FERC’s well publicized enforcement actions against failed hedge fund Amaranth Advisors LLC and transporter Energy Transfer Partners last week should put regulated energy companies on notice that the agency is ready and able to take action against bad actors in the industry, said Chairman Joseph Kelliher Tuesday.
The central message of the enforcement actions is that “we are closely monitoring markets, both natural gas markets and power markets, and we have the [authority and] expertise to do that,” he said during an interview on E&ETV, which is produced by Environment & Energy Publishing LLC. Much of FERC’s new penalty authority comes from the Energy Policy Act of 2005.
“The Amaranth investigation began with Commission staff noticing certain anomalies [in May 2006] and digging deeper. They have the authority to do that on their own initiative. They don’t need my approval to begin that kind of informal investigation,” Kelliher noted.
In both cases, the Federal Energy Regulatory Commission required the companies to disgorge the unjust profits from their alleged manipulation of natural gas prices, as well as proposed penalties. But what was significant in the Amaranth case was that “we proposed penalties [$291 million] that are four times the profits,” he said.
FERC has completed the investigative phase of both cases. “We are now beginning administrative litigation or prosecution of some kind,” Kelliher noted. The instant messages (IM) between former Amaranth traders Brian Hunter and Matthew Donohoe are the most conclusive evidence that price manipulation occurred, he said.
The IMs “are strongly suggestive of intent,” but the ex-Amaranth traders have 30 days to “offer an explanation on what [does] ‘smash the settle’ mean,” Kelliher said. “We think that it suggests a desire to effect a sudden and specific collapse in prices, but there may be an alternate explanation.” FERC believes there were “schemes to manipulate prices downward in one product in order to increase the spread and their profits elsewhere,” such as on the energy trading platform IntercontinentalExchange.
Kelliher dismissed Hunter’s claim that FERC lacked jurisdiction to bring action against Amaranth and its traders. Hunter argued that FERC’s regulatory jurisdiction extended to only physical natural gas trading, not futures trading. But FERC last week countered that it had jurisdiction because the futures market activities affect the New York Mercantile Exchange settlement price, which determines the price of a substantial volume of jurisdictional gas sales, notably in the eastern, midwestern and Gulf Coast markets.
“[Hunter’s] argument that we are somehow acting to regulate futures is a false argument,” Kelliher said.
FERC began its investigation of Dallas-based Energy Transfer in October 2005, in the wake of the hurricanes, after receiving a hotline tip from a competitor, Kelliher said. Initially, the agency staff looked at the company’s practices on Sept. 28, 2005, and “our investigation suggests they earned $40 million in profits by manipulating prices of certain FERC-jurisdictional physical gas sales downward.”
The Commission later learned that the alleged manipulation wasn’t an “isolated incident,” but rather that the practices occurred over a nine-month period between September 2003 and September 2005, Kelliher noted. He said it was important to note that the alleged practices did not just occur on the heel of the hurricanes, but rather had started two years prior to that. Energy Transfer, which faces $167 million in fines and returned profits, has 30 days to respond to the Commission’s charges.
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