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Trading Spaces? Will CFTC Move Into FERC's House?

Will the CFTC move Into FERC's house?
Fortnightly Magazine - January 2004

she has no obligation to refund to the people who bought her silver. But the Hunts did. .

The same rule, as noted above, applies in the financial markets, , 511 U.S. 164 (1994);

The SEC and the CFTC are supposed in general to nip market manipulation in the bud and then let the courts take care of where the damages fall out, with only the civil and criminal penalties being assessed by the agencies, not normally restitution, although the SEC may also bring civil suits asking for restitution. . The CFTC has some reparations authority pursuant to CEA section 14. Note that the Racketeer Influenced and Corrupt Organizations Act (RICO) has also been used from time to time against commodities fraud.

The SEC has extensive authority under section 10(b) of the Securities and Exchange Act of 1934, and Rule 10(b)(5) promulgated under the authority of that section, to define manipulation. The CFTC authority under section 6(d) of the CEA is more complicated but analogous.

FERC does not have that sort of statutory authority, although it may well be that it should. A model like that in use in the financial and commodity markets means that the person who is responsible for the problem is also responsible for paying for more of the damages, not just limited to the amount of extra money he/she accrued. This means that there is a real disincentive to manipulation, not just the risk of losing one's ill-gotten gains, since the damages to market participants will normally be substantially more than the gain to the malefactor.

There are wide ranging civil and criminal penalties under the CEA and SEA that apply for manipulation of prices in commodities and securities, whether that manipulation occurs directly on the organized exchanges or not. Most of the CFTC actions so far which deal with energy matters charge entities with the reporting of false price or quantity information to the press. The amounts recovered are not trivial although they are certainly not at the multibillion dollar level of the losses occasioned by the West Coast market excursions in 2000-2001. Note, moreover, that the CFTC settlements and complaints do not purport to preclude direct suits by those injured by the practices that were the subject of the settlements.

Some Thoughts to Ponder

The CFTC and FERC seem to be at loggerheads on the fact that each claims exclusive jurisdiction over certain overlapping kinds of transactions. That raises several serious questions, including, but certainly not limited to:

  1. How can FERC and the CFTC each have exclusive jurisdiction over the sale of electricity at wholesale in interstate commerce under two wildly disparate acts? If FERC does not have the jurisdiction to establish the form and rules by which these markets work, how can it possibly make the claim that its regulation of the markets assures that the prices resulting are just and reasonable?
  2. Authority arguably exists under the CEA for the CFTC to regulate commercial cash or spot market transactions as well as futures trading, if the transactions in question affect futures trading. But this