This week’s enforcement update reports on developments in the TOTAL and ETRACOM cases—FERC’s order to show cause against TOTAL and venue transfer for TOTAL’s complaint in district court; and ETRACOM files an additional expert affidavit in the FERC proceeding, but FERC denies ETRACOM’s request for discovery from CAISO. Also, there is a new NAV issued against Saracen Energy Midwest for alleged SPP tariff violations.

FERC issues Order to Show Cause to TOTAL. On April 28, FERC ordered TOTAL Gas & Power North America, Inc. (“TGPNA”) and two traders to show cause why they should not be found to have violated FERC’s anti-manipulation rule through a scheme to manipulate the price of natural gas at four locations in the southwest United States between June 2009 and June 2012. The Enforcement Staff Report, which is attached to FERC’s order, alleges that TGPNA deliberately traded to affect monthly natural gas indexes by transacting at prices and in ways that were designed to move index prices in a direction that benefited its related derivative positions.

In particular, Enforcement Staff alleges that TGPNA devised and engaged in uneconomic trades of monthly physical fixed price natural gas during bidweek at the regional trading hubs of Southern California Gas Co., El Paso Natural Gas Co., Permian Basin, West Texas Waha, and El Paso, San Juan Basin, and then reported those trades to publications for inclusion in monthly index prices. Enforcement Staff alleges that TGPNA made and reported these trades for the purpose of affecting the published monthly index prices and benefiting related positions whose value was tied to those same indexes.

The penalty to disgorgement ratio is staggering. The order proposes the following: (i) a civil penalty of $213.6 million against TGPNA; (ii) civil penalties of $2 million and $1 million, respectively, against the two traders; and (iii) disgorgement of $9.18 million plus interest in unjust profits. Like the CFTC settlement, FERC’s OSC makes TOTAL jointly and severally liable for the traders’ liability.

In December, the CFTC settled with TGPNA and one of the traders for a $3.6 million civil penalty following an investigation related to the same conduct (although over a shorter time period). Our colleague Geoffrey Aronow, former Director of Enforcement at the CFTC, said: “The significant size of the penalties sought, including against individual traders, demonstrates the lengths that FERC – and the CFTC – are willing to go when they perceive a pattern of manipulative trading. Whatever the ultimate outcome in this matter, it reinforces the importance of constant monitoring and evaluation of the regulatory risks that may arise from even innocuous trading that may be susceptible to interpretation as something very different.”

Judge transfers TGPNA complaint case to Southern District of Texas. On May 3, the presiding the judge in the Western District of Texas issued a sua sponte order transferring the case to the U.S. District Court for the Southern District of Texas, Houston Division. According to the judge, it appears from the complaint that the U.S. District Court for the Southern District of Texas is substantially more related, and thus more convenient, than the Western District’s Midland-Odessa Division, despite the claim that a majority of TGPNA’s natural gas trading volume arises in the Western District of Texas. The judge ruled that the interest of justice would be best served by transferring the case to Houston, where TGPNA maintains its principal place of business.

On May 2, FERC filed a motion to dismiss the April 14 amended complaint filed by TGPNA and two individual traders seeking declaratory relief with a U.S. district court in Texas. TGPNA asked the court to issue a declaratory judgment to prevent FERC from pursuing its enforcement action against TGPNA in a hearing before an administrative law judge at FERC. The motion to dismiss argued that the court lacks subject matter jurisdiction because Section 19(a) of the Natural Gas Act (15 U.S.C. § 717r) vests exclusive jurisdiction in the courts of appeals to review FERC’s penalty assessment orders. FERC also argued that binding Fifth Circuit precedent holds that in a Natural Gas Act enforcement proceeding, there is no case or controversy ripe for judicial resolution unless and until FERC determines that a violation occurred and assesses a penalty, which has not happened here.

In addition to arguing that the district court lacks jurisdiction, FERC argued that the complaint lacks any allegations establishing venue in a U.S. District Court for the Western District of Texas. Finally, FERC asked the court to decline to exercise its discretion to hear the declaratory judgment action.

ETRACOM files affidavit of Dr. Ronald McNamara in FERC show cause proceeding. On May 3, ETRACOM filed an affidavit from Dr. Ronald R. McNamara, a former Chief Economist and Vice President of Market Management at MISO. Dr. McNamara’s affidavit responds to Enforcement Staff’s position that any market approved by FERC is automatically deemed to be a “well-functioning market” in the context of FERC’s anti-manipulation rule if that market is operating under a tariff that FERC has found to be just and reasonable. Dr. McNamara’s affidavit provides context and further support for ETRACOM’s position that the market at New Melones in May 2011 was dysfunctional such that the pricing outcomes and their negative impacts on virtual and CRR market participants and the market were caused by the market dysfunction – not ETRACOM. According to Dr. McNamara’s affidavit, the observable results of the market at New Melones in May 2011 clearly indicate the market was broken.

On May 4, Enforcement Staff filed a response to ETRACOM’s submission of the McNamara affidavit. Enforcement Staff argues that the Commission should give the affidavit no weight on the grounds that it addresses irrelevant topics, is untimely and unauthorized, and would not assist the Commission in determining a violation of the anti-manipulation rule or assessing a civil penalty. According to Enforcement Staff, not only is there no evidence that ETRACOM was aware of the alleged pricing anomalies at that time, but the existence of such alleged anomalies is not dispositive of whether ETRACOM subsequently engaged in manipulative conduct. Moreover, Enforcement Staff opposes ETRACOM’s position that the anti-manipulation rule requires proof of a “well-functioning market” as a legal threshold to a finding of market manipulation.

FERC denies ETRACOM’s motion for disclosure of information. On May 6, FERC denied ETRACOM’s motion requesting FERC to require CAISO to produce certain data relevant to market design flaws and software pricing/modeling errors to Respondents. The motion argued that the CAISO flaws and errors – which were undisclosed and unknowable to market participants during the relevant time period – raise material issues about the basis of Staff’s allegation that Respondents interfered with or obstructed a “well-functioning market.” The motion further stated that Respondents have not been afforded discovery rights, and that prior requests to Staff and CAISO for the information were not successful.

FERC denied ETRACOM’s request, stating that the Respondents’ Joint Answer to the Order to Show Cause is comprehensive and discussed at length the alleged existence of software errors and “market flaws.” FERC determined that Respondents provided this detail based on the existing record and that Respondents failed to demonstrate that their request for additional information from CAISO is necessary. FERC also stated that the motion lacked merit because the Respondents elected to “forgo discovery in an administrative hearing at the Commission before an administrative law judge.” Instead, Respondents “asked the Commission to evaluate their arguments under the procedures of FPA section 31(d)(3).” FERC contends that under 31(d)(3), the Commission may assess a civil penalty after determining that a violation has occurred. If left unpaid, such penalty would be subject to review in district court. FERC considers that 31(d)(2) allows the Commission to set matters for hearing before an ALJ, which typically includes discovery rights for the parties, in contrast to the procedures outlined in section 31(d)(3).

The Commission ruled that Respondents “cannot seek both the perceived benefits of section 31(d)(3) ‘penalty assessment’ procedures and the discovery rights afforded to litigants in administrative proceedings at the Commission.” FERC also stated that, although it may investigate any facts or conditions it finds necessary or proper, FERC is exercising its discretion in denying the motion, in particular because of the “substantial record” in this matter. FERC further offered that if Respondents still believe additional discovery is needed to provide a defense the Commission “would entertain a request to revoke their election of the procedures of FPA section 31(d)(3) within seven days of this order.” Such a request would permit Respondents to instead seek a hearing before an ALJ under section 31(d)(2). Chairman Bay did not participate.

FERC issues Notice of Alleged Violations regarding Saracen Energy Midwest, LP. On May 6, FERC issued an NAV alleging that Saracen Energy Midwest, LP violated Southwest Power Pool, Inc’s Open Access Transmission Tariff by submitting bids for Transmission Congestion Rights at Electronically Equivalent Settlement Locations between August 2014 and March 2015. The NAV appears limited to a tariff violation and does not allege that Saracen engaged in market manipulation.

Sidley hosting enforcement roundtable event in New York. Please join us on May 12 for an enforcement roundtable event to discuss recent developments in California from the Aliso Canyon gas storage leak, together with Dr. Shaun Ledgerwood, Matt O’Loughlin and Steve Levine of The Brattle Group. We will host the roundtable in New York on May 12 over dinner at Ai Fiore restaurant. Please let us know here if you are interested in attending the roundtable in New York. Space is limited.

CAISO has posted the draft tariff language for energy market rule changes related to Aliso Canyon gas-electric coordination. On May 4, CAISO issued a revised draft final proposal, and CAISO presented its proposal to its Board of Governors.