FERC Proceedings Continue for Alleged Gas Market Manipulator

Michael Giberson

At yesterday’s open meeting of the Federal Energy Regulatory Commission, the Commissioners established a hearing to determine whether Energy Transfer Partners, L.P. and its affiliates engaged in market manipulation in violation of FERC rules. At stake is a possible penalty of over $200,000,000 in proposed fines, recovery of “unjust profits”, and interest.

As was discussed here before (see link below), the companies are alleged to have manipulated wholesale gas prices at the Houston Ship Channel to benefit ETP’s financial positions and other physical positions between December 2003 and December 2005. In addition, ETP’s pipeline affiliate is alleged to have discriminated between affiliated and non-affiliated companies in the provision of transportation services, in violation of related laws and regulation.

At the heart of the manipulation charge is this claim:

Enforcement Litigation Staff asserts in its brief that voice recordings and trade data demonstrate that ETP manipulated wholesale natural gas markets in Texas during the period of December 2003 through December 2005 by: (1) orchestrating its financial and physical portfolio to profit from lower prices as HSC; (2) selling fixed-price gas for prompt month delivery at HSC for less than a competitive price; (3) reporting these artificially lower prices to Platts Inside FERC, which included them in its monthly HSC index (IFERC HSC index); and (4) benefiting from lower prices reported in the IFERC HSC index. (Paragraph 7 from the FERC order)

The anti-manipulation regulation at issue is section 284.403(a) of the Commission’s regulations as it was at the time of the actions. Section 284.403(a) stated:

Any person making natural gas sales for resale in interstate commerce pursuant to §284.402 is prohibited from engaging in actions or transactions that are without a legitimate business purpose and that are intended to or foreseeably could manipulate market prices, market conditions, or market rules for natural gas.

In my initial review of a industry trade journal article that alleged manipulation I said I wasn’t too impressed with the case. The case built up in the article was reasonably detailed but mostly circumstantial, with comments from anonymous traders thrown in. However, unlike FERC, presumably the reporter did not have access to company voice recordings and proprietary trading data. If the allegations prove justified, I guess I’ll have to be impressed by that part of the initial article.

The original article also included assertions of a possible “regulatory gap” that may require legislative action to cover, but investigations by FERC and the CFTC apparently have not been hampered by lack of legal authority.

The CFTC also pursued ETP on related charges. In March 2008, the CFTC announced it obtained a $10 million civil penalty as part of a consent order settling charges against ETP and three subsidiaries. An announcement made by the company points out that the “agreement between the CFTC and ETP contains no findings of fact or conclusions of law.” Which is not the same thing as claiming they didn’t do it, of course.