The U.S. Court of Appeals for the D.C. Circuit decided today that the Commodity Futures Trading Commission (CFTC) has exclusive jurisdiction over all transactions involving commodity futures contracts and that the Federal Energy Regulatory Commission (FERC) may not regulate such contracts, even when they pertain to natural gas. This decision marks at least the third time an appellate court has struck down FERC's expansive interpretation of the authority it was granted in the Energy Policy Act of 2005.

FERC initially fined Brian Hunter $30 million for manipulating natural gas futures contracts. Mr.  Hunter, an employee of the hedge fund Amaranth, traded natural gas futures contracts on the New York Mercantile Exchange, a CFTC-regulated exchange. 

Commodities futures contracts are executory contracts for the sale of a commodity executed at a specific point in time with delivery of the commodity postponed to a future date. The parties to such contracts often use them for speculation on the commodity’s future price and rarely settle their obligations by actual delivery. 

According to FERC, Mr. Hunter was guilty of “banging the close,” or selling a significant number of natural gas futures contracts during the February-April 2006 settlement periods with the intent of lowering the settlement price for natural gas. Mr. Hunter’s portfolio benefited from these sales because he had positioned his assets in the natural gas market to capitalize on a price decrease.

On July 25, 2007, the CFTC filed a civil enforcement action against Mr. Hunter under the Commodity Exchange Act for manipulating the price of natural gas futures contracts. On the next day, FERC filed an administrative enforcement action against him also alleging market manipulation under the Natural Gas Act (NGA). In bringing this action, FERC relied in part on its expanded NGA authority to regulate manipulation in the energy markets, as enacted by Congress in the Energy Policy Act of 2005. 

FERC claimed that Mr. Hunter’s manipulation of the settlement price affected the price of natural gas in FERC-regulated markets. Following an administrative process, FERC ruled against Mr. Hunter and fined him $30 million.

Mr. Hunter appealed to the D.C. Circuit, arguing that FERC lacks jurisdiction to pursue its enforcement action, and the CFTC intervened in support of Mr. Hunter on this issue. The D.C. Circuit agreed that the CFTC's jurisdiction over commodity futures transactions is exclusive. As a result, FERC may not intrude on CFTC’s exclusive jurisdiction by prohibiting manipulation in futures markets, even where the manipulation is “in connection with” FERC-jurisdictional natural gas transactions.

Today’s decision also brings into question the wisdom of FERC’s settlement of a 2009 enforcement action with Amaranth concerning similar alleged price manipulation. Amaranth agreed to pay $7.5 million and conceded FERC’s jurisdiction in this matter.