In the Energy Policy Act of 2005 (EPAct), Congress amended the Natural Gas Act (NGA), the Natural Gas Policy Act (NGPA), and the Federal Power Act (FPA) to give the Federal Energy Regulatory Commission (FERC) authority to impose civil penalties of up to $1 million per day per violation for violations of those statutes, or of the Commission’s rules, regulations, and orders promulgated thereunder.1 On July 26, 2007, FERC proposed for the first time to exercise that authority in contested proceedings, in two separate show cause orders – Amaranth Advisors L.L.C., et al. (Amaranth) and Energy Transfer Partners, L.P., et al. (ETP)2 – setting forth preliminary findings of alleged manipulative conduct in natural gas markets and proposing a combined $458 million in civil penalties and profit disgorgement for entities and individuals involved.3 At present, FERC’s conclusions remain preliminary, and the respondents will have an opportunity to present evidence to rebut the allegations.4 However, these orders illustrate the manner in which FERC intends to exercise its recently gained civil penalty authority, particularly where the underlying allegations concern market manipulation, and the proceedings established by these orders should be watched carefully by participants in both natural gas and electric markets.

The Alleged Manipulative Schemes

Both show cause orders are the result of lengthy investigations by FERC’s Office of Enforcement, and also reflect cooperation between FERC and the Commodity Futures Trading Commission. The details of the alleged manipulative schemes in Amaranth and ETP are complex, but may be briefly summarized. In Amaranth, FERC made a preliminary finding that Amaranth Advisors L.L.C., several other Amaranth entities, and two former Amaranth natural gas traders manipulated the price of FERC-jurisdictional transactions through trading on the New York Mercantile Exchange (NYMEX) Natural Gas Futures Contract (Futures Contract) on certain dates in 2006. According to FERC, Amaranth traders manipulated settlement prices of the Futures Contract by selling “extraordinary” amounts of these contracts within the last 30 minutes of trading before the contracts expired. The resulting artificial decrease in the settlement prices allegedly increased the value of various financial derivatives in which Amaranth had taken long positions, resulting in gains to Amaranth’s derivative financial positions.

Although trading in the Futures Contract is not subject to FERC’s jurisdiction, FERC asserts that Amaranth’s manipulation of the settlement prices directly affected FERC-jurisdictional natural gas transactions where the price of the transactions is directly tied to the settlement price of the Futures Contract. According to FERC, the manipulation occurred “in connection with the purchase or sale of natural gas . . . subject to [its] jurisdiction,” and therefore falls within the purview of the antimanipulation rule recently adopted by FERC in compliance with EPAct.5

FERC’s preliminary findings in ETP involve allegations that ETP violated the pre-EPAct antimanipulation rule, Market Behavior Rule 2, by manipulating wholesale natural gas markets at Houston Ship Channel and Waha, Texas on certain dates from December 2003 through December 2005. The alleged scheme, as in Amaranth, was to drive the price of fixed-price gas down in order to increase the value of the company’s financial derivative positions. FERC also determined preliminarily that ETP’s intrastate pipeline subsidiary, Oasis Pipeline, L.P. (Oasis), which provides interstate transportation service pursuant to section 311 of the NGPA:6 (1) engaged in preferential and unduly discriminatory conduct by favoring affiliated shippers and disfavoring non-affiliates; (2) charged non-affiliates more than the maximum rate approved by FERC for interstate transportation service from Waha to Katy, Texas; and (3) failed to file an amended operating statement to reflect an agreement that changed how it operated the pipeline.

Factors Considered in Assessing Civil Penalties

The alleged manipulation at issue in Amaranth and ETP is of less significance to the energy industry as a whole than that these cases are the first contested proceedings in which FERC has proposed to assess civil penalties for market manipulation under its Enforcement Policy Statement.7 In EPAct, Congress mandated that FERC, in determining the appropriate amount of civil penalties to be assessed for a particular violation, should consider the seriousness of the violation and the remedial actions, if any, taken by the violator in response to the violation. In the Enforcement Policy Statement, FERC identified eight factors to be considered with respect to the seriousness of a violation: 

  • harm caused by the violation
  • whether the violation was the result of manipulation, deceit or artifice 
  • whether it was willful, reckless, or deliberately indifferent to the results 
  • whether it was part of a broader scheme 
  • whether it was a repeat offense or part of a history of violations by a company 
  • whether it was related to actions by senior management 
  • how the wrongdoing came to light 
  • the effect of potential penalties on the financial viability of the company

FERC also identified three factors to be considered with respect to the violator’s remedial actions that could mitigate the otherwise applicable penalties: 

  • internal compliance
  • self-reporting 
  • cooperation

Proposed Civil Penalties: Amaranth

In Amaranth, FERC determined that there were a total of 219 separate violations involved, each consisting of an executed trading floor transaction, such that the maximum civil penalty for the alleged manipulation would be $219 million.8 In determining the civil penalty to be assessed, FERC first concluded that Amaranth was responsible for the activities of its employees, officers and directors, and that the various Amaranth entities should be treated as a single entity for purposes of civil penalty assessment.9 FERC then reviewed the factors concerning the seriousness of the alleged violations. It first noted that the case was very serious in that it involves the rule against market manipulation, which is a critical element in fulfilling FERC’s mandate to ensure that markets are fair and competitive.10 FERC then highlighted four factors in its analysis:

1. There was significant harm to the market. Consumers are harmed when prices are the result of manipulation; manipulation dilutes the price discovery and hedging functions that the markets are supposed to provide; producers who sold under contracts pegged to the Futures Contract were paid significantly less than the market price for their gas; and the pecuniary interests of the state and federal governments were affected, insofar as they sell rights to produce gas from public lands based on royalties to tied to the NYMEX settlement price.11

2. The violations were the result of willful and deceitful conduct. The violations were willful with respect to the effect on the Futures Contract settlement price, and at least reckless with respect to the impact on FERC-jurisdictional transactions. Moreover, instant messages showed that traders knew their conduct was suspect, and suggest that subsequent explanations for their conduct were either disingenuous or false.12

3. Senior management was either aware of the traders’ manipulative conduct, or willfully blind to it. One of the Amaranth traders was a company Vice President at the time of the offenses, and the traders’ conduct should have alerted more senior management that the traders likely were engaged in manipulation or other improper conduct. Nevertheless, the wrongdoing was discovered only by virtue of Commission inquiry, not as a result of discovery or correction by management. The failure of more senior management to supervise and prevent manipulative activity by the traders was viewed by FERC as a particularly significant factor in determining the amount of civil penalties to be assessed.13

4. Amaranth retained sufficient assets to satisfy a maximum assessment of civil penalties. Thus, there was no reason to be concerned about Amaranth’s financial viability.14 FERC noted that the only factor arguably favorable to Amaranth was the absence of prior similar behavior, but it did not view this as a significant consideration. FERC went on to conclude that there was little to be cited in mitigation of the offenses: The company did not self-report the violations, its internal compliance policies were weak, and its cooperation with the investigation was acceptable, but not exemplary. FERC proposed to assess a civil penalty of $200 million against the Amaranth entities, concluding that the balance of considerations warranted a penalty of close to he maximum amount.15 In addition, FERC preliminarily determined that Amaranth should disgorge $59 million in alleged unjust profits, plus interest.16

FERC also imposed additional civil penalties against two Amaranth traders that it considered to have been personally and directly involved in the manipulation, Brian Hunter and Matthew Donohoe. FERC concluded that the traders’ conduct was more egregious due to their personal involvement, and that Hunter, after initially cooperating with the investigation, subsequently became uncooperative. However, FERC found that the traders were less able to pay, though both still had significant resources.17 FERC preliminarily assessed a $30 million civil penalty against Hunter, based on his higher net worth, and a $2 million civil penalty against Donohoe, based on his lesser net worth and the fact that he did not stand to benefit so greatly from the manipulative scheme. FERC further emphasized that it considers it important to impose high levels of sanctions on individual traders, both for enforcement against past manipulation and as a means of deterring future manipulation.18

Proposed Civil Penalties: ETP

In ETP, FERC addressed multiple violations, and its penalty analysis was less detailed. FERC concluded that ETP should be assessed the maximum possible civil penalty of $79 million for its price manipulation at Houston Ship Channel,19 asserting that ETP’s manipulations: (1) harmed the market; (2) were the result of manipulation, fraud or deceit; (3) were willful; (4) were directed, or at least permitted, by senior management; and (5) was not self-reported or remedied in a timely manner.20 FERC further noted that ETP is readily able to pay appropriate civil penalties, and that it did not provide exemplary cooperation in FERC’s investigation.21 In addition, FERC concluded that ETP should disgorge $67,638,416 in unjust profits, plus interest, for this manipulation.22 However, FERC took a different approach with respect to ETP’s price manipulation at Waha, discounting the maximum civil penalty of $58 million down to $3 million, even though its analysis of the civil penalty factors was much the same as in the case of the alleged Houston Ship Channel manipulations.23 The show cause order provides no explanation for the reduction.

FERC also made preliminary determinations with respect to remedies against Oasis. FERC proposed to assess $15 million in civil penalties against Oasis for its allegedly unduly preferential and unduly discriminatory actions, which it noted was considerably less than the maximum that could be assessed, and to require disgorgement of $267,122 in unjust profits, plus interest.24 FERC based this on a review of the relevant factors, noting that: (1) discriminatory treatment of affiliates and non-affiliates is a serious violation; (2) the violations were willful; (3) the violations harmed non-affiliated interstate shippers, as well as their customers and suppliers; (4) Oasis did not self-report; and (5) its cooperation was not exemplary, in that it failed to make employees available for depositions in a timely manner and initially provided incorrect data to investigators.25 Finally, FERC proposed to assess a civil penalty of $500,000 against Oasis for its failure to amend its operating statement to accurately reflect the manner in which it operated the pipeline, and further required Oasis to amend its current operating statement within sixty days of the order.


As noted, the show cause orders reflect only “preliminary” findings by FERC, which may be subject to revision based upon the responses submitted by the parties. However, these preliminary findings are couched in very strong language, indicating that FERC’s conclusions are far more than tentative. Several requests for rehearing have been filed in response to Amaranth and ETP, raising a variety of jurisdictional and procedural issues. Amaranth argues that FERC lacks jurisdiction over natural gas futures trading, and therefore lacks jurisdiction to impose penalties for alleged manipulation of the Futures Contract.26 ETP argues that due process requires that civil penalty liability be determined through a de novo review by a federal district court, rather than by FERC acting alone as prosecutor and judge, and further suggests that independent review is particularly necessary in light of the adversarial tone of the show cause order.

FERC has been subjected to considerable pressure from legislators with respect to its exercise of its investigatory and enforcement powers. The Amaranth and ETP show cause orders indicate that where FERC is unable to reach consent agreements with alleged violators, FERC intends to be aggressive in using its authority to order civil penalties as it seeks to bring about what it has characterized as a “culture of compliance.”27 This is particularly the case where the alleged violations involve market manipulation. Moreover, FERC’s review of the factors that go into its determination of the amount of civil penalties that should be assessed highlight the importance of internal compliance policies and self-reporting as crucial mitigating elements. Companies that trade in natural gas and electric markets – and related derivatives markets – should be highly alert to these considerations as FERC continues to exercise its new enforcement and remedial authority.