On July 11, 2016, FERC imposed fines on BP America Inc., BP Corporation North America Inc., BP America Production Company, and BP Energy Company (collectively, “BP”) of over $20 million in civil monetary penalties, and disgorgement of over $200,000 in profits, for manipulating natural gas prices by, FERC found, uneconomically trading physical natural gas at the Houston Ship Channel to benefit BP’s financial spread positions based on the price differential between the Houston Ship Channel and the Henry Hub.

FERC’s Enforcement Staff alleged that, from September 18, 2008 through November 30, 2008 and shortly after Hurricane Ike made landfall in the Gulf region of Texas, BP’s Southeast Gulf Texas trading team uneconomically traded next-day, fixed-price physical natural gas at the Houston Ship Channel using BP’s transportation capacity on a pipeline from Katy, Texas to the Houston Ship Channel. Enforcement Staff alleged that the trading was designed to decrease the Platts Gas Daily (“Gas Daily”) index price for Houston Ship Channel relative to Henry Hub, thereby benefiting BP’s Houston Ship Channel-Henry Hub spread positions in natural gas financial markets.

On August 13, 2015, an Administrative Law Judge (“ALJ”) issued an Initial Decision determining that BP violated the Commission’s anti-manipulation rule and the Natural Gas Act by devising a scheme to manipulate physical natural gas markets to benefit related financial positions. On exception, BP argued, among other things, that the ALJ’s Initial Decision: (1) improperly found that BP changed its trading activity during the alleged period of manipulation and ignored evidence in the record that the trades at issue were consistent with BP’s historical and contemporaneous conduct at other trading locations; (2) erred in relying on the “speculative conclusions” in Enforcement Staff witnesses’ analysis as to the traders’ intentions, while also disregarding BP employees’ denials of wrongdoing, in determining whether Enforcement Staff met the intent, or “scienter,” element of FERC’s market manipulation prohibition; and (3) erred in finding that Enforcement Staff proved FERC jurisdiction over the physical transactions through transactions priced off of the affected Gas Daily index, despite that most of BP’s physical transactions were “first sales,” which are sales generally exempt from FERC’s jurisdiction and occurring upstream of sales by interstate pipelines, intrastate pipelines, local distribution companies, and their affiliates.

In its order, FERC affirmed all of the ALJ’s findings. Specifically, in response to BP’s arguments, FERC first found that BP had not rebutted Enforcement Staff’s allegations regarding the changes in BP’s trading behavior during the alleged period of manipulative conduct. In addition, FERC held that determinations of scienter can be based on inferences and circumstantial evidence. In turn, FERC reasoned that inferences can be based on the common knowledge of motives and intentions of a person under similar circumstances. Finally, FERC found that Enforcement Staff had shown that the manipulative transactions “directly” impacted FERC-jurisdictional transactions and were “in connection with” FERC-jurisdictional gas markets because the manipulative conduct impacted FERC-jurisdictional transactions and Houston Ship Channel Gas Daily prices, which impacted the contract values of various parties’ FERC-jurisdictional sales. Accordingly, FERC assessed BP a civil penalty of $20,160,000 and required BP to disgorge $207,169 of profits.

A copy of the order is available here.