Energy Legal Blog

In dueling briefs filed in the United States District Court for the Southern District of New York, the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) came out on opposite sides of the question whether FERC has authority to take enforcement actions against manipulators of the natural gas futures market.  CFTC and FERC until recently had been acting in tandem to investigate allegations that Amaranth Advisors, its trader Brian Hunter, and Energy Transfer Partners manipulated the natural gas futures market in 2006. 

The CFTC argued that federal statutes and legal precedent clearly established that the CFTC had “exclusive jurisdiction” over the natural gas futures trading activity and that it was clear the statutory language establishing the CFTC's jurisdiction “superseded or limited” the ability of other federal and state agencies to take action on futures trading activities.  FERC argued to the contrary that the Commodity Exchange Act (CEA) did not permit the CFTC's authority automatically to prevent other federal agencies from taking enforcement actions against market manipulation.  

Additionally, FERC pointed to its stand-by argument that Congress in the Energy Policy Act of 2005 “granted FERC broad authority to police market manipulation by 'any entity' who engages in conduct that is 'in connection with' any [FERC]-jurisdictional transaction,” and did not limit that jurisdiction “to manipulative conduct solely concerning physical markets.”  

In separate statements, FERC Chairman Joseph Kelliher warned of a regulatory gap that could be created by courts acting in favor of Amaranth and CFTC in this area.  “If the Amaranth position prevails,” said Kelliher, “the CFTC won't be able to protect [customers] because the physical market is not jurisdictional to CFTC.”  James Kerr, president of the National Association of Regulatory Utility Commissioners echoed this sentiment, stating that “[i]f FERC is unable to police market manipulation in financial markets that affects the price of natural gas, state regulators will be unable [to] prevent retail customers from being unfairly overcharged.”

The U.S. Supreme Court granted certiorari to review two Ninth Circuit decisions involving long-term contracts that were entered into during the 2000-2001 California energy crisis.  In a pair of decisions issued last December, Public Utility District No. 1 of Snohomish County, WA v. FERC and California Public Utilities Commission v. FERC, the Ninth Circuit held that the long-standing Mobile-Sierra doctrine and its “public interest” standard did not protect contracts from unilateral modification when they were entered in a dysfunctional market that caused prices to exceed a “zone of reasonableness.”  The Ninth Circuit held that FERC should have reviewed the circumstances under which the contracts were entered, and possibly set those contracts aside if it found the prices to be unreasonable. 

Several groups of sellers sought Supreme Court review of the Snohomish and CPUC decisions to determine whether the Ninth Circuit's formulation of the Mobile-Sierra doctrine was appropriate.  Many argued the Ninth Circuit's view would upend contract certainty in electric markets, thereby inhibiting investment, if contracts could later be revised because of changes in the market, buyer's remorse, or other circumstances outside of a seller's immediate control.  Interestingly, FERC itself had asked the Supreme Court not to hear the cases, arguing that because these cases arose out of the “highly unusual context” of the 2000-2001 energy crisis they provided a “poor vehicle” for the Court to evaluate the proper application of the Mobile-Sierra doctrine to a complaint that rates were too high.

A seven-justice panel of the Supreme Court disagreed and granted certiorari in response to petitions filed by Morgan Stanley Capital Group and Calpine Corp. of the Snohomish decision.  (Chief Justice Roberts and Justice Breyer have recused themselves from the case, without explanation.)  The Court has not yet indicated whether it will grant certiorari petitions for the CPUC decision as well or will simply apply its decision in the Morgan Stanley and Calpine petitions to the CPUC case.  Briefs are due in November and December, and oral argument will likely be scheduled for sometime in the first quarter of 2008.