On March 15, 2013, the United States Court of Appeals for the District of Columbia (“D.C. Circuit”) determined that FERC did not have the authority to fine energy trader Brian Hunter – previously a natural gas trader for Amaranth Advisors LLC (“Amaranth”) – $30 million for manipulating natural gas futures markets.  Instead, the D.C. Circuit determined that the Commodity Futures Trading Commission (“CFTC”) has “exclusive jurisdiction over all transactions involving commodity futures contracts” and that nothing in the Energy Policy Act of 2005 (“EPAct 2005”) clearly and manifestly repeals CFTC’s exclusive jurisdiction.

In 2011, FERC determined that Hunter manipulated physical natural gas markets in violation of section 4 of the Natural Gas Act (“NGA”) while working as the head natural gas trader for Amaranth.  According to FERC, Hunter traded in natural gas futures contracts on the New York Mercantile Exchange (“NYMEX”), a CFTC-regulated exchange, in order to produce artificial settlement prices.  FERC ruled that Hunter intentionally manipulated the settlement prices of natural gas futures contracts on NYMEX in order to benefit swap and option positions in other trading platforms.  As such, FERC held that the relationship between financial and physical natural gas markets allowed this manipulation to affect the price of FERC-jurisdictional physical natural gas transactions.  As a result of this conduct, FERC imposed a $30 million civil penalty against Hunter.

Hunter appealed FERC’s decision to the D.C. Circuit, contesting FERC’s jurisdiction in the matter.  On April 25, 2012, the CFTC filed a petition at the D.C. Circuit supporting Hunter’s jurisdictional argument, claiming that section 2(a)(1)(A) of the Commodity Exchange Act (“CEA”) granted exclusive jurisdiction over futures trading to the CFTC.  FERC’s brief to the D.C. Circuit did not contest CFTC’s jurisdiction under the CEA to govern swaps or futures in the Brian Hunter case; instead, FERC argued it has overlapping jurisdiction in the matter (see June 19, 2012 edition of the WER).

In its opinion, the D.C. Circuit analyzed section 2(a)(1)(A) of the CEA, concluding that Congress gave “the CFTC exclusive jurisdiction over transactions conducted on futures markets like the NYMEX.”  However, the D.C. Circuit also recognized that EPAct 2005, which amended section 4 of the NGA, significantly expanded FERC’s authority to regulate manipulation in energy markets.  As a result, the D.C. Circuit stated that the case turned on two issues.  First, the D.C. Circuit needed to determine if CEA section 2(a)(1)(A) encompasses “manipulation” of natural gas futures contracts.  If it did, the D.C. Circuit stated that it then needed to determine if Congress repealed CFTC’s exclusive jurisdiction when it enacted the EPAct 2005.

In terms of the first issue, the D.C. Circuit stated that the plain terms of CEA section 2(a)(1)(A) grant the CFTC exclusive jurisdiction over the manipulation of natural gas futures contracts.  Specifically, the D.C. Circuit stated that section 2(a)(1)(A) grants CFTC “exclusive jurisdiction…with respect to accounts, agreements[,]…and transactions involving contracts of sale of a commodity for future delivery, traded or executed” on a CFTC-regulated exchange (such as the NYMEX).  Furthermore, the D.C. Circuit rejected FERC’s argument that while the CFTC may exclusively regulate day-to-day trading, both FERC and the CFTC regulate manipulation.  Instead, the D.C. Circuit determined that “any infringement of the CFTC’s exclusive jurisdiction” would repeal CEA section 2(a)(1)(A).

Regarding the second issue, the D.C. Circuit found that there was no repeal by implication through EPAct 2005 because there is no “irreconcilable conflict” between the CEA and the NGA, which was amended by EPAct 2005.  Additionally, the D.C. Circuit held that “[A]bsent a clearly expressed congressional intention to repeal CEA section 2(a)(1)(A)”, FERC could not show that NGA section 4 “encroaches upon the CFTC’s exclusive jurisdiction.”  Therefore, the D.C. Circuit concluded that FERC lacked jurisdiction to charge Hunter with manipulation of natural gas futures contracts.

The CFTC’s 2007 civil case against Hunter remains pending.  However, that case has previously been put on hold until the jurisdictional dispute between FERC and the CFTC is settled.  It is unclear how quickly the CFTC will take up that case at this time.  A copy of the D.C. Circuit’s opinion is available here.