by Randall W. Miller
Washington & Lee Journal of Energy, Climate, and the Environment
Amid the government shutdown, the Federal Energy Regulatory Commission (FERC) remained active. On October 9, 2013, FERC asked a federal district court in Sacramento, California to enforce its order against Barclays Bank PLC (Barclays). In the order, issued on July 16, 2013, FERC imposed a total of $487.9 million in penalties and disgorgement from Barclays after an investigation in FERC’s crackdown on market manipulation. FERC’s Office of Enforcement found that, from November 2006 to December 2008, Barclays violated FERC’s anti-manipulation rule by “trad[ing] fixed price products . . . for the fraudulent purpose of moving the [daily index] price at a particular point so that Barclays’ financial swap positions at that same trading point would benefit.” Barclays denied any wrongdoing and refused to pay the penalties within 60 days. As a result, FERC filed an action in the Eastern District of California, pursuant to the Federal Power Act (FPA) Section 31, to gain a court order enforcing its penalties against Barclays.
FERC has conducted at least 13 public probes of energy-market gaming since 2011, and in 2013 alone, FERC has sought more than $900 million in penalties and settlements from banks, such as Deutsche Bank and JP Morgan. The penalties assessed against Barclays reach a record high for FERC. FERC also imposed the following fines against individual traders for their part in the alleged manipulation: Scott Connelly garnered a $15 million fine, Karen Levine received a $1 million fine, and Ryan Smith was assessed a fine of $1 million. In regards to disgorgement, FERC has directed Barclays and its traders to give up $34.9 million in profits in order to distribute the money to help low-income homeowners pay energy bills in the affected markets, which include Arizona, California, Oregon, and Washington.
Even though the sheer size and scope of FERC’s order is intriguing, the procedural posture of the action is also very interesting. Because Barclays chose to have penalties assessed against it, but then refused to pay the penalties within 60 days following the assessment, the case will proceed to district court. Barclays had the opportunity to contest the penalties before FERC’s administrative law judges, but Barclays decided to forego that option. The district court will review the action de novo and will likely consider the evidence supporting FERC’s penalties and Barclays defenses to determine whether or not FERC’s penalties against Barclays are legitimate. The district court has the authority to approve, increase, or reduce the penalties.
Based on the facts set forth in FERC’s Order Assessing Civil Penalties, Barclays could argue that FERC lacks subject matter jurisdiction over a section of the manipulation claim because a portion of the claim involved the swaps market on the Intercontinental Exchange, which is regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC). If the court finds this argument persuasive, then it is very likely that Barclays will pay an amount below $487.9 million, assuming that the court affirms the other grounds for FERC’s penalties.
In its March 2013 opinion in Hunter v. F.E.R.C., the Court of Appeals for the District of Columbia (D.C. Circuit) drew a line in the ongoing turf battle between the CFTC and FERC. Specifically, the D.C. Circuit concluded that the CFTC had exclusive jurisdiction over natural gas futures contracts, even though FERC claimed that it should have jurisdiction under the Natural Gas Act (NGA) Section 4A because the alleged manipulative conduct “affected” a substantial amount of natural gas transactions. The D.C. Circuit prevented FERC from assuming jurisdiction over natural gas futures, even though alleged manipulation in the futures market may influence the physical markets.
In U.S. v. Reliant Energy Services, Inc., the Court considered FERC’s overlapping jurisdiction with the CFTC in the wholesale electricity market. Although the District Court for the Northern District of California concluded that FERC has “exclusive authority” in the electricity context under the FPA, the court found that the CFTC has concurrent jurisdiction under the Commodity Exchange Act (CEA). The District Court supported its reasoning by quoting the United States Supreme Court’s conclusion in U.S. v. Borden Co., which determined that “it is a cardinal principle of construction that . . . when there are two acts upon the same subject, the rule is to give effect to both.” As a result, the court concluded that the CFTC could share jurisdiction with FERC in the electricity market.
Although the reasoning in Reliant Energy seemed to be relevant to the issue in Hunter, the D.C. Circuit distinguished Reliant Energy because it “involve[d] the interaction between the CEA’s criminal provisions and FERC’s exclusive authority over electricity markets” as opposed to FERC’s authority under the NGA and the CFTC’s exclusive authority over futures markets. While the cases involved factual distinctions, the Hunter opinion revealed the D.C. Circuit’s hesitancy to give FERC concurrent jurisdiction with the CFTC in the futures markets. The precedent created in Hunter and Reliant Energy reflects courts’ reluctance to interpret the FPA and NGA broadly.
Even so, FERC may point to Reliant Energy as an example of how it can share jurisdiction with the CFTC and why it has subject matter jurisdiction over the manipulation claim in the swaps market. In contrast, Barclays may be able to counter that argument by demonstrating that the FPA has neither given FERC sole authority over the electricity markets nor concurrent regulatory authority in the relevant swaps market. Because FERC has selected a district court in California and this claim involves the electricity market, the Barclays court may draw more attention to the reasoning in Reliant Energy than the reasoning in Hunter, which mentioned Reliant Energy only once.
FERC’s post-Enron and post-EPAct 2005 enforcement strategy is very aggressive. This aggression may be an attempt to avoid another energy crisis and ensure that the Enron loophole has been closed. Conversely, this aggression may simply be evidence of FERC’s desire to test its regulatory limits after Congress increased the Commission’s authority under the Energy Policy Act of 2005 (EPAct 2005) and failed to draw clear boundaries for the Commission in either EPAct 2005 or the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Instead of clarifying FERC’s jurisdictional scope in the physical and financial markets, Congress created jurisdictional savings clauses and exemption authority, both of which failed to draw the boundaries necessary to avoid duplicative enforcement between the agencies. Even though U.S. Senators have urged the CFTC and FERC to enter into a memorandum of understanding to address these jurisdictional issues, the agencies have not entered into such a memorandum under Dodd-Frank. As a result, the courts must decide the limits of FERC’s regulatory authority.
FERC’s action against Barclays will create precedent for future electricity manipulation litigation in federal court by defining the burden, process, and scope that the parties must meet in district court. If FERC prevails in this action, it may solidify its ability to regulate manipulation in the electricity markets, even if at least one of the affected markets is traditionally regulated by other agencies. Such a victory may also give pause to entities considering the de novo review option in district court. If Barclays prevails, however, future defendants may follow in Barclays’ footsteps and compel FERC to justify its penalties on seemingly more neutral ground in federal court. Either way, this case will be a pivotal point for FERC.