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FERC Staff Brief Against ETP Cites 'Economically Irrational' Trading

The FERC Enforcement Staff, responding to claims by Energy Transfer Partners (ETP) that FERC's price calculations were flawed, defended its use of basis price quotes as part of its charge that ETP manipulated the physical gas market to create an artificial gas price that benefited its financial market position. A public version of the latest salvo from the regulatory agency was made available last Tuesday.

The Federal Energy Regulatory Commission (FERC) staff has charged that ETP and its subsidiaries attempted to manipulate the October 2005 and December 2005 Houston Ship Channel (HSC) monthly index prices of natural gas (see NGI, July 30, 2007) and is seeking penalties of $97.5 million and the disgorgement of unjust profits of approximately $70 million.

The entirety of the evidence of ETP's manipulation is "extraordinary," the staff brief said, listing (1) ETP's dominance of trading at HSC, (2) a $1.70 divergence in ETP's price from another HSC basis transaction a minute beforehand, (3) the fact that the index price for HSC gas for October 2005, normally within 5 cents of nearby points, was in fact more than a dollar lower than those points, and (4) that ETP's portfolio profited by more than $40 million from the lower October index price. In addition, comments from ETP's president of trading were indicative of manipulation and the evidence clearly calls for a trial-type evidentiary hearing, staff said.

ETP, in a brief filed March 31 (IN06-3), attacked the Commission's use of basis prices, which ETP said were extremely volatile, and its "implied price theory" as being insufficient evidence to prove the creation of an artificial price or to justify an evidentiary hearing. FERC, in issuing a show cause order claiming market manipulation, ETP said, set a higher bar for itself in going beyond the charges leveled by the Commodity Futures Trading Commission (CFTC), which cited ETP with "attempted" market manipulation.

"The CFTC thus did not need to prove artificial price. But the Commission [FERC] does face that hurdle," ETP said, claiming it cannot be done using volatile basis prices. Energy Transfer and three subsidiaries reached a settlement with the CFTC last month that included a $10 million penalty (see NGI, March 24).

The Enforcement Staff responded that "there is no question that a basis price represents value at a trading point," pointing to traders' use of basis prices to determine value. ETP's sale of fixed-price gas at $10.25/Mcf during the October bidweek, two to three minutes after it offered physical gas electronically at $11.00 and at the same time the Nymex futures price, minus basis, suggested a Houston Ship Channel value of $11.95, constituted "irrational" market conduct, the staff said. "ETP's sale at $10.25 was economically irrational in that it constituted a major break in value from prevailing transactions."

It was the week after Hurricane Rita hit the Gulf Coast, and ETP dominated the fixed price trades at HSC, contributing to a bidweek index at the "suppressed price" of $10.46, FERC said, leaving the Commission reliant on a basis price as the only value not dominated by ETP. The Commission said its evidence shows that ETP "executed the direction of its trading president to "push Ship down."

Staff said it has produced evidence demonstrating similar behavior in certain other months named in the show cause order and said a trial was necessary to determine "artificial price."

The Commission on April 25 scheduled a closed meeting May 2 for the commissioners to consider "non-public investigations and inquiries, enforcement-related matters. On Monday, April 29, ETP said it did not know what those matters might be, but it asked that FERC not make any ruling on its case until the company had a "fair opportunity to respond" to the Enforcement Staff brief. ETP said it had received a nonpublic version of the brief at about the same time on Friday that the closed meeting was announced. It asked that any decision in its case be deferred until after May 16 when it would respond.

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