Energy Transfer Partners LP (ETP), in a much-anticipated response to a FERC show cause order, said last Tuesday the agency's "theory of the case" that caused it to charge the company with manipulation of natural gas prices was completely wrong, and it called for an immediate dismissal of the charges. The Dallas-based energy company also sought a subpoena to compel Platts, publisher of Inside FERC's Gas Market Report and Gas Daily, to turn over evidence in the enforcement case.

"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 said in a nearly 400-page response to the Federal Energy Regulatory Commission's (FERC) July show-cause order, which accused ETP of manipulating wholesale natural gas markets at the Houston Ship Channel (HSC) and Waha, TX, trading hubs (see NGI, July 30).

"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 Commission," the company argued [IN06-3-002].

"ETP did not engage in market manipulation. Its trades were profitable and economically rational, reflecting real-world supply and demand conditions. These transactions, therefore, had a legitimate business purpose -- a complete and total affirmative defense under Rule 2 of the Commission's market behavior rules," ETP told the agency.

"The show-cause order...does not and cannot prove otherwise. The Commission, therefore, should immediately and summarily dismiss its charges against ETP," the company said.

FERC's "preeminent error -- among many -- is its zealous insistence that it can tell what the price 'should have been' in the physical natural gas markets -- with amazing accuracy (greater than 99%) and in the wake of severe market dislocations caused by Hurricanes Katrina and Rita -- all without doing any meaningful analysis of real-world physical trades or fundamental market conditions." Instead, ETP said FERC incorrectly relied on prices in the derivatives market to determine physical gas prices.

"To our knowledge, no one has ever proposed to use price outcomes in the derivatives markets in the absolute and extraordinarily flawed way the Commission proposes here. The Commission's approach here is completely novel and completely mistaken," it said.

FERC, which began investigating ETP in October 2005, is seeking more than $167 million in total penalties and disgorgement of unjust profits from the Texas-based owner of intrastate/interstate pipeline assets and a natural gas trading affiliate.

The case against ETP, which came to the Commission's attention through its enforcement hotline, involves the alleged manipulation of wholesale natural gas markets at the HSC and Waha trading hubs on various dates from December 2003 through December 2005.

The Commission's investigation found that ETP allegedly violated FERC's market behavior rule, the anti-manipulation rule then in effect, when it artificially lowered the price for prompt-month gas at the HSC to the benefit of its physical and financial positions. By lowering the price, ETP depressed the Inside FERC's Gas Market Report HSC index, published by Platts, on which the pricing of many physical natural gas contracts and financial derivatives are based, FERC charged.

The investigation also found that ETP allegedly depressed the price of daily gas at Waha, and violated the Natural Gas Policy Act by unduly preferring affiliated shippers and unduly discriminating against nonaffiliated shippers on its Oasis Pipeline for gas transportation from Waha in West Texas to Katy, TX, near Houston.

In a related move last week, ETP asked FERC to issue a subpoena requiring Platts to turn over data and information related to its published natural gas price indices, which it claims go to the "core" of FERC's allegations that the company engaged in manipulation of gas prices.

ETP requested that FERC issue the subpoena within 15 days, and that Platts, which is owned by The McGraw-Hill Companies Inc., be required to produce the data and documents no later than 30 days after issuance of the subpoena. It further asked FERC to seek enforcement of the subpoena in a federal district court, if necessary.

In late August a federal judge in Washington, DC, ordered McGraw-Hill to turn over information to the Commodity Futures Trading Commission in connection with its parallel complaint against ETP and three of its subsidiaries for attempted manipulation of physical natural gas prices at the HSC delivery hub in September and November 2005 (see NGI, Sept. 3).

ETP, in requesting the subpoena from FERC, is seeking, among other things, the following types of data and information for certain specific locations for relevant periods between 2000 and 2005:

"The data ETP seeks from McGraw-Hill is necessary in order to discover what data was actually used to compile the relevant indices, who provided such data, what calculations or formulas were used to develop the indices, and what if any data was excluded," ETP said.

"Requiring McGraw-Hill to produce the documents identified in the [requested] subpoena will assist ETP in further analyzing and refuting the basis for the Commission's allegations, at least in part," ETP said. "Given the significant reliance that the Commission places on the Platts index, this data and information is clearly relevant to the Commission's inquiry in this proceeding.

"ETP is entitled to discovery of this material because it provides an important basis for testing core elements of the Commission's theory. For instance, in calculating unjust profits, the Commission apparently relies on the unsupported assumption that ETP trades account for 100% of the Inside FERC HSC index. But without knowing all the trades Platts relied on in developing the relevant indices, it is impossible to know the actual effect of ETP's trading activity on those indices," the company said.

Moreover, the subpoena is needed to "illuminate the highly subjective methodology Platts uses to develop the price indices it publishes," ETP said. "Platts does not always consider all reported transactions and prices in its market price calculations. Instead, it makes subjective judgment calls concerning which reported transactions and prices will be included in its calculations, and which will be excluded from the calculations altogether as 'outliers,'" it noted.

"The Commission does not actually possess (to the best of our knowledge and belief) much, if any, of the underlying data or information that would show what data Platts relied on in developing the indices in question, and how those indices were developed. If the Commission has seen or does possess any such data, it has neither shared it with ETP nor cited in the show cause order," the company said.

"We do not believe that the Commission's case [against ETP] could withstand summary judgment in a federal district court without evidence supporting its allegations regarding the Inside FERC HSC index. Indeed, it is difficult to see how the Commission can claim that ETP's alleged manipulation 'affected the Platts Inside FERC HSC index'...if the Commission has not determined what data Platts actually relied on in developing that index."

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