On March 15, 2013, the U.S. Court of Appeals for the D.C. Circuit granted Amaranth trader Brian Hunter’s petition for review of a $30 Million fine levied by the Federal Energy Regulatory Commission (FERC). A copy of the decision, Hunter v. FERC, __ F.3d __ (D.C. Cir. 2013), slip opinion, can be found here. FERC had imposed the fine based on trading practices it found were market manipulation violations under section 4A of the Natural Gas Act. Copies of the FERC decisions can be found here and here.

In petitioning the court for review, Hunter asserted that FERC lacked authority to issue the fine because the Commodity Futures Trading Commission (“CFTC”) had exclusive jurisdiction over transactions involving commodity futures contracts. The CFTC, in an action which is currently pending, also took action against Hunter, alleging a violation of section 13(a)(2) of the Commodity Exchange Act for manipulating the price of natural gas futures contracts. The CFTC intervened in Hunter’s petition for review, supporting Hunter’s jurisdictional claims. A copy of that brief can be found here. Much that is asserted in the brief can be found in the court’s decision, including the court’s declining to exercise Chevron deference (deference to an agency’s interpretation of its statute) as a result of the “jurisdictional turf war” between the CFTC and FERC. DC Circuit Decision at p.2. A copy of FERC’s brief on the appeal can be found here.

The court noted that a commodities futures contract is “an executory contract for the sale of a commodity executed at a specific point in time with delivery of the commodity postponed to a future date. … It is a rare case when buyers and sellers settle their obligations under futures contracts by actually delivering the commodity. Rather they routinely take a short or long position in order to speculate on the future price of the commodity.” Id at 3. FERC had found that Hunter had manipulated the natural gas market by timing the sales of significant numbers of natural gas futures contracts in order to reduce the settlement price for natural gas; by positioning his assets, Hunter was able to benefit from the price decrease. Hunter made these trades on the New York Mercantile Exchange (“NYMEX”).

For the court, the case turned on two questions: whether the Commodity Exchange Act (“CEA”) section 2(a)(1)(A) provides the CFTC with exclusive jurisdiction in cases involving commodities futures contracts, even if those contracts relate to natural gas, and if so, whether Congress “clearly and manifestly intended to impliedly repeal CEA section 2(a)(1)(A) when it enacted the Energy Policy Act of 2005.” Id. at p. 7. In other words, the Court addressed the issue of whether FERC and the CFTC share jurisdiction over manipulation related to natural gas futures contracts.

The court reviewed CEA section 2(a)(1)(A) as it existed at the time of Hunter’s trades and found that Congress gave the CFTC “exclusive jurisdiction over transactions conducted on futures markets like the NYMEX,” id. at p. 5, including, “exclusive jurisdiction over the manipulation of natural gas futures contracts,” id. at 7.

The D.C. Circuit rejected FERC’s assertions that each agency has exclusive jurisdiction over the “day-to-day regulation of their respective physical energy and financial markets” and that when “there is manipulation in one market that directly or indirectly affects the other market, both agencies have an enforcement role.” FERC’s position stemmed from the wording of the Energy Policy Act of 2005, codified at section 4A of the Natural Gas Act, making it “unlawful for any entity, directly or indirectly to use or employ, in connection with purchase or sale of natural gas … any manipulative or deceptive devise or contrivance.” Id. at pp. 5-6 (citations omitted).

With respect to the second question — whether the Energy Policy Act impliedly repealed the grant of exclusive jurisdiction to the CFTC in the context of futures contracts in the energy industry, the court noted that FERC bears a heavy burden as “repeals by implication are not favored.” Id. at 10. Such repeals must be “clear and manifest,” and courts should not infer repeal unless the later statute expressly contradicts the original or the construction is absolutely necessary. The court found that section 4A of the Energy Policy Act did not expressly answer the question as to whether the exclusive jurisdiction of the CFTC could be abridged by FERC. Further, because there are other markets, not within the CFTC’s exclusive jurisdiction, in which FERC can prohibit manipulative trading, the court saw no “irreconcilable conflict” between the two statutes and so no repeal by implication. The D.C. Circuit concluded, “absent a clearly expressed congressional intention to repeal CEA section 2(a)(1)(A), FERC cannot demonstrate that section 4A encroaches upon the CFTC’s exclusive jurisdiction. Having failed to meet the high bar of showing an implied repeal, FERC lacks jurisdiction to charge Hunter with manipulation of natural gas futures contracts.” Id. at pp. 11-12.

The Hunter decision may well affect ongoing FERC enforcement activities, as the appellate court has clearly placed limits on the scope of FERC’s jurisdiction.