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CFTC Issues Two Final Rules Exempting Certain Public Power and RTO Transactions From Most Dodd-Frank Requirements

March 29, 2013

Yesterday, the Commodities Futures Trading Commission ("CFTC") issued two final rules that clarify the regulatory landscape for public power and other utilities attempting to comply with the Dodd-Frank Act. The first rule exempts energy-related transactions between public power and cooperative utilities from most Dodd-Frank requirements. The second exempts most transactions entered into in centralized RTO or ISO markets governed by FERC-approved tariffs. Together, the orders offer welcome guidance to electric utilities struggling to comply with Dodd-Frank requirements that have often raised more questions than answers.

The first rule concerns transactions between public power entities, including municipal and government-owned utilities and cooperatives. The rule provides that transactions between "Exempt Entities" involving "Exempt Non-Financial Energy Transactions" will be exempt from most requirements of the Dodd-Frank Act. "Exempt Entities" include municipal utilities, government-owned utilities, tribal utilities, and cooperatives that are tax-exempt under Section 501(c)(12) of the Internal Revenue Code. "Exempt Non-Financial Energy Transactions" include transactions involving delivery of electric energy, generation capacity, transmission services, fuel deliveries, and environmental attributes (such as "Renewable Energy Credits") if entered into for purposes of managing supply or price risks associated with the utility's obligation to deliver electric energy to its customers. Hence, if a transaction is between two publicly-owned utilities or cooperatives and involves delivery of commodities or services required to serve end-use customers, the transactions will be exempt from the most burdensome requirements of the Dodd-Frank Act, such as exchange-trading and collateralization obligations. Notably, both parties must be publicly-owned or cooperative utilities for the exempt to apply, and the exemption does not apply to interest rate, credit, or other kinds of non-energy transactions.

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D.C. Circuit Rejects FERC Jurisdictional Claims Over Natural Gas Commodity Market Manipulation

March 18, 2013

On 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's opinion 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.

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CFTC and FERC Battle It Out in Court, Continuing Jurisdictional Uncertainty Over Energy Commodity Trading

February 8, 2013

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.

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October Surprise: FERC Seeks Record Market Manipulation Fine Against Barclays

November 2, 2012

For Barclays Bank, Halloween wasn't much fun this year. But perhaps a treat has been served up for electricity utilities, consumers, and many others who depend upon properly functioning electricity markets.

In an order issued on October 31, the Federal Energy Regulatory Commission ("FERC") proposed to fine Barclays Bank a record $435 million, to disgorge $34.5 million in profits, and to fine four individual Western energy traders a total of $18 million, for manipulation of the Western electricity markets alleged to have occurred between 2006 and 2008. The proposed fines are based upon an extensive report compiled by FERC's Office of Enforcement ("OE"). The OE Report alleges that Barclays' power traders engaged in a coordinated strategy to manipulate prices for physical power at four Western market hubs, including the Mid-Columbia Hub here in the Pacific Northwest, in order to benefit Barclays' positions in the financial swaps market. The Office of Enforcement report estimates that Barclays' manipulations caused approximately $139.5 million in losses to other market participants.

As with much litigation in the computer age, the OE Report is built on a foundation of e-mails and instant messages compiled in Barclays' computers. Like the infamous Enron trader tapes, these messages often contain profanity-laced boasting about the traders' success in manipulating the market. For example, the OE Report quotes an instant message sent by Barclays trader Ryan Smith to another trader on November 3, 2006, in which Smith states: "I totally f****** with the Palo [Verde hub] market today . . . was fun. need to do that more often . . . I just started lifting the p*** out of the palo."

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U.S. Court Upends CFTC Position Limits Rule, Throwing Dodd-Frank Implementation Into Further Chaos

October 3, 2012

Adding an element of uncertainty to efforts by energy traders and utilities to comply with the Dodd-Frank Act, United States District Court Judge Robert Wilkins on September 28 issued an opinion vacating the CFTC's Dodd-Frank rulemaking on "Position Limits," and remanding the rule to CFTC for further consideration. The position limits rule, which was due to go into effect in mid-October, 2012, would placed limits on the market share of traders in commodity markets for 28 commodities. Notable for energy traders, one of the covered commodities would have been natural gas traded at the Henry Hub.

The Position Limits rule was adopted by CFTC on a 3-2 vote in late 2011, and was the subject of considerable controversy -- the proposed rule generated over 15,000 sets of comments. The CFTC majority interpreted Dodd-Frank to impose a mandatory duty on the agency to adopt position limits. The dissenting Commissioners argued that Dodd-Frank did not create such a mandatory duty. Rather, the minority interpreted Dodd-Frank to require position limits to be adopted only upon a finding that they are necessary to combat the negative effects of excessive speculation, and that the no such showing had been made.

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