D.C. Circuit Rejects FERC Jurisdiction Over Natural Gas Market Manipulation

Last Friday, the U.S. Court of Appeals for the D.C. Circuit concluded that the Federal Energy Regulatory Commission ("FERC") lacks jurisdiction to enforce a $30 million fine against accused natural gas market manipulator Brian Hunter. The D.C. Circuit'sopinion provides some needed clarity to the lines of regulatory jurisdiction where manipulation involves both physical natural gas and electricity markets and forward commodity futures markets. In such cases, the D.C. Circuit's opinion makes clear that FERC's jurisdiction is limited to the physical markets, while the Commodity Futures Trading Commission's ("CFTC") exclusive jurisdiction extends to the energy commodity futures markets.

As reported in more detail previously, the case arose from alleged manipulation of the NYMEX futures market for natural gas by Brian Hunter, then a trader for the Amaranth hedge fund. According to FERC's investigation, Hunter "shorted" his position in the natural gas market, then sold very large volumes of gas futures contracts during the February, March and April 2006 NYMEX settlement periods. The sales of commodity futures were intended to artificially depress natural gas prices, thus artificially benefitting Hunter's short position in the physical markets. In 2007, both FERC and the CFTC launched investigations of Hunter's activities, resulting in competing jurisdictional claims.

FERC asserted jurisdiction over Hunter's NYMEX manipulations based upon authority conferred in the Energy Policy Act of 2005 in the wake of the Enron scandal, providing FERC with new powers to prevent energy market manipulation. The CFTC's competing jurisdictional claims arise from the Commodity Exchange Act, which provides CFTC with "exclusive jurisdiction" to regulate the commodity futures markets. In resolving these competing jurisdictional claims, the D.C. Circuit sided with Hunter and the CFTC in concluding that the CFTC retains exclusive jurisdiction over trading in commodity futures markets for natural gas. The court found that Congress did not intend to limit CFTC's jurisdiction, or allow dual regulation by CFTC and FERC, when it expanded FERC's market manipulation authority in 2005.

In short, the D.C. Circuit's opinion creates a fenceline between FERC's area of exclusive jurisdiction and CFTC's. Manipulation of the market for physical contracts for natural gas falls on FERC's side of the fence, while manipulation of the commodities futures markets falls on CFTC's side of the fence. There is little doubt that the D.C. Circuit's opinion will extend to manipulation of the electricity markets, as well, because the Energy Policy Act's language giving FERC authority to prevent electricity market manipulation closely parallels the language concerning natural gas market manipulation construed by the court.

Notably, the D.C. Circuit issued its opinion only five weeks after oral argument, suggesting that the court had little trouble resolving the case against FERC and in favor of the CFTC. Hopefully, now that the internecine battle between FERC and CFTC has been resolved by the courts, the agencies will find a way to cooperate more effectively. In particular, it is reasonable to hope that the long-overdue Memorandum of Understanding between FERC and CFTC, which the Dodd-Frank Act required by January 2011, can finally be issued.

While the court's opinion is likely the last word on the FERC-CFTC jurisdictional split, it is unlikely to resolve the case against Hunter. While the court's opinion forecloses FERC's ability to enforce the $30 million fine leveled against Hunter, it is likely that the CFTC will continue to pursue its own prosecution. Serious consequences for Hunter therefore remain a firm possibility.

Original article

March 20, 2013 by Eric Christensen
D.C. Circuit Rejects FERC Jurisdiction Over Natural Gas Market Manipulation