5th Circuit Orders FERC to Recalculate Market Manipulation Fine Against BP

On Thursday, the Fifth Circuit issued an opinion affirming in part and reversing a part a decision of the Federal Energy Regulatory Commission (FERC) that had imposed a $20 million civil penalty upon BP America, Incorporated and related entities for manipulation of the natural gas market in the aftermath of Hurricane Ike, which hit southeast Texas in September 2008.

The petitioners are four BP entities: BP America, Incorporated; BP Corporation North America, Incorporated; BP America Production Company; and BP Energy Company. In a footnote, the court notes that”… FERC brought its enforcement action against various BP-related entities, but we refer to these collective entities as BP.” FERC is the sole respondent.

The court briefly describes the nature of the market manipulation. “When the hurricane hit, gas prices at HSC [Houston Ship Channel, a gas hub in Houston] plummeted, causing BP to realize a sizable profit.” The profit resulted from BP’s “spread” position, i.e., “… the difference between natural gas prices at Henry Hub, a major natural gas market in Louisiana frequently used as a national benchmark, and … [HSC].”

The court continues, “And amidst the tumult in the market, BP spied an opportunity; the company would make millions more if the price differential between HSC and Henry Hub persisted after the hurricane became history. According to FERC, BP capitalized on this opportunity by engaging in glut of physical sales at HSC, intending to depress the prices on which the value of its financial position depended.”

The Fifth Circuit reviewed the FERC regulatory decision under the Administrative Procedure Act. The most substantial issue BP raised was jurisdictional. BP argued that FERC only has jurisdiction over interstate activity and that “… none of the transactions at issue were transactions in interstate gas regulated under the Natural Gas Act.”

The court engages in a lengthy analysis of the Natural Gas Act, particularly a 2005 amendment that added the following anti-manipulation provision: “It shall be unlawful for any entity, directly or indirectly, to use or employ, in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of the Commission, any manipulative or deceptive device or contrivance … “

The court rejected FERC’s argument that statutory language that “ … forbids manipulation by ‘any entity’ ‘in connection with’ a jurisdictional [i.e. interstate] transaction,” gives FERC jurisdiction over “ … any natural gas transaction that is part of a manipulative scheme, so long as that scheme affects the price of an NGA-jurisdictional transaction.”

The court accepted a related jurisdictional argument FERC made. “Although FERC does not assert that any of the BP transactions directly involved the purchase or transportation of natural gas across state lines, the Commission convincingly points to its long-held position, which BP does not challenge here — that once gas is sold or transported in interstate commerce, it remains interstate gas. “ The court accepts FERC’s finding that eighteen challenged transaction were within in jurisdiction under this test as supported by ”substantial evidence,” but rejects FERC’s jurisdictional claim over thirty-six other transactions.

BP raised a number of other arguments. Of significance, the Court concluded that there was “substantial evidence” to support FERC’s finding that BP engaged in market manipulation and that “FERC’s reasoning in imposing a penalty was not arbitrary and capricious.”

The court remanded the case to FERC to recalculate the penalty in light of “FERC’s reliance on an erroneous understanding of its own jurisdiction.”

FERC is represented by internal counsel. BP is represented by Blank Rome LLP.