Energy Enforcement Update

Yesterday, Presiding Administrative Law Judge (ALJ) Carmen A. Cintron issued the Initial Decision in FERC’s enforcement case against BP.  The decision finds that BP violated the Natural Gas Act and FERC’s anti-manipulation rule with regard to BP’s trading of next-day, fixed-price natural gas at the Houston Ship Channel (HSC) from September 18, 2008 through November 30, 2008.

The Initial Decision follows a hearing before the ALJ at FERC from March 30 to April 15, 2015.  In the Initial Decision, the ALJ agreed with FERC’s Office of Enforcement that BP made uneconomic natural gas sales at HSC as part of a manipulative scheme designed to suppress the HSC Gas Daily index in order to benefit BP’s related financial positions that settled based on the HSC Gas Daily index.  The ALJ found that BP’s trading during the investigative period was markedly different than BP’s trading before the investigative period, and there was no economic or other justification for BP’s changed and unprofitable trading patterns.  According to the ALJ, “BP engaged in market manipulation.  This is a classic case of physical for financial benefits.”

The ALJ made the following factual findings, as ordered by FERC, relevant to a civil penalty and the factors in FERC’s Penalty Guidelines:

  • BP committed a minimum 48 violations, which occurred during a period of 49 days
  • during the relevant period, BP’s manipulation resulted in financial losses of $1,375,482 to $1,927,728 on the next-day natural gas markets at HSC and Katy; BP’s sales of next-day, fixed-price physical gas at HSC involved 10,632,400 MMBtus of natural gas; BP’s financial natural gas positions at HSC involved 25,310,000 MMBtus of natural gas; and BP’s losses occurred during 49 trading days
  • BP’s violations occurred less than five years after a prior FERC adjudication and adjudications of similar misconduct by the CFTC and DOJ, which warrants an increase in BP’s culpability score
  • BP’s conduct contravened the terms of a permanent injunction with the CFTC, which warrants an increase in BP’s culpability score
  • BP did not have an effective compliance program because it failed to prevent or detect the manipulation, and BP’s purported investigation of the traders’ behavior was biased and ineffective
  • BP’s gross profits from the manipulation were between $233,330 and $316,170, and net profits between $165,749 and $248,589

The ALJ also found that FERC Enforcement Staff proved FERC’s jurisdiction in this proceeding through third party transactions priced off of the HSC Gas Daily index, cash-out transactions priced off the HSC Gas Daily index, and BP’s own next-day, fixed-price sales of gas at HSC made to suppress the HSC Gas Daily index.

The ALJ’s Initial Decision does not impose a specific civil penalty against BP.  Rather, in FERC’s order setting matter for hearing, FERC reserved for its own later consideration the issues of whether civil penalties should be imposed for any BP violations and the amount of such penalties, whether any other sanctions should be imposed, and whether BP should disgorge any unjust profits.  FERC Enforcement Staff had proposed a civil penalty of $28 million, plus $800,000 in disgorgement.

The case now goes to the Commission, which will consider the Initial Decision and any exceptions filed by the parties.  The parties have 30 days from the Initial Decision to submit briefs on exceptions to the Commission, and an additional 20 days to file briefs opposing exceptions

BP Initial Decision (August 13, 2015)