Hunting for Energy Market Manipulation Adventures of the Three Musketeers Starring: The Federal Energy Regulatory Commission The Commodity Futures Trading Commission and The Federal Trade Commission Peter H. Rodgers Partner Washington, DC 1 2 Old Paradigm: To Each Musketeer His Own FERC Physical gas and power sales and transportation Limited enforcement authority CFTC Futures exchange platforms and trading Limited oversight of over-the-counter and physical markets FTC Collusive and anticompetitive behavior; consumer fraud And a little help from the Department of Justice (Those pesky criminal cases)
3 New Paradigm: The Double-Team FERC Physical gas and power sales and transportation Anything impacting physical price $1 million per day penalty CFTC Futures exchange platforms and trading Claimed jurisdiction over physical markets $1 million per day penalty FTC Collusive and anticompetitive behavior Wholesale purchase or sale of crude oil, gasoline or petroleum distillates $1 million per day penalty Still a little help from the Department of Justice With a side order of the securities laws 4 Follow the Leader CFTC Futures and Cash Commodities (positions, margins, and anti-manipulation) FERC Wholesale Power/Gas Sales/Transport (transmission/transport and anti-manipulation) FTC Wholesale oil sales (antitrust, consumer protection and anti-manipulation)
5 The Statutes CFTC Jurisdiction Commodity Exchange Act Commodity Futures Modernization Act CFTC Reauthorization Bill FERC Jurisdiction Natural Gas Act Federal Power Act Energy Policy Act of 2005 FTC Federal Trade Commission Act Clayton Act and Sherman Antitrust Act Energy Independence and Security Act of 2007 6 Look-Alike Authority Agency Federal Trade Commission Commodity Futures Trading Commission Federal Regulatory Energy Commission Jurisdiction In connection with In connection with transactions In connection with the purchase or sale of crude oil gasoline or petroleum distillates at wholesale. Manipulation Provisions Unlawful for any person, directly or indirectly, to use or employ any manipulative or deceptive device or contrivance. involving futures contracts as well as manipulation of any cash commodity in interstate commerce (be it a spot, a forward, an OTC transaction on any commodity, or a futures or option contract traded on an exchange). Both manipulation and attempted manipulation are unlawful: It shall be a felony for Any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery, or to corner or attempt to corner any such commodity purchase or sale of natural gas or electric energy or transportation of natural gas or transmission of electric energy in interstate commerce at wholesale or retail. Unlawful to use or employ any device, scheme or artifice to defraud; engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon a person. Must have requisite intent to defraud.
7 The Million Dollar Issue CFTC Civil penalties up to the greater of $1M for each violation or triple the monetary gain to defendants plus equitable relief Criminal sanctions up to $1M and up to 10 years imprisonment Civil claims by private parties are allowed FERC Civil penalties up to $1M per day per violation plus equitable relief Criminal fines up to $1M and up to 5 years imprisonment FTC Civil penalties up to $1M per day per violation plus equitable relief Elements of Manipulation 8 CFTC (1) ability to influence market price (2) intent to manipulate price (3) artificial price (4) defendant caused artificial price NOTE: attempted manipulation and other claims, such as false reports and aiding and abetting FERC (1) manipulative act or fraudulent omission (2) scienter (3) in connection with the purchase or sale of natural gas or electric energy or transportation/transmission subject to the jurisdiction of the Commission NOTE: includes false reports FTC To Be Determined Advance NOPR questions whether to follow CFTC or FERC, and considers much broader scope
Practical Implications: A Witch s Brew 9 The Musketeers investigate same conduct They cooperate during investigations But, the Musketeers typically bring separate actions based upon the same facts 10 Testing the Limits of Jurisdiction BP Tackling problems in unregulated physical markets (CFTC) Amaranth Futures Trades (CFTC) Affecting Physical Markets (FERC) ETP Physical Trades (FERC) Affecting Futures (CFTC)
11 BP Propane April 2003 Trial Run February 2004 BP takes long position 88% of all TET propane Price increase to over 90 cents per gallon October 2007 $303 million in sanctions We would know from there after that we could control the market at will 12 Amaranth Sold futures contracts in last 30 minutes of trading Amaranth profited from positions in various related financial derivatives CFTC: manipulation of futures market FERC: indirect manipulation at of physical market
13 Energy Trading Partners, LP FERC Enforcement Hotline ETP sold fixed price gas for less than a competitive price Accurately reported prices to indices Profited from basis trades FERC: Seeks $167 million in penalties CFTC: Thanks FERC for assistance in investigation, and collects $10 million in settlement 14 And the Winner Is? Enforcement Scoreboard to Date FERC CFTC $291 million (Amaranth Show Cause Order) $167 million (ETP Show Cause Order) Amaranth Complaint Pending $10 million (ETP settlement) $303 million (BP settlement)
15 FTC Enters the Game Energy Independence and Security Act makes it unlawful to Use any manipulative or deceptive device or artifice in connection with the sale or purchase of crude, gasoline or distillates or Report false or misleading information regarding price of crude, gasoline or distillates to federal government Statute directs the FTC enforce these new provisions and provides for civil penalties of up to $1 million per offense The law creates a significant risk of overlapping investigations and enforcement actions by the FTC and the CFTC Advance Notice of Proposed Rulemaking Pending 16 The Future Holds Congress Passes Legislation to Close the Enron Loophole, expanding CFTC jurisdiction Calls to reform agency structure, including suggestions to involve Federal Reserve or merge SEC and CFTC Had enough of principled regulation, wait until the SEC gets its hands on the problem) EPA expected to regulate emissions trading, resulting in regulation The agency has only minimal market experience Speculators blamed for high oil and gas prices, creating pressure for regulators to act
Hunting for Energy Market Manipulation Adventures of the Three Musketeers Starring: The Federal Energy Regulatory Commission The Commodity Futures Trading Commission and The Federal Trade Commission Peter H. Rodgers Partner Washington, DC 17