National Fuel Marketing Co. LLC (NFM) and affiliates have vowed to fight in court FERC allegations that NFM used its affiliates in an unlawful scheme to secure a larger allocation of “scarce and valuable” interstate natural gas transportation capacity on Cheyenne Plains Natural Gas Co. pipeline than the Denver-based company could have acquired on its own.
The Federal Energy Regulatory Commission (FERC) majority, with two commissioners dissenting, Thursday issued an order to show cause why NFM and affiliates — NFM Midstream LLC, NFM Texas Pipeline LLC and NFM Texas Gathering LLC — did not violate the Commission’s market manipulation rule by allegedly engaging in fraudulent bidding for capacity during a March 2007 open season on Cheyenne Plains (see Daily GPI, Jan. 16). Dissenting from the FERC majority were Commissioners Philip Moeller and Marc Spitzer. The NFM companies face $4.5 million in civil penalties.
“The NFM companies did absolutely nothing wrong, and as recognized by the thoughtful dissents of two commissioners, the bids were completely lawful. The charges in the show cause order are based entirely on a theory invented out of whole cloth by the Office of Enforcement [OE] staff long after the bids were made. This theory is contrary to all prior Commission and legal precedent and, in addition, cannot be applied legally to the NFM companies on a retroactive basis,” National Fuel Marketing said in a statement.
In his dissent, Moeller said “those who are subject to Commission penalties need to know in advance what they must do to avoid a penalty,” and “this order violates that principle of fundamental fairness, and that is why I dissent.”
The show cause order is based on allegations in enforcement staff reports that Moeller said have “fundamental flaws” in them. “We should not penalize a company millions of dollars for conduct that reasonably may be viewed as consistent with Commission policy. Instead we should change our existing policy so that bidders have advance notice of when they can legitimately submit bids during an open season,” he said.
“It is regrettable that a narrow majority of the Commission has decided to allow this wasteful and frivolous investigation to continue and to subject the NFM companies to further expense and disruption that will now be needed to defend themselves from these baseless charges brought by [FERC] enforcement,” the company said.
“The NFM companies are fully prepared to litigate this matter because we believe that a court of law will not tolerate the majority’s ‘gotcha’ approach to regulation…FERC’s recommended penalty of $4.5 million is laughable. There is no basis in fact or law for this totally arbitrary figure,” and in the end “we are confident that we will be vindicated and will ultimately prevail before the Commission or the courts, if necessary.”
In addition to NFM and affiliates, the agency Thursday approved four stipulation and consent agreements, requiring marketers and other energy firms to pay more than $8 million in civil penalties and disgorge approximately $4 million in unjust profits for allegedly gaming open-season bidding for capacity on the Cheyenne pipeline.
The Commission also issued an order for Seminole Energy Services and four affiliates to show cause why they should not be found to have perpetrated a fraud in connection with the Cheyenne open season. FERC’s Moeller and Spitzer dissented on Seminole, as well as on an order involving Tenaska Marketing Ventures LLC and its affiliates, which are facing a civil penalty of $3 million and disgorgement of unjust profits of $1.97 million for their alleged fraudulent activities.
At the time of the March 2007 open season on Cheyenne there was a substantial difference in the price of natural gas in Wyoming and at Midcontinent markets due to limited pipeline capacity between the two areas. As a result capacity on Cheyenne, which connects Wyoming production areas to Midcontinent markets, “was therefore very valuable and in high demand,” FERC enforcement said in its report on the NFM companies.
Because of the high demand, Cheyenne at the time allocated capacity on its system on a pro rata basis to all bidders who valued the capacity at the highest allowable net present value. NFM and three affiliates were among the winning bidders, with each being awarded a pro rata share of the available capacity. NFM affiliates did not have any use for the Cheyenne capacity, the agency said. Instead they used the capacity to transport gas belonging to NFM, which FERC said was a violation of the shipper-must-have-title requirement.
Following the open season, FERC received complaints that some of the bidders submitted multiple bids through affiliated companies in order to “game” the pro rata allocation, the staff report said. This prompted an 18-month investigation by the agency.
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