A slim FERC majority Thursday voted out four stipulation and consent agreements, requiring marketers and other energy firms to pay more than $8 million in civil penalties and disgorge approximately $4 million in unjust profits for allegedly engaging in fraudulent open-season bidding for natural gas transportation capacity on the Cheyenne Plains Natural Gas Co. pipeline. The agency also, in sharply divided decisions, issued two orders to show cause resulting from an 18-month investigation into the allegedly illegal activity.
The settlements resolve investigations by the Federal Energy Regulatory Commission's Office of Enforcement (OE) into whether bidding by Tenaska Marketing Ventures LLC (TMV) and its affiliates, Oneok Energy Services Co. and its affiliates, Klabzuba Oil & Gas FLP, Jefferson Energy Trading Co. LLC (Jetco), Wizco Inc. and Golden Stone Resources LLC violated FERC's anti-manipulation regulations in Cheyenne's March 2007 open season. The TMV settlement also resolves allegedly fraudulent bidding by Tenaska on two other pipelines, Colorado Interstate Gas Co. (CIG) and Northern Natural Gas Co.
In two separate show cause orders FERC ordered Seminole Energy Services and four affiliates, and National Fuel Marketing Co. LLC and three affiliates to show why they should not be found to have perpetrated a fraud in connection with their bidding for, and use of, interstate transportation capacity on Cheyenne, and why they should not pay a civil penalty and be subject to disgorgement of unjust profits.
Commissioners Phillip Moeller and Marc Spitzer dissented in the enforcement order on TMV, and the show cause orders for Seminole Energy Service and National Fuel Marketing. Moeller said "the conduct in these proceedings does not merit any penalty."
The enforcement hotline received calls from other Cheyenne open season participants claiming that some marketers submitted bids on behalf of multiple affiliates in order to "game" the pro rata allocation method relied upon by Cheyenne. The hotline calls triggered a FERC investigation of bidder conduct during the Cheyenne open season and similar open seasons held on CIG and Northern Natural.
FERC's OE investigation revealed that five different groups of entities accounted for 27 of the 47 winning bids and those groups obtained 57% of capacity awarded by Cheyenne. Put another way, 20% of the bidders secured more than 50% of the capacity awarded by means of their multiple bidding. Based on all of the facts and circumstances of each case, FERC's OE maintains that these entities violated agency regulations by submitting multiple bids with the intent to defeat the pro rata allocation method relied upon by Cheyenne to ensure fair allocation of scarce and valuable capacity.
TMV has agreed to pay a civil penalty of $3 million and disgorge profits of $1.97 million for its alleged fraudulent activities. The marketer submitted bids on behalf of itself and seven affiliates during the Cheyenne open season. It was awarded eight shares of capacity, and prearranged releases by its affiliates so that all the awarded capacity was used by TMV. TMV also engaged in substantially the same conduct in the CIG and Northern Natural open seasons, the agency said. In each open season, FERC said Tenaska affiliates prearranged releases of all acquired capacity to TMV.
Oneok Energy Services has been ordered to pay a civil penalty of $4.5 million and disgorge $1.9 million in unjust profits. The company submitted bids on behalf of itself and five affiliates during the Cheyenne open season. Oneok was awarded six shares of capacity. Like Tenaska, Oneok prearranged releases by its affiliates so that all the awarded capacity was used by Oneok Energy Services, according to the agency.
In addition, the settlement resolves matters self-reported by Oneok. Oneok self-reported that Oneok Energy Services, Oneok Energy Marketing, Bear Paw, Oneok Midstream Gas Supply and Oneok Field Services participated in numerous transactions that violated shipper-must-have-title (SMHT) requirements on seven interstate pipelines, the Commission said. And between January 2005 and March 2007, Oneok Energy Services and Oneok Field Services participated in prohibited buy-sell transactions that resulted in the transport of 2.1 Bcf of gas. Kansas Gas Service, a Oneok division that provides gas distribution services in Kansas, separately self-reported that it violated SMHT requirements during various months in 2005 and 2006.
The settlement calls for Denver-based Klabzuba Oil & Gas to pay a civil penalty of $300,000 for its part in the fraudulent activities during the Cheyenne open season, according to FERC. This privately held exploration and production company submitted a bid, together with bids by Jetco, Wizco, and Golden Stone, all of which are gas marketers. The bids resulted from TMV's interest in having Golden Stone Resources join with TMV in multiple-entity bidding for Cheyenne's capacity and having Golden Stone find other entities to assist, the agency said.
TMV initially planned to split profits evenly with Golden Stone Resources and the other marketers via an asset management agreement in which TMV would act as agent to nominate the capacity as well as buy and sell the gas to be transported on the Cheyenne capacity. Klabzuba initially agreed to join the plan, but neither it nor Jetco, Wizco nor Golden Stone ever consummated the asset management agreement with TMV, the agency said. Instead, FERC noted that Klabzuba, Wizco and Golden Stone employed Jetco as their agent and to submit bids.
Jetco, Wizco and Golden Stone have been ordered to pay a civil penalty of $585,000. Like Klabzuba, the companies initially planned to join TMV's plan, but they ultimately did not, FERC said. Yet Jetco, for itself and on behalf of Klabzuba, Wizco and Golden Stone, did pay TMV $150,000 for deal information and bidding assistance after it learned from Cheyenne that it was among the winning bidders, the agency noted.
Separately, FERC directed Seminole Energy Services LLC and affiliates Seminole Gas Co. LLC, Seminole High Plains LLC, Lakeshore Energy Services LLC and Vanguard Energy Services LLC to show why they should not be found to have violated agency regulations by engaging in prohibited buy-sell transactions to consolidate capacity. The order also requires the Seminole affiliates to show why they should not be required to pay civil penalties of $4.25 million and disgorge $452,194, plus interest, in unjust profits, as well as any payment received from entities settling FERC's enforcement investigation of bidding on Cheyenne in March 2007.
FERC's OE staff report alleges that Seminole Energy Services employed its subsidiary affiliates in a scheme to obtain a larger allocation of interstate transportation on Cheyenne's pipeline than it could have acquired by itself. Staff alleges that the affiliates themselves had no use for the Cheyenne capacity, therefore they engaged in a series of buy-sell transactions to consolidate the value of the capacity for Seminole Energy Services.
Denver-based National Fuel Marketing (NFM) and affiliates -- NFM Midstream LLC, NFM Texas Pipeline LLC and NFM Texas Gathering LLC -- also were ordered to show cause why they did not violate the Commission's market manipulation rule by allegedly engaging in fraudulent bidding activity on Cheyenne Plains. The NFM companies face $4.5 million in civil penalties.
"The NFM companies did absolutely nothing wrong, and as recognized by the thoughtful dissents of two commissioners [Moeller and Spitzer], the bids were completely lawful. The charges in the show cause order are based entirely on a theory invented out of whole cloth by the Office of Enforcement staff long after the bids were made. This theory is contrary to all prior Commission and legal precedent and, in addition, cannot be applied legally to the NFM companies on a retroactive basis," NFM said in a statement.
In his dissent in the NFM case, Moeller said "those who are subject to Commission penalties need to know in advance what they must do to avoid a penalty," and "this order violates that principle of fundamental fairness, and that is why I dissent."
The show cause order is based on allegations in enforcement staff reports that Moeller said have "fundamental flaws" in them. "We should not penalize a company millions of dollars for conduct that reasonably may be viewed as consistent with Commission policy. Instead we should change our existing policy so that bidders have advance notice of when they can legitimately submit bids during an open season," he said.
"It is regrettable that a narrow majority of the Commission has decided to allow this wasteful and frivolous investigation to continue and to subject the NFM companies to further expense and disruption that will now be needed to defend themselves from these baseless charges brought by enforcement," the company said.
"The NFM companies are fully prepared to litigate this matter because we believe that a court of law will not tolerate the majority's 'gotcha' approach to regulation...FERC's recommended penalty of $4.5 million is laughable. There is no basis in fact or law for this totally arbitrary figure," and in the end "we are confident that we will be vindicated and will ultimately prevail before the Commission or the courts, if necessary."
At the time of the March 2007 open season on Cheyenne there was a substantial difference in the price of natural gas in Wyoming and at Midcontinent markets due to limited pipeline capacity between the two areas. As a result capacity on Cheyenne, which connects Wyoming production areas to Midcontinent markets, "was therefore very valuable and in high demand," FERC enforcement said in its report on the NFM companies.
Because of the high demand, Cheyenne at the time allocated capacity on its system on a pro rata basis to all bidders who valued the capacity at the highest allowable net present value. NFM and three affiliates were among the winning bidders, with each being awarded a pro rata share of the available capacity. The NFM affiliates did not use the Cheyenne capacity for themselves, the agency said. Instead they used the capacity to transport gas belonging to NFM, which FERC said was a violation of the SMHT requirement.
The orders to show cause require Seminole and NFM to respond to the OE's allegations within 30 days.
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