Federal judges ruled today that the Federal Energy Regulatory Commission does not have the authority to assess fines for manipulating natural gas futures markets.
In a closely watched case that could have broad implications for the agency, the U.S. Court of Appeals for the District of Columbia Circuit held that hedge fund manager Brian Hunter was correct in arguing that Congress mandated the Commodity Futures Trading Commission, not FERC, to police futures trading.
"Because manipulation of natural gas futures contracts falls within the CFTC's exclusive jurisdiction and because nothing in the Energy Policy Act clearly and manifestly repeals the CFTC's exclusive jurisdiction, we grant the petition for review," Judge David Tatel wrote for the unanimous three-judge panel.
The case dates back to 2006 trading conducted by Hunter's Amaranth Advisors LLC on the natural gas futures market of the New York Mercantile Exchange (NYMEX) that FERC said manipulated the gas prices.
FERC began an enforcement action the following year that eventually led to a $30 million civil penalty. It marked the first time that FERC claimed authority under the Natural Gas Act, part of the 2005 Energy Policy Act, to regulate natural gas trading.
Hunter, whose fund went bankrupt in 2006 after losing $6 billion in gas market trading, has steadfastly contended that NYMEX falls under the purview of the Commodity Exchange Act and, consequently, CFTC.
CFTC agreed with Hunter and filed briefs on his behalf over jurisdiction.
Tatel and the court also sided with Hunter, turning specifically to the language of that legislation.
The Commodity Exchange Act, he wrote, "vests CFTC with 'exclusive jurisdiction ... with respect to accounts, agreements ... and transactions involving contracts of sale of a commodity.'"
In its court arguments last month, FERC contended that Hunter's trading amounted to a broader transgression because the futures trading affected the price of natural gas in other markets.
"Our interest is with respect to the market manipulation," FERC Solicitor Robert Solomon said. "It goes beyond a mere transaction."
But judges were reluctant to accept that reasoning, choosing instead to focus on the text of the statutes -- as Tatel did in his ruling today.
"So his transactions were not transactions?" asked Senior Judge Stephen Williams (Greenwire, Feb. 7).
The case has been closely watched by FERC and other regulators. FERC has previously said that financial markets can affect physical market prices and therefore fall under its jurisdiction (Greenwire, Aug. 12, 2009).
Today's ruling, however, may undercut that interpretation, some observers said.
FERC spokesman Craig Cano would not comment on the court's decision.
Former Republican FERC Commissioner Marc Spitzer said he understood how the court came to its conclusion but didn't agree. The court, he said, took too narrow a view in determining that the Energy Policy Act and Commodity Exchange Act were irreconcilable and that FERC had to prove its jurisdiction.
Spitzer, an attorney in Steptoe & Johnson LLP's energy practice in Washington, D.C., said he believes Hunter violated both statutes and that FERC was simply trying to fulfill its responsibility of protecting the natural gas markets. Spitzer, who voted in 2011 to levy the fine against Hunter, said the commission was not attempting to invade CFTC's turf.
Spitzer said he hopes FERC won't be timid going forward. Just how far-reaching the court's decision is for the commission will depend on the number of similar cases that surface in the future, he added.
"Time will tell, this was a case of first impression," he said. "If no other cases come down the pike, it may not be that harmful."
Click here for the opinion.