statement:

In the Dodd-Frank Act, Congress directed CFTC and FERC to cooperate in order to protect American consumers from manipulation, so it is unconscionable the CFTC would be unwilling to share this essential information with FERC.

The entirety of Senator Wyden’s and Feinstein’s September 6th statements in response to Chairman Wellinghoff’s August 2013 letter can be read here.

            The news release regarding Senator Feinstein’s and Senator Wyden’s September 6th statements ended by noting that the record penalties recently assessed by FERC against JP Morgan ($410 million) and Barclays and four individual Barclays traders ($453 million) were achieved using legislative authority that was co-sponsored by Senators Wyden and Feinstein in 2005.   See our previous post.  With Chairman Wellinghoff’s engagement of Congress to fashion a new legislative fix to ensure that FERC is imbued with the authority necessary to maximize its enforcement powers, we certainly can expect to see sustained surveillance of the energy markets and enforcement efforts by the federal regulator.

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Moore & Van Allen PLLC

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