Despite a host of energy market manipulation cases already on the books, the U.S. Commodity Futures Trading Commission (CFTC) is still finding more work to do in that area. The agency filed a civil enforcement action Wednesday against BP Products North America for allegedly cornering the propane market in February 2004 to drive up prices. BP has denied the charges, saying that "legitimate forces of supply and demand" were the cause of the price increases.
However, the CFTC said, "With the knowledge, advice and consent of senior management, BP employees developed and executed a speculative trading strategy in which BP cornered the February 2004 TET physical propane market" by purchasing enormous quantities of propane for delivery to Texas Eastern Products Pipeline Co.'s (Teppco) pipeline system in Mont Belvieu, TX, and then withholding some of that supply to drive up the winter price of the heating fuel.
The agency said BP's propane position exceeded the entire Teppco system propane inventory, and at the end of February 2004 when propane inventories are near seasonal lows, the company owned more than 88% of all TET propane on the market. TET refers to Texas Eastern Transmission, which used to own Teppco. Teppco receives imported and domestic natural gas liquids, including propane, at Mont Belvieu for transportation through its pipeline to U.S. residential, commercial and agricultural markets. The Teppco system at Mont Belvieu is the delivery point for propane futures on the New York Mercantile Exchange (Nymex) and is considered a main source of propane for the U.S. market.
The CFTC alleges that BP used its large long market position to force propane prices up to more than 90 cents/gallon on Feb. 27, 2004. In doing this, BP employees "sought to generate a profit for BP of at least $20 million 'with potential for upside from there.'"
The CFTC complaint names the following BP officials and employees as participants in the cornering scheme: Donald Cameron Byers, current CEO of BP's North America Gas and Power business unit (NAGP); Martin Marz, compliance manager for the North America unit during the period; James Summers, vice president of gas liquids trading during the period; Mark Radley, trading manager for gas liquids; Dennis Abbott, second in command of BP liquids trading during the period; and Cody Claborn, primary trader of TET propane for BP during the period. The CFTC said Abbott and Claborn were both placed on paid administrative leave during the investigation of this case and recently were fired by BP for their actions in connection with the cornering strategy.
But the agency revealed in recorded conversations transcribed in the complaint that it was Radley who first made statements indicating that he perceived the propane market was vulnerable to manipulation. On Jan. 8, 2004 in an audiotaped conversation with other BP employees, Radley stated that the propane market was "vulnerable to a squeeze." And during the execution of the strategy, Radley also mentioned again in a taped conversation that "if we squeeze it in the last four or five days of the month, ahh, forgive my French, but ah, you know it's going to be hard to say what's the fair price of the market at the time."
Radley's remark, "excuse my French" signifies that he "recognized that he used the term 'squeeze on an audiotaped phone line," the CFTC said in the complaint. "Accordingly, when Radley returned from vacation, he brought this conversation to the attention of Summers, due to his use of the word 'squeeze'" in describing the strategy... Summers testified under oath that he brought Radley's description of the...strategy as a 'squeeze' to the attention of Byers and Marz. He further testified that all three individuals -- Summers, Byers and Marz -- reviewed the audiotape. Byers testified that Tim Bullock, the president of BP NAGP at that time, also became aware of Radley's description..."
Between Feb. 9 and Feb. 13, BP had purchased more than 1.4 million bbl of February 2004 TET propane. BP's position in February TET propane by the close of business on Feb. 13 exceeded 3.2 million bbl. By Feb. 20, the company had amassed 4.7 million bbl, which was more than the entire Teppco system inventory.
On Feb. 24, the CFTC alleges the company began selling February TET propane at increasing prices. Then on the following day, BP allegedly bought even more propane from sellers entering the market to take advantage of the higher prices caused by BP's squeeze. BP's position, meanwhile, grew to 4.9 million bbl, the CFTC said. On Feb. 26, at the direction of Radley, BP traders refused to sell any propane on the market but continued to buy the little that was available, driving the market price even higher, the CFTC said.
"Cornering a commodity market is more than a threat to market integrity," said the CFTC's Gregory Mocek, director of enforcement. "It is an illegal activity that could have repercussions for commercial market participants as well as retail consumers around this country.
"This case clearly illustrates that complex and covert trading patterns will not prevent us from aggressively pursuing and exposing those that violate the Commodity Exchange Act."
The CFTC is seeking permanent injunctive relief, disgorgement of profits, restitution and payment of civil monetary penalties not to exceed $120,000 or triple the monetary gain for each violation of the Commodity Exchange Act.
This latest case against BP follows a 2004 settlement agreement with the company for charges of illegally engaging in wash trading in the power market in 2000 via an electronic trading platform. A CFTC order in November 2004, directed BP Energy, the marketing arm of BP plc's Gas, Power and Renewables unit, to cease and desist from further Commodity Exchange Act violations, pay a $100,000 civil penalty, and provide future cooperation in investigations of related matters. BP neither admitted nor denied the findings made in the order (see Daily GPI, Nov. 5, 2004).
The order found that on at least six occasions between April and June 2000, an unnamed former trader for BP Energy on its West trading desk executed prearranged trades for electricity contracts at identical prices. On each occasion, according to the order, the BP Energy trader and a counterparty trader agreed to execute one buy or sell on an electronic trading platform and then execute an opposite buy or sell over the telephone at the same volume, price, location and terms. The order also found that the trades resulted in a financial nullity and caused the transactions on the electronic trading platform to be false, or not bona fide, in violation of the Commodity Exchange Act.
In August, the commission reached a settlement with Byron G. Biggs, a former power trader from BP Energy Co. who was accused of conducting six illegal wash trades between April and June 2000. Biggs agreed to pay a $30,000 fine, but he did not admit nor deny the findings. Biggs was employed as a trader for BP between 1999 and 2003.
The controversy over wash trading in the energy industry started in spring of 2002 after several companies, notably Reliant Resources, CMS Marketing and Trading, and Dynegy, publicly revealed that they had engaged in wash trading in order to increase their sales volumes or revenues. Most of the transactions occurred in 2000 and 2001.
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