The recent memoranda of understanding (“MOUs”) entered between the Federal Energy Regulatory Commission (“FERC”) and the Commodity Futures Trading Commission (”CFTC”) made significant progress towards alleviating the long-time tension between the two agencies.

On January 2, 2014, the FERC and the CFTC signed two MOUs on jurisdiction (“Jurisdiction MOU”) and information sharing (“Information Sharing MOU”) regarding market surveillance and investigations into potential market manipulation, fraud, and abuse. [1]

The two MOUs are the latest development in the jurisdictional tug-of-war between the FERC and the CFTC.  The two agencies’ overlapping jurisdiction in pursuing market manipulation cases came to the forefront in the well-known Hunter case.

In 2006, Mr. Hunter allegedly manipulated the price of natural gas by selling a large number of natural gas futures contracts during the settlement period on NYMEX.  On appeal of a FERC order imposing a $30 million civil penalty, the DC Circuit found that the CFTC has exclusive jurisdiction over the manipulation of natural gas futures contracts and, therefore, FERC lacks authority to impose a penalty against Mr. Hunter for the alleged manipulation of such contracts.

In the meantime, the July 2010 Dodd-Frank Act mandated that the FERC and the CFTC enter MOUs concerning certain jurisdictional and information sharing matters.  However, the two agencies were unable to execute such mandate for approximately three and one half years.  In an August 2013 letter to Congress, former-FERC Chairman Wellinghoff noted that the Dodd-Frank Act directed the FERC and the CFTC to enter the MOUs, stated that such effort is complicated by the disagreement “over whether the CFTC should provide FERC with certain data that [FERC] believe[s] is critical to [its] surveillance program to detect and deter energy market manipulation,” and requested that Congress pass a legislative fix.  In response to Wellinghoff’s letter, certain US Senators criticized the CFTC for not cooperating with FERC in its efforts to execute the MOUs.

The FERC and the CFTC finally executed the MOUs during a time of significant turnover at both agencies.

The Jurisdiction MOU establishes procedures for the purposes of:

(i)                 applying the agencies’ authorities in a manner to ensure effective and efficient regulation in the public interest;

(ii)               resolving conflicts regarding the overlapping jurisdiction of the agencies, and

(iii)              avoiding conflicting or duplicative regulation to the extent possible.

The procedures comprise three parts:

First, the FERC and the CFTC agree to notify each other regarding activities that may fall within their respective overlapping jurisdictions.  They subsequently will hold informal consultations to determine whether the notified agency has any interest in the matter.

Second, if the notified agency is interested in the matter, the agencies will commence discussions.  Regarding matters of mutual interest, they agree to coordinate an approach that satisfies both agencies’ regulatory concerns.

Third, if a dispute occurs regarding the implementation of the Jurisdiction MOU, the FERC and the CFTC agree to follow the following three escalating steps:  (i) provide a written statement of the dispute to the other agency in an attempt to resolve the matter; (ii) if no resolution is reached within ten working days of notification, elevate the dispute in writing to the director-level contacts; and (iii) if the director-level contacts can’t resolve the dispute within ten working days, elevate the dispute to the Commission.

The Information Sharing MOU addresses information sharing between the FERC and the CFTC in connection with market surveillance and investigations into potential manipulation, fraud, or market power abuse to ensure that such information sharing is properly coordinated, both to minimize the duplication of information requests and to manage the treatment of confidential information.

At a hearing after the MOUs were signed, Senator Warren attacked the CFTC for its failure to share information and its lethargy in implementing the MOUs. Expect more hearings to come.

Daniel A. Mullen is a litigation partner and head of the Fried Frank’s Energy Enforcement Practice. Michael A. Yuffee is a corporate partner and head of the Firm’s Energy Practice. Peter Ripley is a corporate associate.

[1] See “Memorandum of Understanding between the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission” (issued Jan. 2, 2014) (“Jurisdiction MOU”), available at https://www.ferc.gov/legal/mou/mou-ferc-cftc-jurisdictional.pdf