FERC Monday ordered BP America Inc. and affiliates to show cause in a long-running case [IN13-15] involving the alleged gaming of the physical and financial markets at the Houston Ship Channel (HSC). The Commission proposed a near-$29 million penalty for transactions taking place from mid-September 2008 through Nov. 30, 2008.

BP immediately disputed the allegations, which it said “are without merit and we stand by what we previously disclosed publicly in February 2011 — that BP natural gas traders did not engage in any market manipulation in late 2008…we will vigorously defend against these allegations.”

The order was based on an Office of Enforcement (OE) investigation alleging that traders on the “Texas team” of BP’s Southeast Gas Trading desk traded physical natural gas at HSC in a manner designed to increase the value of the company’s futures market position.

“Specifically, staff alleges that the Texas team traders uneconomically used BP’s transportation capacity between Katy and HSC, made repeated early uneconomic sales at HSC, and took steps to increase BP’s market concentration at HSC as part of a manipulative scheme. In doing so, staff alleges, the Texas team traders suppressed the HSC Gas Daily Index with the goal of increasing the value of BP’s financial position…”

The complaint by the Federal Energy Regulatory Commission (FERC) includes affiliates BP America Inc., BP Corporation North America Inc., BP America Production Co. and BP Energy Co.

In refuting the charges, BP said “the FERC bases its allegations on a recorded two-minute phone conversation between a BP trainee and BP natural gas trader that the regulator has taken completely out of context. The recording does not support any allegation of wrongdoing. In fact, the trainee involved in the conversation states that his characterization was incorrect and the trader never agrees with nor condones the trainee’s statements. The trader also reacts strongly to the trainee’s comments and interrupts him because the trainee’s comments — as the trainee admits on the call — are incorrect and inappropriate.

“The trader also promptly reported the conversation and BP’s compliance personnel acted appropriately in examining the trading at issue.”

BP had revealed in a quarterly Securities and Exchange Commission filing that FERC staff originally notified the company of its preliminary conclusions in November 2010, at which time BP said it gave a detailed response. In late July, the OE made public a preliminary determination accusing BP of making fraudulent physical trades to set up its futures market position (see Daily GPI,Aug. 1; Feb. 2, 2011).

FERC’s order Monday cited violations of the Natural Gas Act in manipulating the next-day, fixed priced gas market at the HSC trading point. The affiliates have been ordered to show cause why the companies should not be assessed a civil penalty in the amount of $28 million and required to disgorge $800,000 plus interest.

BP is ordered to either pay the penalty or contest the order in a detailed case filing, within 30 days. The OE staff then may respond within the following 30 days.