With maximum fanfare two federal regulatory agencies blew the whistle on Dallas-based Energy Transfer Partners LP (ETP) and three of its subsidiaries, alleging that they attempted to manipulate physical natural gas prices at the Houston Ship Channel (HSC) delivery hub in the fall of 2005 in Hurricane Rita's aftermath. The charges against ETP relating to the physical market came at the same time the agencies cited the failed Amaranth hedge fund for allegedly manipulating the natural gas futures market (see related story).
In a coordinated action with the Federal Energy Regulatory Commission (FERC), the U.S. Commodity Futures Trading Commission (CFTC) Thursday announced it had filed a complaint in the U.S. District Court for the Northern District of Texas claiming that ETP and Energy Transfer Co. (also known as La Grange Acquisition LP), Houston Pipeline Co. and ETC Marketing Ltd. attempted to manipulate the October 2005 and December 2005 HSC monthly index prices of natural gas published by Platts in its Inside FERC's Gas Market Report. Both agencies uncharacteristically held press briefings to explain the actions.
FERC Chairman Joseph Kelliher said the actions against Amaranth and ETP 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 is the first time FERC has proposed maximum civil penalties.
Kelliher cited several reasons for proposing maximum penalties against the companies. "First, the violations in question involve market manipulation...Second, the harm to the market caused by Amaranth and Energy Transfer Partners was significant. Third, in both cases, we find the violations were intentional. In both cases, we find there was involvement of senior management. Further, in both cases, we find the level of cooperation does not merit any reduction in civil penalties," he said.
The CFTC, which coordinated the case under a memorandum of understanding with FERC, is seeking permanent injunctive relief, an award of civil penalties, and other remedial and ancillary relief as is necessary. The agencies said they worked in conjunction to achieve a common goal: using all the authority each agency has and the resources provided to combat manipulation attempts in the energy arena. While the agencies coordinated the investigations, the legal actions being pursued under different statutes will take different paths.
FERC's accusations came as a rebuttable preliminary finding, challenging ETP, the owner of intrastate/interstate pipeline assets and a natural gas trading affiliate, in 30 days to show that it did not violate the Commission's former market behavior rule by manipulating the wholesale natural gas market at the Houston Ship Channel and Waha, TX trading hubs on certain dates in 2003, 2004 and 2005. The Commission, which began investigating the company in October 2005, is proposing more than $167 million in total penalties and disgorgement of unjust profits. The company also stands to lose its blanket certificate to sell natural gas beginning 120 days from July 26. If that happens ETP would have to get Commission approval for all jurisdictional sales of natural gas.
ETP disputed the FERC findings. "We believe that our business transactions during the times covered by these proceedings were conducted in a lawful and responsible manner," said former FERC Commissioner Jerry Langdon, who is now chief administrative and compliance officer for ETP. "We will vigorously defend our position as the legal proceedings go forward."
The Commission's investigation, which was sparked by a call to FERC's enforcement hotline, charged that ETP artificially lowered the price for prompt month gas at the Houston Ship Channel to the benefit of its physical and financial positions. By lowering the price, ETP depressed the Inside FERC Houston Ship Channel index, published by Platts, on which the pricing of many physical natural gas contracts and financial derivatives are based.
FERC estimated that ETP earned profits of more than $40 million from its alleged manipulation on Sept. 28, 2005 for gas for October 2005 delivery at the Houston Ship Channel (in the weeks following Hurricanes Katrina and Rita).
The investigation also found that ETP depressed the price of daily gas at Waha, and violated the Natural Gas Policy Act (NGPA) by unduly preferring affiliated shippers and unduly discriminating against nonaffiliated shippers on its Oasis Pipeline for interstate gas transportation system from Waha in West Texas to Katy, TX, near Houston.
The investigation uncovered voice recordings that show senior managers at ETP were aware of the situation and directed the company's manipulative strategy to depress fixed-price gas prices at the Houston Ship Channel.
In one such recording from Sept. 26, 2005, Marshall McCrea, the company officer in charge of trading at the hub, is alleged to have told at least one trader that "as long as we sell as much as we can sell, it ought to push Ship down." The phrase "push Ship down" means to suppress the price at the Houston Ship Channel, which would lower the price of ETP's physical gas purchases and widen the price spread between that market and the Henry Hub, thereby increasing the value of its financial derivative positions, FERC said.
The Commission is proposing to assess ETP civil penalties totaling $97.5 million, and require total disgorgement of $69.9 million in unjust profits.
For market manipulation, FERC proposes that ETP pay $82 million in civil penalties -- the maximum $79 million for the manipulations at the Houston Ship Channel, and $3 million for the manipulations at Waha and Permian. The $69.9 million in allegedly unjust profits includes $67.6 million for manipulation in the Houston Ship Channel and $2.2 million for manipulation at Waha and Permian, plus interest.
For the Oasis Pipeline NGPA violations, the Commission proposes that ETP pay $15.5 million in civil penalties for undue discrimination and undue preference, and $500,000 for failure to file an amended operating statement. The Commission also is proposing the company disgorge $267,122, plus interest, in unjust profits.
CFTC Director of Enforcement Gregory Mocek commented on the market activity of both ETP and Amaranth. "Although these defendants utilized multiple cash contracts, OTC [over the counter] products and indices in an attempt to manipulate the natural gas market, their efforts did not go undetected," said. "At the end of the day, our professionals were able to gather the evidence that led them to the allegations that are in the complaint. The free market allows commodity traders to manage price risk, but it does not grant them the right to attempt to manipulate prices of natural gas in interstate commerce."
The CFTC complaint alleges that ETP used Hurricane Rita as a pretext for their scheme. Specifically, the complaint states that Hurricane Rita made landfall in the Texas and Louisiana Gulf region on Sept. 24, 2005, and demand for natural gas in Houston dropped as residents fled the hurricane. Anticipating this occurrence, the defendants allegedly devised a four-step plan to take advantage of -- and financially benefit from -- Hurricane Rita's impact.
As alleged, the first step in the defendants' plan was to build their short position in the October 2005 HSC financial basis swap. In this instance, the two legs of the swap are the monthly HSC index price published by Inside FERC and the final settlement price of the Henry Hub futures contract traded on the New York Mercantile Exchange (Nymex). As a short, the defendants were obligated to pay the longs the HSC index price; thus they benefited from a lower HSC index price, the complaint stated.
Second, in the days just before and after Hurricane Rita, the CFTC complaint stated that the defendants allegedly built up a huge inventory of physical gas with the intent to deliver that gas to HSC, despite the lack of demand in the Houston area.
Third, on Sept. 28, 2005, the defendants sold a "vast" quantity of natural gas for delivery during October 2005 at HSC with the intent to push down, or cap, the price of physical gas at HSC. They purportedly made most of these sales on the IntercontinentalExchange (ICE). In fact, said the CFTC, the defendants represented 96% by volume of all the trades that took place that day on ICE in the HSC contract.
The fourth and final step in the defendants' plan allegedly occurred when they reported the Sept. 28, 2005 sales to Platts with the intent and belief that Platts would use these transactions in calculating the October Inside FERC monthly price index at HSC -- presumably at lower or stabilized prices to the benefit of the defendants' short swaps positions, the CFTC said.
The CFTC complaint also alleges that the defendants attempted to manipulate the price for November 2005 gas at HSC and attempted to manipulate the December Inside FERC monthly index price. Defendants purportedly repeated the same course of action in the November/December 2005 time period as they did during September/October 2005.
Earlier this month ETP warned that investigations by the CFTC and FERC into trading and intrastate gas transportation activities would likely result in fines in the case of a negotiated settlement (see NGI, July 16). The case first came to light last November 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).
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