On August 5, 2013, the Federal Energy Regulatory Commission (the “Commission” or “FERC”) issued an order directing BP America Inc. and its affiliates (collectively, “BP”) to show cause why it should not pay a $28 million civil penalty and a $800,000 disgorgement fee for manipulating the next-day, fixed-price gas market at the Houston Ship Channel (“HSC”) from September to November 2008 in violation of Section 4A of the Natural Gas Act (“NGA”) and Section 1c.1 of the Commission’s regulations (the “Anti-Manipulation Rule”).1 This is the third in a string of high-profile orders in which the Commission has sought or assessed unprecedented civil penalties against energy traders, financial institutions, and/or energy companies.2 This latest case demonstrates that the Commission will continue to investigate and prosecute allegedly manipulative energy trading schemes, even years after the trading activity at issue has occurred. Further, it bears noting that, while the Commission uses a complex formula to determine civil penalties, its assessment of civil penalties in recent cases ranges from roughly two to thirty times the corresponding disgorgement fee.3

Background

The Commission issued the Show Cause Order based on a FERC Office of Enforcement (“Enforcement”) report alleging that BP conducted a manipulative energy trading scheme in violation of rules prohibiting market manipulation.4 According to the Enforcement Report, in September 2008, the Texas team of BP’s Southeast Gas Trading desk had a financial spread position between HSC (short index swaps) and Henry Hub (long index swaps) that benefited when the spread between the daily physical gas prices between HSC and Henry Hub increased. The Texas team realized that its spread position potentially was worth millions of dollars when Hurricane Ike caused the physical gas prices at HSC to plummet on September 13, 2008. Enforcement staff alleges that, to maintain the beneficial spread, three BP traders began selling next-day, fixed-price gas at HSC to suppress physical gas prices at HSC, and thereby slow the shrinkage of the HSC-Henry Hub spread. In so doing, the traders uneconomically used the transportation capacity on the BP Houston Pipeline between Katy hub and HSC, repeatedly made uneconomic sales at HSC, and increased BP’s market concentration at HSC. The Enforcement Report alleges that such activities suppressed the physical gas prices at HSC with the goal of benefiting the financial HSC-Henry Hub spread. The traders continued this activity through November 2008.

Show Cause Order

The Commission orders BP to show cause why FERC should not find that BP violated NGA Section 4A and the Anti-Manipulation Rule regarding BP’s trading of physical natural gas at HSC and why FERC should not assess a $28 million civil penalty and a $800,000 disgorgement fee for any such violation. Pending an extension request, BP has thirty days from the date of the Show Case Order to file an answer, and Enforcement staff has thirty days thereafter to file a response to BP’s answer. Alternatively, BP may choose not to contest the Show Cause Order and pay the proposed assessment.

Conclusion

While the outcome of this case is unclear, the Commission will continue to use its authority under federal statutes to investigate and prosecute energy trading activities that may constitute market manipulation. It is of paramount importance, therefore, that financial institutions, energy companies, and traders that engage in energy trading activities use lessons from current and past cases to develop internal compliance and surveillance programs to prevent activities that the government may perceive as violations of its market manipulation rules.