On August 13, 2015, a Federal Energy Regulatory Commission (“FERC” or “Commission”) Administrative Law Judge (“ALJ”) issued an initial decision in which she found that BP America Inc. et al. (“BP”) manipulated the natural gas market in Texas for over two and a half months in 2008.1 ALJ Carmen A. Cintron concluded that BP intentionally sold large volumes of next-day, fixed-price physical gas to suppress the physical gas index to benefit BP’s corresponding short financial positions, in violation of Section 4A of the Natural Gas Act and Section 1c.1 of the Commission’s regulations.2 In addition, Judge Cintron determined that the Commission’s Office of Enforcement staff (“Enforcement”) proved that BP’s alleged manipulative conduct fell within FERC’s jurisdiction.3 Notably, the ALJ relied heavily on the Commission’s penalty assessment against Barclays Bank PLC et al. (“Barclays”) for alleged market manipulation—despite the fact that the proposed penalty currently is subject to de novo review in federal court.4
As noted below, BP has announced that it intends to appeal the ALJ’s decision. It is possible that the FERC or a U.S. Court of Appeals may disagree with some or all of the ALJ’s findings of fact and conclusions of law.
BP’s Alleged Manipulative Scheme
Enforcement asserted that traders on BP’s Southeast Gulf Texas team (“Texas Team”) had a spread position comprised of short index exposure at Houston Ship Channel (“HSC”) and long index exposure at Henry Hub. This position benefited when the HSC-Henry Hub spread in daily physical gas prices widened. Following Hurricane Ike on September 13, 2008, the Texas Team’s spread earned significant profits because HSC prices plummeted in comparison to Henry Hub prices.5 Enforcement contended that following the hurricane and from September 18, 2008 through November 30, 2008 (the “Investigative Period”), the team took several coordinated, affirmative steps to slow the shrinkage of the spread by increasing its short exposure to the HSC Gas Daily index and increasing its physical natural gas positions to suppress the index.
The ALJ concluded that a recorded November 5, 2008 phone call (“November call”) between Texas Team traders Clayton Luskie and Grayden Comfort provided direct evidence of BP’s manipulative conduct and intent. In the call, Luskie asked “[s]o how would you explain our dealings on [Houston’s Pipeline System] and with our paper position that don’t make it sound like we’re manipulating the index?”6 The ALJ emphasized Comfort’s lack of a valid explanation for the trading, despite his significant trading experience and participation in the trading at issue, demonstrated his manipulative intent.7 The ALJ then held that this phone call, coupled with the Texas Team’s changes in its trading conduct during the Investigative Period, sufficiently proved a scheme to manipulate natural gas prices.
Judge Cintron cited the following changes in the Texas Team’s trading as persuasive circumstantial evidence of manipulative intent:
- BP became the largest net seller of next-day, fixed-price physical gas at HSC despite a significant drop in prices in that market at the time;
- The Texas Team sold most of BP’s physical gas at HSC despite the option to sell at a higher price at Katy, another natural gas market;
- The Texas Team sold higher volumes of gas at HSC early in the trading day, when sales volumes had the biggest suppressive effect on prices;
- The Texas Team sold at HSC by more frequently hitting bids—rather than posting offers at higher prices—than other market participants;
- BP suffered sustained physical trading losses on HSC (in contrast to consistent profits on such trading before the Investigative Period);
- The Texas Team bought early in the trading day at Katy to increase its net Katy long position, which enabled traders to sell and transport Katy gas to HSC for more HSC gas sales;
- The Texas Team increased its use of BP’s daily firm transportation capacity on the Houston Pipeline System to deliver gas from Katy to HSC despite their close proximity, which made the transportation uneconomical; and
- The Trading Team added short HSC financial spread positions that benefited from suppressed prices on the HSC Gas Daily index and spread most of this exposure against long Henry Hub Gas Daily index exposure.
BP argued that Enforcement improperly compared BP’s conduct during the Investigative Period with its conduct from January 2, 2008 through September 10, 2008 (the “Pre-IP”). BP asserted that the Pre-IP did not reflect several factors present during the Investigative Period that affected its trading, including seasonal changes, a higher baseload, the financial crisis, declining natural gas prices, and the hurricane. BP also contended that Enforcement improperly analyzed end-of-day Gas Daily prices that did not account for intraday trading activity that the Texas Team observed and that it relied on flawed data inputs.8 The ALJ rejected BP’s defenses and determined that BP failed to provide any valid explanations to rebut the circumstantial evidence that Enforcement presented.9
Reliance on the Barclays Case
The ALJ relied heavily on Barclays as support for her holding that BP engaged in manipulation, dismissing BP’s contention that relying on Barclays is inappropriate because a federal court is reviewing the case de novo.10 She concluded that “[t]he fact that Barclays is currently in federal court does not diminish its precedential value at this time since that court has not yet ruled. Additionally, so far a motion to dismiss has been denied by the court.”11 The initial decision analyzed the Commission’s examination of circumstantial evidence in Barclays and, citing to Barclays, emphasized as a significant factor that BP’s trading conduct did not align with profit-seeking behavior.12 The ALJ then highlighted the significant decline in the Texas Team’s financial performance on its next-day physical trading and its increased use of the Houston Pipeline System to transport gas despite the largely negative HSC-Katy price spread.
BP’s Purportedly Ineffective Compliance Program
The ALJ concluded that BP lacked sufficient compliance procedures to warrant a compliance credit under the Penalty Guidelines because it allegedly failed to prevent and detect the manipulation, failed to effectively investigate the Texas Team’s behavior, and lacked the minimum standards of a robust compliance program.13 She emphasized the following findings to support this conclusion:
- BP’s compliance reports to identify manipulation excluded specific markers of manipulation, such as positions and traders’ profits and losses;
- BP Compliance personnel did not always follow up on questionable reports, including Comfort’s trader anomaly report during the Investigative Period;
- BP lacked effective high-level oversight of its internal compliance;
- The Texas Teams’ primary compliance analyst did not take the purported manipulation seriously in the days after the November call;
- BP Compliance failed to take reasonable steps to screen for “bad actors”;
- BP’s anti-manipulation compliance trainings did not appear to address physical for financial manipulation;
- BP did not regularly evaluate its compliance program or take advantage of its frequent manager meetings to review the program;
- BP did not encourage its employees to comply with anti-manipulation rules and compensated its financial gas traders at a higher rate than its physical gas traders; and
- BP failed to take reasonable steps after detecting the alleged manipulation and stopped its internal review of the November call before it was completed.14
Some of the foregoing facts relied upon by the ALJ, such as BP’s compensation system, seem to encroach on BP’s judgment about how it wants to run its business.
Although the Commission will assess penalties at a later time, the ALJ determined that the record supports the $48 million penalty amount requested by Enforcement.15 Moreover, Judge Cintron concluded that BP’s penalty may be enhanced because BP was the subject of three prior adjudications within the past five years, including settlements for propane manipulation with the Department of Justice and the Commodity Futures Trading Commission one year before the conduct at issue in this case.16 Following the initial decision, BP announced that it “strongly disagreed” with the ALJ’s findings and that it will appeal to the full Commission. Absent an extension, BP must submit a brief on any exceptions to the Commission within 30 days of the initial decision.17