Ferc Does Not Have Anti-Manipulation Authority in Financial Markets

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ABSTRACT

Does the Federal Energy Regulatory Commission ("FERC") have authority to police manipulation in financial markets if that conduct has an effect on physical markets?

FERC has erroneously argued that it possesses such authority. Adopting FERC's view would confound the regulatory landscape and promote duplicative and even conflicting regulation. FERC's mission is clear: to ensure that the rates charged for wholesale sales of natural gas and electricity are "just and reasonable." Its jurisdiction is limited by statute and nothing in the legislative history, prevailing case law, or public policy suggests that Congress conferred to FERC powers to police manipulation outside of its statutorily defined jurisdictional boundaries. Accordingly, FERC does not, and should not, have authority to police manipulation in financial markets even if that conduct has an effect on physical markets.

INTRODUCTION

Does the Federal Energy Regulatory Commission ("FERC") have authority to police manipulation in financial markets if that conduct has an effect on physical markets? The answer depends on (i) whether FERC's jurisdiction to police manipulation extends beyond the jurisdictional boundaries established by the Natural Gas Act of 1938 ("NGA") (and its corresponding provision in its sister act, the Federal Power Act of 1935 ("FPA")) and, if so, (ii) whether that jurisdiction extends so far as to encroach upon the jurisdiction of financial markets (such as futures and securities) regulated by other federal agencies such as the Commodity Futures Trading Commission ("CFTC") and Securities Exchange Commission ("SEC"). FERC has erroneously argued that it possesses such authority.1

FERC does not possess the powers of financial regulators. To conclude otherwise would confound the regulatory landscape and promote duplicative and even conflicting regulation. FERC's mission is clear: to ensure that the rates charged for wholesale sales of natural gas and electricity are "just and reasonable."2 Its jurisdiction is limited by statute and nothing in the legislative history, prevailing case law, or public policy suggests that Congress conferred to FERC powers to police manipulation outside of its statutorily defined jurisdictional boundaries. Accordingly, FERC does not, and should not, have authority to police manipulation in financial markets even if that conduct has an effect on physical markets.

I. FERC'S JURISDICTION IS LIMITED TO, AND DOES NOT EXTEND BEYOND, THAT WHICH IS PROVIDED IN NGA §L(B) (AND ITS COROLLARY IN THE FPA)

A. FERC DOES NOT HAVE AUTHORITY TO POLICE MANIPULATION IN FINANCIAL MARKETS BASED ON ITS HISTORICAL JURISDICTION AND MANDATE

Since its inception, FERC and its predecessor entities have had limited jurisdiction and a clearly defined mandate. 3 Congress established FERC's predecessor organization, the Federal Power Commission, in 1920 to coordinate hydroelectric projects under federal control.4 Congress subsequently expanded FERC's jurisdiction with the passage of the FPA and the NGA to close the "Attleboro Gap"5 and regulate the sale and transportation of wholesale electricity and natural gas in interstate commerce, as well as to ensure that prices are "just and reasonable and not unduly discriminatory."6 Since enactment, the NGA and FPA have been amended several times in response to regulatory concerns and energy crises.7 Most recently, the Energy Policy Act of 2005 ("EPAct") amended the NGA and FPA to address regulatory deficiencies that were exposed in the California energy crisis.8 Over time, as a result of its many amendments, FERC evolved from a ratesetting agency into an agency with enforcement powers.9

Before Congress enacted EPAct, FERC relied on its market behavior rules to police price manipulation in wholesale electric and natural gas transactions. I0 The market behavior rules prohibited "[a]ctions or transactions that [were] without a legitimate business purpose and that [were] intended to or foreseeably could manipulate market prices, market conditions, or market rules. …