A Federal Energy Regulatory Commission (FERC) Administrative Law Judge last week issued an Initial Decision finding that BP America (BP) and certain related BP entities violated FERC’s Anti-Manipulation Rule. Following a 13-day hearing, Judge Carmen Cintron found that, during a two-and-a-half month period in 2008, BP sold next-day physical gas at the Houston Ship Channel (HSC) in a way designed to lower market prices at HSC to benefit BP’s corresponding short financial position. FERC’s Office of Enforcement (OE) had alleged that BP—in an effort to maintain a price spread between Katy and HSC that was favorable to BP’s financial positions—engaged in uneconomic trading and transportation of gas between Katy and HSC using the Houston Pipeline (HPL). FERC is expected to issue a final order in the case after the parties submit briefs addressing the Initial Decision.
The BP case presents many interesting legal and factual issues, not the least of which is the possibility that the case could lead to another federal appellate decision addressing the extent to which — if at all — FERC’s “in connection with” enforcement jurisdiction extends beyond the traditional jurisdictional boundaries of FERC’s authority under the Natural Gas Act (NGA) and the Federal Power Act (FPA). The Energy Policy Act of 2005 amended the NGA and FPA to provide FERC with enforcement authority over manipulative conduct “in connection with” FERC-jurisdictional transactions. FERC has interpreted this antimanipulation authority broadly to cover otherwise nonjurisdictional conduct that “affects” FERC-jurisdictional markets. In 2013, however, the U.S. Court of Appeals for the District of Columbia in Hunter v. FERC rejected FERC’s assertion of jurisdiction over allegedly manipulative trading of natural gas futures contracts on the basis that futures markets are subject to the Commodity Futures Trading Commission’s (CFTC) exclusive jurisdiction. FERC had argued in that case that its authority under the NGA to prosecute manipulation “in connection with” jurisdictional natural gas transactions allowed it to prosecute manipulative trading of nonjurisdictional futures contracts if such trading affected prices in FERC-jurisdictional markets.
BP claims that the conduct at issue in this case — like that in Hunter — falls outside of FERC’s NGA jurisdiction. BP claims that the conduct at issue centers on its use of intrastate pipeline capacity on HPL, intrastate sales and “first sales” of natural gas. Because FERC’s NGA jurisdiction is limited to interstate transportation and interstate wholesale sales of natural gas — but not intrastate transactions and “first sales” — BP argues that FERC has no jurisdiction over the conduct at issue. While OE has alleged that the conduct at issue also directly involved certain FERC-jurisdictional transactions, BP contests that assertion.
In its May 2014 Order Establishing Hearing, FERC determined that, as a matter of law, it can assert enforcement jurisdiction over the types of nonjurisdictional transactions at issue (i.e., intrastate transactions and “first sales”) if such transactions, as a factual matter, “affect” — and are therefore “in connection with” — jurisdictional transactions. In its order, FERC distinguished Hunter on the basis that it involved a dispute between two federal agencies regarding the extent of the CFTC’s exclusive jurisdiction over futures markets, whereas this case involves intrastate transactions that, while subject to state jurisdiction, are not subject to states’ exclusive jurisdiction.
Prior to the hearing, BP requested rehearing of FERC’s Order Establishing Hearing — a request that remains pending. In its rehearing request, BP argued, among other things, that the D.C. Circuit’s 2014 decision in Electric Power Supply Association v. FERC — issued shortly after FERC’s Order Establishing Hearing — further undercuts FERC’s assertion of jurisdiction. In EPSA, the D.C. Circuit concluded that FERC did not have jurisdiction under the FPA to regulate wholesale demand response programs because, while demand response affects FERC-jurisdictional wholesale markets, such programs involve conduct in the retail electricity market — a market that, like the intrastate natural gas market, is subject to the jurisdiction of the states, rather than FERC. The EPSA case is currently pending review by the U.S. Supreme Court.
In the Initial Decision, Judge Cintron found that BP’s otherwise nonjurisdictional transactions were, as a factual matter, “in connection with” jurisdictional transactions because BP’s trading lowered the HSC Gas Daily index price — a price index that set the price for certain third-party jurisdictional sales and jurisdictional “cash-out” transactions. Judge Cintron also found that the EPSA case — which was not addressed by FERC in its Order Establishing Hearing — did not involve FERC’s antimanipulation authority or undercut FERC’s assertion of jurisdiction over BP’s conduct.
If FERC issues a final order assessing a civil penalty against BP (FERC previously proposed a $28 million civil penalty) and does not reverse its decision on rehearing, BP is likely to challenge FERC’s penalty in the D.C. Circuit or another federal court of appeals with jurisdiction to hear the appeal. Such an appeal could lead to greater clarity for market participants regarding the scope of FERC’s “in connection with” enforcement jurisdiction and the degree to which otherwise nonjurisdictional conduct could subject market participants to FERC’s enforcement jurisdiction. If BP were to file its appeal in the D.C. Circuit, the appeal could also lead to further guidance from that court on the breadth of its 2013 Hunter decision.