Archive for the ‘Market Manipulation’ Category

Constellation Energy Commodities Group to Pay $245 Million for Violation of FERC’s Anti-Manipulation Rule

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On March 9th, FERC issued an Order approving the Stipulation and Consent Agreement that resolved an investigation into Constellation Energy Commodities Group’s (CCG) physical and financial electric energy trading activities in and around the New York Independent System Operator’s (NYISO) Control Area and in other RTOs.

Back in January 2008, FERC’s Office of Enforcement received anonymous tips suggesting that CCG “may have manipulated the prices of electric energy,” and later observed through its own surveillance activities that CCG was engaging in virtual trading in the NYISO that was unprofitable. An ensuing investigation found that CCG had violated both the Anti-Manipulation Rule (18 CFR § 1c.2) and the accuracy requirements of FERC regulations (18 CFR § 35.41(b)).

CCG has agreed to pay a civil penalty of $135,000,000 and to disgorge unjust profits of $110,000,000, including interest.

Interestingly enough, according to Van Ness Feldman, on the same afternoon that FERC issued the above order penalizing CCG, the agency also approved a proposed merger between CCG and Exelon Corporation.

California Wants Billions of Dollars, FERC Says “Sorry, but no.”

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On May 24, 2011, FERC issued an Order dismissing a complaint filed by the California Attorney General (representing “the People of the State of California”) seeking refunds for “unjust” short-term bilateral sales made to the California Energy Resources Scheduling Division (CERS) of the California Department of Water Resources during the California Energy Crisis.

The Complaint, filed May 22, 2009, alleged that the named respondents – various power marketers – had exercised “undue market power” in their sales to CERS and committed numerous tariff violations, all with the help of FERC’s market monitoring – a system so “fatally deficient” that it failed to detect this bad behavior for an extended period of time.

The complainants requested that FERC order the sellers named in the suit to pay refunds, plus interest, on the sales made to CERS “at unjust and unreasonable rates from January 18, 2001 to June 20, 2001.” During that time period, the California Attorney General claims that CERS was overcharged approximately $1.9 billion.

But FERC was unsympathetic: “[W]e are compelled to dismiss the Complaint as it seeks an unavailable remedy, advances inadequate legal theories and, to the extent it raises an appropriate legal theory, to wit, Federal Power Act (FPA) section 309, the claims are not sufficiently supported.” For an analysis of this decision, I recommend reading Winston & Strawn’s recent Alert on the topic.

You can see more documents related to this case by searching for Docket Number EL09-56 in FERC’s eLibrary.

FERC’s Proposed Data Improvements Aim to Enhance Market Monitoring and Transparency

Late last month, FERC concurrently released two Notices of Proposed Rulemaking (NOPRs) related to electronic tag (e-Tag) data associated with transactions in wholesale power markets.

The first NOPR (Docket No. RM10-12-000) proposes changes to “facilitate price transparency in markets for the sale and transmission of electric energy in interstate commerce” by requiring market participants that are currently excluded from the Commission’s jurisdiction under section 205 of the Federal Power Act (16 USC 824d) to file Electric Quarterly Reports (EQR) with the Commission. The proposal also requires such reports to include e-Tag ID data.

The second NOPR (Docket No. RM11-12-000) would require the North American Electric Reliability Corporation (NERC) to provide FERC with access to “complete electronic tagging data used to schedule the transmission of electric power in wholesale markets.” FERC claims that this information – which would not be made publicly available – would “aid the Commission in market monitoring and preventing market manipulation, help assure just and reasonable rates, and aid in monitoring compliance with certain business practice standards.”

Law firms Van Ness Feldman and Hogan Lovells have published legal alerts summarizing the proposals here and here, respectively. Hogan Lovells predicts that the proposed changes, if passed, will “significantly enhance FERC’s market oversight and enforcement capabilities.”

Attorney General Announces Efforts to Combat Oil and Gasoline Price Fraud

Photo by Damian Cugley. Some rights reserved.

A recent publication from Jones Day brought attention to the forthcoming formation of the Oil and Gas Price Fraud Working Group, where representatives from the DOJ, the National Association of Attorneys General, the CFTC, the FTC, the Treasury, the Federal Reserve Board, the SEC, and the Departments of Agriculture and Energy will come together to fight oil and gas price fraud!

Well, maybe not fight fraud. As of now, all that the Attorney General Eric Holder is asking of these Working Group members is to “explore whether there is any evidence of manipulation of oil and gas prices, collusion, fraud, or misrepresentations at the retail or wholesale levels that would violate state or federal laws and that has harmed consumers or the federal government as a purchaser of oil and gas.” (emphasis added)

As Jones Day points out, “This effort only duplicates existing efforts by multiple government agencies, none of which has found any significant evidence of anticompetitive conduct leading to higher prices.” However, Jones Day also concedes that such action “may signal more aggressive enforcement of existing laws.”

Read the Attorney General’s memo containing the announcement here, and his subsequent post on the White House Blog here.

FERC Orders $30 Million Civil Penalty in Market Manipulation Proceeding

Photo courtesy of Klearchos Kapoutsis. Some rights reserved.

Yesterday FERC announced that Brian Hunter, former Amaranth Advisors LLC trader, had been ordered to pay a $30 million Civil Penalty inthe first fully litigated proceeding involving FERC’s enhanced enforcement authority under section 4A of the Natural Gas Act.

Section 4A – codified at 15 USC 717c-1 and implemented at 18 CFR 1c, the “Anti-Manipulation Rule” – makes it unlawful for “any entity” to utilize any “manipulative device or contrivance” “in connection with” FERC-jurisdictional transactions.

According to FERC, the record shows that “Hunter’s trading practices […] were fraudulent or deceptive, undertaken with the requisite scienter, and carried out in connection with FERC-jurisdictional natural gas transactions.”

This penalty dwarfs the previous $7.5 million civil penalty levied against Amaranth as part of a 2009 settlement with FERC. Litigation continued against Hunter post-settlement, and in early 2010, FERC published an initial decision determining that Hunter had indeed violated FERC’s Anti-Manipulation Rule.

Yesterday’s Order affirmed the initial decision and decided on the “appropriate” civil penalty, which was concluded to be “sufficient to discourage Hunter and others from engaging in market manipulation.”

Consider me discouraged.

Preventing Insider Trading and Market Manipulation in Wholesale Energy Markets

Late last week, international law firm WilmerHale published a very thorough review of the European Commission’s (EC) recently proposed rules aimed at preventing abuse in wholesale energy markets.

Image by William Maver. Some rights reserved.

The proposal hopes to close gaps in the “existing regime” that were found upon inspection by the Committee of European Securities Regulators and the European Regulators Group for Electricity and Gas (at the request of the EC). While the EC’s  Market Abuse Directive and the Markets in Financial Instruments Directive prohibit manipulation in financial markets, these Directives fail to cover the 75% of energy transactions that occur outside of energy exchanges.

According to the EC’s press release, the new rules specifically prohibit:

  • use of inside information when selling or buying at wholesale energy markets.
  • transactions that give false or misleading signals about the supply, demand or on prices of wholesale energy market products
  • distributing false news or rumours that give misleading signals on these products.

While the EC claims to be unaware of any particular cases of price manipulation in the EU, they are quick to make an example of the US. Amaranth Advisors LLC, an American hedge fund, “accumulated massive natural gas holdings in the form of derivatives […], pushing up prices and making huge profits. It is assumed that an Amaranth-style market manipulation would inflate gas and electricity bills of European businesses and industrial users by some Euro 1 billion.”

At least we had the rules to deal with it (eventually) – 18 CFR § 1c became effective in January 2006 after the passage of the Energy Policy Act, and was made famous (well, in certain circles) by the case against Amaranth and subsequent enormous settlement in 2009. Let’s hope for the EU’s sake that their new rules have a more preventative effect.

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