The Federal Energy Regulatory Commission Thursday issued show cause orders in separate investigations, one against failed hedge fund Amaranth Advisors LLC, seven affiliates and two former traders, and the other naming Dallas-based Energy Transfer Partners LP (ETP). At the same time, the Commodity Futures Trading Commission (CFTC), which leveled a complaint against Amaranth Wednesday for attempted manipulation of the natural gas futures market, followed up Thursday with an enforcement action against ETP (see separate story).

Amaranth is accused of manipulating the New York Mercantile Exchange (Nymex) natural gas futures contract, which settles at the Henry Hub and influences physical gas prices, while ETP is alleged to have manipulated the natural gas physical market at the Houston Ship Channel. The Amaranth show cause order, which followed an investigation that began in May 2006, also named former traders Brian Hunter and Matthew Donohoe. The FERC actions proposed civil penalties totaling $458 million.

The charges against Greenwich, CT-based Amaranth LLC followed the filing of a civil complaint Wednesday by the CFTC against the hedge fund that also listed Hunter, who directed the fund's natural gas trading (see Daily GPI, July 26). Amaranth collapsed in September 2006 after losing $6 billion in the gas futures market.

At a press briefing Thursday, Chairman Joseph Kelliher said Amaranth is accused of committing 219 violations over a three-month period, while ETP was accused of violations in five different categories. The actions against both companies 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 the Commission has proposed maximum civil penalties, he said.

Kelliher cited several reasons for proposing maximum penalties against Amaranth and ETP. "First, the violations in question involve market manipulation," not attempted manipulation as the CFTC has charged. "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 [by the two companies] does not merit any reduction in civil penalties," he said.

FERC's Amaranth show cause order gives the company and its traders 30 days to dispute why they should not be assessed civil penalties and be required to disgorge profits totaling $291 million for allegedly manipulating the price of Commission-jurisdictional transactions by trading in the Nymex natural gas futures contract in February, March and April 2006. "This [will] not be their first opportunity to dispute our findings," said Kelliher, adding that the agency has been working with the companies for several months.

In the second case, the Commission voted unanimously to give ETP, a Texas-based owner of intrastate/interstate pipeline assets and a natural gas trading affiliate, 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 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.

"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 Energy Transfer, in response to the actions taken by FERC and the CFTC. "We will vigorously defend our position as the legal proceedings go forward."

While the FERC accusations are couched as preliminary findings, which the companies must rebut, the CFTC actions are complaints, which must be litigated. The two agencies said they cooperated on the investigations, but their actions come under separate laws and the cases will follow separate paths. "There will be differences in the way we prosecute" manipulation, Kelliher noted. In the Amaranth case, the CFTC has requested $130,000 for every violation, which could turn out to be a fairly significant amount.

The Commission's action Thursday came after Amaranth's Hunter lost out in a last-minute court attempt to fend off the charges. A federal judge in Washington, DC, Tuesday denied Hunter's petition for a temporary restraining order to block the FERC enforcement action. Hunter argued that FERC lacked standing because its regulatory jurisdiction covered only physical natural gas trading, not futures trading. Kelliher countered that FERC has jurisdiction because the futures market activities affect the Nymex settlement price, which determines the price of a substantial volume of jurisdictional gas sales, notably in the eastern, midwestern and Gulf Coast markets.

But FERC has no authority over futures transactions per se. "We recognize the CFTC has exclusive jurisdiction over futures," Kelliher said.

"These cases are serious. It is alarming to read and hear the instant message and voice recording evidence of improper actions, some of which were authorized by senior managers. The Commission is right to propose close to the maximum in penalties for actions that harmed millions of consumers and the natural gas markets they depend on for their energy needs," the chairman noted.

"For these two companies, failure to refute these findings will confirm that their actions harmed many wholesale market participants, creating losses that ultimately hurt natural gas customers across the country."

Kelliher gave high marks to the CFTC for helping to coordinate the investigations. "There is a relationship between physical gas sales and gas futures, and coordination between the two agencies is necessary to effectively police market manipulation."

While the two agencies signed a memorandum of understanding several years ago to coordinate market monitoring activities, these actions are the first evidence of that cooperation.

The FERC case against Amaranth involves manipulation of the Nymex settlement price on Feb. 24, March 29 and April 26, 2006, which the hedge fund allegedly accomplished by selling an extraordinary amount of these contracts during the last 30 minutes of trading before these future contracts expired, with the purpose and effect of driving down the settlement price.

Investigators in the Commission's Office of Enforcement found that Amaranth had previously taken positions in various financial derivatives that were several times larger and whose values increased as a direct result of the fall in the Nymex settlement price. Thus, for every dollar lost on its sales of the futures contracts, Amaranth would gain several dollars on its derivative financial positions.

Evidence uncovered by the investigation includes instant messages (IM) written by traders. According to one such IM, the scheme began as "a bit of an expiriment [sic]" devised by Hunter on or before Feb. 23, 2006, the day before the first manipulation occurred. The Feb. 24 "expiriment" was then repeated and refined on March 29 and April 26.

These market manipulation violations took place well before Amaranth's demise in the fall of 2006, when it experienced massive trading losses and ceased trading operations. Amaranth's collapse was not related to these manipulations. This investigation was initiated in the summer of 2006 by Commission staff, well before those losses and collapse.

Based on the facts and circumstances and the absence of any material mitigating factors, the Commission is recommending penalties of $200 million for Amaranth, $30 million for Hunter and $2 million for Donohoe. The Commission also proposes that Amaranth disgorge more than $59 million in unjust profits, plus interest. The penalties will go to the U.S. Treasury, while the unjust profits are to go to those harmed by the action.

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

The Commission's investigation found that ETP 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 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 Commission also is proposing disgorgement of $69.9 million, plus interest, in unjust profits. This includes $67.6 million for manipulation in the Houston Ship Channel and $2.2 million for manipulation at Waha and Permian.

The Commission also is seeking to revoke ETP's blanket certificate to sell natural gas for one year, beginning 120 days from Thursday, July 26. This means that ETP would have to get Commission approval for all jurisdictional sales of natural gas.

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.

FERC noted that both companies' manipulative actions sought to lower the price of natural gas for the profit of their physical and/or financial derivative positions. "Manipulation designed to lower prices is as offensive as manipulation that raises prices," Kelliher said. "In any form, market manipulation undermines the integrity of markets by driving away legitimate participants.

"When it raises prices, manipulation harms consumers immediately and in ways that are easy to understand. Manipulation that lowers prices also hurts consumers, over a longer period and more indirectly," he noted.

Following Hurricanes Katrina and Rita in 2005, "Energy Transfer and all other market participants were confronted with uncertain market conditions," said ETP's Langdon. "FERC asserts, despite record high prices at the time, that we should have achieved even higher prices in the wake of the hurricanes' devastation and the significant disruptions in the natural gas market that followed. We believe that the FERC's hindsight review of what prices should have been ignores the difficult market conditions buyers and sellers were dealing with at the time," he noted.

In the end, the Commission chairman said it was important to note that FERC is not opposed to legitimate risk-taking and trading. "The core element of manipulation is fraud – fraud on consumers and fraud on the market. Manipulation is deception, period. It is not legitimate trading, risk-taking and speculation."

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