Three Senate Democrats from western states last Thursday called on the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC) to work together in pursuing energy manipulation, and to not become entangled in a turf battle that could jeopardize their enforcement actions.
“We believe that a jurisdictional battle between the CFTC and FERC will weaken both Commissions, and could significantly constrain our government’s ability to pursue future market manipulation cases under the authority and penalty regime Congress created just two years ago,” wrote Sens. Dianne Feinstein of California, Maria Cantwell of Washington and Ron Wyden of Oregon in a letter to CFTC Chairman Walter Lukken.
“The American people need both FERC and [the] CFTC to fight manipulators, not each other,” they said. “In 2005, Congress acted to prohibit manipulating the price of natural gas. We intended that authority to be broad, and we expected that FERC would work with [the] CFTC to build and pursue cases against bad actors whose behavior impacted the markets in both agencies’ jurisdiction. We encourage the agencies to continue working together so that Congress does not have to revisit this issue.”
The senators cited the recent enforcement actions against Amaranth Advisors LLC — the fallen hedge fund that lost $6.6 billion in September 2006 speculating in natural gas futures — as an example of where the two agencies must work in tandem, rather than engaging in a turf war. They endorsed FERC’s enforcement action against Amaranth and its former traders. Others, however, question whether FERC may have stepped on the CFTC’s jurisdictional toes in pursuing Amaranth. Amaranth in particular has argued that FERC’s jurisdiction does not extend to the futures gas market, where the hedge fund’s manipulation is alleged to have occurred.
Capitol Hill staffers and reliable regulatory sources earlier this month said the CFTC informed the staff of the Senate Energy and Natural Resources Committee that it plans to submit a legal brief in which it will support Amaranth’s position that FERC lacks jurisdiction to penalize the failed hedge fund for alleged manipulation of natural gas prices (see NGI, Sept. 17).
The legal brief reportedly is due to be filed in the U.S. District Court for the Southern District of New York, where the CFTC filed its complaint against Amaranth for attempted manipulation of the gas futures market.
But another knowledgeable source disputed that account, saying the CFTC did not tell Senate committee staffers that it would oppose in court FERC’s jurisdiction in the Amaranth case. The CFTC “never said that on Capitol Hill,” she noted. “I think someone is getting hysterical on Capitol Hill.”
In late July, the CFTC brought a civil enforcement action in federal court against Amaranth Advisors LLC, Amaranth Advisors (Calgary) ULC and Brian Hunter, a former gas trader with the firm, alleging that they schemed to manipulate the gas futures market in 2006 in violation of the Commodity Exchange Act. The CFTC complaint alleged that Amaranth and Hunter “intentionally and unlawfully attempted to manipulate the price of natural gas futures contracts on the [New York Mercantile Exchange] on Feb. 24 and April 26, 2006.” The agency is seeking permanent injunctive relief and civil penalties (see NGI, July 30).
One day after the CFTC action, FERC issued a show cause order against Amaranth Advisors, affiliates and two former traders, Hunter and Matthew Donohoe, accusing them of manipulating the Nymex natural gas futures contract, which settles at the Henry Hub and influences physical gas prices. The hedge fund and its former traders face penalties and disgorgement of profits totaling $291 million if they are unable to successfully dispute the charges by October.
FERC has conceded that the CFTC has exclusive jurisdiction over Nymex futures contracts. But FERC, in justifying its action against Amaranth, argued that it has authority to act when manipulation of futures prices affect the prices paid for natural gas in the physical markets, over which it has exclusive jurisdiction.
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