In an unusual, and rather unseemly, display, the Federal Energy Regulatory Commission ("FERC") and the Commodity Futures Trading Commission ("CFTC") have brought their long-standing battle concerning which agency has jurisdiction over energy commodity markets to the U.S. Court of Appeals for the D.C. Circuit, which yesterday heard oral arguments on the subject. While a final decision is not expected for several months, early reports suggest that the Court was skeptical of FERC's jurisdictional claims.
The jurisdictional squabble arises from accusations of market manipulation lodged against former natural gas trader Brian Hunter. In 2006, Hunter, then working for the Amaranth hedge fund, took very large positions attempting to capitalize on anticipated steep increases in gas prices during the winter of 2006-07, but those bets went spectacularly wrong. Amaranth lost roughly $6 billion and collapsed. Following the collapse, both FERC and CFTC accused Hunter of manipulating natural gas prices on the New York Mercantile Exchange ("NYMEX"), dumping large volumes on that exchange in order to drive down prices with the aim of benefiting Amaranth's position in related swap markets.
Ultimately, FERC concluded that Hunter had violated the agency's anti-manipulation rules and fined Hunter $30 million. Hunter challenged FERC's conclusions in the D.C. Circuit (Hunter v. FERC, D.C. Cir. No. 11-1477). The CFTC intervened on Hunter's side, arguing that FERC lacks jurisdiction to penalize Hunter because CFTC has exclusive jurisdiction to police commodity exchanges like NYMEX.
While it might reasonably be expected that Congress would have sorted this jurisdictional mess out rather than requiring the agencies to fight it out in court, they declined the opportunity to do so. In the Dodd-Frank Act, Congress instead directed FERC and CFTC to enter into a memorandum of understanding defining their respective jurisdictional roles. Although the memorandum was due in January 2011, it has never been released. Yesterday's oral argument in Hunter suggests that the agencies are a long way from reaching agreement. Unfortunately, this means that utilities with energy trading desks struggling to comply with Dodd-Frank are left with uncertainty regarding the fundamental question of which agency has jurisdiction over their trading operations, and the troubling prospect of overlapping jurisdiction.
If you have any questions about the Hunter litigation, Dodd-Frank, or the jurisdictional issues discussed in this post, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group.