FERC Strikes Back On Financial Market Jurisdiction In BP Manipulation Case

The vexed question of FERC jurisdiction over alleged manipulation of the natural gas futures markets recently bubbled back to the surface, as the commission embraced the aggressive view of FERC anti-manipulation powers asserted by the Office of Enforcement against BP America. Authors Zachary Brez, Jon Daniels and Joe Harrington of Ropes & Gray LLP explain why the commissioners did not think FERC's 2013 defeat in the D.C. Circuit in a futures case pitting it against the CFTC applied to the BP facts. Industry may prevail again in the courts, they say, but it may take more arguments.

1. Introduction

   On May 15, 2014, the Federal Energy Regulatory Commission ("FERC" or the "Commission") denied BP's motion to dismiss allegations that it manipulated natural gas markets in 2008.1 In siding with its Office of Enforcement staff's ("OE Staff") opposition to BP's motion, FERC rejected a challenge to its jurisdiction over allegedly manipulative transactions. The challenge was based on a decision 14 months earlier, in Hunter v. FERC,2 in which the D.C. Circuit Court of Appeals held that FERC lacked jurisdiction over allegedly manipulative natural gas futures transactions.

   FERC construed Hunter narrowly in permitting the case against BP to proceed and asserted a broad understanding of its own jurisdiction. Further administrative proceedings, and perhaps another appeal to the D.C. Circuit, will test that construction's plausibility. An analysis of Hunter and the recent BP decision help illuminate the future of FERC's market-policing authority.

2. FERC's authority to sanction market manipulation

   Assessing BP's challenge to FERC's jurisdiction requires an understanding of the natural gas industry's statutory and regulatory regime. Section 4A of the Natural Gas Act ("NGA") empowers FERC to promulgate rules prohibiting use of "any manipulative or deceptive device or contrivance."3 Pursuant to this authority, FERC enacted the so-called Anti-Manipulation Rule as Section 1c.1 of the Commission's regulations. This regulation prohibits three types of conduct: (1) using "any device, scheme, or artifice to defraud," (2) making a misleading statement or omission of a material fact, and (3) engaging in "any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity."4 Importantly, both the NGA and the Anti-Manipulation Rule only apply to conduct "in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of [FERC]."5 According to Section 1(b) of the NGA, FERC has jurisdiction over the transport or sale for resale of natural gas in interstate commerce.6 The Commission's jurisdiction does not extend to intrastate transportation or transactions.7

3. The allegations against BP

   1. Physical versus financial positions at the Houston Ship Channel

      OE Staff has accused BP of making uneconomical physical gas sales at the Houston Ship Channel ("HSC") to suppress prices and to make its financial position more profitable. In order to appreciate these allegations, it is important to first understand the nature of the natural gas market in which BP was trading.

      HSC is a distribution hub connecting physical natural gas supply to intra- and interstate pipeline systems for eventual downstream consumption. Suppliers' physical gas holdings, or "physical positions," at HSC demonstrate their expectations about future prices there. Investors can also speculate on HSC gas prices by buying or selling HSC Gas Daily index swaps. The HSC...