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FERC Collects Millions in Penalties, Disgorged Profits

FERC obtained more than $148 million in civil penalties and disgorgement of more than $119 million in unjust profits in fiscal year (FY) 2012, according to the agency's annual report on enforcement, which was released last Thursday.

The Federal Energy Regulatory Commission (FERC) Office of Enforcement staff opened 21 investigations and closed 16 during the year. Nine investigations resulted in settlements, including the largest civil penalty the Commission has ever assessed, against Constellation Energy Commodities Group for $135 million, the report said. The Commission is taking a more proactive approach to overseeing electricity trading. It just suspended the trading authority of a unit of JPMorgan Chase & Co. for allegedly submitting false information.

The natural gas settlements reached at FERC in FY 2012 involved the resolution of violations of open-access transportation rules by three companies, including ConocoPhillips, Atmos Energy subsidiaries, and Missouri Energy. In January, the Commission approved a settlement with ConocoPhillips resolving an investigation arising from a self-report of shipper-must-have-title regulations (SMHT). The producer agreed to pay a civil penalty of $545,000 and disgorge $3.17 million in profits (see NGI, Jan. 9).

In late 2011, FERC approved another settlement resolving allegations that Atmos Energy subsidiaries, Atmos Energy Marketing and Trans Louisiana Gas Pipeline, engaged in flipping and SMHT violations. The companies admitted to the violations and agreed to pay a civil penalty of $6.4 million and to disgorge $5.6 million.

Missouri Gas Energy also found itself the target of a Commission investigation after it self-reported that it violated the agency's capacity-release regulations. FERC found that it engaged in rollover transactions, prohibited buy/sell arrangements and SMHT transactions. It agreed to pay a penalty of $35,000.

According to the enforcement report, there were more settlements involving natural gas transportation violations in FY 2012 than in FY 2011, but FERC did not provide numbers for the two years.

Enforcement completed 44 financial, compliance and performance audits of public utilities, natural gas pipelines and storage companies during the year, resulting in $5.8 million in refunds, as well as accounting adjustments of $3.5 million.

During FY 2012, FERC's Office of Enforcement created the Divisions of Analytics and Surveillance to conduct surveillance and analyze transactional and market data to detect potential manipulation, anticompetitive behavior and other anomalous activities in energy markets.

The report noted that oral arguments in the case involving Brian Hunter, former Amaranth natural gas trader, are expected to be heard by the U.S. Court of Appeals for the District of Columbia Circuit in early 2013. What will make this case significant is the fact that it will be the "first fully litigated proceeding under Section 4A of the Natural Gas Act (NGA), and it involves one of the largest civil penalties since [passage of the] EPAct 2005." Section 4A of the NGA makes it illegal for any person who buys/sells natural gas or transportation services subject to FERC jurisdiction to "use or employ any device, scheme or artifice to defraud."

Hunter is asking the court to overturn a November 2011 order that upheld an earlier order affirming an administrative law judge's initial decision that Hunter engaged in trading practices that violated the NGA (see NGI, Dec. 19, 2011). The judge levied a $30 million penalty. Hunter contends that Section 4A of the NGA does not authorize FERC to police manipulation occurring in the futures market; and does not permit FERC to take enforcement actions against natural persons; and vests the federal district courts with exclusive jurisdiction to adjudicate alleged violations."

In response, the Commission countered that Hunter's manipulation of the gas futures market took a toll on physical gas contracts over which FER has sole jurisdiction.

In August 2009 collapsed hedge fund Amaranth, seven affiliates and former trader Matthew Donohoe entered into settlements with FERC enforcement staff to resolve all claims that they manipulated the market to influence gas futures prices (see NGI, Aug. 17, 2009). Hunter remains the only holdout, dueling with FERC and the courts.

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