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Energy Transfer Ordered to Pay $10M to Settle CFTC Charges

Dallas-based Energy Transfer Partners LP and three subsidiaries last Monday were ordered to pay $10 million as part of a settlement reached with the Commodity Futures Trading Commission (CFTC) of charges that they attempted to manipulate natural gas prices at the Houston Ship Channel (HSC).

At the same time, the Federal Energy Regulatory Commission (FERC) won a crucial court victory, with a federal appeals court in Louisiana denying Energy Transfer's petition for court review of the FERC enforcement case against it that alleges the company manipulated the physical natural gas market. The U.S. Court of Appeals for the Fifth Circuit in New Orleans ruled that it lacked jurisdiction to intervene in an ongoing agency matter.

The CFTC consent order, which was signed by U.S. District Judge Ed Kinkeade of the Northern District of Texas, directed Energy Transfer and its subsidiaries to pay the $10 million penalty within 10 days and it permanently enjoined the companies from "attempting, directly or indirectly, to manipulate the price of any commodity in interstate commerce or for future delivery."

Under the agreement, the CFTC has agreed to release Energy Transfer and its affiliates, directors and employees from all claims or causes of actions alleged by the agency, according to Energy Transfer. The three Energy Transfer subsidiaries named in the consent order are Energy Transfer Co. of San Antonio and Houston, TX; Houston Pipeline Co. of Houston; and ETC Marketing Ltd. of San Antonio and Houston.

The court order arose from a CFTC complaint filed in July 2007, which alleged that Energy Transfer and its subsidiaries attempted to manipulate the October 2005 and December 2005 HSC monthly index prices of natural gas published by Platts in its Inside FERC Gas Market Report (see NGI, July 30, 2007). CFTC's action, while similar, is separate from the FERC case.

Specifically, the CFTC complaint charged that the Energy Transfer companies: attempted to manipulate the price of natural gas for delivery at the HSC by selling on the IntercontinentalExchange (ICE) trading platform massive quantities of gas at HSC to place downward pressure on gas prices there; and by reporting those transactions to Inside FERC, the companies sought to exploit the index price of natural gas at HSC that was reported by Inside FERC in its October and December 2005 monthly published newsletters.

The CFTC complaint further alleged that Energy Transfer and subsidiaries engaged in this scheme in an attempt to benefit their financial basis swap positions tied to the Inside FERC October and December 2005 HSC natural gas index prices. The majority of the physical HSC gas transactions and the financial basis swaps at issue in the complaint were executed on Atlanta-based ICE, according to the CFTC.

The case first came to light in November 2006 when the Texas Independent Producers & Royalty Owners Association called on Texas Attorney General Greg Abbott to investigate whether ETP manipulated the HSC physical gas market to profit from natural gas basis swap transactions in the financial market (see NGI, Nov. 6, 2006).

With respect to FERC's action against Energy Transfer, the Fifth Circuit last week granted FERC's motion to dismiss Energy Transfer's petition seeking court review of the agency's enforcement action against the company. The court said it lacked jurisdiction to get involved in an ongoing FERC matter.

Specifically, Energy Transfer had petitioned the court to review the July 2007 FERC show-cause orders, which accused the company and three affiliates of manipulating the physical gas market at the HSC and Waha, TX, trading hubs on various dates from December 2003 through December 2005 (see NGI, July 30, 2007).

In October 2007, Energy Transfer responded to the Commission's allegations, saying that "the Commission's theory of the case against Energy Transfer Partners LP and its affiliates is economically incoherent, internally inconsistent, riddled with factual errors and contrary to sound public policy."

The company further argued that "in federal court -- the proper forum for adjudicating remedies here...the Commission's analysis would never survive an independent de novo review or a Daubert challenge [on the admissibility of expert testimony]. Nor can it support further proceedings" before the agency (see NGI, Oct. 15, 2007).

FERC is seeking to assess penalties on Energy Transfer of $97.5 million and require total disgorgement of $69.9 million in unjust profits. Commission enforcement staff in February asked the agency to increase the penalty amount to $107 million and disgorged profit amount to $74.9 million based on additional information that was uncovered during its investigation (see NGI, Feb. 18).

In seeking a dismissal of Energy Transfer's petition for court review, FERC told the Fifth Circuit that the agency proceedings "initiated by the show-cause order are still ongoing. FERC has made no final determinations fixing ETP's legal rights or obligations, and has not directed ETP to pay any amounts." The proceedings are "only the beginning of formal litigation" into charges that Energy Transfer and subsidiaries took actions that violated regulations under both the Natural Gas Act and Natural Gas Policy Act, the agency said.

"Judicial review of administrative orders is only available once agency action becomes final," FERC argued. To be ripe for judicial review, a FERC action "must mark consummation of the agency's decision-making process [and]...the action must be one by which rights or obligations have been determined, or from which legal consequences will flow," it noted.

Courts previously have ruled that the effect of premature judicial review "is likely to be interference with the proper functioning of the agency and a burden for the courts," and would lead to "piecemeal review," FERC pointed out.

In its petition, Energy Transfer noted that FERC on rehearing rejected its request to have its civil penalty liability initially determined de novo by a federal district court rather than by the agency. While this court does provide an exception "when an agency exceeds the scope of its delegated authority or violates a clear statutory mandate," the Commission told the Fifth Circuit that this was not the case with Energy Transfer.

The action against Energy Transfer, and separately against Amaranth Advisors LLC last July, marked the first prosecution of market manipulation by the Commission with its new enforcement authority granted under the Energy Policy Act of 2005, and also was the first time the Commission had proposed maximum civil penalties.

The Commission's investigation found that Energy Transfer violated FERC's Market Behavior Rule, the anti-manipulation rule then in effect, when it allegedly artificially lowered the price for prompt month gas at the HSC to the benefit of its physical and financial positions. By lowering the price, Energy Transfer reportedly depressed Inside FERC's HSC index on which the pricing of many physical natural gas contracts and financial derivatives are based [IN06-3-002].

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