D.C. Circuit Rules That CFTC – Not FERC – Has Authority To Regulate Futures Trades

by Perkins Coie

On March 15, 2013, the U.S. Court of Appeals for the District of Columbia Circuit held that the Commodity Futures Trading Commission (CFTC) has exclusive jurisdiction over natural gas futures contracts and that the Federal Energy Regulatory Commission (FERC) had exceeded its authority when it fined Brian Hunter, a trader for hedge fund Amaranth, $30 million for allegedly manipulating natural gas futures contracts.  Hunter v. FERC, No. 11-1477 (D.C. Cir. Mar. 15, 2013).

This case resolved a jurisdictional turf battle between the FERC and the CFTC, which stemmed from the expansion of the FERC’s authority as a result of the Energy Policy Act of 2005.  Since 1935, the FERC has exercised jurisdiction under the Natural Gas Act over interstate natural gas sales and transportation.  Under the 1974 amendments to the Commodity Exchange Act, the CFTC was vested with jurisdiction over commodity transactions conducted on futures markets, including energy commodities such as natural gas.  In response to the gaming of electricity markets in the West, Congress amended the Natural Gas Act in 2005 and expanded the FERC's authority to prohibit market manipulation "in connection with" the purchase or sale of natural gas or gas transportation subject to FERC jurisdiction.

In its enforcement action against Hunter, the FERC claimed that after passage of the Energy Policy Act of 2005, both the CFTC and the FERC have an enforcement role when there is manipulation in one market (physical or financial) that affects the other.  The FERC argued that the volume and timing of Hunter's sales of natural gas futures contracts manipulated prices, and that this reduced the price of natural gas in FERC-regulated markets where Hunter had positioned his natural gas assets to capitalize on a price decrease.  The FERC therefore claimed jurisdiction to fine Hunter for trading his natural gas futures contracts with the intent to manipulate prices in the physical natural gas market.

In his petition to the D.C. Circuit, Hunter argued that the FERC lacked jurisdiction because his actions were in the natural gas futures markets.  The CFTC intervened in the case and sided with Hunter, claiming that it had exclusive jurisdiction over futures transactions.

In deciding the case, the D.C. Circuit did not defer to either agency on their competing and conflicting jurisdictional claims.  Rather, it found that under the plain terms of the Commodity Exchange Act, the CFTC has exclusive jurisdiction over the manipulation of natural gas futures contracts.  Although the FERC argued that the Energy Policy Act of 2005 contemplates complementary jurisdiction between the two agencies, the court held that if a scheme involves buying or selling commodity futures contracts, the CFTC is vested with jurisdiction to the exclusion of other agencies. 

This opinion comes at a time when the FERC has a number of ongoing high stakes cases involving similar enforcement actions against financial institutions.  In addition, the FERC and the CFTC have been unable to agree upon the scope of their respective jurisdiction with regard to regulating swaps under the Dodd-Frank Financial Reform Act of 2010. 

It is unclear whether the CFTC will double down its enforcement efforts in energy commodity futures markets.  It is also unclear whether the ruling will prompt increased (or even less) cooperation and coordination between the CFTC and FERC in their regulatory and enforcement roles.  Lastly, it remains to be seen where the FERC will shift the enforcement resources it was using to pursue alleged manipulation of the energy futures markets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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